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TMI Blog2021 (10) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction pertaining to provision of sourcing support services to its Associated Enterprises ('AEs') does not satisfy the arm's length principle envisaged under the Act and in doing so, the Ld. TPO/the Ld. DRP have grossly erred in: 2.1 concluding the incorrect functional profile of the Appellant, thereby wrongly characterizing as a trader and not as a service provider; 2.2 concluding that the Appellant has developed human resource and supply chain intangible for its AEs; 2.3 concluding that the Appellant is engaged in maximizing location savings for its AEs. 3. On the facts & circumstances of the case and in law, the Ld. TPO/Ld DRP have erred in disregarding the benchmarking approach adopted by the Appellant in its TP Documentation and including the Free on Board ('FOB') cost of the goods sourced directly by the AEs from the third party vendors in the cost base of the Appellant, for the purpose of computing the arm's length profit margin of the Appellant. 4. On the facts & circumstances of the case and in law, the Ld. TPO/Ld.DRP have erred in considering the cost incurred by unrelated enterprise to compute net profit margin of the Appellant while a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Value of transaction (in Rs.) 1. Provision of sourcing support services TNMM 919225248 2. Receipt of shared accounting services 601559 3. Services provided to IKEA Foundation in relation to coordination activities TNMM 34194382 4. Reimbursement of expenses received/ receivable 5004999 5. Reimbursement of expenses paid /payable TNMM 6809652 7. We have carefully perused the order of the TPO. We find that the TPO has proceeded on the premise that the business model of the appellant is akin to that of a trader and on this premise, the TPO formed a belief that the assessee's compensation model must include Free on Board [FOB] value of goods sourced from India and following the strong belief, the TPO selected comparables identifying traders as comparables. The search yielded the following result: 1 Shoppers Stop Ltd. 959.4 1052.2 1101.7 30262.8 33897 37864.6 3.05' 2 Isha Natural Beauty Products & Wellness Pvt. Ltd. 14.2 15 14.1 246.3 261.4 332.8 5.15' 3 Lifestyle International Pvt. Ltd. 1940 2470 2699.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the group for identification, selection and starting up of suppliers. OBTAINING OFFERS IKEA Services obtains price quotations, delivery and other contractual terms for the suppliers located in India. IKEA Services then submits this information to the relevant purchasing company, who alone has the authority to conclude purchase agreements with suppliers. IKEA Services does not have the right to negotiate with suppliers or to make any decisions in regard to purchasing the goods. PLACING OF ORDERS AND QUALITY CONTROL When a purchasing contract has been successfully concluded between a purchasing company (AE) and a supplier, orders are generated electronically up to the maximum amount of products as included in the purchasing contract. Prior to commencement of full-fledged production by supplier, sourcing entity/the Appellant is required to ensure that the supplier complies with a working manual, which is formulated by AE namely, 'First Batch Production'. Purpose of First Batch Production is to ensure and verify that supplier understands the IKEA requirements and maintains appropriate production set up to deliver the right quality from the inception. The Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited risk environment providing routine support services to group entities and accordingly, entitled to be remunerated based on assured return. 14. The Hon'ble High Court of Delhi in the case of Li and Fung India Ltd. ITA No. 306 of 2012 has considered a similar quarrel. The most relevant part of the judgment is extracted hereinbelow: "39...This Court is of opinion that to apply the TNMM, the assessee's net profit margin realized from international transactions had to be calculated only with reference to cost incurred by it, and not by any other entity, either third party vendors or the AE. Textually, and within the bounds of the text must the AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application of the TNMM. Rule 10B(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 deter ..... X X X X Extracts X X X X X X X X Extracts X X X X
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