TPO cannot re-characterize assessee's indenting activity as trading activity unless it can be demonstrated by facts on record that the assessee though calling it a "service provider" was actually acting as a "trader". Absent facts justifying such re-characterization, there was no justification for TPO to apply trading margins to assessee's indenting activity under TNMM
In the instant case, the assessee had two segments-trading and indenting. Indenting was done by the assessee for its overseas AE and bulk of its turnover was from indenting. Besides, indenting, assessee had small amount of trading with non-AEs. The gross profit margin (commission) for indenting on AE sales was 1.48% while GP margin on trading was 1.81%. TPO applied trading margin of 1.81% to indenting sales and made additions for difference between 1.81% and 1.48%. DRP upheld TPO's additions. Hence present appeal by assessee to ITAT
The Tribunal held as under:
1) As per the contracted terms and the unrebutted stand of the assessee it was merely providing indenting services. At no point of time the title in goods or possession of the merchandise was in assessee's hands. The contract was entered into by SCJ (AE) and Indian customers directly whether for export or import;
2) The negotiations were directly done by AE and the Indian customers, and the assessee merely functions as a facilitator. The assessee doesn’t need to incur cost either for maintaining or storing the inventory or for the transportation as the title in goods was never held by the assessee for its indenting activity as a service provider. Consequently, the assessee was not exposed to any credit risk in maintaining the inventory nor was the assessee exposed to price risk or the risk linked with offering credit sales;
3) It is an accepted economic principle that the trader acting as an entrepreneur is exposed to price risk, cost risk, credit risk, warranty risk etc, which would necessitate the contract being entered into and negotiated by assessee. In its indenting activity these facts were not evident;
4) The performance of the critical functions, like decisions to enter into contract, to negotiate the terms of the contract, to decide the level and extent of exposure for price risk, credit risk, warranty risk etc are some of the risks to which a trader is exposed. The record shows that at no point of time the assessee was ever exposed to any of those risks as such, the two activities could not be treated at par and thus invited a similar treatment. There was no justification to apply the margins of trading activity to indenting activity in the facts of the present case - Sojitz India (P.) Ltd. v. Dy.CIT [2013] 33 taxmann.com 299 (Delhi - Trib.)
In the instant case, the assessee had two segments-trading and indenting. Indenting was done by the assessee for its overseas AE and bulk of its turnover was from indenting. Besides, indenting, assessee had small amount of trading with non-AEs. The gross profit margin (commission) for indenting on AE sales was 1.48% while GP margin on trading was 1.81%. TPO applied trading margin of 1.81% to indenting sales and made additions for difference between 1.81% and 1.48%. DRP upheld TPO's additions. Hence present appeal by assessee to ITAT
The Tribunal held as under:
1) As per the contracted terms and the unrebutted stand of the assessee it was merely providing indenting services. At no point of time the title in goods or possession of the merchandise was in assessee's hands. The contract was entered into by SCJ (AE) and Indian customers directly whether for export or import;
2) The negotiations were directly done by AE and the Indian customers, and the assessee merely functions as a facilitator. The assessee doesn’t need to incur cost either for maintaining or storing the inventory or for the transportation as the title in goods was never held by the assessee for its indenting activity as a service provider. Consequently, the assessee was not exposed to any credit risk in maintaining the inventory nor was the assessee exposed to price risk or the risk linked with offering credit sales;
3) It is an accepted economic principle that the trader acting as an entrepreneur is exposed to price risk, cost risk, credit risk, warranty risk etc, which would necessitate the contract being entered into and negotiated by assessee. In its indenting activity these facts were not evident;
4) The performance of the critical functions, like decisions to enter into contract, to negotiate the terms of the contract, to decide the level and extent of exposure for price risk, credit risk, warranty risk etc are some of the risks to which a trader is exposed. The record shows that at no point of time the assessee was ever exposed to any of those risks as such, the two activities could not be treated at par and thus invited a similar treatment. There was no justification to apply the margins of trading activity to indenting activity in the facts of the present case - Sojitz India (P.) Ltd. v. Dy.CIT [2013] 33 taxmann.com 299 (Delhi - Trib.)
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