The Commissioner of Income-tax-II v. Li & Fung (India) Pvt. Ltd
[Citation -2015-LL-0311-30]

Citation 2015-LL-0311-30
Appellant Name The Commissioner of Income-tax-II
Respondent Name Li & Fung (India) Pvt. Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 11/03/2015
Judgment View Judgment
Keyword Tags international transaction • transfer pricing officer • associated enterprise • determination of alp • profit margin • total cost • tpo
Bot Summary: At the outset, this Court notices that the basis on which the Transfer Pricing Officer s directions were acted upon by the Assessing Officer in finalising the assessment was by the increased cost base of the total cost incurred for determining ALP in both the years in question. On this the ITAT noticed that this Court s decision in Li and Fung India Pvt. Ltd. vs. Commissioner of Income Tax 361 ITR 85 held that there is no legal authority under the Income Tax Act, 1961 or the Rules to broaden the cost base in that manner. 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. 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. 505506/2014 Page 2 of the enterprise in question, i.e. the assessee, as opposed to the AE or any third party. 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, is nowhere supported by the TNMM under Rule 10B(1)(e) of the Rules.


IN HIGH COURT OF DELHI AT NEW DELHI Decided on 11th March, 2015 ITA 505/2014 ITA 506/2014 COMMISSIONER OF INCOME TAX-II Appellant Through: Mr.Kamal Sawhney, Sr.Standing counsel with Mr.Mukul Mathur and Mr. Shikhar Garg, Advs. versus LI &FUNG ( INDIA) PVT. LTD. Respondent Through: Mr.Porus Kaka, Sr.Adv. with Mr.Neeraj Jain, Mr.Manish Kant Advs. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE R.K.GAUBA MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) 1. Revenue is aggrieved by common order passed by Income Tax Appellate Tribunal (ITAT) in ITA No.5298/Del./2011 and 5903/Del./2012 for Assessment Years (AY) 2007-08 and 2008-09. question of law urged is: Correctness of ITAT s order directing AO/TPO for fresh determination of addition originally made on account of Arm s Length Price, which was specified in course of proceedings. ITANos.505&506/2014 Page 1 2. At outset, this Court notices that basis on which Transfer Pricing Officer s (TPO) directions were acted upon by Assessing Officer (AO) in finalising assessment was by increased cost base of total cost incurred for determining ALP in both years in question. 3. On this 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 Income Tax Act, 1961 or Rules to broaden cost base in that manner. Consequently, ITAT directed remission of matter to AO for redetermination of cost base in tune with this Court s judgment in Li and Fung India Pvt. Ltd. (supra). In abovesaid judgment, this Court held as under: 39. TPO s determination enhanced LFIL s cost base for applying operating profit over total cost margin. LFIL s compensation model is based on functions performed by it and operating costs incurred by it and not on cost of goods sourced from third party vendors in India. Allotting margin of value of goods sourced by third party customers from Indian exporters/vendors to compute appellant s profit is unjustified. This Court is of opinion that to apply TNMM, 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 AE. Textually, and within bounds of text must AO/TPO operate, Rule 10B(1)(e) does not enable consideration or imputation of cost incurred by third parties or unrelated enterprises to compute assessee s net profit margin for application of TNMM. Rule 10B(1)(e) recognizes that net profit margin realized by enterprise from international transaction entered into with associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by enterprise ... (emphasis supplied). It thus contemplates determination of ALP with reference to relevant factors ITANos.505&506/2014 Page 2 (cost, assets, sales etc.) of enterprise in question, i.e. assessee, as opposed to AE or any third party. textual mandate, thus, is unambiguously clear. 40. TPO s reasoning to enhance assessee s cost base by considering cost of manufacture and export of finished goods, i.e., ready-made garments by third party venders (which cost is certainly not cost incurred by assessee), is nowhere supported by TNMM under Rule 10B(1)(e) of Rules. Having determined that (TNMM) to be most appropriate method, only rules and norms prescribed in that regard could have been applied to determine whether exercise indicated by assessee yielded ALP. approach of TPO and tax authorities in essence imputes notional adjustment/income in assessee s hands on basis of fixed percentage of free on board value of export made by unrelated party venders. 4. Such being position, this Court is of opinion that question of law urged in both appeals does not arise since it already stands settled in previous order pertaining to present assessee. 5. appeals are, therefore, dismissed. S. RAVINDRA BHAT, J R.K.GAUBA, J MARCH 11, 2015 mr ITANos.505&506/2014 Page 3 Commissioner of Income-tax-II v. Li & Fung (India) Pvt. Ltd
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