PR. COMMISSIONER OF INCOME TAX-4, DELHI V. ITOCHU INDIA PRIVATE LTD.

ITA/1111/2018

AI Insights

The case involves three appeals by the Revenue against the orders of the ITAT for the Assessment Years 2009-10, 2007-08, and 2008-09, concerning the determination of the arms length price (ALP) of international transactions by ITOCHU India Private Ltd., a wholly owned subsidiary of Itochu Corporation of Japan. The main legal issue was whether the TPO's method of calculating ALP by adding a 5% mark-up on the FOB value of exports was correct. The High Court referenced its earlier decision in Li & Fung India Pvt. Ltd. v. Commissioner of Income Tax, which set a precedent against such an approach. The ITAT had followed this precedent in its decision, which was upheld by the High Court.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 728283 (HC-DELHI)
• Appeal Type: Others
• Pronouncement Date: 13-05-2019
• Assessment Year: misc
• Other Referred Cases: Li & Fung India Pvt. Ltd. v. Commissioner of Income Tax, Principal Commissioner of Income Tax v. Mitsui & Co. India Pvt. Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: PIYUSH KAUSHIK
• Assessee Lawyers: ASHEESH JAIN; RUCHIR BHATIA
• Keywords: Arms' length price; International Transactions; Transactional Net Margin Method; Transfer Pricing Officer; Sogo Shosha company
• Section: 10B(1)(e)

Judgement Text

"$-20 to 22 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA1111/2018 PR. COMMISSIONER OF INCOME TAX-4, DELHI Appellant Through; Mr. Asheesh Jain, Senior Standing Counsel for Revenue with Mr. Adarsh Kumar Gupta, Advocate. versus ITOCHU INDIA PRIVATE LTD. Respondent Through: Mr. Piyush Kaushik, Advocate. + ITA 1129/2018 & CM APPL. 42818/2018 (for delay) THE PR. COMMISSIONER OF INCOME TAX -4 Appellant Through: Mr. Ruchir Bhatia, Advocate. versus M/S ITOCHU INDIA (P) LTD. Respondent Through: Mr. Piyush Kaushik, Advocate. + ITA 1130/2018 & CM APPL. 44228/2018 (for delay) THE PR. COMMISSIONER OF INCOME TAX -4 Appellant Through: Mr. Ruchir Bhatia, Advocate. versus M/S ITOCHU INDIA (P) LTD. Respondent Through: Mr. Piyush Kaushik, Advocate. CORAM: JUSTICE S.MURALIDHAR JUSTICE I.S.MEHTA ORDER O/^ 13.05.2019 Page 1 of 4 ITA 1111/2018 & connected matters Signed By:RAM DATT Signing Date:15.10.2024 16:15 Certify that the digital and physical file have been compared and the digital data is as per the physical file and no page is missing. Signature Not Verified 1. These three appeals by the Revenue are directed against the separate orders by the ITAT for Assessment Years (AYs) 2009-10, 2007-08 and 2008-09 respectively. 2. The common issue sought to be urged by the Revenue in all three of these appeals concerns determination of the arms length price (ALP) of the international transactions entered into by the Assessee during the AYs in question. 3. The admitted facts of the Assessee is that it a wholly owned subsidiary of Itochu Corporation of Japan ('ICJ') and is in the business of rendering support services in relation to facilitation and market support to its Associated Enterprises (AEs) in order to facilitate sourcing transactions of its AEs with prospective sellers. The Assessee is known as a 'Sogo Shosha company. 4. The question that arose in Li & Fung India Pvt. Ltd. v. Commissioner of Income Tax (2014) 361 ITR 85 (Del) before this Court was regarding the determination of the ALP in respect of transactions entered into by an Assessee (similarly situated as the Assessee in the present case). IN that context, it was observed by this Court as under: \"This Court is of the opinion that to apply the transactional net margin method, the assessee's net profit margin realized from the international transactions had to be calculated only with reference to the cost incurred by it and not by any other entity either third party vendors or the associated enterprise. Textually, and within the bounds of the text must the Assessing Officer/ Transfer Pricing Officer operates, rule lOB (1) (e) does not enable , Page 2 of 4 ITA 1111/2018 & connected matters consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the transactional net margin method. Rule lOB (1) (e) recognizes that \"the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise \"(emphasis supplied). It thus contemplates a determination of the arm's length price with reference to the relevant factors (costs, assets, sales, etc.) of the enterprise in question, i.e., the assessee, as opposed to the associated enterprise or any third party. The textual mandate, thus, is unambiguously clear.\" 5. In other words in Li <6: Fung India Pvt. Ltd. {supra), this Court set aside the approach of the Transfer Pricing Officer ('TPO') for proposing an additional 5% mark-up on the free on board value of exports to third parties as the same would tantamount to application of Transactional Net Margin Method ('TNMM') in an erroneous manner. 6. The Court is informed that the Revenue's appeal against the above decision for the AY 2006-07 is pending in the Supreme Court. However, there is no stay of the operation of the said judgment. 7. In Principal Commissioner of Income Tax v. Mitsui & Co. India Pvt. Ltd. (2016) 384 ITR 360 (Del), while dealing with another Sogo Shosha Company, this Court followed its earlier decision in Li & Fung India Pvt. Ltd. V. Commissioner of Income Tax {supra) and dismissed the Revenue's appeal against the orders of the ITAT that followed the decision in Li & Fung India Pvt. Ltd. {supra). In the present case as well the ITAT has Page 3 of 4 ITA 1111/2018 & connected matters followed the decision of this Court in Li & Fung India Pvt. Ltd. {supra). 8. What requires to be noticed also is that in relation to this very Assessee for AYs 2011-12, 2012-13 and 2013-14, the Assessee's determination of ALP has been accepted by the Assessing Officer. This fact has been noticed by the ITAT in the impugned order for the AY in question as well. 9. This Court has already held that including the FOB value of the AE's contract in the operating cost in order to determine its margin not to be sustainable in law. The ITAT has rightly held that the TPO has \"artificially enhanced the cost base of the taxpayer and proposed a mark up of the FOB value of goods sourced by AEs and as such this approach is not available in TNMM under Rule 10 B(l) (e).\" Further, the observation of the ITAT that the TPO \"has wrongly recharacterized the business function of the taxpayer from a business support service provider to a trader\" also suffers from no legal infirmity. 10. No substantial question of law arises. The appeals and pending applications are dismissed. EIDHAR, J. M I.S. MEHTA, J. MAY 13, 2019 nd IT A 1111/2018 & connected matters Page 4 of 4 "