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2010 (2) TMI 1270

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..... erred in deleting the Addition of ₹ 2,57,26,138/- made by the T.P.O to the value of international transaction undertaken by the assessee, without appreciating the facts of the case. 3. After hearing both the parties we find that the reference for computation of Arms Length Price in relation to international transaction which were listed in the detailed audit report was made by JCIT (OSD) Range 8(3) Mumbai to ACIT Transfer Pricing- III,Mumbai. A notice under section 92CA(2) along with a questionnaire was issued by Transfer Pricing Officer. It was found that assessee was located at SEEPZ, SEZ and, hence, enjoyed 100% tax holiday under section 10A of the Act. It was further found that assessee was engaged in the business of sale of finished jewellery to its Associate Enterprises and Non-Associate Enterprises. The assessee had considered the Cost Plus method as most appropriate method. As per the workings given by the assessee it was earning G.P margin of 16.95% in the transactions with unrelated parties as against 19.37% from the related parties. In view of this it was claimed that the transactions with related parties were made at Arms Length Price. 4. It w .....

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..... the above notice assessee again provided the GP calculation and contended that cost plus method is the most appropriate method. It was also argued that the assessee was maintaining detailed cost data and the same was recorded on the ERP system and thus G.P margin provided by the assessee was accurate. The TPO examined the data and rejected the same because detailed calculations were not furnished. In this background the adjustment to be made in respect of Arm s Length Price in case of transaction with the Associated Enterprises and was worked out as under: Particulars Assessee Arms Length Margin @ 7.25% Sales Controlled 25,02,43,313 Uncontrolled 64,49,57,996 89,52,01,309 92,09,27,446 Purchase cost 81,32,15,805 Direct Cost .....

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..... 61,18,362 7. This application was rejected by making reference to the original order and observing that TPO has correctly followed the procedure for making the said adjustment. 8. Thereafter an appeal was filed against the rejection of application under section 154. Before ld. CIT(A) it was mainly contended that TPO has applied 7.25% margin on total cost of ₹ 85,86,73,610/- and arrived at Arm s Length Price at ₹ 92,09,27,446/-. This means 7.25% margin has been calculated on the total cost which is not permissible under the Act. It was further submitted that at best the adjustment could be made at ₹ 61,18,362/- and the calculation for the same was again furnished. Alternatively it was argued that if break-up of cost between controlled sales and uncontrolled sales was not available with the TPO at the time of assessment and he wished to apply 7.25% margin on controlled sales and assuming the cost is equal to sale and the assessee has not made any profit even then the addition on account of transfer pricing could have been made at ₹ 1,81,42,640/- and, therefore, in any case ad .....

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..... ). As the assessee company s value of controlled sales is above the arm s length price calculated above no adjustments is necessary to the transactions undertaken by the assessee. 9. The ld. CIT(A) after considering the submissions observed that TPO has definitely made excessive adjustment because 7.25% profit was applied to the total cost in respect of related and unrelated parties. The ld. CIT(A) accepted the calculation given by the assessee and allowed the appeal and observed vide para 2.7 , 2.8 and 2.9 as under:- 2.7 From the above chart and discussion it is seen that the T.P.O has applied 7.25% profit margin to total cost and then from the total sales so determined, the sales to third parties have been excluded to arrive at the arms length sales to AEs. However, as per section 92C(3), the A.O/T.P.O are supposed to determine the arms length price in relation to the international transactions (with the AEs) only and not with the third parties also. By applying the profit margin to total cost, the T.P.O., in effect has applied the provisions of transfer pricing to all the transactions including those with the third parties. However, the excess sale price so .....

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..... nd submitted that no basis has been given for distribution of purchase cost and direct cost by the assessee and, therefore, ld. CIT(A) should not have followed those figures. 11. On the other hand, ld. counsel for the assessee admitted that assessee had not challenged the original assessment order by way of appeal because the assessee had accepted the adoption of TNMM. The assessee had also admitted the 7.25% rate of margin. However, while disputing the cost etc. some minor differences have arisen and they are because involvement of interest because only operating profits were calculated by the TPO. In this regard he referred to page 2 of the original order passed under section 92CA(3) and pointed out that at the heading of the chart the TPO has mentioned OP/TC% . This clearly shows that TPO has only considered operating margin. He also reiterated the submissions made before lower authorities that adjustment has been made on the total sales which is not possible. He argued that, therefore, there was definitely an error in the order of TPO and same has been correctly held to be rectifiable by ld. CIT(A) and accordingly he strongly supported the order of the first appellat .....

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