Li & Fung (India) Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 386/DEL/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6285 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 22-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 21-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Transfer pricing; International transaction; Avoidance of tax
• Section: 92C; 143(3); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER I.T.A. NO.386/DEL/2014 (ASSESSMENT YEAR 2009-10) LI & FUNG (INDIA) PVT. LTD., VS. DCIT, CIRCLE 4(1) , 202-206, TOLSTOY HOUSE, NEW DELHI 15, TOLSTOY MARG, NEW DELHI-110 001 GIR / PAN :AAACL1663M (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PORUS KAKA, SR. ADV. SHRI MANISH KANT, ADV. RESPONDENT BY : SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING : 22.03.2016 DATE OF PRONOUNCEMENT: 23.03.2016 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (A O) U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HEREINAFTER 2 I.T.A.NO.386/DEL/2014 ALSO CALLED THE ACT) ON 28.10.2013 IN RELATION TO THE ASSESSMENT YEAR 2009-10. THE SOLITARY ISSUE RAISED IN THIS AP PEAL IS AGAINST THE ADDITION OF RS.59,19,00,000/- MADE BY THE ASSES SING OFFICER ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 2. BRIEFLY STATED, THE FACTS OF THIS CASE ARE THAT THE ASSESSEE, AN INDIAN COMPANY, IS A SUBSIDIARY LI & FUNG (SOUTH AS IA) LTD. INCORPORATED IN MAURITIUS. THE HOLDING COMPANY IS A PART OF LI & FUNG GROUP, WHICH IS ONE OF THE WORLD LEADERS IN EX PORT TRADING, HAVING A WORLDWIDE NETWORK. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING BUYING SERVICES TO ITS ASSOCI ATED ENTERPRISES (AES). THE ASSESSEE IS PAID SERVICE CHARGES FOR S UCH SERVICES AT COSTS WITH A 8% MARKUP. AN INTERNATIONAL TRANSACTI ON OF `PROVISION OF BUYING SERVICES WAS REPORTED IN FORM NO. 3CEB WITH TRANSACTED VALUE OF RS.116,95,42,324/-. THE A SSESSEE APPLIED THE TRANSACTIONAL NET MARGINAL METHOD (TNMM) AS THE M OST APPROPRIATE METHOD WITH ITS PROFIT LEVEL INDICATOR (PLI) OF 3 I.T.A.NO.386/DEL/2014 OPERATING PROFIT / TOTAL COSTS (OP/TC) AT 8%. TWENT Y FIVE COMPANIES WERE CHOSEN AS COMPARABLE WITH THEIR AVER AGE PLI AT 9.30%. THE ASSESSEE CLAIMED THAT ITS PROFIT MARGIN AT 8% WAS WITHIN PERMISSIBLE RANGE OF THE PROFIT MARGIN OF CO MPARABLES, AND HENCE THE INTERNATIONAL TRANSACTION WAS AT ARMS LE NGTH PRICE (ALP). THE ASSESSING OFFICER MADE REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ALP OF TH IS INTERNATIONAL TRANSACTION. THE TPO TREATED THE ASS ESSEE AS A TESTED PARTY AND NOTICED THAT IT WAS ALLOWED COMMISSION @ 8% ON THE `COSTS INCURRED FOR ITS SOURCING ACTIVITIES. HE OP INED THAT THE COMPENSATION OUGHT TO HAVE BEEN EXPRESSED AS A PERC ENTAGE ON FOB PRICE OF GOODS SOURCED THROUGH THE ASSESSEE. A CCEPTING THE TNMM AS THE MOST APPROPRIATE METHOD, THE TPO CHANGED THE BASE FROM `COSTS INCURRED TO THE `FOB VALUE OF EXP ORTS. THE ASSESSEE WAS SEEN TO HAVE INCURRED `COSTS IN PROV IDING SUCH SERVICES AT RS.108.89 CRORE, ON WHICH 8% MARKUP WA S CHARGED TO 4 I.T.A.NO.386/DEL/2014 HAVE GROSS REVENUE AT RS.116.95 CRORE, WHICH WAS DE CLARED AS THE VALUE OF THE INTERNATIONAL TRANSACTION. THE TPO SUB STITUTED THE `COST BASE WITH THE `FOB VALUE OF EXPORTS. THE A MOUNT OF NEW BASE WAS CALCULATED AT RS.2935.69 CRORE BY ADDING V ALUE OF GOODS EXPORTED AT RS.2826.8 CRORE TO THE COSTS INCURRED B Y THE ASSESSEE AT RS.108.89 CRORE. HE FURTHER OBSERVED THAT IN AN EA RLIER YEAR IN WHICH HE DID SIMILAR EXERCISE OF SUBSTITUTING THE B ASE OF `COST WITH THE `FOB VALUE OF GOODS EXPORTED FOR APPLYING 8% MARKUP, THE DISPUTE RESOLUTION PANEL (DRP) RESTRICTED IT TO 6%. THIS REDUCED MARKUP OF 6% WAS APPLIED BY HIM ON THE NEW BASE OF FOB VALUE OF GOODS EXPORTED AT RS.2935.69 CRORE, T O WORK OUT THE AMOUNT OF `NET OPERATING INCOME AT RS.176.14 C RORE. AFTER REDUCING `OPERATING INCOME SHOWN BY THE ASSESSEE A T RS.116.95 CRORE FROM THE AMOUNT OF `NET OPERATING INCOME AS CALCULATED BY HIM AT RS.176.14 CRORE, HE DETERMINED THE AMOUNT O F TRANSFER PRICING ADJUSTMENT AT RS.59.19 CRORE. THE AO MADE AN ADDITION 5 I.T.A.NO.386/DEL/2014 OF RS.59.19 CRORE IN THE DRAFT ASSESSMENT ORDER. TH E ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DRP. THE SAID ADD ITION OF RS.59.19 CRORE CAME TO BE MADE IN THE FINAL ASSESSM ENT ORDER PASSED BY THE ASSESSING OFFICER. THE ASSESSEE IS A GGRIEVED AGAINST THIS ADDITION. 3. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO QUARREL ON THE FAC T THAT THE ASSESSEE RENDERED SERVICES OF BUYING TO ITS AES FOR WHICH IT WAS REMUNERATED WITH COSTS INCURRED WITH MARKUP AT THE RATE OF 8%. THIS HAS BEEN SUBSTITUTED BY THE TPO WITH 6% MARKUP ON `FOB VALUE OF GOODS EXPORTED. ACCEPTING THE APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD WITH PLI OF OP/TC, THE TPO HAS WORKED OUT THE AMOUNT OF TRANSFER PRICING ADJUSTMEN T AS UNDER : - NET OPERATING INCOME (AS CALCULATED ABOVE) R S.176.14 OPERATING INCOME SHOWN BY ASSESSEE RS.116. 95 DIFFERENCE RS.59.19 CRORE 6 I.T.A.NO.386/DEL/2014 4. CHAPTER-X OF THE ACT CONTAINS SPECIAL PROVISI ONS RELATING TO AVOIDANCE OF TAX. SECTION 92, WHICH IS THE FIRST SE CTION OF THIS CHAPTER, PROVIDES FOR COMPUTATION OF INCOME FROM AN INTERNATIONAL TRANSACTION HAVING REGARD TO ARMS LE NGTH PRICE. SUB- SECTION (1) OF THE SECTION PROVIDES THAT : ANY INC OME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVI NG REGARD TO THE ARMS LENGTH PRICE. SECTION 92C OF THE ACT ENSHRIN ES PROVISIONS RELATING TO COMPUTATION OF ARMS LENGTH PRICE. SUB- SECTION (1) OF THE SECTION STATES THAT THE ARMS LENGTH PRICE IN R ELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE METHODS LISTED HEREIN WHICH INCLUDE, INTER ALIA , THE TRANSACTIONAL NET MARGIN METHOD. SUB-SECTION (2) OF SECTION 92C P ROVIDES THAT THE MOST APPROPRIATE METHOD REFERRED TO IN SUB-SECT ION (1) SHALL BE APPLIED FOR THE DETERMINATION OF ALP ` IN THE MANNER AS MAY BE PRESCRIBED . ADMITTEDLY, THE ASSESSEE APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD WITH THE PLI OF OP/TC, WHIC H HAS NOT 7 I.T.A.NO.386/DEL/2014 DISTURBED BY THE TPO. CALCULATION OF ALP UNDER THE TNMM HAS BEEN GIVEN UNDER RULE 10B(1)(E) OF THE INCOME-TAX R ULES, 1962, WHICH HAS TO BE NECESSARILY DONE ` IN THE MANNER PRESCRIBED . THIS RULE STATES THAT FOR THE PURPOSES OF SECTION 9 2C(2), THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION SHALL BE DETERMINED AS UNDER : `(E) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; (III) THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAU SE (II) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE INTO ACCOUNT THE 8 I.T.A.NO.386/DEL/2014 DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET ; (IV) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE (I) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE (III) ; (V) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. 5. A BARE PERUSAL OF SUB-CLAUSE (I) OF RULE 10B(1) (E) BRINGS OUT THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION IS TO BE COMPUTED IN RELA TION TO A PARTICULAR BASE. SUB-CLAUSE (II) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM THE COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED HAVING REGARD TO THE SAME B ASE. SUB- CLAUSE (III) PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY A 9 I.T.A.NO.386/DEL/2014 COMPARABLE COMPANY, DETERMINED AS PER SUB-CLAUSE (I I) ABOVE, IS ADJUSTED TO TAKE INTO ACCOUNT THE DIFFERENCES, IF A NY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AM OUNT OF NET PROFIT MARGIN IN THE OPEN MARKET. IT IS THIS ADJUS TED NET PROFIT MARGIN OF THE UNRELATED TRANSACTIONS OR OF THE COMP ARABLE COMPANIES, AS DETERMINED UNDER SUB-CLAUSE (III), WH ICH IS USED AS BENCHMARK FOR THE PURPOSES OF MAKING COMPARISON WIT H THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION AS PER SUB-CLAUSE (I). SUB-CLAUSE (IV) STATES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE, AS REFERR ED IN SUB CLAUSE (I), IS ESTABLISHED TO BE THE SAME AS A NET PROFIT MARGIN REFERRED IN SUB-CLAUSE (III) OF THE COMPARABLES. SUB-CLAUSE (V) STATES THAT THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO INTE RNATIONAL TRANSACTION. 10 I.T.A.NO.386/DEL/2014 6. ON GOING THROUGH THE ABOVE SUB-CLAUSES OF RUL E 10B(1)(E), IT BECOMES VIVID THAT AS PER THE FIRST STEP, THE ` NET PROFIT MARGIN REALIZED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTIO N IS TO BE COMPUTED. USE OF THE WORD NET PROFIT MARGIN REALIZED IN THE PROVISION RICHLY INDICATES THAT IT IS THE CALCULATI ON OF ACTUAL OPERATING PROFIT MARGIN OF THE ASSESSEE EARNED FROM INTERNATIONAL TRANSACTION, WHICH CANNOT BE ANY HYPOTHETICAL OR AD JUSTED FIGURE. AMOUNT OF ACTUAL NET PROFIT MARGIN REALIZED CAN BE CALCULATED FROM THE ASSESSEES PROFIT AND LOSS ACCOUNT WITH T HE STARTING POINT OF OPERATING GROSS REVENUE FROM WHICH THE AMOUNT OF OPERATING EXPENSES ARE REDUCED TO FIND OUT THE AMOUNT OF OPER ATING PROFIT AND THE RESULTANT PERCENTAGE OF OPERATING PROFIT WI TH REFERENCE TO A DEFINED BASE. WHEN WE CONSIDER SUB-CLAUSES (II) AN D (III), IT TURNS OUT THAT, FIRSTLY, THE NET OPERATING MARGIN ACTUALLY REALIZED FROM THE COMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED , WHICH IS DETERMINED IN THE SAME WAY AS THAT OF THE ASSESSEE AS PER CLAUSE 11 I.T.A.NO.386/DEL/2014 (I), THAT IS, ACTUAL FIGURES WITHOUT MAKING ANY ADJ USTMENT. THEN SUB-CLAUSE (III) TALKS OF ADJUSTING THE ACTUALLY REALIZED MARGIN OF COMPARABLES TO BRING THE SAME AT PAR WITH THE INTER NATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE, SO AS TO IR ON OUT THE EFFECTS OF DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTIO N AND COMPARABLE UNCONTROLLED TRANSACTIONS. ON GOING THRO UGH ALL THE SUB-CLAUSES OF RULE 10B(1)(E), THE POSITION WHICH E MERGES IS THAT THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE FROM ITS INTERNATIONAL TRANSACTION IS TAKEN AS SUCH, WHICH I S THEN COMPARED WITH THE RATE OF OPERATING PROFIT MARGIN OF COMPARA BLES FOR SEEING IF THE ASSESSEES PROFIT MARGIN IS AT ARMS LENGTH. 7. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE DO NOT FIND ANY DISPUTE ABOUT THE ASSESSEE ACTUALLY EARNING 8% MARK UP ON THE `COSTS INCURRED. THE ASSESSEE INCURRED TOTAL COST S TO TUNE OF RS.101.89 CRORES. MARKUP OF 8% ON SUCH COST COMES T O RS.8.06 CRORE, RESULTING INTO GROSS REVENUE RECEIPT AT RS.1 16.95 CRORES. 12 I.T.A.NO.386/DEL/2014 WHEN WE TURN TO THE CALCULATION OF THE ALP MADE BY THE TPO, IT EMERGES THAT HE HAS DETERMINED THIS AMOUNT AS THE S ECOND FIGURE. SUB-CLAUSES (II) AND (III) OF RULE 10B (1)(E) TALK OF DETERMINATION OF NET PROFIT MARGIN REALIZED BY THE COMPARABLES WI TH REFERENCE TO THE SAME BASE AS ADOPTED UNDER SUB-CLAUSE (I) FOR C ALCULATION OF THE ASSESSEES PROFIT MARGIN. WHAT THE TPO HAS DON E IN THE INSTANT CASE IS THAT HE COMPUTED `NET OPERATING INC OME AS THE FIRST FIGURE AT RS.176.14 CRORE, BY APPLYING 6% MARKUP ON FOB VALUE OF GOODS EXPORTED BY THE ASSESSEE AT RS.2935.69 CRO RE. AFTER REDUCING `OPERATING INCOME SHOWN BY ASSESSEE AT RS .116.95 CRORE FROM THE AMOUNT OF `NET OPERATING INCOME OF RS.176.14 CRORE, THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT AT RS.59.19 CRORE. 8. WE FIND SUCH CALCULATION DONE BY THE TPO, NEI THER HERE NOR THERE. UNDER SUB-CLAUSE (I), HE WAS SUPPOSED TO WOR K OUT THE RATE OF OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE TO BE COMPUTED 13 I.T.A.NO.386/DEL/2014 BY DIVIDING THE AMOUNT OF OPERATING PROFIT WITH TOT AL COSTS AS MULTIPLIED BY 100. AS AGAINST THAT, HE HAS SIMPLY T AKEN THE AMOUNT OF GROSS REVENUE AT RS.116.95 CRORE, WHICH INCLUDES NOT ONLY THE AMOUNT OF OPERATING PROFIT BUT ALSO THE OPERATING C OSTS INCURRED BY THE ASSESSEE IN PROVIDING THE SERVICES. THE COURSE OF ACTION ADOPTED BY THE TPO IS NOT IN ACCORDANCE WITH LAW. 9. THEN UNDER CLAUSES (II) AND (III) OF RULE 10B (1)(E), THE TPO WAS REQUIRED TO DETERMINE THE RATE OF PROFIT MARGIN OF THE COMPARABLES TO CONSTITUTE THE BENCHMARK. AS AGAINST THAT, THE TPO HAS NOT TAKEN ANY PROFIT RATE OF ANY COMPARABLE. HE ONCE AGAIN ADJUSTED THE FIGURES OF THE ASSESSEE BY CHANGING TH E BASE OF `COSTS INCURRED TO THE `FOB VALUE OF EXPORTS AND RATE OF MARKUP FROM 8% TO 6%. WE FAIL TO COMPREHEND AS TO HOW THIS AMO UNT OF RS.176.14 CRORE CAN BE CONSTRUED AS THE OPERATING P ROFIT MARGIN OF THE UNCONTROLLED TRANSACTIONS/COMPARABLES. THIS AMO UNT IS NOTHING BUT A REVISED COMPENSATION AMOUNT, WHICH IN THE OPI NION OF THE 14 I.T.A.NO.386/DEL/2014 TPO SHOULD HAVE BEEN EARNED BY THE ASSESSEE. BY NO STANDARD, THIS AMOUNT CAN BE CONSTRUED AS THE ARMS LENGTH PR OFIT RATE, AS IT IS NOT A PROFIT RATE OF ANY UNCONTROLLED TRANSACTIO N/COMPARABLES. THIS IS A DERIVATIVE FROM THE SIMPLE REWRITING OF T HE COMPENSATION AMOUNT OF THE ASSESSEE BY THE TPO. 10. INTERESTINGLY, THE AMOUNT OF THE TRANSFER P RICING ADJUSTMENT HAS BEEN CALCULATED BY REDUCING THE ACTUAL GROSS RE CEIPTS OF THE ASSESSEE FROM ITS AE AT RS.116.95 CRORE (`COSTS IN CURRED AT RS.108.89 CRORE PLUS 8% MARKUP AT RS.8.06 CRORE) FR OM THE AMOUNT OF PROFIT MARGIN CALCULATED BY THE TPO AT RS .176.14 CRORE (BY APPLYING 6% ON FOB VALUE OF GOODS EXPORTED AT RS.2935.69 CRORE). WE ARE UNABLE TO UNDERSTAND AS TO HOW THE REVENUE RECEIPTS OF THE ASSESSEE ON ONE HAND, WHICH OBVIOUS LY INCLUDE COSTS INCURRED, CAN BE COMPARED WITH THE NET OPERAT ING INCOME ON THE OTHER HAND. IT GOES WITHOUT SAYING THAT A VALID COMPARISON CAN BE MADE OF SIMILAR COMPONENTS. ONE CAN COMPARE PROF IT MARGIN OF 15 I.T.A.NO.386/DEL/2014 THE ASSESSEE WITH THE PROFIT MARGIN OF THE COMPARAB LES UNDER THE TNMM OR THE PRICE CHARGED BY THE ASSESSEE WITH THE PR ICE CHARGED BY THE COMPARABLES UNDER THE CUP METHOD ETC . THUS THE COMPARISON IS ALWAYS OF THE PROFIT WITH PROFIT OR P RICE WITH PRICE. UNDER NO CIRCUMSTANCE, THE AMOUNT OF TRANSFER PRICI NG ADJUSTMENT CAN BE CALCULATED BY PICKING UP `PROFIT MARGIN OF THE ASSESEE OR COMPARABLES AND THEN COMPARING IT WITH THE `PRICE CHARGED BY THE COMPARABLES OR THE ASSESSEE, AS HAS BEEN DONE IN T HE EXTANT CASE. SUCH CALCULATION OF THE TRANSFER PRICING ADJUSTMENT BY THE TPO HAS RESULTED INTO LANDING IN A PIQUANT SITUATION, IN WH ICH `IDEAL PROFIT HAS BEEN COMPARED WITH THE `ACTUAL PRICE CHARGED F OR THE PURPOSES OF MAKING A TRANSFER PRICING ADJUSTMENT, W HICH IS PATENT INCORRECT. WE HAVE NOTED ABOVE THAT THE ASSESSEE AP PLIED THE TNMM UNDER WHICH THE ALP CAN BE DETERMINED BY COMPARI NG THE ADJUSTED PROFIT MARGIN REALIZED BY COMPARABLES AS PER SUB- CLAUSES (II) AND (III) WITH THE REALIZED PROFIT MAR GIN OF THE ASSESSEE 16 I.T.A.NO.386/DEL/2014 AS PER SUB-CLAUSE (I) OF RULE 10B (1)(E). AS THE TP O HAS COMPUTED ALP OF THE INTERNATIONAL TRANSACTION WITH THE HELP OF A METHOD UNKNOWN TO LAW, WHICH CALCULATION IS AGAIN FLAWED B ECAUSE OF MAKING COMPARISON OF `PROFIT WITH THE `GROSS REVEN UE, WE CANNOT COUNTENANCE THE SAME. THE RIGHT COURSE FOR THE TPO WAS TO COMPUTE ASSESSEES PROFIT MARGIN REALIZED UNDER THE TNMM AS PER RULE 10B(1)(E)(I) FROM ITS ANNUAL ACCOUNTS WITHOUT ANY ADJUSTMENT AND THEN COMPARE IT WITH THE ADJUSTED NET OPERATING PROFIT MARGIN OF THE COMPARABLES WITH THE SAME BASE. THIS WOULD HAVE LED TO THE DETERMINATION OF ALP OF THIS INTERNATIONAL TRAN SACTION. 11. ORDINARILY, WE WOULD HAVE SET ASIDE THE ASSES SMENT ORDER IN THE PRESENT CIRCUMSTANCES REMANDING THE MATTER TO T HE AO/TPO FOR A DE NOVO CALCULATION OF THE ALP OF THE INTERNATIONAL TRANSACTION AS PER THE TNMM ACCEPTED BY HIM AS THE M OST APPROPRIATE METHOD. BUT, WE ARE DESISTING FROM ADO PTING SUCH A COURSE BECAUSE THE ASSESSEE HAS DEMONSTRATED TO THE TPO THAT THIS 17 I.T.A.NO.386/DEL/2014 INTERNATIONAL TRANSACTION IS AT ALP UNDER THE TNMM, W HICH IS MANIFEST FROM PAGE 5 OF THE ORDER OF THE TPO, SHOW ING THAT THE ASSESSEE CALCULATED ITS OP/TC AT 8% AND AVERAGE OP /TC OF 25 COMPARABLE COMPANIES AT 9.30%. CORRECTNESS OF THES E FIGURES RECORDED IN THE ORDER HAS NOT BEEN DISPUTED BY THE TPO. IF WE IGNORE THE EXERCISE DONE BY THE TPO, WHICH IS CLEAR LY NOT IN CONFORMITY WITH ANY OF THE PRESCRIBED METHODS, WHAT REMAINS FOR CONSIDERATION UNDER TNMM IS, THE ASSESSEES PROFIT MA RGIN AT 8%, WHICH IS WITHIN THE PERMISSIBLE RANGE OF THE PROFIT MARGIN OF COMPARABLES AT 9.30%, NECESSITATING NO TRANSFER PRI CING ADJUSTMENT. 12. BE THAT AS IT MAY, IT IS NOTED THAT THE TPO D ETERMINED ALP OF THE ASSESSEES INTERNATIONAL TRANSACTION FOR THE YE AR UNDER CONSIDERATION IN THE SAME MANNER AS WAS DONE BY HIM FOR THE EARLIER YEARS. THOUGH THE TRIBUNAL AFFIRMED THE SHI FTING OF THE BASE OF THE ASSESSEE FROM `COSTS INCURRED TO THE `FOB V ALUE OF 18 I.T.A.NO.386/DEL/2014 EXPORTS AND SUSTAINED THE ADDITION, BUT THE HONBL E DELHI HIGH COURT WAS PLEASED TO DELETE SUCH ADDITION IN LI & FUNG INDIA PVT. LTD. VS CIT (2013) 87 CCH 105 DEL. HC BY HOLDING THAT : `THE TPO'S ARBITRARY EXERCISE OF ADJUSTING THE COST PLUS MARK UP OF 5% ON THE FOB VALUE OF EXPORTS FINDS NO MENTION IN THE IT ACT NOR THE RULES. SIMILAR VIEW HAS BEEN TAKEN BY THE HON 'BLE DELHI HIGH COURT IN THE ASSESSES OWN CASE FOR THE ASSESS MENT YEARS 2007-08 AND 2008-09. 13. IN VIEW OF THE FOREGOING DISCUSSION, WE AR E SATISFIED THAT THE ACTION OF THE AO/TPO IN MAKING/PROPOSING ADDITION/ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING, CANNOT BE UPHELD FOR THE REASON THAT THE SHIFTING OF THE BAS E ON WHICH MARKUP HAS BEEN APPLIED HAS BEEN TURNED DOWN BY THE HON'BLE DELHI HIGH COURT IN ASSESSEES OWN CASE; THE MECHAN ISM FOLLOWED BY THE TPO FOR CALCULATING THE TRANSFER PRICING ADJ USTMENT HAS NO LEGAL LEGS TO STAND ON; AND FURTHER THE ASSESSEES PROFIT MARGIN IS AT 19 I.T.A.NO.386/DEL/2014 ALP UNDER THE TNMM ON THE BASIS OF FIGURES MENTIONED IN THE TPOS ORDER, WHOSE CORRECTNESS HAS NOT BEEN DISTURB ED BY THE TPO. EX CONSEQUENTI , THE ADDITION IS HEREBY DELETED. 14. IN THE RESULT, THIS APPEAL OF THE ASSESSEE IS A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD MARCH, 2016. SD./- SD./- (KULDIP SINGH) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 23.03. 2016 SP. COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) 20 I.T.A.NO.386/DEL/2014 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 22/3/16 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 23/3/16 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT SR. PS/PS 7 FILE SENT TO BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER *