TMI Blog2018 (3) TMI 1565X X X X Extracts X X X X X X X X Extracts X X X X ..... companies are included then the price of the disputed international transaction carried out by the Assessee is within the (+) (-) 5% range difference permitted by the 2nd proviso to Sec.92CA(2) of the Act. Therefore addition on account of adjustment to ALP should be deleted. - ITA No.1101/Kol/2011 - - - Dated:- 14-2-2018 - Shri N.V.Vasudevan, JM Dr.Arjun Lal Saini, AM For the Appellant: Shri R.N.Bajoria, AR For the Respondent: Shri Sanjay Paul, Addl. CIT, Sr.DR ORDER PER N.V.VASUDEVAN, JM: This is an appeal by the Assessee against the order dated 17.02.2011 of C.I.T.(A)-XXXII, Kolkata relating to A.Y.2004-05. 2. Grounds of appeal raised by the assessee reads as follows :- 1. That on the facts and in the circumstances of the case, the Ld -CT (Appeals) erred in not appreciating that the order dated 29th December, 2006 passed u/s. 143(3) of the Income-tax Act, 1961 and served on the appellant by a notice server on 17th January, 2007, is barred by limitation and is accordingly invalid, illegal and is liable to be quashed. 2. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) erred in confirming the addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kshop. The manufacturing activities of the Assessee were not of substantial volume in the relevant financial year. 4. Section 92(1) of the Income Tax Act, 1961 ( Act ) lays down that any income arising from an international transaction shall be computed having regard to the arm s length price. Sec.92C (1) of the Act lays down that the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. Sec.92C(2) lays down that the most appropriate method referred to in sub-section (1) shall be applied, for determination of arm s length price, in the manner as may be prescribed. Rule 10B of the Income Tax Rules, 1962 ( Rules ) lays down as to when and how the various meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s: Determination of arm s length price under section 92C. 10B . (1) For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- .. (c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed. Generally speaking, the choice of a PLI should be determined by the type of activity performed by the tested party and the economic circumstances of the related-party transaction, as well as the reliability of the available data for the third-party comparables. Generally PLI are chosen on the basis of return on capital employed (ROCE); return on sales (ROS); and return on operating costs. The Assessee selected (Gross Profit/ Value Added Expenses) as the PLI. The average margin earned by the comparable was 96% compared to 95% earned by the Assessee. The Second Proviso to Sec.92C (2) lays down as follows: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed 5% of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. Since the variation in the arithmetic mean of the profit margin earned by the comparable companies and the Assessee was less than 5%, the Assessee based on the 2nd proviso to Section 92C(2) of the Act, the Assessee concluded that the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets employed and risks analysis. The CIT(A) passed an order dated February 17,2011 rejecting the Assessee s claim by relying on a decision of the Delhi ITAT in the case of M/S.Adobe Systems India Pvt.Ltd., ITA No.5043/Del/2010 wherein it was held that companies whose results are extreme should be excluded. The CIT(A) held that companies with extreme results should be excluded from the comparable set as they cannot be considered representative of the industry. 12. Aggrieved by the order of the CIT(A), the Assessee has preferred the present appeal before the Tribunal. 13. The learned counsel for the Assessee submitted that the action of the TPO and the CIT(A) in excluding loss making companies from the list of comparable companies cannot be sustained. It was argued that loss making companies should also be considered for computation of arm's length price. The learned counsel for the Assessee explained that it was a routine distributor who bears normal risks attached with it. The learned counsel for the Assessee explained the reasons for its low margins due to transition phase due to technological change in the industry of which Assessee was a part. It was submitted by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )-TP], Exxon Mobil Company India Pvt. Ltd [TS-754-ITAT-2012(Mum)-TP], BP India Services Pvt. Ltd [TS-568-ITAT-2011(Mum)-TP], TCL India Holdings Pvt. Ltd [TS-130-ITAT-2013(Mum)-TP] It was submitted that comparable selected by the Assessee were not earning loss at the Gross level on VAE. Each of the comparable company earned decent level of profit at this PLI level as per the chart given below: Sl. No. Name of the Company GP/VAE 1 Dee Greaves Ltd. 18.46% 2 Media Video Ltd. 145.83% 3 Positive Electronics Ltd. 108.39% 4 Ricoh India Ltd. 30.77% 5 S E S Technologies Ltd. 175.34% Average 96% 15. The learned counsel for the Assessee submitted that the TPO has accepted the comparable companies selected by the Assessee as comparable functionally based on functions, asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the international by the assessee is to be determined by applying CPM as MAM then, ALP must be determined with reference to the functions performed, taking into account the assets employed or to be employed and the comparability the risks assumed by the respective parties to the transaction as per rule 10B(2)(b). Rule 10B(3) mandates that a given or select uncontrolled transaction selected in terms of Rule 10B(2) shall be comparable to an international transaction if none of the differences, if any, between the compared transactions, or between enterprises entering into such transactions are likely to materially affect the price or cost charged or paid or the profit arising from such transaction in the open market or reasonably accurate adjustment can be made to eliminate the effects of such difference. Therefore if a comparable company or it s international transaction broadly confirm to the assessee s functioning, it has to be regarded as comparable. The other exercise which the TPO has to necessarily perform is that if there are some differences, an attempt to adjust them to eliminate the material effects should be made. Once there is functional comparability keeping ..... X X X X Extracts X X X X X X X X Extracts X X X X
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