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TMI Blog2018 (2) TMI 1639X X X X Extracts X X X X X X X X Extracts X X X X ..... k, storage and handling risk etc., it cannot be treated as a trader. Moreover when undisputedly the taxpayer has not developed any intangible or accorded locational savings to its AEs and has earned net operating profit margin on cost of 129.34% against the margin of comparable at 14.05%, it cannot be said that the taxpayer has not been adequately compensated. As has been held in Li & Fung India Pvt. Ltd. (2014 (1) TMI 501 - DELHI HIGH COURT) the determination of 2.58% margin over the FOB value of the AEs contract not sustainable in the eyes of law. Rather TPO has artificially enhanced the cost base of the taxpayer and proposed a mark up of the FOB value of goods sourced by AEs and as such this approach is not available in TNMM under Rule 10B(1)(e) of the Act. So, the TPO has wrongly recharacterized the business function of the taxpayer from a business support service provider to a trader. - Decided against revenue - ITA No.6612/Del./2014 - - - Dated:- 21-2-2018 - SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The ASSESSEE : Shri Vishal Kalra, Advocate For The REVENUE : Shri Sanjay Kumar Yadav, Senior DR ORDER PER KULDIP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dures, business trends, market conditions, etc.; and (iv) Arranging for feasibility studies, industry analysis, and project evaluation for potential projects, in relation to a specific product as identified by the AEs. 5. The Transfer Pricing Officer (TPO) has observed during the transfer pricing proceedings that the taxpayer is part of Sogo Shosha group and is also a trader and thus included Free on Board (FOB) value of the goods sourced by the AEs in the cost base of the taxpayer. 6. The taxpayer in its TP study adopted Transactional Net Margin Method (TNMM) with net operating profit margin on cost, selected 17 comparables companies with margin of 14.05% as against margin of taxpayer at 129.34% and found its international transaction qua provision of business support services at arm s length. However, TPO after recharacterizing the business profile of the taxpayer selected 29 comparables with margin of 2.58% and made TP adjustment of ₹ 5,46,43,844/-. 7. The taxpayer carried the matter before the ld. CIT (A) who has deleted the addition on account of ALP adjustment by allowing the appeal. Feeling aggrieved, the Revenue has come up before the Tribunal by way of fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sustainable under the Act; that the issue in controversy has been squarely covered in taxpayer s own case for AY 2007-08 and 2008-09 in ITA Nos.6287/Del/2012 6288/Del/2012 order dated 18.08.2017 decided by the coordinate Bench of the Tribunal and also relied upon the judgment of Hon ble Delhi High Court in Li Fung India Pvt. Ltd. (supra) and the decision of the coordinate Bench of the Tribunal in GAP International Sourcing India Private Limited in ITA No.5147/Del/2011 228/Del/2012 . 13. When we examine the decision rendered by the Hon ble High Court in Li Fung India Pvt. Ltd. (supra) having identical facts vis- -vis the taxpayer, the findings returned by the ld. CIT (A) deleting the addition made by the TPO need no interference. The operating part of the judgment delivered by the Hon ble High Court in Li Fung India Pvt. Ltd. (supra) is reproduced for ready perusal as under :- The assessee was a wholly owned subsidiary of a company incorporated in Mauritius as a captive offshore sourcing provider. LFT, an associated enterprise, was a group company incorporated in Hong Kong. The assessee entered into an agreement with the associated enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee was performing all critical functions with the help of tangible and unique intangibles as well as supply chain developed, which helped the associated enterprise to enhance its business and resulted in location saving to the consumer, compensation for the services rendered by the assessee to the associated enterprise, equivalent to the cost plus 5 per cent. mark-up, was not at arm's length. Since the assessee was providing crucial sourcing services and the associated enterprise was remunerated by third parties based on such services, the Tribunal relied upon the mark-up on the free on board value of goods sourced through the assessee as the appropriate method to work out the arm's length compensation. The Tribunal accepted the Transfer Pricing Officer s reasoning for applying the 5 per cent. of the free on board value of exports to third parties by Indian manufacturers. On appeal: Held, allowing the appeal, (i) that to apply the transactional net margin method the assessee's net profit margin realised from the international transactions had to be calculated only with reference to the cost incurred by it and not by any other entity either third party ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the exports, which were manufactured independently. Thus, attributing the costs of such third party manufacture, when the assessee did not engage in that activity, and more importantly, when those costs were clearly not the assessee's costs, but those of third parties, was clearly impermissible. ( iv) That once the transactional net margin method was deemed the most appropriate method, the distortions, if any, had to be addressed within its framework. The unrelated transactions which were compared by the assessee had not been adversely commented upon, and neither had the choice of the transactional net margin method. The Transfer Pricing Officer, therefore, ignored relevant and crucial material, and straightaway proceeded to broaden the base for arriving at the profit margin, for attributed income of the assessee. Not only was this a clear infraction of the terms of the Act and Rules; he went ahead to introduce what was clearly alien to the provisions of law and travelled outside the Rules. Therefore, the Transfer Pricing Officer's addition of the cost plus 5 per cent. mark-up on the free on board value of exports among third parties to the assessee's calc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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