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TMI Blog2012 (3) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... Group. It is now a wholly owned subsidiary of Roche Group. The assessee filed its return declaring loss of Rs. 29,65,605. During the course of assessment proceedings such return was revised declaring loss of Rs. 29,65,610. In respect of international transactions the assessee filed a report u/s 92E in Form no. 3CEB. The Assessing Officer referred the case to the Transfer Pricing Officer (TPO) for computing the Arm's Length Price (ALP) in respect of international transactions. The TPO observed that during the year in question the assessee performed functions of distributor and service provider to Roche Diagnostics Asia Pacific Pte. Ltd., Singapore (RDAP) in respect of biomedical equipments, reagents and spares. The assessee's transactions with its Associated Enterprises (AEs) were as under:- TABLE-1 AE Description Amount [Rs. in Crore] Roche Diagnostics, Switzerland Purchase of Trading Goods 4.28 Roche Diagnostic, Germany Purchase of Trading Goods 0.21 Roche Diagnostics Asia Pacific Pte. Ltd. Singapore Commission 2.59 Total 7.08 4. The TPO, after taking into consideration transfer pricing report submitted by the assessee, noted that the assessee has adopted T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nally short listed the comparable cases chosen by him to two, viz, Span Diagnostics Limited and Casil Health Limited. He, thus, worked out PBIT of four comparable cases, that is, two from the assessee's transfer pricing study and two as finally selected from the five initially proposed by him, as under:- TABLE - 2 Sl. No. Company Selected by Operating Margin (PBIT) % for F.Y.2003-04 1. Ashco Industries Limited Assessee 7.25 2. Advanced Micronic Devices Limited Assessee 4.95 3. Span Diagnostics Office 13.31 4. Casil Health Office 9.78 Mean PBIT% 8.82% 6. Such operating margin at 8.82% was applied by the TPO for determining ALP in respect of imports by the assessee from its AEs, as under: - TABLE - 3 A Net Sales as per P & L A/c Rs. 10,91,21,365 B Expenditure as per P&L a/c [excluding interest]. Taken at 74% as Distribution activity sales accounts for 74% of Total Sales. Rs. 11,06,08,217 C Operating Loss [assessee's PBIT] Rs. (-)14,86,852 D At PBIT of comparables at 8.82% Rs. 96,24,504 E Difference between [D-C] Being adjustment towards arm's length price. Rs. 1,11,11,356 7. That is how the addition of Rs. 1.11 crore was propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late authority found that the assessee's operating margin of 1.63% was comparable. It is relevant to mention that the learned CIT(A) went by the assessee's declared Operating Profit (OP) margin at 1.63% ignoring the fact that TPO had rejected such OP rate and had instead determined operating loss at Rs. 14,86,852 as tabulated above. 9. Firstly we will consider as to whether the learned CIT(A) was justified in excluding the cases of Span Diagnostics and Casil Health which were selected by TPO. Insofar as the case of Casil Health is concerned, its Annual report for the financial year 2003-2004, a copy of which is available on record, indicates that the said company had two types of activities viz. manufacturing and marketing. Page 35 of its Annual report points to three types of business segments as under:- (a) Speciality Chemicals : Sulfolane Aqueous and Anhydrous. (b) Hospital Disposables : Disposables (like bandages, adhesive tapes), Diagnostics, Gloves. (c) Pharmaceuticals : Soft Gelatine Capsules, conversion charges. 10. Page no. 34 of their Annual report is segment-wise information in respect of the above referred three business segments. Casil Heal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnostics cannot per se be applied for the purposes of making comparison with the assessee's only trading of diagnostic products. We, therefore, hold that the learned CIT(A) was justified in excluding the case of Span Diagnostics also from the purview of list of comparable cases. 12. This leaves us with the two cases relied on by the assessee as comparables namely, Ashco Industries Limited and Advanced Micronic Devices Limited giving OP rate of 7.25% and 4.95%. The arithmetical mean of these two cases has been rightly calculated by the ld. CIT(A) at 6.1%. 13. Now the next point for determination is about the granting of plus minus 5% adjustment. At the outset we would like to mention that Mumbai Benches of the Tribunal have held in several cases that plus minus 5% margin is to be allowed. We agree in principle that the plus minus 5% adjustment is allowable for determining ALP. The learned CIT(A) has accepted the assessee's contention that if plus minus 5% margin is allowed, the range of OP rate arrived at would be 1.405% to 10.795% which according to him satisfies the assessee's margin at 1.63%. On being called upon to show as to how these percentage was worked out, the ld AR gave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he most appropriate method, having regard to the nature of transactions or class of transaction or class of associated persons .................". When we read the above discussed three provisions, it clearly emerges that firstly there should be an international transaction, secondly there should be income arising from such international transaction and thirdly such income should be computed having regard to the arm's length price. What we compute is income and the base from which such income is computed is transaction, which is in the nature of purchase or sale or provision of services etc. With this background in mind, let us have a look at proviso to section 92C(2) at the material time which reads as under:- "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean." 17. ALP is nothing but a benchmark or a standard price meant for comparison with the price charged or paid by the assessee in international transactions w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is price and not profit embedded in the price. For example, if an assessee has sold goods to its AE worth Rs. 100 and the ALP in respect of such goods sold under CUP method is say Rs. 103 or Rs. 98, then no adjustment is required because it is within 5% of Rs. 100, being the price at which goods were sold to associated enterprises in the international transaction. Irrespective of the fact whether the profit component in the sale value of Rs. 100 is Rs. 4 or Rs. 8 or Rs. 10, it is in fact the comparison of the price charged or paid for property transferred which is the subject matter of proviso to section 92C(2). Thus it can be seen that the plus minus 5% is required on the sale value or purchase price and not on the profit element in such transactions. 20. The second method is Resale price method by which the price at which property purchased or service obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified. Such price as adjusted to make it compatible with the assessee's transaction, is taken as arm's length price for comparison. What is determined under this method is again the price and not the profit element ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, reject this contention raised by the learned Departmental Representative. Ex consequenti it is held that in the present case of TNMM, +-5% is to be applied on the costs incurred and not on the profit margin. 23. Adverting to the facts of the instant case it is noticed that the assessee argued before the learned CIT(A) that plus minus 5% adjustment to 6.1% margin of the remaining 2 comparable cases would give the range of 1.405% to 10.795%. From the Table - 4 above provided by the assessee, it can be seen that operating profit margin at 6.1% gives cost at Rs. 93.90. 5% factor gives value at 4.695. If it is added to the cost of Rs. 93.90 giving operating profit margin 6.1%, the lower permissible limit of cost will come at Rs. 98.595 and the higher permissible limit of cost will come at Rs. 89.2050. The assessee's contention is that its operating profit margin at 1.63% gives cost of Rs. 98.37 and since Rs. 98.37 falls within Rs. 89.205 and Rs. 98.595, therefore, no further adjustment is required. This is what the learned CIT(A) has accepted while deleting the addition of Rs. 1.11 crore. 24. It is relevant to note that the assessee as per its transfer pricing study comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is called for as it falls within +5% range. If however the assessee has paid Rs. 106, then addition for Rs. 6 is warranted irrespective of any benefit for plus minus 5%. 26. In view of the above discussion, it becomes obvious that unless the figure of assessee's operating profit/loss along with its percentage to the amount of sales is determined, there can be no comparison with the average price of uncontrolled transaction as adjusted with plus minus 5% factor. In the instant case if the amount of operating loss is considered as correct, the cost will be Rs. 101.36, which will breach the plus minus 5% range as illustrated by the ld. AR in the Table - 4. 27. On this point, the learned AR argued that the question of operating profit/operating loss earned/incurred by the assessee has not been challenged by the Revenue in its present appeal and hence should be ignored. We are not convinced with this submission for the reason that the Revenue is aggrieved against the deletion of addition made by the A.O. on account of transfer pricing adjustment in entirety and not only the exclusion of 2 cases chosen by the TPO from the list of comparables. The ground as reproduced above is wide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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