2019 (5) TMI 1065 - HC - Income Tax

TPA - determination of ALP of the international transactions - additional 5% mark-up on the free on board value of exports to third parties - assessee is in business of rendering support services in relation to facilitation and market support to its AEs in order to facilitate sourcing transactions of its AEs with prospective sellers - application of TNMM - HELD THAT - As in Li Fung India Pvt. Ltd. 2014 (1) TMI 501 - DELHI HIGH COURT this Court set aside the approach of the TPO for proposing an additional 5% mark-up on the free on board value of exports to third parties as the same would tantamount to application of TNMM in an erroneous manner. This Court has already held that including the FOB value of the AE s contract in the operating cost in order to determine its margin not to be sustainable in law. The ITAT has rightly held that the TPO has artificially enhanced the cost base of the taxpayer and proposed a mark up of the FOB value of goods sourced by AEs and as such this approach is not available in TNMM under Rule 10 B(1) (e). Further, the observation of the ITAT that the TPO has wrongly recharacterized the business function of the taxpayer from a business support service provider to a trader also suffers from no legal infirmity. - No substantial question of law arises

Summary

Issues:
1. Determination of arms length price (ALP) of international transactions for Assessment Years (AYs) 2009-10, 2007-08, and 2008-09.
2. Application of Transactional Net Margin Method (TNMM) in transfer pricing.
3. Acceptance of ALP determination for subsequent assessment years.
4. Recharacterization of business function by Transfer Pricing Officer (TPO).

Analysis:
1. The primary issue in this case revolves around the determination of the arms length price (ALP) of international transactions entered into by the Assessee during the relevant Assessment Years (AYs). The Assessee, a wholly owned subsidiary of a Japanese corporation, engaged in providing support services to its Associated Enterprises (AEs) for sourcing transactions. The core contention of the Revenue in the appeals was the determination of ALP.

2. The Court referred to a prior case, Li & Fung India Pvt. Ltd. v. Commissioner of Income Tax, where it was emphasized that the net profit margin realized from international transactions should be calculated solely with reference to the costs incurred by the assessee and not by any third party or associated enterprise. The Court highlighted the importance of determining the arm's length price based on the relevant factors of the enterprise in question, rather than any external entities.

3. Notably, the Court acknowledged that the ALP determination for subsequent assessment years (2011-12, 2012-13, 2013-14) had been accepted by the Assessing Officer. This acceptance of ALP determination in later years was a significant factor considered by the Court in the present case.

4. Another crucial aspect addressed in the judgment was the recharacterization of the business function of the taxpayer by the Transfer Pricing Officer (TPO). The TPO's attempt to include the FOB value of the AE's contract in the operating cost to determine the margin was deemed unsustainable in law. The Court upheld the ITAT's decision that the TPO had artificially enhanced the cost base of the taxpayer and incorrectly recharacterized the business function.

5. Ultimately, the Court concluded that no substantial question of law arose from the issues presented in the appeals. As a result, the appeals and pending applications were dismissed based on the detailed analysis and precedents cited during the proceedings.