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2021 (2) TMI 675 - AT - Income TaxTP adjustment on entity level rather than the transactions with the Associated enterprises (AEs) - TNMM - whether on segregate or aggregate approach of international transactions? - HELD THAT:- The case of the assessee, with which we concur, is that the transfer pricing adjustment ought to have been restricted to the international transactions rather than the entity level transactions. Section 92 is the first section of the Chapter-X containing special provisions relating to avoidance of tax. Subsection (1) of section 92 provides that: `Any income arising from an international transaction shall be computed having regard to the arm’s length price’. Thus it is graphically clear that the ALP and the consequential transfer pricing adjustment are contemplated only in respect of the international transactions and not the entity level transactions. The TPO, in the instant case computed transfer pricing adjustment in respect of entity level transactions and then forgot to restrict it to the international transactions. In a case of combined TNMM, when there are international transactions of the income as well as expenses nature, the transfer pricing adjustment can be made only by considering either the expenses or the incomes. Out of the balance four international transactions under the `Manufacturing activity’ taken by the TPO, three transactions are of expense nature and one is of income nature. As the TPO took the PLI of OP/OR, naturally, the transfer pricing adjustment as per his version could have been in respect of the international transactions of expenses items and he has also proceeded with the costs base rather than the revenue - after finding out the amount of entity level transfer pricing adjustment accordingly, the TPO should have gone further by restricting it to the transactions with the AEs by ascertaining value-wise percentage of such transactions to the total operating costs of the assessee and then applied such percentage to the amount of the entity level transfer pricing adjustment. AR has placed on record a computation of value of the international transactions in the `Manufacturing activity’, warranting adjustment towards expenses, at ₹ 14.15 crore and also the percentage of such costs to total operating costs of the assessee at 4.26%, thereby working out the proportionate transfer pricing adjustment at ₹ 55,87,148/-. This calculation has not passed through the eyes of the AO/TPO. Under these circumstances, we set aside the impugned order and restore the matter to the file of the AO/TPO for verifying the correctness of the above figures given by the ld. AR and then deciding the issue afresh. Assessee appeal is partly allowed for statistical purposes.
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