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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 ..... eclaring Nil income. Certain international transactions were reported. The Assessing Officer (AO) referred the matter of determination of the arm's length price (ALP) of the reported international transactions to the Transfer Pricing Officer (TPO). The TPO observed that the assessee declared an international transaction of `Purchase of raw material and components' with a transacted value of Rs. 5,77,65,870/- apart from `Purchase of Machinery/Spare etc.' worth Rs. 55,99,020/-. There were other two international transactions of Reimbursement of tax paid and other expenses, which were not disputed. The assessee applied Transactional Net Margin Method (TNMM) to demonstrate that its two international transactions of `Purchase of raw material and components' and `Purchase of machinery/spares etc.' were at ALP. The assessee selected certain comparable companies which were rejected by the TPO as functionally dissimilar. He, then, shortlisted two companies as comparable, viz., M/s Remsons Industries Ltd. and Suprajit Engineering Ltd., with average profit margin of 7.74%. The TPO determined the ALP of `Raw material purchased from AE' at Rs. 4,65,32,510/- as against the declared value of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the assessee, which include not only transactions of import of raw material from AEs, but also domestic purchase/import from non-AEs. The ld. CIT(A), by means of his calculation tabulated below, restricted the amount of addition to the AE transactions, against which the Revenue is in appeal. 6. The moot question in the Revenue's appeal is if a transfer pricing adjustment can be made in respect of non-AEs transactions? Section 92 is a substantive provision in this regard. Sub-section (1) of sec. 92 provides that ; `Any income arising from an international transaction shall be computed having regard to the arm's length price.' The term "international transaction" has been defined u/s 92B to mean: "a transaction between two or more associated enterprises,.......". A conjoint reading of section 92 with section 92B clearly brings out that computation of income at ALP is permissible only in respect of international transaction, which, in turn, means a transaction between two or more associated enterprises. Similar position has been reiterated in the machinery provision contained in section 92C dealing with the manner of computation of ALP. Sub-section (1) of section 92C stipulates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Purchase of Machinery/spares etc. Rs. 31.17 crore is the Total cost of operation as per 'C' in the table. In our considered opinion, the ld. CIT(A) went wrong in adopting these two figures. He undertook this calculation for segregating profit from the AE transaction of Purchase of raw material and components from the overall operating profit of the assessee. We have noted above that the TPO proposed transfer pricing adjustment only w.r.t. the international transaction of `Purchase of raw material and components' and not the other international transaction of `Purchase of machinery/spares etc.'. No bifurcation is available of the transaction of purchase of machinery and spares etc. Obviously, purchase of machinery cannot directly affect the operating profit except through the amount of depreciation on ALP of purchase price of the machinery, which has not been determined by the TPO or the ld. CIT(A). The other component of this international transaction, being the purchase of spares etc., has been taken by the TPO at ALP. This 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 apportio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... readily available with the ld. AR, we, therefore, set aside the impugned order and remit the matter to the file of AO/TPO for doing the needful in above terms. Needless to say, the assessee will be given an adequate opportunity of hearing in doing the above exercise. 10. This brings us to the assessee's grievance about the non-granting of +/- 5% adjustment which the ld. CIT(A) did not allow without assigning any reason. 11. Section 92(1) provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92B(1) defines "international transaction" to mean ".....a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.......". Section 92C dealing with the computation of 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 metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hmetical mean brings the focus back to the price. Thus the prescription of this proviso makes it clear that the plus minus five percent is on the price and not on the profit embedded in such price. 14. The conclusion that plus minus 5% should be applied to the price of purchase or sale or services etc. instead of income component in such price is fortified from the mandate of the methods for determination of arm's length price. Section 92C(1) gives five specific methods for computing arm's length price. Rule 10B deals with the determination of arm's length price under such methods. First is Comparable uncontrolled price (CUP) method, under which the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction is first identified. After making certain adjustments to make it compatible with the international transaction, the adjusted price is taken as arm's length price in respect of property transferred or services provided in the international 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 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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