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2016 (9) TMI 1650 - AT - Income TaxTP Adjustment - Selection of MAM - provision under the Act with regard to the value of the transactions for selecting the method for the determination of ALP - TPO rejected TNMM Method - HELD THAT - In the instant case the TPO has rejected the transfer pricing study of the assessee without finding any defect therein. TPO further held that the international transaction is less than the 5% to the business therefore he adopted the other method for determining the ALP. But contrary to his finding the TPO has accepted the other international transactions where the volume was again less than 5% to the total turnover of the assessee i.e. Royalty, commission etc. In the earlier years and subsequent years the assessee entered into internationals transactions with similar value but no addition was made. Therefore it was not open to the TPO to take a different base for the working of ALP without assigning cogent reasons than that of the method followed consistently. Arguments of the DR that the TPO did not reject the TNMM Method on the ground that CP Method RP Method were used by the assessee in earlier year but the TPO worked the ALP of the International transactions on the basis of functional analysis do not hold good. In our view before adopting the CPM/RPM, the TPO had to first reject TNMM and that too with reasons for the rejection. TPO has considered only cost of raw materials consumed and no other associated costs was considered in arriving at the G.P. margin.TPO in order to apply CP Method cost pertaining to raw materials, labour, factory overheads, direct indirect expenses etc should take into consideration. All the aforesaid cost heads are included for determination of the 'cost of goods sold' as per Rule 10B of the I.T. Rules, 1962 which lays down the manner in which the CP method is to be applied. The profit margins varied significantly depending upon the fact that the products were either sourced locally or imported. Assessee had imported printing inks from AEs worth Rs. 7.06 crores which was sold to unrelated parties for Rs. 8.09 crores resulting in gross profit margin of 13%. Correspondingly the assessee had imported press chemicals from unrelated parties worth Rs. 1.75 crores which was sold to unrelated parties for Rs. 2.02 crores yielding profit margin of 14%. Without prejudice to the assessee's contention that the aforesaid margins would require turnover adjustment and working capital adjustment, it was observed that the margin was 13% earned from transactions with related parties was found comparable to margin of 14% earned from uncontrolled transactions and was therefore held to be at arm's length by the CIT(Appeals). The difference in margin of 1% was well within the permitted range of / - 5% allowed in second proviso Section 92C of the Income-tax Act, 1961. In view of above we do not find any infirmity in the order of the ld. CIT(A). Hence we allow assessee s ground. Deduction u/s. 80HHC for the profit of the business - CIT(A) directing the AO not to use service charge amounting to Rs 90 lakhs in the total turnover while computing deduction - HELD THAT - We find that issue is squarely covered in favour of assessee in assessee s own case - Respectfully following the decision of the Co-ordinate Bench we dismiss the appeal of the Revenue. Deduction of custom duty against the advance license and thereby violating the provision of Sec. 43B - HELD THAT - At the outset, we find that the aforesaid amount had already been taxed in earlier year i.e. 2003-04 as evident from the AO s order. At the time of hearing, Ld. DR did not bring any contrary to the finding of Ld. CIT(A). From the foregoing discussion, we find no reason to interfere in the order of Ld. CIT(A) and we uphold the same and Revenue s ground is dismissed.
Issues Involved:
1. Adjustment of arm’s length price using RPM method. 2. Exclusion of service charge from total turnover for deduction u/s 80HHC. 3. Deduction of customs duty under section 43B. 4. Acceptance of additional evidence in violation of Rule 46(A). Detailed Analysis: 1. Adjustment of Arm’s Length Price Using RPM Method: The core issue was whether the Transfer Pricing Officer (TPO) was justified in rejecting the Transactional Net Margin Method (TNMM) applied by the assessee and instead adopting the Cost Plus Method (CPM) and Resale Price Method (RPM) for determining the Arm’s Length Price (ALP). The TPO contended that the volume of international transactions was less than 5% of the total turnover, hence TNMM was not appropriate. The TPO used CPM for manufacturing and RPM for trading activities, leading to an upward adjustment in the ALP. The assessee argued that the TPO did not find any defect in the TNMM method and that the volume of transactions is not a decisive parameter for selecting the method under Rule 10B. The assessee also pointed out that the TPO accepted TNMM for other transactions like royalty and commission, which were also less than 5% of the total turnover. The CIT(A) agreed with the assessee, noting that the TPO had incorrectly computed the gross profit margin by considering only the cost of raw materials and not other associated costs. The Tribunal upheld the CIT(A)’s decision, stating that the TPO must first reject TNMM with reasons before adopting CPM/RPM. The Tribunal found that the TPO’s method of considering only the cost of raw materials was incorrect, and all costs, including direct and indirect costs, should be considered as per Rule 10B. The Tribunal also noted that the profit margins varied significantly depending on whether the products were sourced locally or imported. 2. Exclusion of Service Charge from Total Turnover for Deduction u/s 80HHC: The AO included service charges amounting to Rs. 90 lakhs in the total turnover while computing the deduction u/s 80HHC, which the assessee contested. The CIT(A) directed the AO to exclude 90% of the service charges from the total turnover, following the Tribunal’s decision in the assessee’s own case for AY 2003-04. The Tribunal upheld the CIT(A)’s decision, noting that the issue was already settled in the assessee’s favor in the earlier year. 3. Deduction of Customs Duty Under Section 43B: The AO added Rs. 11,77,331/- to the taxable income for non-payment of customs duty before filing the return for AY 2003-04. The assessee wrote back this amount in AY 2004-05, but the AO did not exclude it from the taxable income. The CIT(A) allowed the deduction, noting that the amount had already been taxed in AY 2003-04. The Tribunal upheld the CIT(A)’s decision, stating that the amount could not be taxed again in AY 2004-05. 4. Acceptance of Additional Evidence in Violation of Rule 46(A): The Revenue contended that the CIT(A) accepted additional evidence in violation of Rule 46(A). The assessee argued that the CIT(A) merely considered the correct computation of gross profit margin, which the TPO had incorrectly computed by considering only raw material costs. The Tribunal found no merit in the Revenue’s contention, noting that the CIT(A) did not admit any additional evidence but corrected the TPO’s computation based on the audited accounts. Conclusion: The Tribunal dismissed the Revenue’s appeals, upholding the CIT(A)’s decisions on all counts. The Tribunal emphasized the importance of following the correct method for determining ALP and the need to consider all relevant costs as per Rule 10B. The Tribunal also reiterated the settled position on excluding service charges from total turnover for deduction u/s 80HHC and the non-repetition of tax on the same amount in different years.
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