The order of the Bench was delivered by
R. S. Syal, AM:-These two appeals by the assessee relate to the assessment years 2007-08 and 2008-09. Since common issues are raised in these appeals, we are, therefore, proceeding to dispose them of by this consolidated order for the sake of convenience.
Assessment Year 2007-08
2. The major issue involved in this appeal is against the making of the addition towards transfer pricing adjustment of Rs. 4,77,77,646/- on account of Arm's Length Price (ALP) of the international transaction of provision of 'Sourcing Support Services' provided by the assessee to its Associated Enterprises.
3. Briefly stated the facts of the case are that the assessee is engaged in the business of providing services to its group companies for supply of high volume, time sensitive, and consumer goods. The assessee was compensated with charge for the buying services at cost plus markup of 5%. The assessee reported international transactions to the tune of Rs. 62,78,77,646/- in the nature of 'Service fee received'. The assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC). The assessee declared its OP/TC of 7.56% as against mean OP/TC of 53 comparables at 8.32%. It was claimed that its margin was within the ±5% range and hence the transactions should be considered at ALP. The TPO observed that the assessee was allowed commission @ 5% of cost incurred for its sourcing activities in India. He did neither dispute the application of TNMM nor the PLI but applied markup for 5% on the FOB value of goods between third party enterprises instead of the assesse's costs incurred on which it was allowed markup of 5%. That is how the cost base of the assessee was substituted with FOB value of goods between third party enterprises and markup of 5% was applied to work out TP adjustment of Rs. 30,13,18,252/-. The assessee challenged the draft order before the Dispute Resolution Panel (DRP). The DRP did not change the cost base adopted by the TPO but reduced percentage of markup to 4% instead of 5% applied by the TPO. This resulted into an addition of Rs. 4.77 crore which was finally made by the Assessing Officer in his final order passed u/s 144C(13). The assessee is aggrieved against such addition.
4. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the application of TNMM as the most appropriate method. Equally, there is no dispute on PLI of OP/TC. In the like manner, the selection of comparables is also beyond any controversy. The entire point of dispute is against the base of 'Total Cost' in the PLI of Operating Profit/Total Cost. Whereas the assessee computed its OP/TC at 7.56% based on the cost incurred by it as constituting 'Total cost', the TPO changed such base to FOB value of goods exported in the hands of the A.Es. The short question before us is about determination of the correct base in the PLI.
5. It has been brought to our notice that that the TPO in the preceding year also applied the same base of 'total cost' as in the year under consideration, which got the approval from the Tribunal. The assessee assailed the Tribunal order before the Hon'ble High Court. Vide its judgment dated 16.12.2013 in Li & Fung (India) Pvt. Ltd. Vs CIT, a copy which has been placed on record, the Hon'ble Delhi High Court has reversed the Tribunal order by holding the FOB value of goods between the third party enterprises, sourced through the assessee, was not in accordance with the law. In view of the enunciation of law by the Hon'ble jurisdictional High Court in the case of the assessee itself, there remains no doubt whatsoever that the base of 'total cost' as adopted by the TPO and approved by the DRP in considering the FOB value of goods between the third party enterprises cannot be accepted. We, therefore, set aside the impugned order and hold that the 'total cost' being the denominator in the PLI of OP/TC, has to be taken as the costs incurred by the assessee and not the FOB value of goods between third party enterprises sourced through the assessee. In other words, the tested party should be the assessee and not it's A.E.
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 4% by the DRP is concerned, we find that the same would become irrelevant because the base being, the '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.
7. The next ground in this appeal is against allowing of depreciation of computer peripherals @ 15% as against 60% claimed by the assessee. The Assessing Officer made disallowance of Rs. 9,20,701/- on account of depreciation of computer peripherals by reducing the rate of depreciation to 15% as against 60% claimed by the assessee.
8. Having heard both the sides on this issue, we find that this issue is now fairly settled in favour of the assessee in view of the Special Bench order passed in the case of DCIT Vs Datacraft India Ltd. (2010) 133 TTJ (Mum) (SP) 377. We, therefore, hold that the authorities below were not justified in reducing the rate of depreciation on computer peripherals. This ground is allowed.
9. In the result, the appeal is partly allowed.
Assessment Year 2008-09
10. Both the sides are in agreement that the facts and circumstances of the present appeal are mutatis mutandis similar to those of the preceding year except that the assessee received markup of 8% on the costs incurred by it. The TPO changed the cost base to FOB value of goods between third party enterprises. By applying 8% profit rate under TNMM with PLI of OP/TC, he worked out the addition. The DRP reduced such markup from 8% to 6% but retained the cost base as adopted by the TPO.
11. Following the view taken here in above for the assessment year 2007-08, we set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for considering the determination of ALP afresh in accordance with our directions given above.
12. In the result, the appeal of the assessee is allowed for statistical purposes.
The order pronounced in the open court on 5/3/2014.