TMI Blog2009 (11) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not relevant for determining the mean of profit. As seen that in subsequent assessment year 2004-05, and, thereafter, the assessee has applied the same TNMM, though on merit having regard to the net margin of profit earned by the assessee as compare to the net margin of profit of comparables, no adjustment was called for. TNMM method applied in this assessment year has been accepted by the assessee as well as by the department in subsequent assessment year insofar as the facts of the present case are concerned. Having regard to the facts and circumstances, and absence of sufficient materials and evidences to apply another method, we are in full agreement with the conclusion of the CIT(A) in holding that TNMM is the correct method applied by the TPO for determining the arm s length price in respect of the raw materials acquired by the assessee from its sister concerns in Korea. TPO has failed to make adjustments to the net profit margin determined by him on account of benefit accruing to the assessee for utilizing the fund - Only customer purchasing printed circuit board from the assessee is LG Electronics, and its subsidiaries in Korea and Thailand are the principal p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the AO to modify the assessment and make the adjustment only to the extent of difference in the arm s length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the Assessing Officer and further confirmed by the CIT(A) is reduced. We order accordingly. - G.E. VEERABHADRAPPA AND C.L. SETHI, JJ. V.K. Mehta for the Appellant. Smt. Mona Mohanti for the Respondent. ORDER C.L. Sethi, Judicial Member. - The assessee is in appeal against the order dated 29-11-2007 passed by the ld. CIT(A) in the matter of an assessment made under section 143(3) of the Income-tax Act, 1961 ("the Act") pertaining to the assessment year 2003-04. 2. The grounds of appeal raised by the assessee are as under: " 1. The ALP (arm s length price) fixed at Rs. 4,21,83,057 is not justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Purchase of Raw Material TNMM 4,75,54,020 2. Purchase of second-hand goods 40,15,757 3. Repairing Costs TNMM 1,20,903 5. The bulk of international transactions undertaken by the assessee is purchase of raw material worth Rs. 4.75 crores, which is used in manufacturing of printed circuit boards. 6. For the purpose of determining the arm s length price by TNM method, the assessee, in its transfer price report, mentioned eight comparable finalization data, which were pertaining for the year 2003, is as under : Company Operating Margin (%) Ador Powerton Limited 11.50 Akasaka Electronics Limited 11.96 Anand Electronics Inds. Limited 9.26 BCC Fuba India Limited (6.47) Fine-Line Circuits Limited 7.85 Hyderabad Flextech Limited (87.12) Precision Electronics Limited (2.35) Sanmar Micropak Limited (33.59) Mean (11.12) 7. The Assessing Officer referred the matter to the TPO (Transfer Pricing Officer) for determining the arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fine-Line Circuits Limited 7.85 Precision Electronics Limited (2.35) Mean 5.29 The operating profit margin of the assessee has been stated to be at 1.65 per cent in the transfer pricing report. The assessee was asked to explain the working of this margin. The counsel of the assessee has explained the working out this margin as under : Sales 16,98,68,447 Less: Excise Duty 2,31,38,291 Net Sales 14,67,30,156 Add: Other income 8,33,889 Total 14,75,64,045 Net Profit as per P L A/c 24,24,957 Add: Interest 10,218 Operating Profit 24,35,175 Operating Profit Margin 1.65% In view of the above discussion, the assessee on comparability analysis on Transactional Net Margin Method is expected to have an operating margin of 5.29 per cent. Determination of Arm s Length Price Sales Rs. 14,75,64,045 Operating Profit @ 5.29% Rs. 78,06,138 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associate concerns would be called for. An alternative contention was also made by the assessee that even otherwise if TNM method is applied on the adjustment to the cost price, it can only be applied to the imported goods which comprises only 45.50 per cent of the total purchases, and, therefore, applying the operating profit of 5.29 on total sales of Rs. 14,75,64,045, is not justified. The operating profit @ 5.29 per cent at best be applied only to the proportionate sales made out of raw materials imported from the associate concerns and not in respect of total sales of manufactured items which were manufactured from the raw materials procured by way of import as well as indigenously. 12. The ld. DR on the other hand, supported the order of the authority below. 13. It is not in dispute that II Jin Electronics Ltd., Korea was established in 1978 and it is incorporated entity registered in Korea and is a resident of Korea for tax purposes, II Jin Electronics Ltd., Korea, is one of principal vendor to LG Electronics Ltd. in Korea, and it supplies printed circuit boards to the factories of LG Electronics Ltd. in Korea and Thailand. The majority of shares of ILNLG Korea are wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever objections has been raised by the assessee with regard to the some comparable to determine the mean of profit, the Transfer Pricing Officer has taken into account and has excluded those concerns which were objected to by the assessee and not relevant for determining the mean of profit. It is further seen that in subsequent assessment year 2004-05, and, thereafter, the assessee has applied the same TNMM, though on merit having regard to the net margin of profit earned by the assessee as compare to the net margin of profit of comparables, no adjustment was called for. In other words, the TNMM method applied in this assessment year has been accepted by the assessee as well as by the department in subsequent assessment year insofar as the facts of the present case are concerned. Having regard to the facts and circumstances, and absence of sufficient materials and evidences to apply another method, we are in full agreement with the conclusion of the CIT(A) in holding that TNMM is the correct method applied by the TPO for determining the arm s length price in respect of the raw materials acquired by the assessee from its sister concerns in Korea. The CIT(A) s findings and observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h principles or not. No such preference in favour of particular set of methods is found in the TP regulations in India. Consequently, the final selection of a method as the MAM is to be decided purely on facts and circumstances of a case and availability of reliable data. The Aztec ruling also precisely records a similar finding. 8.3-2 In the case, the appellant itself had chosen TNMM as the MAM for the international transaction relating to purchase of raw-materials from the A.E. as evident from annexed Statement-1 of that report. The TNMM was accepted as the MAM after rejecting all other specified methods under the TP regulations in India. The relevant portion of the TP report is reproduced below: The following methods were rejected based on the above factors (reproduced in Para 4.6 of this order) : uThe Comparable Uncontrolled Price Method was rejected on the basis of no comparable transaction being carried out by the Indian entity with a third party. uThe Resale Price method was rejected on the grounds of II Jin Korea not having sold similar items to any unrelated enterprise for this method to be applied. uThe Cost Plus method was rejected as no information on dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant s transactions as no comparability analysis has been conducted from that prospective under the specified TP regulations. 8.3-5 In view of the foregoing analysis, I am of the considered view that under the given circumstances, TNMM is the MAM and the TPO by accepting the appellant s own methodology has not committed any legal infirmity. The argument for using an analysis by taking the Korean A.E. as the tested party is also not acceptable as it is not substantiated by any real comparability analysis." 14. In the course of hearing of this appeal, the ld. counsel for the assessee also pointed out that the TPO has failed to make adjustments to the net profit margin determined by him on account of benefit accruing to the assessee for utilizing the fund in as much the assessee s associate enterprise was supplying raw materials to the assessee on credit for which the associate enterprise was not charging any interest, and if adjustment is made on account of this benefit of purchasing raw material on credit, the adjustment made by the TPO would be wiped out and, consequently, no addition would be called for. In this respect, it is important to point out that only custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociate concerns. In the present case, the Assessing Officer has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the Assessing Officer to modify the assessment and make the adjustment only to the extent of difference in the arm s length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the Assessing Officer and further confirmed by the CIT(A) is reduced. We order accordingly. 16. In the result, the appeal filed by the assessee is partly allowed in the manner as indicated above. - - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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