TMI Blog2016 (5) TMI 867X X X X Extracts X X X X X X X X Extracts X X X X ..... action between enterprises other than the associated enterprises. It cannot be anything else. Only when some gross profit margin in comparable transaction between two independent enterprises is available, sub-clause (ii) of Rule 10B(1)(b) works. The existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and resale of similar goods is an essential condition for determining the ALP under RPM. Adverting to the facts of the instant case, we find from the calculation of the ALP under RPM as extracted above that the TPO has taken arm’s length margin of GP on sales at 50%, which has been considered for determining the ALP of this international transaction at ₹ 4.24 crore leading to transfer pricing adjustment of ₹ 1.05 crore. This 50% arm’s length gross profit margin on sales has been taken by the TPO on the basis of what the assessee stated before the Customs Authorities in a generalized manner. The TPO has not brought on record any comparable uncontrolled case and thus has not eventually determined gross profit margin from purchase and resale of similar goods in a comparable uncontrolled transaction. In the absence of availab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the TNMM as the most appropriate method by observing that there were transactions both of purchase and sale, namely, Import of raw material, components and semi finished goods, Import of capital goods and Export of semi finished goods. In his opinion, the operating profit margin from the international transaction per se was not identifiable. He opined that aggregation of all the international transactions by the assessee was not appropriate inasmuch as controlled transactions could be aggregated with controlled transactions alone and uncontrolled transactions with uncontrolled transactions. He held that there was no provision under which aggregation of controlled transactions with uncontrolled transactions was permissible. He, therefore, treated CUP as the most appropriate method for international transactions under Class I. He proceeded to determine the ALP of one of the international transactions under Class I, namely, Import of raw materials, components and semi finished goods with transacted value of ₹ 2,54,95,801/-, without questioning the ALP of the other three international transactions under this Class. Going with the first international transaction of `I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of various items purchased was ascertainable. A chart has been drawn in the TPO s order showing average margin of 11.75% charged by the AE from the assessee. As the AE was not doing any trading of the raw material and merely procuring the same for distribution to groups concerns, the TPO held this margin of 11.75% as the basis for determining the ALP of the international transaction. By reducing such profit margin at 11.75% from the transacted value of import of raw material, the TPO determined comparable uncontrolled price at ₹ 2,28,15,034/- against the purchase price shown by the assessee at ₹ 2,54,95,801/-, thereby recommending transfer pricing adjustment of ₹ 26,80,767/-. The assessee assailed the assessment order containing this addition before the ld. CIT(A), who deleted the addition by accepting the assessee s contention that the percentage variation computed by the TPO was not on account of margin charged by the AE on sale to the assessee, but, towards the weighted average pricing methodology followed by the AE and the same being further supported by a certificate received from Luxottica SPA, Italy, confirming that no mark-up was charged on raw material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O was right in applying the CUP method for determining the ALP of the international transaction of import of raw materials, components and semi finished goods. 6. Now, turning to the application of the CUP method, we find that the ld. CIT(A) has deleted the addition by simply accepting the assessee s contention that the percentage variation computed by the TPO was not on account of margin charged by the AE on sale to the assessee, but, due to weighted average price methodology followed by the AE. This is in complete contrast to what the assessee argued before the Customs Authorities, namely, that: the imports were made at substantially higher prices than the price at which the AE has purchased the raw material . The ld. CIT(A) was swayed by the assessee s submission without reconciling the conflicting stands of the assessee taken before the Customs Authorities on one hand and that taken before him about the weighted average price methodology indicating no margin charged by the AE on the sale to the assessee on the other hand. We cannot countenance the view point of the ld. CIT(A) in deleting the addition on this count. 7. At the same time, we find that the TPO has taken assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar goods are purchased by some another Indian party from a non-AE. Similarly, some internal comparable uncontrolled transaction will exist when the assessee purchases similar goods from a non-AE. The essence of the matter is that a pre-transaction of purchase by the foreign AE from another unrelated foreign party cannot constitute an internal CUP for determining the ALP of the same goods purchased by an Indian assessee from its AE. 9. Further, what the TPO has done is to apply the alleged profit rate of 11.75% charged by the AE from the assessee for computing the ALP. The CUP method contemplates comparing the adjusted comparable uncontrolled price with the price charged or paid in an international transaction. The TPO has not compared any price charged in a comparable uncontrolled transaction with the price paid by the assessee. It is axiomatic that the CUP method requires comparison of the price charged in a comparable uncontrolled transaction and then making transfer pricing adjustment for the difference, if required. It does not say that the international transaction must be on cost to cost basis and no profit element can be charged. In our considered opinion, profit marg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e most appropriate method. He changed the most appropriate method to the Resale Price Method (RPM) for determining the ALP of this international transaction of `Import of finished goods . In determining the ALP under the RPM, the TPO noticed that the assessee contended before the Customs Authorities that the gross margin of down the line distributors was 100% on cost or 50% if computed on sales. He, therefore, adopted normal gross profit margin under Rule 10B(1)(b)(ii) at 50% and computed the ALP of the import of finished goods at ₹ 4.24 crore, thereby proposing transfer pricing adjustment of ₹ 105,57,553/- as under:- Total sales of traded goods made during the year : Rs.13,02,21,637/- GP on sales as computed by the assessee : 37.57% Value of the import of finished goods : Rs.5,30,25,583/- Re-sale price computed on the same GP margin : Rs.8,49,36,061/- Arm s Length GP on sale : 50% Arm s l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is shows that the price to the Indian company is higher than the price to the unrelated parties. As such, we are constrained to disapprove the view taken by the ld. CIT(A) in deleting the addition on this slippery reasoning. 14. Now, let us examine whether the determination of the ALP by the TPO under RPM is justified. In this regard, we find that rule 10B(1)(b), dealing with the mechanism for determination of the ALP under this method, reads as under :- (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified ; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions ; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services ; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lse. Only when some gross profit margin in comparable transaction between two independent enterprises is available, sub-clause (ii) of Rule 10B(1)(b) works. In other words, the existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and resale of similar goods is an essential condition for determining the ALP under RPM. Adverting to the facts of the instant case, we find from the calculation of the ALP under RPM as extracted above that the TPO has taken arm s length margin of GP on sales at 50%, which has been considered for determining the ALP of this international transaction at ₹ 4.24 crore leading to transfer pricing adjustment of ₹ 1.05 crore. This 50% arm s length gross profit margin on sales has been taken by the TPO on the basis of what the assessee stated before the Customs Authorities in a generalized manner. The TPO has not brought on record any comparable uncontrolled case and thus has not eventually determined gross profit margin from purchase and resale of similar goods in a comparable uncontrolled transaction. In the absence of availability of any comparable uncontrolled transaction, we cannot approve the actio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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