2010 (4) TMI 840 - AT - Income Tax

Arm s length price adjustment - TPO concluded that Arm s Length Price of international transactions relatede to commission on sales and payment of repair charges to AE s on account of repair of equipment under maintenance contract has not been determined at all - grievance of the assessee is that if the TPO wants to determine the arms length price of international transaction with associate concern then he should work out the profit disclosed by the asesee on those receipts and compare that result with the comparables of independent cases who have carried out similar international transactions with independent parties - Held that - Force in the contention of assessee that the TPO ought to have considered the international receipts with the associate enterprises only while determining the profit shown by the assessee in such transaction if the PLI is lower than the one comes out from comparable cases only then he could make necessary adjustment. In the present case while working out the PLI shown by the assessee he included the domestic receipt which gives lesser figure and then compare this result with the comparable cases after the comparison he applied the difference only to the international receipts. To our mind that is not the appropriate step permissible in law and the Ld. CIT(A) has rightly appreciated this aspect. Profit is more than the PLI determined by the TPO at 16.34%. Therefore there is no reason to examine the issue on the argument of assessee that TPO has not applied proper comparable while working out this PLI because that issue will be an academic issue in the present case even if some of the cases are not of comparable then also PLI more than the one adopted by the TPO at 16.34 % canot be take on which is lower than the one shown by the assessee. The CIT(A) has though considered this aspect also before deleting the addition no reason to interfere in it appeal of the revenue is dismissed

Summary

Issues Involved:
1. Deletion of the addition made by the AO on account of arm's length price adjustment.
2. Selection of proper comparable cases for determining the arm's length price.
3. Inclusion of domestic receipts in the computation of the profit level indicator (PLI).

Issue-wise Detailed Analysis:

1. Deletion of the Addition Made by the AO on Account of Arm's Length Price Adjustment:
The revenue appealed against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] dated 30th May 2007, which deleted an addition of Rs. 1,19,41,893/- made by the Assessing Officer (AO) on account of arm's length price adjustment. The AO had made this adjustment based on the Transfer Pricing Officer's (TPO) analysis, which determined that the arm's length operating profit margin should be 16.34%, whereas the assessee's operating profit margin was only 1.31%. Consequently, the AO enhanced the income of the assessee by Rs. 1,19,41,893/-. The CIT(A) deleted this addition, and the revenue challenged this deletion.

2. Selection of Proper Comparable Cases for Determining the Arm's Length Price:
The TPO had adopted the Transactional Net Margin Method (TNMM) as the most appropriate method for determining the arm's length price of the international transactions between the assessee and its associate enterprises. The assessee contended that the TPO had wrongly combined various revenue streams, including installation and commissioning, re-engineering and maintenance, warranty services, and commission income, to compute the profit level indicator (PLI). The assessee argued that the TPO should have considered only the international transactions (warranty services and commission income) and excluded the domestic receipts from the computation.

3. Inclusion of Domestic Receipts in the Computation of the Profit Level Indicator (PLI):
The assessee argued that the TPO should not have included domestic receipts (installation and commissioning, re-engineering and maintenance) while computing the PLI. The TPO had made adjustments only to the warranty services and commission income but included all revenue streams in the PLI computation. The assessee demonstrated that the domestic receipts were independent of the associate enterprises and should be excluded from the PLI computation. The CIT(A) agreed with the assessee's contention, noting that the TPO's method of including domestic receipts resulted in a lower PLI, which was then compared to the PLI of comparable cases. The CIT(A) found that the correct PLI, considering only the international transactions, was 18.98%, which was higher than the TPO's determined PLI of 16.34%.

Conclusion:
The CIT(A) correctly appreciated that the TPO should have considered only the international transactions for computing the PLI and excluded the domestic receipts. The correct PLI, considering only the warranty services and commission income, was 18.98%, which was higher than the TPO's determined PLI of 16.34%. Thus, there was no need for any adjustment. The tribunal upheld the CIT(A)'s order, dismissing the revenue's appeal. The appeal of the revenue was dismissed, and the order was pronounced in the open court on 30th April 2010.