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

ITA 577/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97421 (ITAT-DELHI)
• Duration Of Justice: 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-10-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 20-09-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 29-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SYED NASIR ALI
• Assessee Lawyers: RAHUL K MITRA
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI S. V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.577/DEL./2015 (ASSESSMENT YEAR : 2010-1) GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD., VS. D CIT, CIRCLE 10 (1), UNIT NO.201, DLF SOUTH COURT, NEW DELHI. DISTRICT CENTRE, SAKET, NEW DELHI. (PAN : AACCG3437E) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAHUL K. MITRA, CA REVENUE BY : SHRI SYED NASIR ALI, CIT DR DATE OF HEARING : 28.08.2015 DATE OF PRONOUNCEMENT : 01.10.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL, AT THE INSTANCE OF THE ASSESSEE, IS DI RECTED AGAINST THE ORDER OF AO DATED 26.12.2014 UNDER SECTION 143 (3) READ WITH SECTION 144C (5) OF THE INCOME-TAX ACT, 1961 (HEREI NAFTER REFERRED TO THE ACT) IN PURSUANCE TO THE DIRECTION OF THE DRP -IV, NEW DELHI FOR THE ASSESSMENT YEAR 2010-11. 2 ITA NO.577/DEL/2015 2. GAP INC. INCORPORATED IN DELAWARE, USA IS AN INT ERNATIONAL SPECIALTY RETAILER AND OPERATES STORES SELLING CASU AL APPAREL, SHOES AND OTHER ACCESSORIES. GAP INC. IS NOT INVOLVED IN CARR YING OUT ANY MANUFACTURING ACTIVITY. ALL MANUFACTURING IS DONE B Y THIRD-PARTY MANUFACTURES ACROSS SEVERAL COUNTRIES. GAP INC. SOU RCES PRODUCTS FROM THESE THIRD-PARTY MANUFACTURERS. 3. GAP INDIA IS A WHOLLY OWNED SUBSIDIARY OF GIS IN C. GAP INDIA'S PRIMARY BUSINESS ACTIVITY IS TO FACILITATE SOURCING OF APPAREL MERCHANDISE FROM INDIA. THEREFORE, GAP INDIA ESSENT IALLY ACTS AS A SOURCING SUPPORT SERVICES PROVIDER FOR GAP GROUP. T HE KEY ACTIVITIES PERFORMED BY GAP INDIA INCLUDE SUPPORT TO GAP GROUP IN IDENTIFICATION AND EVALUATION OF VENDORS, PROVISION OF ASSISTANCE TO VENDORS IN PROCUREMENT OF RAW MATERIAL, PROVISION O F ASSISTANCE TO VENDORS IN DESIGNING, INSPECTION AND QUALITY CONTRO L, AND CO- ORDINATION WITH VENDORS TO ENSURE DELIVERY OF GOODS TO GAP GROUP AS PER SCHEDULE. 4. THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY T HE ASSESSEE COMPANY ARE TABULATED BELOW :- 3 ITA NO.577/DEL/2015 NATURE OF TRANSACTION METHOD SELECTED TOTAL VALUE OF TRANSACTION (RS.) PROVISION OF SOURCING SUPPORT SERVICES TNMM 600,281,720 COST ALLOCATION FROM GAP GROUP 263,890,000 COST RECHARGES TO GPA GROUP CUP 684,164,000 5. IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACT IONS TNMM HAS BEEN USED AS THE MOST APPROPRIATE METHOD WITH OP /T C AS THE PLI. THE MARGIN OF THE ASSESSEE COMPANY HAS BEEN WORKED OUT IN ANN-H OF TP REPORT AS TABULATED BELOW: - PARTICULARS AMOUNT (IN RUPEES) GROSS RECEIPTS 600,281,720 EMPLOYEES REMUNERATION & BENEFITS 355,271,294 ADMINISTRATIVE & OTHER EXPENSES 132,774,435 DEPRECIATION 25,928,892 TOTAL COST (TC) 513,974,621 OPERATING PROFIT (OP) 86,974,621 OP/TC 15.36% AS MENTIONED IN THE TP REPORT THE SEARCH FOR COMPAR ABLES WAS UNDERTAKEN, ASSUMING THAT GAP INDIA ACTS AS A MARKE TING SUPPORT / LOW END TECHNICAL SUPPORT SERVICES OF MERCHANDISE F OR GAP GROUP. FOLLOWING SET OF COMPARABLES WAS SELECTED IN THE TP REPORT : 4 ITA NO.577/DEL/2015 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 YE ARS FROM A.Y 2006- 07 ONWARDS, THE TPO HELD AS UNDER :- IN VIEW OF THE ABOVE FINDINGS, IT IS HELD THAT TH E CORRECT COMPENSATION MODEL AT ARMS LENGTH PRICE, IN THIS C ASE, WOULD BE COMMISSION OF FOB COST OF GOODS SOURCED FROM INDIA . THE TPO REPELLED THE CONTENTION OF THE ASSESSEE FOR WORKING CAPITAL ADJUSTMENT AND TOOK THE FOLLOWING COMPARABLES :- S.NO. NAME OF THE COMPANY OP/TX 1 PANTALOON RETAIL (INDIA) LIMITED 7.71 2 SHOPPERS STOP LIMITED 6.29 3 TRENT LIMITED 9.41 4 JAYPEE SPINTEX LIMITED 2.6 AVERAGE 6.50 5 ITA NO.577/DEL/2015 THE TPO COMPUTED THE ARMS LENGTH PRICE AS UNDER :- 12. COMPUTATION OF ARM'S LENGTH PRICE ACCORDINGLY, THE ARMS LENGTH PRICE IN YOUR CASE IS CALCULATED AS BELOW :- DETAILS AMOUNT IN INR TOTAL FOB VALUE OF EXPORTS 60,146,452,989 ARMS LENGTH MARGIN @ 6.50% 3,909,519,444 MARGIN SHOWN BY THE ASSESSEE 86,307,099 DIFFERENCE 3,823,212,345 SINCE THE DIFFERENCE BETWEEN THE ARM'S LENGTH MARGI N AND THE MARGIN SHOWN BY THE ASSESSEE VARIES BY MORE THAN 5% OF THE ARMS LENGTH PRICE HAS TAKEN PLACE, AN ADJUSTMENT OF RS.3 82,32,12,345/- IS TO BE MADE TO THE INCOME OF THE ASSESSEE, I.E. THE ASSESSING OFFICER SHALL ENHANCE THE INCOME OF THE ASSESSEE BY AN AMOU NT OF RS.382,32,12,345/- WHILE COMPUTING ITS TOTAL INCOME . THE ASSESSEE WAS AFFORDED REASONABLE OPPORTUNITY OF BEING HEARD (INCLUDING PERSONAL HEARING) AS MENTIONED IN ROW NO. 7 OF PAGE 1 OF THIS ORDER. 7. PURSUANT TO THE SAID ORDER OF TPO, THE AO PASSED DRAFT ASSESSMENT ORDER, WHICH WAS CHALLENGED BY THE ASSES SEE BEFORE THE DRP WITHOUT SUCCESS, SO THE ASSESSEE IS BEFORE US A ND THE LD. AR FILED THE WRITTEN SUBMISSIONS WHEREIN IT IS SUBMITTED AS UNDER :- 3. THE TPO HAD ALSO RELIED UPON THE RULING OF THE DELHI INCOME TAX APPELLATE TRIBUNAL IN THE CASE OF LI & F UNG INDIA PRIVATE LIMITED (LI & FUNG INDIA), WHERE BASED UPON THE FACTS OF THE SAID CASE, A COMMISSION BASED MODEL WAS DETERMI NED BY THE HONBLE TRIBUNAL. 4. WHEN THE MATTER REACHED THE HON'BLE TRIBUNAL IN THE APPELLANT'S CASE FOR THE AY 2006-07 AND 2007-08 (DI SPOSED BY A 6 ITA NO.577/DEL/2015 CONSOLIDATED ORDER DATED 18TH SEPTEMBER 2012 REFER PAGES 142 TO 192 OF APPEAL SET), THE HON'BLE TRIBUNAL WAS PLEASE D TO DISTINGUISH THE CASE OF LI & FUNG AND HELD THAT GIS INDIA WAS ENTITLED TO A COST PLUS FORM OF REMUNERATION AND NO T A COMMISSION BASED REMUNERATION. HOWEVER, THE HON'BLE TRIBUNAL E NHANCED THE MARK-UP ON THE COST FROM 15%, AS CHARGED BY THE APP ELLANT, 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 TR IBUNAL, 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. T HE A Y 2008-09 (COPY OF ORDER DATED 15TH MARCH 2013 HAS BEEN ENCLO SED 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 H AD APPLIED A COMMISSION BASED REMUNERATION MODEL IN THE APPELLAN T'S CASE FOR THE EARLIER YEARS, WAS OVERTURNED BY THE HON'BLE DE LHI HIGH COURT VIDE THE ORDER DATED 16 TH DECEMBER 2013 (REFER PAGES 841 TO 881 OF THE PAPERBOOK). 7. THE HON'BLE HIGH COURT, VIDE THE SAID ORDER, HAD APPROVED THE REMUNERATION MODEL OF MARK-UP OF 5% ON THE OPER ATIONAL COSTS OF LI & FUNG INDIA, I.E. WITHOUT CONSIDERING THE VA LUE OF GOODS PROCURED BY THE FOREIGN AE OF LI & FUNG INDIA, DIRE CTLY FROM THIRD PARTY VENDORS IN INDIA. 8. AS OPPOSED TO A MARK-UP OF 5% ON OPERATIONAL COS TS, AS BLESSED BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF LI & FUNG INDIA, THE APPELLANT OPERATES ON A MARK-UP OF 15% O F OPERATIONAL COSTS, WHICH IS ANY WAY MORE CONSERVATIVE. 9. THE MARK-UP OF 32%, AS ADOPTED BY THE HON'BLE TR IBUNAL IN THE APPELLANT'S OWN CASE FOR THE EARLIER AYS, BEING THE DERIVED MARK UP ON OPERATIONAL COSTS EVEN WITH REFERENCE TO THE COMMISSION BASE MODEL WHICH WAS APPROVED BY THE HON 'BLE TRIBUNAL IN THE CASE OF LI & FUNG INDIA, WHICH WAS PREVALENT AT THE MATERIAL TIME, NAMELY PRIOR TO ITS DILUTION BY THE HON'BLE DELHI HIGH COURT IN DECEMBER 2013, THUS ALSO STANDS DILUT ED, AS OF TODAY. 7 ITA NO.577/DEL/2015 10. THEREFORE, THE MARK UP ON OPERATIONAL COSTS AS ADOPTED BY THE APPELLANT, NAMELY 15.36%, REMAINS UNCONTROVERTE D FOR THE CURRENT ASSESSMENT YEAR. ACCORDINGLY, THE TP ADJUST MENT OFRS.382.32 CRORE HAS NO LEGS TO STAND AND IS LIABL E TO BE STRUCK DOWN IN THE MERIT APPEAL AS WELL. 11. FURTHER, FOR AY 2009-10 IN THE APPELLANT'S OWN CASE, THE HON'BLE TRIBUNAL WAS PLEASED TO PRONOUNCE THE ORDER ON APRIL 8, 2015 (REFER ANNEXURE -1 TO THE SYNOPSIS) WHEREIN TH E ENTIRE ADJUSTMENT WAS DELETED BASED UPON THE ABOVE STATED ARGUMENTS I.E. THE COMPANY IS ALREADY EARNING A MARK-UP OF 15% ON OPERATIONAL COSTS WHICH IS MORE THAN THE 5% MARK-UP IN CASE OF LI & FUNG INDIA AND EVEN MORE THAN THOSE OF THE COMPARABLE CO MPANIES. 12. FOR THE AY UNDER CONSIDERATION I.E. AY 2010-11, THE TPO HAS ADOPTED A SIMILAR COMMISSION BASED MODEL AS IN EARLIER YEARS (A COMMISSION OF 6.50%(REFER PAGE 140 OF APPEAL SET FOR TPO'S ORDER) HAS BEEN ADOPTED BY THE TPO), AS A RESULT OF WHICH AN ADJUSTMENT OF RS.382.32 CRORES HAS BEEN INFLICTED U PON THE ASSESSEE, RESULTING IN A TOTAL TAX DEMAND OF RS.205 .93 CRORES (ALONGWITH INTEREST). WHEN THE MATTER CAME UP BEFOR E THE DISPUTE RESOLUTION PANEL (DRP), THE ASSESSEE SUBMITTED THAT ITS CASE IS SQUARELY COVERED IN FAVOUR BY THE DECISION OF THE T RIBUNAL RENDERED IN THE ASSESSEE'S OWN CASE FOR THE EARLIER YEARS AS ABOVE. HOWEVER, THE DRP REITERATED TPO'S STAND THAT THE IT AT'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 A ND THE APPEAL IS PENDING. 13. DURING THE AY 2010-11, THE ASSESSEE BENCHMARKED THE TRANSACTION RELATING TO PROVISION OF SOURCING SUPPO RT SERVICES BY CONSIDERING THE SIMILAR SERVICE PROVIDERS EARNING M EAN MARGIN(OP/TC) OF 11.66% (REFER PAGE 35 AND 36 OF PA PER BOOK; ALSO REFER PAGE 98 OF APPEAL SET FOR TPO'S ORDER). 14. HOWEVER, THE TPO IN THE ORDER HAD CONSIDERED CO MMISSION BASED MODEL AS AN APPROPRIATE COMPENSATION MODEL IN THE ASSESSEE'S CASE (REFER PAGE 129 OF APPEAL SET). FUR THER, THE TPO WHILE COMPUTING THE ARM'S LENGTH MARGIN, SELECTED D ISTRIBUTORS AS COMPARABLES EARNING MEAN MARGIN OF 6.50% (REFER PAG E 140 OF APPEAL SET) AND DETERMINED THE TP ADJUSTMENT OF RS .382.32 CRORES. 8 ITA NO.577/DEL/2015 15. FOLLOWING THE APPROACH AS DONE IN EARLIER YEARS , THE ASSESSEE HAS PROVIDED THE FOLLOWING ALTERNATIVE COM PARABLE SETS TO DEMONSTRATE THE TENTATIVE OPERATING PROFIT / TOTAL COST RATIO FOR AY 2010-11 :- PARTICULARS OP/TC OR OP/VAE* (FY 2009-10) COMPANIES ENGAGED IN MARKETING SUPPORT AND LOW END TECHNICAL SUPPORT SERVICES (REFER TP STUDY ON PAGES 35, 36 AND 57 OF PAPER BOOK) 11.66% COMPANIES ENGAGED IN DISTRIBUTION WHICH ARE SELECTE D BY THE TPO IN HIS ORDER FOR AY 2010-11 20.77% 18.06% (AFTER WORKING CAPITAL ADJUSTMENT) 16. IN LIGHT OF ABOVE AS DONE IN PRIOR YEARS, IT IS SUBMITTED THAT THE MAXIMUM MARK-UP CAN BE ATTRIBUTED TO THE ASSESS EE CAN IN NO CASE EXCEED 18.06%. SINCE THE ASSESSEE IS EARNING A MARK-UP OF 15.36% AND AFTER APPLICATION OF PROVISO TO SECTION 92C(2) OF THE ACT, THE MARGIN COMES OUT TO BE 21.13%, WHICH IS WI THIN THE ARM'S LENGTH RANGE. HENCE, THERE EXISTS NO CASE FOR ADJUS TMENT IN THE ASSESSEE'S CASE. 8. THE LD AR, TOOK OUR ATTENTION TO ORDERS PASSED I N ASSESSEES OWN CASE IN ASSESSMENT YEARS 2006-07 AND 2007-08; AND A LSO TOOK OUR ATTENTION TO THE ORDER PASSED IN AY 2009-10 IN ITA NO.692/DEL/2014 ORDER DATED 08.04.2015 WHEREIN THE TRIBUNAL, RELYIN G ON THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF LI & FUNG INDIA PVT. LTD. VS. CIT IN ITA 306/2012 ORDER DATED 16.12 .2013, HAS HELD AS UNDER :- 9 ITA NO.577/DEL/2015 8. IN THE PRESENT CASE SINCE THE ASSESSEE IS ALREA DY EARNING A MARKUP OF 15% WHICH IS MORE THAN THE 5% MARKUP IN T HE CASE OF LI & FUNG INDIA (SUPRA), THEREFORE, MARKUP OF 15 % ON OPERATIONAL COSTS IN ASSESSEES CASE IS MORE CONSER VATIVE. AS SUCH NO TP ADJUSTMENT IS REQUIRED IN ASSESSEES CAS E. 9. THE LD. DR RELIED ON THE ORDER OF THE TPO. 10. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REC ORDS. WE FIND THAT IN ASSESSEES OWN CASE FOR AYS 2006-07 AND 200 7-08 IN ITA NOS.5147/DEL/2011 & 228/DEL/2012 ORDER DATED 18.09. 2012, THE TRIBUNAL HAS UPHELD THE BUSINESS MODEL OF THE ASSES SEE AND HELD AS UNDER :- 9.4 .. IV. HOWEVER, THE FACTS IN THE APPELLANTS CASE ARE DIFFERENT IN AS MUCH AS ALL THE SIGNIFICANT DIRECTIONS RELATING TO PROCUREMENT OF GOODS FROM THIRD PARTY VENDORS IN INDIA, NAMELY ( A) DESIGNS & TRENDS OF APPAREL; (B) QUALITY PARAMETERS OF MATERI ALS: (C) TERMS & CONDITIONS FOR DEALING WITH VENDORS, ETC, ARE ALL P ROVIDED BY GAP US TO THE APPELLANT THROUGH THE VOLUMINOUS VENDOR H ANDBOOK & OTHER CORRESPONDENCES WHICH ARE PLACED ON RECORD AN D HAVE NOT BEEN CONTROVERTED BY THE DEPARTMENT. IT EMERGES THA T ASSESSEE FOLLOWS AND EXECUTES THEM AS A SERVICE PROVIDER. . VI. CONSIDERING ABOVE WE CONCLUDE THAT NON RISK BEA RING PROCUREMENT FACILITATING FUNCTIONS WHICH ARE PREORD AINED BY CONTRACT AND HAND BOOK, THE APPROPRIATE PLI WILL BE NET PROFIT / TOTAL COST AND NOT THE % OF FOB VALUE OF GOODS SOUR CED BY AE. ACCORDINGLY, WE UPHOLD THE NET PROFIT / TOTAL COST REMUNERATION MODEL ADOPTED BY THE ASSESSEE. HAVING HELD SO NOW W E PROCEED TO DECIDE THE PERCENTAGE OF MARKUP TO BE APPLIED TO AS SESSEES COST. 9.5 .. 10 ITA NO.577/DEL/2015 (III) IN VIEW OF THE FOREGOING WE HAVE NO HESITATIO N TO ACCEPT A CANDID PROPOSAL GIVEN BY THE ASSESSEE AND HOLD THAT ASSESSEE TP ADJUSTMENTS BE MADE BY ADOPTING THE 32% COST PLUS M ARK UP OF THE ASSESSEE FOR AY 2006-07 AND 2007-08. THE MARK-UP PR OPOSAL OF ASSESSEE IS HIGHER THAN MARK-UP OVER TOTAL COST EAR NED BY ALL COMPARABLES PLACED ON RECORD. THE ASSESSMENTS SHOUL D BE FRAMED ACCORDINGLY. WE MAY HASTEN TO ADD THAT THIS MARK WE WILL BE SUBJECTED TO VARIATION IS SUBSEQUENT YEARS IF THE F ACTS 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/2013 ORDER DATED 15.03.20 13, UPHELD THE CONTENTION OF THE ASSESSEE AS UNDER:- 9. SINCE THE FACTS ARE IDENTICAL, ADHERING TO THE DOCTRINE OF STAIRE DECISES, IN OUR OPINION, THE SAME ORDER AS A BOVE IS APPLICABLE IN THE CURRENT YEAR. ACCORDINGLY, IN VI EW OF THE FORGOING, WE HOLD THAT THE ASSESSEES TP ADJUSTMENT BE MADE BY ADOPTING 34% COST PLUS MARKUP OF THE ASSESSEE FOR A .Y. 2008-09. IN VIEW OF THE ABOVE, THE APPEAL FILED BY THE ASSES SEE IS PARTLY ALLOWED. WE TAKE NOTE THAT THE TPO HAD ALSO RELIED UPON THE RULING OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF LI & FUNG INDI A PRIVATE LIMITED (LI & FUNG INDIA), WHERE BASED UPON THE FACTS OF TH E SAID CASE, A COMMISSION BASED MODEL WAS DETERMINED BY THE TRIBUN AL. HOWEVER, WE NOTE THAT FOR AY 2006-07 AND 2007-08 VIDE ORDER DATED 18.09.2012 (PAGES 142 TO 192 OF APPEAL SET), THE TR IBUNAL DISTINGUISHED THE CASE OF LI & FUNG AND HELD THAT G IS INDIA WAS 11 ITA NO.577/DEL/2015 ENTITLED TO A COST PLUS FORM OF REMUNERATION AND NO T A COMMISSION BASED REMUNERATION. HOWEVER, THE 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 CAS E OF LI & FUNG INDIA. WE TAKE NOTE THAT THE ORDER OF THE 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 APPELL ANT'S CASE FOR THE EARLIER YEARS, WAS OVERTURNED BY THE HON'BLE DE LHI HIGH COURT VIDE ORDER DATED 16 TH DECEMBER 2013 (PAGES 841 TO 881 OF THE PAPERBOOK). THE HON'BLE HIGH COURT, VIDE THE SAID O RDER, HAD APPROVED THE REMUNERATION MODEL OF MARK-UP OF 5% ON THE OPERATIONAL COSTS OF LI & FUNG INDIA, I.E. WITHOUT CONSIDERING THE VALUE OF GOODS PROCURED BY THE FOREIGN AE OF LI & F UNG INDIA, DIRECTLY FROM THIRD PARTY VENDORS IN INDIA. FURTHE R, WE NOTE THAT THE MARK-UP OF 32%, AS ADOPTED BY THE TRIBUNAL IN THE A PPELLANT'S OWN CASE FOR THE EARLIER AYS, BEING THE DERIVED MARK UP ON OPERATIONAL COSTS EVEN WITH REFERENCE TO THE COMMISSION BASE MO DEL WHICH WAS APPROVED BY THE TRIBUNAL IN THE CASE OF LI & FUNG I NDIA, WHICH WAS PREVALENT AT THE MATERIAL TIME, WAS PRIOR TO THE OR DER REVERSING THE 12 ITA NO.577/DEL/2015 SAME BY THE HON'BLE DELHI HIGH COURT IN DECEMBER 20 13. IN THE LIGHT OF THE SAID ORDER OF THE HONBLE DELHI HIGH C OURT, THE MARK UP ON OPERATIONAL COSTS OF THE ASSESSEE I.E. 15.36% IS CONSERVATIVE. 11. WHILE REVERSING THE ORDER OF THE TRIBUNAL IN LI & FUNG INDIA PVT. LTD., THE HONBLE JURISDICTIONAL HIGH COURT HE LD AS FOLLOWS :- 49. THIS COURT SUMMARIZES ITS CONCLUSIONS AS FOLLO WS: (A) THE BROAD BASING OF THE PROFIT DETERMINING DENO MINATOR AS THE ENTIRE FOB VALUE OF THE CONTRACTS ENTERED INTO BY T HE AE TO DETERMINE THE LFIL S ALP, AS AN ADJUSTMENT, IS CONTRARY TO PROVISION S OF THE ACT AND RULES; (B) THE IMPUGNED ORDER HAS NOT SHOWN HOW, AND TO WH AT EXTENT, LIFIL BEARS SIGNIFICANT RISKS, OR THAT THE AE ENJ OYS SUCH LOCATIONAL ADVANTAGES, AS TO WARRANT REJECTION OF THE TRANSFER PRICING EXERCISE UNDERTAKEN BY LFIL; (C) TAX AUTHORITIES SHOULD BASE THEIR CONCLUSIONS O N 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 AN D THE RELATIVE EVALUATION OF THEIR WEIGHT AND SIGNIFICANCE. (D) WHERE ALL ELEMENTS OF A PROPER TNMM ARE DETAILE D AND DISCLOSED IN THE ASSESSEES REPORTS, CARE SHOULD BE TAKEN BY THE TAX ADMINISTRATORS AND AUTHORITIES TO ANALYZE THEM IN D ETAIL AND THEN PROCEED TO RECORD REASONS WHY SOME OR ALL OF THEM A RE UNACCEPTABLE. (E) THE IMPUGNED ORDER, UPHOLDING THE DETERMINATION OF 3% MARGIN OVER THE FOB VALUE OF THE AE S CONTRACT, IS IN ERROR OF LAW. 50. IN LIGHT OF THE ABOVE CIRCUMSTANCES, THIS COURT IS OF THE OPINION THAT THE TPO S ADDITION OF THE COST PLUS 5% MARKUP ON THE FOB VA LUE OF EXPORTS AMONG THIRD PARTIES TO LFILS CALCULATIO N OF ARMS LENGTH PRICE USING THE TNMM IS WITHOUT FOUNDATION AND LIAB LE TO BE DELETED. THE APPEAL IS ALLOWED AND THE ORDER DATED 25/11/11 OF THE ITAT TRIBUNAL, DELHI BRANCH IS LIABLE TO BE AND IS ACCOR DINGLY SET ASIDE. THE 13 ITA NO.577/DEL/2015 QUESTIONS OF LAW FRAMED ARE ANSWERED IN FAVOUR OF T HE ASSESSEE, AND AGAINST THE REVENUE. THE APPEAL IS ALLOWED IN THE A BOVE TERMS. IN VIEW OF THE ENUNCIATION OF LAW BY THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF LI & FUNG INDIA PVT. LTD. ORDE R DATED 16.12.2013, 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. EX CONSEQUENTI, THE TOTAL COST BEING THE DENOMINATOR IN THE PLI OF OP/TC, HAS TO BE TAKEN AS THE COST INCUR RED BY THE ASSESSEE AND NOT THE FOB VALUE OF GOODS BETWEEN THIRD PARTY ENTERPRISES SOURCED THROUGH THE ASSESSEE. IN OTHER WORDS, THE TESTED PARTY SHOULD BE THE ASSESSEE AND NOT ITS AE. THUS, WE HOLD THAT THE ASSESSEE IS ENTITLED TO COST PLUS FORM OF REMUNERATION AND NOT A COMMISSION BASED REMUNERATION. IN THE LIGHT OF THE SAME, WE T AKE NOTE OF THE ORDER OF THE TRIBUNAL IN THE PREVIOUS ASSESSMENT YE AR I.E. AY 2009-10 IN ITA NO.692/DEL/2014 ORDER DATED 08.04.2015 WHERE IN THE TRIBUNAL, RELYING ON THE DECISION OF HONBLE JURISD ICTIONAL HIGH COURT IN THE CASE OF LI & FUNG INDIA PVT. LTD. VS. CIT IN ITA 306/2012 ORDER DATED 16.12.2013, HAS HELD AS UNDER :- 14 ITA NO.577/DEL/2015 8. IN THE PRESENT CASE SINCE THE ASSESSEE IS ALREA DY EARNING A MARKUP OF 15% WHICH IS MORE THAN THE 5% MARKUP IN T HE CASE OF LI & FUNG INDIA (SUPRA), THEREFORE, MARKUP OF 15% ON O PERATIONAL COSTS IN ASSESSEES CASE IS MORE CONSERVATIVE. AS SUCH N O TP ADJUSTMENT IS REQUIRED IN ASSESSEES CASE. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF THE C OORDINATE BENCH, WE ARE OF THE OPINION THAT THERE IS NO NECESSITY OF ANY TP ADJUSTMENT. EVEN FURTHER, FOR THE CURRENT YEAR, WE NOTE THAT BO TH AS PER THE COMPARABLES CHOSEN BY THE ASSESSEE WHICH YIELD A MA RKUP ON 11.66% ON OPERATING COST AND ALSO THE COMPARABLES CHOSEN B Y THE TPO, WHICH YIELD 18.06% ON OPERATING COST, AFTER MAKING NECESS ARY WORKING CAPITAL ADJUSTMENT, INDICATES THAT THE ASSESSEES M ARKUP OF 15.36% CHARGED ON ITS OPERATING COST FALLS WELL WITHIN THE ARMS LENGTH PRICE AFTER CONSIDERING THE RANGE OF +/- 5% AS ENVISAGED IN THE PROVISO TO SECTION 92C (2) OF THE ACT. THEREFORE, NO TP ADJUS TMENT IS REQUIRED IN ASSESSEES CASE. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 1 ST DAY OF OCTOBER, 2015. SD/- SD/- (S. V. MEHROTRA) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 1 ST DAY OF OCTOBER, 2015/TS 15 ITA NO.577/DEL/2015 COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A)-IX, NEW DELHI. 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI