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TMI Blog2010 (2) TMI 1170X X X X Extracts X X X X X X X X Extracts X X X X ..... unable to agree with the order of ld. CIT(A) that no adjustment could have been made. Admittedly, the assessee has no objection that if TNMM was followed and even no objection was raised to the average profit rate of 7.25%. However, as argued that this rate should be taken as only operating profiting which is not correct because TNMM in Rule 10B of Income tax Rules refers to only net profit and, therefore, there is no scope for reducing interest or any other overheads. Here also TPO has at top of the chart where average rate was calculated at page 2 of his order refers to OP/TC%. Therefore, it is not clear whether this margin is net profit or not. Similarly how the cost etc. was distributed by ld. CIT(A) is not clear because detailed figures are not available. Therefore, in the interest of justice we set aside the order of ld. CIT(A) and remit the matter back to AO with a direction to follow TNMM by working out the average net profit. Further, the adjustment should be worked out on a very simple basis by reducing the net profit declared by the assessee from the gross sales and then divide the same in the controlled and uncontrolled sale and apply the net profit rate. Appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction is functionally different due to various terms and conditions and risks being different to the related parties transactions. In view of this the cost plus method was rejected and consequently the Arm s Length Price as calculated by the assessee was also rejected. Accordingly a show cause notice was issued as to why Transactional Net Margin Method (TNMM) method should not be considered as most appropriate method using the following comparable companies: Name of the Company OP/TC% C I Jewels Ltd 1.44% Deep Diamond India Ltd. 7.14% Diastar Jewellery Ltd. 0.69% Fine Jewellery (India) Ltd. 10.92% Fine Platinum (India) Ltd. 16.34% Gitanjali Jewels Ltd. 5.88% Gold Star Jewellery Ltd. 4.19% Goldiam Internation Ltd. 10.86% International Gold co. Ltd. 1.71% Moon Diamonds Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the -5% of the same is determined at ₹ 26,21,70,978/-. As against this the assessee s arms length price is ₹ 25,02,43,313/-. 7. the assessee s transaction value is below the arms length price an adjustment of ₹ 2,57,26,138/- (Rs.27,59,69,451 ₹ 25,02,43,313) is being made to all the transactions undertaken by the assessee. 6. In response to the above order assessee accepted the application of TNMM method, however, assessee made an application for rectification under section 154of the Act. In that application it was mainly stated that adjustment has been made on total sales inclusive of controlled sales. It was pointed out that as per the provisions of the Act the adjustment could be made only in respect of controlled sales. Accordingly the assessee suggested the calculation which is as under:- Particulars AE Non-AE Total Sales 250,243,313 433,598,227 683,841,540 Ratio of sales 36.59% 63.41% 100% Total cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit 36,527,699 62,253,836 It can be observed from the statement that the arms length sales as per the above calculation is determined at ₹ 87,60,73,557/- which was arrived at by applying 7.25% margin on the controlled cost of ₹ 23,99,99,274/- and adding the balance uncontrolled cost. Thereafter from the total sales calculated at ₹ 87,60,73,557/- the uncontrolled sales (i.e. sales to non AE s) of ₹ 64,49,57,996/- has been reduced thereby arriving at the arms length sale price of controlled transactions at ₹ 23,11,15,561/- (87,60,73,557/- - 64,49,57,996/-). As the assessee company s value of controlled sales is above the arm s length price calculated above no adjustments is necessary to the transactions undertaken by the assessee. 9. The ld. CIT(A) after considering the submissions observed that TPO has definitely made excessive adjustment because 7.25% profit was applied to the total cost in respect of related and unrelated parties. The ld. CIT(A) accepted the calculation given by the assessee and allowed the appeal and observed vide para 2.7 , 2.8 and 2.9 as under:- 2.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectification application is ₹ 68,38,41,540/-, whereas originally sales have been recorded by the TPO at ₹ 89,52,01,309/-. He then referred to the original TPO s order and submitted that since assessee failed to give the separate figures for gross profit margin on the sales to related and unrelated parties and, therefore, TPO had correctly considered the TNMM as the correct method and, therefore, the same could not be reviewed in the garb of rectification application under section 154. He also referred to the appellate order and submitted that no basis has been given for distribution of purchase cost and direct cost by the assessee and, therefore, ld. CIT(A) should not have followed those figures. 11. On the other hand, ld. counsel for the assessee admitted that assessee had not challenged the original assessment order by way of appeal because the assessee had accepted the adoption of TNMM. The assessee had also admitted the 7.25% rate of margin. However, while disputing the cost etc. some minor differences have arisen and they are because involvement of interest because only operating profits were calculated by the TPO. In this regard he referred to page 2 of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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