TaxTMI 
TaxTMI 
2010 (2) TMI 1270
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....he Addition of ₹ 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 at Arms Length Price. 4. It was observed by TPO that as per data....
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....the same is determined at ₹ 26,21,70,978/-. As against this the assessee's arms length price is ₹ 25,02,43,313/-. 7. the assessee's transaction value is below the arms length price an adjustment of ₹ 2,57,26,138/- (Rs.27,59,69,451 - ₹ 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:- Particulars AE Non-AE Total Sales 250,243,313 433,598,227 683,841,540 Ratio of sales 3 6.59% 63.41% 100% Total cost 239,031,865 414,239,152 653,271,017 Operating profit(PBIT) 11,211,448 19,359,075 30,570,523 OP/TC 4.69% Est.Profit if OP/TC is 7.25% 17,329,810 TP adj. as per the assessee 61,18,362 7. This application was rejected b....
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.... 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), the A.O/T.P.O are supposed to determine the arms length price in relation to the international transactions (with the AEs) only and not with the third parties also. By applying the profit margin to total cost, the T.P.O., in effect has applied the provisions of transfer pricing to all the transactions including those with the third parties. However, the excess sale price so determined has been allocated only to the transactions with AEs. This methodology is not correct. 2.8 The T.P.O was first required to obtain f....
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....ecause 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 order of the first appellate authority. 12. In the rejoinder ld. D.R invited our attention to Rule 10B of the Income-tax Rules, 1962, wherein procedure regarding determination of Arm's Length Price has been detailed. He particularly referred to sub-clause (e), which deals with Transactional Net Margin Method (TNMM) and all clauses make reference to the net profit. He argued that TNMM would always involve calculation of net profit and there was no scope for making any further adjustment. 13. We have considered the rival submissions carefully. We....