TaxTMI 
TaxTMI 
2017 (4) TMI 410
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....Officer ("TPO") accepted the application of the Transactional Net Margin method ("TNMM") to benchmark the petitioner's international transactions. By order dated 18 October, 2010, the benchmarking methodology by adoption of comparables was accepted by the TPO, who however concluded that the petitioner was a trader and substituted its cost base from total costs to the FOB value of the goods exported to the third party customers. The DRP approved the order of the TPO in changing the cost base of the petitioner. However, the DRP restricted the mark up to 4% of the FOB value of goods. 3. The petitioner had appealed to the ITAT, which remanded the matter (by the order dated 5 March, 2014) to the TPO with a direction to undertake fresh determination of arm's length price on the basis of correct cost base of the Petitioner in line with the judgment of this Court in the Petitioner's case for assessment year 2006-07. The ITAT's operative order is as follows: "6. In so far as the markup on the wrong base of FOB value of goods between the third party enterprises, applied by the TPO at 5% and reduced to 40/0 by the DRP is concerned, we find that the same would become irrelevant because t....
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....operating revenues are selected as comparables. This is an appropriate filter as this is the stage which will determine the correct comparability. In respect of enterprises whose main source of income is from service segment, the companies whose income from Business Support Services is more than 75% of the operating revenues have been considered for the ALP study so that the other segment may not materially affect the financial results of the company. * Companies who have persistent losses for the last two out of three years including FY 2006-07 are excluded. This filter is essential as such companies having peculiar economic circumstances are not in line with industry trend. * Companies having more than 25% related party transactions (sales as well as expenditure combined) of the sales are excluded. Companies having related party transactions of more than 25% are proposed to be excluded. A threshold of 25% is being applied following the provisions of Section 92A(2) (a) which provides a limit of 26% for treating an enterprise as Associated Enterprise. If the limit is reduced further it would only result in eliminating more companies and on the other hand if the limit is relax....
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....the inclusion of the 53 comparable entities whose profits were taken into account in the TP report (and on which there was no dispute between the parties) the Revenue could not have sought to inquire into the merits of their inclusion in an extremely limited remand, i.e., working out of the profit level in the light of the existing comparables. It was also argued that the inclusion of fresh comparables as the basis for judging the ALP was unwarranted in law. Besides, submitted counsel, the ground for rejection of the comparables were unsustainable, given the reasoning of this court in the assessment for AY 2006-07 which attained finality, with the judgment in Li and Fung v Commissioner of Income Tax 361 ITR 85. It was also argued that the functionalities of the proposed comparables were entirely different from the activities of the assessee. 6. The Revenue argues that the ITAT had directed the TPO to determine the ALP of the transaction after excluding the FOB value of exports. For the purpose of determination of ALP, functional analysis of the comparables with FAR of assessee is required, which has been done by the TPO. Therefore, the TPO acted within his jurisdiction and exami....
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....milar to the assessee and having the same financial year ending. Therefore a detailed show cause was issued to the assessee on 23.09.2016 explaining why the 51 comparables were not acceptable. It is lastly argued that the TPO did a fresh search to find comparables that performed similar functions as the assessee. This resulted in the inclusion of fresh comparables. 9. It is evident from the above discussion that the narrow controversy which requires resolution in this proceeding, is whether the show cause notice impugned by the assessee could have been issued, in the manner done by the Revenue. The assessee's threshold argument is that the ITAT's remit was limited to complying with its directions and did not under any circumstances extend to questioning the basis for the TP exercise. The Revenue relies on Rule 10-B of the Income Tax Rules to say that the appropriateness of the comparables adopted by the assessee had not been gone into for the previous and that it is not bound by assumption based orders; rather the remit was broad enough to allow it to consider if and to what extent, the comparable entities had similar functions. 10. The matter can best be considered if the IT....
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....e 'total cost' in the denominator will stand changed to the 'total cost' incurred by the assessee instead of the FOB value of goods between third party enterprises. Since, necessary details for the determination of ALP with the correct base of the assessee as well as comparables are not readily available on record, we consider it expedient to set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of ALP with the correct cost base of the 'total cost' incurred by the assessee in line with the above judgment of the Hon'ble Jurisdictional High Court in the assessee's own case." 11. It is obvious that the ITAT was not seized of any dispute with respect to the appropriateness of including any comparable or excluding any from the list furnished by the assessee. The record nowhere shows that the original TPO report, or the draft assessment order, or even the DRP's determination reflects any concern about the appropriateness of the inclusion of any comparable on the ground of its/their functionality. The ITAT's substantial ruling shows that the TPO had followed the previous order and changed the basis of PLI of Op....
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.... capital, etc., nor does it claim to have any expertise in the manufacture of garments. More importantly, and given no material to the contrary, LFIL does not bear the enterprise risk for manufacture and export of garments. LFIL's functional and risk profile thus is entirely different and has nothing to do with the manufacture and export of garments by unrelated third party vendors. Simply put, LFIL renders support services in relation to the exports, which are manufactured independently. Thus, attributing the costs of such third party manufacture, when LFIL does not engage in that activity, and more importantly, when those costs are clearly not LFIL's costs, but those of third parties, is clearly impermissible. A contrary conclusion would amount to treating it (the appellant) as the vendor/ exporters" partner in their manufacturing business- a completely unwarranted inference. 43. Indeed, having done the work, LFIL has developed experience and expertise which the Tribunal has held to be human capital and supply chain intangibles. But such description does not in any way reveal how the appellant bears any risk - either enterprise or economic. LFIL's remuneration on a cost plus m....