TaxTMI 
TaxTMI 
2016 (5) TMI 867
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....hree categories, namely, Class I, Class II and Class III. The Transactional Net Margin Method (TNMM) was applied in respect of transactions falling in Class I and Class II and the Comparable Uncontrolled Price (CUP) method in respect of transaction falling in Class III. On a reference made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions, the latter took up transactions falling under Class I, on which the assessee adopted Profit level indicator (PLI) of Operating Profit/Total Cost (OP/TC) and computed the same at 17.87%, as against average net profit margin of comparables at 6.23%. That is how, it was shown that these international transactions were at ALP. The TPO did not accept application of the TNMM as the most appropriate method by observing that there were transactions both of purchase and sale, namely, Import of raw material, components and semi finished goods, Import of capital goods and Export of semi finished goods. In his opinion, the operating profit margin from the international transaction per se was not identifiable. He opined that aggregation of all the international tr....
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.... 2002 and imports were made by the assessee during the period April, 2003 to March, 2004. The other distinguishing feature pointed out by the assessee was that its AE was making bulk purchases, thereby availing huge volume discounts. Still another distinguishing feature was put across that the details of third party raw material purchase prices, submitted before the Customs Authorities, were on a sample basis. In the light of the above distinguishing features, it was argued before the TPO that there was no internal CUP available to benchmark the international transaction of Import of raw material/components from group companies. The TPO did not accept the assessee's contentions. He noticed from the submissions made before the Customs Authorities that the comparable uncontrolled price of various items purchased was ascertainable. A chart has been drawn in the TPO's order showing average margin of 11.75% charged by the AE from the assessee. As the AE was not doing any trading of the raw material and merely procuring the same for distribution to groups concerns, the TPO held this margin of 11.75% as the basis for determining the ALP of the international transaction. By reducing such p....
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....stance of purchase or sale of similar goods or services is available, then, CUP serves as the most appropriate method for determining the ALP of such an international transaction. Adverting to the facts of the instant case, we find that the dispute is only qua the determination of ALP of the international transaction of 'Import of raw materials, components and semi finished goods' under Class I transactions. It is obvious that if some comparable uncontrolled instances can be found, then, there can be no other method more appropriate than the CUP method for determining the ALP of such import of goods etc. As the ld. CIT(A) has also upheld the application of CUP as the most appropriate method, which aspect has not been challenged by the assessee, we hold that the TPO was right in applying the CUP method for determining the ALP of the international transaction of import of raw materials, components and semi finished goods. 6. Now, turning to the application of the CUP method, we find that the ld. CIT(A) has deleted the addition by simply accepting the assessee's contention that the percentage variation computed by the TPO was not on account of margin charged by the AE on sale to the ....
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....ces, if any, between the international transaction and the comparable uncontrolled transactions. Such adjusted price arrived at under sub-clause (ii) becomes ALP of the international transaction of property transferred as per sub-clause (iii). When we espouse the facts of the instant case, it is found that the TPO has proceeded to determine the ALP under CUP method by considering the transaction between the asessee's AE in Italy and third party also in Italy. Such a geographical difference, where in both the buyer and seller are foreign parties, cannot constitute a `comparable' uncontrolled transaction, more so, when the assessee itself has been treated as a tested party. An external comparable uncontrolled transaction will exist when similar goods are purchased by some another Indian party from a non-AE. Similarly, some internal comparable uncontrolled transaction will exist when the assessee purchases similar goods from a non-AE. The essence of the matter is that a pre-transaction of purchase by the foreign AE from another unrelated foreign party cannot constitute an internal CUP for determining the ALP of the same goods purchased by an Indian assessee from its AE. 9. Further, w....
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....assessee was higher than the price to the unrelated parties. The assessee had also contended before the Customs Authorities that it sold the imported sunglasses, etc. to the dealers/retailers at almost 50% of the MRP, whereas the dealers/retailers were selling at 40% mark up. From this submission made before the Customs Authorities, the TPO inferred that the transaction of import of finished goods from AE was not at ALP as the assessee itself admitted that the price charged by its AE was higher than what the AE was charging from other unrelated Indian enterprises. Considering these and host of other factors, which were noted while not approving TNMM for Class I transactions, the TPO held that the TNMM could not be accepted as the most appropriate method. He changed the most appropriate method to the Resale Price Method (RPM) for determining the ALP of this international transaction of `Import of finished goods'. In determining the ALP under the RPM, the TPO noticed that the assessee contended before the Customs Authorities that the gross margin of down the line distributors was 100% on cost or 50% if computed on sales. He, therefore, adopted normal gross profit margin under Rule 10....
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....not impact the ultimate profit margin so as to warrant a separate adjustment on account of its payment alone. The ld. CIT(A) failed to take note of this important aspect and went on to consider only the payment part in isolation of the receipt part of VAT/sales tax. He further failed to consider the assessee's contention before the Customs Authorities that: 'they have submitted the details of these imports and that this shows that the price to the Indian company is higher than the price to the unrelated parties.' As such, we are constrained to disapprove the view taken by the ld. CIT(A) in deleting the addition on this slippery reasoning. 14. Now, let us examine whether the determination of the ALP by the TPO under RPM is justified. In this regard, we find that rule 10B(1)(b), dealing with the mechanism for determination of the ALP under this method, reads as under :- "(b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified ; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the e....
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....accruing in a comparable transaction between enterprises other than the associated enterprises. The crux of the matter is that ALP of an international transaction of purchase of goods is always determined on the basis of the gross profit margin on the resale price charged in a comparable transaction between enterprises other than the associated enterprises. It cannot be anything else. Only when some gross profit margin in comparable transaction between two independent enterprises is available, sub-clause (ii) of Rule 10B(1)(b) works. In other words, the existence of a comparable uncontrolled transaction giving gross profit margin accruing from purchase and resale of similar goods is an essential condition for determining the ALP under RPM. Adverting to the facts of the instant case, we find from the calculation of the ALP under RPM as extracted above that the TPO has taken arm's length margin of GP on sales at 50%, which has been considered for determining the ALP of this international transaction at Rs. 4.24 crore leading to transfer pricing adjustment of Rs. 1.05 crore. This 50% arm's length gross profit margin on sales has been taken by the TPO on the basis of what the assessee ....