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TMI Blog2011 (7) TMI 177X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to as "Associated Enterprise" or "AE"). The object of the company was to manufacture various magnetic components like transformers, inductors, printed circuit boards etc., and to export the same to AE. 2.1 In the year under consideration assessee exported finished goods worth Rs. 15,91,07,755. The assessee however incurred loss of Rs. 13.2 lakhs during the year. Operating loss of the assessee as a percentage of sales works out to 0.93 per cent. 2.2 The case of the assessee was that 95 per cent of the raw materials were received from AE free of cost i.e., without payment of custom duty as provided in the EXIM policy. Balance is sourced, by the assessee, locally or through imports. Title to the goods vests with AE throughout the manufacturing process. It was also contended that the production schedule is given by the AE and assessee does not own any manufacturing intangibles nor do they conduct any independent research and development activities. Under the circumstances, it was contended, on the exports made to the AE a mark-up of 6 per cent is charged to the expenditure/standard cost incurred by the assessee. The 'standard cost' is based on an estimate of the cost likely to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he circumstances, he observed that the claim of assessee that it followed cost-plus method, is not evidenced by the financial results. Transfer Pricing Officer had noticed that though the assessee-company has claimed that it was entitled for a mark-up of 6 per cent on costs attributable to the assessee, as per the agreements entered with AE, assessee-company did not furnish a copy of the agreement. The TPO directed the assessee-company to produce copy of the agreement and also to define the "standard cost" i.e., cost on which mark-up was agreed to be charged. Assessee, however, failed to produce the agreement. 2.6 Having regard to the circumstances of the case, the TPO observed that even as per the method adopted by the assessee i.e., TNMM, the mark-up should be on the total cost incurred by the assessee whereas the assessee claimed to have incurred net loss which means that it is not able to recover even the cost attributable to manufacturing of the transformers etc., which are supplied to the AE. 2.7 Assessee objected to the view of the TPO by stating that as per rule 10B assessee has to prove that the transaction is at ALP and, in support thereof, data of comparables has to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the method followed by the assessee-company as well as the percentage of mark-up is in accordance with the procedure prescribed in law and hence, the transfer pricing adjustment made by the Assessing Officer deserves to be set aside. Explaining further, it was stated that the external comparables were extracted from the "PROWESS" database. Comparison of the data shows that the price charged by the assessee is within the margin i.e., the assessee was selling its goods on ALP. It was also contended that the TPO has disregarded various comparables without giving any reasons. Submissions made before the TPO were reiterated before the CIT(A). 4. Learned CIT(A) observed that the assessee is a contract manufacturer and hence cost-plus method is the most appropriate method for testing the arm's length price. He further observed that by charging the mark-up on estimated cost the assessee has depressed the cost base. The basis for such estimation is also not known. In the opinion of the learned CIT(A), if there was a difference between the estimated cost and the actual cost, then it is incumbent upon the assessee-company to make up by billing the balance in the subsequent months. The met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent the contract price deviates from the arm's length price. He accordingly upheld the Order of the Assessing Officer. 5. Further aggrieved, assessee is in appeal before us. Learned Counsel submitted that in the instant case TNMM is the most appropriated method. Adverting our attention to the details of key financials in respect of comparable companies with turnover less than Rs. 50 crores (page 59 of the paper book), it was submitted that the assessee followed a well established method of cost-plus 6 per cent mark-up thereon and the said price, with reference to the comparable cases, can be said to be at arm's length. The TPO as well as the Assessing Officer accepted TNMM as the correct method but the learned CIT(A) sought to apply cost-plus method which is not justified. He further contended that the Assessing Officer has not given any comparables to arrive at standard cost and has not followed the parameters prescribed under rule 10B of the I.T. Rules in which event, method followed by the assessee-company should not have been disturbed. In this regard, he relied upon the decision of the ITAT, Mumbai Bench in the case of C.A. Computer Associates (P.) Ltd. v. Dy. CIT [2010] 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 to submit that "transfer pricing" is not an exact science and evaluation of transactions is some times based on approximation after taking into account all facts and circumstances of the case. In the instant case, the assessee did not perform its obligation of proving the correctness of its claim with regard to the agreement entered into with AE and also on account of failure to charge the mark-up on the actual cost. Therefore, the tax authorities were justified in ignoring the basis adopted by the assessee. Learned DR thus strongly relied upon the Orders passed by the tax authorities. 7. We have carefully considered the rival submissions and perused the record. In our considered opinion, the initial burden is upon the assessee to prove the correctness of the method followed. In the instant case this burden was not discharged properly. As could be seen from rules 10B to 10D of the I.T. Rules read with provisions of section 92C of the Act, the ALP in relation to an international transaction has to be determined by one of the prescribed methods, which is a most appropriate method in the circumstances of the case i.e., having regard to the nature of transaction, class of transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT, Mumbai Bench in the case of C.A. Computer Associates (P.) Ltd. (supra). In our opinion, the decision rendered in the aforecited case is confined to the facts therein; Since parameters prescribed in rule 10B, vis-à-vis bad debts written off, were not taken into consideration the Tribunal correctly observed that the TPO was not justified in arriving at the arm's length price by taking into account the bad debts written off. In the instant case, however, there is no dispute with regard to the method followed by the assessee except for the fact that the assessee has not proved satisfactorily as to why estimated 'standard-cost' has to be taken into consideration particularly when the transaction is with the principal who is holding 99.95 per cent control over the assessee-company. 10. As could be noticed from paras 4.1 to 4.6 of the CIT(A)'s order, the main factor for disregarding the method followed by the assessee was due to non-furnishing of the so-called agreement with the AE. Since, we are in agreement with the detailed reasons given by the TPO/Assessing Officer as well as the CIT(A), we hold that the initial burden is upon the assessee to prove the reasonableness of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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