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

ITA 692/DEL/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9982 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 07-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES
• Assessee Lawyers: RAHUL K MITRA
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I , NEW DELHI BEFORE SH. N. K. SAINI , AM AND SH. I. C. SUDHIR , JM ITA NO. 692/D EL/2014 : ASSTT. YEAR : 2009 - 10 GAP INTERNATIONAL SO URCING (INDIA) PVT. LTD., UNIT NO. 201, DLF SOUTH COURT, DISTRICT CENTRE, SAKET, NEW DELHI - 110019 VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 12(1), NEW DELHI (APPELLANT) (RESPONDENT) PAN NO. AACCG3437E ASSESSEE BY : MR . RAHUL K. MITRA, CA REVENUE BY : SH . JUDY JAMES, STANDING COUNSEL DATE OF HEARING : 16 . 03 .2015 DATE O F PRONOUNCEMENT : 08 .04 .2015 ORDER PER N.K . SAINI , A.M. THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 31.12.2012 , NEW DELHI. 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: 1. THE HON BLE DISPUTE RESOLUTION PANEL ( HON BEL DRP ) AND THE LEARNED DEPUTY COMMISSIONER OF INCOME - TAX ( LD. AO ) (FOLLOWING THE DIRECTIONS OF THE HON BLE DRP), ERRED ON FACTS AND IN LAW BY HOLDING TH AT THE INTERNATIONAL TRANSACTION OF PROVISION OF SOURCING SUPPORT SERVICES TO ASSOCIATED ENTERPRISES ( AES ) UNDERTAKEN BY THE APPELLATE DOES NOT SATISFY THE ARM S LENGTH PRINCIPLE ENVISAGED UNDER THE INCOME - TAX ACT 1961 ( THE ACT ). IN DOING SO, THE ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 2 HON B E DRP AND CONSEQUENTLY THE LD. AO (FOLLOWING THE DIRECTIONS OF THE HON BLE DRP) HAVE GROSSLY ERRED IN ENHANCING THE INCOME OF THE APPELLANT BY RS. 186,68,46,190/ - ON ACCOUNT OF THE TRANSFER PRICING ( TP ) ADJUSTMENT U/S 92CA(3) OF THE ACT MADE BY THE LD. T PO BY; 1.1 IGNORING THE DECISION OF HON BLE INCOME TAX APPELLATE 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) AND AY 2008 - 09 (ITA 55/DEL/2013) BY REJECTING THE COST PLUS COMPENSATION MODEL OF THE APPELLANT; 1.2 DISREGARDING THE FACT THAT HON BLE ITAT HAS ACCEPTED THE FUNCTIONAL, ASSET AND RISK PROFILE ( FAR ) OF THE APPELLANT TO BE THAT OF A LOW RISK PROCUREMENT SUPPORT SERVICE PROVIDER AND THEREBY IGNORING THAT TH E APPELLANT NEITHER CREATES SUPPLY CHAIN OR HUMAN INTANGIBLES NOR BEAR ANY SIGNIFICANT RISKS WITH RESPECT TO ITS BUSINESS OPERATIONS; AND 1.3 IGNORING THE FACT THAT HON BLE ITAT HAS BLESSED THE BUSINESS MODEL OF THE APPELLANT BY ACCEPTING THE APPLICATION OF COST PLUS REMUNERATION MODEL FOLLOWED BY IT. 2. THE HON BLE DRP AND CONSEQUENTLY THE LD. AO (FOLLOWING THE DIRECTIONS OF THE HON BLE DRP), ERRED ON FACTS AND IN LAW IN UPHOLDING THE LD. TPO S APPROACH OF DISREGARDING THE BENCHMARKING APPROACH ADOPTED BY THE APPELL A NT OF SELECTING COMPANIES ENGAGED IN PROVIDING MARKETING SUPPORT/LOW END TECHNICAL SUPPORT SERVICES IN ITS TP DOCUMENTATION REPORT FOR THE YEAR TO SUBSTANTIATE THE ARM S LENGTH NATURE OF ITS INTERNATIONAL TRANSACTIONS. ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 3 3. THE HON BLE DRP AND CON SEQUENTLY THE LD. AO (FOLLOWING THE DIRECTIONS OF THE HON BLE DRP), ERRED ON FACTS AND IN LAW IN UPHOLDING THE LD. TPO S APPROACH OF INCLUDING THE VALUE OF THE GOODS SOURCED DIRECTLY BY THE AES OF THE APPELLANT FORM 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 INTANGIBLES IN INDIA AND GENERATED LOCATION SAVINGS IN INDIA WHICH HAVE NOT BEEN FACTORED IN ITS PREVAILING/CURRENT REMUNERATION MODEL. 4. THE HON BLE DRP AND CONSEQUENTLY THE LD. AO (FOLLOWING THE DIRECTIONS OF THE HON BLE DRP), ERRED ON FACTS AND IN LAW IN DISREGARDING THE DETAILED SUBMISSIONS AND EXTENSIVE ANALYSIS TO DEMONSTRATE THAT APPELLANT IS OPERATING ON A GUARANTEED PROFIT MARGIN OF 15% ON ITS OPERATING COST AND THE APPELLANT DOES NOT PROCURE CONTRACTS FROM THE THIRD PARTY VENDORS OR PERFORM AND 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 ONLY WITH A REFERENCE TO THE VALUE OF GOODS SOURCED BY THE AES FORM THE THIRD PARTY VENDORS. 5. THE HON BLE DRP AND CONSEQUENTLY THE LD. AO (FOLLOWING THE DIRECTIONS OF THE HO N BLE DRP), ERRED ON FACTS AND IN LAW IN UPHOLDING THE LD. TPO S STANCE OF REJECTING THE APPELLANT S RELIANCE ON RELEVANT INTERNATIONAL JUDICIAL PRECEDENTS ON ABSOLUTELY IRRELEVANT, INCONSISTENT AND EXTRANEOUS REASONS. 6. WITHOUT PREJUDICE TO THE ABOVE, T HE APPELLANT HUMBLY SUBMITS THAT JUDGMENT PRONOUNCED BY HON BLE DELHI ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 4 TRIBUNAL IN CASE OF LI & FUNG INDIA PVT. LTD. (LI & FUNG), WHICH WAS HEAVILY RELIED BY THE REVENUE IN APPELLANT S CASE OF HON BLE TRIBUNAL FOR EARLIER YEARS FOR THE PROPOSITION THAT A CO MMISSION BASED FORM OF REMUNERATION MODEL WAS TO BE APPLIED EVEN IN THE CASE OF THE APPELLANT HAS BEEN REVERSED BY DELHI HIGH COURT (DELHI HC) RECENTLY. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO ERRED IN INITIATING PENALTY P ROCEEDINGS UNDER SECTION 271(1)(C) READ WITH SECTION 274 OF THE ACT. THAT THE ABOVE GROUNDS OF APPEAL ARE WITHOUT PREJUDICE TO EACH OTHER. THAT THE A PPELLANT RESERVES ITS RIGHT TO ADD, LATER, AMEND OR WITHDRAW ANY GROUNDS OF APPEAL EITHER BEFORE OR AT T HE TIME OF HEARING OF THE APPEAL. 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRANSPORTATION OF TIME SENSITIVE PACKAGES, DOCUMENTS AND CARGO TO DOMESTIC AND INTERNATIONAL DESTINATIONS. THE ASSESSEE FILED ITS RETURN O F INCOME ON 29.09.2009 DECLARING AN INCOME OF RS. 8,24,64,443/ - . LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSEE OPERATES AS A PROCUREMENT SUPPORT SERVICES COM PANY FOR ITS FOREIGN A SSOCIATE D ENTERPRISES (AE) I.E. GAP US , UNDER A MODEL OF REIMBUR SEMENT OF THE OPERATING COST PLUS A MARKUP OF 15%. THE TPO CHALLENGED THE COST PLUS MODEL ADOPTED BY THE ASSESSEE IN THE EARLIER YEARS AND ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 5 MADE THE TP ADJUSTMENTS . I N THE YEAR UNDER CONSIDERATION ALSO , T HE AO HAD ADOPTED A SIMILAR COMMISSION BASED MODEL AS IN EARLIER YEARS AND ADOPTED A COMMISSION OF 3.82% ON THE VALUE OF GOODS PROCURED BY THE GAP US DIRECTLY FROM THIRD PARTY VENDORS FROM INDIA. THE TPO MADE AN ADJUSTMENT OF RS. 186,68,46,190/ - AS SHORTFALL U/S 92CA OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) WHICH WAS ARRIVED AT AFTER MAKING CUMULATIVE ADJUSTMENTS. THEREAFTER THE AO PASSED THE DRAFT ORDER U/S 144C OF THE ACT ON 27.02.2013 AND THE ASSESSEE WENT BEFORE THE DRP WHO GAVE CERTAIN DIRECTION VIDE ORDER DATED 20.12.2013. THE DR P ACCEPTED THAT THE ITAT HAD ACKNOWLEDGED THE FACT THAT THE ASSESSEE S RO LES , FUNCTIONS AND ACTIVITIES DI D NOT LEAD TO CREATION OF ANY HUMAN INTANGIBLES AND SUPPLY CHANGE INTANGIBLE. THE DRP ALSO ACCEPTED THIS CONTENTION OF THE ASSESSEE THAT THE CASE IS SQ UARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT FOR EARLIER YEARS AND MENTIONED THAT IF THE TAX DEPARTMENT ACCEPTED THE ORDER OF THE TRIBUNAL THEN THE ASSESS MENTS NEEDS TO BE FRAMED AS PER GUIDELINES GIVEN BY THE TRIBUNAL. HOWEVER, THE AO PROCEEDED TO CONFIRM THE ADJUSTMENT OF RS. 186.86 CRORES AND FRAMED THE ASSESSMENT AT AN INCOME OF RS. 194,93,10,630/ - . ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 6 4. NOW THE ASSESSEE IS IN APPEAL. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ORDER OF THE ITAT IN THE CASE OF LI & FU NG INDIA WITH REFEREN CE TO WHICH THE TPO AND DRP HAD APPLIED A COMMISSION BASED REMUNERATION MODEL IN ASSESSEE S CASE FOR THE EARLIER YEARS HAD RECENTLY BEEN OVERRULED BY THE HON BLE DELHI HIGH COURT VIDE ORDER DATED 16.12.2013 , A REFERENCE WAS MADE TO PAG E NO. 139 TO 179 OF THE ASSESSEE S PAPER BOOK WHICH IS THE COPY OF THE SAID ORDER. IT WAS FURTHER STATED THAT THE HON BLE HIGH COURT HAD APPROVED THE REMUNERATION MODEL OF MARKUP OF 5% AND THE OPERATION COST OF LI & FUNG INDIA , WITHOUT CONSIDERING THE VALU E OF GOODS PROCURED BY THE FOREIGN AE OF LI & FUNG INDIA , DIRECTLY FROM THIRD PARTY VENDORS IN INDIA. IT WAS ALSO STATED THAT AS OPPOSED TO A MARKUP OF 5% OF OPERATION AL COST S, AS BLESSED BY HON BLE DELHI HIGH COURT IN THE CASE OF LI & FUNG INDIA (SUPRA) , T HE ASSESSEE OPERATES ON A MARKUP OF 15% OF OPERATIONAL COST S, WHICH IS ANYWAY MORE CONSERVATIVE. IT WAS CONTENDED THAT THE MARKUP OF 32% AS ADOPTED BY THE ITAT IS ASSESSEE S OWN CASE IN THE EARLIER ASSESSMENT YEARS, BEING THE DERIVED MARKUP ON OPERATIONAL COST S EVEN WITH REFERENCE TO COMMISSIO N BASE MODEL WHICH WAS APPROVED BY THE ITAT IN THE CASE OF LI & FUNG INDIA, WHICH WAS PREVALENT AT THE ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 7 MATERIAL TIME, NAMELY, PRIOR TO ITS DILUTION BY THE HON BLE DELHI HIGH COURT ON 16.12.2013, THUS, ALSO STANDS DILU TED AS OF TODAY. THEREFORE, THE MARKUP ON OPERATIONAL COST S AS ADOPTED BY THE ASSESSEE, NAMELY, 15% REMAINS UNCONTROVERTED F OR THE CURRENT ASSESSMENT YEAR. IT WAS ACCORDINGLY SUBMITTED THAT THE TP ADJUSTMENT OF RS. 186.86 CRORES HAD NO LEGS TO STAND AND IS LIABLE TO BE STRUCK DOWN. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE HAS PROVIDED THE FOLLOWING ALTERNATIVE COMPARABLE SETS TO DEMONSTRATE THE TENTATIVE OPERATING PROFIT/TOTAL COST RATIO FOR THE ASSESSMENT YEAR UNDER CONSIDERATIO N : PARTICUL A RS OP/TC OR OP/VAE* (2008 - 09 COMPANIES ENGAGED IN MARKETING SUPPORT AND LOW END TECHNICAL SUPPORT SERVICES (REFER TP STUDY ON PAGE 67 OF THE MERIT APPEAL PAPER BOOK) 11.62% COMPANIES ENGAGED IN DISTRIBUTION WHICH ARE SELECTED BY THE TPO IN HIS ORDER FOR AY 2009 - 10 11.86% 12.01% *FOR SERVICE PROVIDER TOTAL COST AND VALUE ADDED EXPENSES ARE SAME. 5 . IT WAS ACCORDINGLY SUBMITTED THAT THE MAXIMUM MARKUP WHICH CAN BE ATTRIBUTED TO THE ASSES SEE CAN IN NO CASE EXCEED 12% AND S INCE THE ASSE SSEE WAS ALREADY ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 8 EARNING A MARKUP OF 15%, THERE EXIST ED NO CASE FOR ADJUSTMENT. 6 . IN HIS RIVAL SUBMISSIONS THE LD. DR ALTHOUGH SUPPORTED THE ORDER OF THE AO BUT COULD NOT CONTROVERT THE AFORESAID CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE. 7 . WE HAV E CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IT WAS NOTICED THAT ON A SIMILAR ISSUE THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF LI & FUNG INDIA PVT. LTD. VS CIT IN ITA 306/2012 V IDE ORDER DATED 16.12.2013 OBSERVED AS UNDER: 49. THIS COURT SUMMARIZES ITS CONCLUSIONS AS FOLLOWS: (A) THE BOARD BASING OF THE PROFIT DETERMINING DENOMINATOR 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 THE AE ENJOYS SUCH LOCATIONAL ADVANTAGES, AS TO WARRANT REJECTION OF THE TRANSFER PRICING EXE RCISE UNDERTAKEN BY LFIL; ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 9 (C) TAX AUTHORITIES SHOULD BASE THEIR CONCLUSIONS ON 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 S UCH FINDINGS ARE WARRANTED, THEY SHOULD BE SUPPORTED BY DEMONSTRABLE REASON, BASED ON OBJECTIVE FACTS AND THE RELATIVE EVALUATION OF THEIR WEIGHT AND SIGNIFICANCE. (D) WHERE ALL ELEMENTS OF A PROPER TNMM ARE DETAILED AND DISCLOSED IN THE ASSESSEE S REPORTS, C ARE SHOULD BE TAKEN BY THE TAX ADMINISTRATORS AND AUTHORITIES TO ANALYZE THEM 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 ARM S LENGTH PRICE USING THE TNMM IS WITHOUT FOUNDATION AND LIABLE 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 ACCORDINGLY SET ASIDE. THE QUESTIONS OF LAW FRAMED ARE ANSWERED IN FAVOUR OF THE ASSESSEE, AND AGAINST THE REVENUE. THE APPEAL IS ALLOWED IN THE ABOVE TERMS. ITA NO. 692 /DE L/2014 GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD. 10 8 . IN THE PRESENT CASE SINCE THE ASSESS EE IS ALREADY EARNING A MARKUP OF 15% WHICH IS MORE THAN THE 5% MARKUP IN THE CA SE OF LI & FUND INDIA (SUPRA), T HEREFORE, MARKUP OF 15% ON OPERATIONAL COSTS IN ASSESSEE S CASE IS MORE CONSERVATIVE . A S SUCH NO TP ADJUSTMENT IS REQUIRED IN ASSESSEE S CASE. 9 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . ( ORDER PRON OUNCED IN THE COURT ON 08 /04 / 2015) . SD/ - SD/ - (I. C. SUDHIR) ( N. K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 08 /04 /2015 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR