9911796707
TMI Blog2009 (11) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits of other companies for the current year alone has disregarded wide fluctuations in profit margins of respective companies from year to year in contravention of the proviso to Rule 10B(4). 5. Without prejudice to the grounds above, differences in operating environment and margins of individual companies have been disregarded in contravention of Rule 10B(3) in the TNM analysis for arriving at the arithmetical mean of the profits of the other companies. 6. Without prejudice to the grounds above, the learned Commissioner of Income-tax (Appeals) XX has erred in holding that compensation of 8.27 per cent to AE for its services cannot be considered for determination of ALP in the absence of compatibility analysis in disregard to the considerations of reasonableness with reference to functions performed, responsibility, risks and benefits divided between the respective parties to the transaction." 3. The assessee-company was incorporated on 11-9-2001 to manufacture printed circuit boards for consumer durations. Commercial production commenced on 1-1-2002. The shareholding of the assessee-company is as under: Name No. of shares Shareholding (%) Mr. Yong Joo Sim 7,58,267 85.35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imited had high negative margins. However, the assessee has itself stated that for the purposes of calculating average margin. Hyderabad Flextech has not been considered. It has not made any mention of Sanmar Micropak Limited on this account. An analysis at this end reveals that Sanmar Micropak Limited also has negative net worth in the year under consideration. This is akin of a company with dwindling profitability and hence is outside the purview of comparability. The assessee-company was confronted with these facts vide order sheet entry dated 27-2-2006. It has been argued during the course of discussions that this company has shown positive results in the earlier years and as such it cannot be rejected. However, the comparability is in the year under audit and the data for this year has been submitted by the assessee hence Sanmar Micropak is excluded from the list of comparables for making this analysis. The assessee-company also argued that without prejudice to the above, even if Sanmar Micropak is excluded the performance of the assessee would still be within the 5 per cent tolerance band. This is a factual aberration and is not correct as shown in the later part of the ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociate concerns, and added the same to the total income of the assessee. 9. Being aggrieved, the assessee went in appeal before the CIT(A). The CIT(A) confirmed the Assessing Officer's order by holding that the TPO was justified in taking arm's length price at the arithmetical meaning of prices without allowing any reduction up to 5 per cent. 10. Still aggrieved, the assessee is in appeal before us. 11. The ld. counsel for the assessee has reiterated the submissions and contentions that were made before the CIT(A), and submitted that the CIT(A) has not been justified in confirming TPO's order where arm's length price was determined on TNM method instead of a correct method of making comparable analysis of purchase prices of typical items by associate enterprise from unrelated foreign vendors. He further submitted that the TPO has not considered the individual price of various items but rather cases he went on to apply the average net profit margins of the comparable. He, therefore, submitted that if individual prices of various items are considered rather than going in for the average net profit margins of the comparables, no adjustment to the cost paid by the assessee to associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the transactions undertaken by the assessee with his associate concerns in Korea and Thailand. The assessee's contention that the Transfer Pricing Officer should have considered the individual price of various items as paid by the assessee's associate enterprises to its unrelated vendors and should have taken into account the margin of profit earned by its associate concerns on the raw materials procured by them from their vendors and supplied to the assessee. However, all these details are not sufficient to determine the arm's length price with reference to the individual price of various items inasmuch as the assessee has not submitted any details about price at which the assessee's associate concerns for supplied the raw materials to another unrelated customers so as to compare price charged by the assessee's associate concerns from its unrelated buyers with the price charged by the assessee's associate concerns from the assessee. Insofar as determination of mean of profit by Transfer Pricing Officer, the ld. counsel for the assessee has not been able to point out any irregularity or discrepancy in the report submitted by the Transfer Pricing Officer. Whatever objections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO/Assessing Officer has to provide cogent reasons for the substitution. (v )Appropriate and suitable adjustment in the arm's length price determined by the taxpayer can be made by the Assessing Officer on the basis of information furnished by the assessee or otherwise available with revenue authorities. However, any changes in the most appropriate method for computing the arm's length price is to be dealt with by way of speaking order. (vi)Computation of arm's length price is essentially a factual exercise. Each case depends on its own peculiar facts and circumstances. If identical transactions is not found for comparison, suitable adjustment is to be made to the price of somewhat similar transaction. 8.3-1 It has been observed in the (1995) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ("OECD Guidelines") that TNMM may afford a practical solution to otherwise insoluble transfer pricing problems, especially when there is sufficient data on uncontrolled transaction. Therefore, TNMM is recognized as a method of last resort that assists in determining whether transfer pricing complies with the arm's length principles or not. No such preference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued by the appellant that in the presence of such clinching direct evidence, there is no justification for adopting TNMM as the MAM. 8.3-4 I find a basic flaw in the arguments put forward by the appellant. In essence, the appellant is talking about a benchmarking analysis, with the Korean A.E. as the tested party, looking at the reasonableness of the rate of compensation paid by the appellant. Such a benchmarking analysis could have been done by the appellant by examining either the Resale Price Method or the Cost Plus Method, with Korean A.E. as the tested party and conducting the comparability analysis by selecting a set of comparables operating in the Korean market performing similar functions, assuming similar risks and deploying similar assets as that of the A.E. However, the appellant had not opted for such a analysis and conducted the benchmarking analysis with the appellant as a tested party and companies operating in the Indian market as comparables. Under these circumstances, I do not find any merit in the appellant's argument that 8.27 per cent compensation paid to the Korean A.E. represents arm's length price for the appellant's transactions as no comparability ana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails 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. 15. The assessee has also taken one 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. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns. In the present case, the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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