2015 (6) TMI 32 - AT - Income Tax

Transfer pricing adjustment - Held that - In the present case since the assessee is already earning a markup of 15% which is more than the 5% markup in the case of Li & Fund India (2014 (1) TMI 501 - DELHI HIGH COURT), therefore, markup of 15% on operational costs in assessee s case is more conservative. As such no TP adjustment is required in assessee s case. - Decided in favour of assesse.

Summary

Issues involved:
1. Transfer pricing adjustment on international transactions.
2. Disregarding benchmarking approach for arm's length nature of transactions.
3. Inclusion of goods value in cost base for computing arm's length profit margin.
4. Disregarding detailed submissions on guaranteed profit margin and functions performed.
5. Rejection of reliance on international judicial precedents.
6. Penalty proceedings under sections 271(1)(c) and 274 of the Income Tax Act.

Detailed analysis:
1. The appeal involved a transfer pricing adjustment dispute where the appellant contested the enhancement of income by the tax authorities due to alleged non-compliance with the arm's length principle under the Income Tax Act. The appellant argued that the authorities erred by disregarding previous ITAT rulings and the functional profile of the appellant as a low-risk procurement support service provider. The appellant also challenged the inclusion of goods value in the cost base for profit margin computation, emphasizing a guaranteed profit margin and the absence of significant functions related to goods sourced by AEs directly. The appellant further disputed the rejection of international judicial precedents.

2. The appellant raised concerns regarding the authorities' rejection of the benchmarking approach adopted for substantiating the arm's length nature of international transactions. The appellant argued that the approach of selecting companies engaged in marketing support services was disregarded, leading to an erroneous assessment.

3. The dispute also encompassed the inclusion of goods value in the cost base for determining the arm's length profit margin. The appellant contended that the authorities erred in considering supply chain and human asset intangibles, which were not part of the appellant's prevailing remuneration model. The appellant emphasized operating on a guaranteed profit margin and challenged the authorities' decision based on detailed submissions.

4. The appellant contested the authorities' disregard of detailed submissions demonstrating the appellant's operational structure and profit margin calculations. The appellant highlighted the lack of involvement in third-party contracts and functions related to goods supplied directly to AEs, asserting entitlement to remuneration based on goods value sourced by AEs.

5. The appellant challenged the rejection of reliance on relevant international judicial precedents, citing inconsistent and irrelevant reasons provided by the tax authorities. The appellant sought to establish the applicability of international precedents to support their case.

6. Additionally, the appellant addressed penalty proceedings initiated under sections 271(1)(c) and 274 of the Income Tax Act, citing a recent reversal of a commission-based remuneration model by the Delhi High Court. The appellant argued against the penalty imposition based on the evolving legal interpretations and the specific circumstances of the case.