GAP INTERNATIONAL SOURCING (INDIA) PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

per schedule.

5. In order to benchmark the international transactions TNMM has been used as the most appropriate method with OP /TC as the PLI.

The margin of the assessee company has been worked out in Ann-H of TP Report as tabulated below: -

Particulars Amount (In Rupees) Gross Receipts 600,281,720 Employees Remuneration & Benefits 355,271,294 Administrative & Other Expenses 132,774,435 Depreciation 25,928,892 Total Cost (TC) 513,974,621 Operating Profit (OP) 86,974,621 OP/TC 15.36% As mentioned in the TP Report the search for comparables was undertaken, assuming that GAP India acts as a marketing support / low end technical support services of merchandise for GAP Group.

Following set of comparables was selected in the TP Report :

S.No. Name of the Company Data Working Source Capital Adjusted OP/VAE 1 Asian Business Exhibition & P 20.97% Conference Limited 2 IDC (India) Ltd., P 12.79% 3 Empire Industries Ltd. Seg-P 11.60% 4 Entertainment Network(India)Ltd Seg- P 0.22% 5 Priya International Ltd. Seg-P 20.39% 6 Hansa Vision Pvt Ltd C 4.00% Mean 11.66%

6. The TPO, however, rejected the transfer pricing study of the assessee on the same reasons as held in earlier years from A.Y 2006- 07 onwards, the TPO held as under :-

“ In view of the above findings, it is held that the correct compensation model at arm’s length price, in this case, would be commission of FOB cost of goods sourced from India.”

The TPO repelled the contention of the assessee for working capital adjustment and took the following comparables :-

S.No. Name of the Company OP/TX 1 Pantaloon Retail (India) Limited 7.71 2 Shoppers Stop Limited 6.29 3 Trent Limited 9.41 4 Jaypee Spintex Limited 2.6 AVERAGE 6.50 The TPO computed the arm’s length price as under :- “12. Computation of Arm's Length Price Accordingly, the arms length price in your case is calculated as below :-

Details Amount in INR Total FOB Value of Exports 60,146,452,989 Arm’s length margin @ 6.50% 3,909,519,444 Margin shown by the assessee 86,307,099 Difference 3,823,212,345

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 Rs.382,32,12,345/- is to be made to the income of the assessee, i.e. the Assessing Officer shall enhance the income of the assessee by an amount of Rs.382,32,12,345/- while computing its total income. The assessee was afforded reasonable opportunity of being heard (including personal hearing) as mentioned in row no. 7 of page 1 of this order.”

7. Pursuant to the said order of TPO, the AO passed draft assessment order, which was challenged by the assessee before the DRP without success, so the assessee is before us and the ld. AR filed the written submissions wherein it is submitted as under :-

“3. The TPO had also relied upon the ruling of the Delhi Income Tax Appellate Tribunal in the case of Li & Fung India Private Limited (Li & Fung India), where based upon the facts of the said case, a commission based model was determined by the Hon’ble Tribunal. 4. When the matter reached the Hon'ble Tribunal in the appellant's case for the AY 2006-07 and 2007-08 (disposed by a 18th September 2012 Refer pages 142 to 192 of Appeal set), the Hon'ble Tribunal was pleased to distinguish the case of Li & Fung and held that GIS India was entitled to a cost plus form of remuneration and not a commission based remuneration. However, the Hon'ble Tribunal enhanced the mark-up on the cost from 15%, as charged by the appellant, to 32%, being the derived mark-up on operational costs, as in the case of Li & Fung India.

8. As opposed to a mark-up of 5% on operational costs, as blessed by the Hon'ble Delhi High Court in the case of Li & Fung India, the appellant operates on a mark-up of 15% of operational costs, which is any way more conservative.

10. Therefore, the mark up on operational costs as adopted by the appellant, namely 15.36%, remains uncontroverted for the current assessment year. Accordingly, the TP adjustment ofRs.382.32 crore has no legs to stand and is liable to be struck down in the merit appeal as well.

12. For the AY under consideration i.e. AY 2010-11, the TPO has adopted a similar commission based model as in earlier years (a commission of 6.50%(refer page 140 of appeal set for TPO's order) has been adopted by the TPO), as a result of which an adjustment of Rs.382.32 crores has been inflicted upon the assessee, resulting in a total tax demand of Rs.205.93 crores (alongwith interest). When the matter came up before the Dispute Resolution Panel (DRP), the assessee submitted that its case is squarely covered in favour by the decision of the Tribunal rendered in the assessee's own case for the earlier years as above. However, the DRP reiterated TPO's stand that the ITAT's decision in its own case was not final as the order has been challenged by the Department in the Hon'ble High court of Delhi and the appeal is pending.

PARTICULARS OP/TC or OP/VAE* (FY 2009-10) Companies engaged in marketing support and low end technical support services (Refer TP Study on Pages 35, 11.66% 36 and 57 of Paper book) Companies engaged in distribution which are selected by 20.77% the TPO in his order for AY 2010-11 18.06% (after working capital adjustment)

“8. In the present case since the assessee is already earning a markup of 15% which is more than the 5% markup in the case of Li & Fung India (supra), therefore, markup of 15% on operational costs in assessee’s case is more conservative. As such no TP adjustment is required in assessee’s case.”

9. The ld. DR relied on the order of the TPO.

“9.4 ….. iv. However, the facts in the appellant’s case are different in as much as all the significant directions relating to procurement of goods from third party vendors in India, namely – (a) designs & trends of apparel; (b) quality parameters of materials: (c) terms & conditions for dealing with vendors, etc, are all provided by GAP US to the appellant through the voluminous vendor handbook & other correspondences which are placed on record and have not been controverted by the department. It emerges that assessee follows and executes them as a service provider. …. vi. Considering above we conclude that non risk bearing procurement facilitating functions which are preordained by contract and hand book, the appropriate PLI will be net profit / total cost and not the % of FOB value of goods sourced by AE. Accordingly, we uphold the net profit / total cost remuneration model adopted by the assessee. Having held so now we proceed to decide the percentage of markup to be applied to assessee’s cost. 9.5 …..

(iii) In view of the foregoing we have no hesitation to accept a candid proposal given by the assessee and hold that assessee TP adjustments be made by adopting the 32% cost plus mark up of the assessee for AY 2006-07 and 2007-08. The mark-up proposal of assessee is higher than mark-up over total cost earned by all comparables placed on record. The assessments should be framed accordingly. We may hasten to add that this mark we will be subjected to variation is subsequent years if the facts and circumstances of the case so warrant.”

We further take note that the Tribunal in assessee’s own case, in AY 2008-09 in order dated 15.03.2013, upheld the contention of the assessee as under:-

“9. Since the facts are identical, adhering to the doctrine of staire decises, in our opinion, the same order as above is applicable in the current year. Accordingly, in view of the forgoing, we hold that the assessee’s TP adjustment be made by adopting 34% cost plus markup of the assessee for A.Y. 2008-09. In view of the above, the appeal filed by the Assessee is partly allowed.”

We take note that the TPO had also relied upon the ruling of the Delhi Bench of the Tribunal in the case of Li & Fung India Private Limited (Li & Fung India), where based upon the facts of the said case, a commission based model was determined by the Tribunal. However, we note that for AY 2006-07 and 2007-08 vide order dated 18.09.2012 (pages 142 to 192 of Appeal set), the Tribunal distinguished the case of Li & Fung and held that GIS India was entitled to a cost plus form of remuneration and not a commission based remuneration. However, the Tribunal enhanced the mark-up on the cost from 15%, as charged by the appellant, to 32%, being the derived mark-up on operational costs, as in the case of Li & Fung India. We take note that the order of the Tribunal in the case of Li & Fung India with reference to which the TPO and the DRP had applied a commission based remuneration model in the appellant's case for the earlier years, was overturned by the Hon'ble Delhi High Court vide order dated 16th December 2013 (pages 841 to 881 of the Paperbook). The Hon'ble High Court, vide the said order, had approved the remuneration model of mark-up of 5% on the operational costs of Li & Fung India, i.e. without considering the value of goods procured by the foreign AE of Li & Fung India, directly from third party vendors in India. Further, we note that the mark-up of 32%, as adopted by the Tribunal in the appellant's own case for the earlier AYs, being the derived mark up on operational costs even with reference to the commission base model which was approved by the Tribunal in the case of Li & Fung India, which was prevalent at the material time, was prior to the order reversing the Hon'ble Delhi High Court in December 2013. In the light of the said order of the Hon’ble Delhi High Court, the mark up on operational costs of the assessee i.e. 15.36% is conservative.

11. While reversing the order of the Tribunal in Li & Fung India Pvt. Ltd., the Hon’ble jurisdictional High Court held as follows :-

“49. This court summarizes its conclusions as follows: (a) The broad basing of the profit determining denominator as the entire FOB value of the contracts entered into by the AE to determine the LFIL‟s ALP, as an “adjustment”, is contrary to provisions of the Act and Rules; (b) The impugned order has not shown how, and to what extent, LIFIL bears “significant” risks, or that the AE enjoys such locational advantages, as to warrant rejection of the Transfer pricing exercise undertaken by LFIL; (c) Tax authorities should base their conclusions on specific facts, and not on vague generalities, such as “significant risk”, “functional risk”, “enterprise risk” etc. without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reason, based on objective facts and the relative evaluation of their weight and significance. (d) Where all elements of a proper TNMM are detailed and disclosed in the assessee’s reports, care should be taken by the tax administrators and authorities to analyze them in detail and then proceed to record reasons why some or all of them are unacceptable. (e) The impugned order, upholding the determination of 3% margin over the FOB value of the AE‟s contract, is in error of law.

In view of the enunciation of law by the Hon’ble jurisdictional High Court in the case of Li & Fung India Pvt. Ltd. order dated 16.12.2013, there remains no doubt whatsoever that the base of “total cost” as adopted by the TPO and approved by the DRP in considering the FOB value of goods between the third party enterprises cannot be accepted. Ex consequenti, the “total cost” being the denominator in the PLI of OP/TC, has to be taken as the cost 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 its AE. Thus, we hold that the assessee is entitled to cost plus form of remuneration and not a commission based remuneration. In the light of the same, we take note of the order of the Tribunal in the previous assessment year i.e. AY 2009-10 in order dated 08.04.2015 wherein the Tribunal, relying on the decision of Hon’ble jurisdictional High Court in the case of Li & Fung India Pvt. Ltd. Vs. CIT in ITA 306/2012 order dated 16.12.2013, has held as under :-

“8. In the present case since the assessee is already earning a markup of 15% which is more than the 5% markup in the case of Li & Fung India (supra), therefore, markup of 15% on operational costs in assessee’s case is more conservative. As such no TP adjustment is required in assessee’s case.”

Respectfully following the aforesaid order of the coordinate Bench, we are of the opinion that there is no necessity of any TP adjustment.

Even further, for the current year, we note that both as per the comparables chosen by the assessee which yield a markup on 11.66% on operating cost and also the comparables chosen by the TPO, which yield 18.06% on operating cost, after making necessary working capital adjustment, indicates that the assessee’s markup of 15.36% charged on its operating cost falls well within the arm’s length price after considering the range of +/- 5% as envisaged in the Proviso to section 92C (2) of the Act. Therefore, no TP adjustment is required in assessee’s case.