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August, 16th 2014

%                                                DECIDED ON: 04.07.2014

+                          ITA 322/2014
                           CM APPL.10445/2014

                    Through: Mr. M.S. Syali, Sr. Advocate with
                             Mr. Mayank Nagi, Advocate.


                                                    ..... Respondent
                   Through: Mr. Sanjeev Sabharwal, Sr. Standing
                            Counsel with Mr. Ruchir Bhatia, Jr.
                            Standing Counsel.

      1.     This is an appeal filed under Section 260A of the Income Tax
Act, 1961 (hereinafter referred to as the `Act') impugning the order dated
23.08.2013 (hereinafter referred as the 'impugned order') passed by the
Income Tax Appellate Tribunal (ITAT).
      2.     The grievance of the appellant/assessee is that the Assessing
Officer, Transfer Pricing Officer (TPO) as well as the Disputes Resolution
Panel (DRP) has not considered its functional profile while determining its
character as that of a trader.
      3.     Briefly stated, the relevant facts are that the assessee is a wholly

ITA 322/2014                                                              Page 1
owned subsidiary of Mitsubishi Corporation-a company incorporated under
the laws of Japan. The assessee filed its return for the assessment order
2006-07 on 29.11.2006 declaring a total income of `6,39,59,620/-. The
return was taken up for scrutiny and a notice under Section 143(2) was
issued on 11.10.2007. The Assessing Officer made a reference to the
Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act in respect
of international transaction between the assessee and its holding company.
      4.     The TPO rejected the Profit Level Indicator (PLI) used by the
assessee to bench mark its international transactions which was a ratio of net
revenue and operating expenses. The sales and cost of sale had been
excluded by the assessee. The TPO computed the Arm's Length Price (ALP)
by assuming a margin of 19.6% and by its order dated 29.10.2009 held that
income of the assessee was to be enhanced by a sum of `1,55,27,14,989/-.
      5.     The Assessing Officer made a draft assessment order on
31.12.2009, which was not accepted by the assessee and the assessee filed
its objection before the Dispute Resolution Penal (DRP) under Section 144C
of the Act. By an order dated 30.09.2010 , the DRP rejected the objections
preferred by the assessee in respect of transfer pricing additions made by the
TPO and directed the Assessing Officer to complete the assessment as per
the draft assessment order. Thereafter, on 25.10.2010, the Assessing Officer
passed a final order, which was carried in appeal before the Tribunal by the
assessee. The appeal was disposed of by the impugned order.
      6.     We have heard the learned counsel for the parties.
      7.     The international transactions reported by the appellant are of
four kinds; services, commission, cost to cost reimbursement as well as from
sale of products imported from the Associated Enterprise. While, there is no

ITA 322/2014                                                           Page 2
dispute as to the international transactions resulting in receipts as
commission and cost to cost reimbursement for rendering service, the
assessee seriously contests the addition made on account of transactions of
sale and purchase of goods. The assessee is aggrieved by the margin of
19.6% being applied with respect to transactions of sale and purchase.
      8.     It was submitted by the learned counsel that its functional
profile was not that of a trader but that of a service provider. It was
explained that the assessee places orders for purchase with its parent
company on the basis of confirmed orders from its customers. It was
submitted that in substance the assessee only front ends the transactions of
its parent company. The assessee is, thus, not exposed to the risk of carrying
any inventory and/or deploying           any significant      working     capital.
Accordingly, it was claimed by assessee that the cost of goods sold should
not be taken into consideration while computing the profit margins which
should be calculated on the operating costs and the appropriate ratio to be
considered for comparing with other entities would be the ratio of net
revenue to operating costs.
      9.     The said contentions had also been advanced by the assessee
before the ITAT. In the alternative, the assessee had submitted, before the
ITAT, that if the transactions of buying and selling were considered to be
trading then the ALP should be determined in comparison with companies
which were similarly situated.
      10.    The Tribunal had considered the submissions of the assessee
and held as under: -
             "10. The second ground of the assessee is on the issue of transfer
             pricing adjustment. The nature of assessee's business as described in
             the DRP order is to undertake (sogo shosha) activities i.e. role of a

ITA 322/2014                                                               Page 3
            trade intermediary. The purchases are made by the assessee are
            recorded as such in its books of accounts and there after when sold,
            the sales recorded as such. The title in the goods is held by the
            assessee for some time. The assessee deals on a principle to
            principle basis. Though it is claimed that it is intermediary
            activities, in our view, the activity cannot be bracketed with the
            activity of a commission agent or a broker. In our view the activity
            in question is akin to trading activities. Thus we uphold these
            findings of the revenue authorities."

      11.   It is apparent from the order of the ITAT that the ITAT had
concluded that the transaction entered into by the assessee work on principal
to principal basis and that the activities were in the nature of trading.
Accordingly, the ITAT has held that the activities undertaken by the
assessee could not be classified as activities of a commission agent or a
broker. It is not disputed that the transactions of purchase and sale between
the assessee and Mitsubishi Corporation are done on a principal to principal
basis. We find no infirmity with the reasoning of the ITAT that such
transactions are akin to trading and cannot be considered activities of a
commission agent or a broker.       However, the learned counsel for the
assessee has expressed his apprehension that in view of the findings of the
ITAT, the assessee is likely to be treated as an ordinary trader and compared
with other traders who may not be similarly situated. We do not find any
ground for such apprehension as the ITAT has made it clear that appropriate
comparables would have to be considered for determination of the ALP.
This would obviously mean that entities which are similarly placed as the
assessee including in respect of their functional and risk profile as well as
working capital exposure would be chosen as comparables.
      12.   We accordingly find no reason to interfere with the order of the

ITA 322/2014                                                             Page 4
Tribunal. The appeal is accordingly dismissed with the above clarifications.

                                                      VIBHU BAKHRU, J

                                                  S. RAVINDRA BHAT, J
JULY 04, 2014

ITA 322/2014                                                           Page 5
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