TMI Blog2010 (11) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the net profit margin realized by the enterprises from each international transaction or the aggregate of a class of an international transaction, with the net profit margin realized by another similar entity on an international transaction or on a class of international transactions, as claimed by the assessee - If this exercise has been done by the assessee, then as the TPO has not contradicted these findings, the claim of the assessee that the transfer pricing study report issued under section 92E has to be accepted by the Revenue and no adjustment has to be made, will have to be accepted by the Assessing Officer - Appeal is allowed by way of remand - 6437 (MUM.) of 2005 - - - Dated:- 26-11-2010 - R.V. EASWAR, J. SUDHAKAR REDDY, JJ. Narender Singh for the Appellant. Ms. Indira G. Anand for the Respondent. ORDER J. Sudhakar Reddy, Accountant Member. This is an appeal filed by the Revenue directed against the order of the Commissioner of Income-tax (Appeals) - XVII, Mumbai dated 10-8-2005 for assessment year 2002-03, on the following grounds : 1. That the Learned CIT(A) has erred in law and on facts in directing the Assessing Officer to delete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts incurred or sales effected or assets employed or to be employed. u The net margin realized by the enterprise from a Comparable Uncontrolled Transaction or net margin realized by an Unrelated Enterprise is to be computed having regard to the same base. u The net margin as computed in (ii) above is to be adjusted to take into account the differences, if any, between the International Transaction and the Comparable Uncontrolled Transaction or between the enterprise entering into the International Transaction and Unrelated Enterprises, which could materially affect the net margin in the open market. u The net margin realized by the enterprise as referred to in (i) above is established to be the same as the net margin computed in (iii) above. u The net margin thus established in (iv) above is to be taken into account to arrive at ALP in relation to the International Transaction. Thus, the net margin of 9.27 per cent as computed by the learned TPO should be : u Adjusted downwards for various differences as pointed out in our submission before the TPO like difference in terms of sale, difference in proportion of trading and manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to clear provisions of law. [Emphasis supplied] 4. Further the Assessing Officer observed as follows : During the course of hearing the authorized representative pointed out that the TPO has applied operating profit margin of independent enterprises as entire sales or operating cost of the assessee. The authorized representative further submitted that Chapter X authorizes TPO to determine ALP of an international transactions with AE and not for all the transactions of the assessee. The assessee s application under section 154 is pending before TPO. The provisions of section 92CA permit rectification/amendment by TPO only and not by the Assessing Officer. In view of the above, the amount of Rs. 61,84,483 is added to the income of the assessee as directed by the TPO. Aggrieved, the assessee carried the matter in appeal before the first appellate authority. 5. Before the learned first appellate authority, the assessee submitted that u the data relating to Profit Before Interest, Depreciation and Tax (PBIDT) margin of listed companies of the diamond industries gave 6.3 per cent as against PBIDT margin of 6.60 per cent of the assessee. The data relied upon by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions of the assessee on the Transactional Net Margin Method which brought out by the CIT(A) which is extracted in page 11, para 3 onwards to page 12 para (v) as under : It was also pointed out by the learned representative of the appellant that Transactional Net Margin Method (TNMM) as defined in Rule 10B of Income-tax Rules, 1962 require following steps to be followed to arrive at Arm s Length Price (ALP) in relation to International transaction : (i) The net margin realized by the enterprise from an International Transaction is to be computed in relation to costs incurred or sales effected or assets employed or to be employed. (ii) Then net margin realized by the enterprise from a Comparable Uncontrolled Transaction or net margin realized by an Unrelated Enterprise is to be computed having regard to the same base. (iii) The net margin as computed in (ii) above is to be adjusted to take into account the differences, if any, between the International Transaction and the comparable Uncontrolled Transaction or between the enterprise entering into the International Transaction and Unrelated Enterprise, which could materially affect the net margin in the open mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that the industry average have nothing to do and have no application while computing the ALP or under TNMM. He submitted that as the issue has been considered by various Benches of the Tribunal and the Benches have consistently set aside the matter to the file of Assessing Officer for fresh adjudication in accordance with law. He relied on following judgments : u Asstt. CIT v. Twinkle Diamond [IT Appeal No. 5033 (Mum.) of 2007, dated 30-4-2010]. u Addl. CIT v. Tej Diam [2010] 37 SOT 341 (Mum.). u Dy. CIT v. Starlite [2010] 40 SOT 421 (Mum.). u Dy. CIT v. Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum.). He submitted that the facts of the present appeal should follow the proposition laid down in the aforenoted decisions of the co-ordinate Benches of the Tribunal and set aside the matter to the file of Assessing Officer for fresh adjudication. 10. The learned Counsel for the assessee Ms. Indira G. Anand, on the other hand, vehemently opposed the submissions of the department. She contended that the assessee has in fact conducted transfer pricing study and applied TNMM at the transaction level and has demonstrated that its international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. [Emphasis supplied] Section 92C reads as follows : 92C. Computation of arm s length price. (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 prescribed79 by the Board. [Emphasis supplied] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adoption of TNMM by the assessee. The assessee has adopted the TNMM by comparing the overall operating profits of the assessee company with the overall operating profits of certain other organizations or companies which were the comparable companies selected by it, from out of data available in the public domain, by using the software Prowess and adopting various filters for elimination of uncomparables as listed out by it. The assessee classifies itself as a licensed manufacturer and thus having lesser risks. While so the learned Senior Departmental Representative is right in point out that the comparables selected by the assessee are not of licensed manufacturers of the similar commodity. The TNMM compares net margins of uncontrolled transactions between independent entities, with those achieved in controlled transactions between related parties. The Tribunal in the case of Aztec Software Technology Services Ltd. (supra) on page 238 observed as follows : The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto account the differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprise entering into such transactions, which would materially affect the amount of net profit margin in the open market. Step 4 : The net profit margin realized by the enterprise and referred to in step 1 is established to be the same as the net profit margin referred in step 3. Step 5 : The net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. 70. Section 92C(1) refers to arm s length price in relation to an international transaction. Rule 10B(1)(e) read with section 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole. Paragraph 3.26 of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by OECD reads as follows : 3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rison is permitted both by the OECD commentary as well as by the commentaries by eminent authors like Robert T. Cole, J.Harold Mc Lure and others, in our considered opinion is not correct. In the book Transfer Pricing Note Book Third Edition Robert T. Cole at Chapter XXV what is said is that the regulator should also note that segmentation of transaction does not always lead to more reliable results and that the combined effect of two or more separate transactions may be considered if such transactions are taken as a whole and are so inter-related with consideration of multiple transactions, is the most reliable means of determining the arm s length consideration of the transactions. At paragraph 25.4 the learned author states that OECD guidelines may also require some segmentation of the inter-company transactions. The issue whether further disaggregation is required, depends on practical issues. Such comments cannot be interpreted as permitting entity level comparison. Similarly, Taxman s book on Law of Transfer Pricing by D.P. Mittal, Second Edition paragraph 7.9 has been cited and the book US Transfer Price by Robert T. Cole paragraph 2.06 was relied upon by Shri Rajan Vor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer the assessee had submitted as follows : Further, the provisions as contained in section 92CA are worth considering. u 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 TPO. u Sub-section (2) required the TPO 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-section (1). u 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 same to the Assessing Officer and the assessee. u Sub-section (4) required the Assessing Officer shall compute the Total Income of the assessee having regard to the ALP determined by TPO under sub-section (3). Thus, the scheme of the assessment is very clear and it states that (i) The TPO shall, and is entitled only to, determine the ALP in relation to the International Transaction an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verages or operating level margins of various enterprises. 21. Hence we have no other alternative but to hold that the transfer prising adjustments suggested by the T.P.O. are illegal and against the law. 22. This brings us the arguments of the learned Counsel for the assessee that they have conducted the transfer pricing study and arrived at the ALP by comparing the net profit margins realized by the enterprises from an international transaction, with the net profit margin of transaction of another enterprise of same class. This aspect is not clear either from the order of the Assessing Officer nor from the order of the CIT(A). The Transfer Pricing study is not before us. As the required papers are not before us to confirm this submission of the learned Counsel for the assessee, we deem it fit to set aside the issue to the file of the Assessing Officer for examining whether the assessee in its transfer pricing study, has arrived at the ALP by comparing the net profit margin realized by the enterprises from each international transaction or the aggregate of a class of an international transaction, with the net profit margin realized by another similar entity on an international ..... X X X X Extracts X X X X X X X X Extracts X X X X
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