PR. COMMISSIONER OF INCOME TAX-4 v. ITOCHU INDIA PRIVATE LTD.

1. These three appeals by the Revenue are directed against the separate orders by the ITAT for Assessment Years(AYs)2009-10, 2007-08 and 2008-09 respectively.

2. The common issue soughtto be urged bythe Revenue in allthree ofthese appeals concerns determination of the arms length price (ALP) of the international transactions entered into by the Assessee during the AYs in question.

3. The admitted facts ofthe Assessee is that it a wholly owned subsidiary of Itochu Corporation of Japan ('ICJ') and is in the business of rendering support services in relation to facilitation and market support to its Associated Enterprises(AEs)in order to facilitate sourcing transactions of its AEs with prospective sellers. The Assesseeisknown asa'SogoShosha company.

4. The questionthatarose inLi&FungIndiaPvt.Ltd. v. Commissionerof Income Tax(2014)361 ITR 85(Del) before this Court was regarding the determination of the ALP in respect of transactions entered into by an Assessee (similarly situated as the Assessee in the present case). IN that context,it was observed bythis Courtas under: "This Court is ofthe opinion that to apply the transactional net margin method,the assessee's netprofit marginrealizedfrom the internationaltransactionshadto be calculated only withreference to the cost incurred by it and not by any other entity either third party vendors orthe associated enterprise. Textually,and within the bounds of the text must the Assessing Officer/ Transfer Pricing Officer operates, rule lOB (1) (e) does not enable, Page2of[4] consideration or imputation of cost incurred by third parties or unrelated enterprises to compute the assessee's net profit margin for application ofthe transactional net margin method.Rule lOB (1)(e) recognizes that "the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise "(emphasis supplied). It thus contemplates a determination of the arm's length price with reference to the relevant factors (costs, assets, sales, etc.) of the enterprise in question, i.e., the assessee, as opposed to the associated enterprise or any third party. The textual mandate, thus, is unambiguously clear."

5. In other words inLi <6: FungIndiaPvt.Ltd.{supra),this Courtset aside the approach of the Transfer Pricing Officer ('TPO') for proposing an additional5% mark-up onthefree on board valueofexportstothird parties as the same would tantamount to application ofTransactional Net Margin Method('TNMM')in an erroneous manner.

6. The Court is informed that the Revenue's appeal against the above decision for the AY 2006-07 is pending in the Supreme Court. However, there is no stay ofthe operation ofthe saidjudgment.

7. In Principal Commissioner ofIncome Tax v. Mitsui& Co.India Pvt. Ltd.(2016)384ITR 360(Del),while dealing with another Sogo Shosha Company,this Courtfollowed its earlier decision inLi& FungIndiaPvt. Ltd. V. CommissionerofIncome Tax{supra)and dismissedthe Revenue's appeal againstthe orders ofthe ITAT thatfollowed the decision in Li& Fung India Pvt. Ltd. {supra).In the present case as well the ITAT has Page3of[4] followed the decision ofthis CourtinLi& FungIndiaPvt.Ltd.{supra).

8. What requires to be noticed also is that in relation to this very Assessee for AYs 2011-12, 2012-13 and 2013-14, the Assessee's determination of ALP has been accepted by the Assessing Officer. This fact has been noticed by theITAT in the impugned orderfor the AY in question as well.

9. This Court has already held that including the FOB value of the AE's contract in the operating cost in order to determine its margin not to be sustainable in law.The ITAT has rightly held that the TPO has"artificially enhanced the cost base ofthe taxpayer and proposed a mark up ofthe FOB value ofgoods sourced by AEs and as such this approach is not available in TNMM under Rule 10 B(l)(e)." Further, the observation ofthe ITAT that the TPO "has wrongly recharacterized the business function ofthe taxpayer from a business support service provider to a trader" also suffers from no legal infirmity.

10. No substantial question of law arises. The appeals and pending applications are dismissed. EIDHAR,J. M I.S.MEHTA,J. MAY 13,2019 nd IT A 1111/2018 & connected matters Page4of[4]