The Bangalore Bench of Income Tax Appellate Tribunal ( ITAT ) directed the Transfer Pricing Officer (TPO) to reassess the arm’s-length price for Decathlon Sports India Private Limited’s trading segment after rejecting the foreign associated enterprise (AE) as the tested party.
Decathlon Sports India Private Limited,appellant-assessee,is a subsidiary of Decathlon, France, engaged in trading sports goods. It imports goods from AEs and third-party vendors for resale in India.
The assessee filed a return on 13.2.2021 at Rs. NIL, which was selected for scrutiny based on transfer pricing risk parameters. A notice under section 143(2) was issued on 29.6.2021. Due to international transactions, the assessing officer referred the case to the TPO on 03.12.2021.
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The assessee’s trading segment amounted to Rs. 7353162873/-, with 99% of purchases from Desipro Pte Ltd. Singapore. The assessee used the Transactional Net Margin Method (TNMM) and selected Desipro as the tested party. A comparability analysis was conducted using the Oriana database, focusing on companies in similar markets and activities.
Seven comparables were selected, and the tested party margin was calculated at 3.06%, with comparable margins ranging from 1.66% to 4.49%. The assessee concluded that the transaction was at arm’s length price (ALP).
The TPO, in a notice dated 16.2.2022, requested information on international transactions, which the assessee responded to on 18.2.2022. He also sought the financials of the AE, which the assessee stated were unavailable.
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On 27.6.2023, the TPO issued a show cause notice, stating that no reliable public information was available for the AE. He conducted a fresh search, finding three comparables with a margin of 5.04%.
The assessee defended the selection of the foreign AE, arguing that reliable information was available and the comparables were included in the Transfer Pricing Study Report(TPSR). Despite this, the TPO rejected the AE as the tested party and selected the appellant instead. He made an adjustment of Rs. 126,77,22,887 based on a Profit Level Indicator(PLI) of 0.66%, compared to 3.83% for the comparables.
The DRP, in its directions on 20.6.2024, upheld the TPO’s decision to reject the foreign entity as the tested party due to insufficient information. The assessee’s objections to the comparables, Metal Toy India Pvt. Ltd. and Stone Sapphire India Pvt. Ltd., were also rejected.
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The tribunal reviewed the rival contentions and the orders of the lower authorities. The main issue was whether a foreign associated enterprise (AE) could be considered the tested party. The assessee’s transfer pricing report mentioned that various functions, such as strategic management and marketing, were shared between the assessee and the France entity, while the Singapore entity handled purchasing, vendor identification, and logistics but did not bear significant risks.
The assessee argued that it should be considered a risk-bearing distributor and submitted information on its asset base. However, the tribunal found that the assessee lacked critical information about the Singapore entity when preparing the transfer pricing report, including its annual accounts. This raised concerns about the reliability of choosing the foreign AE as the tested party. The TPO had concluded that the foreign AE was more complex and carried higher risks.
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The appellate tribunal noted that the learned dispute resolution panel had rejected the foreign AE as the tested party, as sufficient information was missing for proper verification. The TPO also rejected the assessee’s choice, stating that it had not provided enough reasoning or information about the foreign AE.
The two member bench comprising Soundararajan.K(Judicial Member) and Prashant Maharishi(Vice President) sent the matter back to the TPO instructing the assessee to provide more data to support the selection of the foreign AE as the tested party. The TPO was asked to reassess whether the method used was reliable and if the arm’s-length price of the trading segment was correctly determined.
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