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TMI Blog2013 (8) TMI 735X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, asked the assessee to submit the details of TP study undertaken by it to compute the transfer pricing adjustment. After considering the details the TPO noted that the assessee had applied TNMM method for bench marking the international transaction and had selected six comparables which gave weighted average on operating profit on sales at -7.95% and weighted average profit on operating cost at -6.84% as per the details given below:- Name of the Company Weighted Average operating Profit/Sales % Weighted Average operating costs on total operating profit (%) Companies 2006-07 2006-07 Panasonic AVR (3.41) (2.92) Salora International 3.30 4.10 Calcom Vision Ltd (21.70) (20.30) BPL consumer (6.70) (5.76) Sharp India (8.50) (7.68) Videocon Industries 5.80 6.22 Consumer Arithematic mean (5.20) (4.39) Maximum 5.80 6.22 Minimum -21.70 -20.30 Weighted average (7.95) (6.84) Arithematic mean TCL India Holdings (6.97) (6.51) Private Limited 3. The assessee explained that weighted average operating margin of the assessee both in relation to sales and operating cost was more than the weighted operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied TNMM method in which only broad similarity of products was required to be seen. The comparables selected by TPO were also dealing in the consumer electronics products. TPO also observed that the assessee itself in TP study had considered Salora International and Videocon Industries but in the submissions dated 22.10.2010 the assessee disputed the inclusion of Salora International thereby contradicting its own stand. The assessee had also ignored Videocon Industries and considered Phillips India Ltd., as comparable. The TPO also pointed out that the assessee had ignored all the profit making entities and considered only the loss making entities in the new set of comparables. The TPO, therefore, rejected the objection raised by the assessee and proceeded to make the TP adjustment on the basis of new comparables selected by him which gave mean margin of 2.23% after excluding loss cases. He, therefore, computed the adjustment on the basis of mean margin of 2.23% which was applied to the entire operating cost of the business to arrive at TP adjustment to Rs. 65,27,33,366/-. 5. The assessee aggrieved by the decision of TPO filed objection before the DRP challenging the adjustment an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected the comparables of the assessee on the ground that most of the comparables were loss making. It was pointed out that the comparables could not be rejected only on the ground of loss making without giving any specific reason, which had not been done either by the TPO or by DRP. It was also pointed out that the comparables selected by the TPO had totally different products, some of which were also manufacturing concerns which were functionally not comparable. The adjustment made by TPO which was upheld by the DRP with respect to the entire sale which was not correct as the adjustment could be made only with respect to international transaction. This had been specifically pointed out by the DRP who had rejected the claim on the ground that the assessee itself had made the adjustment on the basis of TNMM method at entity level. It was pointed out that the adjustment had been made with respect to sales when the international transaction was purchase of goods. The assessee had also given the computation of internal margin with respect to imported goods and local trading goods which clearly showed that the margin in respect of imported goods were higher, which was not accepted by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding the transfer pricing adjustment made to the international transaction entered into by the assessee with associate enterprise (AE). The assessee during the year has claimed to have made purchases of CBUs and components for total value of Rs. 56,25,31,000/-. The matter had been referred to TPO for carrying out the transfer pricing exercise. As per the section 92, the income arising from an international transaction is required to be computed having regard to arm's length price of the transaction. For computing the arm's length price there are various methods prescribed in section 92 C which includes transactional net margin method (TNMM). In this case, both the assessee and the TPO have applied TNMM method. The assessee had selected six comparables the mean margin of which was found to be lower than the margin declared by the assessee. Therefore, it has been argued that no adjustment was required to be made. The TPO had not accepted the comparables selected by the assessee on the ground that most of them were loss making companies. The TPO has also excluded loss making cases out of seven comparables selected by him for making the TP adjustment. We agree with the submissions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (DR) pointed out that the PL account placed at page 27 of the paper book does not show any purchase of CBUs. The learned CIT (DR) has also pointed out discrepancy in the figures of total income shown by the assessee which was 377 crore as given at page 72 of the paper book whereas the figure given at page 27 is Rs. 304 crore. Similar discrepancy has also been pointed out in case of margin of Salora International which as per the assessee was 3.30% whereas as per the TPO it was 3.08%.
7.2 Considering the various discrepancies as well as infirmities in the approach adopted by both the parties we consider it appropriate that a fresh transfer pricing study be undertaken for selecting proper comparables after careful study of functional profile of the assessee so as to arrive at proper TP adjustment. We, therefore, set aside the order of AO and restore the matter back to AO/TPO for passing a fresh order after necessary examination in the light of observations made in this order and after allowing the opportunity of hearing to the assessee.
8. In the result appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 15/05/2013
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