TaxTMI 
TaxTMI 
2019 (4) TMI 2187
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.... That the Assessing officer erred on facts and in law in making an adjustment of Rs.5,56,86,238/- to the income of the appellant by doubting arm's length price ('ALP') of certain specified domestic transactions undertaken during the relevant previous year. 2.1 That the Assessing officer/Dispute Resolution Panel ('DRP') erred on facts and in law in computing the adjustment to total income on ad hoc basis, by comparing profitability of the eligible unit with that of the other companies comparable to the appellant company as a whole and applying the profit ratio of the comparable companies to arrive at the arm's length profit of the eligible unit, without following any acceptable methods for determining arm's length price prescribed under section 92C of the Act. 2.2 That the Assessing officer erred on facts and in law in disregarding the directions issued by the DRP under section 144C(5) of the Act wherein the DRP had given a categorical finding that the price adopted by appellant for inter-unit transfer was higher than the purchase price thereof from third parties and thus, there was no basis for enhancing the cost price of raw materials/packing materials/consumable....
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....determination of Arm's Length Price of the transactions. The learned TPO noted the benchmarking of above transactions by the assessee as under: "The first two transactions were benchmarked by applying Transactional Net Margin Method ('TNMM Method'). While applying TNMM method, at the company level, the appellant found companies, having the same product mix and function at the company level as a whole, and compared average profits of those companies, viz.. 2.90% with the operating profit margin of the appellant company being 3.55 %. The latter being higher than that of the comparable companies viz.. 2.90 %, the said transaction was considered to be at arms-length price. The TPO/AO accepted the aforesaid transactions and benchmarking carried out by the assessee was found to be valid and accordingly, no further adjustment thereto was proposed. The third category of specified domestic transactions, viz., inter-unit transaction(s) entered between eligible unit (unit at Kala Amb) and other noneligible units for transfer of raw material, were benchmarked using the Comparable Uncontrolled Price Method ('CUP method'), being the most appropriate and preferred method in ....
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....tself has allocated Rs.9,14,01,671/- to the eligible unit and the same amount had been taken by the learned TPO, hence no further directions were issued on the issue. 2. On the issue of non-allocation of finance cost, while computing deduction under section 80IC of the Act in respect of the eligible unit situated at Kala Ambb, the Ld. DRP, directed the AO/TPO to allocate finance cost (excluding income tax) in the ratio of sales/operative revenue of the Kala Amb unit and recompute SDT expenses considered for adjustment accordingly. 3. On the issue of impact of exemption of taxes on the profitability of kalaAmb unit, the learned DLP directed the AO/TPO to compute the operating profit margin without considering the excise duty, sales tax and income-tax. 4. On the issue of invoices for transfer of other consumables/packing materials, the learned DRP observed that the assessee had apparently transfered the materials to the "Kala Amb" unit at a higher cost than the cost price of purchase from 3rd parties, therefore there is apparently no basis for enhancing the cost price of Kala Amb unit, however directed the AO/TPO to examine the details submitted in this reg....
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....purchase comparing the price at which goods were procured by the assessee from thirdparty suppliers, which is an internal comparable uncontrolled transaction price. According to the learned counsel the CUP method is the most appropriate method for benchmarking the specified domestic transaction and the result derived from applying the CUP method will be the most direct and reliable measure of arm's length result for the controlled transaction. The learned counsel submitted that in view of his arguments, the learned TPO is not correct in rejecting the CUP method, without pointing out any inaccuracy and applying the arbitrary method. 3.3 The learned counsel submitted that the method applied by the AO/TPO is some variation of the TNMM method. He submitted that the learned AO/TPO has erred in comparing the average profit of 2.9% of the comparable companies with the profit of the eligible unit, without appreciating that said companies are engaged in manufacture of multiple products and therefore were not functionally similar to the eligible unit, which was engaged in manufacturing of only single item i.e. foam mattresses. The learned counsel suggested that, at best, the AO/TPO could ....
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....he learned AO/TPO has not considered the invoices issued for inter-unit transfer of goods from the non-eligible unit to the eligible unit vis-à-vis purchase made by the eligible unit from third parties. 4.1 Before us, the learned counsel referred to para 5 of the impugned order and submitted that the Ld. AO/TPO has not considered the invoices submitted by the assessee for verification as directed by the learned DRP and therefore the issue may be restored back to the Ld.AO/TPO. The learned counsel referred to page 152 of the paper book, and drawn our attention that cloth materials have been transferred from non-eligible unit to the eligible unit at the same prices which the eligible unit purchased from the third parties. 4.2 The learned DR, on the other hand, relied on the order of the lower authorities. 4.3 We have heard the rival submission and perused the relevant material on record. The issue in dispute is on the adjustment made to the specified domestic transactions. The very basis of the computation of the adjustment applying TNMM method is the comparison of the margin of the eligible unit with the average margin of the other comparables. The Ld. AO/TPO has dul....
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.... of the excess margin on the specified transaction of the allocation of common/head office expenses, ignoring that said transaction has been held by the learned DRP as it arm's length. In our opinion, the Ld.AO/TPO is not justified in making adjustment to the specified transaction of allocation of common/head office expenses of Rs.9,14,01,671/- and accordingly, we direct the Ld. AO/TPO to exclude the said amount from the total specified domestic transaction of the eligible unit of Rs.29,82,52,633/- considered for adjustment. The ground of the appeal of the assessee is accordingly allowed. 6. In ground No.2.4, the assessee has challenged the allocation of the finance cost of Rs.65,28,298/- to the eligible unit while working out the profit margin of the eligible unit. 6.1 The learned counsel submitted before us that the eligible unit has sufficient funds as the unit earned substantial profit in earlier years and also during the year under consideration. He submitted that no part of head office funds were transferred to the eligible unit and on the contrary a fund of Rs.8,62,58,747/- was receivable from the head office at the end of the year. He further submitted that the assess....