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2021 (7) TMI 750 - HC - Income TaxTP Adjustment - 'arranged' pricing' - TNMM method or CUP method - eligible profits of the assessee - determination of excess export profit - AO restricting the deduction claimed under Section 10-B - deemed income under the head “Other Sources” - as per CIT-A two firms that is the exporter in India and the Importer in the USA were closely associated with common shareholder and substantial profits of the Indian Company were siphoned off by him - whether Tribunal was right in not considering the revenues appeal relating to the order of CIT(A) to exclude only 83.1% of the profit admitted by the assessee as against the stand of the revenue that the entire 100% of the profit admitted by the assessee had to be excluded from the exempt income.? HELD THAT:- As cursory glance into the two methods i.e. “Comparable Uncontrolled Price method” and “Transactional Net Margin method” reveals that Comparable Uncontrolled Price method (CUP) is applied when price is charged for a product or service. This is a comparison of prices charged for the property transferred or service provided in a controlled transaction to a price charged for property or services transferred in a Comparable Uncontrolled transaction. The TNMM (Transactional Net Margin Method) requires establishing comparability level at a broad functional level. It requires comparison between net margin derived from operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation. The net profit margin earned by an associate enterprise is compared with net profit margin of uncontrolled transactions to arrive at arm's length price. As already pointed out the superiority of any particular method to arrive at the ALP is ruled out.The TNMM (Transactional Net Margin Method) requires establishing comparability level at a broad functional level. It requires comparison between net margin derived from operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation. The net profit margin earned by an associate enterprise is compared with net profit margin of uncontrolled transactions to arrive at arm's length price. Thus CUP method was found to be more appropriate and it was the discretion of the revenue to accept it. Subsequently, the assessee company gave a revised calculation dated 28.12.2006 for a much lesser amount citing error in calculation eventhough initially they had admitted excess profit of ₹ 3.54 Crores. The revised calculation mentioned the excess profit as US $ 1,85,702. Strangely, the Income Tax Appellate Tribunal has not discussed this aspect also. Assessing Officer and the CIT(A) were right in observing that the two companies were closely associated and had common shareholder who was a foreigner - The revised calculation by the assessee company was clearly an 'after thought' after knowing very well that the Assessing Officer had accepted its earlier submission of ₹ 3.54 Crores excess profit.The contention that with a limited source of fund of just ₹ 5.57 Crores the assessee company was earning more than ₹ 12.50 cores in itself showed that the profit was overstated by pricing the products - The revised calculation submitted by the assessee company was not accepted as it had no actual error in it but contained two new European comparables to arrive at the ALP and therefore considered as an 'after thought' by the Assessing Officer. he assessee was accepted even though it was lower than the excess profit over ALP arrived at by the Transfer Pricing Officer (TPO) by another method. We also find that the CIT(A) in her order had suddenly deviated from her narration of her observation and concluded that “he (Assessing Officer) ought to have excluded only 83.1% of ₹ 3.54 Crores for the purpose of recomputing the deduction under Section 10B”. In the instant case the close association between the seller and the buyer and their 'arranged' pricing were adequately substantiated by the Transfer Pricing Officer (TPO) / Assessing Officer (AO) / CIT(A). We therefore uphold that part of the CIT(A)'s order which confirms in toto the Assessing Officer's order as regards the ALP and the resultant excess profit to be treated as deemed income under 'other sources'. The ITAT's order of deleting the disallowance of ₹ 3.54 Crores is set aside. However, as regards the value of scrap sales, the levy of interest and the 5% of interest income taken as expenditure, we find no infirmity in the ITAT's order. In both the appeals it was observed by the CIT(A) that the practical difficulty was of hitting upon correct comparables to arrive at the ALP for this particular product and therefore the submission of the assessee was accepted even though it was lower than the excess profit over ALP arrived at by the Transfer Pricing Officer (TPO) by another method. This observation of CIT(A) is acceptable and answers the substantial question of law No.2.
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