Facts of the Case

Marubeni India Pvt. Ltd., a wholly owned subsidiary of Marubeni Corporation, was engaged in providing agency and marketing support services to its group entities and also independently engaged in trading activities.

For Assessment Year 2008–09, the assessee reported five international transactions, out of which the dispute related to the transaction involving provision of agency and marketing support services, for which it received ₹32.18 crores.

The assessee applied TNMM as the most appropriate method and claimed its international transactions were at arm’s length based on its operating profit margin of 16.87% compared with comparable companies’ average margin of 13.81%.

The Transfer Pricing Officer (TPO), however, rejected TNMM and applied Profit Split Method (PSM), alleging that the assessee performed critical functions, assumed substantial risks, and developed unique intangibles benefiting its AEs, thereby making an upward adjustment of ₹30.14 crores.

Issues Involved

  1. Whether TNMM was the most appropriate method for benchmarking the assessee’s international transaction?
  2. Whether the TPO was justified in applying Profit Split Method (PSM)?
  3. Whether the assessee assumed significant risks and created unique intangibles warranting profit attribution?
  4. Whether reliance on the earlier ITAT ruling in Li & Fung India Pvt. Ltd. v. DCIT was legally sustainable?

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the assessee was performing crucial and strategic functions beyond mere liaison activities.
  • It was contended that the assessee conducted feasibility studies, market analysis, and project evaluations, which significantly contributed to AE profitability.
  • The assessee had allegedly created valuable human and supply-chain intangibles.
  • It was argued that TNMM did not adequately capture the value of functions performed and risks assumed.
  • Therefore, Profit Split Method was the appropriate method to allocate profits fairly.

Respondent’s Arguments (Assessee)

  • The assessee contended that it merely acted as an intermediary between AEs and Indian customers/vendors.
  • It had limited functions and minimal risk exposure.
  • It neither owned nor developed any valuable intangibles.
  • The AE undertook all entrepreneurial and enterprise-level risks including market risks, credit risks, and inventory risks.
  • TNMM was the accepted and appropriate method based on comparables and industry practice.
  • The TPO’s adoption of PSM was based solely on the ITAT ruling in Li & Fung, which had already been reversed by the Delhi High Court.

Sections Involved

  • Section 92C – Computation of Arm’s Length Price
  • Section 92CA – Reference to Transfer Pricing Officer
  • Section 260A – Appeal to High Court
  • Rule 10B of Income Tax Rules, 1962 – Determination of ALP

Court Findings / Court Order

The Delhi High Court upheld the ITAT’s findings and dismissed the Revenue’s appeal.

The Court observed:

  • The TPO failed to establish with evidence that the assessee performed critical functions or assumed substantial risks.
  • Mere assertions regarding intangible creation and strategic decision-making were unsupported by material evidence.
  • The assessee’s role was limited to support services and mediation between AEs and Indian enterprises.
  • The TPO’s reliance on the ITAT decision in Li & Fung was misplaced since it had already been reversed by the High Court.
  • TNMM remained the most appropriate method considering the assessee’s functional and risk profile.

Accordingly, the Court held that no substantial question of law arose and the appeal was dismissed.

Important Clarification

The Court clarified that:

  • Profit Split Method cannot be invoked merely because an assessee contributes operational support.
  • For applying PSM, there must be demonstrable evidence of substantial value creation, unique intangibles, and risk assumption.
  • Routine support service providers with limited risks should ordinarily be benchmarked under TNMM.
  • Unsupported presumptions cannot justify transfer pricing adjustments.

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:3690-DB/SRB23042015ITA942015.pdf 

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