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TMI Blog2017 (4) TMI 1094X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of the net operating profit margin realised by the enterprise from an international transaction 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. Sub-clause (ii) provides that the net operating profit margin realised by a comparable uncontrolled transaction should be computed having regard to the same base as that taken in sub-clause (i) for the assessee. In the formula for calculating the profit margin under rule 10B(1)(e) under sub-clauses (i) and (ii), there can be any denominator, such as, costs incurred or sales effected or assets employed or to be employed. However, the numerator is uniform, which is, net operating margin. In fact, the numerator is `operating profit’ and not the `net profit’ as has been taken by the TPO in making transfer pricing adjustment. Whereas, operating profit is the excess of operating revenue over the operating costs, net profit is the excess of revenue over all costs, both operating and non-operating. The Hon’ble Supreme Court in DIT (I.T.) vs. Morgan Stanley and Co. (2007 (7) TMI 201 - SUPREME Court) has held that 'operating profit’ from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was employed for any of the three international transactions, which is apparent from the remarks `None given under the column `Method employed . To justify non-application of any method for benchmarking, the assessee stated that no comparables were available. The TPO, following his view for an earlier year, noticed that the AE of the assessee was supplying similar material to other parties in India also. He took upon himself the task of determining the ALP of this international transaction by applying Transactional Net Margin Method (TNMM) as the most appropriate method. Seven companies, which were chosen as comparable for the A.Y. 2003-04, were picked up by the TPO as comparable for this year as well. During the course of proceedings, the assessee also supplied data of three comparable companies. The TPO worked out the average net profit margin of the ten comparable companies as under :- Table - 1 Name of the company Sales Net Profit Rico Auto Industries 598 35.23 Rane Engine VAL 176.07 23.02 JBM Auto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43,51,793/-). This resulted in the TPO holding that the purchases from AE were inflated by a sum of ₹ 74,70,729, which was proposed as the transfer pricing adjustment. The AO made the addition for the equivalent sum. The ld. CIT(A) deleted the addition, against which the Revenue is in appeal before us. 6. We have heard the rival submissions and perused the relevant material on record. It is noticed that the only international transaction in dispute is `Purchase of material from F-Tech, Japan. The assessee did not apply any of the recognized methods for demonstrating that this international transaction was at ALP. In fact, no method at all was employed for finding out the ALP of the international transaction. This was on the premise that no functionally comparable company was available and, hence, the transfer pricing provisions could not apply. Pages 30 and 31 of the paper book, designated as Transfer pricing study report , reiterate the assessee s stand that no independent third party is functionally similar. In this so-called Transfer Pricing Study Report, the assessee has mentioned that in the absence of a suitable comparable uncontrolled price, the only option availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments, if any, which were made to account for differences between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions . Clause (l) is again relevant, which provides that the assessee shall maintain `details of the adjustments, if any, made to transfer prices to align them with arm s length prices determined under these rules and consequent adjustment made to the total income for tax purposes . The above information has to be necessarily incorporated in the Transfer pricing study report. 8. When we advert to the contents of the so-called `Transfer pricing study report prepared by the assessee, it comes to the fore that the same is absolutely devoid of the relevant information as required to be mandatorily maintained. What to talk of maintaining `a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions entered into , the assessee has simply stated that no comparable is available. Then, as against the requirement of giving `a description of the methods considered for determining the arm s length price in relation to each interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or intent to avoid tax. The view point of the ld. CIT(A) in this regard is, therefore, completely extraneous in so far as the determination of ALP of an international transaction is concerned. 12. (B) The ld. CIT(A) recorded in para 1.4 of the impugned order that: It is nowhere prescribed to compare the net profit margin of the organization as a whole (which includes the net profit margin even of transactions which have no relation with the international transaction) with other organizations and to estimate the net profit of the assessee for the entire transactions including transactions other than the international transaction. 13. We agree in principle that the transfer pricing provisions are applicable only qua the international transactions. If an assessee has transactions both with AE and non-AEs, the transfer pricing adjustment can be made only in respect of transactions with AEs and not non-AEs. This is otherwise also a settled position of law as laid down by the Hon ble Delhi High Court in CIT vs. Keihin Panalfa Ltd. (2016) 381 ITR 407 (Del). Similar view has been taken by the Hon ble Bombay High Court in CIT vs. Thyssen Krupp Industries India P. Ltd. (2016) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (D) The ld. CIT(A) noticed and rightly so that the assessee has two units. He, however, went astray by recording in paras 1.6 (d) and (f) that the net profit margin of Unit-2, which was only dealing with manufacture and sale of automobile components, at 5.34% was to be considered and not the margin from Job work receipts having no relation with the international transaction. 17. It is an admitted position that the assessee earned income from two units. Initially, the ld. AR also argued that the entire Job work was done under Unit-1 and the Manufacturing was done under Unit-2 and hence profit margin from Unit-2 alone ought to have been taken into consideration. On perusal of the Annual accounts of the assessee during the course of hearing itself, such a contention was found wanting. When confronted, the ld. AR admitted this position. 18. The assessee s overall Profit Loss Account is available at page 11 of the paper book, which has the figure of Sales (net of excise duty) at ₹ 23.71 crore. The next figure is Job work amounting to ₹ 97.49 lac. Page 27 of the paper book is Profit Loss Account of the assessee for Unit-2 alone which shows the figure of Sales (net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required for earning revenue from job work), should not be considered. After excluding the effect of such depreciation, he determined the net profit margin of Unit-2 at 7.03% and found the same at arm s length. 22. This finding is again not sustainable. Firstly, there is no discussion to fortify his view that ED plant was exclusively required for earning revenue from job work . Secondly, it is not clear if purchase of material was also used for job work. In such circumstances, the exclusion of depreciation on ED plant from the operating costs for determining the operating profit margin, and that too, by restricting the computation only to the Unit-2, cannot be justified. 23. The ld. CIT(A) deleted the addition by summing up his point of view in para 1.8 of the impugned order as under:- 1.8. Now, looking to such a state of affairs, when the TPO has not discharged the required onus, while following inferences as discussed earlier:- (a) That the net profit margin of unit-2 of the assessee company, which only deals with manufacturing sales of automobile components (including transactions pertaining to international transactions) for which assessee has maintained sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom 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 realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; 27. Sub-clause (i) deals with the computation of the net operating profit margin realised by the enterprise from an international transaction 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. Sub-clause (ii) provides that the net operating profit margin realised by a comparable uncontrolled transaction should be computed having regard to the same base as that taken in sub-clause (i) for the assessee. In the formula for calculating the profit margin under rule 10B(1)(e) under sub-clauses (i) and (ii), there can be any denominator, such as, costs incurred or sales effected or assets employed or to be employed. However, the numerator is uniform, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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