Tribunal Clarifies Transfer Pricing Rules on Sourcing Support Services

The Tribunal addressed transfer pricing adjustment issues related to the Arm's Length Price (ALP) for 'Sourcing Support Services,' determining the correct base for the Profit Level Indicator. It clarified that the 'total cost' incurred by the assessee should be considered, not the FOB value of goods between third party enterprises. Additionally, the Tribunal ruled in favor of the assessee regarding the depreciation rate on computer peripherals, disallowing the reduction from 60% to 15%. The impugned order was set aside, and a fresh determination of ALP with the correct cost base was directed, aligning with legal precedents and principles.

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Issues Involved:
1. Transfer pricing adjustment regarding Arm's Length Price (ALP) for provision of 'Sourcing Support Services' to Associated Enterprises.
2. Correct base for Profit Level Indicator (PLI) in the determination of ALP.
3. Depreciation rate on computer peripherals.

Issue 1: Transfer Pricing Adjustment for ALP of 'Sourcing Support Services':
- The major issue involves making an addition towards transfer pricing adjustment of Rs. 4,77,77,646/- due to the Arm's Length Price (ALP) of the international transaction of providing 'Sourcing Support Services' to Associated Enterprises.
- The assessee adopted the Transactional Net Margin Method (TNMM) with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC). The dispute arose regarding the correct base for 'Total Cost' in the PLI.
- The Tribunal referred to a previous case where the Hon'ble Delhi High Court held that the FOB value of goods between third party enterprises, sourced through the assessee, was not in accordance with the law. Consequently, the correct base for 'Total Cost' in the PLI should be the costs incurred by the assessee, not the FOB value of goods between third party enterprises.
- The Tribunal set aside the impugned order and remitted the matter for a fresh determination of ALP with the correct cost base of the 'total cost' incurred by the assessee.

Issue 2: Correct Base for PLI in ALP Determination:
- The dispute primarily revolved around the correct base for the Profit Level Indicator (PLI) in the determination of ALP. The Tribunal clarified that the 'total cost' incurred by the assessee should be considered as the denominator in the PLI, not the FOB value of goods between third party enterprises.
- The Tribunal emphasized that the tested party should be the assessee, not its Associated Enterprises, in line with the judgment of the Hon'ble Delhi High Court in a similar case.
- The Tribunal directed a fresh determination of ALP with the correct cost base of the 'total cost' incurred by the assessee.

Issue 3: Depreciation Rate on Computer Peripherals:
- The Assessing Officer disallowed depreciation of computer peripherals at 60% claimed by the assessee, reducing it to 15%. The Tribunal referred to a Special Bench order in favor of the assessee regarding the depreciation rate on computer peripherals.
- The Tribunal held that the authorities were not justified in reducing the rate of depreciation on computer peripherals and allowed the ground in favor of the assessee.

In conclusion, the Tribunal addressed the issues related to transfer pricing adjustment, the correct base for the Profit Level Indicator, and the depreciation rate on computer peripherals. The Tribunal set aside the impugned order and directed a fresh determination of the Arm's Length Price with the correct cost base, in line with legal precedents and settled principles.

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