2010 (2) TMI 1170

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....cumstances of the case and in law, the Ld. CIT(A) erred in deleting the Addition of Rs. 2,57,26,138/- made by the T.P.O to the value of international transaction undertaken by the assessee, without appreciating the facts of the case." 3. After hearing both the parties we find that the reference for computation of Arms Length Price in relation to international transaction which were listed in the detailed audit report was made by JCIT (OSD) Range 8(3) Mumbai to ACIT Transfer Pricing- III,Mumbai. A notice under section 92CA(2) along with a questionnaire was issued by Transfer Pricing Officer. It was found that assessee was located at SEEPZ, SEZ and, hence, enjoyed 100% tax holiday under section 10A of the Act. It was further found that assessee was engaged in the business of sale of finished jewellery to its Associate Enterprises and Non-Associate Enterprises. The assessee had considered the Cost Plus method as most appropriate method. As per the workings given by the assessee it was earning G.P margin of 16.95% in the transactions with unrelated parties as against 19.37% from the related parties. In view of this it was claimed that the transactions with related parties were made ....

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....  Direct Cost 1,76,66,6605     Indirect Cost 2,77,71,200     Total Cost   85,86,73,610 85,96,73,610 Net Profit   3,65,27,699 Net Profit 3,65,27,699   "6. The arm's length sales as per the above calculation is determined as Rs. 27,59,69,451/- (92,01,27,446 - 64,49,57,996) and the -5% of the same is determined at Rs. 26,21,70,978/-. As against this the assessee's arms length price is Rs. 25,02,43,313/-. 7. the assessee's transaction value is below the arms length price an adjustment of Rs. 2,57,26,138/- (Rs.27,59,69,451 - Rs. 25,02,43,313) is being made to all the transactions undertaken by the assessee." 6. In response to the above order assessee accepted the application of TNMM method, however, assessee made an application for rectification under section 154of the Act. In that application it was mainly stated that adjustment has been made on total sales inclusive of controlled sales. It was pointed out that as per the provisions of the Act the adjustment could be made only in respect of controlled sales. Accordingly the assessee suggested the calculation which is as under:- Partic....

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.... by applying 7.25% margin on the controlled cost of Rs. 23,99,99,274/- and adding the balance uncontrolled cost. Thereafter from the total sales calculated at Rs. 87,60,73,557/- the uncontrolled sales (i.e. sales to non AE's) of Rs. 64,49,57,996/- has been reduced thereby arriving at the arms length sale price of controlled transactions at Rs. 23,11,15,561/- (87,60,73,557/- - 64,49,57,996/-). As the assessee company's value of controlled sales is above the arm's length price calculated above no adjustments is necessary to the transactions undertaken by the assessee." 9. The ld. CIT(A) after considering the submissions observed that TPO has definitely made excessive adjustment because 7.25% profit was applied to the total cost in respect of related and unrelated parties. The ld. CIT(A) accepted the calculation given by the assessee and allowed the appeal and observed vide para 2.7 , 2.8 and 2.9 as under:- "2.7 From the above chart and discussion it is seen that the T.P.O has applied 7.25% profit margin to total cost and then from the total sales so determined, the sales to third parties have been excluded to arrive at the arms length sales to AEs. However, as per section 92C(3....

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....eferred to the appellate order and submitted that no basis has been given for distribution of purchase cost and direct cost by the assessee and, therefore, ld. CIT(A) should not have followed those figures. 11. On the other hand, ld. counsel for the assessee admitted that assessee had not challenged the original assessment order by way of appeal because the assessee had accepted the adoption of TNMM. The assessee had also admitted the 7.25% rate of margin. However, while disputing the cost etc. some minor differences have arisen and they are because involvement of interest because only operating profits were calculated by the TPO. In this regard he referred to page 2 of the original order passed under section 92CA(3) and pointed out that at the heading of the chart the TPO has mentioned "OP/TC%". This clearly shows that TPO has only considered operating margin. He also reiterated the submissions made before lower authorities that adjustment has been made on the total sales which is not possible. He argued that, therefore, there was definitely an error in the order of TPO and same has been correctly held to be rectifiable by ld. CIT(A) and accordingly he strongly supported the or....