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TMI Blog2015 (4) TMI 948X X X X Extracts X X X X X X X X Extracts X X X X ..... y services on behalf of MCJ and other group companies across the globe; liaises between departments of MCJ group companies and their suppliers/customers in India. The assessee also co-ordinates import and export of goods and services; inter alia it is independently engaged in trading. For AY 2008-09, five international transactions were reported by it. The controversy in this appeal is with respect to one international transaction, i.e. provision of Agency and marketing support services. The assessee was compensated Rs. 32,18,11,018/- during the assessment year. It selected the Transactional Net Margin Method (TNMM) as the most appropriate method with the Profit Level Indicator (PLI) of OP/OC and reported a profit rate of 16.87% in respect of its international transactions, with the same PLI of OP/OC of certain unrelated comparables at 13.81% on the basis of multiple years' data. The assessee claimed that its international transactions were at arm's length price (ALP) falling within +/- 5% range. 3. The TPO, by his order noted that the assessee provided some crucial services to its Associates Enterprises (AEs) which formed the basis of sourcing activities carried out by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourced from India at Rs. 24,208 crores; applied ratio at 1.78% on such FOB value to determine the total operating profits attributable to Indian turnover at Rs. 43.05 crores; and thereafter determined the assessee's 70% share in such profits at Rs. 30.14 crores. The TPO thus proposed transfer pricing adjustment at Rs. 30.14 crores. In the alternative approach, he proceeded to benchmark the assessee's international transactions under TNMM by treating it as a commission agent. Nine comparables were chosen giving an arithmetic mean margin of profit at 42.13% on cost. An adjustment of Rs. 30.14 crores on the basis of PSM was applied by relying on the Tribunal's order in M/s Li & Fung (supra). 4. The assessee unsuccessfully objected to the addition, before the Dispute Resolution Panel (DRP) against the draft order passed by the Assessing Officer. The DRP approved the application of PSM by relying on the decision of the Tribunal in the case of M/s Li & Fung (supra). Aggrieved by the addition of Rs. 30.14 crores, the assessee approached the ITAT. 5. By the impugned order, the ITAT noticed that there was no dispute on any international transaction other than that of `Provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged independently between them. There was, as a result, no question of its assuming higher risk or using its highly valued intangibles. The ITAT held that the TPO repeatedly reiterated that the assessee played a crucial role in the transactions between AEs and Indian parties by using valuable intangibles which has benefited the group as a whole, but never substantiated those conclusions. On the basis of its appreciation of the facts and the decision of this Court in M/s Li & Fung India Pvt. Ltd. v. CIT (2014) 361 ITR 85 (Del) (which reversed the decision in Li & Fung, by the ITAT, relied on by the TPO) the ITAT held that: "8. Considering the entirety of the facts and circumstances prevailing in the present case, we find that the findings returned by the TPO - the assessee assuming substantial risks; doing critical functions for its AEs; and allowing the user of its highly-valued intangibles to such AEs - are all in air without any bedrock. Further, the conclusion drawn by the authorities in applying the PSM by basing their finding on the strength of the order of the Tribunal in the case of M/s Li & Fung (supra) cannot be sustained because of its reversal by the Hon'ble Delhi H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrectly held that the assessee was not compensated on account of location savings, a benefit which accrued to its AEs. Lastly, it was urged that the TPO held that the assessee's functional profile was that of a "Trader" in the related party segment, rather than the actual functional profile of a "service provider". All these went into making the PSM as the most appropriate method. 9. The TPO, in his order, after discussing the rival contentions and further elaborately noticing various decisions, recorded practically no reasons why the TNMM was not appropriate. His allusion to development of "unique intangibles" or assumption of significant risks was not based on any logic, much less materials. That order was an incantation of the statute and conditions spelt out in the rules. To hold that the PSM should be applied, it was stated that: "The assessee has submitted its reply on 05.10.2011 towards the use of Profit Split Method. The main contentions of the assessee is that the key conditions in which profit split method can be applied is when both parties to the transaction are making significant contribution to the transactions, or that the operations of both the parties are highl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the assessee and the associated enterprise should be in the ratio of 70 : 30. The assessee must get 70% of the profit earned from the goods sourced from India. The assessee has raised a point that in the show cause notice, while calculating the operating profit of AE, certain non operating income was not deducted from the OP. The same is found to be valid and the calculation is corrected, while doing the final calculation. Based on the above discussion, the arm's compensation of the assessee shall be computed as per Profit Split Method..." 10. This Court in Li & Fung (supra) discussed why a similar approach was contrary to law: "42. Moreover, there is considerable merit in the submission that the (finding of the) lower authorities, including the Tribunal, misdirected themselves in holding that LFIL assumed substantial risk. Whilst this court would neither state that LFIL performed functions with a limited risk component, as it does not engage itself in manufacturing of garments (which is LFIL's stance), apart from the broad assumptions made by the Revenue, no material on record testifies to that fact such that it can be the basis for an arm's length price adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r out of the five transactions. The TPO discarded TNMM as the most appropriate method, holding that the assessee assumed significant risks, and relied on unique intangibles thus resulting in higher profits of the AE which should be attributed to it. In a given case, concededly this can be argued if the facts can logically support such a conclusion. However, the revenue cannot merely state that significant risks, such as credit, operational, manpower and other risks were borne or that the assessee's business was subjected to fluctuations. It merely mediated between the AEs and customers/vendors in India. Furthermore, it only supplied information to the AEs and mediated between them and Indian enterprises in the transactions arranged independently between them. The observations that the AE's decisions were taken by the assessee is a general one, unsupported by any independent material; it is anecdotal and based on the TPO's belief, rather than objective fact based analysis. There was, as a result, no question of its assuming higher risk or using its highly valued intangibles. This court also concurs with the ITAT's finding that the assessee's risk was limited and minimal with least c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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