TaxTMI 
TaxTMI 
2015 (7) TMI 600
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies Company Ltd., China. The assessee reported four international transactions in Form No.3CEB. The Assessing Officer (AO) referred the matter of determination of the arm's length price (ALP) of the international transactions reported by the assessee to the Transfer Pricing Officer (TPO). The entire controversy in the instant appeal is against the international transaction of 'Provision of Marketing support services' with the transacted value of Rs. 28,89,60,870/-. The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that this international transaction was at ALP. Profit level indicator (PLI) was chosen as Operating Profit/Total Cost (OP/TC). The assessee calculated OP/TC of this international transaction at 17.90%, which has been extracted from page 10 of the TPO's order, as under : - Table I. Operating expenses Rs.245,906,097 (A) Add: Non operating provision for tax Rs.11,592,050 Provision for FBT Rs.13,363,746 Total expenses Rs.270,861,893 Add: 7% mark up Rs.19,071,560 Total Revenue Rs.289,933,453 (B) Operating profit (B-A) Rs.44,027,356 (C) Margin on c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....`Provision of marketing support services'. There is a three-fold attack to the computation of the ALP. First is the determination of the assessee's profit margin by the TPO; second is the selection of some comparables; and third is against not allowing risk adjustment. We will deal with these issues, one by one. 9. First we espouse the aspect of determination of the assessee's profit margin from the international transaction of `Provision of marketing support services'. The ld. AR agitated the computation of the assessee's OP/TC. More specifically and to narrow down the core of controversy, it is on the computation by the TPO of 'Revenue shown' as per Table II above calculated at Rs. 26,31,19,523/-. The assessee's contention is that this amount has been erroneously taken by the TPO. 10. It can be seen that the assessee was compensated by its AE for rendering marketing support services at direct and indirect costs incurred with a mark-up of 7% on such total costs. The total amount received by the assessee is to the tune of Rs. 28,89,60,870/-. This figure of revenue was computed by applying mark-up of 7% on both operating and non-operating costs incurred by the assessee in prov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lation to some base, which also includes, costs incurred. Sub-clause (ii) states that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. Under sub-clause (iii), the net profit margin as per sub-clause (ii) is adjusted to take into account the differences between the international transaction and the comparables. Sub-clauses (iv) and (v) state that the net operating profit margin realized by the assessee as per sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) and 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. Having determined the ALP of an international transaction as per rule 10B(1)(e), we come back to the second proviso to section 92C(2) which provides that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed such percentage of the latter, as may be notified by the Central Govern....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tional transaction with a figure of Rs. 263,119,523 as per Table II above. By doing so, the TPO is seeking to compare the profit rate (7%) realized by the assessee on total costs (both operating and non-operating) with the profit rate (25.31%) of comparables on operating costs alone, which is an invalid comparison because the base of the assessee's international transaction and that of comparables has become different, which under all circumstances must remain same as per rule 10B(1)(e). As such, we hold that the authorities below were not justified in working out the transfer pricing adjustment by considering the amount of revenue at Rs. 263,119,523, which ought to have been taken at Rs. 28,89,60,870/-. 14. We find from the asessee's Profit & Loss Account that the amount of Revenue received from AEs stands at Rs. 28,89,60,870/-. As against that, the assessee calculated its margin at 17.90% by considering operating revenue at Rs. 28,99,33,453/-. It is self evident that the gross revenue received by the assessee from its AE from this international transaction is actually Rs. 28,89,60.870/-, which the assessee erroneously took as Rs. 28,99,33,453/-, thereby increasing the revenue ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing year and a copy of such order dated 4.4.2014 (in ITA No.3236/Del/2011) is available on record. Vide this order, the tribunal has restored the matter to the file of the AO for examining the comparability or otherwise of these companies along with the question of allowability or otherwise of working capital adjustment. It has been brought to our notice that the matter of the preceding year is still pending before the TPO and no final decision has so far been taken on the comparability or otherwise of these three companies. Under such circumstances and respectfully following the precedent, we also set aside the impugned order and remit the matter to the file of TPO/AO for deciding the comparability or otherwise of the above referred three companies in line with his decision pursuant to the tribunal order for the AY 2005-06. Apart from considering the question of inclusion or exclusion of these three companies in the final set of comparables, the TPO will also go into the issue of working capital adjustment as has been directed by the Tribunal in its aforequoted order. 17. The last aspect of the transfer pricing adjustment is against not allowing any risk adjustment. During the ....