AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2026 (4) TMI 1026
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....earned CIT-A the appeal effect order was passed by the learned Assessing Officer wherein the transfer pricing adjustment of Rs. 2,95,99,030 made by the learned Assessing Officer based on the order of the Transfer Pricing Officer with respect to the manufacturing segment was deleted. 3. The Assessing Officer is aggrieved and has raised ten grounds of appeal as under: i. Whether the CIT(A) was right in directing to confine the TP adjustment to the value of International Transactions in manufacturing segment of the assessee? ii. Whether the CIT(A) erred in not considering the fact that whatever is the reduction in the margin of the assessee víz a viz comparables is on account of purchase from AE at a higher price and the same gets considered when ALP is calculated by applying TNMM? iii. Whether the CITIA) is right in restricting the adjustment to international transaction when it brings the margin of the tested party at 1.43% which is lower than the ALP of 6.40%, when the ALP margin is confirmed? iv. Whether the CIT(A) erred in ignoring the interdependence between AE and non-AE transactions and the impact of controlled transactions driving....
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....to various group companies across the globe. In the trading segment it imports finished goods from associated enterprises and sales it in the domestic market. 5. The assessee company filed its return of income on 15th October 2010 of Rs. NIL after claiming deduction under Section 10A of Rs. 2,18,44,872. The return was picked up for scrutiny. 6. During the year the assessee has entered international transactions and therefore these international transactions were referred to by the learned Transfer Pricing Officer for determination of arm's length price. The consequent order under Section 92 CA of the Act was passed on 30th January 2014 wherein the adjustment of Rs. 2,95,99,030 was made to the total international transaction of the assessee. 7. The assessee has returned eight distinct types of international transactions. The financial statement on the segment-wise basis shows that in manufacturing segment the assessee has earned negative margin of 2.27%, profit of 16.98% in trading segment and 21.48% in shared services segment. The assessee for all these three segments has selected three sets of comparables using multiple year data. The learned Transfer Pricing Officer also....
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....m's length price adjustment of Rs. 2,95,99,030. 11. Thus, AO is aggrieved with the appellate order and is in appeal before us. 12. The learned Departmental Representative made a detailed submission stating that adjustment cannot be restricted to the international transaction but is required to be made on total transaction. He stated following reasons for not accepting the above view: i. Interdependency of AE and Non-AE Transactions: Even if the primary transactions occur between the appellant and non-AEs, the cost structures for goods and services derived from AES (such as rate materials or components) may significantly impact the final pricing. Transfer pricing principles aim to ensure that profits from such interdependent transactions reflect an arm's length standard, which includes indirect effects on non-AE transactions. ii. Need for Comprehensive Analysis of ALP: Section 92 intends to capture the entirety of influence from AE transactions, which may not be fully isolated to international transactions alone. The IKA India Pot Ltd. decision presumes that such separation is feasible, yet in practice, cost structures may not be easily divided without di....
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....roduct is sold, only overall profit margin is recorded without any data as to what would be the profit in relation to purchases from AE. So, this cannot be presumed that the profit percentage earned in relation to costs related to international transactions as well as non international transactions was same. Since costs are common to the products ultimately sold by the assessee, and the same includes international transactions, so it is always possible that the margin of profit percentage vis a vis costs related to international transaction is not the same as profit margin on costs related to non-international transactions, but ultimately overall certain profits are being shown. In fact, the profit margin of the assessee in relation to imports should be higher than the profit margins on costs related to domestic sector as the imported items would be scarce while domestic items would be abundantly available in local markets. The following paragraphs provide a detailed explanation of the transfer pricing analysis and adjustments made: Analysis of the Taxpayer's Financials Particulars Amount Remarks Operating Revenue (OR) 33,92,74,880 Operating Cos....
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.... Following CIT(A)'s proportionate adjustment ruling, the revised PLI (OP/OR) remains at 1.43%. This contradicts the purpose of transfer pricing adjustments, which aim to prevent base erosion and profit shifting. CIT(A) has overlooked that the negative PLI of -2.32% is solely due to the controlled transaction of Rs. 3,53,48,429. Therefore, the adjustment should be limited to the extent of the AE's transaction, rather than applying on a proportionate basis. Demonstrating the Issue with Proportionate Adjustment Consider a hypothetical scenario where Company X incurs an operating cost of Rs. 60 from non-AEs and generates an operating revenue of Rs. 100 from non-AEs. The PLI (OP/OR) in this scenario is 40% (100-60/100). The financials of Company X are: Particulars Amount Remarks Operating Revenue (OR) 100 Operating Cost (OC) 60 Operating Profit (OP) 40 OP = OR - OC OP/OR 40% 40% is also the ALP Margin for the company Now, assume the group instructs Company X to procure Rs. 50 from non-AEs and the remaining Rs. 10(ALP price) from AEs at an inflated cost of Rs. 40. The revised finan....
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....). The resulting amount ($750) is then reduced by the costs of sales incurred to unrelated parties ($200). Therefore, an arm's length price for S's cost of sales of FP's product in this case equals $550 (i.e.,$750 minus $200). It is clear from the above example that the adjustment is restricted to the controlled transaction and not on proportionate basis. 13. Accordingly, the Assessing Officer expressed significant concern regarding Ground No. 1 of the appeal. As the ground No. 5-7 for capacity utilization and ground No. 8-9 with respect to working capital adjustment same was granted by the learned Assessing Officer/TPO after verification, nothing much was submitted. With respect to ground No. 10, also because of the uniformity provision written back, it is to be treated as operating income no further arguments are advanced. 14. The learned Authorized Representative vehemently submitted that it is now beyond doubt and judicially settled that adjustment to the arm's length price is required to be restricted only to the extent of international transaction. He referred to plethora of judicial precedent and stated that there is no infirmity in the order of the learned CI....