TMI Blog2015 (4) TMI 948X X X X Extracts X X X X X X X X Extracts X X X X ..... bservations that the AE’s decisions were taken by the assessee is a general one, unsupported by any independent material; it is anecdotal and based on the TPO’s belief, rather than objective fact based analysis. There was, as a result, no question of its assuming higher risk or using its highly valued intangibles. This court also concurs with the ITAT’s finding that the assessee’s risk was limited and minimal with least capital employed, and that the TPO’s findings that it (the assessee) performed all the crucial functions on behalf of the AEs was not proved. The TPO did not dispute the facts given by the assessee and held without foundation that it undertook all the critical functions of its AEs. This finding was unsubstantiated and generally made; the TPO never elaborated any critical function or decision of the assessee inuring to the AEs except saying that the assessee was engaged in arranging for feasibility studies, industry analysis, and project evaluation for potential projects identified by its AEs. It is quite evident that the TPO based his findings and conclusions on the decision of the ITAT in Li Fung (2011 (9) TMI 204 - ITAT, New Delhi), which was subsequently rever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata. The assessee claimed that its international transactions were at arm's length price (ALP) falling within +/- 5% range. 3. The TPO, by his order noted that the assessee provided some crucial services to its Associates Enterprises (AEs) which formed the basis of sourcing activities carried out by the AEs from or to India. The TPO held that the assessee's functions to its AEs were not only confined to providing marketing support services but also in arranging for feasibility studies, industry analysis and project evaluation for potential projects identified by the AEs. It was held that besides providing agency support and acting in the capacity of liaising agent for various AEs, the assessee helped them to make conscious sale and purchase decisions. The TPO noticed that the assessee made sizeable investments in exploring and analyzing the Indian market. Its contention that it bore limited risk, performing basic functions of agency, were not accepted by the TPO, who held that its functions were critical in assuming significant risk and using both its tangibles and intangibles created over a period of time. It was held that the assessee developed several unique intangibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DRP approved the application of PSM by relying on the decision of the Tribunal in the case of M/s Li Fung (supra). Aggrieved by the addition of ₹ 30.14 crores, the assessee approached the ITAT. 5. By the impugned order, the ITAT noticed that there was no dispute on any international transaction other than that of `Provision of Agency and marketing support services' to the tune of ₹ 32.18 crores. The ITAT noted the supply transactions structure of the assessee s business on the basis of materials on record, given to the TPO by letter dt. 5.10.2011 inter alia, containing a chart. The chart/table showed three types of parties involved in each transaction, viz., Customer/Vendor from India, AEs and the assessee. The assessee acted as a mediator between its AEs and customer/vendor from India. The facts showed that on the one hand, the responsibilities of AEs extended to contracting, pricing, sourcing, scheduling, procuring, inventory management, logistics, marketing, credit management, quality and compliance of global laws etc.; those of the vendors/customer from India extend to contracting, pricing, scheduling, negotiating, inventory etc. On the other hand, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing the user of its highly-valued intangibles to such AEs - are all in air without any bedrock. Further, the conclusion drawn by the authorities in applying the PSM by basing their finding on the strength of the order of the Tribunal in the case of M/s Li Fung (supra) cannot be sustained because of its reversal by the Hon'ble Delhi High Court. Ergo, we set aside the impugned order in making the transfer pricing adjustment of ₹ 30.14 crore. The ITAT lastly concluded that there was no reference to the names of comparables in the TPO's order while working out the alternative, PSM and that the TPO embarked upon the PSM throughout the length and breadth of his order. The alternative approach of TNMM was not given any serious consideration. Even there is no discussion about the comparables chosen by the assessee and how they were acceptable or not. Under such circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the TPO/Assessing Officer for a fresh determination of the ALP of the disputed international transactions of `Provision of Agency and marketing sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that: The assessee has submitted its reply on 05.10.2011 towards the use of Profit Split Method. The main contentions of the assessee is that the key conditions in which profit split method can be applied is when both parties to the transaction are making significant contribution to the transactions, or that the operations of both the parties are highly integrated. The assessee has also quoted from rule 10B (1) (d) and para 2.109 of OECD Transfer Pricing Guidelines. 7.3 The argument of the Assessee is not tenable in view of the fact that the Assessee is creating unique intangibles which have given an advantage to the AE in the form of the low cost of the product, quality of the product and enhanced the profitability of the AE. These intangibles have increased profit potential of the AE though cost for development and use of intangibles was not taken for computations of routine markup earned by the appellant. The reply of the assessee is without any basis. As mentioned in the preceding paragraphs, assessee is doing a lot of functions relating to trading activities. It has gained unique knowledge of people, processes and has used this knowledge to help its AE thrive. Such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed substantial risk. Whilst this court would neither state that LFIL performed functions with a limited risk component, as it does not engage itself in manufacturing of garments (which is LFIL's stance), apart from the broad assumptions made by the Revenue, no material on record testifies to that fact such that it can be the basis for an arm's length price adjustment. Indeed, LFIL has neither made investment in the plant, inventory, working capital, etc., nor does it claim to have any expertise in the manufacture of garments. More importantly, and given no material to the contrary, LFIL does not bear the enterprise risk for manufacture and export of garments. LFIL's functional and risk profile thus is entirely different and has nothing to do with the manufacture and export of garments by unrelated third party vendors. Simply put, LFIL renders support services in relation to the exports, which are manufactured independently. Thus, attributing the costs of such third party manufacture, when LFIL does not engage in that activity, and more importantly, when those costs are clearly not LFIL's costs, but those of third parties, is clearly impermissible. A contrary conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee is a general one, unsupported by any independent material; it is anecdotal and based on the TPO s belief, rather than objective fact based analysis. There was, as a result, no question of its assuming higher risk or using its highly valued intangibles. This court also concurs with the ITAT s finding that the assessee s risk was limited and minimal with least capital employed, and that the TPO s findings that it (the assessee) performed all the crucial functions on behalf of the AEs was not proved. The TPO did not dispute the facts given by the assessee and held without foundation that it undertook all the critical functions of its AEs. This finding was unsubstantiated and generally made; the TPO never elaborated any critical function or decision of the assessee inuring to the AEs except saying that the assessee was engaged in arranging for feasibility studies, industry analysis, and project evaluation for potential projects identified by its AEs. It is quite evident that the TPO based his findings and conclusions on the decision of the ITAT in Li Fung (supra), which was subsequently reversed by this Court. 12. Resultantly, we hold that the ITAT s conclusion that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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