TMI Blog2023 (4) TMI 1090X X X X Extracts X X X X X X X X Extracts X X X X ..... benchmark always has a reference to the comparable uncontrolled transactions. TPO dispensed with the adoption of any of the methods. Neither any comparison of the Payment of Management Fee in an uncontrolled situation was made nor even the allocation of the third component on the basis of head count was done by considering any comparable uncontrolled instance. Such a course of action adopted by the TPO is contrary to the mandatory statutorily stipulated procedure and hence, cannot be countenanced. If the working of the TPO, which is not in accordance with the law, is removed from the scene, what remains is the ALP determination done by the assessee of the international transaction of its Transfer pricing study report. Such determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duly accompanied by Form No.3CEB containing details of certain international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm s Length Price (ALP) of the international transactions. In this appeal, we are concerned only with the international transaction of Payment of Management fees for a sum of Rs.10.79 crore. The assessee determined the ALP of the transaction on segregate basis with the Transactional Net Margin Method (TNMM) as the most appropriate method, using Operating Profit to Operating Cost as Profit Level Indicator (PLI). The assessee shortlisted 18 comparable companies having arm s length range of profit between 4.15% to 8.78%. The Associated Enterprise (AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Rs.10.79 crore. He proceeded to `allow or `disallow the Management Fee under each sub-head. In this exercise, he accepted the cost allocation on the basis of average total assets and third party sales, but refused to accept allocation done on the basis of head count. The portion of expenses charged to the assessee under various heads on the basis of head count was re-determined by adopting sales ratio. In this way, he worked out management costs allowable at Rs.7.89 crore and costs not allowable at Rs.2.89 crore on the basis of a table drawn at pages 20 to 25 of his order. That is how, the adjustment of Rs.2.89 crore was proposed in this transaction. The AO made the transfer pricing adjustment in the draft order. No relief was allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E, which was treated as tested party, was at ALP. 6. The TPO went ahead with the break-up of total costs of Rs.10.79 crore under various sub-heads and did not accept the allocation done on a part of such costs done by the assessee on the basis of head count. Though the TPO mentioned in the order that he was reworking out the cost allocation on the basis of costs incurred rather than head count, but actually he determined the allowable portion of costs on the basis of sales ratio. For example, allocation of Group CEO costs has three components, namely, 1/3rd of average total assets, 1/3rd of total third party sales; and 1/3rd of average full time equivalent head count. The TPO accepted the allocation of 1/3rd of average total assets, at 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an expense or interest arising from an international transaction shall also be determined having regard to the arm s length price. The other relevant section is 92C dealing with Computation of arm s length price . Sub-section (1) of section 92C provides that the ALP in relation to an international transaction etc. shall be determined by any of the following methods, 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. It can be seen that five specific methods have been prescribed in section 92C(1) for determining the arm s length price. Modus operandi of the ALP determination und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verting to the facts of the extant case, it is discernible that the TPO simply dissected the transacted value of the international transaction of payment of Management Fees. The Total amount disallowed was computed by substituting a part of expense allocated by the assessee on the basis of head count with ratio of turnover. This is the beginning and the end of the transfer pricing exercise done by the TPO for recommending the transfer pricing adjustment. No ALP was determined of the international transaction of Payment of Management Fees under any of the prescribed methods. All these methods talk of computing the ALP by considering por una parte the value or profit from the international transaction and por otra parte the value or profi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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