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TMI Blog2014 (4) TMI 617X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be presumed that the assessee company has not incurred any expenditure on research and development – thus, the computation of the ALP in the case of the assessee shall be reworked, by treating the difference in profit margin as nil and accordingly, any upward revision cannot be sustained for making addition towards increase in income based on determination of ALP – Decided in favour of Assessee. Selection of comparables - Held that:- There was no justification as to why the TPO had not adopted the comparable company M/s. Audco India Ltd., for the subsequent assessment year. Instead Ld. TPO has adopted two different companies M/s. Orson Holdings Co. Ltd and M/s. Sakthi Auto Ancillary P Ltd., as comparable companies – the TPO without examining the intricacies of the assessee company and comparable companies cryptically arrived at the conclusion – the matter is remitted back to the TPO for fresh adjudication – Decided in favour of Revenue. Exclusion of sale of DEPB license u/s 80HHC of the Act – Held that:- The decision in Topman Exports v. CIT [2012 (2) TMI 100 - SUPREME COURT OF INDIA] followed – thus, the matter is required to be remitted back to the AO for fresh adjudicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92CA of the Act in order to determine the Arm's Length Price (ALP) since the assessee had earned income from international transaction during the relevant previous years. The Ld. TPO vide his order U/s 92CA(3) of the Act dated 20.12.2006 determined the ALP at Rs. 1,78,39,0381/- and thereby adjusted the total income upwardly by a sum of Rs. 72,95,381/-. The reference to TPO was not objected by the assessee's company since the assessee company had made export sale to its associate enterprises abroad. In the transfer pricing document, the assessee company had adopted cost plus method considering it to be the most appropriate method. However, the assessee company could not establish its stand for adopting cost plus method before the Revenue. The Ld. TPO was of the view that Transaction Net Margin Method (TNMM) was the most appropriate in the case of the assessee and for necessary comparison, Profit Loss account of M/s. Audco India Ltd., was adopted. The assessee objected to the same citing the following reasons in its reply dated 15.12.2006: 1. There is no other company in India producing the same product as that of the assessee company's product. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered for determining the ALP adjustment and accordingly, upward revision of income was made for Rs. 72,95,381/-. 6. On appeal, Ld. CIT(A) after examining the issue arrived at the conclusion that without assigning any reasons the Ld. TPO had rejected the cost plus method adopted by the assessee and followed TNMM method and compared the net profit of the assessee company with M/s. Audco India Ltd., for determining the ALP. Further for the following reasons, Ld. CIT(A) opined that the Ld. TPO had wrongly adopted the TNMM method whereas the correct method was cost plus method as adopted by the assessee: (i) From the documents of the comparable company, it was noticed that the company was a full-fledged manufacturing entity whereas the appellant company was a manufacturing entity working on contract basis. (ii) The appellant company being a contract manufacturer has a limited and typical know-how pertaining only to the manufacturing process of the product manufacture. (iii) The appellant company being a contract manufacturer performs lesser functions and assumes lesser risks than a full-fledged manufacturing company and therefore, would earn a lower rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sults of the assessee company and the comparable company which is reproduced here below for reference: Mar.04 Expression Audco India Ltd. % of Sales Flow Link systems Pvt Ltd. P L a/c summary /mfg cos. Income Rs. crore _____ ___________ Export Sales Rs. crore _____ 26.28 Sales 370.93 0.86 Other income 2.59 2.34 Total Income 373.52 Total Income 29.48 Expenditure Expenditure(as per P L) Raw materials, stores, etc. 234.47 63.21 Raw material consumables 14.49 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment. If this amount is also considered, the operation profit to ratio cost to M/s. Audco India Ltd. would work out as follows: (a) Total cost 333.01 (+) 6.05 R D expenditure = 339.06 (b) Operating profit 40.51 ( - ) R D expenditure 6.05 = 34.46 (c) O/P/cost = {34.46 ( ) 100} 339.06 = 10.16 Thus O/P to cost ratio of M/s. Audco India Ltd would fall from 12.16 to 10.16. Further, giving leverage of 5% due to the second proviso of Sec. 92C(2) of the Act, the difference in profit margin between both the companies will be nil [10.16 (-) 7.04 (-) 5 = (-) 1.88 instead of 5.12% determined by the Ld. TPO and the Ld. Assessing Officer. In view of our above observation, we hereby hold that the computation of the ALP in the case of the assessee shall be reworked, by treating the difference in profit margin as nil and accordingly, any upward revision cannot be sustained for making addition towards increase in income based on determination of ALP. 10. Ground No. 2 for A.Y. 2005-06: For the similar reasons cited for the earlier assessment year, the Ld. TPO computed the ALP of the assessee following the TNMM method, however adopted two other companies ..... X X X X Extracts X X X X X X X X Extracts X X X X
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