Facts of the Case

The present appeals were filed by the Revenue against separate orders of the Income Tax Appellate Tribunal (ITAT) for Assessment Years 2007-08, 2008-09, and 2009-10.

The assessee, Itochu India Private Limited, is a wholly owned subsidiary of Itochu Corporation, Japan, and operates as a “Sogo Shosha” company engaged in providing support services such as facilitation and market support to its Associated Enterprises (AEs) for sourcing transactions.

The dispute centered around the determination of Arm’s Length Price (ALP) of international transactions undertaken by the assessee with its AEs.

Issues Involved

  • Whether the Transfer Pricing Officer (TPO) was justified in enhancing the cost base by including Free on Board (FOB) value of goods sourced by AEs while determining ALP.
  • Whether the Transactional Net Margin Method (TNMM) was correctly applied under Rule 10B(1)(e).
  • Whether the TPO could recharacterize the business model of the assessee from a support service provider to a trader.

Petitioner’s Arguments (Revenue)

  • The Revenue contended that the ALP determination by the assessee was incorrect.
  • It supported the TPO’s approach of adding a mark-up on the FOB value of exports made by AEs.
  • The Revenue argued that such inclusion was necessary to properly compute the profit margin under TNMM.

Respondent’s Arguments (Assessee)

  • The assessee argued that TNMM requires computation of net profit margin only with reference to its own costs, not costs incurred by third parties or AEs.
  • It relied on judicial precedent stating that inclusion of FOB value artificially inflates the cost base.
  • The assessee emphasized that it was merely a support service provider and not a trader.

Court’s Findings / Order

  • The Delhi High Court upheld the ITAT’s decision and dismissed the Revenue’s appeals.
  • The Court relied on the precedent in Li & Fung India Pvt. Ltd. vs CIT (2014) 361 ITR 85 (Del) and reaffirmed that:
    • Under TNMM, profit margins must be computed with reference to the assessee’s own costs.
    • Inclusion of FOB value of goods sourced by AEs is not permissible.
  • The Court observed that the TPO:
    • Artificially enhanced the cost base.
    • Incorrectly applied TNMM.
    • Wrongly recharacterized the assessee’s business model.
  • It was also noted that for subsequent assessment years (2011-12 to 2013-14), the Revenue had accepted the assessee’s ALP determination.
  • The Court concluded that no substantial question of law arises, and dismissed all appeals.

Important Clarification

  • TNMM must strictly be applied based on costs incurred by the tested party (assessee).
  • Inclusion of third-party or AE-related costs (such as FOB value) is legally impermissible.
  • Recharacterization of business functions without basis is not sustainable in transfer pricing assessments.

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:7399-DB/SMD13052019ITA11112018_155021.pdf

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