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2016 (4) TMI 478 - ITAT DELHI

2016 (4) TMI 478 - ITAT DELHI - TMI - Transfer pricing adjustment - 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) - Held that:- Under no circumstance, the amount of transfer pr .....

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d above that the assessee applied the TNMM under which the ALP can be determined by comparing the adjusted profit margin realized by 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 sa .....

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unt 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, t .....

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(hereinafter also called the Act ) on 28.10.2013 in relation to the assessment year 2009-10. The solitary issue raised in this appeal is against the addition of ₹ 59,19,00,000/- made by the Assessing Officer on account of transfer pricing adjustment. 2. Briefly stated, the facts of this case are that the assessee, an Indian Company, is a subsidiary Li & Fung (South Asia) Ltd. incorporated in Mauritius. The holding company is a part of Li & Fung group, which is one of the world lea .....

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Indicator (PLI) of Operating Profit / Total Costs (OP/TC) at 8%. Twenty five companies were chosen as comparable with their average PLI at 9.30%. The assessee claimed that its profit margin at 8% was within permissible range of the profit margin of comparables, and hence the international transaction was at arm s length price (ALP). The Assessing Officer made reference to the Transfer Pricing Officer (TPO) for determining the ALP of this international transaction. The TPO treated the assessee as .....

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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 e .....

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₹ 59.19 crore. The AO made an addition of ₹ 59.19 crore in the draft assessment order. The assessee remained unsuccessful before the DRP. The said addition of ₹ 59.19 crore came to be made in the final assessment order passed by the Assessing Officer. The assessee is aggrieved against this addition. 3. We have heard rival submissions and perused the relevant material on record. There is no quarrel on the fact that the assessee rendered services of buying to its AEs for which i .....

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isions relating to avoidance of tax. Section 92, which is the first section of this Chapter, provides for computation of income from an international transaction having regard to arm s length price. Subsection (1) of the section provides that : Any income arising from an international transaction shall be computed having regard to the arm s length price . Section 92C of the Act enshrines provisions relating to computation of arm s length price. Sub-section (1) of the section states that the arm .....

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lculation of ALP under the TNMM has been given under Rule 10B(1)(e) of the Income-tax Rules, 1962, which has to be necessarily done in the manner … prescribed . This rule states that for the purposes of section 92C(2), the ALP in relation to the international 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 .....

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fferences, 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) ; (v) the net profit margin thus established is then taken into account to arri .....

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ealized by a comparable company, determined as per sub-clause (ii) above, is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. It is this adjusted net profit margin of the unrelated transactions or of the comparable companies, as determined under sub-clause (iii), which is used as benchmark for the purposes of making comparison .....

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ing through the above sub-clauses of Rule 10B(1)(e), it becomes vivid that as per the first step, the net profit margin realized by the enterprise from an international transaction is to be computed. Use of the word net profit margin realized in the provision richly indicates that it is the calculation of actual operating profit margin of the assessee earned from international transaction, which cannot be any hypothetical or adjusted figure. Amount of actual net profit margin realized can be cal .....

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at 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 mar .....

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into gross revenue receipt at ₹ 116.95 crores. When we turn to the calculation of the ALP made by the TPO, it emerges that he has determined this amount as the second figure. Sub-clauses (ii) and (iii) of Rule 10B (1)(e) talk of determination of net profit margin realized by the comparables with reference to the same base as adopted under sub-clause (i) for calculation of the assessee s profit margin. What the TPO has done in the instant case is that he computed Net operating income as the .....

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lized by the assessee to be computed by dividing the amount of operating profit with total costs as multiplied by 100. As against that, he has simply taken the amount of gross revenue at ₹ 116.95 crore, which includes not only the amount of operating profit but also the operating costs incurred by the assessee in providing the services. The course of action adopted by the TPO is not in accordance with law. 9. Then under clauses (ii) and (iii) of rule 10B(1)(e), the TPO was required to dete .....

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ised compensation amount, which in the opinion of the TPO should have been earned by the assessee. By no standard, this amount can be construed as the arm s length profit rate, as it is not a profit rate of any uncontrolled transaction/comparables. This is a derivative from the simple rewriting of the compensation amount of the assessee by the TPO. 10. Interestingly, the amount of the transfer pricing adjustment has been calculated by reducing the actual gross receipts of the assessee from its A .....

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n 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 char .....

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s 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 .....

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opting such a course because the assessee has demonstrated to the TPO that this international transaction is at ALP under the TNMM, which is manifest from page 5 of the order of the TPO, showing that the assessee calculated its OP/TC at 8% and average OP/TC of 25 comparable companies at 9.30%. Correctness of these figures recorded in the order has not been disputed by the TPO. If we ignore the exercise done by the TPO, which is clearly not in conformity with any of the prescribed methods, what r .....

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