TaxTMI 
TaxTMI 
2015 (6) TMI 597
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....It is a matter of record that the assessee company got merged with JCB India by virtue of the judgment of the Hon'ble High Court dated 26.5.2010 w.e.f. 1.4.2009. Thus, in so far as the year under consideration is concerned, the assessee was a subsidiary of JCB India. The assessee manufactured components such as back blades, buckets, dippers, chassis, loader arm, track beam, etc., which form parts of earth moving machines. Five international transactions were reported by the assessee in Form No.3CEB for the year in question. First transaction is 'Export of finished goods' amounting to Rs. 20,21,62,339/- and the second transaction is 'Import of raw materials' to the tune of Rs. 73,73,270/-. The assessee benchmarked these two international transactions jointly by applying the Transactional Net Margin Method (TNMM). Apart from the above two, the assessee also entered into three more international transactions, namely, 'Import of machinery, jigs and fixtures', `Reimbursement of expenses paid' and `Reimbursement of expenses received.'. These three international transactions were demonstrated at arm's length price (ALP) by applying the Comparable Uncontrolled Price (CUP) method. The....
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....asis, the TPO adopted unadjusted profit margin of the assessee at (-)45.23%. By considering the arithmetical mean of the operating profit margin of the comparables at 13.47%, the TPO applied benchmark of Operating profit/Total cost at 58.70% (45.23% +13.47%) on the international transaction of 'Export of finished goods.' This resulted into recommendation for a transfer pricing adjustment to the tune of Rs. 2175.425 lac. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). That is how, the AO in the impugned order made addition for a sum of Rs. 21.75 crore and odd. The assessee is aggrieved against this addition. 4. We have heard the rival submissions and perused the relevant material on record. The assessee is not satisfied with the order of the AO/TPO only on two counts viz., (i) non-adoption of adjusted operating profit rate; and (ii) removal of two companies from the list of comparables. Apart from the above, all other aspects of the TP analysis carried out by the TPO, have been accepted by the assessee. We will deal with the above referred two issues one by one. I. Non-adoption of adjusted PLI of the tested party. 5. It is an undisputed position that....
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....al transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe....' . Then five specific methods have been set out in this provision and the sixth one is: 'Such other method as may be prescribed by the Board.' Rule 10B deals with the determination of arm's length price u/s 92C with the methods as prescribed under the Act. Adverting to the facts of the instant case, it is found that the assessee applied the TNMM as the most appropriate method, which has been concurred with by the TPO. The modus operandi for the computation of ALP under this method has been set out in Rule 10B(1)(e) as under:- "(e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit m....
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....onably accurate adjustments can be made to eliminate the material effects of such differences. 9. When we read sub-rules (2) and (3) in juxtaposition to Rule 10B(1)(e), it emerges that the arm's length price under TNMM can be determined by comparing the profitability of an international transaction with that of the comparable uncontrolled transaction. In order to make such a comparison, it is relevant to see the differences, if any, between the international transaction and comparable uncontrolled transaction. If there are no differences between the two sets of transactions or the differences, if exist, are not likely to materially affect the price/profit from such transaction, then, the matter ends and the comparables are determined and the ALP can be worked out. The other situation may be when there are differences between the international transaction and uncontrolled transaction, which materially affect the price or profit from such transactions. In such a situation, the law contemplates of making a reasonably accurate adjustment to the uncontrolled transaction for eliminating the material effects of such differences. Coming back to the modus operandi given in Rule 10B(1)(e) f....
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.... transfer pricing regime is to compare the costs/profits incurred/earned by the assessee from an international transaction as it is with an uncontrolled transaction and compute income from such international transaction having regard to its ALP determined on the basis of a comparable uncontrolled transaction. If the operating costs incurred by the assessee from the international transaction are adjusted at the very threshold, then how the transfer pricing provisions would apply to determine the ALP of an international transaction, is beyond our comprehension. The mandate of the provision is crystal clear that whatever be the operating costs incurred by the assessee in relation to an international transaction, these are liable to be considered as such without making any adjustment whatsoever in determining the net profit margin realized. If any adjustments are allowed to the assessee's profit margin, then the entire transfer pricing exercise will be thrown to the winds, thereby making the provisions of Chapter-X as a redundant piece of legislation. Once the legislature provides for computing profit margin earned by the assessee from an international transaction without any adjustmen....
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....gin earned by comparables in uncontrolled transactions. Firstly, when we take into consideration the percentage of the operating profit margins, the effect of quantitative differences between the two sets of transactions is automatically wiped out. Secondly, when we consider the operating profit margin, it carries the overall effect of all operating costs/revenue. In the case an assessee having newly set up its business, the amount of depreciation may be higher. One cannot simply make an adjustment by comparing the higher amount of depreciation charged by the assessee vis-à-vis its comparables. It is so for the reason that when during the initial years, the amount of depreciation is higher, the repair costs is on the lower side. In later years of operation, when the amount of depreciation goes southwards, the repair cost goes northwards. When we take up operating profit for comparison under the TNMM, such figure of operating profit counterbalances the effect of all such higher and lower individual costs which eventually subsume into the operating profit. As such, it is impermissible to pick up individual items of costs or revenues for making a comparison and then adjusting t....
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....iring adjustment in the profit margin of the comparables. Nothing of this sort has been done by the assessee. 13. We notice that the assessee vide its letter dated 7.9.2009 addressed to the TPO, a copy of which is available on page 1004 of the paper book, submitted with prejudice to its earlier submissions that if the adjustment as computed by it was not acceptable, that is, the abnormal costs were not excluded, then the comparables so chosen by it would cease to be comparable. Similar contention was made by the assessee before the DRP vide its letter dated 20.7.2010. We find that the TPO/DRP have not considered this argument of the assesee. They simply held that no adjustment is warranted in the computation of the operating profit of the assessee, with which we also agree. However, they failed to consider if the assessee had in fact, incurred any extraordinary or abnormal costs due to its first year of operation. If, in fact, such abnormal costs were incurred, then it was mandatory on the part of the authorities to adjust the profit margin of comparables to that extent. It appears that both the assessee as well the TPO did not properly approach the transfer pricing analysis in a ....
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....ficantly reduced to Rs. 9.92 crore in the current year from Rs. 36.68 crore in the preceding year due to change in the Government policies. It has been so recognized in the director's report of this company. It has further been mentioned in such report that this company retrenched 105 employees and compensation aggregating to Rs. 42.39 lac was paid during the year. In our considered opinion, the above cited extraordinary and abnormal differences make this company incomparable with the assessee. We, therefore, hold that the TPO was right in excluding this company from the list of comparables. (ii) Shiv Agrico Implements Ltd. (Seg.) 17. The assessee included this company on segment level in the list of comparables with OP/TC at (-)50.79%. The TPO held this company to be non-comparable by observing that it has three business segments, namely, Foundry, rolling and forging; Engineering & Fabrication; and Others. He noticed that all the products made by the company from Foundry, rolling and forging division pass on to the Engineering & Fabrication unit, thereby impacting the profitability of the Engineering division. He further noticed that the fixed assets used in these two seg....