ACIT, NEW DELHI vs. M/S. LOUIS DREYFUR COMMODITIES INDIA PVT. LTD., GURGAON

PER O.P. KANT, AM:

These cross appeals by the assessee and the Revenue are directed against final assessment order dated 27/02/2015 passed by the Assistant Commissioner of Income-tax, Circle-15(2), New Delhi (in short ‘the Assessing Officer’) for assessment year 2010- 11, pursuant to the direction of Learned Dispute Resolution Panel (DRP). 2. The grounds raised by the assessee in its appeal are reproduced as under: That on the facts and circumstances of the case, and in law; 1. That on the facts and in the circumstances of the case and in law, the order passed by the Assessing Officer (‘Ld AO’) in pursuance to the directions issued by the Learned Dispute Resolution Panel (‘Ld DRP’) is bad in law. 2. That the Ld. DRP erred both on facts and in law in confirming action of the Ld. AO/ Transfer Pricing Officer’s (Ld. TPO) of making an adjustment of Rs. 1,14,09,377/- to the income of the appellant by holding that the international transactions undertaken by the appellant do not satisfy the arm’s length principle envisaged under the Income-tax Act 1961 (‘Act’) 3. That the Ld. DRP erred in confirming an adjustment of Rs. 64,84,261/- in back-office support services segment and in doing so the Ld. DRP has grossly erred in agreeing with the Ld. TPO’s action of: 3.1 not appreciating that none of the conditions set out in section 920(3) of the Act are satisfied in the present case; 3.2 disregarding the Arm’s Length Price (‘ALP’) as determined by the Appellant in the Transfer Pricing ('TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’); and in particular modifying/ rejecting the filters applied by the Appellant; 3.3 disregarding multiple year/ prior years’ data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2009-10) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation;

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3.4. rejecting comparability analysis in the TP documentation based on application of the additional/ revised filters in determining the ALP: 3.5. including high-profit making companies in the final comparables set for benchmarking a low risk captive unit such as the Appellant (disregarding judicial pronouncements on the issue) 3.6. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.7. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.8. ignoring the business/ commercial reality that since the Appellant is remunerated on an arm’s length cost plus basis, i.e. it is compensated for all its operating costs plus a pre- agreed mark-up based on a benchmarking analysis, the Appellant undertakes minimal business risks as against comparable companies that are full fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the Appellant on account of this fact; 4. That the Ld. DRP erred in agreeing with the action of the Ld. TPO/ Ld. AO of classifying the international transaction of merchanting trade as a “financing’ arrangement without understanding its exact nature and without taking into cognizance the functions performed, assets employed and risks assumed by the assessee in this regard;

4.1. without prejudice to the above contention, the Ld. DRP/ Ld. AO/ Ld. TPO erred in disregarding the claim of the assessee to use the same interest rate i.e. 2.74% p.a (Libor plus 100 basis points)which Assessee had used to pay interest on advances received from its associated enterprise (AE) to test the arm’s length character of the subject international transaction.

2.1 The grounds raised by the Revenue in its appeal are reproduced as under:

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18/03/2014, the Assessing Officer proposed transfer pricing adjustment along with other disallowance on account of commission and brokerage ( Rs.3,58,91,944/-), disallowance on account of cash discount ( Rs.77,32,269/-) and disallowance on account under section 14A of the Act (Rs. 8,48,25,000/-). 3.1 The learned DRP upheld the adjustment of ₹ 49,25,116/- to the transaction of merchanting of commodities, however, part relief of ₹ 2,64,448/- has been granted against the transfer pricing adjustment of back office support services by way of allowing working capital adjustment. The other additions proposed by the Assessing Officer were also rejected by the learned DRP. Pursuant to the direction of the learned DRP, the Assessing Officer passed the impugned final assessment order against which both the assessee and the Revenue are in appeal before the Tribunal raising the grounds as reproduced above. 4. Before us, the parties appeared through Video Conferencing facility and filed paper-book and another documents electronically (through email). 5. The ground No. 1 & 2 of the appeal of the assessee are general in nature and, therefore, we are not required to adjudicate upon these grounds specifically. 6. The ground No. 3 of the appeal relates to adjustment to back office support service segment. 6.1 Brief facts qua the issue in dispute are that in its transfer pricing study, the assessee reported many international transactions, which have been reproduced by the learned TPO on page 2 of the order. For ready reference said transactions are extracted as under:

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1.1 Purchase of Crude Palm Oil - 807,402,850 Raw Material Purchase of Soya bean Oil - 796,658,133 1.2 Raw Material Comparable 1.3 Purchase of Crude Palm Oil - 198,004,805 Uncontrolled Traded Goods Price Method (''CUP1') 1.4 Purchase of Sugar - Traded 2,281,788,761 Goods 1.5 Purchase of Cotton - Traded 6,255 Goods 2. Export of Agri-Commodities 2.1 Sale of Soya Bean Meal 9,461,751 2.2 Sale of Maize 99,427,923 2.3 Sale of Cotton 5,125,418,551 2.4 Sale of Coffee 83,526,864 3. Merchanting trade of Agri- CUP Commodities 3.1 Purchase of Soyabean Seed 244,909,808 3.2 Sale of Soyabean seed 246,571,182 4. Provision of Market Research and Research for Freight and Metal 4.1 Provision of Market Research 16,942,314 Transactional Services Net Margin 4.2 Provision of Research Service 8,463,131 Method ("TNMM”) for Freight and Metal 5. Provision of Back-office support services 5.1 Provision of Logistic 55,812,068 support/Execution TNMM 5.2 Provision of Manpower 2,366,481 Services Interest expense on trade 21,092,726 CUP 6. advances 7. Acceptance of trade 2,282,706,564 CUP advances Reimbursement of 2,043,874 CUP 8. Expenses. 9. 3,135,821 CUP Recovery of Expenses. 10. Pre-Payment Discount CUP allowed 78,203,624

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Pre-Payment Discount 204,074 CUP 11. received TOTAL 12,364,147,560

6.2 The learned TPO, however, made adjustment to transaction of merchanting trade of Agri-comodities and provision of back office support services, details of which are as under:

Method Adjustment Nature of Value of Adjustment S. Applied by as per final International Transactio as per TPO No. the AO order Transaction n (INR) order (INR) Appellant (INR) 1 Merchanting trade of Agri-Commodities Adjustment 24,49,09,80 Purchase of Adjustment of l.l Comparable of INR 8 Soyabean Seed INR 49,25,116 Uncontrolle 49,25,116 (refer page no d Price (refer page Sale of 24,65,71,18 48 of the 1.2 (“CUP”) no 82 of the Soyabean seed 2 Appeal Set) Appeal Set) 2 Provision of Back - Office support services Adjustment Transaction Adjustment of Provision of of INR al Net INR 67,48,709 Logistic 64,84,261 2.1 5,81,78,549 Margin (refer page no support/Execut (refer page Method 66 of the io n no 82 of the (“TNMM”) Appeal Set) Appeal Set

6.3 As far as transaction of provision of back office support services is concerned, the assessee was engaged in providing business support services to holding company (LD Asia) and other affiliated entities in return for a service fee. In business support service segment, the assessee reported Operating Revenue (OR) of ₹ 5,81,78,549/- and total operating cost (OC) of ₹ 5,28,89,588/- and worked out operating profit (OP) of ₹ 52,88,961/-. In this manner, the assessee computed Profit Level Indicator or Profit Margin of the assessee (OP/OC) as 10.00 percentile. In its

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transfer pricing study, the assessee selected 8 comparables and computed the average arithmetic mean of the margin at 11.79%. The list of the comparables selected by the assessee and there margin is reproduced as under: SI. No. Name Of the Comparable Margin Aditya Birla Minacs Worldwide 2.20% 1. Limited Datamatics Financial Services -1.26% 2. Ltd. 3. I C R A Techno Analytics Ltd. 13.81% 4. Informed Technologies India Ltd. 16.26% 5. Infosys B P O limited 17.55% 6. Inhouse Productions Limited 8.81% Nittany Outsourcing Services Pvt. 7. Ltd. 26.25% 8. R Systems International Limited 10.70%

6.4 Accordingly, the assessee treated its international transaction of back office support service at arm’s-length in view of the margin being in the range of plus minus 5% of average margins of comparables. The learned TPO rejected few comparables of the assessee and added few comparables selected by him. Finally, he retained nine comparables as under and computed their average margin at 22.76%. Final list of comparable is reproduced as under: Operating Sr. No. Comparable name Profit / Total Cost margin 1 Apitco Ltd. 40.02% 2 Cameo Corporate Services Ltd. 7.84% 3 Crystal Hues Ltd. 9.08% 4 Cyber Media Research Ltd. 14.85% 5 Global Procurement Consultants Ltd. 37.18% 6 H C C A Business Services Pvt. Ltd. 19.73% 7 Quadrant Communications Ltd. 13.11% 8 Quippo Valuers & Auctioneers Pvt. Ltd. 23.96% 9 T S R Darashaw Ltd. 39.07%

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Count 9 Average OP/TC margin 22.76%

6.5 The learned TPO computed the amount of adjustment of Rs.67,48,709/- as under:

Particulars Amount (INR) Price charged in International 5,81,78,549 transaction Operating Cost of the Assessee for provision of services (A) 5,28,89,588 Add: Mark-up @ 22.76% (B) 1,20,37,670 ALP for provision of services (C= A+B) 6,49,27,258 Price received 5,81,78,549 Amount of adjustment 67,48,709

6.6 The claim of working capital adjustment as well as risk adjustment was declined by the learned TPO. The learned DRP retained the comparables finally selected by the learned TPO, but directed to allow the working capital adjustment. Accordingly, in the final assessment order, the Learned Assessing Officer has allowed relief of ₹ 2,64,448/- on transfer pricing adjustment to back office support services. 6.7 Before us, the Learned Counsel of the assessee has only disputed inclusion of five comparables namely Aptico Ltd.; Global Procurement Consultant Ltd. (GPCL); HCCA Business Services Private Limited; Quipo Valuers and TSR Darashaw Ltd. Before adjudicating selection/acceptance of comparables, it is relevant to summarise functions under the segment of back office support

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services of the assessee reported in transfer pricing study (page No. 394 to 398 of APB). as under: (i) maintaining accounts and generating financial reports for associated enterprises ; (ii) providing logistic and operations support to associated enterprise including scheduling and documentation of shipments, raising of bills/invoice, generating warehouse advice, processing the payments for trading executed, liaison with counter parties, inventory management for insurance and management of warehouse accounts (iii) trade support including settlement of sale/purchase transactions of futures entered into by the associated enterprise on exchange on daily basis, accept trades entered into by the AEs and verify those trades from exchange with the trade sheet provided by the AE, preparing of position report of the physical and futures trades of AEs (iv) providing travel support desk to employees of AEs including online search of availability of the airline ticket and comparing quotes for available carriers between a specified destinations (v) providing internal audit services to associated enterprises (vi) providing quality control/ inspection services for quality and grade of Coffee to associated enterprises.

6.8 In background of above functional analysis of the assessee, the comparability of comparable companies challenged by the assessee is adjudicated as under:

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1.1 Before the learned TPO, this company was challenged for inclusion on the ground that it is engaged in providing high-end technical consultancy services. The learned TPO rejected this objection observing that majority of the income of the company is from skill development, tourism and research studies, project related services, which are in the nature of business and support services for development of tourism and industry and thus company is a good comparable. The other arguments of the assessee of high and volatile profit margin, employee experience in diverse disciplines were also rejected. The learned TPO noted that the assessee has also booked revenue under the head skill development. The learned DRP also rejected the contention of the assessee of technical services observing that that revenue breakup of the technical services constituted much lower percentage of total services and upheld inclusion of the company in the set of the comparables. 1.2 Before us, the Learned Counsel of the assessee submitted that company is functionally dissimilar and Tribunal in assessment year 2008-09 has excluded the company from the set of the comparables on the ground of functional dissimilarity. 1.3 The Learned DR submitted that activities of the company are in the nature of back office support services

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and, therefore, it is one of good comparable with the assessee. 1.4 We have heard rival submission of the parties and perused the relevant material on record. On perusal of schedule 11 of profit and loss account available on page 19 of annual reports of company, we find that income from operations has been shown from following activities: INCOME FROM OPERATIONS Micro Enterprises Development 5,283,039 11,782,673 Skill Development 27,575,000 32,259,550 Entrepreneurship Development 10,873,397 3,078,030 Tourism & Research Studies 14,835,450 20,743,985 Project related services, Infrastructure Planning & Development 32,600,996 18,805,321 Environment Management 3,998,796 1,000,000 Energy related Services 4,835,206 5,086,749 Cluster Development 47,986,516 9,714,128 Asset Reconstruction & Management Services 5,503,141 7,802,982 683,732 Emerging Areas 154,175,273 110,273,418

1.5 In assessment year 2008-09, also this company was engaged in similar services and the Tribunal in ITA No. 6409/Del/2012 has held the company is functionally dissimilar with the assessee, observing as under: “19. We have carefully considered the rival contention and orders of the learner Transfer Pricing Officer where in at page No. 32/33 the above comparable company has been considered. The Ld. Transfer Pricing Officer has rejected the contention of the assessee as the comparable company is fulfilling all the quantitative criteria set forth by the Ld. Transfer Pricing Officer. The argument of the selection of the above comparable company vis-a-vis is the functions performed by the comparable company which shows that only 12% of the total revenue of the comparable company is pertaining to the research studies deserves consideration. This is a glaring factor which shows that the comparable company is not functionally comparable wherein it performs only one functions which is constituting only 12% of its revenue which is comparable with the functions performed by the assessee. We have also perused the annual accounts of

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the above comparable company placed at page No. 681/706 of the paper book furnished by the assessee. A careful perusal of the operations carried out by Apitco Ltd. deciphers that this company is providing services in the nature of Project report preparation, Technical and economic studies, feasibility studies, Micro enterprise development, Skill development, Project management consulting, Industrial cluster development, Environmental management consulting, Energy management consulting, Market and social research and Asset reconstruction management services. No segment-wise profitability data of these services is available. In view of above facts as well as considering the various judicial pronouncements, which are also relied upon by the assessee, we are of the opinion that above comparable company cannot be considered as functionally similar to the functions performed by the assessee company hence the Ld. Transfer Pricing Officer is directed to exclude the above company from the comparability analysis.”

1.6 In view of no change in activity of the company as compared to assessment year 2008-09, respectfully following the finding of the Tribunal (supra), the learned AO/TPO is directed to exclude the above company from the set of comparables.

2.1 Before the learned TPO, the assessee contended that this company is engaged in providing consultancy services and review procurement process for various projects funded by the World Bank and, therefore, it is functionally dissimilar to the assessee. The learned TPO, however, observed that main service provided is procurement management service which is in the nature of business support services and therefore company is functionally

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similar to the assessee. The learned TPO also rejected the objection of the assessee of abnormally high and volatile profit margins. Learned DRP also upheld the finding of the learned TPO. 2.2 Before us, the learned Counsel of the assessee referred to page 42 of the Annual Report Compendium and submitted that company is mainly in providing consultancy services in the procurement field, whereas the assessee is engaged in providing back-office support services. He further relied on the decision of the Tribunal in the case of Exxon Mobile Gas (India) Private Limited Vs. ACIT in ITA No. 1491/Del/2015 for assessment year 2010-11. 2.3 The Learned DR, on the other hand, submitted that company is engaged in providing procurement related advisory as well as audit or review of procurement, procurement management, procurement governance, bid support services, valuation assignments etc, which are primarily in the nature of back office support services and, therefore, company is functionally similar to the assessee. 2.4 We have heard rival submission of the parties on the issue in dispute and perused relevant material on record. The dispute is regarding whether the services rendered by the company are in the nature of the consultancy or in the nature of support services. On perusal of annual report of the company, we find that on page 42 of the Annual Report Compendium, the critical activity of the company has been mentioned as monitoring of all procurement activities including project management from concept to

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commissioning so as to ensure timely supply and delivery, quality control, through inspection and evidence of cost overruns to the client. Further on perusal of the Annual Report Compendium pages 44 to 61, we find that the company has provided procurement related advisory and auditing services for multilaterally funded project across a range of developing countries including India. The company has also provided procurement management services in India. The company has also provided bid support services. The relevant part of the annual report is reproduced as under: “Bid Support Services GPCL’s expertise in conducting audits and providing services in multilaterally funded projects was put to use in offering Bid Support Services to an Indian Contracting firm in its maiden international tender for an African Development Bank funded Highway Project in Mauritius. The Services involved assistance in technical investigation of site conditions, assessment of materials in the Bill of Quantities and obtaining competitive quotations for the same from accredited vendors, and ensuring that the bidding documents is complete in all respects.”

2.5 The company has also carried out performance review of various projects of Asian Development Bank, which were executed in India, survey of health facilities under UNICEF etc. In view of all this activity reported in annual report of the company, we are of the view that company is no longer engaged in providing consultancy but it is providing support services for execution of the various projects and, thus, primarily it is engaged in back-office support services. Accordingly, it is functionally similar to assessee; therefore,

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the Learned AO/TPO is directed to retain this company for the purpose of set of comparables.

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enterprises and therefore services are identical to the services of back-office support rendered by the assessee.

3.4 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. As far as argument that services are payroll processing are similar to services of preparing and maintaining accounts by the assessee for its associated enterprises, we agree with the Learned DR. On perusal of function performed by the assessee under back-office support services ( page 394 of the paper-book), we find that the assessee utilized two softwares for maintenance of accounts of AEs. The first software is ‘EKA’, i.e., trading/logistics application, which captures trades both in the physical and the futures side. Another software is ‘Dream’ which is an accounting application and captures accounting aspects of trades entered into ‘EKA’, both on the physical and futures side. The accounts support service team of the assessee generates debtors ageing report and trial balance, after posting of invoice and bank reconciliation etc. Thus, the activities of the assessee are also in the nature of processing of accounting data for AEs, which is akin to payroll processing support services, which is sole segment of the company. As far as regrouping/rearrangement of he figures is concerned, the relevant part of the annual report of the company is reproduced as under:

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“2.14 Quantitative Details The Company’s operations comprise of Payroll processing services. Hence, it is not possible to give the quantitative details of sales and certain information as required under paragraphs 3, 4C and 4D of Part II of Schedule VI of the Companies Act, 1956. 2.15 Figures for the previsou year have been re-grouped/re- arranged, wherever considered necessary to conform to current period’s presentation.”

3.5 On perusal of the above, we find that previous year figures have been regrouped/rearranged, which is not having any impact on the figures of the year under consideration. Accordingly, we reject the objections of assessee to exclude the company from the set of the comparables. The Learned AO/TPO is directed to retain the company in the set of the comparables.

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submitted that company is engaged in providing services of sale of construction and earthmoving equipment, auctions for financial institutions and industrial assets disposal and valuation services. The Learned Counsel referred to page 139 of the Annual Report Compendium and submitted that segment of the company is in the nature of consultancy/professional services and therefore company is liable to be rejected. 4.3 On the contrary, the Learned DR submitted that the assessee is also providing logistic and operations support services to associated enterprises which include scheduling and documentation of shipments, liaison with counter parties, inventory management for insurance, management of warehouse accounts including sending instruction to warehouse for storage. These services are also akin to services of valuation and auction of the assets of third parties and primarily business support services and therefore, company is a good comparable. 4.4 We have heard rival submission of the parties and perused the relevant material on record. The assessee has objected inclusion of the company on the ground of functional dissimilarity only. However we find that services of valuation of the assets of the third parties and assisting in their disposal by way of auction is in the nature of business support to third parties. Therefore, in our opinion, the company is a valid comparable being functionally similar. The Learned AO/TPO is accordingly directed to retain the company in the set of comparables.

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assessee, who is engaged in providing back-office support services. 5.3 The Learned DR, on the other hand, relied on the finding of the lower authorities and submitted that services rendered by the company are in the nature of back-office support services. 5.4 We have heard rival submission of the parties and perused relevant material on record. On perusal of page 152 of Annual Report Compendium, we find that entire revenue of ₹ 20.07 lakhs has been shown from service charges and there is no separate segment for record management and payroll processing services. On page 145 of the Annual Report Compendium, under financial highlights it is reported that income from traditional registry business has increased by 10% from ₹ 1089 lakhs to Rs.119 4 lakhs. Similarly, revenue from record management business increased by 24% from ₹ 116 to ₹ 144 lakhs and income from payroll business has increased by 0.15% from ₹ 670 lakhs to ₹ 671 lakhs. Thus, we find that majority of the income of the company is from registry and share transfer business. Before the TPO, it was submitted by the assessee on the basis of the website of the company that transfer agent activity functions include transfer for equity and preference shares, debentures instruments and bonds, commercial paper and private placements. The transfer processing include customer/query handling and correspondence, split/consolidation/renewal of certificates, processing and distribution of the interest. These

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observations have not been disputed by the lower authorities. If we take into account these activities, then we find that these activities are in the nature of independent activities of a share broking house and cannot be treated as back-office support services. Accordingly, we hold the company is functionally dissimilar to the assessee and, therefore, direct the Learned AO/TPO to exclude the company from the set of the comparables. 6.9 The ground Nos. 3 to 3.8 of the appeal are accordingly allowed partly. 7. In ground No. 4, the assessee has challenged action of the Learned DRP in upholding the action of the learned TPO of classifying the international transaction of merchandising trade as a finance arrangement. In ground No. 4.1, the assessee has alternatively requested to take interest rate of 2.74%, which the assessee had used to pay interest on advance received from associated enterprises. 7.1 The facts qua the issue in dispute are that during financial year 2009-10, ‘LD India’ entered into merchanting trade transaction with Louis Dreyfus Corporation, Wiltom (“LD Wilton”) and ‘LD Asia’ of the import and export of ‘Soyabean seed’ respectively. The assessee purchased 11,000 metric ton of Yellow Soyabeen from ‘LD Wilton’ at US dollar 462.88 per metric ton CNF and sold it on the same date to LD Asia at US dollar 466.02 per metric ton CNF. According to the assessee, it earned a net margin of US dollar 3.14 per metric ton between sales and purchase price. The sale price was computed based on the market report of Chicago Board of trade (CBOT) on the date of

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purchase/sale. According to the assessee, comparable uncontrolled price on the date of purchase/sale was within + /- 5% of the price at which the assessee undertook the purchase/sale transaction and therefore transaction of merchanting trade was within arm’s length price. However, the learned TPO rejected the arms length price computed by the assessee. He observed that the assessee made payment for the purchase of the ‘Soyabeen’ almost immediately on 01.10.2009 but the payment for sale was received on 04/12/2009, i.e., after 65 days of trade. According to learned TPO, the assessee had financed its AE to the extent of ₹ 24.65 crore and in an independent transaction, firstly, the assessee would not have waited for 65 days for payment; and secondly, had it not been its AE, the assessee would not have entered into such transaction, if payment was to be received after 65 days. According to the learned TPO, had the same money of ₹24.65 crores given on interest for the same period of 65 days on the basis of SBI PLR plus a mark-up of 300 basis point, it would have fetched a return of ₹ 65.86 lakh and against which assessee has shown only a profit of Rs.16.61 lakhs. The learned TPO held that assessee has financed the transaction of ‘LD Asia’ and is projecting it as opportunity availed to make quick profit when the real money does not reach him in real-time as it would have in an independent uncontrolled transaction. The learned TPO held that in independent situation, the assessee would have also taken into consideration the cost of the money that has been put at risk. But since this transaction is happening between controlled parties, those considerations taken a backseat, and therefore arm’s length

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determination of such transaction of financing need to be done. The learned TPO taking average lending rate of SBI at 11.8% during financial year 2009-10 and after adding 300 points, he computed interest rate for 65 days at the rate of 14.80% per annum, which was worked out ₹ 65,86,490/-. And, accordingly, he made adjustment of ₹ 49,25,116/- after reducing the amount of ₹ 16,61,734/- shown by the assessee as profit in the trade of ‘soyabeen’. Before the learned DRP, the assessee submitted that in the export leg of transaction between the ‘LD India’ and ‘LD Asia’, a credit term of payment of 90 days was provided in the contract, though the assessee was paid within 65 days. According to the assessee, the cost of credit was built in by the assessee in the sale price at which ‘Soyabeen’ was exported to the AE and, therefore, contention of the learned TPO to treat such transaction as a financing arrangement was completely incorrect. The Learned DRP, however, rejected the contention of the assessee in absence of details of allowance of credit of 90 days and upheld the disallowance made by the learned TPO.

7.2 Before us, the contention raised by the learned Counsel of the assessee, and submitted in synopsis, are reproduced as under: “13. Based on the FAR analysis in the TP report, the role of LD India in this transaction was limited to identification of buyer and seller of a particular commodity without performing any functions generally performed by the trader including inventory management, marketing, distribution, etc. The Appellant did not assume any of the risks which a trader generally assumes. The risks are tabulated below:

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• Pricing risk - The pricing risk was not borne by the Appellant since the LD India had entered into the import transaction immediately based on confirmed sales order in place.

• Inventory risk - The Appellant did not bear the inventory risk as the commodities were directly transferred by LD Wilton to LD Asia.

• Credit risk - The Appellant did not bear credit risk since the transactions were entered into with the AEs of the Appellant.

Particulars Purchase of Soyabean Sale of Soyabean Associated Enterprise LD Wilton LD Asia Date of purchase/ sale September 18, 2009 September 18, 2009 Price (USD/MT) 462.88 466.02 Quantity (MT) 11,000 11,000 Amount (INR) 24,49,09,808 24,65,71,182 Date of issuance of September 24, 2009 September 24, 2009 invoice Date of payment October 1, 2009 December 4, 2009

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Sale value (INR) 24,65,71,182 Interest cost (2.74% of 12,03,132 246,571,182 X 65/365)(B) 4,58,242 Excess profit earned (INR) (A- B)

7.3 In support of alternate ground, the learned Counsel submitted for application of the LIBOR for benchmarking of foreign currency loans. 7.4 The learned DR, on the other hand, submitted that the assessee has paid money out of Indian rupees and, therefore, suffered loss on interest in Indian Rupees and, thus, learned TPO justified in holding the arrangement as financial arrangement and benchmarking invoking the SBI prime lending rate +300 basis point. 7.5 We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The learned TPO has considered financing of loan by the assessee to LD Asia, being a receivable amount. The assessee has sold ‘Soyabeen’ to ‘LD Asia’ and payment has been received with delay of 65 days, whereas payment for purchase from another AE, i.e., ‘LD Wilton’ was made immediately. The transaction of the assessee with ‘LD Asia’ has happened in US dollar and, therefore, assessee was to receive US dollar from LD Asia. In view of the facts of purchase of soybean from one AE and sale at same moment to another AE and incurring of interest burden of payment for 65 days by the assessee is not justified as a prudent businessmen and therefore the Learned TPO is justified in holding the transaction as financing transaction. The transaction

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of purchase of ‘Soyabean’ by the assessee has happened when goods were already there on Singapore Port, which is the port for ‘LD Asia’. The assessee has sold the goods also at the same port immediately within minutes of purchase transaction. In such circumstances, question arises, why ‘LD Wilton’ has transferred goods at Singapore Port, without any purchase order. Obviously, this ‘Soyabean’ must have been shipped in advance from the assessee to Singapore Port on the request of ‘LD Asia’, and due to non-availability of funds with ‘LD Asia, the assessee must have been roped in for financing the transaction. In the facts of the case, the transaction can be assumed in two ways. The first, the ‘LD Wilton’ must have been in need of funds and assessee must be having available fund, therefore, assessee has been roped in for financing the ‘LD Wilton’. Then, it becomes pure loan transaction by the assessee to ‘LD Wilton’. The second way, it can be interpreted that assessee has owned the finance burden of ‘LD Asia’, and assessee should have received the payment from ‘LD Asia’ on the same date when it made payment to ‘LD Wilton’. But since the payment from ‘LD Asia’ was received after a delay of 65 days, it is in international transaction in the nature of outstanding receivable simpliciter without any allegation of arrangement of colluded finance transaction. The ld. TPO has though alleged it as financial arrangement to benefit AE, but benchmarked it is outstanding receivable. But in both ways, the currency of transaction is US Dollar. In first way, it is US Dollar have been sent to AE; in second way, US Dollar was outstanding to be received for 65 days. Neither the loan has been given in Rupees, nor outstanding was to be received in Rupees.

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7.6 As far as benchmarking of the transaction is concerned, we agree with the learned Counsel of the assessee that in view of transaction of sale in US dollar, adjustment for interest should be benchmarked on the basis of currency of transaction following the decision of the Hon’ble Delhi High Court in the case of CIT vs Cotton Naturals (I) P Ltd [2015] 55 taxmann.com 523/231 Taxman 401, accordingly the Learned TPO is directed to re- compute the adjustment. The ground No. 4 of the appeal is dismissed, however, the alternative ground 4.1 is allowed for the statistical purposes. 8. The Revenue in its appeal has challenged the finding of Learned DRP on the issue of disallowance under section 14A of the Act that the addition should be made on average investment and not on turnover. 8.1 The fact qua the issue in dispute are that during the year assessee made investment of ₹ 1696.55 crores in mutual funds and earned dividend income of ₹ 94,929. According to the assessee, it has not incurred any expenditure for earning said exempted income . The Assessing Officer invoked Rule 8D (iii) of Income-tax Rules, 1962 (in short ‘the Rules’) and determined the expenditure attributable to earning exempt income at ₹ 8,48,25,000/- being 0.5% of the turnover of the mutual funds purchase and sold. The Learned DRP held that there was no opening balance of mutual fund as one 01/04/2009 and closing balance of mutual fund as on 31/03/2010 and, therefore, on

30 ITA No. 2432/Del/2015 & ITA No.2479/Del/2015

application of the Rule 8D(2)(iii) of Rules, there could be no disallowance, and deleted the disallowance observing as under: “8.2 We have carefully considered the submission made by the Id. AR and gone through the draft assessment order. We have noted that during the relevant period the assessee has purchased and sold the mutual funds namely Deutsche Insta cash Plus Fund and the income has been shown in the computation of income as short term capital gain. There was no opening balance of mutual funds as on 01.04.2009 or the closing balance of mutual funds as on 31.03.2010 and all the mutual fund purchases during the year were sold by the assessee. However, there was a dividend income of Rs. 94,929/- which was earned by the assessee during the period of holding of mutual funds which was claimed to be exempt u/s 10(35) of the Income Tax Act. It is an undisputed fact that there were no direct expenses or any financial expenses incurred by the assesses for earning the exempt income. However, the AO has disallowed 0.5% of the total turnover for the sale of mutual funds by the assessee during the relevant period under Rule 8D(2)(iii) read with Section 14A of the Income Tax Act. As per Rule 8D(2)(iii), even if some indirect expenses has to be allocated for earning the exempt income, it should be the value of average investment of the assessee during the relevant period and not the turnover of the assessee. In this case, we have noted that there was no opening value or the closing value of mutual funds as the mutual funds were purchased and sold by the assessee during the relevant assessment year itself. Hence the average value of investment would be nil in respect of the mutual funds traded by the assessee. In our opinion, if some disallowance was to be made for the indirect expenses incurred by the assessee for earning exempt income, it would have been the value of average investment and not the turnover of the mutual funds. The AO has clearly erred in disallowing 0.5 per cent of the turnover of the assessee regarding the mutual funds which is against the expressed provisions of Rule 8D2(iii) of the I T Rules. Hence, the AO is directed to delete the impugned addition of Rs. 8,48,25,000/- u/s 14A read with Rule 8D (2)(iii) of the IT Rules.”

8.2 We have heard rival submission of the parties and perused the relevant material on record. During the year under consideration, assessee has made purchase and sale of mutual funds of huge amounts and, therefore, incurring of expenditure for earning exempt income cannot be denied in terms of section

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14A of the Act. However, if Rule 8D of the Rules is invoked, there would not be any disallowance in view of no opening and closing stock value of mutual funds. In the circumstances, we accept the alternative claim of the assessee to restrict the disallowance to the extent of exempted income following the decision of the Hon’ble Delhi High Court in the case of Joint Investment Private Limited versus CIT [2015] 59 taxmann.com 295/233 Taxman 117 (Del. HC) and accordingly direct to restrict the disallowance to the amount of ₹ 94,929/-. The ground of the appeal of the Revenue is accordingly allowed partly. 9. In the result, the appeal of the assessee as well as the appeal of Revenue are allowed partly for the statistical purposes. Order pronounced in the open court on 30th September, 2021

Sd/- Sd/- (AMIT SHUKLA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 30th September, 2021. RK/-(DTDC) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi