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Gap International Sourcing (India) Pvt. Ltd. Versus DCIT, Circle 10 (1) , New Delhi

2016 (7) TMI 15 - ITAT DELHI

Transfer pricing adjustment - valid remuneration model for benchmarking the TP adjustment - cost plus form of remuneration v/s commission based remuneration - Held that:- As relying on assessee’s own case qua the assessment years 2006- 07 and 2007-08 and case from Li & Fung India Pvt. Ltd. vs. DCIT [2011 (9) TMI 204 - ITAT, New Delhi] wherein remuneration model of markup of 5% on the operation cost without considering the value of the cost procured by the AE directly from the third party vendors .....

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ld that:- TPO has not made a fair analysis of the comparables, though chosen by the assessee in its TP study for the AY 2007-08, rather relied upon his own finding for the earlier years which have undisputedly been set aside by the Tribunal. So, we are of the further opinion that the ld. TPO to benchmark international transactions afresh by examining the suitable comparables by providing opportunity of being heard to the assessee. So, file is ordered to be restored to the TPO to benchmark the in .....

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perty, the business would not have been started even and as such, allowable for deduction - ITA No.1077/Del./2016 - Dated:- 17-5-2016 - SHRI R.S. SYAL, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER For The Assessee : S/Shri Rahul K. Mitra, Vinay Verma, Ashish Jain, Adity Anand and Ms. Neeti Satija, CAs For The Revenue : Shri Amit Mohan Govil, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, Gap International Sourcing (India) Pvt. Ltd. (hereinafter referred to as the assesse .....

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ken by the Appellant does not satisfy the arm's length principle envisaged under the Income-tax Act 1961 ('the Act'). In doing so, the Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) have grossly erred in enhancing the income of the Appellant by INR 3,265,301,3351- on account of the Transfer Pricing ('TP') adjustment u/s 92CA(3) of the Act made by the Ld. TPO by ; 1.1 ignoring the decision of Hon'ble Income Tax Appellate Tribunal ('ITAT&# .....

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and thereby ignoring that the Appellant neither creates supply chain or human intangibles nor bear any significant risks with respect to its business operations; 1.3 ignoring the fact that Hon 'ble ITA T has blessed the business model of the Appellant by accepting the application of 'Cost Plus' remuneration model followed by it; and 1.4 ignoring the fact that Hon'ble IT A T in A Y 2009-10 and A Y 2010-11 has upheld the mark-up of 15% applied by the Appellant to be at arm's le .....

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he directions of the Ld. 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 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 intangibles in India and generated location savings in India which have not been factored in its prevailing/ curre .....

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e Appellant, and thus the Appellant was entitled to a remuneration only with a reference to the value of goods sourced by the AEs from the third party vendors. 5. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law in disregarding the extensive/ voluminous documents evidencing that all key decisions in the value chain such as selection of vendors, designing of products, establishing parameters of sourcing, establishing quality standards, d .....

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sequently the Ld. AO (following the directions of the Ld. DRP), erred on facts and in law in drawing an adverse inference in terms of Section 114 of the Indian Evidence Act and upholding that Appellant has failed to produce the best available evidence available with it. 8. The Ld. DRP and consequently the Ld. AO (following the directions of the Ld. DRP) has completely disregarded the relevant judicial pronouncements which upholds cost plus remuneration for procurement support service providers. .....

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nomic analysis using profit split method without appreciating the fact that the current business model and the functionality of the Appellant company (which has been duly approved by the Hon'ble TTAT in Appellant's own case in 2006-07 and A Y 2007-08) does not involve unique intangibles or transactions that are interlinked which would warrant such an analysis . 11. The Hon'ble DRP and consequently the Ld. AO erred on facts and in law, in enhancing the income of the Appellant by INR 1 .....

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) on distinguishing facts to hold that one time conversion charges paid by the Appellant to the MCD were capital in nature as it resulted in enduring advantage to the Appellant; 10.2 concluding that the conversion charges paid were for violation of municipal laws, without obtaining! verifying necessary facts / information from the Appellant; 10.3 completely disregarding the fact that such payment was made on account of commercial expediency by the appellant and did not consider favourable decisi .....

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. AO erred in initiating penalty proceedings 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 Appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. 3. Briefly stated the facts of this case are : GAP International Sourcing (India) Pvt. Ltd. is a wholly owned subsidiary of GIS Inc. and its business activities are to facilitat .....

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ment, assessee company entered into international transaction as under :- Nature of transaction Method Selected Total value of transaction (Rs.) Provision of sourcing support services TNMM 59,24,41,155 5. Assessee company in its transfer pricing study to benchmark international transaction used Transactional Net Margin Method (TNMM) as the most appropriate method with Operating Profit / Total Cost (OP/TC) as Profit Level Indicator (PLI) and worked out its OP/TC at 15.52%. Assessee company chosen .....

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at the ALP. TPO further held that in view of the functional profile of the assessee company, which is that of a sourcing agent, it should be compensated in terms of higher commission as assessee company is controlling critical functions, such as, merchandising, fabric sourcing, product integrity, quality assurance, compliance and logistics and major risk arising from the aforesaid functions, such as, poor quality management lies with the assessee company. Assessee s compensation model is based o .....

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lysis of the assessee company and computed ALP of international transaction at ₹ 3,26,53,01,335/-. In pursuance to the order passed by the ld. TPO/DRP, the AO made addition on account of transfer pricing adjustment at ₹ 3,26,53,01,335/- and disallowed the rent expenses to the tune of ₹ 1,75,16,800/-. 7. Assessee carried the matter before the DRP which has dismissed the objections raised by the assessee company. Feeling aggrieved, the assessee company has come up before the Trib .....

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tudy is as under :- S.No. Name of the company OP/TC 2 IDC (India) Limited 12.57 3 Quadrant Communication Ltd. 9.14 4 Empire Industries Ltd. (Trading & Indenting) 15.81 5 Entertainment Network (India) Ltd. (Consolidated) -0.3 6 Priya International Limited (Indenting) 29.2 13.28 10. Assessee, by using multiple year data, computed the mean margins of the comparable companies at 13.28% as against its own margin at 15.52% and treated its international transactions at arm s length. However, ld. TP .....

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supply chain management intangibles; that the assessee owns human assets intangibles; that the compensation model of the assessee does not include the profit attributable to the assessee on account of location savings; and that the assessee s remuneration should be expressed as a percentage of the FOB price of goods sourced through the assessee. Consequently, the ld. TPO held that functional profile of the assessee company apparently proves that it is not a market support service provider and co .....

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mited 7.54 3 Trent Limited -0.12 4 Jaypee Spintex Limited 5.88 AVERAGE 5.33 13. Computation of Arm s Length Price Details Amount in INR Total FOB Value of exports 62,756,195,91 0 Arm's Length margin @ 5.33% 3,344,905,24 2 Margin shown by the assessee 79,603,907 Difference 3,265,301,335 Since the difference between the arm s length margin and the margin shown by the assessee varies by more than 5% of the arms length price has taken place, an adjustment of ₹ 3,26,53,01,335/- is to be mad .....

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DCIT reported in 12 ITR (Trib) 748 relied upon by the TPO to benchmark the international transactions and held that the assessee company was entitled to a cost plus form of remuneration, as claimed by the assessee and not a commission based remuneration. So, in other terms, the assessee company has been declared as a service provider and not being into buy and sell company rather functions as a facilitator only. So, now the profit margin of the assessee is in dispute only in this case. 13. Howev .....

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is the first and foremost to determine the compensation model. 14. However, to repel the argument addressed by the ld. DR, the ld. AR for the assessee simply relied upon the findings returned by the Tribunal in assessee s own case in ITA Nos.5147/Del/2011 and 228/Del/2012 (supra) and further contended that each and every point as to creation of intangibles, location savings, assessee having no human assets intangibles have been set at rest; that the assessee company has been performing normal an .....

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earlier years i.e. 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11, which have admittedly been set aside by the Tribunal in ITA Nos.5147/Del/2011 AY 2006-07, 228/Del/2012 AY 2007- 08, 55/Del/2013 AY 2008-09, 692/Del/2014 AY 2009-10 and 577/Del/2015 AY 2010-11. 16. So, by respectfully following the decisions rendered by the coordinate Bench of the Tribunal in assessee s own case in AYs 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11 and judgment delivered by the Hon ble jurisdictional High Court i .....

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ost of goods sourced from India, rather assessee company is entitled to cost plus remuneration and not a commission based remuneration. 17. Now, the next question arises for determination in this case is as to whether ld. TPO/DRP have correctly benchmarked the international transaction by using appropriate comparables? 18. The TPO selected three comparables with an average OP/OC of 5.33% which has applied on the FOB value of the export and thereby made an adjustment of ₹ 3,26,53,01,335/-. .....

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gins of the comparables are as given below :- S. No. Name of the company OP/OC 1 Pantaloon Retail (India) Limited 8.01 2 Shoppers Stop Limited 7.54 3 Trent Limited -0.12 4 Jaypee Spintex Limited 5.88 AVERAGE 5.33 Accordingly, the arm s length price in your case is calculated as below :- Details Amount in INR Total FOB Value of exports 62,756,195,910 Arm's Length margin @ 5.33% 3,344,905,242 Margin shown by the assessee 79,603,907 Difference 3,265,301,335 The above shortfall of ₹ 326,53 .....

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recording findings that, the Hon ble ITAT erred in completely disregarding the critical functions carried out by the assessee and the consequent risks borne by the assessee and further recorded the finding that even the judgment rendered by the High Court in Li & Fung India Pvt. Ltd. case has not been accepted by the revenue as filing of SLP to the Supreme Court has been suggested as if he was sitting in appeal on the assessee s case of earlier year. 20. So, in the totality of the facts and .....

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o, file is ordered to be restored to the TPO to benchmark the international transactions in the light of the observations made hereinbefore. 21. The next issue arises for determination is as to whether DRP/AO have erred in enhancing the income of the assessee by ₹ 1,75,16,800/- by disallowing the rent expenses being conversion charges paid to the Municipal Corporation of Delhi (MCD)? 22. Undisputedly, the assessee company has claimed rent expenses to the tune of ₹ 4,96,35,663/- and f .....

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