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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 ..... sfer pricing addition made by the AO, cannot be sustained. 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, 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 St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact, no method 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 Components 90.22 8.65 JMT Auto 98.16 11.57 Goetze India 511.7 32.5 Amtek India 347.27 58.19 Pricol 448.97 62.25 ANG Auto Limited 13.88 0. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 available is to use the information pertaining to functionally comparable companies. Thereafter, a few companies have been discussed in certain paras and it has been mentioned at the end of each such para that the company discussed herein is functionally different. This report ends on page 31 with the narration : "Thus in the circumstances, there is no other option, but, to accept the book value of these international transactions entered by the company at (sic as) arm's length price." 7. At this juncture, it is pertinent to note that section 92D provides for maintenance and keeping of information and document by persons entering into an international transaction. Sub-section (1) of this section states that : `Every person who has entered into an international transaction shall keep and maintain such information a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alk 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 international transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case', the assessee has merely said that no method is applicable. In view of the above position, the assessee cannot be said to have maintained `a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction' or `a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any.' Thus, it is unambiguous that the assessee did not undertake any transfer pricing analysis in the manner prescribed. In s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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) 381 ITR 413 (Bom) and CIT vs. Tara Jewels Exports P. Ltd. (2016) 381 ITR 404 (Bom). 14. However, we find that the recording by the ld. CIT(A) that the TPO made transfer pricing adjustment on entity level, is factually incorrect. It can be seen that the TPO first computed the assessee's net profit margin at 4.25%. He then determined the arm's length margin of comparables at 9.87%, which was then applied to the entity level figure of Sale of automobile parts and Job work totaling ₹ 24.68 crore. The amount of arm's length margin so determined at ₹ 2.43 crore, as being reduced by the assessee's own profit margin at ₹ 40.57 lac, was apportioned between the international transaction of purchase of material from AEs and total raw material purchased from AEs and non- AEs. Transfer pricing addition has been made only f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of excise duty) at ₹ 22.25 crore and that of Job work at ₹ 82.91 lac. Thus, it is manifest that as against the total Job work receipts of ₹ 97.49 lac, the Job work receipts pertaining to Unit-2 stand at ₹ 82.91 lac. This implies that the remaining Job work receipts of ₹ 14.58 lac (Rs.97.49 lac minus ₹ 82.91) are in relation to Unit-1. Ergo, it is apparent that the recording by the ld. CIT(A), as also initially argued by the ld. AR, that Unit-2 deals only with Manufacturing and sale of automobile components, is factually incorrect as it also has Job work receipts. 19. It can be seen that the ld. CIT(A) has proceeded on the premise that all the imports from AE were utilized only in the manufacturing of Unit-2. That is why, he focused on PLI from Unit-2 at 5.34%. As against this, the TPO has proceeded with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 separate books of accounts & no adverse finding in respect of the same has been recorded by TPO/AO, comes to 5.34%; (b) That after eliminating the difference on account of depreciation of ED plant capitalized during the year (exclusively required for earning revenue from job work), the net profit margin of unit-2 comes to 7.03%; (c) That the net profit margin of Companies which are having comparable turnover with the assessee company are just 5.07%; (d) On the basis of search made by me independently & as per the financial statement of assessee's associated enterprise M/s F. Tech Inc. as at 31.03.05, its net profit margin being just 2.40%, and thus, the NP of assessee being better than that of its AE; (e) And the fact that adjustments were not made by TPO as per transfer pricing regulations. I conclude that there appears to be no reasons for making any adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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) 162 Taxmann 165 (SC) has held that `operating profit' from the international transaction is compared with the operating profit margin of the comparables under the TNMM. Thus the addition based on the transfer pricing adjustment, on the strength of `net profit' as numerator in contrast to `operating profit', cannot be upheld. The same is required to be corrected accordingly. 28. It is further noticed that the TPO considered seven companies as comparables on the basis of his deci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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