TMI Blog2016 (4) TMI 478X X X X Extracts X X X X X X X X Extracts X X X X ..... y comparables as per subclauses (ii) and (iii) with the realized profit margin of the assessee as per sub-clause (i) of Rule 10B (1)(e). As the TPO has computed ALP of the international transaction with the help of a method unknown to law, which calculation is again flawed because of making comparison of 'profit’ with the 'gross revenue’, we cannot countenance the same. The right course for the TPO was to compute assessee’s profit margin realized under the TNMM as per Rule 10B(1)(e)(i) from its annual accounts without any adjustment and then compare it with the adjusted net operating profit margin of the comparables with the same base. This would have led to the determination of ALP of this international transaction. In view of the foregoing discussion, we are satisfied that the action of the AO/TPO in making/proposing addition/adjustment on account of transfer pricing, cannot be upheld for the reason that the shifting of the base on which markup has been applied has been turned down by the Hon'ble Delhi High Court in assessee’s own case; the mechanism followed by the TPO for calculating the transfer pricing adjustment has no legal legs to stand on; and further the assessee’s pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of goods sourced through the assessee. Accepting the TNMM as the most appropriate method, the TPO changed the base from `Costs incurred to the `FOB value of exports . The assessee was seen to have incurred `Costs in providing such services at ₹ 108.89 crore, on which 8% markup was charged to have gross revenue at ₹ 116.95 crore, which was declared as the value of the international transaction. The TPO substituted the `cost base with the `FOB value of exports . The amount of new base was calculated at ₹ 2935.69 crore by adding value of goods exported at ₹ 2826.8 crore to the costs incurred by the assessee at ₹ 108.89 crore. He further observed that in an earlier year in which he did similar exercise of substituting the base of `Cost with the `FOB value of goods exported for applying 8% markup, the Dispute Resolution Panel (DRP) restricted it to 6%. This reduced markup of 6% was applied by him on the new base of FOB value of goods exported at ₹ 2935.69 crore, to work out the amount of `Net operating income at ₹ 176.14 crore. After reducing `Operating income shown by the assessee at ₹ 116.95 crore from the amount of `Net Operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transaction shall be determined as under : `(e) transactional net margin method, by which,- (i) the net profit margin realised 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 or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uses (ii) and (iii), it turns out that, firstly, the net operating margin actually realized from the comparable uncontrolled transaction is computed, which is determined in the same way as that of the assessee as per clause (i), that is, actual figures without making any adjustment. Then sub-clause (iii) talks of adjusting the actually realized margin of comparables to bring the same at par with the international transaction undertaken by the assessee, so as to iron out the effects of differences between the international transaction and comparable uncontrolled transactions. On going through all the sub-clauses of Rule 10B(1)(e), the position which emerges is that the net profit margin realized by the assessee from its international transaction is taken as such, which is then compared with the rate of operating profit margin of comparables for seeing if the assessee s profit margin is at arm s length. 7. Adverting to the facts of the instant case, we do not find any dispute about the assessee actually earning 8% markup on the `Costs incurred. The assessee incurred total costs to tune of ₹ 101.89 crores. Markup of 8% on such cost comes to ₹ 8.06 crore, resulting into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer pricing adjustment has been calculated by reducing the actual gross receipts of the assessee from its AE at ₹ 116.95 crore (`Costs incurred at ₹ 108.89 crore plus 8% markup at ₹ 8.06 crore) from the amount of profit margin calculated by the TPO at ₹ 176.14 crore (by applying 6% on FOB value of goods exported at ₹ 2935.69 crore). We are unable to understand as to how the revenue receipts of the assessee on one hand, which obviously include costs incurred, can be compared with the net operating income on the other hand. It goes without saying that a valid comparison can be made of similar components. One can compare profit margin of the assessee with the profit margin of the comparables under the TNMM or the price charged by the assessee with the price charged by the comparables under the CUP method etc. Thus the comparison is always of the profit with profit or price with price. Under no circumstance, the amount of transfer pricing adjustment can be calculated by picking up `profit margin of the assesee or comparables and then comparing it with the `price charged by the comparables or the assessee, as has been done in the extant case. Suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee from `Costs incurred to the `FOB value of exports and sustained the addition, but the Hon ble Delhi High Court was pleased to delete such addition in Li Fung India Pvt. Ltd. Vs CIT (2013) 87 CCH 105 Del. HC by holding that : `the TPO's arbitrary exercise of adjusting the cost plus mark up of 5% on the FOB value of exports finds no mention in the IT Act nor the Rules . Similar view has been taken by the Hon'ble Delhi High Court in the assesse s own case for the assessment years 2007-08 and 2008-09. 13. In view of the foregoing discussion, we are satisfied that the action of the AO/TPO in making/proposing addition/adjustment on account of transfer pricing, cannot be upheld for the reason that the shifting of the base on which markup has been applied has been turned down by the Hon'ble Delhi High Court in assessee s own case; the mechanism followed by the TPO for calculating the transfer pricing adjustment has no legal legs to stand on; and further the assessee s profit margin is at ALP under the TNMM on the basis of figures mentioned in the TPO s order, whose correctness has not been disturbed by the TPO. Ex consequenti, the addition is hereby deleted. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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