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2016 (5) TMI 867 - AT - Income TaxAddition on account of transfer pricing adjustment - determination of the most appropriate method - non availability of comparable uncontrolled transaction - computation of adjusted gross margin of distributors - Held that:- RPM is quite a useful method where the goods purchased by the Indian AE are sold without doing any value enahncement. We, therefore, approve the application of RPM as the most appropriate method. The term ‘uncontrolled transaction’ has been defined in Rule 10A(a) to mean: ‘a transaction between enterprises other than associated enterprises whether resident or nonresident.’ When we substitute the definition of the term ‘uncontrolled transaction’ in Rule 10B(1)(b)(ii), the relevant part would read that the resale price of the enterprise is reduced by the amount of normal gross profit margin accruing in a comparable transaction between enterprises other than the associated enterprises. ALP of an international transaction of purchase of goods is always determined on the basis of the gross profit margin on the resale price charged in a comparable transaction between enterprises other than the associated enterprises. It cannot be anything else. Only when some gross profit margin in comparable transaction between two independent enterprises is available, sub-clause (ii) of Rule 10B(1)(b) works. The existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and resale of similar goods is an essential condition for determining the ALP under RPM. Adverting to the facts of the instant case, we find from the calculation of the ALP under RPM as extracted above that the TPO has taken arm’s length margin of GP on sales at 50%, which has been considered for determining the ALP of this international transaction at ₹ 4.24 crore leading to transfer pricing adjustment of ₹ 1.05 crore. This 50% arm’s length gross profit margin on sales has been taken by the TPO on the basis of what the assessee stated before the Customs Authorities in a generalized manner. The TPO has not brought on record any comparable uncontrolled case and thus has not eventually determined gross profit margin from purchase and resale of similar goods in a comparable uncontrolled transaction. In the absence of availability of any comparable uncontrolled transaction, we cannot approve the action of the AO in making such an addition, as the same has not been done in the manner prescribed under the rule. As we have upheld the application of RPM as the most appropriate method and found the view point of the ld. CIT(A) in deleting addition to be untenable, we consider it expedient to set aside the impugned order and remit the matter to the file of TPO/AO for a fresh determination of the ALP - Decided in favour of assessee for statistical purposes.
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