2010 (1) TMI 806

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....n international transaction with M/s. Harizon Diamond B.V. Belgium which is owned and controlled by M/s. Jitendra Shah who is the brother of the partner Mr. Vinit Shah, of the firm. The assessee filed a audited report in Form No. 3CEB. It adopted theCUP method for computing the arm's length price of the international transaction. The TPO on the ground that, the assessee has not given any comparables, had rejected the method followed by the assessee and he used the Transaction Net Margin Method (TNMM). In the TPO's order under section 92A(3) dated 22-12-2006, an adjustment of Rs. 44 lakhs has been suggested while adopting the Transaction Net Margin Method. The Assessing Officer considered operating margins to sale of various enterprises and ....

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....ta, on the other hand, submitted that even in the method adopted by the Assessing Officer, the errors have crept in as non-operational profits have not been excluded while computing the percentage of operating profits. He submits that if the non-operational profits are excluded, then the variation is below 5 per cent and in view of the CBDT Circular, the CIT (Appeals) was right in holding that no adjustment is called for. 5. Coming to the issue whether TNM Method allows the Assessing Officer to take the profits at enterprises level, he submitted that the methodology is against the provisions of the Act. 6. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on reco....

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....led transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (ii); (v) 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." 8. A plain reading of the above shows that TNMM requires comparison of net profit margins realised by an enterprise from an international transaction or an aggregate of international transactions and not comparisons of operating margins of enterprises. F....