Importance of FAR analysis to determine ALP; choice of Method & Profit Level Indicator ("PLI")

GAP International Sourcing (India) Pvt. Ltd vs. ACIT (ITAT Delhi)

(i) The FAR analysis gives the basis of broad characterization for e.g. Manufacturer, Service Provider, Distributor, etc with a further sub-characterization including low-risk service provider, high risk service provider; Full-Fledged manufacturer, contract manufacturer, etc. These characterizations are vitally important to determine the arm’s length price of international transactions; (ii) The Dept has proceeded on the erroneous premise that the assessee is a risk bearing AE and its functions are not in the nature of a service provider only. The FAR attributable to assessee are far greater than what are claimed. It is also assumed that the assessee has developed substantial intangibles in the form of human resources and supply chain and enjoys location advantages. The fact is that the assessee is only a low risk procurement support service provider; (iii) The arm’s length pricing (method & Profit Level Indicator (PLI)) should be the one which reflects commercial and economic realities of the industry and does not lead to aburd results. The Dept’s choice of PLI of percentage of FOB value of goods procured by parent results in absurd and distorted results. The appropriate PLI is net profit/ total cost as adopted by the assessee. (iv) On the Q of percentage of mark-up to be applied to the assessee’s cost, in a comparable instance of Li & Fung vs. DCIT 12 ITR (Trib) 748, the rate of 32% was applied as opposed to the rate of 15% applied by the assessee. The said rate has to be applied to the assessee’s case well.