9911796707
TMI Blog2013 (10) TMI 550X X X X Extracts X X X X X X X X Extracts X X X X ..... rs for large man made fiber, chemical and petrochemical plants. The CEIL, in turn, is owned by Chemtex International Inc., USA (CII) and American Investment Inc., USA. CII was agroup company of Mitsubushi Corporation, Tokyo. 4. During the financial year under consideration the assessee company provided engineering consultancy services to CII. The business operations of the assessee company were analysed by taking the assessee as "tested party", since, in the financial year relevant to A.Y. 2004-05, the assessee company provided engineering consultancy services to CII which is an Associate Enterprise (AE) of assessee company. According to the assessee the price charged was at arm's length. 5. In its Transfer Pricing Report it has analysed the transactions with the help of Transactional Net Margin Method (TNMM) as a primary method. During the course of assessment proceedings the assessee company has also compared the rates charged to AE vis-à-vis third party (non-AE) and benchmarked the price by applying CUP methodology in support of the international transactions. Vide letter dated 18th August, 2006 it was submitted that the assessee charged fees at hourly basis from the AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to take four fresh comparables and upon hearing the objections of the assessee he dropped three companies but sought to include Rites Ltd. as a comparable and, according to the TPO, by taking 11 comparables, including Rites Ltd., the assessee's case do not fall in the safe harbour limit and accordingly the arm's length price of the international transaction of the assessee has been computed at Rs. 15,41,49,544/- and an amount of Rs. 1,19,59,656/- was added to assessee's income and directed the AO accordingly. In the opinion of the TPO the average operating profit margin of the comparable case works out to 13.88% as against assessee's margin of about 5%. 7. Though several objections were raised before the AO challenging the methodology followed by the TPO, the AO proceeded to complete the assessment under section 143(3) of the Act by making an adjustment of Rs. 1,19,59,656/- to the income declared by the assessee. The main case of the assessee before the AO was that the learned TPO has not followed the principles of natural justice while rejecting the comparable companies listed out by the assessee company and he has also wrongly taken Rites Ltd. as a comparable case. 8. Aggrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee and the AO has also not afforded an opportunity before rejecting the plea of the assessee about application of internal CUP method. 11. In the grounds of appeal filed before the CIT(A) it was highlighted that the assessee has given its FAR analysis to highlight as to why 18 comparables are chosen but the AO has not given any reason as to why the chosen comparables cannot be taken into consideration. It was also highlighted that as per the provisions of section 92C(2) of the I.T. Act, 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 a price which varies from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. By adopting that formula the arithmetical mean of the berry ratio of the comparable cases given by the assessee works out to 1.06 whereas the berry ratio of the assessee worked to 1.05 before adjusting non-operational/extraordinary expenses and thus it is comparable with the average of the berry ratio of the independent comparable service companies. Therefore, the fees charged by the assessee has to be treated as reasonable and the price ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the fee charged from AE to the fee collected from the third party). It was also highlighted that in the earlier years also the assessee was subjected to transfer pricing scrutiny of same AE transactions but no adjustment was made. 14. The learned CIT(A) has also noticed that as per Rule 10B of the IT Rules the profit margin arising in comparable uncontrolled transactions can be adjusted to take into consideration the difference, if any, such as the specific characters of the transaction, functions performed and assets employed by the comparable companies. He also noticed that use of net margin can potentially introduce a greater element of volatility because the net margin can be influenced by some factors that may not have an effect on the gross margin and prices because of the potential for variation of operating expenses across enterprises. In this regard he observed that the extraordinary expenses highlighted by the assessee should not figure in the operating expenses and if such adjustment is made before determining the ALP, the TNMM method employed by the assessee would offer a practical solution; further if the above mentioned material difference on account of "extraor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o referred to page 34 and 50 of the paper book to submit that the assessee had taken into consideration the nature of services rendered by it to its AE while coming to the conclusion that TNMM is the most appropriate method. Therefore, the assessee cannot, at a later stage, request the AO/TPO to apply another method as the most appropriate method. 17. He also adverted our attention to page 70 and 71 of the paper book to submit that while selecting the profit level indicator the assessee adopted berry ratio as the most appropriate PLI which is defined as the ratio of operating revenue to operating expenses whereas Rule 10B(c))i) provided that profit level indicator should be with reference to the cost or sales of assets. On the contrary, in berry ratio, profit is not taken into consideration since only operating revenue and operating expenses are taken into account. Therefore, the PLI adopted by the assessee is not in accordance with the rules prescribed under the IT Rules. 18. He also adverted our attention to pages 127 and 129 of the paper book to submit that as per berry ratio it works out to 1.05 and operating profit and operating cost also comes to 11.17% only on account of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the transaction with the non-AE company were furnished before the TPO and hence no fresh facts were furnished before the learned CIT(A). It also adverted our attention to several letters addressed to the TPO to highlight that all the details were available before the TPO and hence it is incumbent upon the TPO as well as the AO to take into consideration the CUP data to examine as to whether the international transactions of the assessee are at arm's length. He adverted our attention to the order passed by the learned CIT(A) to submit that based on the fees charged from non-AE companies the international transactions with the AE are at arm's length and hence it was held to be not a fit case for making any adjustment. 22. With regard to exclusion of extraordinary expenses from the cost/operating expenses the learned counsel submitted that this issue was specifically raised before the TPO (page 130 of the paper book) but the TPO did not question as to how these are not extraordinary expenses. The TPO had proceeded to adopt the ratio of operating profit to operating expenses as PLI but the most important factor that needed to be kept in mind was that the "cost that needs to be taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the learned CIT(A) does not call for any interference for the following reasons. According to the TPO operating margin on operating cost in the case of comparable companies works out to 13.88% as against 5% in the case of the assessee company whereas, in order to arrive at the cost, the one time extraordinary expenses, which are not standard expenses for earning income, ought not have been taken into consideration and, therefore, the learned CIT(A) was justified in reducing the extraordinary expenses for the purpose of arriving at the cost and by adopting such cost as the basis, the rate of profit declared by the assessee would be at arm's length and hence there is no need for making any adjustment. 25. Even with regard to the comparable companies which are taken into consideration by the AO/TPO the learned CIT(A) has correctly held that Rites Limited is a Government of India enterprise and considering the nature of the contracts and the implicit guarantee provided by the Government of India, etc. Rites Limited cannot be taken as a comparable case and hence the learned CIT(A) was justified in excluding the same. 26. Further, the Act does not provide that an assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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