TMI Blog2012 (3) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... edded in the price - it is noticed that the assessee argued before the learned CIT(A) that plus minus 5% adjustment to 6.1% margin of the remaining 2 comparable cases would give the range of 1.405% to 10.795% - it is sine qua non to decide the correctness of the operating profit/loss earned/incurred by the assessee from the international transactions - it will be just and fair if the impugned order is set aside and the matter is restored to CIT(A) - Appeal is allowed for statistical purpose - IT Appeal No. 4127 (Mum.) of 2009 - - - Dated:- 14-3-2012 - R.S. Syal, N.V. Vasudevan, JJ. ORDER R.S. Syal, Accountant Member This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals) on 16.03.2009, in relation to the assessment year 2004-2005. 2. The solitary ground projects the grievance of the Revenue as under:- "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in disallowing the addition made by the A.O. on account of transfer pricing adjustment made by the T.P.O. without appreciating the facts of the case." 3. Briefly stated the facts of the case are that the assessee-company was inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve Table-1. 5. The entire controversy in the present appeal revolves around the determination of ALP in respect of the Distribution segment. The assessee depicted operating margin at 1.63% as against the arithmetical mean of the operating margin of comparable cases as chosen by the assessee at 1.73%. Exercising option under proviso to section 92C(2), the assessee declared that its international transactions with AEs were at arm's length price. The TPO considered the details of cases relied on by the assessee in its TP study qua the Distribution segment. Out of total 7 cases considered by the assessee as comparables, the TPO found that 5 cases, viz. Bijoy Hans Limited, Duchem Laboratories Limited, J.B. Marketing Finance Limited, Radicura Co. Ltd. and Zydus Pharmaceuticals, were not comparable. For the reasons set out in para 1.2 of the TPO's order, he refused to consider such cases for bench marking the price of the assessee's international transactions. He considered 5 new comparable cases at his own giving average PBIT (Profit before interest and tax) i.e. Operating Margin at 10%. Considering the 5 cases so chosen by him and the other 2 cases remaining from the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also argued that if Comparable uncontrolled price method (CUP) was applied for determining ALP, then no adjustment would be required. Since this submission was raised for the first time before the learned CIT(A) apart from adducing certain additional evidence in respect of two cases chosen by TPO, the learned CIT(A) called for remand report from the TPO. The TPO objected to the admission of additional evidence and insisted on the sustenance of addition. The learned CIT(A) got convinced with the assessee's contention for the removal of two comparable cases of Span Diagnostics and Casil Health which were chosen by the TPO for the reasons discussed in the impugned order. During the course of hearing before the learned CIT(A), the assessee submitted that the arithmetical mean of the assessee's remaining two comparable cases (Ashco Industries Limited and Advanced Micronic Devices Limited) comes at 6.1% and if the option given under proviso to section 92C(2) i.e. plus minus 5% adjustment to the margin was exercised, the assessee's declared margin at 1.63% would become comparable to the uncontrolled transactions. The learned CIT(A) got convinced with the assessee's submission and orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of diagnostic products but also disposables and gloves which have been largely manufactured by it and partly traded in. The TPO has considered sales of Casil Health at Rs. 30 crore and PBIT 9.78% for the purpose of making his calculation. When we turn to page 23 of Casil Health's Annual report, it can be seen that the sale of Rs. 30 crore is of all the three segments i.e. Speciality Chemicals, Hospital Disposables and Pharmaceuticals. Further PBIT at 9.78% has also been considered by taking the Profit before interest and tax of all the three segments as one unit. There are no segmental accounts or segmental data in respect of Diagnostics and that too only meant for trading. On the other hand we are concerned only with the determination of ALP in respect of trading transactions of the assessee in diagnostic products. Thus there is no functional comparability between assessee's case and that of Casil Health. We, therefore, hold that the learned CIT(A) was right in excluding this case from the total list of comparables. 11. Then comes the second case of Span Diagnostics which was included by the TPO and excluded by the ld. CIT(A) by holding it as not comparable. A copy of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), it would require no addition. The contention in other words is that the assesee's cost at Rs. 98.37 (100 - 1.63) falls within the permissible range of Rs. 89.205 to Rs. 98.595 ( i.e. +-5%). 15. The learned Departmental Representative contended that the learned CIT(A) was not justified in considering +-5% margin on the figure of 93.90 arrived at by reducing the operating profit rate of 6.1 from the sales taken at 100 (hereinafter referred to as cost). He contended that 5% should have been considered of 6.1% being arithmetical mean of OP rate of two comparable cases finally selected by him. Since +-5% of 6.1% gives percentage of OP ranging between 6.4% to 5.8%, it was contended by the ld. DR that the assessee's declared margin at 1.63% was far below. It was thus summed up that the ld. CIT(A) erred in applying +-5% on the cost instead of the OP margin of 6.1%. In the opposition the learned AR supported the impugned order on this issue. 16. Section 92 with the marginal note - Computation of income from international transactions having regard to arm's length price - provides under sub-section (1) that "Any income arising from an international transaction shall be computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o make such standard price or ALP flexible and not rigid. In this direction it has been provided that if the price actually charged or paid by the assessee falls within plus minus 5% range of such ALP or standard price, then no addition should be made. 18. From the language of the above proviso, it can be noticed that where more than one price is determined by the most appropriate methods, the arm's length price shall be taken to be the arithmetical mean of such prices. Further an option has been given to the assessee by which variation up to plus minus 5% of 'such arithmetical mean' can be ignored. The former part of the proviso talks of the ALP as arithmetical mean of such prices and the later part of the proviso refers to five percent of such arithmetical mean. The word ' such' arithmetical mean brings the focus back to the price. Thus the prescription of this proviso makes it clear that the plus minus five percent is on the price and not on the profit embedded in such price. 19. The conclusion that plus minus 5% should be applied to the price of purchase or sale or services etc. instead of income component in such price can be fortified from the mandate of the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in the instant case, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed etc. The net profit margin realized by the enterprise from comparable uncontrolled transaction is computed having regard to the same base and eventually it is the comparison of net profit margin from an uncontrolled transaction with the net profit margin realized by the assessee. Even though we compute the net margin under TNMM, but the transaction remains that of the cost incurred or sale effected which constitutes the base for determining the net profit margin. Naturally, plus minus 5% in case of TNMM can also be on the costs incurred or sales effected or assets employed, as the case may be and not on the net profit margin. 22. When we turn to the language of proviso to section 92C(2), the obvious conclusion which follows is that plus minus 5% margin has been stipulated on the value of the transaction and not the income from such transaction. Various methods prescribed u/s. 92C(1) are ways to compute arm's length price in respect of international ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the A.O. Nowhere from the impugned order it can be ascertained that the learned CIT(A) held such figure of operating loss to be incorrect or correct. He simply proceeded with profit margin of 1.63% as declared by the assessee for coming to the conclusion that it was within the range of 1.405% to 10.597%. When the assessee challenged the adjustment of Rs. 1.11 crore before the ld, CIT(A), it was his duty to adjudicate not only upon the inclusion or exclusion of the comparable cases and determination of operating profit margin percentage but also the most important figure being operating profit or operating loss in assessee's own case. Ultimately, under TNMM it is the assessee's figure of profit or loss which is compared with the uncontrolled transactions to determine whether or not the price charged or paid by the assessee is on ALP. If we accept the TPO's calculation giving loss of Rs. 14.86 lakh as correct, it would mean that such amount as a percentage of sales value of Rs. 10.91 crore will give percentage of operating loss at 1.36%. In that case, the assessee's cost will become Rs. 101.36, which will cease to fall between the permissible range of Rs. 89.2050 and Rs. 98.595 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule". This rule empowers the appellant, which is Revenue in the instant case, to urge any ground not set forth in the memorandum of appeal provided the Tribunal gives sanction to it. That apart, the second limb of rule 11 empowers the Tribunal suo motu in not confining itself to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal provided the affected party has been given opportunity of being heard on that ground. 29. The Hon'ble Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967 66 ITR 710 (SC)] and the Hon'ble Jurisdictional High Court in Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom.) (FB) have approved the power of the tribunal to consider and decide any issue by the tribunal, even if not specifically raised in the appeal memo provided it falls within the subject matter of the appeal and the affected party has been given o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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