Gap International Sourcing (India) Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1077/DEL/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7734 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 10-05-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 01-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMIT MOHAN GOVIL
• Assessee Lawyers: NEETI SATIJA CAS
• Keywords: Transfer pricing; International transaction; Commercial expediency; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1077/DEL./2016 (ASSESSMENT YEAR : 2011-12) GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD., V S. DCIT, CIRCLE 10 (1), UNIT NO.201, DLF SOUTH COURT, NEW DELHI. DISTRICT CENTRE, SAKET, NEW DELHI. (PAN : AACCG3437E) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI RAHUL K. MITRA, VINAY VERMA, ASHISH JAIN, ADITY ANAND AND MS. NEETI SATIJA, CAS REVENUE BY : SHRI AMIT MOHAN GOVIL, CIT DR DATE OF HEARING : 10.05.2016 DATE OF ORDER : 17.05.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. (HEREINAFTER REFERRED TO AS THE ASSESSEE), BY FIL ING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER PASSE D BY THE TPO/DRP/AO QUA THE ASSESSMENT YEAR 2011-12 ON THE G ROUNDS INTER ALIA THAT :- 1. THE LEARNED DISPUTE RESOLUTION PANEL ('LD. DRP' ) AND THE LEARNED DEPUTY COMMISSIONER OF INCOME-TAX ('LD. AO' ) (FOLLOWING THE DIRECTIONS OF THE LD. DRP), ERRED ON FACTS AND IN LAW ITA NO.1077/DEL./2016 2 BY HOLDING THAT THE INTERNATIONAL TRANSACTION OF PR OVISION OF SOURCING SUPPORT SERVICES TO ASSOCIATED ENTERPRISES ('AES'), UNDERTAKEN BY THE APPELLANT DOES NOT SATISFY THE AR M'S LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME-TAX ACT 1961 ( 'THE ACT'). IN DOING SO, THE LD. DRP AND CONSEQUENTLY THE LD. AO ( FOLLOWING THE DIRECTIONS OF THE LD. DRP) HAVE GROSSLY ERRED IN EN HANCING THE INCOME OF THE APPELLANT BY INR 3,265,301,3351- ON A CCOUNT OF THE TRANSFER PRICING ('TP') ADJUSTMENT U/S 92CA(3) OF T HE ACT MADE BY THE LD. TPO BY ; 1.1 IGNORING THE DECISION OF HON'BLE INCOME TAX APP ELLATE TRIBUNAL ('ITAT') IN THE APPELLANT'S OWN CASE (GAP RULING 20 ITR (TRIB) 779) FOR EARLIER YEARS I.E. ASSESSMENT YEARS ('AY') 2006-07, AY 2007-08 ), AY 2008-09 (ITA 55/DEL/2013), AY 2009 -10 (ITA 692/DE1/2014) AND AY 2010-11 (ITA 577/DEL/2015) BY REJECTING THE COST PLUS COMPENSATION MODEL OF THE APPELLANT; 1.2 DISREGARDING THE FACT THAT HON'BLE ITA T HAS A CCEPTED THE FUNCTIONAL, ASSET AND RISK PROFILE ('FAR') OF THE A PPELLANT TO BE THAT OF A LOW RISK PROCUREMENT SUPPORT SERVICE PROV IDER AND THEREBY IGNORING THAT THE APPELLANT NEITHER CREATES SUPPLY CHAIN OR HUMAN INTANGIBLES NOR BEAR ANY SIGNIFICANT RISKS WITH RES PECT TO ITS BUSINESS OPERATIONS; 1.3 IGNORING THE FACT THAT HON 'BLE ITA T HAS BLES SED THE BUSINESS MODEL OF THE APPELLANT BY ACCEPTING THE AP PLICATION OF 'COST PLUS' REMUNERATION MODEL FOLLOWED BY IT; AND 1.4 IGNORING THE FACT THAT HON'BLE IT A T IN A Y 2 009-10 AND A Y 2010-11 HAS UPHELD THE MARK-UP OF 15% APPLIED BY THE APPELLANT TO BE AT ARM'S LENGTH. 2. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP), ERRED ON FACTS AND IN L AW IN UPHOLDING THE LD. TPO'S APPROACH OF DISREGARDING THE BENCHMAR KING APPROACH ADOPTED BY THE APPELLANT OF SELECTING COMP ANIES ENGAGED IN PROVIDING MARKETING SUPPORT LOW END TECHNICAL SU PPORT SERVICES IN ITS TP DOCUMENTATION REPORT FOR THE YEAR TO SUBS TANTIATE THE ARM'S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIO NS. 3. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP), ERRED ON FACTS AND IN L AW IN UPHOLDING THE LD. TPO'S APPROACH OF INCLUDING THE VALUE OF TH E GOODS SOURCED DIRECTLY BY THE AES OF THE APPELLANT FROM T HIRD PARTY VENDORS IN THE COST BASE OF THE APPELLANT, FOR THE PURPOSE OF COMPUTING THE ARM'S LENGTH PROFIT MARGIN OF THE APP ELLANT ON THE ALLEGED GROUND THAT IT CREATED SUPPLY CHAIN AND HUM AN ASSET INTANGIBLES IN INDIA AND GENERATED LOCATION SAVINGS IN INDIA WHICH HAVE NOT BEEN FACTORED IN ITS PREVAILING/ CURRENT R EMUNERATION MODEL. ITA NO.1077/DEL./2016 3 4. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP), ERRED ON FACTS AND IN L AW IN DISREGARDING THE DETAILED SUBMISSIONS AND EXTENSIVE ANALYSIS TO DEMONSTRATE THAT APPELLANT IS OPERATING ON A GUARAN TEED PROFIT MARGIN OF 15% ON ITS OPERATING COST AND THE APPELLA NT DOES NOT PROCURE CONTRACTS FROM THE THIRD PARTY VENDORS OR P ERFORM ANY SIGNIFICANT FUNCTIONS WHATSOEVER WITH REFERENCE TO THE GOODS SUPPLIED BY THE VENDORS DIRECTLY TO THE AES OF THE APPELLANT, AND THUS THE APPELLANT WAS ENTITLED TO A REMUNERATION O NLY WITH A REFERENCE TO THE VALUE OF GOODS SOURCED BY THE AES FROM THE THIRD PARTY VENDORS. 5. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP), ERRED ON FACTS AND IN L AW IN DISREGARDING THE EXTENSIVE/ VOLUMINOUS DOCUMENTS EV IDENCING THAT ALL KEY DECISIONS IN THE VALUE CHAIN SUCH AS SELECT ION OF VENDORS, DESIGNING OF PRODUCTS, ESTABLISHING PARAMETERS OF S OURCING, ESTABLISHING QUALITY STANDARDS, DECIDING VENDOR PRI CING ETC. WERE TAKEN BY THE OVERSEAS ASSOCIATED ENTERPRISES ('AES ') OF THE APPELLANT AND THAT THE APPELLANT MERELY CARRIED OUT LOW RISK BEARING LIAISONING AND COORDINATION FUNCTIONS AT TH E INSTANCE, BEHEST AND DIKTAT OF ITS AES. 6. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP), ERRED ON FACTS AND IN L AW IN MISINTERPRETING THE EXTENSIVE DOCUMENTS FILED BY TH E APPELLANT AND DRAWING VAGUE INFERENCES FROM THE SAME. 7. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP), ERRED ON FACTS AND IN L AW IN DRAWING AN ADVERSE INFERENCE IN TERMS OF SECTION 114 OF THE IN DIAN EVIDENCE ACT AND UPHOLDING THAT APPELLANT HAS FAILED TO PROD UCE THE BEST AVAILABLE EVIDENCE AVAILABLE WITH IT. 8. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP) HAS COMPLETELY DISREGARD ED THE RELEVANT JUDICIAL PRONOUNCEMENTS WHICH UPHOLDS COST PLUS REM UNERATION FOR PROCUREMENT SUPPORT SERVICE PROVIDERS. 9. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOWI NG THE DIRECTIONS OF THE LD. DRP) HAS GROSSLY ERRED IN STA TING THAT FOR THE YEAR UNDER CONSIDERATION, THE FACTS OF THE APPELLAN T HAVE UNDERGONE A CHANGE WHEREAS THE FACTS ARE EXACTLY TH E SAME AS PRIOR YEARS. IN DOING SO, THE LD. DRP AND LD. AO HAVE NOT PROVIDED ANY DOCUMENTARY EVIDENCE TO SUBSTANTIATE THEIR CLAIM. 10. THE LD. DRP AND CONSEQUENTLY THE LD. AO (FOLLOW ING THE DIRECTIONS OF THE LD. DRP) HAS GROSSLY ERRED IN PRO POSING AN ALTERNATE ECONOMIC ANALYSIS USING PROFIT SPLIT METH OD WITHOUT ITA NO.1077/DEL./2016 4 APPRECIATING THE FACT THAT THE CURRENT BUSINESS MOD EL AND THE FUNCTIONALITY OF THE APPELLANT COMPANY (WHICH HAS B EEN DULY APPROVED BY THE HON'BLE TTAT IN APPELLANT'S OWN CAS E IN 2006-07 AND A Y 2007-08) DOES NOT INVOLVE UNIQUE INTANGIBLE S OR TRANSACTIONS THAT ARE INTERLINKED WHICH WOULD WARRA NT SUCH AN ANALYSIS . 11. THE HON'BLE DRP AND CONSEQUENTLY THE LD. AO ERR ED ON FACTS AND IN LAW, IN ENHANCING THE INCOME OF THE AP PELLANT BY INR 17,516,800 BY DISALLOWING RENT EXPENSE BEING CONVER SION CHARGES PAID TO THE MUNICIPAL CORPORATION OF DELHI ('MCD'), PURSUANT TO AN ARRANGEMENT BETWEEN THE APPELLANT AND THE LESSORS I N CONNECTION WITH THE PREMISES OCCUPIED BY THE APPELLANT. WHILE DISALLOWING THE CLAIM OF MCD CONVERSION CHARGES, THE HON'BLE DR P AND LD. AO (FOLLOWING THE DIRECTIONS OF THE HON'BLE DRP) GR OSSLY ERRED BY: 10.1 ERRONEOUSLY RELYING ON THE DECISION OF ARUN KU MAR GUPTA (HUF) V. ACIT (2012) 54 SOT 509 (DELHI) ON DISTINGU ISHING FACTS TO HOLD THAT ONE TIME CONVERSION CHARGES PAID BY TH E APPELLANT TO THE MCD WERE CAPITAL IN NATURE AS IT RESULTED IN EN DURING ADVANTAGE TO THE APPELLANT; 10.2 CONCLUDING THAT THE CONVERSION CHARGES PAID W ERE FOR VIOLATION OF MUNICIPAL LAWS, WITHOUT OBTAINING! VER IFYING NECESSARY FACTS / INFORMATION FROM THE APPELLANT; 10.3 COMPLETELY DISREGARDING THE FACT THAT SUCH PA YMENT WAS MADE ON ACCOUNT OF COMMERCIAL EXPEDIENCY BY THE APP ELLANT AND DID NOT CONSIDER FAVOURABLE DECISIONS OF THE JURISD ICTIONAL ITAT IN THE CASE OF DCTT V. HALDIRAM PRODUCTS PVT. LTD. (I. T.A. NO. 5158/DEV2012) AND ACIT V. KALINGA INTERNATIONAL (I. T.A. 0.4500/DEIL2O.12), ON IDENTICAL FACTS, SUBMITTED BY THE APPELLANT DURING THE COURSE OF PROCEEDINGS BEFORE THE LD. DRP . 12. WITHOUT PREJUDICE TO THE ABOVE, IN THE FACTS AN D CIRCUMSTANCES OF CASE AND IN LAW, THE LD. AO HAS ER RED IN LEVYING INTEREST UNDER SECTION 2348 OF THE ACT. 13. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. AO ERRED IN INITIATING PENALTY PROCEED INGS UNDER SECTION 271 (1)( C) READ WITH SECTION 274 OF THE AC T. THAT THE ABOVE GROUNDS OF APPEAL ARE WITHOUT PREJUD ICE TO EACH OTHER. THAT THE APPELLANT RESERVES ITS RIGHT TO ADD, ALTER , AMEND OR WITHDRAW ANY GROUND OF APPEAL EITHER BEFORE OR AT T HE TIME OF HEARING OF THIS APPEAL. ITA NO.1077/DEL./2016 5 3. BRIEFLY STATED THE FACTS OF THIS CASE ARE : GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. IS A WHOLLY OWNED SUBSID IARY OF GIS INC. AND ITS BUSINESS ACTIVITIES ARE TO FACILITATE SOURC ING OF APPAREL MERCHANDISE FROM INDIA AND AS SUCH, GAP INDIA ACTS AS A SOURCING SUPPORT SERVICES PROVIDER OF GAP GROUP. FUNCTIONS PERFORMED BY GAP INDIA INCLUDE SUPPORT TO GAP GROUP IN IDENTIFIC ATION AND EVALUATION OF VENDORS, PROVISION OF ASSISTANCE TO V ENDORS IN PROCUREMENT OF RAW MATERIAL, PROVISION OF ASSISTANC E TO VENDORS IN DESIGNING, INSPECTION AND QUALITY CONTROL AND COORD INATION WITH VENDORS TO ENSURE DELIVERY OF GOODS TO GAP GROUP AS PER SCHEDULE. 4. DURING THE YEAR UNDER ASSESSMENT, ASSESSEE COMPA NY ENTERED INTO INTERNATIONAL TRANSACTION AS UNDER :- NATURE OF TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) PROVISION OF SOURCING SUPPORT SERVICES TNMM 59,24,41,155 5. ASSESSEE COMPANY IN ITS TRANSFER PRICING STUDY T O BENCHMARK INTERNATIONAL TRANSACTION USED TRANSACTIONAL NET MA RGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATIN G PROFIT / TOTAL COST (OP/TC) AS PROFIT LEVEL INDICATOR (PLI) AND WORKED OUT ITS OP/TC AT 15.52%. ASSESSEE COMPANY CHOSEN SIX C OMPARABLES HAVING AVERAGE OP/TC AT 13.28% AGAINST THE MARGIN O F THE ITA NO.1077/DEL./2016 6 ASSESSEE AT 15.52% AND TREATED ITS INTERNATIONAL TR ANSACTION AT ARMS LENGTH. 6. HOWEVER, TPO, WHILE REJECTING THE TRANSFER PRICI NG STUDY UNDERTAKEN BY THE ASSESSEE COMPANY, OBSERVED THAT T HE COMPENSATION MODEL ADOPTED BY THE ASSESSEE COMPANY WITH ASSOCIATED ENTERPRISES (AES) IS NOT AT ARMS LENGTH AND PROPOSED TO USE THE VALUE OF GOODS SOURCED BY THE ASSESSEE COMP ANY AS FOB VALUE OF THE GOODS SOURCED THROUGH YOU TO ARRIVE A T THE ALP. TPO FURTHER HELD THAT IN VIEW OF THE FUNCTIONAL PRO FILE OF THE ASSESSEE COMPANY, WHICH IS THAT OF A SOURCING AGENT , IT SHOULD BE COMPENSATED IN TERMS OF HIGHER COMMISSION AS ASSESS EE COMPANY IS CONTROLLING CRITICAL FUNCTIONS, SUCH AS, MERCHAN DISING, FABRIC SOURCING, PRODUCT INTEGRITY, QUALITY ASSURANCE, COM PLIANCE AND LOGISTICS AND MAJOR RISK ARISING FROM THE AFORESAID FUNCTIONS, SUCH AS, POOR QUALITY MANAGEMENT LIES WITH THE ASSESSEE COMPANY. ASSESSEES COMPENSATION MODEL IS BASED ON THE COST ON SERVICE RENDERED BY THE PROVIDER PLUS 5%. THE LD. TPO OBSE RVED THAT SINCE THE ASSESSEE IS OWNER OF SUPPLY CHAIN MANAGEMENT AN D INTANGIBLES, HUMAN ASSETS INTANGIBLES, THE COMPENSATION MODEL IN THIS CASE IS VERY NOMINAL AND ROUTINE MARKUP OF 15% OF THE COST WITHOUT ALLOCATING ANY PROFIT COMPONENT FOR DEVELOPMENT AND USE OF UNIQUE INTANGIBLES BY THE ASSESSEE RESULTED INTO HUGE COMM ERCIAL AND ITA NO.1077/DEL./2016 7 STRATEGIC ADVANTAGE TO THE AE IN THE FORM OF LOW CO ST GOODS. SO, THE TPO REJECTED ECONOMIC ANALYSIS OF THE ASSESSEE COMPANY AND COMPUTED ALP OF INTERNATIONAL TRANSACTION AT RS.3,2 6,53,01,335/-. IN PURSUANCE TO THE ORDER PASSED BY THE LD. TPO/DRP , THE AO MADE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUST MENT AT RS.3,26,53,01,335/- AND DISALLOWED THE RENT EXPENSE S TO THE TUNE OF RS.1,75,16,800/-. 7. ASSESSEE CARRIED THE MATTER BEFORE THE DRP WHICH HAS DISMISSED THE OBJECTIONS RAISED BY THE ASSESSEE COM PANY. FEELING AGGRIEVED, THE ASSESSEE COMPANY HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. THE ASSESSEE COMPANY CLAIMING ITSELF TO BE A SOU RCING SUPPORT SERVICE PROVIDER FOR GAP GROUP, SELECTED SI X COMPANIES AS COMPARABLES FOR TP ADJUSTMENT OF ITS INTERNATIONAL TRANSACTION AND THE SET OF COMPARABLES SELECTED IN TP STUDY IS AS U NDER :- S.NO. NAME OF THE COMPANY OP/TC 2 IDC (INDIA) LIMITED 12.57 3 QUADRANT COMMUNICATION L TD. 9.14 4 EMPIRE IND U STRIES LTD. (TRADING & INDENTING) 15.81 5 ENTERTAINMENT NETWORK (INDIA) LTD. (CONSOLIDATED) - 0.3 6 PRIYA INTERNATIONAL LIMITED (INDENTING) 29.2 13.28 ITA NO.1077/DEL./2016 8 10. ASSESSEE, BY USING MULTIPLE YEAR DATA, COMPUTED THE MEAN MARGINS OF THE COMPARABLE COMPANIES AT 13.28% AS AG AINST ITS OWN MARGIN AT 15.52% AND TREATED ITS INTERNATIONAL TRAN SACTIONS AT ARMS LENGTH. HOWEVER, LD. TPO RAISED THE OBJECTION AGAI NST THE USE OF MULTIPLE YEAR DATA AND ALLOWED THE ASSESSEE TO UPDA TE THE MARGIN BY USING LATEST DATA AVAILABLE. 11. THE COMPENSATION MODEL IN THIS CASE IS BASED ON THE COST ON SERVICE RENDERED BY THE PROVIDER PLUS 15% WHICH HAS NOT BEEN ACCEPTED BY THE TPO, WHO HAS HELD THAT THE CORRECT COMPENSATION MODEL AT ALP IN THIS CASE WOULD BE COMMISSION OF FO B COST OF THE GOODS SOURCED FROM INDIA BY TAKING INTO CONSIDERATI ON THE FACTORS INTER ALIA THAT THE ASSESSEE IS OWNER OF SUPPLY CHA IN MANAGEMENT INTANGIBLES; THAT THE ASSESSEE OWNS HUMAN ASSETS IN TANGIBLES; THAT THE COMPENSATION MODEL OF THE ASSESSEE DOES NOT INC LUDE THE PROFIT ATTRIBUTABLE TO THE ASSESSEE ON ACCOUNT OF LOCATION SAVINGS; AND THAT THE ASSESSEES REMUNERATION SHOULD BE EXPRESSED AS A PERCENTAGE OF THE FOB PRICE OF GOODS SOURCED THROUGH THE ASSESSEE . CONSEQUENTLY, THE LD. TPO HELD THAT FUNCTIONAL PROF ILE OF THE ASSESSEE COMPANY APPARENTLY PROVES THAT IT IS NOT A MARKET SUPPORT SERVICE PROVIDER AND CONSIDERING ITS FUNCTIONAL PRO FILE AND RISK BORNE BY IT, THE ASSESSEE WAS NOT REASONABLY COMPEN SATED IN ITA NO.1077/DEL./2016 9 COMPARISON OF ITS EFFORT PUT IN TOWARDS SOURCING GO ODS TO ITS AE AND COMPUTED THE ALP OF INTERNATIONAL TRANSACTION U NDERTAKEN BY THE ASSESSEE DURING THE PERIOD UNDER ASSESSMENT AS UNDER :- 12. FOLLOWING THE DISCUSSIONS IN THE PRECEDING PAR AS THE COMPARABLES THAT SHALL BE USED IN THE ASSESSEES CA SE ARE :- S.NO. NAME OF THE COMPANY OP/OC 1 PANTALOON RETAIL (INDIA) LIMITED 8.01 2 SHOPPERS STOP LIMITED 7.54 3 TRENT LIMITED - 0.12 4 JAYPEE SPINTEX LIMITED 5.88 AVERAGE 5.33 13. COMPUTATION OF ARMS LENGTH PRICE DETAILS AMOUNT IN INR TOTAL FOB VALUE OF EXPORTS 62,756,195,91 0 ARMS LENGTH MARGIN @ 5.33% 3,344,905,24 2 MARGIN SHOWN BY THE ASSESSEE 79,603,907 DIFFERENCE 3,265,301,33 5 SINCE THE DIFFERENCE BETWEEN THE ARMS LENGTH MARG IN AND THE MARGIN SHOWN BY THE ASSESSEE VARIES BY MORE THA N 5% OF THE ARMS LENGTH PRICE HAS TAKEN PLACE, AN ADJUSTMENT OF RS.3,26,53,01,335/- IS TO BE MADE TO THE INCOME OF THE ASSESSEE I.E. THE ASSESSING OFFICER SHALL ENHANCE THE INCOME OF T HE ASSESSEE BY AN AMOUNT OF RS.3,26,53,01,335/- WHILE COMPUTING IT S TOTAL INCOME. 12. UNDISPUTEDLY, IDENTICAL ISSUE WAS CROPPED UP BE FORE THE ITAT, DELHI IN ASSESSEES OWN CASE QUA THE ASSESSME NT YEARS 2006- 07 AND 2007-08 BEARING ITA NOS.5147/DEL/2011 AND 22 8/DEL/2012 ORDER DATED 18.09.2012, WHEREIN THE DELHI BENCH OF THE TRIBUNAL DISTINGUISHED THE ASSESSEES CASE FROM LI & FUNG IN DIA PVT. LTD. ITA NO.1077/DEL./2016 10 VS. DCIT REPORTED IN 12 ITR (TRIB) 748 RELIED UPON BY THE TPO TO BENCHMARK THE INTERNATIONAL TRANSACTIONS AND HELD T HAT THE ASSESSEE COMPANY WAS ENTITLED TO A COST PLUS FORM OF REMUNER ATION, AS CLAIMED BY THE ASSESSEE AND NOT A COMMISSION BASED REMUNERATION. SO, IN OTHER TERMS, THE ASSESSEE COMPANY HAS BEEN D ECLARED AS A SERVICE PROVIDER AND NOT BEING INTO BUY AND SELL CO MPANY RATHER FUNCTIONS AS A FACILITATOR ONLY. SO, NOW THE PROFI T MARGIN OF THE ASSESSEE IS IN DISPUTE ONLY IN THIS CASE. 13. HOWEVER, THE LD. DR, BY RELYING UPON THE ORDER PASSED BY THE TPO/DRP, CONTENDED INTER ALIA THAT THE REMUNERA TION MODEL ADOPTED BY THE LD. TPO IS APPROPRIATE IN VIEW OF TH E TP PROVISIONS AS THE COST BASE WAS NOT MAKING VALID COMPENSATION; THAT THE TP ADJUSTMENT HAS BEEN MADE BY THE TPO KEEPING IN VIEW THE CREATION OF INTANGIBLES BY THE ASSESSEE COMPANY AND LOCATION SAVINGS TO ITS AES; THAT GAP INTERNATIONAL, AE OF THE ASSESSEE COM PANY, HAS OUTSOURCED ALL ITS FUNCTIONS AND AS SUCH, FAR OF TH E TAXPAYER IS THE FIRST AND FOREMOST TO DETERMINE THE COMPENSATION MO DEL. 14. HOWEVER, TO REPEL THE ARGUMENT ADDRESSED BY THE LD. DR, THE LD. AR FOR THE ASSESSEE SIMPLY RELIED UPON THE FIND INGS RETURNED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NOS.5147 /DEL/2011 AND 228/DEL/2012 (SUPRA) AND FURTHER CONTENDED THAT EAC H AND EVERY POINT AS TO CREATION OF INTANGIBLES, LOCATION SAVIN GS, ASSESSEE ITA NO.1077/DEL./2016 11 HAVING NO HUMAN ASSETS INTANGIBLES HAVE BEEN SET AT REST; THAT THE ASSESSEE COMPANY HAS BEEN PERFORMING NORMAL AND ROU TINE FUNCTION AND NO INTANGIBLES ARE BEING CREATED. 15. LD. DRP WHILE REJECTING THE OBJECTIONS RAISED B Y THE ASSESSEE UPHELD THE FINDINGS RETURNED BY THE TPO BY ADOPTING THE SAME REASONING THAT THE ASSESSEE IS OWNER OF SUPPLY CHAIN MANAGEMENT INTANGIBLES; THAT THE ASSESSEE OWNS HUMA N ASSETS INTANGIBLES; THAT THE COMPENSATION MODEL OF THE ASS ESSEE DOES NOT INCLUDE THE PROFIT ATTRIBUTABLE TO THE ASSESSEE ON ACCOUNT OF LOCATIONAL SAVINGS ETC. BY ADOPTING THE FINDINGS RE TURNED BY THE DRP IN THE EARLIER YEARS I.E. 2006-07, 2007-08, 20 08-09, 2009-10 AND 2010-11, WHICH HAVE ADMITTEDLY BEEN SET ASIDE B Y THE TRIBUNAL IN ITA NOS.5147/DEL/2011 AY 2006-07, 228/DEL/2012 A Y 2007- 08, 55/DEL/2013 AY 2008-09, 692/DEL/2014 AY 2009-10 AND 577/DEL/2015 AY 2010-11. 16. SO, BY RESPECTFULLY FOLLOWING THE DECISIONS REN DERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE IN AYS 2006-07, 2007-08, 2008-09, 2009-10 AND 2010-11 AND JUDGMENT DELIVERED BY THE HONBLE JURISDICTIONAL HIGH COURT IN CASE ENTITLED LI & FUNG INDIA PVT. LTD. ON 16.12.2013 WHEREIN REM UNERATION MODEL OF MARKUP OF 5% ON THE OPERATION COST WITHOUT CONSIDERING THE VALUE OF THE COST PROCURED BY THE AE DIRECTLY F ROM THE THIRD ITA NO.1077/DEL./2016 12 PARTY VENDORS IN INDIA HAS BEEN HELD AS A VALID REM UNERATION MODEL FOR BENCHMARKING THE TP ADJUSTMENT. SO, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE IS NOT INTO BUY AND SELL RAT HER IT IS A FACILITATOR/SERVICE PROVIDER AND ITS COMPENSATION M ODEL AT ALP WOULD NOT BE COMMISSION OF FOB COST OF GOODS SOURCE D FROM INDIA, RATHER ASSESSEE COMPANY IS ENTITLED TO COST PLUS REMUNERATION AND NOT A COMMISSION BASED REMUNERATION. 17. NOW, THE NEXT QUESTION ARISES FOR DETERMINATION IN THIS CASE IS AS TO WHETHER LD. TPO/DRP HAVE CORRECTLY BENCHMARK ED THE INTERNATIONAL TRANSACTION BY USING APPROPRIATE COMPARABLES? 18. THE TPO SELECTED THREE COMPARABLES WITH AN AVER AGE OP/OC OF 5.33% WHICH HAS APPLIED ON THE FOB VALUE OF THE EXPORT AND THEREBY MADE AN ADJUSTMENT OF RS.3,26,53,01,335/-. DETAILED FINDINGS RETURNED BY THE TPO ARE AS UNDER :- WHEREAS, IN YOUR TP STUDY FOR AY 2007-08 YOU HAVE TAKEN COMPARABLES WHO ARE IN BUSINESS OF GARMENTS. THIS HAS BEEN ACCEPTED BY THE TPO CONSISTENTLY. SINCE, THERE HAS BEEN NO CHANGE IN YOUR FUNCTIONS COMPARED TO PREVIOUS YEARS AS DEP ICTED BY YOUR TP DOCUMENTATIONS, ON WHAT BASIS YOU HAVE CHANGED Y OUR SEARCH CRITERIA THIS TIME IS NOT MENTIONED IN THE TP STUDY . BASED ON THE LAST YEARS COMPARABLES USED BY THE ASSESSEE IN ITS TP STUDY, UPDATED MARGINS OF THE COMPARABLES ARE AS GIVEN BEL OW :- S.NO. NAME OF THE COMPANY OP/OC 1 PANTALOON RETAIL (INDIA) LIMITED 8.01 2 SHOPPERS STOP LIMITED 7.54 3 TRENT LIMITED - 0.12 4 JAYPEE SPINTEX LIMITED 5.88 AVERAGE 5.33 ITA NO.1077/DEL./2016 13 ACCORDINGLY, THE ARMS LENGTH PRICE IN YOUR CASE IS CALCULATED AS BELOW :- DETAILS AMOUNT IN INR TOTAL FOB VALUE OF EXPORTS 62,756,195,910 ARMS LENGTH MARGIN @ 5.33% 3,344,905,242 MARGIN SHOWN BY THE ASSESSEE 79,603,907 DIFFERENCE 3,265,301,335 THE ABOVE SHORTFALL OF RS.326,53,01,335/- IS BEING PROPOSED AS AN ADJUSTMENT TO THE PROFIT SHOWN BY TH E TAXPAYER IN ITS BOOKS OF ACCOUNT. 19. ASSESSEE COMPANY FILED COMPREHENSIVE REPLY DATE D 08.05.2015 RAISING OBJECTION TO THE TP ADJUSTMENT M ADE BY THE TPO BY RELYING UPON THE DECISION RENDERED BY ITAT, DELHI IN ASSESSEES OWN CASE FOR AYS 2006-07 AND 2007-08. H OWEVER, THE LD. TPO WITHOUT LEGALLY CONTROVERTING THE FACT THAT THE DECISIONS RENDERED BY ITAT IN ASSESSEES OWN CASE HAS NOT BEE N CHALLENGED BY THE REVENUE, INDULGED IN RECORDING FINDINGS THAT , THE HONBLE ITAT ERRED IN COMPLETELY DISREGARDING THE CRITICAL FUNCTIONS CARRIED OUT BY THE ASSESSEE AND THE CONSEQUENT RISKS BORNE BY THE ASSESSEE AND FURTHER RECORDED THE FINDING THAT EVEN THE JUDG MENT RENDERED BY THE HIGH COURT IN LI & FUNG INDIA PVT. LTD. CASE HAS NOT BEEN ACCEPTED BY THE REVENUE AS FILING OF SLP TO THE SUP REME COURT HAS BEEN SUGGESTED AS IF HE WAS SITTING IN APPEAL ON T HE ASSESSEES CASE OF EARLIER YEAR. ITA NO.1077/DEL./2016 14 20. SO, IN THE TOTALITY OF THE FACTS AND CIRCUMSTAN CES NARRATED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE LD. T PO HAS NOT MADE A FAIR ANALYSIS OF THE COMPARABLES, THOUGH CHOSEN B Y THE ASSESSEE IN ITS TP STUDY FOR THE AY 2007-08, RATHER RELIED UPON HIS OWN FINDING FOR THE EARLIER YEARS WHICH HAVE UNDISPUTEDLY BEEN SET ASIDE BY THE TRIBUNAL. SO, WE ARE OF THE FURTHER OPINION THAT T HE LD. TPO TO BENCHMARK INTERNATIONAL TRANSACTIONS AFRESH BY EXAM INING THE SUITABLE COMPARABLES BY PROVIDING OPPORTUNITY OF BE ING HEARD TO THE ASSESSEE. SO, FILE IS ORDERED TO BE RESTORED T O THE TPO TO BENCHMARK THE INTERNATIONAL TRANSACTIONS IN THE LIG HT OF THE OBSERVATIONS MADE HEREINBEFORE. 21. THE NEXT ISSUE ARISES FOR DETERMINATION IS AS TO WHETHER DRP/AO HAVE ERRED IN ENHANCING THE INCOME OF THE AS SESSEE BY RS.1,75,16,800/- BY DISALLOWING THE RENT EXPENSES B EING CONVERSION CHARGES PAID TO THE MUNICIPAL CORPORATIO N OF DELHI (MCD)? 22. UNDISPUTEDLY, THE ASSESSEE COMPANY HAS CLAIMED RENT EXPENSES TO THE TUNE OF RS.4,96,35,663/- AND FROM T HE DETAILS SUPPLIED BY THE ASSESSEE COMPANY, AO NOTICED THAT A SUM OF RS.1,75,16,800/- HAS BEEN CLAIMED IN THE NAME OF DU A ASSOCIATES. ASSESSEE PLEADED BEFORE THE AO THAT THE AMOUNT OF RS.1,75,16,800/- HAS BEEN PAID AS CONVERSION CHARGE S TO MCD ITA NO.1077/DEL./2016 15 THROUGH DUA ASSOCIATES, LEGAL CONSULTANT OF THE ASS ESSEE. AO HAS NOT DISPUTED THE PAYMENT OF RS.1,75,16,800/- AS CON VERSION CHARGES TO MCD BUT TREATED THE SAME AS CAPITAL EXPE NDITURE IN CONNECTION WITH THE BUSINESS ACTIVITIES. 23. HOWEVER, COORDINATE BENCH IN THE JUDGMENT IN CA SE OF ACIT, CIRCLE 33 (1), NEW DELHI VS. KALINGA INTERNAT IONAL ITA NO.4500/DEL/2012 ORDER DATED 08.09.2014 DECIDED THE IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE BY RETURNING THE FO LLOWING FINDINGS:- 8. IN VIEW OF THE FACT THAT THE ASSESSEE WAS TO US E THIS PROPERTY OF SOME THIRD PERSON FOR BUSINESS PURPOSE AND THE SAME WAS NOT POSSIBLE UNLESS IT WAS SO CONVERTE D, THE CONVERSION CHARGES IN SUCH CIRCUMSTANCES COULD NOT HAVE BEEN CONSIDERED AS A CAPITAL EXPENDITURE. THE CASE IS NOT EVEN HIT BY EXPL. 1 TO SEC. 32(1) INASMUCH AS PAYME NT OF SUCH CONVERSION CHARGES CANNOT BE CONSIDERED AS ANY CAPITAL EXPENDITURE ON THE CONSTRUCTION OF ANY STR UCTURE OR DOING OF ANY WORK IN OR IN RELATION TO, AND BY W AY OF RENOVATION OR EXTENSION OF, OR IMPROVEMENT TO, THE BUILDING. WE, THEREFORE, HOLD THAT SUCH A PAYMENT CANNOT BE CONSIDERED AS CAPITAL EXPENDITURE. THE IMPUGNED ORDER ON THIS SCORE IS UPHELD. 24. SO, BY FOLLOWING THE DECISION RENDERED BY THE C OORDINATE BENCH, WE HEREBY HELD THAT THE LD. DRP/AO HAVE ERRE D IN DISALLOWING THE EXPENSES OF CONVERSION CHARGES TO T HE TUNE OF ITA NO.1077/DEL./2016 16 RS.1,75,16,800/- CLAIMED BY THE ASSESSEE AND THEN A DDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE COMPANY WHICH A RE NOT TO BE CONSIDERED AS CAPITAL EXPENDITURE AS THE SAME HAVE BEEN EXPENDED FOR BUSINESS PURPOSE AND WITHOUT CONVERSION OF THE PROPERTY, THE BUSINESS WOULD NOT HAVE BEEN STARTED EVEN AND AS SU CH, ALLOWABLE FOR DEDUCTION. SO, GROUND NO.11 IS DETERMINED IN F AVOUR OF THE ASSESSEE. 25. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE P RESENT APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 17 TH DAY OF MAY, 2016. SD/- SD/- (R.S. SYAL) (KULDIP SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 17 TH DAY OF MAY, 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.