IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `I', NEW DELHI
Before Sh. N. K. Saini, AM And Sh. I. C. Sudhir, JM
ITA No. 692/Del/2014 : Asstt. Year : 2009-10
GAP International Sourcing Vs Deputy Commissioner of Income
(India) Pvt. Ltd., Unit No. Tax, Circle 12(1),
201, DLF South Court, New Delhi
District Centre, Saket,
New Delhi-110019
(APPELLANT) (RESPONDENT)
PAN No.AACCG3437E
Assessee by : Mr. Rahul K. Mitra, CA
Revenue by : Sh. Judy James, Standing Counsel
Date of Hearing : 16.03.2015 Date of Pronouncement : 08.04.2015
ORDER
PER N.K. SAINI, A.M.
This is an appeal by the assessee against the order dated
31.12.2012, New Delhi.
2. Following grounds have been raised in this appeal:
"1. The Hon'ble Dispute Resolution Panel (`Hon'bel DRP')
and the Learned Deputy Commissioner of Income-tax (`Ld.
AO') (following the directions of the Hon'ble DRP), erred
on facts and in law by holding that the international
transaction of provision of sourcing support services to
associated enterprises (`AEs') undertaken by the Appellate
does not satisfy the arm's length principle envisaged under
the Income-tax Act 1961 (`the Act'). In doing so, the
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Hon'be DRP and consequently the Ld. AO (following the
directions of the Hon'ble DRP) have grossly erred in
enhancing the income of the Appellant by Rs.
186,68,46,190/- 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') in the Appellant's own
case (GAP Ruling 20 ITR (Trib) 779 for earlier years
i.e. assessment years (`AY') 2006-07, AY 2007-08)
and AY 2008-09 (ITA 55/Del/2013) by rejecting the
cost plus compensation model of the Appellant;'
1.2 disregarding the fact that Hon'ble ITAT has accepted
the Functional, Asset and Risk Profile (`FAR') of the
Appellant to be that of a low risk procurement support
service provider and thereby ignoring that the
Appellant neither creates supply chain or human
intangibles nor bear any significant risks with respect
to its business operations; and
1.3 ignoring the fact that Hon'ble ITAT has blessed the
business model of the Appellant by accepting the
application of `Cost Plus' remuneration model
followed by it.
2. The Hon'ble DRP and consequently the Ld. AO
(following the directions of the Hon'ble DRP), erred on
facts and in law in upholding the Ld. TPO's approach of
disregarding the benchmarking approach adopted by the
Appellant of selecting companies engaged in providing
marketing support/low end technical support services in its
TP Documentation report for the year to substantiate the
arm's length nature of its international transactions.
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3. The Hon'ble DRP and consequently the Ld. AO
(following the directions of the Hon'ble 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 form 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/current remuneration
model.
4. The Hon'ble DRP and consequently the Ld. AO
(following the directions of the Hon'ble DRP), erred on
facts and in law in disregarding the detailed submissions
and extensive analysis to demonstrate that Appellant is
operating on a guaranteed profit margin of 15% on its
operating cost and the Appellant does not procure contracts
from the third party vendors or perform and significant
functions whatsoever with reference to the goods supplied
by the vendors directly to the AEs of the Appellant, and thus
the Appellant was entitled to a remuneration only with a
reference to the value of goods sourced by the AEs form the
third party vendors.
5. The Hon'ble DRP and consequently the Ld. AO
(following the directions of the Hon'ble DRP), erred on
facts and in law in upholding the Ld. TPO's stance of
rejecting the Appellant's reliance on relevant international
judicial precedents on absolutely irrelevant, inconsistent
and extraneous reasons.
6. Without prejudice to the above, the Appellant humbly
submits that judgment pronounced by Hon'ble Delhi
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Tribunal in case of Li & Fung India Pvt. Ltd. (Li & Fung),
which was heavily relied by the Revenue in Appellant's case
of Hon'ble Tribunal for earlier years for the proposition
that a commission based form of remuneration model was
to be applied even in the case of the Appellant has been
reversed by Delhi High Court (Delhi HC) recently.
On the facts and in the circumstances of the case and in
law, the Ld. 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, later, amend or
withdraw any grounds of appeal either before or at the time
of hearing of the appeal."
3. Facts of the case in brief are that the assessee is
engaged in the business of transportation of time sensitive
packages, documents and cargo to domestic and
international destinations. The assessee filed its return of
income on 29.09.2009 declaring an income of Rs.
8,24,64,443/-. Later on, the case was selected for scrutiny.
The assessee operates as a procurement support services
company for its foreign associated enterprises (AE) i.e.
GAP US, under a model of reimbursement of the operating
cost plus a markup of 15%. The TPO challenged the cost
plus model adopted by the assessee in the earlier years and
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made the TP adjustments. In the year under consideration
also, the AO had adopted a similar commission based
model as in earlier years and adopted a commission of
3.82% on the value of goods procured by the GAP US
directly from third party vendors from India. The TPO
made an adjustment of Rs. 186,68,46,190/- as shortfall u/s
92CA of the Income Tax Act, 1961 (hereinafter referred to
as the Act) which was arrived at after making cumulative
adjustments. Thereafter the AO passed the draft order u/s
144C of the Act on 27.02.2013 and the assessee went
before the DRP who gave certain direction vide order
dated 20.12.2013. The DRP accepted that the ITAT had
acknowledged the fact that the assessee ' s roles, functions
and activities did not lead to creation of any human
intangibles and supply change intangible. The DRP also
accepted this contention of the assessee that the case is
squarely covered in favour of the assessee by the decision
of the ITAT for earlier years and mentioned that if the tax
department accepted the order of the Tribunal then the
assessments needs to be framed as per guidelines given by
the Tribunal. However, the AO proceeded to confirm the
adjustment of Rs. 186.86 crores and framed the assessment
at an income of Rs. 194,93,10,630/-.
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Gap International Sourcing (India) Pvt. Ltd.
4. Now the assessee is in appeal. The ld. Counsel for the
assessee submitted that the order of the ITAT in the case
of Li & Fung India with reference to which the TPO and
DRP had applied a commission based remuneration model
in assessee ' s case for the earlier years had recently been
overruled by the Hon ' ble Delhi High Court vide order
dated 16.12.2013, a reference was made to page no. 139 to
179 of the assessee ' s paper book which is the copy of the
said order. It was further stated that the Hon ' ble High
Court had approved the remuneration model of markup of
5% and the operation cost of Li & Fung India, without
considering the value of goods procured by the foreign AE
of Li & Fung India, directly from third party vendors in
India. It was also stated that as opposed to a markup of 5%
of operational costs, as blessed by Hon ' ble Delhi High
Court in the case of Li & Fung India (supra), the assessee
operates on a markup of 15% of operational costs, which
is anyway more conservative. It was contended that the
markup of 32% as adopted by the ITAT is assessee ' s own
case in the earlier assessment years, being the derived
markup on operational costs even with reference to
commission base model which was approved by the ITAT
in the case of Li & Fung India, which was prevalent at the
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material time, namely, prior to its dilution by the Hon ' ble
Delhi High Court on 16.12.2013, thus, also stands diluted
as of today. Therefore, the markup on operational costs as
adopted by the assessee, namely, 15% remains
uncontroverted for the current assessment year. It was
accordingly submitted that the TP adjustment of Rs.
186.86 crores had no legs to stand and is liable to be
struck down. The ld. Counsel for the assessee further
submitted that the assessee has provided the following
alternative comparable sets to demonstrate the tentative
Operating Profit/Total cost ratio for the assessment year
under consideration:
Particulars OP/TC or
OP/VAE*
(2008-09
Companies engaged in marketing support and low 11.62 %
end technical support services (Refer TP Study on
Page 67 of the Merit Appeal Paper book)
Companies engaged in distribution which are 11.86 %
selected by the TPO in his order for AY 2009-10 12.01 %
*For service provider total cost and value added expenses are
same.
5. It was accordingly submitted that the maximum
markup which can be attributed to the assessee can in no
case exceed 12% and since the assessee was already
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earning a markup of 15%, there existed no case for
adjustment.
6. In his rival submissions the ld. DR although
supported the order of the AO but could not controvert the
aforesaid contention of the ld. Counsel for the assessee.
7. We have considered the submissions of both the
parties and carefully gone through the material available
on the record. It was noticed that on a similar issue the
Hon ' ble Jurisdictional High Court in the case of Li &
Fung India Pvt. Ltd. Vs CIT in ITA 306/2012 vide order
dated 16.12.2013 observed as under:
" 49. This court summarizes its conclusions as
follows:
(a) The board 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;
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(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.
50. In light of the above circumstances, this Court
is of the opinion that the TPO ' s addition of the cost
plus 5% markup on the FOB value of exports among
third parties to LFIL ' s calculation of arm ' s length
price using the TNMM is without foundation and
liable to be deleted. The appeal is allowed and the
order dated 25/11/11 of the ITAT Tribunal, Delhi
Branch is liable to be and is accordingly set aside.
The questions of law framed are answered in favour
of the assessee, and against the revenue. The
appeal is allowed in the above terms. "
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Gap International Sourcing (India) Pvt. Ltd.
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 & Fund 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. In the result, appeal of the assessee is allowed.
(Order Pronounced in the Court on 08/04/2015).
Sd/- Sd/-
(I. C. Sudhir) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 08/04/2015
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
ASSISTANT REGISTRAR
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