ADM Agro Industries Kota & Akola P.Ltd, a company based in Gurugram, found itself entangled in a legal dispute with the Assistant Commissioner of Income Tax (ACIT), Circle-1(1), New Delhi, concerning the assessment year 2018-19. The crux of the dispute revolved around the adjustments made by the Transfer Pricing Officer (TPO) to the Arm’s Length Price (ALP) of international transactions particularly related to merchanting trades.
The appeal was heard before Shri G.S. Pannu, President, and Shri Saktijit Dey, Judicial Member of the Delhi Bench ‘I’. The legal representatives for the appellant, ADM Agro Industries, included Sh. Ajay Vohra, Sr. Advocate, and Ms. Ananya Kapoor, Advocate. The respondent, ACIT, was represented by Sh. Rajesh Kumar, CIT-DR.
The primary issue in question was the adjustment proposed by the TPO to the ALP of the international transactions pertaining to merchanting trades. The TPO had challenged the Profit Level Indicator (PLI) used by ADM Agro Industries, which applied the Transactional Net Margin Method (TNMM) using Operating Profit (OP)/Value Added Cost (VAC) as the PLI. This was in contrast to the comparables that employed Operating Profit (OP)/Operating Cost (OC) as the PLI.
ADM Agro Industries is involved in two main types of activities: physical trading of agricultural commodities and merchanting trades under regulations by the Foreign Exchange Management Act and the Director General of Foreign Trade (DGFT). The dispute specifically related to the merchanting trades, where the TPO did not accept the company’s claim of transactions with its Associated Enterprises (AEs) being at arm’s length.
The Tribunal delved deeply into the merits of the case, examining the functional and risk profiles of the merchanting versus physical trade segments. It was noted that the company acted more as a facilitator in the merchanting trades, not taking physical possession of the goods and therefore not engaging in typical trading risks or activities.
The Tribunal recognized the need for a PLI that appropriately reflected the minimal risk and administrative functions performed by ADM Agro Industries in its merchanting activities. It ultimately directed the Assessing Officer to recompute the ALP by applying a PLI of Operating Profit to Value Added Cost, excluding the cost of goods, thus aligning more closely with the company’s operational realities.
The appeal was partly allowed, marking a significant decision on the application of the TNMM method and the selection of appropriate PLIs for companies engaged in merchanting trades. This case sets a precedent for how similar disputes might be handled in the future, emphasizing the importance of understanding the underlying business functions and the corresponding transfer pricing methodologies.
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