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Issues involved: Transfer pricing adjustment on sales made to associate enterprise (AE) u/s 92C of the Income Tax Act, 1961.
Summary: 1. Facts: The assessee imported rough diamonds and exported polished diamonds, engaging in international transactions with an AE in Belgium. The Transfer Pricing Officer (TPO) calculated a profit margin of 5.95% on operating costs, leading to a TP adjustment of Rs. 1,17,06,870. The CIT(A) upheld only 3 comparables with a margin of 6.28%, resulting in a reduced adjustment of Rs. 89,04,458. 2. Assessee's Argument: The assessee contested the computation of TP adjustment based on the entire operating cost, emphasizing that adjustments should only apply to AE sales' operating expenses. Citing the Hindustan Uniliver Ltd. case, the assessee argued for a recalculated adjustment specific to AE sales. 3. Revenue's Position: The Revenue referred to the IHG IT Services case and the Finance Act 2012 amendment, asserting that the +/- 5% range benefit should only apply if the arms length price variation stays within 5%. They agreed to adjustments solely concerning AE sales. 4. Judgment: The Tribunal noted discrepancies in the AE sales value and the need for recalculating the TP adjustment specifically for AE sales. Emphasizing that adjustments should be based on international transactions, not total sales, the Tribunal set aside the CIT(A)'s decision and remanded the case to the AO/TPO for a fresh order after reassessment and providing the assessee with a hearing opportunity. 5. Outcome: Both appeals were allowed for statistical purposes, with the order pronounced on 6th May 2013.
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