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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 ..... n declaring Nil income. Three international transactions, viz., Purchase of material worth Rs. 6,78,21,310; Royalty paid for providing technical know-how worth Rs. 35,88,664; and Technical fee paid for providing technical assistance worth Rs. 10,96,337, were reported. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of these international transactions. The TPO disputed only the international transaction of 'Purchase of material' by the assessee from its Associated Enterprise (AE), F- Tech, Japan. The other two international transactions were impliedly accepted at arm's length price (ALP). The assessee did not apply any prescribed method for demonstrating that the international transaction of `Purchase of materials' was at ALP. As a matter of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO holding that the purchases from AE were inflated by a sum of Rs. 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 available is to use the information pertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count 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 international transaction or class of transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 381 ITR 413 (Bom) and CIT vs. Tara Jewels Exports P. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tray 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 Rs. 23.71 crore. The next figure is Job work amounting to Rs. 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 Rs. 22.25 crore and that of Job work at Rs. 82.91 lac. Thus, it is manifest that as again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terprise 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, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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