Facts of the Case

Li & Fung India Pvt. Ltd. was engaged in providing sourcing support services relating to garments, handicrafts, leather products, and similar products to its Associated Enterprises and charged a markup of 5% on total cost.

For Assessment Year 2007–08, the petitioner adopted the Transactional Net Margin Method (TNMM) for benchmarking international transactions and selected 53 comparables in its transfer pricing study.

The TPO accepted TNMM and comparables but altered the cost base by substituting petitioner’s total cost with the FOB value of exported goods.

The Dispute Resolution Panel (DRP) upheld the TPO’s methodology but reduced markup from 5% to 4%.

On appeal, the ITAT remanded the matter solely for fresh determination of ALP by adopting the correct cost base (actual total cost incurred by assessee) instead of FOB value.

Subsequently, the TPO issued a fresh show cause notice proposing rejection of 51 out of 53 comparables and inclusion of new comparables, thereby proposing substantial TP adjustment.

The petitioner challenged this action before the Delhi High Court.

Issues Involved

  1. Whether the TPO could go beyond the limited scope of ITAT remand and re-examine comparables already accepted?
  2. Whether fresh comparables could be introduced during remand proceedings where comparability was never in dispute?
  3. Whether the Revenue could expand the scope of remand under Rule 10B for a fresh functional analysis?

 Petitioner’s Arguments

  • The ITAT remand was restricted only to correction of the cost base in the PLI computation.
  • Selection of comparables was never disputed before the TPO, DRP, or ITAT.
  • The Revenue cannot enlarge the scope of remand and revisit finalized issues.
  • Fresh comparables cannot be introduced where the original comparables had attained finality.
  • The earlier Delhi High Court judgment in petitioner’s own case had already settled the issue regarding cost base and risk profile.
  • The proposed fresh comparables were functionally dissimilar to petitioner’s business model.

 Respondent’s Arguments

  • ITAT directed fresh determination of ALP, which permitted complete review of comparability analysis.
  • Proper FAR (Functions, Assets, Risks) analysis required re-evaluation of comparables.
  • Original acceptance of comparables was not based on detailed scrutiny.
  • Functional similarity is mandatory under Rule 10B and OECD guidelines.
  • Fresh comparables were necessary for correct ALP determination.

 Court Findings / Court Order

The Delhi High Court allowed the writ petition and quashed the show cause notice.

The Court held:

1. Scope of Remand Cannot Be Expanded

When a superior appellate authority remands a matter for a specific purpose, subordinate authorities cannot travel beyond that limited mandate.

2. Comparables Had Already Attained Finality

The selection of comparables was not disputed in earlier proceedings and therefore could not be reopened.

3. Fresh Determination Means Limited Fresh Exercise

The phrase “fresh determination” in remand must be read contextually and cannot authorize reopening settled issues.

4. Revenue Action Was Beyond Jurisdiction

The TPO exceeded jurisdiction by rejecting previously accepted comparables and introducing fresh comparables.

Final Order

Show cause notice dated 23.09.2016 and all consequential proceedings were quashed.
Writ petition allowed.

Important Clarification

The Court clarified that:

  • Remand proceedings are confined strictly to the scope of appellate directions.
  • Revenue cannot reinterpret remand orders to enlarge jurisdiction.
  • Comparability disputes cannot be reopened unless specifically remanded.
  • Transfer pricing proceedings must maintain procedural finality and certainty.

This judgment strengthens taxpayer protection against excessive expansion of remand proceedings.

Sections Involved

  • Section 92C – Computation of Arm’s Length Price
  • Section 92CA – Reference to Transfer Pricing Officer
  • Section 144C – Dispute Resolution Panel
  • Rule 10B of Income Tax Rules, 1962 – Determination of Arm’s Length Price
  • Section 92A – Associated Enterprise

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2017:DHC:1391-DB/SRB08032017CW115962016.pdf

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