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

ITA 5298/DEL/2011

• Counselvise Citation: 529820114 RSA 2011
• Duration Of Justice: 2 year(s) 3 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 04-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 29-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: YOGESH KUMAR VERMA
• Assessee Lawyers: PORUS KAKA SHRI NEERAJ JAIN
• Keywords: Depreciation; Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ITA NO. 5298/DEL/2011 (ASSESSMENT YEAR-2007-08) & ITA NO. 5903/DEL/2012 (ASSESSMENT YEAR-2008-09) LI & FUNG (INDIA) PVT. LTD., 202-206, DUA ASSOCIATES, TOLSTOY HOUSE, 15-TOLSTOY MARG, NEW DELHI-110001 VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AAACL1663M ASSESSEE BY: SHRI PORUS KAKA, SHRI NEERAJ JAIN, & MANISH KANTH REVENUE BY: SHRI YOGESH KUMAR VERMA DATE OF HEARING 4.3.2014 DATE OF PRONOUNCEMENT 5.3.2014 ORDER PER R. S. SYAL, AM: THESE TWO APPEALS BY THE ASSESSEE RELATE TO THE ASS ESSMENT YEARS 2007-08 AND 2008-09. SINCE COMMON ISSUES ARE RAISED IN THESE APPEALS, WE ARE, THEREFORE, PROCEEDING TO DIS POSE THEM OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE . ITA NOS. 5298/D EL/2011 & 5903/DEL/2012 LI & FUNG (INDIA) PVT. LTD. 2 ASSESSMENT YEAR 2007-08 2. THE MAJOR ISSUE INVOLVED IN THIS APPEAL IS AGAIN ST THE MAKING OF THE ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT OF RS. 4,77,77,646/- ON ACCOUNT OF ARMS LENGTH PRICE (ALP ) OF THE INTERNATIONAL TRANSACTION OF PROVISION OF `SOURCING SUPPORT SERVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATE D ENTERPRISES. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF PROVIDING SERVICES TO IT S GROUP COMPANIES FOR SUPPLY OF HIGH VOLUME, TIME SENSITIVE , AND CONSUMER GOODS. THE ASSESSEE WAS COMPENSATED WITH C HARGE FOR THE BUYING SERVICES AT COST PLUS MARKUP OF 5%. THE ASSESSEE REPORTED INTERNATIONAL TRANSACTIONS TO THE TUNE OF RS. 62,78,77,646/- IN THE NATURE OF `SERVICE FEE RECEIVED. THE ASSESS EE ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH PROFIT LEVEL INDICATOR (PLI ) OF OPERATING PROFIT/TOTAL COST (OP/TC). THE ASSESSEE DECLARED I TS OP/TC OF 7.56% AS AGAINST MEAN OP/TC OF 53 COMPARABLES AT 8. 32%. IT WAS CLAIMED THAT ITS MARGIN WAS WITHIN THE 5% RANGE AN D HENCE THE TRANSACTIONS SHOULD BE CONSIDERED AT ALP. THE TPO O BSERVED THAT THE ASSESSEE WAS ALLOWED COMMISSION @ 5% OF COST IN CURRED FOR ITS SOURCING ACTIVITIES IN INDIA. HE DID NEITHER DISPUT E THE APPLICATION OF TNMM NOR THE PLI BUT APPLIED MARKUP FOR 5% ON TH E FOB VALUE OF GOODS BETWEEN THIRD PARTY ENTERPRISES INST EAD OF THE ITA NOS. 5298/D EL/2011 & 5903/DEL/2012 LI & FUNG (INDIA) PVT. LTD. 3 ASSESSES COSTS INCURRED ON WHICH IT WAS ALLOWED MA RKUP OF 5%. THAT IS HOW THE COST BASE OF THE ASSESSEE WAS SUBS TITUTED WITH FOB VALUE OF GOODS BETWEEN THIRD PARTY ENTERPRISES AND MARKUP OF 5% WAS APPLIED TO WORK OUT TP ADJUSTMENT OF RS. 30,13,18,252/-. THE ASSESSEE CHALLENGED THE DRAFT O RDER BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP DID NOT CHA NGE THE COST BASE ADOPTED BY THE TPO BUT REDUCED PERCENTAGE OF MARKUP TO 4% INSTEAD OF 5% APPLIED BY THE TPO. THIS RESULTED INT O AN ADDITION OF RS. 4.77 CRORE WHICH WAS FINALLY MADE BY THE ASSES SING OFFICER IN HIS FINAL ORDER PASSED U/S 144C(13). THE ASSESSEE I S AGGRIEVED AGAINST SUCH ADDITION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE ON THE APPL ICATION OF TNMM AS THE MOST APPROPRIATE METHOD. EQUALLY, THERE IS NO DISPUTE ON PLI OF OP/TC. IN THE LIKE MANNER, THE S ELECTION OF COMPARABLES IS ALSO BEYOND ANY CONTROVERSY. THE ENT IRE POINT OF DISPUTE IS AGAINST THE BASE OF TOTAL COST IN THE PLI OF OPERATING PROFIT/TOTAL COST. WHEREAS THE ASSESSEE COMPUTED IT S OP/TC AT 7.56% BASED ON THE COST INCURRED BY IT AS CONSTITUT ING TOTAL COST, THE TPO CHANGED SUCH BASE TO FOB VALUE OF GOODS EXP ORTED IN THE HANDS OF THE A.ES. THE SHORT QUESTION BEFORE US IS ABOUT DETERMINATION OF THE CORRECT BASE IN THE PLI. ITA NOS. 5298/D EL/2011 & 5903/DEL/2012 LI & FUNG (INDIA) PVT. LTD. 4 5. IT HAS BEEN BROUGHT TO OUR NOTICE THAT TH AT THE TPO IN THE PRECEDING YEAR ALSO APPLIED THE SAME BASE OF TOTAL COST AS IN THE YEAR UNDER CONSIDERATION, WHICH GOT THE APPROVAL FR OM THE TRIBUNAL. THE ASSESSEE ASSAILED THE TRIBUNAL ORDER BEFORE THE HONBLE HIGH COURT. VIDE ITS JUDGMENT DATED 16.12.2 013 IN LI & FUNG (INDIA) PVT. LTD. VS CIT, A COPY WHICH HAS BEE N PLACED ON RECORD, THE HONBLE DELHI HIGH COURT HAS REVERSED THE TRIBUNAL ORDER BY HOLDING THE FOB VALUE OF GOODS BETWEEN THE THIRD PARTY ENTERPRISES, SOURCED THROUGH THE ASSESSEE, WAS NOT IN ACCORDANCE WITH THE LAW. IN VIEW OF THE ENUNCIATION OF LAW BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF THE ASSESS EE ITSELF, THERE REMAINS NO DOUBT WHATSOEVER THAT THE BASE OF TOTAL COST AS ADOPTED BY THE TPO AND APPROVED BY THE DRP IN CONSI DERING THE FOB VALUE OF GOODS BETWEEN THE THIRD PARTY ENTERPRI SES CANNOT BE ACCEPTED. WE, THEREFORE, SET ASIDE THE IMPUGNED ORD ER AND HOLD THAT THE TOTAL COST BEING THE DENOMINATOR IN THE PLI O F OP/TC, HAS TO BE TAKEN AS THE COSTS INCURRED BY THE ASSESSEE AND NOT THE FOB VALUE OF GOODS BETWEEN THIRD PARTY ENTERPRISES SOUR CED THROUGH THE ASSESSEE. IN OTHER WORDS, THE TESTED PARTY SHOULD BE THE ASSESSEE AND NOT ITS A.E. 6. IN SO FAR AS THE MARKUP ON THE WRONG BASE OF FOB VALUE OF GOODS BETWEEN THE THIRD PARTY ENTERPRISES, APPLIED BY THE TPO AT 5% AND REDUCED TO 4% BY THE DRP IS CONCERNED, WE FI ND THAT THE SAME WOULD BECOME IRRELEVANT BECAUSE THE BASE BEING , THE TOTAL ITA NOS. 5298/D EL/2011 & 5903/DEL/2012 LI & FUNG (INDIA) PVT. LTD. 5 COST IN THE DENOMINATOR WILL STAND CHANGED TO THE TOTAL COST INCURRED BY THE ASSESSEE INSTEAD OF THE FOB VALUE O F GOODS BETWEEN THIRD PARTY ENTERPRISES. SINCE, NECESSARY DETAILS FOR THE DETERMINATION OF ALP WITH THE CORRECT BASE OF THE A SSESSEE AS WELL AS COMPARABLES ARE NOT READILY AVAILABLE ON RECORD, WE CONSIDER IT EXPEDIENT TO SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF ALP WITH THE CORRECT COST BASE OF THE TOTAL COST INCURRED BY T HE ASSESSEE IN LINE WITH THE ABOVE JUDGMENT OF THE HONBLE JURISDICTION AL HIGH COURT IN THE ASSESSEES OWN CASE. 7. THE NEXT GROUND IN THIS APPEAL IS AGAINST ALLOWI NG OF DEPRECIATION OF COMPUTER PERIPHERALS @ 15% AS AGAIN ST 60% CLAIMED BY THE ASSESSEE. THE ASSESSING OFFICER MADE DISALLOWANCE OF RS. 9,20,701/- ON ACCOUNT OF DEPRECIATION OF COM PUTER PERIPHERALS BY REDUCING THE RATE OF DEPRECIATION TO 15% AS AGAINST 60% CLAIMED BY THE ASSESSEE. 8. HAVING HEARD BOTH THE SIDES ON THIS ISSUE, WE FI ND THAT THIS ISSUE IS NOW FAIRLY SETTLED IN FAVOUR OF THE ASSESS EE IN VIEW OF THE SPECIAL BENCH ORDER PASSED IN THE CASE OF DCIT VS D ATACRAFT INDIA LTD. (2010) 133 TTJ (MUM) (SP) 377. WE, THEREFORE, HOLD THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN REDUCING TH E RATE OF DEPRECIATION ON COMPUTER PERIPHERALS. THIS GROUND I S ALLOWED. 9. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ITA NOS. 5298/D EL/2011 & 5903/DEL/2012 LI & FUNG (INDIA) PVT. LTD. 6 ASSESSMENT YEAR 2008-09 10. BOTH THE SIDES ARE IN AGREEMENT THAT THE FACTS AND CIRCUMSTANCES OF THE PRESENT APPEAL ARE MUTATIS MUTANDIS SIMILAR TO THOSE OF THE PRECEDING YEAR EXCEPT THAT THE ASSESSE E RECEIVED MARKUP OF 8% ON THE COSTS INCURRED BY IT. THE TPO C HANGED THE COST BASE TO FOB VALUE OF GOODS BETWEEN THIRD PARTY ENTERPRISES. BY APPLYING 8% PROFIT RATE UNDER TNMM WITH PLI OF O P/TC, HE WORKED OUT THE ADDITION. THE DRP REDUCED SUCH MARKU P FROM 8% TO 6% BUT RETAINED THE COST BASE AS ADOPTED BY THE TPO. 11. FOLLOWING THE VIEW TAKEN HERE IN ABOVE FOR T HE ASSESSMENT YEAR 2007-08, WE SET ASIDE THE IMPUGNED ORDER AND R EMIT THE MATTER TO THE FILE OF ASSESSING OFFICER/TPO FOR CON SIDERING THE DETERMINATION OF ALP AFRESH IN ACCORDANCE WITH OUR DIRECTIONS GIVEN ABOVE. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 5/3/2014. SD/- SD/- (RAJPAL YADAV) (R. S. SY AL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 5/3/2014 *SUBODH* ITA NOS. 5298/D EL/2011 & 5903/DEL/2012 LI & FUNG (INDIA) PVT. LTD. 7 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(APPEALS) 5.DR: ITAT ASSISTANT REGISTRAR DATE INITIAL 1. DRAFT DICTATED ON 4.3.2014 PS 2. DRAFT PLACED BEFORE AUTHOR 4.3.2014 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/ AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. *