2015 (11) TMI 788 - AT - Income Tax

Transfer pricing adjustment - TOP held that the correct compensation model at arm s length price, in this case, would be commission of FOB cost of goods sourced from India - Held that - In view of the enunciation of law by the Hon ble jurisdictional High Court in the case of Li & Fung India Pvt. Ltd. order dated 16.12.2013, there remains no doubt whatsoever that the base of total cost as adopted by the TPO and approved by the DRP in considering the FOB value of goods between the third party enterprises cannot be accepted. Ex consequenti, the total cost being the denominator in the PLI of OP/TC, has to be taken as the cost incurred by the assessee and not the FOB value of goods between third party enterprises sourced through the assessee. In other words, the tested party should be the assessee and not its AE. Thus, we hold that the assessee is entitled to cost plus form of remuneration and not a commission based remuneration. See case of Li & Fung India Pvt. Ltd. 2014 (1) TMI 501 - DELHI HIGH COURT There is no necessity of any TP adjustment. Even further, for the current year, we note that both as per the comparables chosen by the assessee which yield a markup on 11.66% on operating cost and also the comparables chosen by the TPO, which yield 18.06% on operating cost, after making necessary working capital adjustment, indicates that the assessee s markup of 15.36% charged on its operating cost falls well within the arm s length price after considering the range of /- 5% as envisaged in the Proviso to section 92C (2) of the Act. Therefore, no TP adjustment is required in assessee s case. - Decided in favour of assessee.

Issues Involved:
1. Determination of the appropriate transfer pricing method.
2. Benchmarking the international transactions.
3. Selection of comparable companies.
4. Computation of arm's length price.
5. Application of the commission-based remuneration model.
6. Reference to previous judgments and their implications.

Detailed Analysis:

1. Determination of the appropriate transfer pricing method:
The assessee used the Transactional Net Margin Method (TNMM) with Operating Profit/Total Cost (OP/TC) as the Profit Level Indicator (PLI) to benchmark its international transactions. The Transfer Pricing Officer (TPO) rejected this method, proposing instead a commission-based remuneration model, asserting that the correct compensation model would be a commission of the Free on Board (FOB) cost of goods sourced from India.

2. Benchmarking the international transactions:
The assessee benchmarked its transactions by comparing its margins with those of companies providing similar services. The TPO, however, rejected the assessee's transfer pricing study and selected different comparables, leading to a significant adjustment in the assessee's income.

3. Selection of comparable companies:
The assessee selected a set of comparables assuming it acts as a marketing support/low-end technical support service provider. The TPO, however, chose different comparables, including retail companies like Pantaloon Retail (India) Limited, Shoppers Stop Limited, and Trent Limited, which resulted in a lower average margin of 6.50%.

4. Computation of arm's length price:
The TPO computed the arm's length price based on a commission model, resulting in a substantial adjustment of Rs. 382.32 crores to the assessee's income. This computation was based on the FOB value of exports and the average margin of the selected comparables.

5. Application of the commission-based remuneration model:
The TPO and the Dispute Resolution Panel (DRP) applied a commission-based remuneration model, which was challenged by the assessee. The assessee argued that its case was covered by previous Tribunal decisions, which had upheld a cost-plus remuneration model with a 32% markup on costs for earlier assessment years.

6. Reference to previous judgments and their implications:
The Tribunal referred to its earlier decisions in the assessee's own case for AYs 2006-07, 2007-08, and 2008-09, where it had upheld a cost-plus remuneration model. The Tribunal also considered the Delhi High Court's judgment in the case of Li & Fung India Pvt. Ltd., which had approved a 5% markup on operational costs. The Tribunal noted that the assessee's markup of 15.36% was more conservative and within the arm's length range.

Conclusion:
The Tribunal concluded that the assessee's markup of 15.36% on operational costs was appropriate and no transfer pricing adjustment was required. The Tribunal emphasized that the assessee's remuneration model was consistent with previous judgments and within the arm's length range. Consequently, the appeal of the assessee was allowed, and the TP adjustment of Rs. 382.32 crores was struck down. The order was pronounced in the open court on October 1, 2015.

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