Appeal Dismissed: Tribunal Order Challenged, Delay Condoned. Profit Determination Focus on Functions, Not Vendor Costs.

The appeal, challenging the Income Tax Appellate Tribunal's order for the Assessment Year 2010-11, was dismissed. The delay in filing the appeal was condoned. The judgment emphasized that the appellant's profit determination should be based on its functions and operating costs, not third-party vendor costs. The Tribunal's decision to enhance the appellant's cost base with costs not incurred by the assessee was deemed unjustified. The application of Transfer Pricing Rules, specifically Rule 10B(1)(e), was discussed, highlighting the importance of considering the assessee's functions and costs in determining the net profit margin for international transactions.

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The application for condonation of 117 days' delay in filing the appeal was allowed. The appeal challenges the ITAT order dated 31 October 2018 for AY 2010-11. The issue is covered by a Coordinate Bench decision in Li and Fung India Pvt. Ltd. v. Commissioner of Income Tax. The Decision held: "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 ..." " The Coordinate Bench held that TNMM under Rule 10B(1)(e) requires reference to the assessee's own costs/assets/sales, not costs of third parties; imputing adjustments based on unrelated vendors' FOB export value is unsupported. Applying that ratio, no substantial question of law arises; the appeal is dismissed.

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