TaxTMI 
TaxTMI 
2010 (11) TMI 565
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.... 31-10-2002 declaring total income of Rs. 8,04,363. The assessee declared export sales of polished diamonds to the tune of Rs. 18,86,66,709 and showed gross total income of Rs. 28,22,788 and claimed deduction under section 80HHC to the tune of Rs. 19,76,092. The assessee filed audit report in Form No. 3CEB. The Assessing Officer referred the case to the Transfer Pricing Officer ('TPO' for short) for determination of Arm's Length Price in terms of special provisions relating to avoidance of tax under Chapter X of the Income-tax Act, 1961. Vide his letter dated 14-3-2005 intimated the enhancement of total income of the assessee of Rs. 61,84,483, on account of adjustments to the value of international transactions entered into by the assessee. In this respect the assessee vide its letter dated 23-3-2005 submitted as follows :- "1. We have already made a Rectification Petition under section154, read with section 95CA(5), before the learned Addl. CIT (TP-3), bringing out certain material mistakes, which are apparent from record and requested him to rectify the same before 31-3-2005 so that the regular assessment under section 143(3) can be completed. In view of this, we request your ....
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....lished as our net margin, which is then to be applied to International Transaction to arrive at ALP of the same. Further, the provisions as contained in section 92CA are worth considering. u Sub-section (1) states that when an assessee has entered into an International Transaction, the Assessing Officer, may, with the previous approval of the Commissioner, refer the computation of ALP in relation to International Transaction to the TPO. u Sub-section (2) required the TPO to serve a notice on the assessee to produce evidence on which the assessee has relied upon in support of computation of ALP in relation to international transaction referred to in sub-section (1). u Sub-section (3) states that the TPO shall pass the order in writing, determining the ALP in relation to the International Transaction and send the copy of the same to the Assessing Officer and the assessee. u Sub-section (4) required that the Assessing Officer shall compute the "Total Income" of the assessee having regard ....
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....ed upon by the learned TPO pertained to partnership firm/proprietary concern/private limited companies, which are not publically available for the purpose of transfer pricing study, and hence, they cannot be used for the purpose of comparison. u The reliance placed by the assessee on published data, while concluding that its International Transaction are at ALP is correct and in accordance with law. u The data base sent by the TPO along with show-cause notice dated 23-11-2004 does not calculate, in a fair, reasonable and scientific manner the "Industry Average" because- n The sample compiled, includes data pertaining to entities having turnover ranging from Re. 0 crore and above to Rs. 50 crore and hence not comparable. n The sample compiled by the TPO the date pertaining to six entities in the turnover of Rs. 40 crores to Rs. 50 crores. One entity in range between Rs. 20 crores to Rs. 30 crores and only two entities in the range of Rs. 10 crores to Rs. 20 crores. Thus, the size of sample is not uniform. n&nb....
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....bove is to be adjusted to take into account the differences, if any, between the International Transaction and the comparable Uncontrolled Transaction or between the enterprise entering into the International Transaction and Unrelated Enterprise, which could materially affect the net margin in the open market. (iv) The net margin realized by the enterprise as referred to in (i) above is established to be the same as the net margin computed in (iii) above. (v) The net margin thus established in (iv) above is to be taken into account to arrive at ALP in relation to the International Transaction." [Emphasis supplied] 7. The CIT(A) at pages 15 and 16 has brought out the arguments of the assessee on the scheme of provisions contained in section 92CA. After extracting them, at page 17 last para he held as follows :- "Though, I find merit in appellant's contention, the fact that modified operating margin of 5.46 per cent is less than the appellant's operating margin of 5.91 per cent. I am also convinced that pricing of its international transaction is at ALP and hence no adjustment is to be made to total income. So, I am not going into legality o....
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....renoted decisions of the co-ordinate Benches of the Tribunal and set aside the matter to the file of Assessing Officer for fresh adjudication. 10. The learned Counsel for the assessee Ms. Indira G. Anand, on the other hand, vehemently opposed the submissions of the department. She contended that the assessee has in fact conducted transfer pricing study and applied TNMM at the transaction level and has demonstrated that its international transactions were at ALP. She contended that the TPO has committed an error in taking entity level and industry level data and applying the same to the gross margins of the assessee and suggesting adjustments. The assessee had demonstrated with data, that even if the transfer pricing adjustments are done by a methodology of comparison of gross margins of various enterprises, at the entity level, for the purpose of determination of ALP, is taken into account, then also, the adjustment proposed is bad on facts as held by the ld. CIT(A). She vehemently contended that it is not proper for the Revenue to argue against, the method adopted by its own TPO based on which the CIT granted relief, by only correcting the mistake done by the TPO, while computi....
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....oard 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 prescribed79 by the Board. [Emphasis supplied] Section 92F (ii) arm's length price: "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions." u - transaction. "transaction includes an arrangement, understanding or action in concert,- u whether or not such arrangement, understanding or action is formal or in writing; or u whether or not such arrangement, understanding or action is intended to be enforceable by legal proceeding." [Emphasis supplied] 14. We now extract Rules 10B(1), 10B(e) :- "10B. Determination of arm's length price under secti....
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....s as listed out by it. The assessee classifies itself as a licensed manufacturer and thus having lesser risks. While so the learned Senior Departmental Representative is right in point out that the comparables selected by the assessee are not of licensed manufacturers of the similar commodity. The TNMM compares net margins of uncontrolled transactions between independent entities, with those achieved in controlled transactions between related parties. The Tribunal in the case of Aztec Software & Technology Services Ltd. (supra) on page 238 observed as follows : "The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operations. Under this method, the net profit margin realized by an associated enterprise from an international transaction is computed in relation to a particular factor such as costs incurred, sales, assets utilized, etc. The net profit margin realized by an associated enterprise is compared with net profit margin of an uncontrolled transactions to arrive at the ALP. The TNMM is similar....
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....n referred in step 3. Step 5 : The net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 70. Section 92C(1) refers to arm's length price in relation to an international transaction. Rule 10B(1)(e) read with section 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises as a whole. Paragraph 3.26 of Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by OECD reads as follows : "3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in whi....
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....le results and that the combined effect of two or more separate transactions may be considered if such transactions are taken as a whole and are so inter-related with consideration of multiple transactions, is the most reliable means of determining the arm's length consideration of the transactions. At paragraph 25.4 the learned author states that OECD guidelines may also require some segmentation of the inter-company transactions. The issue whether further disaggregation is required, depends on practical issues. Such comments cannot be interpreted as permitting entity level comparison. Similarly, Taxman's book on "Law of Transfer Pricing" by D.P. Mittal, Second Edition paragraph 7.9 has been cited and the book "US Transfer Price" by Robert T. Cole paragraph 2.06 was relied upon by Shri Rajan Vora. On a perusal of all these material we find that none of them suggests entity level comparison. Reliance was also placed on paragraph 1.20 of "Transfer Pricing Guidelines" of OECD. From a perusal of this paragraph it is clear that they are applicable to all methods, that may be adopted for arriving at the arm's length price. The learned counsel for the assessee cannot restrict para 1.20 t....
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....onal Transaction to the TPO. u Sub-section (2) required the TPO to serve a notice on the assessee to produce evidence on which the assessee has relied upon in support of computation of ALP in relation to International Transaction referred to in Sub-section (1). u Sub-section (3) states that the TPO shall pass the order in writing, determining the ALP in relation to the International Transaction and send the copy of the same to the Assessing Officer and the assessee. u Sub-section (4) required the Assessing Officer shall compute the 'Total Income' of the assessee having regard to the ALP determined by TPO under sub-section (3). Thus, the scheme of the assessment is very clear and it states that (i) The TPO shall, and is entitled only to, determine the ALP in relation to the International Transaction and (ii) The Assessing Officer shall compute the 'Total Income' having regard to the ALP determined by TPO in relation to the International Transaction. There is no authority under the law bestowed on the TPO to determine the 'Total Income' of the assessee. He is to determine only the....