2018 (10) TMI 1677 - HC - Income Tax

TP adjustment - Comparable selection - functional similarity between the Assessee and Li and Fung - HELD THAT - The observations with respect to functional identity with Li and Fung India Pvt. Ltd. is not appropriate because the assessee renders support services to its members whereas Li Fung is providing services on principal to principal basis to its AEs as well as third party. The second distinction is highlighted with respect to the revenue model while in Li and Fung the cost plus was on a certain percentage mark up the rule here is entirely different. There is no functional similarity and secondly the revenue model though similar is not identical. Needless to say TPA analysis for all subsequent years would proceed on the facts presented.

Summary

Issues: Rectification of order regarding Transfer Pricing Adjustment

Analysis:
The judgment revolves around an application seeking the correction of an order dated 10.04.2018 concerning the Transfer Pricing Adjustment issue. The court initially declined to frame a question of law related to this matter. However, during the proceedings, it was observed that the assessee's functional similarity with another entity was noted, where the assessee did not assume any risk and was dependent on reimbursement of expenses by associated enterprises, with a fixed markup. The court clarified that the functional identity with the other entity was not appropriate as the assessee provided support services to its members, unlike the other entity that operated on a principal-to-principal basis with associated enterprises and third parties. Additionally, a distinction was made regarding the revenue model, highlighting that the cost-plus structure differed from that of the other entity. The court considered submissions from both parties and the ITAT's order, which had previously distinguished its decision in another case. The court clarified that there was no functional similarity and that although the revenue model was similar, it was not identical. The judgment emphasized that the Transfer Pricing Analysis for subsequent years would proceed based on the facts presented. Ultimately, the application was partly allowed based on the clarifications provided by the court.