2021 (10) TMI 610 - AT - Income Tax

TP Adjustment - International transaction pertaining to provision of sourcing support services to its Associated Enterprises ('AEs') - functional profile of the Appellant - characterizing as a trader OR service provider - Whether Appellant has developed human resource and supply chain intangible for its AEs? - HELD THAT - As entire TP approach was on the premise that the services of the appellant are akin to that of a trader and therefore, the TPO has selected the comparables identifying traders as comparables. We are of the considered view that the TPO has proceeded on an erroneous premise which has resulted into his TP adjustment erroneously. The assessee does not have any market risk, product liability risk, service liability risk, credit risk and price risk. The facts on record show that the assessee does not take part in purchase decisions. In fact, the assessee is not engaged and does not have any legal right to do so, in the activity relating to maintaining any stock of merchandise manufactured by vendors and/or reselling the same to group's retail entities on its own account. In other words, the assessee does not bear any risk associated with carrying/owing/maintaining stock of inventory. The glaring fallacy in the approach of the TPO lies on the fact that he has adopted FOB cost of goods procured from India by the AEs through the assessee as cost base. In our considered view, this approach of the TPO is in complete disregard to the functional profile of the assessee. The assessee operates in a limited risk environment providing routine support services to group entities and accordingly, entitled to be remunerated based on assured return. TPO has not accepted the decision of Li Fund 2014 (1) TMI 501 - DELHI HIGH COURT solely on the ground that an appeal has been recommended before the Hon'ble Apex Court. In our considered view, when the operation of the decision of the Hon'ble Jurisdictional High Court has not been suspended or stayed, it was mandatory upon the TPO to follow the binding decision of the Hon'ble Jurisdictional High Court. We set aside the TP adjustment made by the Assessing Officer and direct him to delete the addition - Decided in favour of assessee.

Issues Involved:
1. Validity of the order passed by the National e-Assessment Centre.
2. Characterization of the appellant's functional profile.
3. Development of human resource and supply chain intangible.
4. Engagement in maximizing location savings.
5. Benchmarking approach and inclusion of FOB cost.
6. Computation of net profit margin using unrelated enterprise costs.
7. Selection of comparables for arm's length price computation.

Issue-wise Detailed Analysis:

1. Validity of the Order:
The appellant challenged the validity of the order passed by the National e-Assessment Centre, Delhi, arguing that it was "bad in law and void ab-initio."

2. Characterization of Functional Profile:
The appellant contested the Deputy Commissioner of Income Tax's (TPO) characterization of its functional profile, arguing that it was wrongly characterized as a trader instead of a service provider. The Tribunal found that the appellant operates on an assured return revenue model with minimal risk, primarily providing sourcing support services such as identifying suppliers, obtaining offers, managing logistics, and quality control checks. The TPO's characterization was deemed erroneous as the appellant does not engage in strategic sourcing decisions or bear significant risks associated with trading activities.

3. Development of Human Resource and Supply Chain Intangible:
The TPO's assertion that the appellant developed human resource and supply chain intangible for its Associated Enterprises (AEs) was rejected. The Tribunal noted that the appellant's role was limited to routine support services, and the strategic functions were performed by the AEs.

4. Engagement in Maximizing Location Savings:
The TPO's conclusion that the appellant was engaged in maximizing location savings for its AEs was also found to be incorrect. The Tribunal emphasized that the appellant's functions were limited to support services without involvement in strategic decision-making or risk-bearing.

5. Benchmarking Approach and Inclusion of FOB Cost:
The TPO's approach of including the Free on Board (FOB) cost of goods sourced by the AEs from third-party vendors in the cost base of the appellant for computing the arm's length profit margin was challenged. The Tribunal referred to the Delhi High Court's decision in the case of Li and Fung India Ltd., which held that the net profit margin should be calculated only with reference to costs incurred by the assessee and not by any other entity. The TPO's inclusion of FOB costs was found to be in complete disregard of the appellant's functional profile and was set aside.

6. Computation of Net Profit Margin Using Unrelated Enterprise Costs:
The TPO's method of considering the costs incurred by unrelated enterprises to compute the net profit margin of the appellant was rejected. The Tribunal reiterated that the arm's length price should be determined based on the costs, assets, and sales of the assessee, not third parties.

7. Selection of Comparables for Arm's Length Price Computation:
The selection of companies carrying out trading activities as comparables for the appellant's business of providing sourcing support services was contested. The Tribunal found that the TPO's selection of comparables, including Shoppers Stop Limited, Isha Natural Beauty Products & Wellness Private Limited, and others, was based on the erroneous premise that the appellant's business model was akin to that of a trader. The Tribunal concluded that the TPO's approach was flawed and the selected comparables were inappropriate.

Conclusion:
The Tribunal set aside the TP adjustment made by the Assessing Officer, directing the deletion of the addition of ?43,01,97,828/-. The appeal of the assessee was allowed, emphasizing that the TPO's approach was based on an incorrect premise and disregarded the functional profile of the appellant. The Tribunal also highlighted the binding nature of the Delhi High Court's decision in the case of Li and Fung India Ltd., which was not followed by the TPO despite the absence of a stay or suspension of the judgment.

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