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TMI Blog2015 (11) TMI 788X X X X Extracts X X X X X X X X Extracts X X X X ..... ther, for the current year, we note that both as per the comparables chosen by the assessee which yield a markup on 11.66% on operating cost and also the comparables chosen by the TPO, which yield 18.06% on operating cost, after making necessary working capital adjustment, indicates that the assessee’s markup of 15.36% charged on its operating cost falls well within the arm’s length price after considering the range of +/- 5% as envisaged in the Proviso to section 92C (2) of the Act. Therefore, no TP adjustment is required in assessee’s case. - Decided in favour of assessee. - ITA No.577/Del./2015 - - - Dated:- 1-10-2015 - SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER For The Assessee : Shri Rahul K. Mitra, CA For The Revenue : Shri Syed Nasir Ali, CIT DR ORDER PER A.T. VARKEY, JUDICIAL MEMBER : This appeal, at the instance of the assessee, is directed against the Order of AO dated 26.12.2014 under section 143 (3) read with section 144C (5) of the Income-tax Act, 1961 (hereinafter referred to the Act ) in pursuance to the direction of the DRP-IV, New Delhi for the assessment year 2010-11. 2. GAP Inc. incorporated in De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / low end technical support services of merchandise for GAP Group. Following set of comparables was selected in the TP Report : S.No. Name of the Company Data Source Working Capital Adjusted OP/VAE 1 Asian Business Exhibition Conference Limited P 20.97% 2 IDC (India) Ltd., P 12.79% 3 Empire Industries Ltd. Seg- P 11.60% 4 Entertainment Network(India)Ltd Seg- P 0.22% 5 Priya International Ltd. Seg-P 20.39% 6 Hansa Vision Pvt Ltd C 4.00% Mean 11.66% 6. The TPO, however, rejected the transfer pricing study of the assessee on the same reasons as held in earlier years from A.Y 2006- 07 onwards, the TPO held as under :- In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Hon ble Tribunal. 4. When the matter reached the Hon'ble Tribunal in the appellant's case for the AY 2006-07 and 2007-08 (disposed by a consolidated order dated 18th September 2012 Refer pages 142 to 192 of Appeal set), the Hon'ble Tribunal was pleased to distinguish the case of Li Fung and held that GIS India was entitled to a cost plus form of remuneration and not a commission based remuneration. However, the Hon'ble Tribunal enhanced the mark-up on the cost from 15%, as charged by the appellant, to 32%, being the derived mark-up on operational costs, as in the case of Li Fung India. 5. As a result of the said ruling of the Hon'ble Tribunal, the appellant had received more than 98% relief in each of the said AYs. The same resolution was reached by the Hon'ble Tribunal in the appellant's case for the subsequent year i.e. the A Y 2008-09 (copy of order dated 15th March 2013 has been enclosed at Refer pages 193 to 2010 of Appeal set). 6. The order of the Hon'ble Tribunal in the case of Li Fung India with reference to which the TPO and the DRP had applied a commission based remuneration model in the appellant's case for the ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the decision of the Tribunal rendered in the assessee's own case for the earlier years as above. However, the DRP reiterated TPO's stand that the ITAT's decision in its own case was not final as the order has been challenged by the Department in the Hon'ble High court of Delhi and the appeal is pending. 13. During the AY 2010-11, the assessee benchmarked the transaction relating to provision of sourcing support services by considering the similar service providers earning mean margin(OP/TC) of 11.66% (Refer Page 35 and 36 of Paper book; Also refer page 98 of appeal set for TPO's order). 14. However, the TPO in the order had considered commission based model as an appropriate compensation model in the assessee's case (Refer Page 129 of Appeal set). Further, the TPO while computing the arm's length margin, selected distributors as comparables earning mean margin of 6.50% (Refer Page 140 of Appeal set) and determined the TP adjustment of ₹ 382.32 crores. 15. Following the approach as done in earlier years, the assessee has provided the following alternative comparable sets to demonstrate the tentative Operating Profit / Total Cost ratio fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overted by the department. It emerges that assessee follows and executes them as a service provider. . vi. Considering above we conclude that non risk bearing procurement facilitating functions which are preordained by contract and hand book, the appropriate PLI will be net profit / total cost and not the % of FOB value of goods sourced by AE. Accordingly, we uphold the net profit / total cost remuneration model adopted by the assessee. Having held so now we proceed to decide the percentage of markup to be applied to assessee s cost. 9.5 .. (iii) In view of the foregoing we have no hesitation to accept a candid proposal given by the assessee and hold that assessee TP adjustments be made by adopting the 32% cost plus mark up of the assessee for AY 2006-07 and 2007-08. The mark-up proposal of assessee is higher than mark-up over total cost earned by all comparables placed on record. The assessments should be framed accordingly. We may hasten to add that this mark we will be subjected to variation is subsequent years if the facts and circumstances of the case so warrant. We further take note that the Tribunal in assessee s own case, in AY 2008-09 in ITA Nos.55/Del/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the Tribunal in Li Fung India Pvt. Ltd., the Hon ble jurisdictional High Court held as follows :- 49. This court summarizes its conclusions as follows: (a) The broad basing of the profit determining denominator as the entire FOB value of the contracts entered into by the AE to determine the LFIL‟s ALP, as an adjustment , is contrary to provisions of the Act and Rules; (b) The impugned order has not shown how, and to what extent, LIFIL bears significant risks, or that the AE enjoys such locational advantages, as to warrant rejection of the Transfer pricing exercise undertaken by LFIL; (c) Tax authorities should base their conclusions on specific facts, and not on vague generalities, such as significant risk , functional risk , enterprise risk etc. without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reason, based on objective facts and the relative evaluation of their weight and significance. (d) Where all elements of a proper TNMM are detailed and disclosed in the assessee s reports, care should be taken by the tax administrators and authorities to analyze them ..... X X X X Extracts X X X X X X X X Extracts X X X X
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