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TMI Blog2014 (11) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 92C(2) and therefore, no addition ought to have been made. 2. The brief facts of the case are that the assessee company is engaged in the business of manufacture and sale of textile machinery, related parts, automotive parts and trading material, handling equipments and related parts. It has filed its return of income on 23.11.2006 declaring Nil income. The case of the assessee was selected for scrutiny assessment and a notice u/s. 143(2) was issued to the assessee on 24.09.2007 which was duly served upon the assessee. Learned Assessing Officer noticed the international transactions with the AE, therefore, a reference was made u/s. 92CA of the Income Tax Act to the TPO for determination of ALP in respect of international transactions reported by the assessee. The TPO found that there are two international transactions as mentioned in the TP study report. These transactions are (a) auto component segments and (b) textile machinery segment. In the auto component segments the assessee has shown the PLI which is operating profits/sales at 8.08%. The TPO found arithmetic mean margin of the comparables at 9.70% on sales. This PLI of the comparables falls within the margin of (+-) 5% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination of ALP. He passed an order u/s. 154 of the I.T. Act r.w.s. 92CA(5) on 27.01.2010. The TPO has rectified the errors and ultimately determined the following adjustments:- Operating Revenues Rs.99,97,74,000 Arms Length Mean Margin 8.26% of the sales Arms Length Cost (ALP) @ 91.74% of operating revenues Rs.91,71,92,667 2.1.1 Price Received vis-à-vis the Arms Length Price:- The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under:- Arms Length Cost @ 91.74% operating revenues (a) Rs.91,71,92,667 Operating cost (including the purchases made from AEs) (b) Rs.93,82,88,000 Purchases made from AE (c) Rs. 9,75,04,096 Cost with unrelated parties (d) = (b) - (c) Rs.84,07,83,904 Arm's length cost of the purchases made (e) = (a) - (d) Rs.7,64,08,763 Excess payment being adjustment u/s 92CA (f) = (c) - (d) Rs. 2,10,95,333 The above shortfall of Rs. 2,10,95,333/- is treated as transfer pricing adjustment u/s. 92CA. Hence, the original adjustment of Rs. 7,16,83,897/- stands revised to Rs. 2,10,95,333/-. Accordingly the A.O. may amend the order of the assessment in conformity with thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit from sales attributable to the purchases made from the AEs. The panel is therefore, of the view that the TNMM method has to be applied at the manufacturing segment level and that the method followed by the TPO is more appropriate than that suggested by the assessee based on an estimated bifurcation of the sales". 7. We have duly considered the rival contentions and carefully gone through the record. Section 92C of the Income Tax Act provides computation of income from international transaction having regard to Arm's Length Price. It contemplates that any income arising from an international transaction shall be computed having regard to the ALP. Before us the assessee has not disputed about the nature of the international transaction with its AE in textile machinery segment. It has also not disputed selection of TNMM method for determining ALP of the international transaction. Similarly the learned Counsel for the assessee did not dispute about the selection of comparable cases for determining the PLI of the comparables. The dispute before is, whether the arithmetic mean of the profit level indicator arrived at from the comparables could be applied to the total cost inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties, the adjustment worked out by the TPO in the figure would be more than the total purchases made from the AE. The learned Counsel for the assessee drew our attention towards the order of the ITAT in the case of Polartech India (P) Ltd. v. Asstt. CIT (Supra). In this case the Tribunal has followed the order of the ITAT Delhi Bench and made the following observations under a similar situation:- "31. For applying the TNMM in case of international transactions constituting a small portion of expenses, the only practical way of applying the TNMM is to adopt the profitability of the entire enterprise as the profitability from international transaction. It has then to be compared with the PLI of the comparable companies and adjustment made only to the international transactions. This will be achieved by taking the total adjustment applicable to the enterprise as a whole and applying pro rata, on the basis of ratio of the value of international transactions forming part of operational cost to the total operational expenses of the enterprise as a whole. We find that the adjustment made by the TPO for this purpose is not correct. 32. We find support of this view in the Delhi Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of these factors, we accept the first fold of submission made by the learned Counsel for the assessee and direct the Assessing Officer to confine the adjustment, qua the purchases made by the assessee from the AE. To be more specific, the adjustment is to be made only to the purchases made from the AE. However, this exercise be carried out after verifying the details of purchases available on Page No. 47 of the TP study report (extracted supra). The Assessing Officer first determine the purchase of raw material and components from the AE and then determine the ALP having regard to the mean profit margin of comparable cases at 8.26%. 9. As far as the second fold of submission is concerned, we remit this issue to the file of the Assessing Officer for re-adjudication. The learned Assessing Officer, after determination of any adjustment, if required to the value of the international transactions shall determine, whether the assessee is entitled for the benefit of proviso appended to section 92C(2). Since the learned TPO granted this benefit to the assessee with regard to the automotive component segment, it cannot be denied qua, this claim also, if the adjustment falls within the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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