The Pr. Commissioner Of Income Tax -5 v. Li & Fung ( India ) Pvt. Ltd

Signature Not Verified $~1 IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 819/2019 THE PR. COMMISSIONER OF INCOME TAX -5 ..... AppellantThrough:Mr.Ruchir Bhatia, Standing Counsel versus LI & FUNG ( INDIA ) PVT. LTD...... RespondentThrough:Mr.NeerajJainandMr.AniketD.Agarwal, Advocates. CORAM:HON'BLE MR. JUSTICE MANMOHANHON'BLE MR. JUSTICE SANJEEV NARULAO R D E R%12.03.2020 CM APPL. 40531/2019 (delay in filing 117 days) By this application, the applicant seeks condonation of delay of 117days in filing the appeal. For the reasons stated in the application, the delayis condoned. The application stands disposed of in the aforesaid terms. ITA 819/2019 The present appeal has been filed challenging the order dated 31[st]October, 2018 passed by the learned Income Tax Appellate Tribunal in ITANo. 2480/Del/2015 for the Assessment Year 2010-11. Learned counsels for the parties state that the issue raised in thepresent appeal is covered by the judgment of a Coordinate Bench of thisCourt in Li and Fung India Pvt. Ltd. vs. Commissioner of Income Tax,ITA 306 of 2012. The relevant portion of the said judgment is reproducedhereinbelow: Signature Not Verified “39.The TPO’s determination enhanced LFIL‟s cost base for applying the operating profit over total cost margin. LFIL’scompensation model is based on functions performed by it andthe operating costs incurred by it and not on the cost of goodssourced from third party vendors in India. Allotting a margin ofthe value of goods sourced by third party customers from Indianexporters/vendors to compute the appellant’s profit is unjustified.This Court is of opinion that to apply the TNMM, the assessee’snet profit margin realized from international transactions had tobe calculated only with reference to cost incurred by it, and notby any other entity, either third party vendors or the AE.Textually, and within the bounds of the text must the AO/TPOoperate, Rule 10B(1)(e) does not enable consideration orimputation of cost incurred by third parties or unrelatedenterprises to compute the assessee’s net profit margin forapplication of the TNMM. Rule 10B(1)(e) recognizes that “thenet profit margin realized by the enterprise from an internationaltransaction entered into with an associated enterprise iscomputed in relation to costs incurred or sales effected or assetsemployed or to be employed by the enterprise...” (emphasissupplied). It thus contemplates a determination of ALP withreference to the relevant factors (cost, assets, sales etc.) of theenterprise in question, i.e. the assessee, as opposed to the AE orany third party. The textual mandate, thus, is unambiguouslyclear. 40.The TPO’s reasoning to enhance the assessee’s cost base byconsidering the cost of manufacture and export of finished goods,i.e., ready-made garments by the third party venders (which costis certainly not the cost incurred by the assessee), is nowheresupported by the TNMM under Rule 10B(1)(e) of the Rules.Having determined that (TNMM) to be the most appropriatemethod, the only rules and norms prescribed in that regard couldhave been applied to determine whether the exercise indicated bythe assessee yielded an ALP. The approach of the TPO and thetax authorities in essence imputes notional adjustment/income inthe assessee’s hands on the basis of a fixed percentage of the freeon board value of export made by unrelated party venders.” Signature Not Verified In view of the aforesaid judgment, no question of law arises forconsideration in the present matter. Accordingly, the present appeal isdismissed. MANMOHAN, J SANJEEV NARULA, J MARCH 12, 2020v