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2017 (10) TMI 1086 - AT - Income TaxTPA - determination of the ALP under the CUP method or TNMM - international transaction - Held that:- Sub-clause (i) deals with the computation of the net operating profit margin realised by the enterprise from an international transaction in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Sub-clause (ii) provides that the net operating profit margin realised by a comparable uncontrolled transaction should be computed having regard to the same base as that taken in sub-clause (i) for the assessee. In the formula for calculating the profit margin under rule 10B(1)(e) under sub-clauses (i) and (ii), there can be any denominator, such as, costs incurred or sales effected or assets employed or to be employed. However, the numerator is uniform, which is, net operating margin. In fact, the numerator is ‘operating profit’ and not the ‘net profit’. Whereas, operating profit is the excess of operating revenue over the operating costs, net profit is the excess of revenue over all costs, both operating and non-operating. Coming back to the decision of the TPO, it is found that he proceeded to compute the ALP by considering that one Mr. Paul Solgan, the Executive Vice President, was seconded to the assessee in another year. His cost per day was worked out. 120% and 80% of such cost was attributed as the cost per day of Sr. VP and Assistant VP to work out the total cost at ₹ 1,54,60,875, which was increased by the arm’s length margin of comparables at 12.89% for determining the arm’s length price at ₹ 1,74,53,782/-. As the assessee actually paid a sum of ₹ 3,76,54,642/-, the TPO proposed transfer pricing adjustment of ₹ 2,02,00,860/-. It is obvious that the methodology adopted by the TPO for determining under the TNMM does not conform to the method prescribed under rule 10B(1)(e) and hence cannot be approved. We are confronted with a situation in which the action of the CIT(A) in deleting the transfer pricing addition cannot be upheld and equally the view of the TPO in applying the TNMM also cannot be approved for the reasons assigned supra, albeit his exercise of rejecting the assessee’s determination of ALP is correct. Under such circumstances, we are of the considered opinion that the ends of justice would adequately meet if, the impugned order is set aside and matter is restored to the file of the AO/TPO with a direction to determine the ALP of the international transaction afresh as per law after allowing a reasonable opportunity of being heard to the assessee.
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