TMI Blog2011 (1) TMI 151X X X X Extracts X X X X X X X X Extracts X X X X ..... e only ground for rejecting resale price method adopted by the assessee is that the comparables are wrongly chosen - Held that: As the assessee is a trader, without value addition to the goods, we find force in the submission of the assessee that resale price method is the most appropriate method for determining the ALV with respect to AE transaction. - as the comparables given by the assessee i.e., Flawless Diamonds and Professional Diamonds are not in the business of purchase and sale of rough diamonds, it would have to set aside of the issue to the file of the Assessing Officer for fresh adjudication, so as to enable both the assessee, as well as the Assessing Officer to undertake a fresh exercise, by finding out appropriate comparables, and adopting resale price method. Variation upto 5% - The second proviso to s. 92C(2) (as substituted by F (No. 2) Act, 2009 w.e.f 1.10.09) clearly shows that if the difference is less than 5% then the actual price paid should be considered as arm’s length price. The Transfer Pricing Officer as well as CIT(A) have clearly observed that difference in respect of these two items is 4% and, therefore, same has to be reckoned in terms of second prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns is always arrived, at the entity level and cannot be segmented unless the margins of the external comparables are also segmented. He held that there is no provision for calculating profit only on sales of goods purchased from AE. Hence, he rejected the contention of the assessee to calculate profit only on the sale of the goods purchased from the AE. Thereafter he also rejected the contention of the assessee to consider net purchases, instead of gross purchases. He concluded as follows : Thus to achieve a profit margin of arithmetic 2.68% on sales the appellant ought to have purchased goods at a price of Rs. 4.89 crores or at a price within 5% of the arithmetic mean which would mean that the appellant should have purchased goods at a maximum of Rs. 5.13 crores (105% of 4.89). Since the appellant has purchased/imported at a price higher that Rs. 5.13 crores, therefore the import transaction is not at arm s length. In view of the above, an adjustment of Rs. 73 lac (5.62 -4.89) is required to be made to the income of the assessee by making an adjustment of Rs. 73 lacs to the transaction of import as against an adjustment of Rs. 96 lacs made by the A. O. Hence the appellant gets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method (RSP) was correct and that the CIT(A) has clearly demonstrated at paras 7.7 and 7.8 of his order that both M/s. Flawless Diamonds as well as M/s. Professional Diamonds are in the field of diamond cutting and polishing and not dealing in trade of rough diamonds. Thus he submitted that the assessee was wrong in arguing that resale price method adopted by the assessee was not rejected. (b) That transaction net margin method is the best method under the facts and circumstances of the case. (c) That the comparables given by the assessee, were not totally rejected but, the CIT(A) enlarged the number of comparables, by including three more parties and thereafter, arrived at the mean operating margin. (d) That operating profit margins, of the entire turnover of the assessee have to be considered for adjustment quantification as, in the case of comparables, entity level operating margins were taken, for bench marking. (e) That it is wrong to say that the Assessing Officer has considered gross purchases and not net purchases, i.e., purchases after returns, by relying at para 7.2.1 of the CIT(A) order at page 16. 8. Rival contentions heard. On careful consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of arm s length price. 92C. (1) The arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely: (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (Emphasis ours) Section 92F(ii) arm s length price : arm s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. (v) - transaction. transaction includes an agreement, understanding or action in concert,- (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding. 14. We now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a class of transactions. Law does not permit determination of ALP of international transactions, by comparing operating margins at entity levels, or by taking overall industry level averages. Thus the exercise done by the TPO as modified by the CIT(A) is against the provisions of the Act and Rules and has to be struck down as illegal. 18. It can be seen that before the A.O. the assessee had submitted as follows : Further, the provisions as contained in S. 92CA are worth considering. (i) Sub-section 1 states that when an assessee has entered into an international transaction, the Assessing Officer, may, with the previous approval of the Commissioner, refer the computation of ALP in relation to International Transaction to the Transfer Pricing Officer. (ii) Sub-section 2 required the Transfer Pricing Officer to serve a notice on the assessee to produce evidence on which the assessee has relied upon in support of computation of ALP in relation to international transaction referred to in sub-sec. 1. (iii) Sub-section 3 states that the TPO shall pass the order in writing, determining the ALP in relation to the International Transaction and send the copy of the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the appellant has not proved its case for applying the resale price method, as the comparables chosen by it are not in the business of exclusively reselling and distributing rough diamonds. Hence their gross margins cannot be relied upon as margins achieved on account of reselling goods, which make their comparability suspect and redundant. Hence in absence of proper comparables who are exclusive resellers themselves, the action of the Assessing Officer in not relying on the resale price method applied by the appellant and applying the TNMM method is upheld. 13. This finding in our humble opinion is wrong for the reason that the CIT(A) has adopted these very comparables, along with three others while arriving at the operating margins at para 7.16 of his order. As the assessee is a trader, without value addition to the goods, we find force in the submission of the assessee that resale price method is the most appropriate method for determining the ALV with respect to AE transaction. In fact, the Revenue has accepted this method in earlier two years. The Transfer Pricing Officer in his order dated 7-3-2005 for the assessment year 2002-2003 and order dated 20-3-2006 for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be applied to both purchases and returns. Hence, it would be appropriate that the arms length price has to be determined only in respect of this Rs. 94 lakhs and addition if any has to be made only on this Rs. 94 lakhs. The adjustment made by the Transfer Pricing Officer was Rs. 96 lakhs and has reduced by the CIT(A) to Rs. 73 lakhs. When the net purchases is Rs. 94 lakhs, how can an adjustment be suggested at Rs. 96 lakhs without proper evidence. This adjustment is erroneous, as entity level margins are applied, at entity level of the assessee. The margin adopted by the Transfer Pricing Officer i.e., 3.31%. This minus the margin declared by the assessee 1.76%, gives a difference of 1.55%. If this 1.55% is applied on 94 lakhs the addition comes to only Rs. 1.41 lakhs. The Revenue in this case has not challenged the margin of 2.68% arrived at by the CIT(A). In such a case the difference in the margin between that arrived by the CIT(A) i.e., 2.68% and that disclosed by the assessee i.e., 1.76%, comes to 0.92%. When this is applied to the net purchase of Rs. 94 lakhs, the adjustment comes to Rs. 86,000/-. This is incorrect. 15.1 This Bench of the Tribunal in the case of DCIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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