LI & FUNG INDIA PVT. LTD. V. ASST. COMMISSIONER OF INCOME TAX & ANR.

W.P.(C)/11596/2016

AI Insights

Li & Fung India Pvt. Ltd. challenged a show cause notice issued by the Assistant Commissioner of Income Tax, which sought to re-evaluate the comparables used in determining the Arm's Length Price (ALP) for transfer pricing. The petitioner argued that the notice exceeded the scope of the remand by the Income Tax Appellate Tribunal (ITAT), which had only directed a fresh determination of the ALP based on the correct cost base. The Revenue contended that the ITAT's directions allowed for a re-examination of the comparables. The court found that the Revenue's actions were not supported by the ITAT's order and that the comparables initially used were appropriate, as there was no functional or financial basis to exclude them.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 687193 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 08-03-2017
• Assessment Year: misc
• Other Referred Cases: Li and Fung v Commissioner of Income Tax 361 ITR 85
• Laws Referred To: Income Tax Act, Income Tax Rules
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: RUCHIR BHATIA; PUNEET RAI
• Assessee Lawyers: PORUS KAKA; NEERAJ JAIN; MANISH KANT
• Keywords: Arms' length price; Comparable entities; Income Tax; Show cause notice; Transfer pricing
• Section: 10B(4); 92A(2)(a)

Judgement Text

" W.P.(C)11596/2016 Page 1of 13 $~ * IN THE HIGH COURT OF DELHI AT NEW DELHI % DECIDED ON: 08.03.2017 + W.P. (C) 11596/2016, CM APPL.45660-61/2016 LI & FUNG INDIA PVT. LTD. ..... Appellants Through: Mr. Porus Kaka, Sr. Advocate with Mr. Neeraj Jain and Mr. Manish Kant, Advocates. Versus ASSTT. COMMISSIONER OF INCOME TAX & ANR. ..... Respondents Through: Mr. Ruchir Bhatia with Mr. Puneet Rai, Advocates. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE NAJMI WAZIRI S.RAVINDRA BHAT, J. 1. The petitioner is aggrieved by a show cause notice issued by the respondents (hereafter called “the Revenue”) and argues that it is beyond the scope of the remit by the Income Tax Appellate Tribunal (ITAT) and that the respondents are seeking to re-open issues that have attained finality in judicial orders. 2. The Petitioner-company is engaged in the business of providing support services for sourcing of garments, handicrafts, leather products, etc. to its associated enterprises. It charges a markup of 5% on its total cost in consideration for provision of sourcing support services to the associated enterprises (\"AE\"). For AY 2007-08 the Transfer Pricing Officer (\"TPO\") accepted the application of the Transactional Net Margin method W.P.(C)11596/2016 Page 2of 13 (\"TNMM\") to benchmark the petitioner’s international transactions. By order dated 18 October, 2010, the benchmarking methodology by adoption of comparables was accepted by the TPO, who however concluded that the petitioner was a trader and substituted its cost base from total costs to the FOB value of the goods exported to the third party customers. The DRP approved the order of the TPO in changing the cost base of the petitioner. However, the DRP restricted the mark up to 4% of the FOB value of goods. 3. The petitioner had appealed to the ITAT, which remanded the matter (by the order dated 5 March, 2014) to the TPO with a direction to undertake fresh determination of arm’s length price on the basis of correct cost base of the Petitioner in line with the judgment of this Court in the Petitioner’s case for assessment year 2006-07. The ITAT’s operative order is as follows: “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 40/0 by the DRP is concerned, we find that the same would become irrelevant because the base being, the 'total cost' in the denominator will stand changed to the 'total cost' incurred by the assessee instead of the FOB value of goods between third party enterprises. Since, necessary details for the determination of ALP with the correct base of the assessee 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 the assessee in line with the above judgment of the Hon'ble Jurisdictional High Court in the assessee's own case.” 4. The impugned show cause notice, the Revenue facially rejected the data relating to comparable concerns and stated as follows: W.P.(C)11596/2016 Page 3of 13 “this office has conducted a fresh search on the Prowess database regarding Provision of Business Support Services. After a careful study, following filters were applied by this office which may lead towards selecting proper comparables which are functionally similar to the tested party. These filters and the rationale for applying these filters is as follows: - • Companies whose data is not available/or the FY 2006-07 are excluded. As per the Rule 10B (4), it is mandatory to use the current year data i.e. the data for the FY 2006-07. The proviso to Rule 10B(4) says that data for earlier two year can also be used if it is shown that such earlier year's data had an influence in determining the transfer price. Further, the use of earlier year data in addition to the current year data can be resorted to provided certain conditions are satisfied, which is not applicable in the instant case. This view is upheld by various ITAT decisions. Hence companies, for whom data for FY 2006-07 is not available, are excluded. • Companies whose Business Support Services Income