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TMI Blog2009 (11) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... rth Rs. 4.75 crores, which is used in manufacturing of printed circuit boards. 6. For the purpose of determining the arm's length price by TNM method, the assessee, in its transfer price report, mentioned eight comparable finalization data, which were pertaining for the year 2003, is as under :-- Company Operating Margin (%) Ador Powerton Limited 11.50 Akasaka Electronics Limited 11.96 Anand Electronics & Inds. Limited 9.26 BCC Fuba India Limited (6.47) Fine-Line Circuits Limited 7.85 Hyderabad Flextech Limited (87.12) Precision Electronics Limited (2.35) Sanmar Micropak Limited (33.59) Mean (11.12) 7. The Assessing Officer referred the matter to the TPO (Transfer Pricing Officer) for determining the arm's length price under section 92A(3) in respect of international transaction entered into by the assessee with associate enterprises during the year under consideration. The TPO after analyzing transfer pricing report submitted by the assessee, has made adjustment to the extent of Rs. 53,70,963 to the price of raw material imported by the assessee from associate concerns. The material portion of TPO's order is as under:-- "The search criteria has been depicted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.65% In view of the above discussion, the assessee on comparability analysis on Transactional Net Margin Method is expected to have an operating margin of 5.29 per cent. Determination of Arm's Length Price Sales Rs. 14,75,64,045 Operating Profit @ 5.29% Rs. 78,06,138 Operating Profit booked Rs. 24,35,175 Difference Rs. 53,70,963 This difference of Rs. 53,70,963 is to be adjusted on the import price of raw material which means that the import price has to be lowered by this amount. Import price of raw material Rs. 4,75,54,020 Less : Rs. 53,70,963 Arm's Length Import Price Rs. 4,21,88,057 105% of the Arm's Length Price Rs. 4,42,92,210 Since the price paid to the Associated f Enterprise for import of raw material has been breached the limit available to the assessee in the tolerance band specified in the Proviso to section 92C(2) of the Income-tax Act, the Arm's Length Price of purchase of raw material shall be taken at the arithmetic mean. The Assessing Officer shall, accordingly, increase the income of the assessee by an amount of Rs. 53,70,963. No adverse inferences drawn in respect of the other international transactions for this year." 8. In the light of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted circuit boards to the factories of LG Electronics Ltd. in Korea and Thailand. The majority of shares of ILNLG Korea are with Mr. Yong Joo Sim, and Yong Geun Sim, who also hold majority stacks in the present assessee-company viz., IL JN Electronics India Pvt. Ltd. The present assessee has only one customer viz., LG Electronics India, and the assessee-company can be called a captive vendors for LG Electronics India. The associate concern of the assessee is also one of principal vendors to LG Electronics in Korea and Thailand. The item supplied by the assessee and its associate concern to LG Electronics is also same being the supply of printed circuit boards. The business of the assessee in India is closely connected to the business activities to its associates in Korea and Thailand. The assessee has not procured any raw material from any other entity situated in Korea or Thailand. The comparable transactions has not been carried out by the assessee with any third party in respect of the raw materials, which have been import by the assessee from its associate concerns. The assessee has itself obtained Transfer Pricing Report at TNMM method and the particulars supplied by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of the raw materials acquired by the assessee from its sister concerns in Korea. The CIT(A)'s findings and observations are very much relevant, and, hence, they are being reproduced here as under:-- "8.3 TNMM v. Unspecified Method as MAM.--I have carefully considered the submissions made by the appellant and all other evidences brought on record on this issue. The selection of the MAM is a question of relative merit and is also highly fact-intensive. This observation finds approval in Aztec ruling as well. It would be appropriate to start analyzing this issue by listing out the essence of the Aztec Ruling in respect of MAM. The observations made by the Hon'ble Special Bench of ITAT are summarized below:-- (i )The burden to select the most appropriate method is on the assessee. (ii )The selection of the MAM by the assessee is, however, to be done objectively, after considering all the facts and circumstances of the case, availability of reliable data and degree of comparability. (iii)Selection of MAM should be based on analysis of functions performed, asset deployed and risks assumed (FAR analysis) of both the controlled and uncontrolled transactions. (iv)For rejecting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise for this method to be applied. uThe Cost Plus method was rejected as no information on direct or indirect costs being available from the associated enterprise. uThe Profit Split Method was rejected as its applicability is for transactions which are in no way similar to the transactions in question. By the process of elimination the Transactional Net Margin Method (TNMM) has been used to determine the Arm's Length Price of each transaction'. The TPO has simply concurred with the selection of the appellant under the given circumstances.Under these circumstances, there is no justification for the appellant to come up with the argument that TNMM was used in the TP report only for providing a general view of the industry for comparison without bringing on record any additional evidence to support its contention. 8.3-3 Another contention of the appellant related to the choice of the MAM is the fact that it had outsourced a substantial part of its procurement of raw materials to its A.E. at Korea and offered a reasonable margin of 8.27 per cent as compensation for this function. Prices paid to third party vendors by the A.E. and selling these very items at cost or below the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion would be called for. In this respect, it is important to point out that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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