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TMI Blog2014 (4) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... the Associated Enterprise - splitting of residual profits, no bench marking is necessary, as it is not practicable. The transfer pricing report furnished by the assessee is not in accordance with rules prescribed in this regard - The PSM has not been correctly applied as per law - No bench marking has been done – thus, it cannot be approved - the most appropriate method in this type of function/transaction would be profit split method only - the relevant years were the formative years, when transfer pricing was introduced and the law was developing – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of Revenue. - ITA no. 4670/Del/2009 - - - Dated:- 31-12-2013 - J.SUDHAKAR REDDY AND RAJPAL YADAV, JJ. For the Appellant : Smt. Renuka Jain Gupta For the Respondent : Suresh Ramachandran and Sanjesh Jawarani ORDER:- PER : J. Sudhakar Reddy This is an appeal by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals)-XX, New Delhi dt. 13.10.2009 pertaining to the A.Y. 2004-05, on the following grounds. 1. Ld. Commissioner of Income Tax (Appeals) erred in law and on the facts and circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Enterprises and consequently the TPO suggested an adjustment of Rs.43,69,441 on account of difference in arm's length price to the value of International Transactions. Transfer Pricing Report 5. S-Net Freight (India) Pvt. Ltd is a subsidiary of S-Net (Holdings) Pvt. Ltd, Singapore. It provides freight forwarding services to the customers in India. S-Net Indian and its fellow subsidiaries mutually appoint each other as the others exclusive agents with respect to the transportation of shipment to and from these territories. In order to determine the arm's length price of the International Transaction with its Associated Enterprises the appellant used the Profit Split Method for cost collection received and cost collections paid. 5.1 In the documents filed by the appellant the application of the most appropriate method has been described as under: The Company's dealing with its Associates consists of an arrangement of profit sharing ratio of 50% of all transactions of in bound and out bound shipments (specimen enclosed). All these transactions are subject to supplementary agreement enclosed . 5.2 In the Transfer Pricing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. ABC India Ltd. 4.85 2. Blue Dart Express Ltd. 13.68 3. Gati Limited 4.57 4. Patel On Board Couriers Ltd. 3.61 5. Transport Corporation of India Ltd. 7.82 6. South Asia Corporation 8.10 7. Inter State Oil Carriers Ltd. 7.61 Average: 7.17% (iii) Since the appellant's operating margin of 2.56% was less than the average margin of the comparables of 7.17%, TPO therefore made an adjustment of Rs. 43,69,441 on account of arm's length margin.' 4. On appeal the Ld. Commissioner of Income Tax (Appeals) accepted the plea of the assessee and deleted the T.P. adjustment. Aggrieved the Revenue has filed this appeal before us. 5. We have heard Smt. Renu Jain Gupta, Ld. Sr. D.R. on behalf of the Revenue and Shri Suresh Ramachandran, C.A. the Ld. Counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riate method. Under Rule 10 B(1)(d) profit split method is as follows. 10(B)(1)(d) : Profit split method, which may be applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so inter related that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which (i) The combined net profit of the associated enterprises arising from the international transaction in which they are engaged, is determined; (ii) The relative contribution made by each of the associated enterprise to the earnings of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) The combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub clause (ii); (iv) The profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and reflected in an agreement made at arm's length. The combined profit may be the total profit from the transactions or a residual profit intended to represent the profit that cannot be readily assigned to one of the parties, such as the profit arising from high value, some times unique, intangibles. The contribution of each enterprise is based upon a functional analysis and valued to the extent possible by any available reliable external market data. The functional analysis is an analysis of the functions performed (taking into account assets used and risks assumed) by each enterprise. The external market criteria may include, for example, profit split percentages or returns observed among independent enterprises with comparable functions. Transactional Net Margin Method (TNMM) : Rule 10B(1)(e) describes TNMM as under: (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne. Hence we are unable to approve the same. In our view the most appropriate method in this type of function/transaction would be profit split method only. Only the method was not applied as per law. 9.7 At the same time we are also unable to approve the findings of the Ld. TPO as TNMM has been applied at the entity level. Such determination of ALP by comparison of profits at entity level has been held as bad in law by the Special Bench in the case of L.G. Electronics. Transaction level comparison and bench marking has to be done. 9.8 Coming to the decisions relied by the Ld. Counsel for the assessee in the case of ITA 4427/Mum/2010 for the Assessment Year 2004-05 in the case of DHL Danzas Lemuir (P.) Ltd. (supra) order dt. 12.12.2012 we find that the same is not applicable as in that case the assessee has applied transactional net margin method. In the case of ACIT v. HDL Logistics the assessee had adopted CUP method. Coming to the argument that the TPO has not made any adjustment in the next three AYs, we are of the considered opinion that the TPO was wrong and that he had not followed the law on this issue. When the method is not applied in accordance with law, the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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