Bestseller United India Pvt. Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 6140/DEL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8140 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 03-02-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 10-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: HIMANSHU S SINHA; LALIT; POOJA GUPTA CAS
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Earning of tax free income; Wholly owned subsidiary
• Section: 92D; 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.6140/DEL./2012 (ASSESSMENT YEAR : 2008-09) M/S. BESTSELLER UNITED INDIA PRIVATE LTD., VS. ADDL . CIT, RANGE 2, 1 ST & 2 ND FLOOR, E 20, HAUZ KHAS, NEW DELHI. NEW DELHI 110 044. (PAN : AABCD5315J) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU S. SINHA, ADVOCATE, AN D SHRI LALIT & MS. POOJA GUPTA, CAS REVENUE BY : SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING : 03.02.2016 DATE OF ORDER : 25.04.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. BESTSELLER UNITED INDIA PRIVATE LIM ITED (HEREINAFTER REFERRED TO AS THE ASSESSEE), BY FIL ING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 17.10.2012 PASSED BY THE DRP/TPO/AO QUA THE ASSESSMENT YEAR 20 08-09 ON THE GROUNDS INTER ALIA THAT :- L. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE ORDER PASSED BY THE ASSISTANT COMMISSIO NER OF INCOME TAX, RANGE 2, NEW DELHI ('LEARNED ASSESSING OFFICER ' OR 'LD. AO') IS BAD IN LAW AND VOID AB-INITIO. ITA NO.6140/DEL./2012 2 2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/ ASSISTANT/DEPUTY DIRECTOR OF INCOME TAX, TR ANSFER PRICING OFFICER - 1(4), NEW DELHI (LD. TPO) AND LEA RNED DISPUTE RESOLUTION PANEL - I, NEW DELHI ('LD. DRP') ERRED I N RE- COMPUTING THE ARM'S LENGTH PRICE ('ALP') OF THE APP ELLANT'S INTERNATIONAL TRANSACTION AT RS.27,76,86,636 AS AGA INST RS.13,88,43,318 ADOPTED BY THE APPELLANT AND RECOMM ENDING AN ADDITION OF RS.13,88,43,318 ON THAT ACCOUNT TO THE APPELLANT'S INCOME. 3. THAT THE LD. AO/TPO/DRP HAS ERRED IN LAW AND FAC TS BY: A. NOT APPRECIATING THE FACT THAT THE APPELLANT HAS COMPLIED WITH THE INDIAN TRANSFER PRICING REGULATION BY MAIN TAINING APPROPRIATE DOCUMENTATION A MANDATED BY SECTION 92D OF THE ACT AND RULE 10D OF THE INCOME-TAX RULES, 1962 ('RULES' ) AND ADOPTING APPROPRIATE BENCHMARKING APPROACH TO SUBST ANTIATE THE ARM'S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIO NS; B. NOT APPRECIATING THAT THE APPELLANT IS A LOW RIS K SOURCING SUPPORT SERVICE PROVIDER AND DISREGARDING THE FUNCT IONAL ASSET AND RISK (FAR) PROFILE OF THE APPELLANT, ON THE BASIS OF PRE-CONCEIVED NOTIONS, SURMISES AND CONJECTURES, AND WITHOUT ANY COGENT EVIDENCE, FACTS OR BASIS WHATSOEVER; C. INCLUDING THE VALUE OF THE GOODS SOURCED DIRECTL Y BY THE ASSOCIATED ENTERPRISES OF THE APPELLANT FROM THIRD PARTY VENDORS IN THE COST BASE OF THE APPELLANT, FOR THE PURPOSE OF COMPUTING THE ARM'S LENGTH PROFIT MARGIN OF THE APPELLANT ON THE ALLEGED GROUND THAT IT CREATED SUPPLY CHAIN AND HUMAN ASSET INTANG IBLES IN INDIA AND GENERATED LOCATION SAVINGS IN INDIA WHICH HAVE NOT BEEN FACTORED INTO IN ITS REMUNERATION MODEL. D. DISREGARDING THE FACT THAT THE ARM'S LENGTH PRIC E ADOPTED BY THE TPO LEADS TO THE APPELLANT'S OPERATING PROFIT / OPERATING COST (OP/TC) RATIO GOING UP TO AN ABSURDLY HIGH FIGURE O F 1069%. E. APPLYING THE DECISION OF THE HON'BLE DELHI TRIBU NAL IN THE CA E OF LI & FUNG (INDIA) PVT. LTD. VS. DCIT IN THE CASE OF THE APPELLANT WITHOUT APPRECIATING THAT THE FAR PROFILE OF THE APPELLANT WAS ENTIRELY DIFFERENT THAN THE APPELLANT INVOLVED IN THE SAID CASE; AND ACCORDINGLY, THE SAID DECISION COULD HAVE NO AP PLICATION IN THE INSTANT CASE OF THE APPELLANT. F. DETERMINING ARM'S LENGTH MARGIN AT THE RATE OF 5 % OF THE FOB VALUE OF GOODS SOURCED BY AES FROM INDIA ON AN AD-HOC BASIS WITHOUT APPLYING ANY APPROPRIATE TRANSFER PRICING M ETHOD AS PRESCRIBED IN SEC. 92C(1) OF THE ACT. ITA NO.6140/DEL./2012 3 G. HOLDING THAT THE APPELLANT HAS DEVELOPED UNIQUE INTANGIBLES LIKE SUPPLY CHAIN MANAGEMENT INTANGIBLES AND HUMAN ASSET INTANGIBLES WHICH HAS RESULTED IN HUGE COMMERCIAL AND STRATEGIC ADVANTAGE TO THE ASSOCIATED ENTERPRISE WITHOUT PROVIDING ANY BASIS O R EVIDENCE WHATSOEVER. A. HOLDING THAT THE VALUE ADDITION MADE BY THE APPE LLANT TO THE FOB VALUE OF GOODS REMAINED UNCOMPENSATED DESPITE I TS COMPENSATION MODEL BASED ON THE VALUE OF GOODS. 4. THAT THE LD. DRP ERRED IN LAW AND IN FACTS IN IG NORING THE PRINCIPLES LAID DOWN IN THE CASE OF GAP INTERNATION AL BY THE HON'BLE IT AT, DELHI BENCH. 5. THAT ON FACTS AND IN LAW, THE LD. AO/LD. DRP ERR ED IN DISALLOWING RS.203,725 U/S 14A OF THE ACT. 6. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED ASSESSING OFFICER HAS ERRED IN INITIATING PENALTY P ROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT AGAINST THE APPELLANT, WHICH IS INAPPROPRIATE. 2. BRIEFLY STATED, THE FACTS OF THIS CASE ARE : BES T SELLER UNITED INDIA PVT. LTD., INCORPORATED ON OCTOBER 26, 1994, IS A WHOLLY OWNED SUBSIDIARY OF BEST SELLER AS (BSAS) ENGAGED I N THE PROFESSION OF BUYING AGENCY SERVICES (SOURCE) I.E. SOURCING OF FINISHED GOODS FROM BSAS FROM INDIA. BSAS, PRIMARI LY PROCURES READYMADE GARMENTS AND APPAREL FROM INDIA AND SELL IN WESTERN EUROPE AND BSAS OWNS NUMEROUS WHOLESALE ENTITIES AR OUND THE WORLD. ASSESSEE COMPANY HAS BEEN PROVIDING SERVICE S TO BSAS TO THE FOLLOWING EFFECT :- BESTSELLER INDIA COLLECTS SAMPLES AND PRICE ESTIMAT ES FROM PRODUCERS IN INDIA AND FORWARD THESE TO BSAS. THE COLLECTION OF PRODUCTION SAMPLES FROM VENDORS I N ITA NO.6140/DEL./2012 4 INDIA IS DONE AS A SUPPORT SERVICE TO BSAS IN RELAT ION TO COUPLE OF BRANDS ONLY. STYLES AND DESIGNS ARE PICKED BY BSAS; TO ENSURE THAT SUPPLIERS COMPLY WITH THE BESTSELLER S CODE OF CONDUCT; TO FOLLOW-UP ON SUPPLIERS TO MAKE SURE THAT THEY DELIVER THE RIGHT QUALITY AND COMPLY WITH THE DELIV ERY TERMS IN GENERAL. 3. ASSESSEE COMPANY ENTERED INTO INTERNATIONAL TRAN SACTIONS DURING THE YEAR UNDER ASSESSMENT AS UNDER :- PARTICULARS AMOUNT (IN RUPEES) COMMISSION INCOME 138843318 ADMINISTRATIVE & OTHER EXPENSES 25633901 DEPRECIATION 241608 TOTAL OPERATING COST 25875509 OPERATING PROFIT (OP) 112967809 OP/OC 437% 4. ASSESSEE IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS USED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT (OP) / OPE RATING COST (OC) AS PROFIT LEVEL INDICATOR (PLI) BY SELECTING E IGHT COMPARABLES HAVING MEAN MARGIN OF 12.72% AS AGAINST THE MARGIN OF ASSESSEE AT 437% AND SHOWN THE INTERNATIONAL TRANSACTION AT ARM S LENGTH. HOWEVER, TRANSFER PRICING OFFICER (TPO), BY REJECTI NG MULTIPLE YEAR DATA AS TAKEN BY THE ASSESSEE FOR BENCHMARKING , PROPOSED TO ITA NO.6140/DEL./2012 5 USE ANNUAL CURRENT YEARS DATA FOR BENCHMARKING. A SSESSEE CLAIMED ITSELF TO BE A SERVICE PROVIDER AND FILED C OMPREHENSIVE REPLY TO THE QUERIES RAISED BY TPO DURING TP PROCEE DINGS. THE TPO REJECTED THE TP STUDY MADE BY THE ASSESSEE AND PROCEEDED TO DECLARE THE ASSESSEE COMPANY AS A CONTRACT MANUFAC TURING AS IT HAS PERFORMED ALL THE FUNCTIONS OF A CONTRACT MANUF ACTURING BY ASSUMING SIGNIFICANT RISKS AND USING BOTH TANGIBLES AND UNIQUE TANGIBLES DEVELOPED BY IT OVER A PERIOD OF TIME. T HE TPO, BY FOLLOWING THE ORDER PASSED BY THE ITAT, DELHI BENCH IN LI AND FUNG INDIA PVT. LTD. ITA NO.306/2012 DECIDED ON 1 6.12.2013, COMPUTED THE CORRECT COMPENSATION AT ARMS LENGTH P RICE (ALP) BY USING MARK UP ON THE FOB VALUE OF THE GOODS SOUR CED THROUGH THE ASSESSEE AS THE MOST APPROPRIATE METHOD BEING I N CONSONANCE WITH THE TRANSFER PRICING PRACTICE ADOPTED BY THE A SSOCIATED ENTERPRISES (AES) FOR PURCHASING COMPANIES. THE TP O HAS TAKEN SIX COMPANIES AS FINAL COMPARABLES HAVING OP/OC AT 8.07% AND PROPOSED TO MAKE AN ADJUSTMENT OF RS.30,93,42,913/- AT ALP. 5. ASSESSEE CARRIED THE MATTER BEFORE THE DRP, WHIC H HAS NOT AGREED WITH THE TPO, TO MAKE COMPARABILITY WITH THE MANUFACTURING COMPANY AND HELD THAT THE ASSESSEE SH OULD HAVE BEEN COMPENSATED AT 5% OF THE COST INCLUDING THE FO B VALUE OF GOODS AND DIRECTED THE TPO TO RECOMPUTE THE ALP ACC ORDINGLY. IN ITA NO.6140/DEL./2012 6 PURSUANCE TO THE DIRECTIONS ISSUED BY THE DRP, THE TPO RECOMPUTED THE ALP OF THE INTERNATIONAL TRANSACTION TO RS.13,88,43,318/-. 6. FEELING AGGRIEVED, THE ASSESSEE COMPANY HAS COME UP BEFORE THE TRIBUNAL BY FILING THE PRESENT APPEAL. 7. 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. 8. THERE IS NO DISPUTE AS TO THE DETERMINATION OF A LP OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESS EE COMPANY DURING THE EARLIER YEARS. ASSESSEE CLAIMED ITSELF TO BE A SERVICE PROVIDER BUT TPO REJECTED THIS CLAIM OF THE ASSESSE E AND PROCEEDED TO HOLD THE ASSESSEE COMPANY AS A CONTRACT MANUFACT URER. THE TPO ALSO REJECTED ALL THE COMPARABLES SELECTED BY THE A SSESSEE COMPANY FOR BENCHMARKING AND CHOSEN HIS OWN COMPARABLES FRO M THE MANUFACTURING COMPANY. ASSESSEE AS WELL AS TPO USE D TNMM AS THE MOST APPROPRIATE METHOD TO DETERMINE OP/OC AS T HE PROFIT LEVER INDICATOR (PLI) BUT TPO ALSO APPLIED 5% ON TH E FOB OF INDIAN SUPPLY AS AGAINST ASSESSEES CLAIM THAT IT I S GETTING 2.5% OF THE COST OF THE GOODS SOURCED BY THE ASSESSEE BUT T PO BY DISPUTING THE SAME STATED THAT COMPENSATION SHOULD BE EXPRESS ED AS A ITA NO.6140/DEL./2012 7 PERCENTAGE OF THE FOB OF THE PRICE OF GOODS SOURCED THROUGH THE ASSESSEE I.E. IT SHOULD BE ON THE COST CHARGED BY T HE MANUFACTURER. 9. ADMITTEDLY, THE HONBLE JURISDICTIONAL HIGH COUR T HAS REVERSED THE ORDER OF THE TRIBUNAL DATED 30.09.2011 PASSED IN LI AND FUNG INDIA PVT. LTD. IN ITA NO.5156/DEL/2010 VI DE ORDER DATED 16.12.2013 FOLLOWED BY THE TPO TO DETERMINE T HE ALP OF INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSE E COMPANY BY HOLDING THAT ASSESSEE COMPANY SHOULD HAVE BEEN COMP ENSATED AT 5% OF THE COST INCLUDING THE FOB VALUE OF GOODS IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE DRP. 10. NOW, TO PROCEED FURTHER, IT WOULD BE APPROPRIAT E TO REPRODUCE THE OPERATIVE FINDINGS RETURNED BY THE HO NBLE JURISDICTIONAL HIGH COURT IN THE JUDGMENT LI AND FU NG INDIA PVT. LTD. (SUPRA) :- 48. THE TPO AFTER TAKING INTO ACCOUNT ALL RELEVANT FACTS AND DATA AVAILABLE TO HIM HAS TO DETERMINE ARMS LENGTH PRICE AND PASS A SPEAKING ORDER AFTER OBTAINING THE APPROVAL OF TH E DEPARTMENT OF INCOME TAX (TRANSFER PRICING). THE ORDER SHOULD CON TAIN DETAILS OF DATA USED, REASONS FOR ARRIVING AT A CERTAIN PRICE AND APPLICABILITY OF METHODS, SUBJECT TO JUDICIAL SCRUTINY. THE ORDER OF THE TPO, IN THE INSTANT CASE, HAS NOT PROVIDED ANY SUBSTANTIVE REAS ONS FOR DISREGARDING THE TNM METHOD AS APPLIED BY LFIL. FUR THER, THE TPO S ARBITRARY EXERCISE OF ADJUSTING THE COST PLUS MAR K UP OF 5% ON THE FOB VALUE OF EXPORTS FINDS NO MENTION IN THE IT ACT NOR THE RULES. SUCH AN EXERCISE OF DISCRETION BY THE TPO, D ISREGARDING THE LFILS LAWFUL TAX PLANNING MEASURES WITH ITS GROUP COMPANIES, IS NOT IN COMPLIANCE WITH THE IT ACT AND RULES OF INCO ME TAX. 49. THIS COURT SUMMARIZES ITS CONCLUSIONS AS FOLLOW S: ITA NO.6140/DEL./2012 8 (A) THE BROAD BASING OF THE PROFIT DETERMINING DENOMINA TOR AS THE ENTIRE FOB VALUE OF THE CONTRACTS ENTERED INTO BY THE AE TO DETERMINE THE LFIL S ALP, AS AN ADJUSTMENT, IS CONTRARY TO PROVISIONS OF THE ACT AND RULES; (B) THE IMPUGNED ORDER HAS NOT SHOWN HOW, AND TO WHAT EXTENT, LIFIL BEARS SIGNIFICANT RISKS, OR THAT TH E AE ENJOYS SUCH LOCATIONAL ADVANTAGES AS TO WARRANT REJ ECTION OF THE TRANSFER PRICING EXERCISE UNDERTAKEN BY LFIL; (C) TAX AUTHORITIES SHOULD BASE THEIR CONCLUSIONS ON SP ECIFIC FACTS, AND NOT ON VAGUE GENERALITIES, SUCH AS SIGN IFICANT RISK, FUNCTIONAL RISK, ENTERPRISE RISK ETC. WI THOUT ANY MATERIAL ON RECORD TO ESTABLISH SUCH FINDINGS. IF S UCH FINDINGS ARE WARRANTED, THEY SHOULD BE SUPPORTED BY DEMONSTRABLE REASON, BASED ON OBJECTIVE FACTS AND T HE RELATIVE EVALUATION OF THEIR WEIGHT AND SIGNIFICANC E. (D) WHERE ALL ELEMENTS OF A PROPER TNMM ARE DETAILED AN D DISCLOSED IN THE ASSESSEES REPORTS, CARE SHOULD BE TAKEN BY THE TAX ADMINISTRATORS AND AUTHORITIES TO ANALYZE T HEM IN DETAIL AND THEN PROCEED TO RECORD REASONS WHY SOME OR ALL OF THEM ARE 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 VALUE OF EXPORTS AMONG THIRD PARTIES TO LFIL S CALCULATION OF ARMS LENGTH PRICE USING THE TNMM IS WITHOUT FOUNDA TION AND LIABLE TO BE DELETED. THE APPEAL IS ALLOWED AND THE ORDER DATED 25/11/11 OF THE ITAT TRIBUNAL, DELHI BRANCH IS LIAB LE TO BE AND IS ACCORDINGLY SET ASIDE. THE QUESTIONS OF LAW FRAMED ARE ANSWERED IN FAVOUR OF THE ASSESSEE, AND AGAINST THE REVENUE. TH E APPEAL IS ALLOWED IN THE ABOVE TERMS. 11. THE ASSESSEE COMPANY HAS PROVIDED SOURCING SPOR T SERVICES TO ITS AE AND HAS BENCHMARKED ITS SERVICES AGAINST OTHER SPORT SERVICES COMPANIES TO BENCHMARK ITS INTERNATIONAL T RANSACTION AT ARMS LENGTH. THE COMPENSATION MODEL OF THE ASSESS EE IS 2.5% ON ITA NO.6140/DEL./2012 9 THE COST OF THE GOODS SOURCED OF THE TOTAL PURCHASE S IN THE COUNTRY IN QUESTION. 12. A PERUSAL OF THE COOPERATION AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE COMPANY AND AE DEFINES THE FUNCTIONS A ND SCOPE OF THE WORK OF THE ASSESSEE, RELEVANT PROVISIONS THERE OF ARE REPRODUCED FOR READY REFERENCE AS UNDER :- 2 - TASKS OF BESTSELLER INDIA: 2.1 BESTSELLER INDIA SHALL COLLECT COLLECTION SAMPL ES AND PRICE ESTIMATES FROM PRODUCERS IN INDIA AND FORWARD THESE TO BESTSELLER DK. 2.2 BESTSELLER OK SHALL SELECT AMONGST THESE COLLEC TION SAMPLES OR SHALL PRODUCE ITSELF COLLECTIONS WHICH SHALL THEN BE FORWARDED TO BESTSELLER INDIA WITH A STATEMENT OF WHICH QUANTITIES, QUALITY AND C OLOURS ARE OF INTEREST. FURTHERMORE, BESTSELLER DK SHALL STATE TH E REQUESTED TIME OF DELIVERY, THE QUANTITIES AND THE PRICE LEVEL IT IS WILLING TO PAY FOR THE ORDER. 2.3 BESTSELLER INDIA SHALL ENTER INTO NEGOTIATIONS WITH THE PRODUCERS ESTIMATED TO BE ABLE TO DELIVER THE ORDER ON THE STATED TERMS AND AT THE LOWEST PRICE POSSIBLE. 2.4 BESTSELLER INDIA SHALL ACT IN ITS OWN NAME AND SHALL NOT BE EMPOWERED TO BIND BESTSELLER DK LEGALLY OR FINANCIA LLY WHEN THEY ENTER INTO ANY AGREEMENTS WITH SUPPLIERS IN INDIA 2.5 BESTSELLER INDIA SHALL SEE TO THE MOST APPROPR IATE DISTRIBUTION OF ORDERS AMONGST THE PRODUCERS AND SH ALL COLLECT FOR BESTSELLER DK WRITTEN QUOTATIONS FOR DELIVERY FROM THE PRODUCERS. 2.6 ALL BINDING AGREEMENTS BETWEEN BESTSELLER INDIA AND PRODUCERS SHALL BE IN WRITING AND SHALL BE APPROVED BY BESTSELLER DK. 2.7 AS REGARDS ORDERS PLACED BESTSELLER INDIA SHAL L SEE TO THE FOLLOW-UP OF SUCH ORDERS TOWARDS PRODUCERS IN ORDER TO PERFORM CURRENT QUALITY CONTROLS AND ANY OTHER TASKS TO ENS URE THAT THE PRODUCT IS DELIVERED IN THE AGREED QUALITY AND ON T HE AGREED TERMS. ITA NO.6140/DEL./2012 10 2.8 BESTSELLER INDIA SHALL BE OBLIGED TO KEEP BESTS ELLER DK CURRENTLY INFORMED OF SUCH DEVELOPMENTS OF ORDERS, COMPLAINTS ETC. IN PROGRESS WHICH MAY BE IMPORTANT TO BESTSELLER DK 'S DISPOSITIONS MADE IN ANTICIPATION OF THE PLANNED IMPLEMENTATION OF THE ORDER. 2.9 BESTSELLER INDIA SHALL BE OBLIGED TO MAKE COMPL AINTS TOWARDS THE INDIVIDUAL PRODUCERS ONCE IT IS ASCERTA INED THAT AN ORDER DOES NOT PROCEED SATISFACTORILY OR THAT IT IS NOT PERFORMED ACCORDING TO CONTRACT. BESTSELLER INDIA SHALL BE OB LIGED TO MAKE SUCH COMPLAINT IN ACCORDANCE WITH INDIAN RULES OF L AW. 3 - SCOPE OF THE AGREEMENT: 3.1. THIS AGREEMENT SHALL BE OPERATIVE FOR ALL PURC HASES MADE BY BESTSELLER DK IN INDIA. BESTSELLER DK IS NOT ALL OWED TO MAKE ANY PURCHASES IN INDIA THROUGH OTHER TRADING PARTNE RS OR TO MAKE ANY PURCHASES DIRECTLY. 4 - QUANTITIES: 4.1 THE BUSINESS BESTSELLER DK SHALL NOT BE OBLIGED TO BUY ARTICLES FROM INDIA AT A FIXED AMOUNT OF MONEY. 5 - REMUNERATION: 5.1 IT IS AGREED THAT BESTSELLER INDIA SHALL RECEI VE A REMUNERATION OF 2.5% OF THE PRICE WHICH THE PRODUCE R BILLS BESTSELLER DK (NET PRICE EXCLUSIVE OF FREIGHT, VAT, DUTY AND DISCOUNTS, IF ANY). 5.2 THE COMMISSION SHALL BE PAID BY THE SUPPLIER. BESTSELLER DK DRAWS THE COMMISSION FROM THE PAYMENT TO THE SUP PLIER AND SENDS ON BEHALF OF THE SUPPLIER THE COMMISSION TO B ESTSELLER INDIA ONCE A MONTH. 13. ASSESSEE COMPANY IN ORDER TO BENCHMARK THE INTE RNATIONAL TRANSACTION USED THE TNMM AS THE MOST APPROPRIATE M ETHOD WITH OP/OC AS PLI AND COMPUTED ITS MARGIN AS UNDER :- PARTICULARS AMOUNT (IN RUPEES) COMMISSION INCOME 138843318 ADMINISTRATIVE & OTHER EXPENSES 25633901 DEPRECIATION 241608 TOTAL OPERATING COST 25875509 OPERATING PROFIT (OP) 112967809 OP/OC 437% ITA NO.6140/DEL./2012 11 14. THEREAFTER, THE ASSESSEE COMPANY, BY TREATING I TSELF AS A SUPPORT SERVICE PROVIDER OF MERCHANDISE FOR BESTSEL LER GROUP, SELECTED THE FOLLOWING SET OF COMPARABLES IN ITS TP REPORT :- S.NO. NAME OF THE COMPANY WEIGHTED AVERAGE OF 3 YEARS MARGIN 1. EDUCATIONAL CONSULTANTS 3% 2. EPIC ENERGY LTD. 55% 3. GEEFCEE FINANCE LTD. 0% 4. NIS SPARTA LTD. -8% 5. IDC (INDIA) LTD. 14% 6. PRIYA INTERNATIONAL LTD. 9% 7. RATAN GLITTER INDIA LTD. - 7% 8. RITES LTD. 35% MEAN 12.72% 15. HOWEVER, THE TPO REJECTED THE TP STUDY ON THE G ROUNDS, INTER ALIA, THAT THE ASSESSEE HAS USED MULTIPLE YEA RS DATA VIS--VIS CURRENT YEAR DATA WHICH IS NOT IN COMPLIANCE WITH THE PROVISIONS OF THE ACT; THAT THE ASSESSEE COMPANY IS NOT SERVICE P ROVIDER AS CLAIMED BY IT AS ASSESSEE COMPANY IS ALSO PERFORMIN G STRATEGIC FUNCTION LIKE PRODUCT DESIGN, QUALITY AND TIMELY SU PPLY OF PRODUCT, ETC.; THAT DURING THE COURSE OF TP PROCEEDINGS, THE ASSESSEE COMPANY HAS NOT FILED ANY TP REPORT CONTAINING EVID ENCE THAT FIXATION OF 2.5% OF COMMISSION ON THE COST OF GOODS SOURCED WAS DETERMINED BY SELECTING MOST APPROPRIATE METHOD AND COMPARABLES TO SHOW THAT THE PROPOSED MARK-UP WAS AT ARMS LENG TH; THAT ITA NO.6140/DEL./2012 12 COMPENSATION MODEL OF 2.5% ON COST OF MODEL SHOWS A RBITRARY AND WITHOUT ANY VALID BASIS. 16. TPO WHILE REJECTING THE TP STUDY RELIED UPON BY THE ASSESSEE COMPANY FOR BENCHMARKING ITS INTERNATIONAL TRANSACT IONS PROCEEDED TO HOLD THAT THE UNIQUE INTANGIBLES CREATED BY THE ASSESSEE COMPANY OVER A PERIOD OF TIME HAVE GIVEN AN ADVANTAGE TO TH E AE IN THE FORM OF LOW COST OF PRODUCT, QUALITY OF PRODUCT AND ENHANCED THE PROFITABILITY OF THE AE BUT THE COST FOR DEVELOPMEN T AND USE OF INTANGIBLE WAS NOT TAKEN INTO ACCOUNT FOR COMPUTATI ON OF ROUTINE MARK-UP OF 2.5%. THE TPO CAME TO THE CONCLUSION TH AT, THE REMUNERATION MODEL USED IN THIS CASE DOES NOT PROVI DE COMPENSATION TO THE ASSESSEE AT ALP AS THE MODEL DO ES NOT INCLUDE COMPENSATION FROM DEVELOPMENT AND USE OF IN TANGIBLES AND MOREOVER, THE COST OF GOODS HAS NOT BEEN REFLEC TED WHILE COMPUTING THE REMUNERATION. 17. THE TPO PRIMARILY BASED HIS FINDINGS TO DETERMI NE THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE C OMPANY BY RELYING UPON THE CASE OF LI AND FUNG INDIA PVT. LTD. (SUPRA), WHICH HAS BEEN SET ASIDE BY THE HONBLE JURISDICTIONAL HIGH C OURT, ON THE GROUNDS, INTER ALIA, THAT THE ASSESSEE FALLS IN THE CATEGORY OF CONTRACT MANUFACTURING; THAT THE ASSESSEE PERFORM ED ALL CRITICAL FUNCTION RELATING TO CONTRACT MANUFACTURING, ASSUME D SIGNIFICANT ITA NO.6140/DEL./2012 13 RISK AND USED BOTH TANGIBLES AND UNIQUE INTANGIBLES DEVELOPED OVER A PERIOD OF TIME, THUS BECOME A FULL RISK BEARING C ONTRACT MANUFACTURING; THAT IT IS HIGHLY UNLIKELY AND IMPRA CTICAL THAT THERE IS A DIRECT COMMUNICATION BETWEEN VENDORS AND THE A E OF THE ASSESSEE COMPANY; THAT THE VERY FACT OF OUTSOURCING OF THE MANUFACTURING PROCESS DOES NOT CONVERT ASSESSEE FRO M MANUFACTURING TO SOURCING AGENT; THAT THE AE HAS DE PLOYED THE ASSESSEE IN INDIA TO OVERSEE THE MANUFACTURING OF T HE REQUIRED GOODS, HANDLE THE REQUIRED QUALITY CONTROL, THE LOG ISTIC, THE DOCUMENTATION PROCESS RELATED TO EXPORT, ETC., SO, THE ASSESSEE BEARS THE ENTIRE RISK RELATING TO THE MANUFACTURING AND S ALES OF THOSE GOODS AND AS SUCH, THE ASSESSEES COMPENSATION MODE L DOES NOT CAPTURE THE REALITY OF THE FAR; THAT THE TPO, AFTER CONSIDERING THE FAR ANALYSIS OF THE ASSESSEE AND VARIOUS OTHER FACT ORS AS TO THE DEVELOPMENT AND USE OF INTANGIBLES AND LOCATIONAL S AVINGS ENJOYED BY THE ASSESSEE COMPANY AND ITS AE, THE COMPENSATIO N THAT RECEIVED IN A COST PLUS MODEL IS NOT ADEQUATE AND A S SUCH, DOES NOT MEET ARMS LENGTH PRINCIPLE; THAT THE TPO CAME TO T HE CONCLUSION THAT SINCE THE DIFFERENCE OF THE ARMS LENGTH MARGI N AND THE MARGIN SHOWN BY THE ASSESSEE VARIES BY MORE THAN 5% OF THE ALP AND BY COMPUTING ARMS LENGTH MARGIN AT 8.07% AT RS.44,81, 86,231/-, MADE AN ADJUSTMENT OF RS.30,93,42,913/-. ITA NO.6140/DEL./2012 14 18. ON THE OTHER HAND, THE DRP HELD THAT THE ASSESS EE SHOULD HAVE BEEN COMPENSATED AT 5% OF THE COST INCLUDING T HE FOB VALUE OF THE GOODS INSTEAD OF 8.07% AS COMPUTED BY THE TP O ON THE GROUND THAT SINCE COST BASED INCLUDES FOB VALUE, TH E MARGIN MUST INCREASE IN VIEW OF THE DETAILED REASONS RECORDED A ND DIRECTED THE TPO TO RECOMPUTE THE ALP. FOR READY REFERENCE, FIN DINGS RETURNED BY THE LD. DRP ARE REPRODUCED AS UNDER :- 4.2 GROUNDS 2 & 3 ARE CONSIDERED TOGETHER. A) IT IS SEEN THAT THE ASSESSEE COMPANY HAS PROVIDE D SOURCING SUPPORT SERVICES AND IT HAS BENCH MARKED I TS SERVICES AGAINST OTHER SUPPORT COMPANIES TO DEMONSTRATE THAT THE TRANSACTIONS ARE AT ARM'S LENGTH. THE COMPENSATION MODEL OF THE ASSESSEE IS 2.5% ON THE COST OF GOODS SOURCED. ACCO RDINGLY TO ASSESSEE ALL 4 SOURCING SERVICES PROVIDERS WITHIN THE BESTSELLAR GROUP ARE COMPENSATED BASED ON 2.5 % OF THE TOTAL P URCHASES IN THE COUNTRY IN QUESTION.' B) WE HAVE SEEN AND EXAMINED THAT THE FUNCTIONS AND SCOPE OF WORK OF THE ASSESSEE ARE DEFINED IN THE CO OPERATION AGREEMENT WHICH THE TPO HAS REPRODUCED AT PAGE 8 OF ITS ORDER. WE FIND THAT ALL THE CRITICAL FUNCTIONS RELA TED TO THE SERVICES ARE PERFORMED BY THE ASSESSEE. FURTHERMORE THE SCOPE AND SUBSTANCE OF THE AGREEMENT REVEALS THAT NORMAL RISKS AKIN TO THE BUSINESS ARE ALSO UNDERTAKEN BY THE ASSESSEE. I N SUCH A SITUATION, WHILE PERFORMING THE MARGIN ANALYSIS, TH E ASSESSEE SHOULD HAVE TAKEN THE COST OF GOODS IN ITS COST BAS E WHICH IT DID NOT. C) WE HAVE ALSO EXAMINED THE CASE OF THE ASSESSEE I N LIGHT OF THE FUNCTIONS PERFORMED BY IT AND ARE OF THE OPI NION THAT THE ASSESSEE HAS INDEED DEVELOPED UNIQUE INTANGIBLES LI KE SUPPLY CHAIN MANAGEMENT INTANGIBLES AND HUMAN ASSET INTANG IBLES WHICH HAS RESULTED IN HUGE COMMERCIAL AND STRATEGIC ADVANTAGE TO THE AE. TO TAKE THE ARGUMENT FURTHER, THE VALUE ADDITION MADE BY THE ASSESSEE TO THE FOB VALUE OF GOODS REMA INED UNCOMPENSATED DESPITE ITS COMPENSATION MODEL BASED ON THE VALUE OF GOODS. D) THE DRP ALSO EXAMINED THE CONTENTION OF THE ASSE SSEE ALLEGING THAT THE FACTS AND CIRCUMSTANCES OF THE CA SE ARE ITA NO.6140/DEL./2012 15 DISTINGUISHABLE FROM THE CASE OF LI & FUNG. WE HAVE CRITICALLY GONE THROUGH THE SUBMISSIONS MADE BY THE ASSESSEE A T PARA 3.4.26 IN ITS PAPER BOOK. WE DO NOT FIND ANY REMARK ABLE DIFFERENCE IN THE CASES. THE ONLY POINT IN CONTENTI ON IS THAT THE LI & FUNG CASE WAS ON A COST PLUS COMPENSATION AND THE CASE OF THE ASSESSEE HAS BEEN ON A COMMISSION BASIS. HO WEVER, WE HAVE EXAMINED THAT IN BOTH CASES, THE POINT OF EXAM INATION BOILS DOWN TO EXAMINATION OF COMPENSATION AS A PERC ENTAGE OF COST OF GOODS SOURCED SO THE DIFFERENCE IS NOT REAL LY MATERIAL AS THE ASSESSEE HAS POINTED OUT. E) THE NEXT POINT OF CONTENTION IS CHOICE OF COM PA RABLES AND COMPENSATION PERCENTAGE. THE TPO HAS TAKEN A SE T OF TEXTILE MANUFACTURING COMPANIES AND HAS ARRIVED AT A MARGIN OF 8.07% WHICH THE ASSESSEE SHOULD HAVE RECEIVED ON CO STS INCLUDING THE FOB VALUE OF GOODS. WE ARE IN AGREEME NT WITH 'THE TPO THAT THE CHARACTERISTICS OF THE INSTANT CA SE CANNOT PARTAKE THE COMPARABILITY WITH SUPPORT SERVICE COMP ANIES. HOWEVER WE ARE ALSO NOT IN COMPLETE AGREEMENT THAT THE COMPARABILITY SHOULD BE MADE WITH MANUFACTURING COM PANIES. DURING THE COURSE OF DISCUSSIONS WITH THE COUNSELS OF THE ASSESSEE BEFORE US, THEY SUBMITTED THAT THE DENMARK PARENT COMPANY NAMELY BESTSELLER, A/S DENMARK 'KOETSHUIS NIMMERDOR' EARNS 9% ON COST. LOOKING INTO THE FACT THAT THE MOST CRITICAL FUNCTIONS IN THE CHAIN OF BUSINESS IS PERFORMED BY THE INDIAN ENTITY, WE ARE OF THE OPINION THAT THE A SSESSEE SHOULD HAVE BEEN COMPENSATED AT 5% OF COSTS INCLUDING THE FOB VALUE OF GOODS. SINCE NOW COST BASE INCLUDES FOB VALUE, T HE MARGIN MUST INCREASE IN VIEW OF THE SUBMISSION AS QUOTED I N THE EARLIER PARA. THE TPO IS DIRECTED TO RECOMPUTE ALP ACCORDIN GLY. 19. THE TPO ULTIMATELY CONCLUDED THAT THE ASSESSEE COMPANY IS A CONTRACT MANUFACTURING PERFORMING CRITICAL FUNCTI ONS; ASSUMED SIGNIFICANT RISK AND USED BOTH TANGIBLES AND INTANG IBLES DEVELOPED OVER A PERIOD OF TIME; THAT ASSESSEE IS OUT SOURCIN G THE MANUFACTURING PROCESS TO THIRD PARTY AND THAT THE T PO CONSIDERED THE FAR ANALYSIS OF THE ASSESSEE AND ENTIRELY RELIE D UPON THE CASE OF LI AND FUNG INDIA PVT. LTD. (SUPRA). ITA NO.6140/DEL./2012 16 20. IN THE BACKDROP OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE LAW LAID DOWN BY HONBLE JURISDICTIONAL HIG H COURT IN JUDGMENT LI AND FUNG INDIA PVT. LTD. (SUPRA), WE AR E OF THE CONSIDERED VIEW THAT THE TPO/DRP/AO HAVE ERRED IN M AKING ADJUSTMENT OF ALP TO THE ASSESSEES INCOME AT RS.13 ,88,43,318/- FOR THE FOLLOWING REASONS :- (I) THAT FROM THE COOPERATION AGREEMENT DATED 30.04.2004, IT IS APPARENTLY CLEAR THAT THE ASSESSE E COMPANY WORKED UNDER STANDARD CODE OF CONDUCT TO GET THE GOODS MANUFACTURED FOR ITS AE AND THERE IS NO AGREEMENT BETWEEN THE ASSESSEE COMPANY AND MANUFACTURER TO MANUFACTURE THE GOODS FOR ITS AE AN D AS SUCH, THE ASSESSEES ALP IS REQUIRED TO BE DETERMINED ON ITS OWN COST AND NOT AT THE COST OF I TS AE; (II) THAT THE ROLE OF ASSESSEE COMPANY IS THAT OF A MERE FACILITATOR, IT DOES NOT TAKE TITLE OR POSSESSION O F THE GOODS AND BEARS NO PRICE RISK, INVENTORY RISK AND WARRANTY RISK, NOR DOES IT TAKE CREDIT RISK BY EMPLOYING CAPITAL, SO IT CANNOT BE COMPARED WITH MANUFACTURER; ITA NO.6140/DEL./2012 17 (III) THAT THE FINDINGS RETURNED BY THE TPO THAT THE ASSE SSEE COMPANY IS A CONTRACT MANUFACTURER HAVE ALREADY BEE N UPSET BY THE DRP AND AS SUCH, THERE IS NO NEED TO G O INTO THE DETAILS OF THIS ISSUE; (IV) THAT THE DRP IN AGREEMENT WITH TPO ALSO REJECTED TH E COMPARABLES SELECTED BY THE ASSESSEE COMPANY ON THE GROUND THAT THE ASSESSEE COMPANY CANNOT BE COMPARED WITH SPORT SERVICE COMPANIES; (V) THAT AT THE SAME TIME, THE DRP ALSO SET ASIDE THE COMPARABLES SELECTED BY THE TPO TO DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION WITH MANUFACTURING COMPANY; (VI) THAT WHEN THE TP STUDY ADOPTED BY THE ASSESSEE COMPANY HAS BEEN REJECTED BY THE TPO AND AT THE SAME TIME, COMPARABLES CHOSEN BY THE TPO HAVE BEEN REJECTED BY THE DRP, WE ARE OF THE CONSIDERED VIEW THAT TP ADJUSTMENT IN THIS CASE CANNOT BE MADE EXCE PT BY RESORTING TO THE FRESH TP STUDY CHOSEN BY THE ASSESSEE COMPANY AND EXAMINED BY THE TPO BY PROVIDING OPPORTUNITY OF BEING HEARD TO THE PARTY; (VII) THAT FROM THE SCHEDULE SHOWING ROLE AND RESPONSIBIL ITY OF ASSESSEE COMPANY QUA FY 2007-08, LYING AT PAGE ITA NO.6140/DEL./2012 18 245 OF THE PAPER BOOK, IT IS APPARENTLY CLEAR THAT THE ASSESSEE COMPANY IS HAVING 11 EMPLOYEES ONLY WITH TOTAL EXPENDITURE OF RS.29,78,340/- AND AS SUCH, TH E COST OF THE ASSESSEE COMPANY IS TOTALLY CAPTURED. IN THESE CIRCUMSTANCES, ASSESSEE COMPANYS ALP IS TO B E DETERMINED ON ITS OWN COST AND NOT ON THE FOB VALUE OF EXPORT PLUS VALUE ADDED EXPENSES (VAE) AS HAS BEEN HELD BY THE TPO/DRP; (VIII) THAT THE TPO/DRP HAS BROADLY RETURNED THE FINDINGS THAT THE ASSESSEE COMPANY IS PERFORMING CRITICAL FUNCTION HAVING SIGNIFICANT RISK AND AE IS ALSO ENJOYING LOCATIONAL ADVANTAGES OF THE ASSESSEE COMPANY BUY HAS NOT GIVEN ANY ANALYSIS BY COMPUTING THE ENTIRE GROSS PROFITS AS WELL AS OPERATIVE COST; (IX) THAT THE CONTENTION OF THE LD. DR THAT THE ASSESSEE COMPANIES HAS BEEN OPERATING ON THE BASIS OF DARLIN G AGREEMENT TO AVOID THE ACCURATE ALP OF THE INTERNATIONAL TRANSACTIONS DESPITE THE FACT THAT TH E ASSESSEE COMPANY IS BEARING ALL THE RISKS, IS NOT SUSTAINABLE BECAUSE ASSESSEE COMPANY HAS NOT ENTERE D TO ANY AGREEMENT WITH THE MANUFACTURER, THUS HAVE N O ITA NO.6140/DEL./2012 19 ACCOUNTABILITY, AND AS SUCH, THE QUESTION OF BEARIN G RISK DOES NOT ARISE; (X) THAT THE AES ENTERED INTO AN AGREEMENT WITH THE MANUFACTURER ON ITS OWN AND THE ROLE OF THE ASSESSE E COMPANY IS JUST TO PERFORM THE LIAISON WORK TO ENSU RE THAT THE QUANTITIES, QUALITIES AND COLOURS ARE IN ACCORDANCE WITH THE ORDER PLACED BY ITS AES; (XI) THAT THE ASSESSEE COMPANY IS ALSO TO FOLLOW UP THE ORDERS PLACED BY ITS AES TOWARDS MANUFACTURER AND T O ENSURE THE QUALITY CONTROL AND THAT THE PRODUCT IS DELIVERED AS PER THE ORDER PLACED; (XII) THAT WHEN THE ASSESSEE COMPANY IS NOT HAVING ANY MACHINERY OR TECHNICAL WORK FORCE, IT HAS BEEN RIGH TLY TREATED BY THE DRP NOT AS A MANUFACTURER; (XIII) THAT THE DRP VIDE IMPUGNED ORDER HAS SAILED IN TWO BOATS (A) THAT THE ASSESSEE COMPANY IS NOT A MANUFACTURER; AND (B) THAT THE ASSESSEE COMPANY CANNOT BE COMPARED WITH THE SPORT SERVICES COMPANIE S BUT HAS FAILED TO PINPOINT THE ACTUAL FUNCTIONAL PR OFILE OF THE ASSESSEE COMPANY TO ARRIVE AT THE LOGICAL CONCLUSION TO DETERMINE THE ALP OF THE INTERNATIONA L TRANSACTION; ITA NO.6140/DEL./2012 20 (XIV) THAT WHEN THE ASSESSEE COMPANY IS NOT HAVING ANY PLANT AND MACHINERY NOR IT HAS INCURRED ANY EXPENSE S UNDER THE HEAD MACHINERY EXPENSES NOR PURCHASED ANY RAW MATERIAL AND ALL THESE FUNCTIONS HAVE BEEN INDEPENDENTLY DONE BY MANUFACTURER ENGAGED BY THE AE, THE ASSESSEE COMPANY CANNOT BE KEPT IN THE CATEGORY OF MANUFACTURER; (XV) THAT MERELY ON THE BASIS OF FAR ANALYSIS AND BROAD BASED FINDINGS THAT THE ASSESSEE COMPANY USED TANGIBLES AND INTANGIBLES DEVELOPED OVER THE YEARS AND THE LOCATIONAL SAVINGS ENJOYED BY THE ASSESSEE COMPANY AND ITS AE, IT CANNOT BE HELD THAT THE COMPENSATION THAT THE ASSESSEE RECEIVES IN A COST P LUS MODEL IS NOT ADEQUATE AND DOES NOT MEET THE ARMS LENGTH PRINCIPLE, BY RELYING UPON THE CASE OF LI AN D FUNG INDIA PVT. LTD. WHICH HAS BEEN OVERRULED BY TH E HONBLE JURISDICTIONAL HIGH COURT AS DISCUSSED IN T HE PRECEDING PARAGRAPHS; (XVI) THAT A BARE SCRUTINY OF THE FUNCTIONS OF THE ASSESS EE COMPANY AS ENUMERATED IN THE COOPERATION AGREEMENT SHOWS THAT IT IS TO PERFORM AS A COORDINATOR, FOLLO W UP, QUALITY CONTROL, ENSURED DELIVERY OF GOODS, AND TO ITA NO.6140/DEL./2012 21 PERFORM THE LIAISON WORK BETWEEN THE AE AND LOCAL VENDOR AND HAS BEEN RUNNING ITS BUSINESS WITH 11 EMPLOYEES HAVING EXPENDITURE OF RS.29,78,340/- PER ANNUM AND IN THESE CIRCUMSTANCES, THE ALP OF ITS INTERNATIONAL TRANSACTION IS REQUIRED TO BE DETERMI NED BY SELECTING PROPER COMPARABLES BY THE TPO; (XVII) THAT THE TPO HAS DETERMINED THE ARMS LENGTH MARGIN AT 8.07% ON THE BASIS OF COMPARABLES CHOSEN BY HIM, WHICH ARE FULL-FLEDGED MANUFACTURER HAVING 8.07% OF OP/OC AND THIS FINDING OF THE TPO HAS BEEN QUASHED BY THE DRP BUT AT THE SAME TIME, DRP PROCEEDED TO DETERMINE THE ALP ON THE BASIS OF HYPOTHETICAL FIGU RE OF 5% WHICH IS ALSO NOT SUSTAINABLE IN THE EYES OF LAW; (XVIII) THAT ASSESSEE COMPANY IN ITS TP STUDY CHOSEN 8 COMPARABLE COMPANIES WHO ARE SUPPORT SERVICE PROVIDER AND THEIR WEIGHTED AVERAGE OF 3 YEARS MARG IN IS 12.72% AS AGAINST OP/TC OF ASSESSEE COMPANY AT 437%; (XIX) THAT TPO REJECTED THE TP STUDY OF THE ASSESSEE PRIMARILY ON THE GROUNDS INTER ALIA THAT THE ASSESS EE HAD USED MULTIYEAR DATA VIS--VIS CURRENT YEAR DATA ; THAT ASSESSEE COMPANY IS NOT A SERVICE PROVIDER; ITA NO.6140/DEL./2012 22 (XX) THAT AS DISCUSSED IN THE PRECEDING PARA, ASSESSEE COMPANY IS PROVED TO BE A SUPPORT SERVICE PROVIDER AND SO FAR AS 2 ND OBJECTION AS RAISED BY TPO IS CONCERNED SINCE THE OP/TC OF ASSESSEE COMPANY AT 437% IS MUCH HIGHER THAN 12.72% OF COMPARABLE COMPANIES AND IN CASE IT IS COMPUTED ON THE BASIS OF SINGLE YEAR DATA, IT IS FAR BEHIND THE OP/TC OF THE ASSESSEE COMPANY; (XXI) THAT IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE CONSIDERED VIEW THAT AS THE BASIS OF TP STUDY ADOPT ED BY THE ASSESSEE COMPANY, ITS INTERNATIONAL TRANSACT IONS ARE AT ARMS LENGTH PRICES. 21. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, GROUN DS NO.2, 3 & 4 ARE DETERMINED IN FAVOUR OF THE ASSESSEE. GROUND NO.5 22. THE ASSESSEE COMPANY DURING THE YEAR UNDER CONS IDERATION HAS CLAIMED EXEMPTION UNDER SECTION 10 (34) OF THE ACT ON THE DIVIDEND INCOME OF RS.10,65,515/-. THE ASSESSEE CO MPANY ON ITS OWN HAS DISALLOWED 10% OF THE EXEMPTED INCOME EARNE D DURING THE YEAR BY STATING THAT PROVISIONS CONTAINED UNDER RULE 8D ARE NOT APPLICABLE. ITA NO.6140/DEL./2012 23 23. HOWEVER, THE AO CAME TO THE CONCLUSION THAT FRO M THE DETAILS FILED, IT COULD NOT BE ASCERTAINED WHETHER THE INVESTMENT MADE IS FROM OUT OF ITS OWN FUNDS OR BORROWED FUNDS NOR THE ASSESSEE HAS SHOWN ANY EXPENSES INCURRED ON ACCOUNT OF INTEREST PAYMENTS IN THE PROFIT & LOSS ACCOUNT AND AS SUCH, IT IS DIFFICULT TO COMPUTE THE EXPENSES INCURRED IN RELATION TO EARN E XEMPT INCOME. SO, THE AO COMPUTED THE DISALLOWANCE UNDER RULE 8D OF THE INCOME-TAX RULES, 1963 AND DETERMINED THE AMOUNT TO RS.2,03,725/- ON ACCOUNT OF DISALLOWANCE UNDER SECT ION 14A OF THE ACT. 24. THE AO COMPUTED THE CORRECT AMOUNTS OF DISALLOW ANCE U/S 14A AS PER PROCEDURE LAID DOWN UNDER RULE 8D OF THE INCOME-TAX RULES, 1962 AS UNDER :- 4.7 ACCORDINGLY, THE DISALLOWANCE IS WORKED OUT AS PER THE PROVISIONS OF RULE 8D (2) AS UNDER :- (I) AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME NIL (II) A AMOUNT OF INTEREST BY WHICH IS NOT DIRECTING ATTRIBUTABLE TO ANY PARTICULAR INCOME/ RECEIPT I.E. OTHER INTEREST NIL B AVERAGE VALUE OF INVESTMENT RELATED TO EXEMPT INCOME (AS SUBMITTED BY ASSESSEE) - OPENING BALANCE OF INVESTMENTS - CLOSING BALANCE OF 25132247 60619687 ITA NO.6140/DEL./2012 24 INVESTMENTS - AVERAGE VALUE OF ABOVE INVESTMENT 42875967 C AVERAGE OF TOTAL ASSETS - OPENING BALANCE OF ASSETS - CLOSING BALANCE OF ASSETS - AVERAGE VALUE OF ABOVE ASSETS 486717610 572928624 529823117 A X B / C = NIL X 42875967 529823117 NIL (III) AVERAGE VALUE OF INVEST MENT (AS SUBMITTED BY ASSESSEE) - OPENING BALANCE OF INVESTMENTS - CLOSING BALANCE OF INVESTMENTS - AVERAGE VALUE OF ABOVE INVESTMENT - % OF AVERAGE VALUE OF INVESTMENT OF RS.42875967 25132247 60619687 42875967 214380 DISALLOWANCE U/S 14A OF THE ACT I.E. AGGREGATE OF (I), (II) AND (III) 214380 25. KEEPING IN VIEW THE MATERIAL AVAILABLE ON RECOR D PERUSED AND EXTENSIVELY DISCUSSED BY THE AO, WE ARE OF THE CONSIDERED VIEW THAT THE AO HAS MADE THE DISALLOWANCE IN ACCOR DANCE WITH THE PROVISIONS OF RULE 8D (2) OF THE INCOME-TAX RULES, 1962 WHICH IS REASONABLE AND AS SUCH, NO GROUND IS MADE OUT TO IN TERFERE INTO THE FINDINGS RETURNED BY THE AO. CONSEQUENTLY, GROUND NO.5 IS DETERMINED AGAINST THE ASSESSEE. ITA NO.6140/DEL./2012 25 26. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE P RESENT APPEAL FILED BY THE ASSESSEE IS HEREBY PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 25 TH DAY OF APRIL, 2016. SD/- SD/- (R.S. SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 25 TH DAY OF APRIL, 2016 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.