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2014 (10) TMI 460 - AT - Income TaxTransfer pricing adjustment – Adoption of method - Evaluation of royalty payment, technical fees and other payments by adopting CUP method without justifying how the same was most appropriate method – Held that:- Whether the international transactions have to be considered separately or independently without aggregating them as part of the segment to which they relate, the term ‘international transaction’ has been defined in section 92B of the Act to mean and include transactions between two or more AEs, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money or any other transaction having bearing on the profits, income, losses or assets of such enterprise. Section 92 of the Act provides that income from international transactions between AEs shall be computed having regard to ALP - the Act and the Rules contemplate determining ALP by aggregating international transactions which are multiple, interlinked or inter-related to each other and cannot be evaluated separately - To this extent the conclusions of the TPO regarding determination of ALP by taking segmental results without looking into as to whether the two segments are interlinked or inter-related cannot be sustained. The TPO has arrived at the bifurcation of the manufacturing and trading segmental operating results - the trading and manufacturing segments are interlinked and therefore a combined transaction approach has to be adopted, the results arrived at by the TPO is combined - If the segmental results are combined, the operating revenue of the assessee would be 3767.91 crores and the operating profit would be ₹ 94.34 crores - Thus, the operating profit margin on sales would be 2.517 - If the arithmetic mean of the five comparables as above is tested as against the operating profit margin on sales of the assessee at 2.517%, then the same would be within the (+)/(-) 5% range of the arithmetic mean and therefore no addition by way of adjustment to the ALP can be made – Decided in favour of assessee. Computation of ALP - Whether the TPO can come to a conclusion that the ALP of an international transaction is nil because no services were rendered or that the assessee did not derive any benefit from the AE for which payments were made – Held that:- The conclusions of the TPO/DRP that the trading and manufacturing segment of the Assessee are distinct and not inter related warranting combined transaction approach is not correct and that a combined transaction approach has to be adopted and that on the basis of combined transaction approach the price paid for the international transaction is at Arm’s Length – relying upon Castrol India Ltd. v. ACIT [2013 (1) TMI 212 - ITAT MUMBAI] - it was incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil - the stand taken by the assessee in this regard deserves to be accepted - the TPO has to work out the ALP of the international transaction by applying the methods recognized under the Act - He is not competent to hold that the expenditure in question has not been incurred by the assessee or that the assessee has not derived any benefits for the payment made by the assessee and therefore he cannot consider the ALP as NIL. Determination of ALP at NIL in respect of royalty payments – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that the TPO’s determination of the ALP of the royalty payment at ‘nil’ cannot be supported - For such ALP determination, a proper analysis of comparables is required to be performed and the TPO is directed to identify suitable comparables and, after providing adequate opportunity to the appellant to determine the appropriate ALP of royalty payment – Decided in favour of assessee.
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