TaxTMI 
TaxTMI 
2009 (11) TMI 669
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....ysis for arriving at the arithmetical mean of the profits of other companies for the current year alone has disregarded wide fluctuations in profit margins of respective companies from year to year in contravention of the proviso to Rule 10B(4). 5. Without prejudice to the grounds above, differences in operating environment and margins of individual companies have been disregarded in contravention of Rule 10B(3) in the TNM analysis for arriving at the arithmetical mean of the profits of the other companies. 6. Without prejudice to the grounds above, the learned Commissioner of Income-tax (Appeals) XX has erred in holding that compensation of 8.27 per cent to AE for its services cannot be considered for determination of ALP in the absence of compatibility analysis in disregard to the considerations of reasonableness with reference to functions performed, responsibility, risks and benefits divided between the respective parties to the transaction." 3. The assessee-company was incorporated on 11-9-2001 to manufacture printed circuit boards for consumer durations. Commercial production commenced on 1-1-2002. The shareholding of the assessee-company is as under: Name No. ....
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.... chosen. However, a closer look at the Operating Margins of the comparables for the year 2003 shows that two comparables namely Hyderabad Flextech Limited and Sanmar Micropak Limited had high negative margins. However, the assessee has itself stated that for the purposes of calculating average margin. Hyderabad Flextech has not been considered. It has not made any mention of Sanmar Micropak Limited on this account. An analysis at this end reveals that Sanmar Micropak Limited also has negative net worth in the year under consideration. This is akin of a company with dwindling profitability and hence is outside the purview of comparability. The assessee-company was confronted with these facts vide order sheet entry dated 27-2-2006. It has been argued during the course of discussions that this company has shown positive results in the earlier years and as such it cannot be rejected. However, the comparability is in the year under audit and the data for this year has been submitted by the assessee hence Sanmar Micropak is excluded from the list of comparables for making this analysis. The assessee-company also argued that without prejudice to the above, even if Sanmar Micropak is....
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....ll, accordingly, increase the income of the assessee by an amount of Rs. 53,70,963. No adverse inferences drawn in respect of the other international transactions for this year." 8. In the light of the TPO's order, the Assessing Officer made addition of Rs. 53,70,963 by disallowing the cost of raw material imported by the assessee from associate concerns, and added the same to the total income of the assessee. 9. Being aggrieved, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the Assessing Officer's order by holding that the TPO was justified in taking arm's length price at the arithmetical meaning of prices without allowing any reduction up to 5 per cent. 10. Still aggrieved, the assessee is in appeal before us. 11. The ld. counsel for the assessee has reiterated the submissions and contentions that were made before the CIT(A), and submitted that the CIT(A) has not been justified in confirming TPO's order where arm's length price was determined on TNM method instead of a correct method of making comparable analysis of purchase prices of typical items by associate enterprise from unrelated foreign vendors. He further submitted that the TPO has not c....
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....y in respect of the raw materials, which have been import by the assessee from its associate concerns. The assessee has itself obtained Transfer Pricing Report at TNMM method and the particulars supplied by the assessee itself in its Transfer Pricing Report has been used by the Transfer Pricing Officer while determining the net margin of profit in respect of the transactions undertaken by the assessee with his associate concerns in Korea and Thailand. The assessee's contention that the Transfer Pricing Officer should have considered the individual price of various items as paid by the assessee's associate enterprises to its unrelated vendors and should have taken into account the margin of profit earned by its associate concerns on the raw materials procured by them from their vendors and supplied to the assessee. However, all these details are not sufficient to determine the arm's length price with reference to the individual price of various items inasmuch as the assessee has not submitted any details about price at which the assessee's associate concerns for supplied the raw materials to another unrelated customers so as to compare price charged by the assessee's associate conce....
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....e of comparability. (iii)Selection of MAM should be based on analysis of functions performed, asset deployed and risks assumed (FAR analysis) of both the controlled and uncontrolled transactions. (iv)For rejecting the method followed by the assessee and to substitute the same by a new method, the burden of proof shifts to the TPO/Assessing Officer and the TPO/Assessing Officer has to provide cogent reasons for the substitution. (v )Appropriate and suitable adjustment in the arm's length price determined by the taxpayer can be made by the Assessing Officer on the basis of information furnished by the assessee or otherwise available with revenue authorities. However, any changes in the most appropriate method for computing the arm's length price is to be dealt with by way of speaking order. (vi)Computation of arm's length price is essentially a factual exercise. Each case depends on its own peculiar facts and circumstances. If identical transactions is not found for comparison, suitable adjustment is to be made to the price of somewhat similar transaction. 8.3-1 It has been observed in the (1995) Transfer Pricing Guidelines for Multinational Enterprises and Tax Adminis....
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....t of its procurement of raw materials to its A.E. at Korea and offered a reasonable margin of 8.27 per cent as compensation for this function. Prices paid to third party vendors by the A.E. and selling these very items at cost or below the cost or a nominal margin of profit to the appellant, by themselves, provide sufficient evidence of fulfilment of arm's length standards. It has been argued by the appellant that in the presence of such clinching direct evidence, there is no justification for adopting TNMM as the MAM. 8.3-4 I find a basic flaw in the arguments put forward by the appellant. In essence, the appellant is talking about a benchmarking analysis, with the Korean A.E. as the tested party, looking at the reasonableness of the rate of compensation paid by the appellant. Such a benchmarking analysis could have been done by the appellant by examining either the Resale Price Method or the Cost Plus Method, with Korean A.E. as the tested party and conducting the comparability analysis by selecting a set of comparables operating in the Korean market performing similar functions, assuming similar risks and deploying similar assets as that of the A.E. However, the appellant had....
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....o its associate concerns on account of the cost of raw materials purchased by the assessee, and thereby whether the assessee was getting any benefit of utilization of the fund realized from LG Electronics of India to earn some other income instead of making the payment to its associate concern in Korea. In this respect, the ld. counsel of the assessee expressed his inability to furnish the details about when and how the assessee has been realizing the sale proceeds from the LG Electronics and as and when the payments are being made by the assessee to his associate in Korea. Therefore, in the absence of details in this respect, the assessee's contention that some adjustment is to be made to the net margin determined by the TPO on account of benefit accruing to the assessee by way of interest on the amount payable by the assessee to its associate concerns is rejected. 15. The assessee has also taken one alternative ground out of the total raw materials consumed by the assessee for manufacturing print circuit boards, only 45.51 per cent of the total raw materials were imported through assessee's associate concerns, and, therefore, any adjustment, if any called for, can only be made....