TaxTMI 
TaxTMI 
2017 (2) TMI 1573
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....9; amounting to Rs. 3,46,10,993/-. There is no dispute on the third transaction of Purchase of finished goods amounting to Rs. 2.41 crore. The Assessing Officer (AO) referred the matter of determination of the arm's length price (ALP) of the international transactions to the Transfer Pricing Officer (TPO). The assessee benchmarked both the disputed transactions by applying Cost Plus Method (CPM) to justify that these were at ALP. However, no documentation was filed determining the ALP of such transactions on comparability standards. The TPO did not dispute the application of CPM as the most appropriate method. As the assessee maintained accounts on entity level, including trading segment, the TPO bifurcated such accounts into `Manufacturing' and Trading' segments, as under :- Heads of account Manufacturing Trading Total as per audited financials. Gross Sales Sales 34610993 27152888 61763881 Stock adjustment 6029300 0 6029300 Total Revenue 40640293 27152888 67793181 Purchases 28265027 24123089 52388116 Consumables 638442 0 638442 Clearing expenses, freight and....
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.... Rs. 2,62,90,268/-, as under :- 'Total Cost = Rs.3,98,70,472 Profit at the rate of 67.87% = Rs.2,70,60,089 Profit earned by the assessee = Rs.7,69,821 Difference = Rs.2,62,90,268' 6. A draft order was passed making addition on account of transfer pricing adjustment to the above extent. The assessee challenged the action of the AO/TPO before the ld. CIT(A), who observed that the assessee company was receiving Kits as raw material from its AE and after assembling and partial testing, the same were re-exported to such AE. In view of these facts, it was held that the raw material cost was not liable to be considered either as the assessee's direct and indirect costs or as a part of revenue for working out the gross profit margin. In this way, the ld. CIT(A) computed the assessee's gross margin on 'Cost of value addition' at 9.65%, as under :- Particulars 2004-05 (in Rs.) Gross Sales Invoiced to Akon Inc. USA 3,46,10,993 Less: Purchase Cost of Raw Kits (Contra entry) 2,82,65,027 Increase/Decrease in Stock (Closing Stock - Opening Stock) 60,29,300 ....
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....hange in WC required 29966 Interest cost @ 11% 3.29626 Adjusted Profit 23.19 Adjusted Total Cost 44.92 Adjusted Cost Plus Margin % 51.63 8. In this way, the ld. CIT (A) worked out the amount of transfer pricing adjustment at Rs.46,91,361/-, as under :- 1 Total cost of International Transaction (refer Para 10 above) Rs. 1,12,55,442 2. Cost Plus Margin earned by the comparable company (refer Para 14 above) 51.63% 3. Profit the appellant should have made (1 x 2) Rs. 58,11,185 4. Profit actually made by the appellant (refer Para 11 above) Rs. 11,19,824 5. Adjustment Rs. 46,91,361 9. The assessee is aggrieved against the sustenance of addition to the tune of Rs. 46.91 lac, whereas the Revenue has assailed the reduction in the amount of addition by Rs. 2.12 crore. 10. We have heard the rival submissions and perused the relevant material on record. The Revenue is aggrieved against the reduction in the addition by the ld. CIT(A) for excluding the cost of raw material from the direct costs, which we are taking up first for consideration. 11. We have noticed above that the assessee applied CPM to claim that i....
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....mined under sub-clause (iii). The amount so determined under sub-clause (iv) is taken as ALP in relation to the property or services under sub-clause (v). 13. It is apparent that sub-clause (i) talks of `direct and indirect costs' of production incurred by the assessee in respect of property transferred. The moot question is as to whether the cost of raw material should be included in the direct costs base of the assessee under this sub-clause. Ordinarily, when some raw material is purchased which is subjected to certain processes and, then, finished good emerges, the cost of raw material is included in the direct cost base and, so is the amount of sale price for determining the gross margin of the assessee for comparing it with comparables. However, it is a trite law that pass through costs cannot be considered for determining profit margin. Pass through costs are such costs which are reimbursed as such without any profit. Such costs may be in the form of some services availed or some material supplied by the other enterprise for the purposes of use in the rendering of services or manufacturing of goods by the assessee and such cost of services or material cost is reimburse....
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....India, the assessee re-exports such kits to its foreign AE. A copy of invoice raised by the assessee dated 7.5.2004 exporting such kits with the same Purchase order no. 301412 is available on page 205 of the paper book. Similar is the position qua all other invoices raised by the foreign AE at the time of export of kits to the assessee and invoices raised by the assessee at the time of re-export of such tested kits back to the AE. Though for the purposes of accounting, purchase price of kits received from AE for re-export is recorded in the books of account with equal amount of credit to the AE, but, no separate amount is paid as such price as per the export invoice of AE is ultimately adjusted against the price charged by the assessee at the time of re-export, which also includes cost of kits received from the AE for re-export. This transaction shows that import of raw kits by the assessee is made with prior obligation of re- exporting the same kits to the AE after doing the needful at its end. Thus, it is evident that the duty of the assessee is confined only to rendering services on the raw kits to be ultimately used by the AE. The assessee gets remunerated only in respect of....
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....ollowing the uniform method as adopted for the assessee, determined adjusted cost plus margin of AMCL at 51.63%. The ld. AR contended that AMCL was wrongly considered as comparable and hence the same should be excluded. 16. In this regard, it is noticed that the assessee submitted before the TPO that AMCL: "has a wide range of product manufacturing and its turnover is ten times in comparison to Akon with huge asset base." The TPO rejected this contention by observing that the assessee did not specifically object to the consideration of this company as comparable on the ground of functional similarity. The assessee reiterated its submission before the ld. CIT(A) as well, who noted on page 30 of the impugned order that the assessee did not compare his results with any comparable company and, hence, there was no justification for it to contend that AMCL is a "full-fledged design manufacturing and marketing company." He, however, upheld the comparability on the ground that both the assessee and AMCL were engaged in dealing in microwave super components and sub-systems which has application in defense, space and civil communication systems. We have noticed the functionality of the as....