ITAT rejects working of PLI when TPO took FOB value of goods as 'total cost' instead of cost incurred by assessee

While working out PLI 'total cost' has to be taken as costs incurred by assessee and not the FOB value of goods.

Facts:

a) The assessee had provided 'Sourcing Support services' to its associated enterprises and it was compensated at cost plus markup of 5 per cent.

b) It adopted Transactional Net Margin Method (TNMM) as the most appropriate method with Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC).

c) The assessee declared its OP/TC and claimed that its margin was within tolerable range of 5 per cent range and, hence, the transactions to be considered at ALP.

d) T.P.O. applied markup on the FOB value of goods between third party enterprises instead of assessee's cost. The DRP did not change the cost base but reduced the percentage of markup applied by the TPO.

The Tribunal held as under:

1) In the preceding year, the Transfer Pricing officer (‘TPO’) had applied the same base of 'total cost' as in the year under consideration, which got the approval from the Tribunal;

2) The assessee had assailed the Tribunal's order before the High Court and, the High Court had reversed the Tribunal's order by holding the FOB value of goods between the third party enterprises, sourced through the assessee, could not be accepted.

3) Thus, the markup (on FOB value of goods) applied by TPO and approved by the DRP could not be accepted. Therefore, the 'total cost' being the denominator in the PLI of OP/TC, was to be taken as the cost incurred by the assessee and not the FOB value of goods between third party enterprises. - Li & Fung (India) (P.) Ltd. v. DY. CIT [2014] 44 taxmann.com 125 (Delhi - Trib.)