TaxTMI 
TaxTMI 
2014 (4) TMI 614
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....t and also in the business of freight contractors and agents, forwarding packing, hauling and transport agents and also to arrange for the transportation of person and of goods, wares and merchandise of every kind nature and description by all means of transport by air, land sea and inland waterway. It filed its return of income declaring 'nil income' after adjusting total income against brought forward losses on 01.11.2004. The issue before us is transfer pricing adjustment. 3. The facts relating to the issue of transfer pricing are brought out at pages 2 to 5 of the Ld. Commissioner of Income Tax (Appeals)'s order. For ready reference we extract pages 2 to 5 of the same. "Adjudication of Transfer pricing issue 3. During the assessment proceedings, the AO noticed the following International Transactions entered into by the appellant during the financial year 2003-04, as reported in Form 3CEB, filed along with the return of income. S. No. Type of International Transactions Method selected Value of transactions 1. Cost Collection Received Profit Split Method 4,43,99,085 2. Cost Colle....
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.... International Transaction with its Associate Enterprises. Transfer Pricing Order 6. After going through the Transfer Pricing documentation and other details filed by the appellant during the transfer pricing proceedings, the TPO came to the conclusion that since the sufficient information was not available to determine whether the arrangement of profit sharing rate of 50% is appropriate or not, therefore in the appellant's case the TNMM (and not the profit split method) is the Most Appropriate Method (MAM) to determine whether the International Transaction undertaken by the appellant with its AE is at arm's length or not. The TPO therefore used TNMM method in the appellant's case and determined the Arm's Length Price of the International Transaction after taking into account the following:- (i) In order to reach to the conclusion that in appellant's case TNMM is the Most Appropriate Method (MAM), the TPO stated that as per guidelines of statutory provisions of Rule 10C the most appropriate method is dependent (a) On availability of complete and reliab....
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....ook running into 102 pages. He filed a synopsis and also relied on the following case laws: (a) ITA 4427/Mum/2010 - ACIT vs. Danzas Lemuir P.Ltd. (b) ACIT vs. Agility Logistics P.Ltd. 2012 (136) ITD 0046-TBOM,ITAT, Mumbai (c) Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.) (d) Asstt. CIT v. MSS India (P.) Ltd. [2009] 32 SOT 132 (Pune) He submitted that PSM is the only method which is most appropriate method on the facts and circumstances of the case. He submitted that the requisite documents were submitted to the A.O. in the remand proceedings and there was no default on the part of the assessee on the issue of compliance. He argued that the A.O. while adopting TNMM has taken the comparables without any application of mind and that an addition by adopting the net profit rate at 7.15 as against 2.56% declared by the assessee. He disputed the comparables taken by the A.O. He submitted that the A.O. cannot substitute the most appropriate method. The Ld. Counsel submitted that the department has not rejected the assessee's adoption of Profits ....
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....dual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction; (Emphasis supplied)". 9.1 A plain reading of the Rules demonstrate that profit split method is applicable mainly in international transactions: (a) involving transfer of unique intangibles; (b) in multiple international transactions which are so interrelated that they cannot be valuated separately. 9.2 The method specifies in Clause (ii) that the relative contribution made by each of associated enterprise should be evaluated on the basis of FAK analysis and on the basis of reliable external data. Thus, bench marking by selection of comparables is mandatory under this Method. 9.3 The Special Bench of the Tribunal in the case of Aztec Software & Technology Services Ltd. v. Asstt. CIT ,....
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....ions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realized 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 (iii); (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." 9.4 Under the transfer pricing rules described the assessee can adopt: (a) Either a contribution PSM, namely where the entire system profits are split among the various AEs who are parties to the transaction in question or; (b) Residual PSM, namely where each of the AEs who are parties to the transaction in question are first assigned routine basic returns for the routine functions performed by them, and there after the residual profits are split among the AEs. 9.5 The profits need to be split among the AEs on the basis of reliable external market data, which indicate how unrelated parties have split the profits in similar circumstances. For practical ap....