2014 (3) TMI 886 - AT - Income Tax

Determination of the correct base in the PLI Held that - The decision in Li & Fung (India) Pvt. Ltd. Vs CIT 2014 (1) TMI 501 - DELHI HIGH COURT followed - the FOB value of goods between the third party enterprises, sourced through the assessee, was not in accordance with the law - 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 thus, the order is set aside and the 'total cost' being the denominator in the PLI of OP/TC, has to be taken as the costs incurred by the assessee and not the FOB value of goods between third party enterprises sourced through the assessee - the tested party should be the assessee and not it's A.E. Transfer pricing adjustment on account of ALP International transaction of provision of sourcing support services Services provided to AE - Held that - The 'total cost' in the denominator will stand changed to the 'total cost' incurred by the assessee instead of the FOB value of goods between third party enterprises - necessary details for the determination of ALP with the correct base of the assessee as well as comparables are not readily available on record thus, the matter is remitted back to the AO for fresh adjudication. Depreciation of computer peripherals 15% OR 60% - Held that - The decision in DCIT Vs Datacraft India Ltd. 2010 (7) TMI 642 - ITAT, MUMBAI followed - whether a particular machine can be classified as a computer or not, the predominant function, usage and common parlance understanding, would have to be taken into account - the authorities below were not justified in reducing the rate of depreciation on computer peripherals Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment regarding Arm's Length Price (ALP) for provision of 'Sourcing Support Services' to Associated Enterprises.
2. Correct base for Profit Level Indicator (PLI) in the determination of ALP.
3. Depreciation rate on computer peripherals.

Issue 1: Transfer Pricing Adjustment for ALP of 'Sourcing Support Services':
- The major issue involves making an addition towards transfer pricing adjustment of Rs. 4,77,77,646/- due to the Arm's Length Price (ALP) of the international transaction of providing 'Sourcing Support Services' to Associated Enterprises.
- The assessee adopted the Transactional Net Margin Method (TNMM) with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC). The dispute arose regarding the correct base for 'Total Cost' in the PLI.
- The Tribunal referred to a previous case where the Hon'ble Delhi High Court held that the FOB value of goods between third party enterprises, sourced through the assessee, was not in accordance with the law. Consequently, the correct base for 'Total Cost' in the PLI should be the costs incurred by the assessee, not the FOB value of goods between third party enterprises.
- The Tribunal set aside the impugned order and remitted the matter for a fresh determination of ALP with the correct cost base of the 'total cost' incurred by the assessee.

Issue 2: Correct Base for PLI in ALP Determination:
- The dispute primarily revolved around the correct base for the Profit Level Indicator (PLI) in the determination of ALP. The Tribunal clarified that the 'total cost' incurred by the assessee should be considered as the denominator in the PLI, not the FOB value of goods between third party enterprises.
- The Tribunal emphasized that the tested party should be the assessee, not its Associated Enterprises, in line with the judgment of the Hon'ble Delhi High Court in a similar case.
- The Tribunal directed a fresh determination of ALP with the correct cost base of the 'total cost' incurred by the assessee.

Issue 3: Depreciation Rate on Computer Peripherals:
- The Assessing Officer disallowed depreciation of computer peripherals at 60% claimed by the assessee, reducing it to 15%. The Tribunal referred to a Special Bench order in favor of the assessee regarding the depreciation rate on computer peripherals.
- The Tribunal held that the authorities were not justified in reducing the rate of depreciation on computer peripherals and allowed the ground in favor of the assessee.

In conclusion, the Tribunal addressed the issues related to transfer pricing adjustment, the correct base for the Profit Level Indicator, and the depreciation rate on computer peripherals. The Tribunal set aside the impugned order and directed a fresh determination of the Arm's Length Price with the correct cost base, in line with legal precedents and settled principles.