ANDANTE FOODS LLP,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU

The assessee filed its return of income on 13.1.2021 at Rs.Nil. Return was selected for scrutiny by issuing necessary notice u/s. 143(2) on 29.6.2021.

Assessee has entered in to international transaction with Adante Belgium , its Associated entity at Belgium of (i) Sale of Processed food pickled vegetables of Rs 117814292/-, (ii) Purchase of packing materials Rs 907688/-, (iii) Sales commission paid Rs. 48800421/-, (iv)Compensation for goods damaged Rs. 9728293/- (v) Rent for machinery paid Rs 1309242/- and some other transactions of purchase of fixed assets and loan. Assessee combined transactions of sale of processed foods , purchase of packing materials., sales commission , compensations and rent for machinery etc. Assessee selected Belgium entity as tested party saying it to be least complex .The assessee adopted TNMM as the most appropriate method using the refinitive fundamentals and worldwide profit company database for comparable companies engaged in distribution of processed food products in Belgium. The assessee selected 13 comparable with median margin of 2.27%, but AE earned a margin of (-) 7.41% from sales commission. Therefore, it was stated that as the operating profit margin of the AE is lower than the operating profit margin earned by the independent companies in Belgium, the international transaction relating to sales commission are deemed to be at arm’s length. [ para No 10.6 of TPSR]

As the assessee has entered into international transaction, reference was made for determining ALP of the same.

As per the TP Study Report and the financials, the assessee determined its loss before tax of Rs.2,44,283, whereas the financial profitability of the assessee was computed by the TPO at operating loss of Rs.16,16,63,124.

The ld. TPO issued show cause notice against the selection of AE as the tested party. The assessee submitted that operations performed by the AE are less complex, however, same was not substantiated by any documentary evidences. The TPO noted that the transaction carried out by the assessee are also not complex. Assessee has only transaction with its AE which is in Belgium. Assessee is not transacting with the customers in other countries, but is through Belgium entity. The TPO noted that the risk exposure of Indian entity is relatively less and therefore selection of the AE as tested party was rejected, therefore the whole TP Study Report was rejected. The TPO carried out fresh search adopting several filters by putting the keywords of food processing and trading in Prowess Database on 26.5.2023 and reached at a set of 7 comparables whose 3 years 35th percentile margin ranging from 3.39% to 65th percentile margin of 45.3%, having median margin of 6.04%. The TPO computed the PLI of Operating Profit/ Operating Revenue [OP/OR] of the assessee of (-) 91.103%, the ALP was considered at Rs.16,67,32,942 against the cost incurred of Rs.33,91,14,105 resulting into adjustment of Rs.17,23,81,163.

It was further found that the assessee has received the consideration from its AE late beyond 120 days as per agreement and therefore the TPO was of the view that the assessee should charge interest as it is a separate international transaction. As the invoices are prepared in euro, he computed the interest at the LIBOR rate of 6.818% and worked out the interest chargeable at Rs.4,53,367.

After the above adjustment, draft order was passed against which the assessee filed objections wherein the main objection was incorrect rejection of TP Study Report. The assessee was aggrieved that the taxpayer has identified the AE as tested party claiming their operations are less complex, but still the TPO rejected the same. The ld. DRP held that assessee has failed to substantiate with any documentary evidence that AE is the least complex entity. Further when the foreign entity is taken as a tested party, sufficient information is not available. The DRP further relied on UN Practice Manual on Transfer Pricing that if a taxpayer wishes to select a foreign enterprise as a tested party, it must ensure that the necessary relevant information about the AE and sufficient data on comparable are available. In the instant case, as no data was furnished, the TPO was held to be correct in rejecting the TP Study Report.

With respect to the interest on receivable, the objections of the assessee were rejected, holding it to be a separate international transaction requiring separate benchmarking and as the bills are prepared in Euro, Libor rates are correctly taken. The DRP rejected the computation of the assessee that assessee company is a debt free company. The DRP held that as the outstanding dues beyond a specified period of 120 days is a separate international transaction with an independent entity, the assessee should have charged interest and whether the assessee is a debt free company or not is of no consequence. Accordingly, the order of the TPO was upheld. Final assessment order was passed determining the total income of assessee incorporating the above adjustment.

The assessee is aggrieved and is in appeal before us raising the following two grounds: -

The ld. AR submitted a paperbook containing 124 pages. The ld. AR referred to the document submitted before the DRP. It was the claim of assessee that assessee manufactures processed pickles at its manufacturing plant, It has s a subsidiary in Belgium and operation of the AE are funded by the Indian entity, assessee. The Belgium entity assumes normal risk as all significant business and entrepreneur risk are borne by the Indian entity. The Belgium entity is compensated by appropriate sales commission. The assessee submitted that Belgium agent enters into contract with customers on behalf of assessee and it cannot enter into contract with customers independently without assessee’s authorisation. Each purchase order obtained from the customers are forwarded to the assessee and assessee will have a right to refuse the contract. If the assessee agrees to manufacture, it will supply the goods and the Belgium entity is paid a remuneration in the form of sales commission @ 9% on Free on Board value of sales to customer of AE. Based on the above facts, the Belgium entity was considered as tested party. It was further submitted that there is no bar in selection of Foreign AE as a tested party. The ld. AR submitted that based on the above objection, the TP Study Report was rejected and fresh benchmarking analysis was carried out.

With respect to the interest on overdue receivable, it was submitted that when the assessee is taken as tested party and TNMM is applied, the ld. TPO should have considered that the interest on overdue receivable is subsumed in the working capital adjustment. It was further stated that the ld. TPO has not granted working capital adjustment even in his own comparable set.

The ld. DR vehemently objected and submitted that the foreign AE cannot be effected as a tested party as the relevant data of the AE as well as comparability is not shown by the assessee. He submitted that though there is no denial that the foreign AE cannot be a tested party, but unless there is relevant data available, same cannot be used for determining the ALP.

During the hearing, the Bench asked the ld. AR to show the function, assets & risks of the foreign entity as well as the assessee. Assessee referred to page no 137 of the paper book where in financial information of Belgium entity is mentioned. The assessee could not show us even the audited accounts of the Belgium entity, even when it is a subsidiary of the assessee entity. In view of the above facts, it could not have been possible to determine whether the assessee or the foreign entity is a least complex party.

We find that the assessee has shown the international transaction of sales of processed foods of Rs.11,78,14,292 which was stated to be carried out through the Belgium subsidiary to whom commission payment of 9% was made. In the TP Study Report it is stated that the assessee has entered into sales commission agreement wherein the AE is pointed out as the commission agent for promotion and sale of packaged pickle vegetable. The products are consigned to AE in England, Canada, USA, and other jurisdictions. The assessee adopted

In view of the above facts, we restore the whole issue in ground No.1 of the appeal back to the file of the ld. AO with a direction to the assessee to show from the audited financial statements of Adante Belgium, about function, assets & risks of that entity. The assessee is also directed to produce the function, assets & risks of the assessee and thereby demonstrate what the actual transaction between the AE and the assessee is, and then to benchmark the international transaction of trading of goods and sales commission. It is the duty of the assessee to show that foreign AE is the least complex entity, and sufficient data is available and furnished to the TPO/AO to verify the selection and application of the Transfer Pricing method. The ld. AO may refer the matter to the ld. TPO to examine the details produced by the assessee and then decide whether the foreign entity can be accepted as a tested party and may result in determination of ALP of the international transaction. Accordingly ground No.1 of the appeal is restored back to the file of the ld. TPO.

Ground No.2 is with respect to the interest on delayed receivables which is also dependent on the disposal of ground No.1 and therefore same is also restored back to the file of the TPO to examine that whether the outstanding shown is pertaining to the buyer of the goods or the foreign entity. Accordingly same is also restored to the file of the AO.

The ld. AO is directed to refer the matter back to the ld. TPO for determination of the ALP in accordance with law, thereafter he may pass a draft assessment order giving opportunity of hearing to the assessee to file objections before the DRP, if the assessee so wishes.

Accordingly, both the grounds of appeal are allowed, and appeal of the assessee is allowed for statistical purposes.