TMI Blog2017 (4) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods between third party enterprises sourced through the assessee. In other words, the tested party should be the assessee and not it's A.E”. The operative part of the ITAT’s direction to carry out the exercise afresh since it did not have the figures relating to the comparables has to be therefore, seen in the context of what was actually done. Therefore, the Revenue’s argument that the TPO/AO could doubt the appropriateness of the comparables used by the assessee is insubstantial and unmerited. The court is of opinion that the impugned show cause notice cannot be sustained. Firstly, when there is a remand on the basis of a specific finding (in this case, the untenability of shifting of the OP/TC to FOB) the TPO could not have travelled beyond it, given that there was no controversy ever about the inclusion of any comparable. Concededly there was no controversy about the appropriateness of inclusion of any comparable for the ALP determination purpose. Nor was there any finding or direction on that score. In the given circumstances, the Revenue could not have seized upon the direction to determine it “afresh” as the basis for going into the merits of inclusion of such co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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: 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A(2) (a) which provides a limit of 26% for treating an enterprise as Associated Enterprise. If the limit is reduced further it would only result in eliminating more companies and on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. Therefore, on a balancing note, 25% is a proper threshold limit for related party transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. Companies having different financial year ending (i.e. not March 31, 2007) or data of the company does not fall within 12 month period i.e. 01-04-2006 to 31-03-2007, are rejected. Since the tested party ends its financial year in March, hence, taking companies whose financial year ends in March will be an appropriate filter and may lead to a proper comparability. Companies that are functionally different from the tax payer are excluded. Companies that are having peculiar economic circumstances are excluded. Any other peculiar circumstances of a company which is divergent from the tax payer and the environment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the FOB value of exports. For the purpose of determination of ALP, functional analysis of the comparables with FAR of assessee is required, which has been done by the TPO. Therefore, the TPO acted within his jurisdiction and examined the comparables. In the original order the TPO had not analyzed the comparables selected or rejected by the assessee in its TP study as it had accepted the mark up of 5%, which the assessee received from its AE as remuneration for the functions performed and the risk undertaken. Pursuant to the ITAT's direction the TPO examined the assessee s comparables in its TP. The assessee adopted 53 comparables to determine its ALP. The assessee applied TNMM for determination of Arms Length Price of the transaction and OP/TC was claimed to be PLI. The assessee had computed OP/TC at 7.56% while the OP/TC of the comparables selected by the assessee were computed at 8.32% by the assessee. The assessee claimed that the transaction was at Arm's Length Price and the difference was within +/- 5%. 7. It is urged that for ALP determination - on the basis of FAR/ Comparability analysis, it was found that out of 53 comparables 51 could not be accepted to com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he previous and that it is not bound by assumption based orders; rather the remit was broad enough to allow it to consider if and to what extent, the comparable entities had similar functions. 10. The matter can best be considered if the ITAT s discussion in the order for the relevant assessment year (dated 5 March, 2014) is read in all material aspects and not only the operative portion. The same is as follows: 4. We have heard the rival submissions and perused the relevant material' on record. There is no dispute on the application of TNMM as the most appropriate method. Equally, there is no dispute on PLI of OP/TC. In the like manner, the selection of comparables is also beyond any controversy. The entire point of dispute is against the base of 'Total Cost' in the PLI of Operating Profit/Total Cost. Whereas the assessee computed its OP/TC at7.56% based on the cost incurred by it as constituting 'Total cost', the TPO changed such base to FOB value of goods exported in the hands of the A.Es. The short question before us is about determination of the correct base in the PLI. 5. It has been brought to our notice that that the TPO in the precedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termination reflects any concern about the appropriateness of the inclusion of any comparable on the ground of its/their functionality. The ITAT s substantial ruling shows that the TPO had followed the previous order and changed the basis of PLI of Operating Profit/Total Cost to FOB value of the export goods in the hands of the AEs. The assessee had computed its OP/TC at 7.56% based on the cost incurred by it as constituting 'Total cost'. This is reflected in the finding and conclusion that We, therefore, set aside the impugned order and hold that the 'total cost' being the denominator in the PLI of OP/TC, has to be taken as the costs incurred by the assessee and not the FOB value of goods between third party enterprises sourced through the assessee. In other words, the tested party should be the assessee and not it's A.E . The operative part of the ITAT s direction to carry out the exercise afresh since it did not have the figures relating to the comparables has to be therefore, seen in the context of what was actually done. Therefore, the Revenue s argument that the TPO/AO could doubt the appropriateness of the comparables used by the assessee is insubstantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed experience and expertise which the Tribunal has held to be human capital and supply chain intangibles. But such description does not in any way reveal how the appellant bears any risk - either enterprise or economic. LFIL s remuneration on a cost plus mark-up of 5 per cent represents the functions performed, assets utilized and risks assumed by it. Further, the TPO s determination that LFIL bore significant risks is not borne out from the records. In transactions in which LFIL was a party, it did not bear any financial risk. To the contrary, its costs towards establishment, transportation, salaries, etc. were fully reimbursed, and it was insulated from any economic or financial downside to any particular transaction. In other words, its remuneration was based entirely on the costs borne by it. In essence, it is a low risk contract service provider exclusively rendering sourcing support to the AE. It does not bear any significant operational risks for its functions, rendered to the third party vendor/customers. Rather, it is the AE that undertakes substantial functions and in fact assumes enterprise risks, such as market risk, credit risk etc. It also bears the letter of credit a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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