2011 (9) TMI 296 - AT - Income Tax

Arm length price - whether cost plus method, as claimed by the assessee and as applied by the assessee, is sustainable in law - Noted that the assessee was duly confronted with comparable cases for application of transaction net margin method, but the assessee did not have anything to say beyond his rather vague and generalized objections to the application of TNMM and insistence that the CUP and CPM method adopted by him should not be disturbed - Even in proceedings, no specific submissions have been made in this regard, nor any document, in support of his stand on comparable cases being incorrect, have been filed in the paper-book - There is no discussion whatsoever about precise comparability of the cases selected for TNMM, nor is there any application of suitable filters, even if any - Therefore, it deem fit and proper to remit the matter to the file of the CIT(A) for adjudication de novo in the light of our above observations and in the light of whatever additional material the assessee is able to produce in support of his grievances, in accordance with the law, by way of a speaking order and after giving a reasonable opportunity of hearing to the assessee.

Issues Involved:
1. Rejection of Cost Plus Method (CPM) for determining the Arm's Length Price (ALP) of sales of finished goods to Associated Enterprises (AEs).
2. Rejection of Comparable Uncontrolled Price (CUP) method for determining the ALP of imports and exports of diamonds.
3. Application of Transactional Net Margin Method (TNMM) for determining the ALP of international transactions with AEs.
4. Adequacy of opportunity provided to the assessee for presenting its case.
5. Validity of the ALP adjustments made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Rejection of Cost Plus Method (CPM) for determining the ALP of sales of finished goods to AEs:
The assessee adopted the CPM for determining the ALP of sales of finished goods to AEs, claiming a gross profit margin of 21.75% on transactions with AEs compared to 18.65% with unrelated parties. The TPO rejected this method due to lack of detailed calculations and strict comparability, as well as the use of sales/GP as the profit level indicator, which was deemed incorrect. The CIT(A) upheld the assessee's use of CPM, noting the detailed records and internal comparables provided by the assessee. However, the Tribunal found that the CIT(A) erred in accepting the CPM without proper verification of costs and comparability, and noted that the method was not correctly applied as it should be on a transaction basis rather than a global basis.

2. Rejection of CUP method for determining the ALP of imports and exports of diamonds:
The TPO rejected the CUP method for imports and exports of diamonds due to the assessee's failure to provide third-party invoices or any evidence to substantiate the use of the CUP method. The CIT(A) did not address this issue specifically, and the Tribunal noted that there was no documentation provided by the assessee to support the ALP of diamond imports and exports. The Tribunal emphasized that in the absence of such documentation, the application of TNMM or another indirect method is inevitable.

3. Application of TNMM for determining the ALP of international transactions with AEs:
The TPO applied the TNMM, using operational profit/total cost as the profit level indicator, and determined an adjustment of Rs. 8,27,30,858. The CIT(A) rejected the TNMM application, focusing only on the sales of finished goods to AEs and not addressing the imports and exports of diamonds. The Tribunal found that the CIT(A) was superficial in his approach and failed to vacate the findings of the TPO regarding the rejection of the CUP method for diamond transactions. The Tribunal held that the application of TNMM was appropriate given the lack of documentation for the CUP method and remitted the matter to the CIT(A) for fresh adjudication.

4. Adequacy of opportunity provided to the assessee for presenting its case:
The CIT(A) noted that the assessee was not given sufficient time to submit additional details requested by the TPO, and the order was passed in haste. The Tribunal acknowledged this but focused on the merits of the case, emphasizing the need for proper documentation and verification of costs and comparables.

5. Validity of the ALP adjustments made by the AO and TPO:
The Tribunal found that the CIT(A) erred in deleting the ALP adjustment in principle without addressing the issues regarding the rejection of the CUP method for diamond transactions and the incorrect application of the CPM. The Tribunal vacated the relief granted by the CIT(A) and remitted the matter for fresh adjudication, emphasizing the need for a detailed and reasoned order based on proper documentation and verification.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, vacating the relief granted by the CIT(A) and remitting the matter for fresh adjudication, emphasizing the need for proper documentation, verification, and a detailed and reasoned order in accordance with the law.

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