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$~61 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 674/2016
PR. COMMISSIONER OF INCOME TAX, DELHI- 5..... Appellant Through : Sh. Rahul Chaudhary and Sh. Raghvendra Singh, Advocates.
versus
LI & FUNG (INDIA) PRIVATE LIMITED ..... Respondent
Through : Sh. Aniket. D. Agrawal, Advocate.
CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MS. JUSTICE DEEPA SHARMA
O R D E R %
05.09.2016
The revenue is aggrieved by the order of the Income Tax Appellate Tribunal (ITAT) whereby the assessee’s contentions were accepted and a direction for determination of Arm’s Length Pricing (ALP) was made. The ITAT’s decision is premised upon a Division Bench ruling of this Court for a previous assessment year in Li and Fung India Pvt. Ltd. v. CIT 2014 (361) ITR 85 (Del). The Court had observed that the Income Tax Act does not authorise the broadening of the cost base in the circumstances. The Court had observed as follows: “3. On this the ITAT noticed that this Court’s decision in Li and Fung India Pvt. Ltd. vs. Commissioner of Income Tax (2014) 361 ITR 85 (Del) held that there is no legal authority under the Income Tax Act, 1961 or the Rules to broaden the cost base in that manner. Consequently, the ITAT directed a remission of the matter to the AO for redetermination of the cost base in tune with this Court’s
judgment in Li and Fung India Pvt. Ltd. (supra). In the abovesaid judgment, this Court held as under:
“39. The TPO’s determination enhanced LFIL‟s cost base for applying the operating profit over total cost margin. LFIL’s compensation model is based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Allotting a margin of the value of goods sourced by third party customers from Indian exporters/vendors to compute the appellant’s profit is unjustified. 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 determination of ALP with reference to the relevant factors (cost, assets, sales etc.) of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. The textual mandate, thus, is unambiguously clear.
The TPO’s reasoning to enhance the assessee’s cost base by considering the cost of manufacture and export of finished goods, i.e., ready-made garments by the third party venders (which cost is certainly not the cost incurred by the assessee), is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules. Having
determined that (TNMM) to be the most appropriate method, the only rules and norms prescribed in that regard could have been applied to determine whether the exercise indicated by the assessee yielded an ALP. The approach of the TPO and the tax authorities in essence imputes notional adjustment/income in the assessee’s hands on the basis of a fixed percentage of the free on board value of export made by unrelated party venders.”
Since the ITAT followed the above decision and also having regard to the fact that this Court in other appeals for later years (ITA 505-506/2014, decided on 11.03.2015) ruled against the revenue, no question of law arises. The appeal is accordingly dismissed.
S. RAVINDRA BHAT, J
DEEPA SHARMA, J SEPTEMBER 05, 2016 ‘ajk’