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2016 (4) TMI 478 - AT - Income TaxTransfer pricing adjustment - transfer pricing adjustment has been calculated by reducing the actual gross receipts of the assessee from its AE at ₹ 116.95 crore (`Costs’ incurred at ₹ 108.89 crore plus 8% markup at ₹ 8.06 crore) from the amount of profit margin calculated by the TPO at ₹ 176.14 crore (by applying 6% on FOB value of goods exported at ₹ 2935.69 crore) - Held that:- Under no circumstance, the amount of transfer pricing adjustment can be calculated by picking up `profit margin’ of the assessee or comparables and then comparing it with the `price’ charged by the comparables or the assessee, as has been done in the extant case. Such calculation of the transfer pricing adjustment by the TPO has resulted into landing in a piquant situation, in which 'ideal profit’ has been compared with the `actual price charged’ for the purposes of making a transfer pricing adjustment, which is patent incorrect. We have noted above that the assessee applied the TNMM under which the ALP can be determined by comparing the adjusted profit margin realized by comparables as per subclauses (ii) and (iii) with the realized profit margin of the assessee as per sub-clause (i) of Rule 10B (1)(e). As the TPO has computed ALP of the international transaction with the help of a method unknown to law, which calculation is again flawed because of making comparison of 'profit’ with the 'gross revenue’, we cannot countenance the same. The right course for the TPO was to compute assessee’s profit margin realized under the TNMM as per Rule 10B(1)(e)(i) from its annual accounts without any adjustment and then compare it with the adjusted net operating profit margin of the comparables with the same base. This would have led to the determination of ALP of this international transaction. In view of the foregoing discussion, we are satisfied that the action of the AO/TPO in making/proposing addition/adjustment on account of transfer pricing, cannot be upheld for the reason that the shifting of the base on which markup has been applied has been turned down by the Hon'ble Delhi High Court in assessee’s own case; the mechanism followed by the TPO for calculating the transfer pricing adjustment has no legal legs to stand on; and further the assessee’s profit margin is at ALP under the TNMM on the basis of figures mentioned in the TPO’s order, whose correctness has not been disturbed by the TPO. Ex consequenti, the addition is hereby deleted. - Decided in favour of assessee
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