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2016 (6) TMI 583 - AT - Income TaxTransfer pricing adjustment - determination of ALP - bench marking technique - Held that:- There is a strength in the contention of the learned Authorised Representative that in view of the complexity of the transactions between the assessee and its AEs as well as the third party transactions in which the assessee has to pay the selling commission to the AE, the assessee adopted entity level operating margin for the purpose of bench marking its international transactions. However, this method is not permitted as per the provisions and rules of the transfer pricing under Income Tax Act and I.T. Rules and therefore to that extent, we find that the learned CIT (Appeals) was justified in rejecting the methodology applied by the assessee as well as by the TPO. Once the CIT (Appeals) has rejected the entity level profit margin of the assessee for the purpose of bench marking the international transactions with ALP, the CIT (Appeals) was required to redo exercise of determination of ALP as per the provisions of transfer pricing. Instead of following the proper procedure stipulated under Chapter X of the I.T. Act as well as Rule 10 of I.T. Rules, the CIT (Appeals) has proceeded to take the AEs of the assessee as tested party and further recomputed their profit margin by excluding certain expenses which we find is not permitted under the provisions of transfer pricing. Not only changing the tested party from the assessee to its AE, the CIT (Appeals) has also selected a domestic company as a comparable to the AE of the assessee. Therefore the entire exercise of determining the ALP by the CIT (Appeals) is contrary to the provisions of transfer pricing under the I.T. Act. Hence in view of the facts and circumstances of the case, we set aside the impugned order of the authorities below and remit the issue to the record of the Assessing Officer / TPO for deciding the matter afresh by considering the segment-wise data of the assessee and then compare the same with the comparable companies in the light of various decisions relied upon by the assessee. We find that in the series of decisions, this Tribunal has come to a conclusion that the threshold limit of the RPT should not be more than 15% in normal circumstances where there is no difficulty in selecting the comparable companies. Therefore we direct the TPO to apply the RPT filter at 15% instead of 25% and then consider the comparability of the companies. Since the assessee did not fully co- operate with the authorities below in the first round of the proceedings therefore we direct the assessee to co-operate in the proceedings before the A.O./TPO and furnish the relevant and requisite details in order determining the ALP. Needless to say that the Assessing Officer/TPO also consider the benefit of tolerance range of + / - 5% as per the proviso to Section 92C(2) as well as working capital adjustment. Reduction of foreign currency expenses from the export turnover - Held that:- We direct the Assessing Officer/TPO not to reduce the expenses from the export turnover for computation of deduction under Section 10A Foreign tax credit - Held that:- In the outcome of the remand proceedings if any tax liability is determined by the Assessing Officer, then the tax credit in respect of the foreign tax paid by the assessee is also required to be considered. We accordingly direct the Assessing Officer to consider the appropriate credit for foreign tax paid. Computation of deduction under Section 10A - Held that:- The Hon’ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others ( 2011 (8) TMI 782 - KARNATAKA HIGH COURT ) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator.
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