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2010 (2) TMI 1170 - AT - Income TaxRectification of mistake u/s 154 - TP Adjustment - Determination of Arms Length Price - value of international transaction - whether TPO’s order is erroneous because he has applied the net profit margin of 7.25% on the gross sales and followed a complicated procedure to arrive at the amount of adjustment? HELD THAT:- We partially agree with the submissions of the ld. counsel for the assessee that original TPO’s order is definitely erroneous because he has applied the net profit margin of 7.25% on the gross sales and followed a complicated procedure to arrive at the amount of adjustment. In simple terms if the sales to Associated Enterprises is taken at ₹ 25 crores and straight way 7.25% margin is applied then approximately total margin would be ₹ 1.81 crores, whereas adjustment has been made at ₹ 2,57,26,138/-. At the same time we are unable to agree with the order of ld. CIT(A) that no adjustment could have been made. Admittedly, the assessee has no objection that if TNMM was followed and even no objection was raised to the average profit rate of 7.25%. However, as argued that this rate should be taken as only operating profiting which is not correct because TNMM in Rule 10B of Income tax Rules refers to only net profit and, therefore, there is no scope for reducing interest or any other overheads. Here also TPO has at top of the chart where average rate was calculated at page 2 of his order refers to OP/TC%. Therefore, it is not clear whether this margin is net profit or not. Similarly how the cost etc. was distributed by ld. CIT(A) is not clear because detailed figures are not available. Therefore, in the interest of justice we set aside the order of ld. CIT(A) and remit the matter back to AO with a direction to follow TNMM by working out the average net profit. Further, the adjustment should be worked out on a very simple basis by reducing the net profit declared by the assessee from the gross sales and then divide the same in the controlled and uncontrolled sale and apply the net profit rate. Appeals are allowed for statistical purposes.
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