TMI Blog2018 (9) TMI 2015X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions are concerned, we are of the view that the provisions of section 92 mandate determination of ALP. The fact that after carrying out such exercise, the profit margins of the assessee would be abnormal cannot be the basis to accept the price paid in the international transactions as at arm s length. In other words, it is mandatory to determine the ALP in the manner contemplated by the Act and the Rules. In our view, the DRP fell into an error in accepting the price received by the assessee in international transactions as at arm s length without carrying out such an exercise. We therefore feel it proper to set aside the order of DRP and remand to the AO/TPO for fresh consideration the determination of ALP on the basis of MAM as adopted by the assessee in its TP study. As assessee submitted before us that the comparables chosen by the assessee in its TP study were also chosen by the TPO, when he adopted TNMM. His prayer was that pursuant to the remand by the Tribunal, the TPO should be directed to restrict himself from choosing any fresh comparables. In our view, the TPO has to carry out the exercise in accordance with the law and no restriction can be placed on his powers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd underutilization of capacity and not due to transfer price of goods purchased from its associated enterprise. 2. The Ld. TPO/Ld. DRP, while proposing a transfer pricing adjustment to the international transactions undertaken by the Appellant with its AEs, ought to have accounted the corresponding reduction/adjustment in customs duty paid by the Appellant. 3. The Ld. TPO / Ld. DRP has erred in not considering the use of multiple year data for computing the final margin of the comparable and to determine the profit level indicator ( PLI ). 4. The Ld. TPO/Ld. DRP erred in wrongly computing the margin of following companies: Manufacturing: a) Genus Power Infrastructures Limited b) Incap Limited c) Remi Elektrotechnik Limited d) Salzer Electronics Limited Trading: a) Cuprum Bagrodia Limited b) G P Lightning Limited c) K Dhandapani Co. Limited The respondent craves leave to add, alter, amend and/or delete any of the ground mentioned above. 3. The grounds raised by the Revenue and the Assessee arise in the context of determination of Arm s Length Price (ALP) in respect of the two international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch 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 subsection (1) shall be applied, for determination of arm s length price, in the manner as may be prescribed as follows:- Provided that where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices: 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 five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm s length price. 7. Rule 10B of the Income Tax Rules, 1962 (Rules) lays down the details of the various methods that are to be used in determination of ALP. For the present appeal, what are rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. 9. The Assessee filed its Transfer Pricing documentation to support its claim that the price paid in the international transaction was at Arm s Length. As far as the transaction of trading in water heaters by the Assessee after purchase from the AE, the Assessee adopted Resale Price Method (RPM) as the Most Appropriate Method (MAM) for determination of ALP. As far as the transaction of purchase of raw materials from AE is concerned, the Assessee adopted CPM as the MAM. 10. The TPO rejected adoption of CPM as the MAM for determination of ALP for the transaction of purchase of raw materials for the reason that the Assessee has not given how its gross profit was computed. The TPO adopted TNMM as the MAM and determined the ALP of the transaction of purchase of raw materials. 11. As far as transaction of trading is concerned, the Assessee had adopted RPM as the MAM f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales OP OC OP/OC OP/Sales 1 Cuprum Bagrodia Ltd. 49.84 6.88 42.96 16.01% 13.80% 2 G P Lighting Ltd. 1.51 0.04 1.47 2.72% 2.65% 3 Globus Corporation Ltd. 23.16 0.54 22.62 2.39% 2.33% 4 K Dhandapani Co. Ltd. 40.99 0.4 40.59 0.99% 0.98% 5 Suzlon Engitech Ltd. 8.33 -0.16 8.49 -1.88% -1.92% Arithmetic mean margin 4.04% 3.57% Determination of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75,460,643 154,648,202 Gross Margin 22.22% 133.61% Trading Segment Gross Margin Computation as per TP documentation Gross margin on giving effect to the adjustment made by the TPO Sales- (A) 75,887,398 7.5,887,398 Total Direct Expenses- (B) 63,837,839 47,404,699 Gross Profit (A) - (B) 12,049,558 28,482,789 Gross Margin 15.88% 60,08% 15. The DRP agreed with the contention of the Assessee and held that the MAM adopted by the Assessee for both the international transaction was correct and should be accepted. The following were the relevant observations of the DRP:- Based on the above analysis, it is submitted by the assessee that the adjustment proposed by the TPO would result in an abnormal gross margin of the Assessee i.e. 83.61 per cent in the manufacturing segment and 60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this regard, the ld. DR submitted that the requirement of section 92(1) of the Act for determination of ALP in respect of an international transaction has to be followed and merely for the reason that on such determination, the profit margin of the assessee will be exorbitant cannot be the basis to delete the addition made on account of determination of ALP. His submission that if the DRP finds that the MAM is CPM for international transaction for purchase of raw materials and RPM for international transaction for trading in water heaters is appropriate, then the DRP ought to have embarked upon an enquiry as to whether the ALP computed by the assessee in accordance with those methods was correct. It was submitted by him that by default price paid in international transaction cannot be considered as at arm s length. It was therefore submitted by him that determination of MAM and determination of ALP based on the MAM should be directed to be carried out. 18. The ld. counsel for the assessee, on the other hand, pointed out that as far as international transaction of trading in heaters is concerned, in assessee s own case, this Tribunal has held that RPM is the MAM for determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our view, the DRP fell into an error in accepting the price received by the assessee in international transactions as at arm s length without carrying out such an exercise. We therefore feel it proper to set aside the order of DRP and remand to the AO/TPO for fresh consideration the determination of ALP on the basis of MAM as adopted by the assessee in its TP study. 22. The ld. counsel for the assessee submitted before us that the comparables chosen by the assessee in its TP study were also chosen by the TPO, when he adopted TNMM. His prayer was that pursuant to the remand by the Tribunal, the TPO should be directed to restrict himself from choosing any fresh comparables. In our view, the TPO has to carry out the exercise in accordance with the law and no restriction can be placed on his powers to bring any relevant and appropriate data on record in the matter of determination of ALP. 23. In the result, the appeal by the revenue is allowed for statistical purposes. 24. As far as Cross Objection filed by the assessee is concerned, we feel that the grounds raised in the CO are on the manner of determination of ALP. We are of the view that it would be just and appropriate to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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