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2014 (11) TMI 132 - AT - Income TaxTransfer pricing adjustment – Computation of ALP – Addition made on entire transaction - Assessee contended that the addition on the entire transactions under taken by the assessee, irrespective of the fact that during the year, the assessee has also under taken transactions with unrelated treaties which are not subject to transfer pricing – Held that:- The assessee was established in 1998 as a 100% subsidiary of Danisco A/S Denmark - Danisco India is engaged in the business of manufacturing and trading of food additives - The manufacturing business in respect of food flavours and the trading business is for products for falling under the category of food ingredients – assessee rightly contended that the methodology adopted by the TPO has been to arrive at the deficiency in the operating profits of the assessee vis-ŕ-vis the comparables and attribute the entire differential only to the prices accordingly - TPO has conveniently ignored that the purported deficiency in the profits of the appellant is also a function of several other normal third party business expenses incurred by the assessee during the year - in the manufacturing activity the majority of the raw material was purchased from unrelated third parties - TPO has himself has noted only 12.5% of purchases are from related parties - about 87.5% of the purchases of raw material are from unrelated parties and hence these transactions were outside the purview of transfer pricing examination - in respect of purchase of traded goods, a small portion of the same was purchased from unrelated entities. Selection of comparables – Economic adjustment claim denied – Computation of margins erroneous – Held that:- Assessee rightly contended that there was error in rejecting 4 comparable companies selected by the assessee in its transfer pricing document - three of the comparables namely Ashok Alco Chem, Gayatri Star Chem and Kothari Ferment has been rejected on the ground that they have negative net-worth - there is no correlation between net worth and profitability of a company - The fact that two of these 3 companies had positive margins clearly shows the absence of this correlation - loss and profit are normal incident of business and the law as provided in section 92C(2) provides for taking an arithmetic mean of more than one ALPs is meant to take into account profit and loss making companies - almost half of the revenue of the assessee have been derived from trading as evident from the segmental accounts - the predominant international transaction is import of traded goods - choice of manufacturing companies as comparables for the assessee company having both trading and manufacturing operations is fundamentally flawed and contrary to the standards of comparability laid down in Rule 10B(2) of I.T. Rules 1962 - TPO ought to have used the segmental accounts furnished by the assessee to examine the trading and manufacturing activities separately - Separate set of comparables should have been chosen for the trading segment. Furthermore for trading Resale Price Method (RPM) widely acknowledged as the most appropriate method for distributors ought to have been used. Failure to consider the supplementary analysis carried out by the assessee using resale price method (RPM) for determining the arm’s length price (ALP) of the import transactions – Held that:- Assessee rightly contended that in the trading segments the assessee imports the ingredients from associated enterprise(s) and resells them to its customers in India through its distribution chain - In its transfer pricing documentation the assessee had conducted a company as a whole approach and applied TNMM as the most appropriate method to benchmark its international transfer - the assessee in its transfer pricing documentation had also conducted a secondary analysis in form of resale price method for the trading transactions undertaken by it - under the trading segment the assessee merely imports the ingredients and resells it further to unrelated parties - in respect of the international transaction of import of furnished goods, wherein the assessee merely acts a reseller / distributor it has applied RPM while comparing the gross profit margin from the sale of such imports in the domestic market with the gross profit margin earned by the comparable companies from the similar transactions - The international transaction of import of finished goods from the AEs for distribution in India would appropriately be benchmarked applying RPM as defined at Rule 10B (1) by comparing - the gross profit margins from the transactions of resale of similar products sourced from unrelated parties the gross margins earned by the comparable companies is 17.86% while that earned by assessee is 50.01%. Thus the international transactions undertaken by the assessee with respect to its trading segment are at arm’s length as defined by the Indian Transfer Pricing regulations - there was substance in the contentions of the assessee and the matter is to be remitted back to the TPO for his fresh consideration and decide the issue afresh after affording opportunity of being heard to the assessee and discussing their submissions in the order and reasons, if any for not agreeing or agreeing with them – Decided in favour of assessee.
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