AI Drafter 
TaxTMI 
TaxTMI 
2010 (4) TMI 840
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.... assessee company is a wholly owned subsidiary of M/s. Digital Microwave (Mauritius) Ltd. It is mainly engaged in undertaking contracts for installation, commissioning and equipment maintenance contracts of telecommunication equipments, The AO while scrutinising the return of assessee observed that order u/s 92 CA (3) of the Income Tax Act has been passed in the case of assessee by the Transfer Pricing Officer New Delhi on 7.12.2006. He found that assesse had international transaction with associate enterprises. On an analysis of method adopted by the assessee for determination of its arms length price of international transaction vis a vis the most appropriate method required to be adopted he pointed out that TNMM is the most appropriate method determining the arm's length price in the case of assessee in respect of international transaction. The relevant discussion made by the TPO has been reproduced by the AO which read as under:- "The arm' length price of the international transactions entered into with the AE is computed in the following manner :- Total Cost Rs. 7,94,78,065 Operating Profit Rs. 10,44,822 Operating Profit margin 1.31% Arm's....
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....ssee company. The TPO is not justified in calculating PLI of 1.31% by combining (1) Installation and Commissioning Revenue, (ii) Re-engineerign & maintenance Contract Revenue, (iii) Warranty services Revenue and (iv) Commission Income. The assessee company never provides warranty for installation & Commissioning work carried out by it. The warranty facilities is provided only by the AE on equipment supplied by it which starts from the date of shipment of the equipment itself." The submission filed by the assessee has been considered and found not satisfactory. The issue raised by the assessee has already been discussed by the TPO in his order at length. Accordingly international transaction of related to commission on sales and warranty support services will get adjusted upwards to the extent to Rs. 46,46,591- and Rs. 72,95,302/- respectively. The AO shall, therefore, enhance the income of the assessee by Rs. 1,19,41,893/-. 3. On appeal Ld. CIT(A) has deleted this addition. 4. Ld. DR while impugning the order of Ld. CIT(A) contended that the assessee is wholly owned subsidiary of Digital Microwave Mauritius Ltd. Which in turn held by Digital ....
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....nstrued that these comparables are most appropriate cases and the method adopted by the TPO is also the most appropriate method then whether any adjustment is required or not. The associate enterprises directly entered into the transaction with the customer. Assessee get 3% commission. There is no tripartite agreement between the assessee, customer and the associate enterprises. On behalf of the associate enterprises assessee do provide warranty etc. The assessee itself has included warranty service receipt and commission receipt in the international transaction and computed the arm's length price. As far as the receipt in respect of installation and commissioning reengineering and maintenance are concerned they are domestic receipts which assessee has earned independently without any contribution of the AE. For butteracing his contention he referred to the letter dated 16.11.2006 written to the AO pointing out that installation and commissioning services provided by the assessee are not international transaction. Taking us through page 20 of the paper book he pointed out that AE has supplied equipments' to 40 parties during the year. The assessee has extended installation and comm....
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....aintenance 3,49,91,750 3,40,30,354 3. Warranty services 2,32,37,906 1,91,75,407 4. Commission income 1,47,96,910 1,16,41,215 Total 8,05,22,887 7,94,78,065 Operating profit = Operating revenue - Operating cost = Rs. 8,05,22,887 - Rs. 7,94,78,065 = Rs. 10,44,822/- PLI = 1.31% 7. The TPO on page 12 in the order extracted by the AO in the asstt. Order himself accepted that adjustment is required to be made to the value of international transaction related to commission on sales and warranty service. He has made the adjustment on these two items only. The grievance of the assessee is that if the TPO wants to determine the arms length price of international transaction with associate concern then he should work out the profit disclosed by the asesee on those receipts and compare that result with the comparables of independent cases, who have carried out similar international transactions with independent parties. In that exercise the domestic receipts which has nothing to do with the associate enterprises are required to be exclu....