2020 (3) TMI 796 - HC - Income Tax

TP Adjustment - arm s length price applying the TNMM method was contrary to the transfer pricing provisions - HELD THAT - As decided in LI AND FUNG INDIA PVT. LTD. VERSUS COMMISSIONER OF INCOME TAX 2014 (1) TMI 501 - DELHI HIGH COURT a determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear. TPO s reasoning to enhance the assessee s cost base by considering the cost of manufacture and export of finished goods, i.e., ready-made garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. The approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee s hands on the basis of a fixed percentage of the free on board value of export made by unrelated party venders - no question of law

Issues: Condonation of delay in filing the appeal, Challenge to the order of the Income Tax Appellate Tribunal for the Assessment Year 2010-11, Application of Transfer Pricing Rules

Condonation of Delay in Filing the Appeal:
The judgment begins with an application seeking condonation of a 117-day delay in filing the appeal. The delay is condoned based on the reasons presented in the application. The application is disposed of with the delay being condoned.

Challenge to the Order of the Income Tax Appellate Tribunal for the Assessment Year 2010-11:
The appeal challenges the order dated 31st October, 2018, passed by the Income Tax Appellate Tribunal for the Assessment Year 2010-11. The issue raised in the appeal is stated to be covered by a judgment of a Coordinate Bench of the Court in Li and Fung India Pvt. Ltd. vs. Commissioner of Income Tax. The judgment emphasizes that the determination of the appellant's profit should be based on its functions and operating costs, not on the cost of goods sourced from third-party vendors. It clarifies that the net profit margin should be calculated with reference to costs incurred by the assessee, not by third parties or associated enterprises. The Tribunal's reasoning to enhance the appellant's cost base by considering costs not incurred by the assessee is deemed unjustified and not supported by the Transfer Pricing Rules. As the issue raised in the present appeal is covered by the Coordinate Bench's judgment, it is concluded that no question of law arises for consideration, leading to the dismissal of the appeal.

Application of Transfer Pricing Rules:
The judgment extensively discusses the application of Transfer Pricing Rules, specifically Rule 10B(1)(e), emphasizing that the net profit margin should be determined with reference to the relevant factors of the enterprise in question, i.e., the assessee, and not based on third-party costs. The judgment criticizes the tax authorities' approach of imputing notional adjustments or income in the assessee's hands based on the costs of unrelated party vendors. It clarifies that the TNMM (Transactional Net Margin Method) should be applied in accordance with the prescribed rules and norms to determine the Arm's Length Price (ALP). The judgment underscores the importance of considering the functions performed and costs incurred by the assessee in calculating the net profit margin for international transactions.

In conclusion, the judgment addresses the issues of delay condonation, challenge to the Tribunal's order, and the application of Transfer Pricing Rules with a detailed analysis of the relevant legal principles and precedents, ultimately dismissing the appeal based on the principles established in the referenced judgment.

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