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2009 (11) TMI 669 - AT - Income TaxTransfer pricing Adjustment - Computation of arm s length price - MAM selection - TNMM v/s Unspecified Method - HELD THAT - The assessee has itself obtained Transfer Pricing Report at TNMM method and the particulars supplied by the assessee itself in its Transfer Pricing Report has been used by the Transfer Pricing Officer while determining the net margin of profit in respect of the transactions undertaken by the assessee with his associate concerns in Korea and Thailand. Insofar as determination of mean of profit by Transfer Pricing Officer, assessee has not been able to point out any irregularity or discrepancy in the report submitted by the Transfer Pricing Officer. Whatever objections has been raised by the assessee with regard to the some comparable to determine the mean of profit, the Transfer Pricing Officer has taken into account and has excluded those concerns which were objected to by the assessee and not relevant for determining the mean of profit. As seen that in subsequent assessment year 2004-05, and, thereafter, the assessee has applied the same TNMM, though on merit having regard to the net margin of profit earned by the assessee as compare to the net margin of profit of comparables, no adjustment was called for. TNMM method applied in this assessment year has been accepted by the assessee as well as by the department in subsequent assessment year insofar as the facts of the present case are concerned. Having regard to the facts and circumstances, and absence of sufficient materials and evidences to apply another method, we are in full agreement with the conclusion of the CIT(A) in holding that TNMM is the correct method applied by the TPO for determining the arm s length price in respect of the raw materials acquired by the assessee from its sister concerns in Korea. TPO has failed to make adjustments to the net profit margin determined by him on account of benefit accruing to the assessee for utilizing the fund - Only customer purchasing printed circuit board from the assessee is LG Electronics, and its subsidiaries in Korea and Thailand are the principal purchaser of assessee s associate concerns situated in Korea. The assessee has been supplying manufactured items to LG Electronics, the only customer of the assessee, which has a close association and business dealing with assessee s concerns in Korea. The present assessee-company is established in India with a view to supply the same item of printed circuit boards in India, which are also being supplied by its associate concerns in Korea and Thailand to LG Electronics. Keeping all these facts in mind, a query was raised by the Bench in the course of hearing this appeal to show as to whether the assessee has been realizing the sale price from the LG Electronics Ltd., India much before the payment made by the assessee to its associate concerns on account of the cost of raw materials purchased by the assessee, and thereby whether the assessee was getting any benefit of utilization of the fund realized from LG Electronics of India to earn some other income instead of making the payment to its associate concern in Korea. Assessee expressed his inability to furnish the details about when and how the assessee has been realizing the sale proceeds from the LG Electronics and as and when the payments are being made by the assessee to his associate in Korea. Therefore, in the absence of details in this respect, the assessee s contention that some adjustment is to be made to the net margin determined by the TPO on account of benefit accruing to the assessee by way of interest on the amount payable by the assessee to its associate concerns is rejected. Calculation of operating profit - alternative ground out of the total raw materials consumed by the assessee for manufacturing print circuit boards, only 45.51 per cent of the total raw materials were imported through assessee s associate concerns, and, therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee - HELD THAT - The present case, the Assessing Officer has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. Assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the AO to modify the assessment and make the adjustment only to the extent of difference in the arm s length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnover of the assessee. Therefore, to this extent, the addition made by the Assessing Officer and further confirmed by the CIT(A) is reduced. We order accordingly.
Issues Involved:
1. Justification of the Arm's Length Price (ALP) fixed at Rs. 4,21,83,057. 2. Correctness of the ALP fixation based on the Transactional Net Margin Method (TNMM) using the arithmetical means of other companies' profits. 3. Adoption of the ALP based on uncontrolled prices paid by the Associated Enterprise (AE) for goods supplied to the appellant company. 4. Consideration of wide fluctuations in profit margins of respective companies in the TNMM analysis. 5. Consideration of differences in operating environment and margins of individual companies in the TNMM analysis. 6. Consideration of compensation of 8.27% to AE for its services in determining ALP. Detailed Analysis: 1. Justification of the Arm's Length Price (ALP) fixed at Rs. 4,21,83,057: The assessee challenged the ALP determined by the Transfer Pricing Officer (TPO) for the raw materials imported from its associated enterprises (AEs). The TPO used the TNMM and calculated an ALP of Rs. 4,21,83,057, resulting in an adjustment of Rs. 53,70,963. The TPO excluded certain companies with high negative margins from the comparables list, which the assessee contested. However, the Tribunal upheld the TPO's exclusion, noting the absence of sufficient material to apply another method and confirming that the TNMM was appropriately applied. 2. Correctness of the ALP fixation based on the Transactional Net Margin Method (TNMM) using the arithmetical means of other companies' profits: The TPO's determination of the ALP using the TNMM was based on the operating margins of comparable companies. The Tribunal found that the TPO had correctly applied the TNMM and excluded companies with high negative margins. The Tribunal also noted that the TNMM method had been accepted by both the assessee and the department in subsequent assessment years, reinforcing its appropriateness in this case. 3. Adoption of the ALP based on uncontrolled prices paid by the Associated Enterprise (AE) for goods supplied to the appellant company: The assessee argued that the TPO should have considered the individual prices of items paid by the AE to unrelated vendors. However, the Tribunal noted that the assessee did not provide sufficient details about the prices charged by the AE to unrelated customers. Therefore, the Tribunal upheld the TPO's use of the TNMM instead of the assessee's proposed method. 4. Consideration of wide fluctuations in profit margins of respective companies in the TNMM analysis: The assessee contended that the TNMM analysis should account for fluctuations in profit margins over different years. The Tribunal found that the TPO had considered the relevant comparables and excluded those with high negative margins, addressing the assessee's concerns about fluctuations. The Tribunal upheld the TPO's approach and confirmed the ALP determination. 5. Consideration of differences in operating environment and margins of individual companies in the TNMM analysis: The assessee argued that the TPO disregarded differences in operating environments and margins of individual companies. The Tribunal found no irregularity in the TPO's comparability analysis and noted that the TPO had excluded certain comparables based on the assessee's objections. The Tribunal upheld the TPO's method and confirmed the ALP determination. 6. Consideration of compensation of 8.27% to AE for its services in determining ALP: The assessee argued that the TPO should have considered the 8.27% compensation paid to the AE for procurement services. The Tribunal found that the assessee did not conduct a comparability analysis with the AE as the tested party. The Tribunal upheld the TPO's use of the TNMM and rejected the assessee's argument regarding the 8.27% compensation. Conclusion: The Tribunal upheld the TPO's determination of the ALP using the TNMM and confirmed the adjustment of Rs. 53,70,963. However, the Tribunal accepted the assessee's alternative contention that the adjustment should only apply to the proportionate sales made from imported raw materials (45.51% of total turnover). The Tribunal directed the Assessing Officer to modify the assessment accordingly, reducing the addition made to the assessee's income. The appeal was partly allowed.
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