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TMI Blog2017 (7) TMI 806X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale value of ₹ 100 is ₹ 4 or ₹ 8 or ₹ 10, it is, in fact, the comparison of the price charged or paid for property transferred which is the subject matter of proviso to section 92C(2). Thus it can be seen that the plus minus 5% is required on the value of international transaction, being the purchase price in the instant case and not on the profit element in such transactions. We, therefore, direct that +-5% should be given effect in the calculation of the transfer pricing adjustment from the international transaction, if any. It is however, clarified, that this +-5% is not a standard deduction. This benefit is to be given only if the ALP falls within +-5% range of the price and not otherwise. - ITA No.2036/Del/2014 And ITA No.1849/Del/2014 - - - Dated:- 3-3-2017 - SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The Assessee : Shri Rajan Sachdev, CA Shri Varun Khanna, CA For The Department : Shri B. Ramanjaneyulu, Sr. DR ORDER PER R.S. SYAL, AM: These two cross appeals one by the assessee and the other by the Revenue are directed against the order passed by the CIT(A) on 16.01.2014 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... propose any transfer pricing adjustment for the international transaction of `Purchase of machinery/stores etc. . He proposed transfer pricing adjustment only in respect of the international transaction of `Purchase of raw material and components amounting to ₹ 5,77,65,870, which is discernible from his calculation as under : - Determination of Arm s Length Pric e: Operating Income of the Assessee 325,720,182 Operating Profit shown @ 4.29% 1,39,77,382 Operating Profit @ 7.74% Difference 2,52,10,742 Book value of raw material purchased from AE 5,77,65,870 ALP of raw material purchased from AE 4,65,32,510 5. It can be seen from the above working that the TPO started with the Operating income of the assessee at ₹ 32.57 crore, which is the amount of Gross receipts as per the assessee s Profit Loss Account, whose relevant part has been reproduced at page 6 of his order. Thereafter, Operating profit has been taken at ₹ 1.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e arising from non- AE transactions can be computed having regard to its ALP. In fact, price/profit from comparable transactions of the assessee with non-AEs, is one of the subtle and most reliable modes for determining ALP of the international transactions. Thus, it boils down that the Act does not contemplate an addition by way of transfer pricing adjustment in respect of transactions with non-AEs. As the TPO ventured to make a composite addition and the ld. CIT(A) restricted it to the transactions with AEs, we uphold, in principle, the view point of the ld. CIT(A). Our view is fortified by the judgment rendered by the Hon ble jurisdictional High Court in the case of CIT vs. Keihin Panalfa Ltd., (2016) 381 ITR 407 (Del) . 7. Now comes the manner of allowing relief by the ld. CIT(A) on merits. The ld. CIT(A) restricted the amount of transfer pricing addition to transactions with AEs in the following manner : - Particulars Formula Value (in INR Crs.) Operating Income of the Appellant A 32.57 Cost of imported raw material spares consumed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is shows that we need to work out the profit from the international transaction of `Purchase of raw material and components alone. This can be done by apportioning the total operating profit in the ratio of `utilized raw material purchased from the AEs (i.e. Opening stock of raw material purchased from the AEs + Purchases of raw material from the AEs Closing stock of raw material out of the above transactions with AEs) and `utilized raw material purchased from non-AEs (i.e. Opening stock of raw material purchased from non-AEs + Purchases of raw material from non-AEs Closing stock of raw material out of the above transactions with non-AEs). Or alternatively, the share of operating profit from the `utilized raw material purchased from the AEs can be deduced from the total amount of operating profit by dividing the amount of `utilized raw material purchased from the AEs with the overall amount of `utilized raw material purchased from the AEs and non-AEs . 9. When we advert to the calculation of the ld. CIT(A), it can be seen that he has taken ₹ 6.31 crore as numerator, which is the value of both the international transactions of `Purchase transaction of raw material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f arm s length price provides through sub-section (1) that : The arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transactions or class of transaction or class of associated persons . . When we read the above discussed three provisions, it clearly emerges that firstly, there should be an international transaction; secondly, there should be income arising from such international transaction; and thirdly, such income should be computed having regard to the arm s length price. What we compute is income and the base from which such income is computed, is an international transaction, which can be in the nature of purchase or sale or provision of services etc. With this background in mind, let us have a look at proviso to section 92C(2) at the material time, which reads as under:- Provided that where more than one price is determined by the most appropriate method, the arm s length price shall be taken to be the arithmetical mean of such prices , or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transaction. Thus it can be noticed that what is determined under this method is the price. When we refer to plus minus 5% of the value determined under this method as per proviso to section 92C(2), it inevitably refers to the figure determined under this method, which is price and not profit embedded in the price. For example, if an assessee has sold goods to its AE worth ₹ 100 and the ALP in respect of such goods sold under CUP method is say ₹ 103 or ₹ 98, then no adjustment is required because it is within 5% of ₹ 100, being the price at which goods were sold to associated enterprises in the international transaction. Irrespective of the fact whether the profit component in the sale value of ₹ 100 is ₹ 4 or ₹ 8 or ₹ 10, it is, in fact, the comparison of the price charged or paid for property transferred which is the subject matter of proviso to section 92C(2). Thus it can be seen that the plus minus 5% is required on the value of international transaction, being the purchase price in the instant case and not on the profit element in such transactions. We, therefore, direct that +-5% should be given effect in the calculation o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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