2017 (8) TMI 1355 - AT - Income Tax

Addition on account of Arm s Length Price - comparable selection - Held that - Itochu Corporation, Japan ( ICJ ) is a trading organization in Japan and is engaged in trading of various products such as textiles, machinery, information and communications related products, meals, products related to oil and other energy resources, general merchandise, chemicals, provisions and food. IIPL was incorporated as a wholly owned subsidiary of ICJ to render business support services to its AEs in the nature of facilitation services to source goods from India. The TPO failed to appreciate that the Assessee has not undertaken the activity of purchase and resale. Further, the companies adopted by the TPO as comparable are undertaking trading operations which is not comparable to the inter-company transactions undertaken by the Assessee. The TPO has artificially enhanced the cost base on the Assessee and proposed a mark-up on the FOB value of goods sourced by AEs, such approach does not correspond to any one of the five methods, as provided under the ACT. Assessee has earned a net operating profit margin on cost of 110.91% and 123.52% for AY 2007-08 and 2008-09, respectively. Computation of an adjustment (over and above the existing remuneration) to the tune of INR 6,53,22,520 and INR 9,69,43,894 by the TPO for the relevant AYs, has required the Assessee to earn an NCP of 202.35% and 246.09% for AY 2007-08 and 2008-09, respectively is practically impossible to achieve. These contentions taken by the Ld. AR are accepted. The Revenues appeal agitating the issue of deletion of the addition made on account of Arms Length Price related to FOB value of cost is similar to the case of GAP International Sources India Pvt. Ltd. 2012 (9) TMI 766 - ITAT DELHI - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made on account of Arm's Length Price for Assessment Year 2007-08.
2. Deletion of addition made on account of Arm's Length Price for Assessment Year 2008-09.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Arm's Length Price for Assessment Year 2007-08:

The Revenue appealed against the CIT(A)'s order which deleted the addition of ?6,53,22,520/- made on account of Arm's Length Price (ALP). The assessee, engaged in rendering business support services to its associated enterprises (AEs), was initially characterized as a trader by the Transfer Pricing Officer (TPO). The TPO included the free-on-board (FOB) value of goods sourced from India in the operating cost of the assessee to compute the Net Cost Plus (NCP). The TPO's analysis was rejected by the CIT(A), who upheld that the assessee is engaged in business support services and not trading. The CIT(A) relied on the ITAT's decision in GAP International Sourcing India Pvt. Ltd., which held that the FOB value of goods sourced by AEs cannot be included in the cost of the assessee. The CIT(A) also upheld the use of comparables selected by the assessee in its Transfer Pricing (TP) documentation, noting that the assessee's margins were higher than the mean margins of comparables. The ITAT upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

2. Deletion of Addition Made on Account of Arm's Length Price for Assessment Year 2008-09:

Similar to the previous year, the Revenue appealed against the CIT(A)'s order which deleted the addition of ?9,69,43,894/- made on account of ALP. The TPO had again re-characterized the assessee as a trader and included the FOB value of goods in the operating cost. The CIT(A) rejected this characterization and upheld the assessee's approach, relying on the ITAT's decision in GAP International Sourcing India Pvt. Ltd. The CIT(A) found that the international transactions were at arm's length since the assessee's margins were significantly higher than those of the comparables. The ITAT upheld the CIT(A)'s decision, noting that the TPO's approach was not supported by the law and that the assessee's functions and risks were limited, making the TPO's characterization as a trader incorrect. The ITAT also noted that in subsequent years, the TPO accepted the assessee's contentions and did not make similar adjustments. Thus, the Revenue's appeal was dismissed.

Conclusion:

The ITAT upheld the CIT(A)'s orders for both Assessment Years 2007-08 and 2008-09, dismissing the Revenue's appeals. The key reasons included the incorrect re-characterization of the assessee by the TPO, the improper inclusion of FOB value in the operating cost, and the higher margins of the assessee compared to the comparables. The ITAT relied on previous decisions, including those in GAP International Sourcing India Pvt. Ltd. and Li & Fung India Pvt. Ltd., to support its conclusions. The appeals were dismissed, and the CIT(A)'s orders were upheld.