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Income Tax Appellate Tribunal, DELHI “I” BENCH: NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI MANISH AGARWAL
The captioned appeals are filed by the assessee against the separate assessment orders dated 29.06.2024 & 30.10.2024 passed by Assessment Unit, Income Tax Department u/s 143(3) r.w.s 144C(13) r.w.s 144B of the Act towards the direction dated 28.05.2025 & 24.09.2024 of Ld. Dispute Resolution Panel-2, New Delhi (“DRP”) pertaining to assessment years 2020-21 & 2021-22 respectively.
2. At the time of hearing, it was stated that the issues involved for Assessment Years 2020-21 & 2021-22 are common, interlinked
1 | P a g e and identical. Hence, both captioned appeals have been heard together and accordingly, adjudicated by this common order.
Brief facts of the case are that the assessee, M/s. Samsung SDI India Pvt. Ltd. is a subsidiary of Samsung SDI Co. Ltd., engaged in the business of manufacturing and trading in Battery packs used in mobile phones and was incorporated on 10.04.2019, having its registered office in Noida. The assessee e-filed its return of income, declaring NIL income on 14.02.2021 for the year under consideration. The same was processed u/s 143(1) of the Act on 30.03.2021, determining the total income at NIL. However, due to challenges faced by the assessee company in obtaining manufacturing licenses and other commercial reasons, with effect from 01.01.2020, the assessee company has shifted its business model from manufacturing to distribution of battery packs, wherein it purchased battery packs from a single Indian vendor, namely Elentec India Pvt. Ltd. ('Elentec') and sold the same to a single Indian customer, namely, Samsung India Electronics Pvt. Ltd. ('SIEL'). From the period April 2019 to November 2019, it carried out test-runs & installation activities, and accordingly operated as a manufacturer only for one month i.e., December 2019 before transitioning to distribution operation from 01.01.2020. The assessee has entered into the following international transactions
2 | P a g e during the year under appeal hence, reported in the form 3CEB filed by the assessee:-
The AO in order to determine the ALP of the international transactions entered by the assessee during the FY 2019-20 relevant to AY under appeal, made a reference to the AO technical unit u/s 92CA(3) of the Act. In compliance, the TPO vide order dated 28.07.2023 proposed total adjustment of INR 8,65,25,835/- to the ALP of international transactions carried out by the assessee. Thereafter, the draft assessment order was passed on 30.08.2023 wherein adjustments proposed by the TPO were added to the total income of the assessee and total income was assessed at INR 8,65,25,835/-. Against this order, the assessee filed objections before Ld. DRP who vide its order dated 28.05.2024 rejected the 3 | P a g e aggregation approach of the TPO and allowed the transaction by transaction approach of the assessee in respect to the distribution segment and upheld the benchmarking adopted the appellant using other method in its TP study report. With respect to the manufacturing segment as the assessee has stopped production within one month of commencement therefore, Ld. DRP has held TNMM as most appropriate method applied by the TPO. Ld. DRP further rejected Berry ratio (GP/VAE) as PLI. Thereafter, the TPO has passed the effect giving order dated 24.06.2024 wherein adjustment of INR 1,27,79,403/- were computed for distribution segment and of INR 11,22,976/- for manufacturing segment and accordingly, the total adjustment of INR 1,39,02,379/- was proposed by the TPO. Subsequently, the AO passed final assessment order on 26.09.2024 u/s 143(3)/144C(13) r.w.s. 144B of the Act wherein the total income of the assessee was assessed at INR 1,39,02,380/- after making addition on account of transfer pricing adjustment after the directions given by the Ld. DRP amounting to INR 1,39,02,379/-.
Against this order, the assessee is in appeal before the Tribunal by taking following grounds of appeal:- 1. “That on the facts and circumstances of the case and in law, the Ld. DRP/AO/TPO has erred in making addition of Rs. 1,39,02,380/- to the loss of Rs. 3,66,84,816/-declared by the Appellant in its return of income for AY 2020-21.
2. That the Ld. DRP/AO/TPO erred in not adjusting the returned losses of Rs. 3,66,84,816/- for the relevant AY against the addition of Rs. 1,39,02,380/- to the income of the Appellant, which, if adjusted, would have nullified the demand on the Appellant.
3. That on the facts and circumstances of the case and in law, the Ld. DRP/ΑΟ/ΤΡΟ have erred in rejecting the 'Other method' applied by the Appellant to benchmark its international transactions pertaining to the distribution operations without providing any cogent reason. Furthermore, the Learned AO and TPO erred in applying the Transactional Net Margin Method (TNMM) for determining the Arm's Length Price (ALP) of the international transactions undertaken by the Appellant for its distribution operations.
4. That the Ld. DRP/AO/TPO erred in determining the arm's length price for international transactions pertaining to distribution operations by rejecting the "Berry Ratio' (Gross Profit/Value added expenses') as the profit level indicator (PLI) and instead applying the PLI of Net Cost Plus Margin (Operating Profit/Operating Cost) under TNMM.
5. That the Ld. DRP/AO/TPO has erred by selecting certain companies which were not comparable to the Appellant in order to determine the arm's length margin applicable to the Appellant. 6. Without prejudice to the ground that the Ld. AO/TPO/DRP erred in applying TNMM with Operating Profit/Operating Cost as the PLI while benchmarking the transactions pertaining to the distribution operations, the Ld. AO/TPO while doing so has erred in not allowing appropriate adjustments under 10B(1)(e)(iii) and Rule 10B(3) to account for material differences in the comparables vis-à-vis the Assessee including the working capital adjustment. 7. That the Ld. DRP has erred in not adjudicating the issue of working capital adjustment and thus, has violated the principles of natural justice. 8. That on the facts and circumstances of the case and in law, if the adjustment pertaining to the distribution operations is deleted, the adjustment in manufacturing segment will also be consequently deleted. 9. That on the facts and circumstances of the case and in law, the Ld. AO erred in levying interest of Rs. 3,32,396/- under the Act. 10. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 270A of the Act for alleged under-reporting of income. Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant.”
7. Ground No.1 & 2 are general in nature hence, not adjudicated.
8. Ground Nos. 3 and 5 raised by the assessee are not pressed hence, dismissed.
In Ground No.4 to 7, the assessee has challenged the action 9. of AO/TPO/DRP in determining the ALP of international transactions related to distribution segment by applying PLI of Net cost plus margin under TNMM as against Berry ratio taken by the assessee for computing PLI.
Ld.AR for the assessee submitted that under distribution segment, the assessee placed orders for purchase of goods against confirmed order received from its customer and since there is only one supplier i.e. Elentec and only customer i.e. SEIL, the assessee is not required extensive marketing activities and limited marketing were carried out. Ld. AR further submitted, that assessee enters into purchase contract with Elentec and a back to back sale contract with SEIL to sell the mobile batteries, where the purchases and sale contracts are entered into instantaneously. He submitted, even, the assessee does not take possession of the goods involved in the distribution activities and goods were directly transferred from the supplier to the customer hence, has no responsibility of maintaining warehouses and storing the goods. Besides this, the assessee has not maintained any inventory of goods since purchases have been made against the confirmed orders. Ld. AR submitted, the limited economic value adding activities undertaken by the assessee consist primarily of coordination, transportation and processing of documentation. Therefore, the risk and functions
6 | P a g e involved in the distribution are very less as compared to a regular trade transaction. Ld. AR further submits that the assessee is not exposed to any risk of fulfilment of contract and risk on account of price and inventory are transferred on back to back basis. He submitted, in the distribution activities, the assessee earns profit to covers running and administrative cost with a little mark-up.It is thus submitted by Ld.AR that the assessee is working under very limited risk environment and therefore, Berry ratio is the most appropriate method for PLI which deserves to be accepted. In this context, he drew our attention to OECD guidelines on berry ratio. Further, reliance was placed on the judgement of Sumitomo Corporation India (P.) Ltd. vs CIT [2016] 71 taxmann.com 290 and Mitsubishi Corporation India (P.) Ltd. vs CIT [2014] 50 taxmann.com 379 and certain other judgements. Besides this, Ld.AR submits a detailed written submission in this regard which is reproduced as under:- 24. It is submitted that the DRP has erroneously categorized the Appellant as a medium to normal risk distributor. (refer para 7.3 of DRP Directions on pg 32 of Appeal Set).
Under its distribution operations, the Appellant is engaged in business to business (B2B) buy-sell operation wherein it procures battery packs from a single vendor i.e. Elentec India and sells it as is to a single customer i.e. SIEL, without undertaking any value addition. (refer para 5.2 of the TP Study at pg. 130 of PB 1) 26. A summary of functions performed, risks assumed by the AE, Appellant and other third parties in respect of the distribution operations of the Appellant are given below which will make it evident that Appellant is a limited risk distributor (refer para 5.2.4 of the TP Study at pg. 137-138 of PB 1): Functions Related Parties Unrelated Party Performed SDI Korea Samsung SDI Elentec India/SIEL Business Strategy x May be involved 7 | P a g e
on global level via their parent entities Research and x x Development Vendor and x - Customer Identification Purchase of Limited to - Finished Products purchase price (Against confirmed determination orders) Quality Control x Limited Distribution Limited to sale - price (Against confirmed determination orders) Logistics and x x Warehousing Marketing Limited x After Sale Services x x Support Activities x x Summary of risks assumed Risk Related Parties Unrelated Party SDI Korea Samsung Elentec SDI India/SIEL Business/Market Risk Limited Research and Development Risk X X Inventory Risk x X Product Liability Risk Limited Credit and Collection Risk x Limited X
From the above tables, it is evident that the Appellant's FAR has following attributes and hence, it is a limited function and risk distributor: 27.1. Buys battery packs from one seller Elentec India and sells it only to its AEs. Said vendor and customer has also been identified by its AE- Samsung SDI Korea. 27.2. Appellant sells the traded goods as it is without any value addition; 27.3. Procurement is made from Elentec India against confirmed order 27.4. No role in technical specification of battery
27.5. Appellant only gets the flash title of the goods which are transferred directly from Elentec's factory to SIEL upon placing of the purchase order. 28. The asset base of the Appellant is as follows (refer para 5.2.2 of the TP Study at pg. 135 of PB 1): Written down value of assets employed (as on 31 March 2020) Sl.No. Assets Amount(in INR) 1. Plant & Machinery - 2. Office Equipments 7,48,072 3. Computer and computer servers 38,27,566
29. As is evident from summarized FAR analysis of the Appellant business, it can be construed that the Appellant does not have a significant asset base or assumes any risks which might indicate that it carries out the functions of a full-fledged distributor. COGS is non-value-added expense for Appellant 30. Therefore, it can be concluded that the Appellant does not perform any function or assumes any risk as regards the value of goods recorded in the ("P&L") of the Appellant. Considering the functional profile and business model of Appellant with respect to distribution services, the "cost of goods sold" ("COGS") is merely pass through and is a non-value-added expense in case of the Appellant. 31. Accordingly, the Appellant has appropriately considered the Berry Ratio, i.e. Gross Profit/ Value Added Expenses ('GP/VAE') as the Profit Level Indicator ('PLI'). 32. Judicial precedents relied by the Appellant 32.1. In Sumitomo Corporation India (P.) Ltd. v. CIT [2016] 71 taxmann.com 290/242 Тахman 260/387 ITR 611 (Delhi), (refer pg. 1 of CLC) Hon'ble jurisdictional High Court, while considering applicability of Berry Ratio, has observed that it can be used effectively in cases where the value of goods have no role to play in the profit earned by the assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. The operating expenditure incurred by the Assessee should effectively captures the functions performed and risk undertaken by the Assessee. The relevant paragraphs are extracted below for reference: 45. Traditionally, the denominator of the ratio only comprised of selling, general and administration expenses. However, the Treasury Legislation of USA also included depreciation as a part of the Operating Expenses used as a denominator in the berry ratio. As is apparent, Berry ratio has limited applicability; it can be used effectively only in cases where the value of goods have no role to 9 | P a g e play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating expenditure incurred by the Assessee effectively captures all functions performed and risks undertaken by the Assessee. Thus, in cases where an Assessee uses intangibles as a part of its business. Berry ratio would not be an apposite PLI as the value of such tangibles would not be captured in the operating cost and, therefore, it would not be appropriate to compute the ALP based on net profit margin having regard to the operating cost as a relevant base. Similarly, Berry ratio would not be an appropriate PLI for determining ALP in cases of Assessees who have substantial fixed assets since the value added by such assets would not be captured in Berry ratio. "46. It can be seen from the above that the Berry ratio can be used only in very limited circumstances and the limitations that we have listed above are by no means exhaustive. There is also a view expressed that use of Berry ratio as a PLI results in indicating less than fair ALPs in tax jurisdiction where the Assessees have a lower bargaining power. In the aforesaid context, in our view, the TPO had correctly reasoned that Berry ratio could not be used as a PLI in cases of Assessees which were using intangibles. However, we find that there was no cogent material for the TPO to hold that the Assessee had developed supply chain and human resources intangibles. In any event, there was no material to conclude that costs of such intangibles were not captured in the operating expenses.
47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profits and the profits are mainly dependent on expenses incurred. The fundamental premise being that the operating expenses adequately represent all functions performed and risks undertaken. For this reason Berry ratio is effectively applied only in cases of stripped down distributors; that is, distributors that have no financial exposure and risk in respect of the goods distributed by them.” 32.2. Mitsubishi Corporation India (P.) Ltd. v. Dy. CIT [2014] 50 taxmann.com 379/ [2015] 67 SOT 83 (Delhi - Trib.)/(ITA No. 5042/Del/2011 dated 21-10-2014)- ITAT Delhi (refer pg. 14 of CLC) 50. In the landmark care of E.1. DuPont de Nemours & Co. v. United States, 608 F.2d 445, Charles Berry, an economist, served at an expert witness on behalf of the U.S. government and the development of berry ratio is attributed to his testimony. What came up for consideration in the said case was the "proper," arm's length
10 | P a g e compensation that a Swiss subsidiary of DuPont USA, engaged as a distributor of the DuPont-USA, should earn on the distribution services it performed in Switzerland on behalf of the AB. In his analysis, Charles Berry determined that the best method for determining an arm's length result was to compare the Swiss distributor's mark-up on operating expenses to the same mark-up earned by uncontrolled (Le, third-party) distributors performing aubstantially similar functions. Berry's key Insight in the case was that distributors should earn a return commensurate to the distribution services performed and that the value of the products being distributed, in other words, was irrelevant. The implicit emphasis was thus on the service element even in trading activity, and in the costs incurred on rendering this service rather than in the value of goods traded. That was a case in which the assessee was simply involved in distributorship function without much risks, though certainly much more risks than in a back to back trading, associated with inventories or with uncertainties of normal trading. The key contribution to the economic activity was recognized as performing the distributorship function rather than the value of goods sold. Accordingly, distributors must achieve a particular gross profit in order to compensate them for their services, the costs of which are accounted for, almost entirely, in their operating expenses. To reflect the reality of distributors' economic significance and to provide an arm's length return to DuPont's Swiss subsidiary, Berry utilized a ratio that has since been named in his honour and is computed as gross profit to operating expenses. There are some variants to this ration but that aspect of the matter is not really relevant for the present purposes.
The underlying assumption for applicability of berry ratio is that the return to the tested party should be commensurate with his operating expenses and the value of goods dealt in was irrelevant for this purpose. While this proposition so laid down was in the case of a limited risk distributor without any value addition to the goods or significant risks associated with inventories, we are of the considered view that it is equally useful in a case in which the business entity is engaged in trading, with zero or low inventory levels, and particularly as it does not involve any unique intangibles or value addition to the goods traded.
The answer to the fundamental question of whether a taxpayer should be entitled to a return on the value of goods handled by it, would actually depend on the functions performed and the related risks borne by it, with respect to the goods; and not on whether the taxpayer has taken title to the goods, shorn of the assessee's FAR profile.
Clearly and undisputedly, on the facts of this case, neither the assessee has performed any functions on or with respect to the 11 | P a g e goods traded by it, beyond holding flash title for the goods in some of the cases, nor has the assessee borne any significant risks associated with the goods so traded. All the functions, assets and risk of the assessee are quite reasonably reflected by the operating costs incurred and the value of goods traded does not have much of an impact on its analysis of FAR. The cost of goods sold would be relevant if and only if the assessee would have assumed any significant risks associated with such goods sold and when monetary impact of such risks is not reflected in operating expenses of the assessee. The berry ratio should, therefore, be equally useful in the present case as well. In the case of the traders like assessee, who neither assume any major inventory risk nor commit any significant assets for the same and particularly as there is no value addition or involvement of unique intangibles, the berry ratio should also be equally relevant as in the case of a limited risk distributor."
The use of OP/VAE or the Berry Ratio as an appropriate PLI has also been upheld in the following judicial precedents in India: * DHL Logistics (P.) Ltd. v. DCIT, [2020] 115 taxmann.com 40 (Mumbai-Trib) (refer pg. 76 of CLC) * Marubeni Itochu Steel India (P.) Ltd. v. Dy. CIT [2015] 60 taxmann.com 464/ [2016] 156 ITD 620 (Delhi-Trib.)/(ITA No. 761/Del/2015 dated 24-7-2015) (refer pg. 105 of CLC) * Dy. CIT v. Cheil Communications India (P.) Ltd. [2011] 11 taxmann.com 205 (Delhi) (refer pg. 123 of CLC) * Agility Logistics (P.) Ltd. v. DCIT, [2022] 138 taxmann.com 545 (Mumbai - Trib.) (refer pg. 150 of CLC) * ADM Agro Industries Kota & Akola (P.) Ltd. v. ACIT [2023] 151 taxmann.com 232 (Delhi - Trib.) (refer pg. 140 of CLC) 34. Further, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, 2022 provides guidance regarding applicability of the Berry Ratio and reads as under (refer pg 263 of CLC): "2.108. A situation where Berry ratios can prove useful is for intermediary activities where a taxpayer purchases goods from an associated enterprise and on-sells them to other associated enterprises. In such cases, the resale price method may not be applicable given the absence of uncontrolled sales, and a cost plus method that would provide for a mark-up on the cost of goods sold might not be applicable either where the cost of goods sold consists in controlled purchases..."
The United Nations Practical Manual on Transfer Pricing for Developing Countries, 2021 provides guidance regarding applicability of the Berry Ratio and reads as under (refer pg 266 of CLC):
12 | P a g e "For the Berry Ratio to be the most appropriate transfer pricing method to determine the remuneration of a controlled transaction (for instance for the distribution of products) the following elements have to be present: (i) the value of the functions performed, taking into account assets used and risks assumed, should be proportional to the operating expenses; (ii) the value of the functions performed, taking into account assets used and risks assumed, is not materially affected by the value of the products distributed; in other words it is not proportionate to sales; and (iii) the tested party does not perform other significant functions in the transaction under examination that should be remunerated using another method or profit level indicator. 4.5.6.5 The Berry Ratio represents a return on a company's value added functions on the assumption that these value added functions are captured in its operating expenses. It has been observed in practice that the Berry Ratio is used as a PLI for distributors and service providers. The Berry Ratio assumes that there is a relationship between the level of operating expenses and the level of gross profits earned by distributors and service providers in situations where their value-added functions can be considered to be reflected in the operating expenses. Consequently, it may be appropriate to use the Berry Ratio if the selling or marketing entity is a service provider entitled to a return on the costs of the provision of its services..."
It is submitted that once Berry Ratio (GP/VAE) is accepted as PLI and the benchmarking is undertaking taking into consideration the final set of comparables as per the final assessment order, the Appellant's GP/VAE will be at arm's length and the entire addition will get deleted. It is submitted that even if NP/VAE (Net Profits/Value Added Expenses) is considered as PLI, Appellant's NP/VAE will be at arm's length. The same is evident from the below computation: Sr.No. Company Name TPO Unadjusted Berry Ratio Berry Ratio Margins Allowed Allowed (GP/VAE) (NP/VAE) 1. Ramakrishna Electro 1.51% 1.34 0.34 Components Pvt.Ltd.
Susan Electricals India Pvt.Ltd. 1.66% 1.23 0.23 3. Shree N M Electricals Ltd. 3.04% 1.55 0.55 4. Sumitron Exports Pvt.Ltd. 3.82% 1.17 017 5. EnarayanElex India Pvt.Ltd. 4.20% 1.80 0.80 6. Aditya Industech Ltd. 7.32% 1.35 0.35 7. Balaji Switchgears Pvt.Ltd. 7.57% 1.91 0.91 8. Gemini International Pvt.Ltd. 11.09% 1.68 0.68 9. Vallabh Impex (India) Pvt.Ltd. 13.56% 1.95 0.95 Count 9 9 9 35th Percentile 3.82% 1.35 0.35 Median 4.20% 1.55 0.55 13 | P a g e
65th Percentile 7..32% 1.73 0.68 SDI Margins 2.06% 1.64 0.64 Operating Revenue 617,605,335 617,605,335 617,605,335 Operating Cost 605,138,551 605,138,551 605,138,551 GP 31,905,325 31,905,325 31,905,325 VAE 19,438,551 19,438,551 19,438,551 TP Adjustment (INR) 12,949,035 NIL NIL
On the other hand, ld. CIT DR for the Revenue submits that the assessee is working under medium and normal risk environment and therefore, Berry ratio for PLI is not applicable. For this, Ld.CIT DR relied upon the order of TPO and ld. DRP. Since the assessee is also manufactured goods and also taken care of repairs and post sales services therefore, the same should be taken as the normal distributor. He further submits that the assessee in its TP study report submitted wherein para 5.2.1 the functions performed were in “sub-para (d)” function related to purchase of finished goods is stated as under:- d. Purchase of finished products “Purchase function relates to day-to-day sourcing of finished products for carrying out distribution operations. SDI Korea, in co-ordination with SIEL's parent company i.e. Samsung Electronics Co. Ltd. ('SEC Korea') decides the global sales targets based on inputs from its affiliates (in this case, SIEL) and allocates the production targets among its affiliates and outside vendors identified by them. Basis this, the production quantums are allocated to SDII India. SDII then relays to such information to Elentec India to enable it plan its assembly operations. SDII receives a forecast from SIEL for 1-2 months. In accordance with the same, SIEL raises a purchase order ('PO') on SDII for a fixed purchase quantity for a period of 2 weeks. SDII, in turn, raises a PO on the vendor (Elentec India) for the purchase of battery packs required by SIEL. Elentec India carries out its assembly operations, by utilizing the technology received from SEC Korea. in accordance with such PO for timely sale of finished products to SDII. SDI Korea in coordination with SEC Korea determines purchase price for battery packs procured by SDII, by taking into considerations factors such as arm's market considerations, competition, quantities involves etc. In 14 | P a g e
effect, SDII does not participate in price negotiations for such purchases from Elentec.”
Further, the Ld.CIT DR refers “sub-para (e)” relating to the quality control which reads as under:- e. Quality Control “Quality Control activities involve establishing and enforcing minimum standards to ensure that inferior goods/services are not sold to consumers. This process involves testing and analysing the finished product/service. Quality control can be pursued by employing a combination of automated quality control equipment and qualified inspectors. For conducting its assembly operations, Elentec India procures raw materials (lithium lon cell) from SDI Korea and its affiliates, which comply with quality guidelines / parameters defined by SDI Korea. SDI Korea performs quality control procedures for all such raw materials provided to Elentec India. There is no role of SDII in the procurement function of raw material by Elentec India. However, during Elentec India's assembly operations, SDII's engineers, comprising of a team of three personnel, monitor and control the quality of the battery packs so assembled, to ensure compliance with quality standards prescribed by SDI Korea / SEC Korea. In the initial stages of SDII's operations (i.e. manufacturing operations), SDI Korea had sent certain employees to India to provide technical assistance and training to SDII's engineers to enable them to perform effective quality control.”
Ld.CIT DR further drew our attention to the Profit & Loss Account where the assessee had paid technical assistance and related fee of INR 81,69,448/- and thus, submits that the assessee is not a low risk distributor that the AO has rightly applied TNMM method to compute the ALP.
Heard the contentions of both parties and perused the material available on record. From the facts, it is seen that the assessee though has started commercial production that continue only for one month and did the trading of the products that mobile 15 | P a g e batteries for the remaining periods for the previous year. The assessee cannot treated as a normal trader who is doing trading activity of various goods of number of customers rather the assessee is working in special environment and it had purchased goods from a single supplier and sole to only one customer that too on order to order basis wherein when the assessee gets the order from customers, the corresponding order is placed to the supplier for the supply of goods. In other words, assessee enters into a purchase contract with only one supplier i.e. Elentec and sells the goods to only one customer. Though, technically, the assessee had entered into purchase and sale contracts for buying and selling goods, however, in reality, the assessee merely acts as a facilitator of buying and selling of goods between the supplier and customer. As per the business model, the goods purchased from Elentec are sold to SEIL. Thus, the goods never come to assessee's inventory and nor stored in any warehouse of the assessee. It is also a fact on record that both the seller and buyer are pre-determined and prices of the good i.e. mobile battery is pre-fixed. The assessee only provides logistics and certain administrative functions. Hence, the role of the assessee is limited. In this process, the assessee has made no value addition to the goods and kept his margin to meet out the cost incurred such as transportation, handling and certain administrative charges. Since the assessee is not maintaining any inventory therefore, there is no investment on this count and amount outstanding to the customer against the supplies is paid within prescribed time limit and the cost of funds involved has been taken care in the in the margin retained by the assessee. From the 16 | P a g e perusal of the financial statement, it is seen that the assessee has not incurred any cost on account of finance charges i.e. no interest is paid to financial institutions or banks which further prove that the assessee is having sufficient funds. Under these circumstances, it can be held that the assessee is a low risk distributor.
The Hon’ble Delhi High Court in the case of Sumitomo Corporation India (P.) Ltd. vs CIT (supra) while considering the application of Berry ratio has observed as under:- 45. “Traditionally, the denominator of the ratio only comprised of selling, general and administration expenses. However, the Treasury Legislation of USA also included depreciation as a part of the Operating Expenses used as a denominator in the berry ratio. As is apparent, Berry ratio has limited applicability; it can be used effectively only in cases where the value of goods have no role to play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating expenditure incurred by the Assessee effectively captures all functions performed and risks undertaken by the Assessee. Thus, in cases where an Assessee uses intangibles as a part of its business. Berry ratio would not be an apposite PLI as the value of such tangibles would not be captured in the operating cost and, therefore, it would not be appropriate to compute the ALP based on net profit margin having regard to the operating cost as a relevant base. Similarly, Berry ratio would not be an appropriate PLI for determining ALP in cases of Assessees who have substantial fixed assets since the value added by such assets would not be captured in Berry ratio. "46. It can be seen from the above that the Berry ratio can be used only in very limited circumstances and the limitations that we have listed above are by no means exhaustive. There is also a view expressed that use of Berry ratio as a PLI results in indicating less than fair ALPs in tax jurisdiction where the Assessees have a lower bargaining power. In the aforesaid context, in our view, the TPO had correctly reasoned that Berry ratio could not be used as a PLI in cases of Assessees which were using intangibles. However, we find that there was no cogent material for the TPO to hold that the Assessee had developed supply chain and human resources intangibles. In any event, there was no material to conclude that 17 | P a g e costs of such intangibles were not captured in the operating expenses.
In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profits and the profits are mainly dependent on expenses incurred. The fundamental premise being that the operating expenses adequately represent all functions performed and risks undertaken. For this reason Berry ratio is effectively applied only in cases of stripped down distributors; that is, distributors that have no financial exposure and risk in respect of the goods distributed by them.”
The coordinate Delhi bench of Tribunal in the case of Adm Agro Industries Kota & Akola P.Ltd, Vs. ACIT, Circle-1(1) , New Delhi in vide order dt. 13.06.2022 under similar circumstances held the berry ratio applicable for PLI by making following observations: 22. At this stage, it is necessary to look into the relevant statutory provisions relating to determination of ALP of international transactions with AEs. Section 92 of the Act provides for computation of income having regard to the ALP of international transactions with AE. Section 92C of the Act provides the methods for computation of ALP. TNMM is one of the approved methods for computing ALP. Rule 10B(1)(e) lays down the mechanism for computation of ALP under TNMM. On a holistic reading of Rule 10B(1)(e), it becomes clear, the computational mechanism is in several steps. In the first step, the net profit margin of the enterprise (in the present case, the assessee) realised from the international transaction with AE has to be computed in relation to cost incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. In the second step, the net profit margin realised by an enterprise (in the present case, comparables) from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. In the third step, necessary adjustments, if any, is made to the profit margin of comparables to take care of the differences that may be arising in the margin of the controlled transactions, which could materially affect the amount of net profit margin in the open market. In the fourth and fifth steps, the net profit margins of the controlled and 18 | P a g e uncontrolled transactions are compared and the ALP is determined. Thus, as could be seen from the computational mechanism provided in rule 10B(1)(e), it is not rigid but flexible. The net profit margin of the assessee can be computed not only in relation to cost incurred or sales effected or assets employed, but, having regard to any other relevant base also. The expression "any other relevant base" is wide enough to align the computation of margin of the assessee and the comparables.
Thus, if we go by the provision of rule 10B(1)(e), the return on value added cost, otherwise known as berry ratio, is not completely excluded from its purview. It can be a relevant base for computing the margin. The berry ratio in simple terms means a ratio of gross profit to operating expenses. Therefore, where operating expense is considered as a relevant base, there would be no difficulty in using berry ratio as PLI in terms of Rule 10(B)(1)(e). In case of Sumitomo Corporation India Pvt. Ltd. (supra), Hon'ble jurisdictional High Court, while considering applicability of berry ratio, has observed that it can be used effectively only in cases where the value of goods have no role to play in the profit earned by a assessee and the profits earned are directly linked with the operating expenditure incurred by the assessee. The operating expenditure incurred by the assessee effectively captures the functions performed and risk undertaken by the assessee. Thus, in a case where assessee uses an intangible as a part of its business, berry ratio may not be an appropriate PLI, as the value of such intangible would not be captured in the operating cost. Similarly, berry ratio is not appropriate PLI for determining the ALP in cases where the assessee may be having substantial fixed assets since, the value added by such assets would not be captured in berry ratio. However, it can be applied where the operating expense adequately represent all functions performed and risks undertaken. Thus, the Hon'ble High Court held that berry ratio is effectively applied only in case of stripped down distributors who have no financial exposure and risk in respect of the goods distributed by them. Various other decisions cited by learned Sr. counsel lay down the ratio that Rule 10(B)(1)(e) does not completely rule out applicability of berry ratio. 24…… 25…..
On examination of facts on record, we find that the aforesaid submissions of learned Departmental Representative are extraneous to the issue at hand. Admittedly, in the TP study report, the assessee had furnished segmental information regarding both the merchanting trades segment and physical trade segment. The TPO has also accepted the segmental analysis
19 | P a g e of the assessee. In fact, he has accepted the transactions in trading segment to be at ALP. As discussed earlier, the only variation, he has made in merchanting trades segment, is in relation to PLI of the assessee. Thus, neither the TPO nor DRP have made any adverse comment regarding the merchanting trades segment. Further, when there is no allegation either by RBI or any other regulatory authority regarding merchanting trades segment of the assessee, in our view, learned Departmental Representative cannot give a new dimension to the entire issue by making allegations which are not borne out on record. At this stage, learned Departmental Representative cannot improve upon the case of the TPO or learned DRP by enlarging the scope of the appeal. Thus, considering the fact that in the PLI of the comparables, cost of goods is not included in the denominator, in our view, the same would also apply to the assessee. Hence, cost of goods cannot form part of the denominator of PLI. Accordingly, we direct the Assessing Officer to compute the ALP by applying PLI of operating profit to value added cost, excluding the cost of goods. Grounds are allowed.
This view is further supported by the judgement of Mitsubishi Corporation India (P.) Ltd. vs CIT (supra) and various other judgments which are relied upon by the assessee.
In view of the above-mentioned facts, we are of the view that the Berry ratio is applicable in the present case as PLI and the assessee in para 36 of its written submissions as reproduced above has stated that if the same is applied to the final set of comparables, the assessee is working of ALP is at bar and no adjustment is required to be made which in our opinion, is correct and therefore, we hold the assessee approach of computing the Alp on the distribution operations based on Berry ratio as PLI is correct and directed to delete the adjustment made by AO/TPO on this count. Thus, Ground Nos. 4 to 7 raised by the assessee are allowed.
Ground No.8 raised by the assessee which relates to the adjustment under manufacturing segment. In this regard, it is submitted by the ld. AR that Ld. DRP has accepted other method as adopted by the assessee in its TP study Report and rejected TNMM adopted by the TPO however, while giving effect to the direction given by Ld.DRP, the AO has again applied TNMM under manufacturing segment.
After verification of the facts, we find the contention of the assessee is correct. The direction in finding given by Ld.DRP in para 6.1 reads as under:- 6.1 “In this ground, assessee has challenged the application of TNMM to evaluate the arm's length price of the international transaction entered into by assessee entity. It is pertinent to mention that the TPO has applied the TNMM at the entity level in an aggregate manner. However, in ground 2, this Panel has determined that this approach is deficient and hence, has issued directions for adopting transaction-by-transaction approach. As far as international transactions related to manufacturing activity such as 'machinery installation', test run & Inspection' & 'commercial production' are concerned, considering the fact that assessee had test run the manufacturing process during the FY Itself and thereafter stopped it after only one month, this Panel is of the view that manufacturing transactions should not be benchmarked using the TNMM method but using 'other method' as proposed in the TPSR.”
Further, from the perusal of para 6.2 of the order giving effect dated 24.06.2024 passed by the TPO, he admitted that Ld.DRP has rejected the application of TNMM for benchmarking the international transactions under manufacturing segments. However, Ld.TPO/AO has made an adjustment of INR 11,22,976/- by observing that there is a shortfall in distribution segment of 2.14% and thus, proportionate adjustment was made. Since we
21 | P a g e have already held the transfer pricing value taken by the assessee in the case of distribution segment as reasonable and proper therefore, their remained no difference as has been demonstrated observed by the assessee. Accordingly, the adjustment made is hereby deleted. Ground No.8 raised by the assessee is thus, allowed.
Ground No.9 raised by the assessee is regarding levy of interest which is consequential in nature and AO is directed to charge the interest on the income computed after giving effect to the order of the Tribunal.
23. Ground No.10 raised by the assessee is against the initiation of penalty proceedings u/s 270A of the Act for alleged under reporting of income which is pre-mature hence, dismissed.
In the result, appeal of the assessee is partly allowed.
[Assessment Year 2021-22] 25. Ground No. 1 is general in nature thus, not adjudicated.
26. Ground No.5 is not pressed by the assessee hence, dismissed.
27. Ground Nos.2, 3 & 4 raised by the assessee having common issues which have already been decided in favour of the assessee in Year 2020-21] while disposing Ground Nos.4, 5 6 & 7 raised by the assessee in this appeal as well.
22 | P a g e Thus, by respectfully following the same, Ground Nos. 2, 3 & 4 raised by the assessee in this appeal are allowed.
Ground No.6 raised by the assessee is with regard to levy of interest u/s 234A of the Act.
Heard the contentions of both the parties and perused the material available on record. The claim of the assessee is that the assessee has filed the return of income before extended due date given in Circular No.1/2022 dated 11.01.2022 issued by Central Board of Direct Taxes. Thus, the AO is directed to verify these facts and if the return of income is filed within extended time given in terms of Circular No.1/2022 dated 11.01.2022 by CBDT, no interest would be charged u/s 234A of the Act for delay in filing the return of income. Thus, Ground No.6 raised by the assessee is partly allowed for statistical purposes.
Ground No.7 raised by the assessee is with respect to levy of interest u/s 234B of the Act which is consequential in nature and AO is directed to charge interest on income finally computed after giving effect to the order of the Tribunal. Thus, Ground No.7 raised by the assessee is allowed.
Ground No.8 is with respect to levy of interest which is pre- mature at this stage hence, dismissed.
In the result, appeal of the assessee is partly allowed.