© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
© 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated...
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The Delhi High Court upheld the Tribunal’s ruling, that trading intermediary (‘Sogo Shosha’ in Japanese context) is akin to trading activities, not provision of service

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Recently, the Delhi High Court in the case of Mitsubishi Corporation India Private Limited (the taxpayer), upheld the ruling of the Income-tax Appellate Tribunal holding that the taxpayer’s activities of trading intermediary (commonly referred as ‘Sogo Shosha’ in Japanese context) are akin to a trader and not service provider

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The Delhi High Court upheld the Tribunal’s ruling, that trading intermediary (‘Sogo Shosha’ in Japanese context) is akin to trading activities, not provision of service

  1. 1. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA The Delhi High Court upheld the Tribunal’s ruling, that trading intermediary (‘Sogo Shosha’ in Japanese context) is akin to trading activities, not provision of service 16 July 2014 Background Recently, the Delhi High Court (High Court) in the case of Mitsubishi Corporation India Private Limited 1 (the taxpayer), upheld the ruling of the Income-tax Appellate Tribunal (the Tribunal) holding that the taxpayer’s activities of trading intermediary (commonly referred as ‘Sogo Shosha’ in Japanese context) are akin to a trader and not service provider. Facts of the case  The taxpayer is a wholly-owned subsidiary of Mitsubishi Corporation (MC) Japan, which is one of Japan’s leading ‘Sogo Shosha’ or general trading companies. Sogo Shosha are Japanese trading conglomerates, engaged in general trading of diversified range of products in every major market of the world, playing the role of trade intermediaries. ______________ 1 Mitsubishi Corporation India Private Limited v. ACIT (ITA No 322/2014) Delhi High Court (Assessment Year 2006-07)  The taxpayer in this case was engaged in import of products from associated enterprises, and further resale. The taxpayer took a position that it effectively performs as a provider of support services to the ‘Sogo Shosha’ activities of MC, Japan.  The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) were of the view that the transactions in question were trading transactions. Accordingly, the TPO adopted operating profit/total cost as the Profit Level Indicator (PLI) to review the arm’s length nature of transactions, wherein the total cost was computed, including cost of goods sold. Taxpayer’s contentions  Though the sales and purchases of goods were recorded in the taxpayer’s books of accounts, for the purposes of Functions, Assets and Risk (FAR) analysis, these transactions should be taken as services transactions. The taxpayer is effectively a service provider.
  2. 2. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  If the TPO considers the taxpayer’s function of buying and selling similar to service transactions, then the cost of goods sold should not be taken into consideration while computing the PLI. Alternatively, if the functions are considered as akin to trading, then the comparable companies which have a profile of trading concern should be selected. Tax department’s contention  The taxpayer is not a service provider as the purchases and sales transactions are recorded in its books of accounts. These transactions have been entered on a principle to principle basis which is akin to trading transactions. The comparable companies to be selected should be having the functional profile of a trader. Tribunal’s ruling  Both purchases and sales made by the taxpayer are recorded in its books of accounts. The title of goods is held by the taxpayer for some time and transactions were done on a principle to principle basis. Such activity cannot be bracketed with that of a commission agent or a broker. Thus, the activities in question are akin to trading activities.  The comparables in this case have not been selected keeping in view the functional profile of a trading entity. Both the taxpayer and the TPO have benchmarked the transactions by using comparables which have the functional profile of a service provider. The Tribunal set aside the issue to the file of the Assessing Officer (AO) for fresh adjudication in accordance with the law. Issue before the High Court The taxpayer filed an appeal against the Tribunal order contending that its functional profile was not that of a trader but that of a service provider. The taxpayer also contended that it is not exposed to the risk of carrying any inventory and/or deploying any significant working capital. Based thereon, the cost of goods sold should not be taken into consideration while computing the profit margins. The taxpayer also seemed to have expressed apprehension that in view of the findings of the Tribunal, the taxpayer is likely to be treated as an ordinary trader and compared with other traders who may not be similarly situated. High Court’s ruling  The High Court observed that the Tribunal had concluded the taxpayer’s activities were in the nature of trading as such transactions are entered on a principal to principal basis and cannot be considered activities of a commission agent/broker. The High Court held that it found no infirmity with the reasoning of the Tribunal.  Regarding taxpayer’s apprehension that in view of the findings of the Tribunal, the taxpayer is likely to be treated as an ordinary trader and compared with other traders who may not be similarly situated, the High Court did not find any ground for such apprehension as the Tribunal had made it clear that appropriate comparables would have to be considered for determination of ALP i.e. entities which are similarly placed as the taxpayer including in respect of their functional and risk profile as well as working capital exposure would be chosen as comparables.  The High Court found no reason to interfere with the order of the Tribunal, and dismissed the appeal of the taxpayer. Our comments The Tribunal’s ruling seemed to be based on two facts; taxpayer took the title of goods and the purchases/sales transactions were recorded in the taxpayer’s books of accounts. Ideally, merely taking responsibility of the title of goods (for some time) is not enough to entail a return on the value of the goods. It should ultimately depend on who performs the significant functions and bears the risks in relation to the goods. Even in cases of buy/sell trading transactions, where the reseller entity does not add any value to the products, probably use of the Berry ratio is considered appropriate. The Berry ratio (gross profit over operating expenses) computes the return on operating cost (or value added costs) for a limited risk distributor. Therefore, a return on the value of goods should not be viewed as a general proposition in such cases. Now that the Tribunal’s findings are affirmed by the High Court, use of the above explanations and alternate methodology (viz. Berry Ratio) may be challenged. Therefore, the option of advance pricing agreement seems most sensible for a thorough recognition of the FAR analysis of Sogo Shosha entities.
  3. 3. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903, Near Vodafone House, Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bengaluru Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi Syama Business Center 3rd Floor, NH By Pass Road, Vytilla, Kochi – 682019 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010

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