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TMI Blog2021 (2) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... AO. Succinctly, the factual matrix of the case is that the assessee is engaged in providing lighting solutions to the automotive industry, i.e. two wheelers and commercial vehicles. Return of income was filed declaring total income at Nil. Thirteen international transactions were reported in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. The assessee applied a combined Transactional Net margin method (TNMM) as the most appropriate method in respect of eight transactions. The TPO did not dispute the correctness of the method and restricted himself only to the five international transactions under the `Manufacturing Activity' for ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Import of components for manufacture, wiring harness, plastic and related - Rs. 1,14,74,722/-; Sale of Finished goods - Rs. 9,37,66,308/-; Royalty charges - Rs. 11,56,48,118/-; Consulting services - Rs. 1,43,88,579/-; and Designing & Product Development Charges - Rs. 10,88,47,390/-. He computed 2.40% as arm's length margin (OP/OR) of the comparables and then proposed the transfer pricing adjustment of Rs. 13.10 crore in para 12.1 of his order in the following manner: As per Assessee As per ALP Particulars Amount (Rs. Particulars Amount (Rs. Operating Income 3266594915 Operating Income 3266594915 Operating Cost 3319246999 Operating Cost 3188196637 Operating Profit (52652084) Operating Profit 78398278 PLI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct Development Charges at Rs. 10.88 crore is a part of Rs. 15.02 crore. This was attempted to be demonstrated with the help of Note No.34 to the Financial statements, a copy given at page 120 of the paper book, where a sum of Rs. 10,88,47,390/- has been shown as "Design Charges" (Intangible Assets). This figure of Rs. 10.88 crore in the Notes to Financial statements matches with the figure of international transaction of Design and Product Development Charges. However, it is not clear as to whether or not the value of international transaction of Rs. 10.88 crore is a part of figure of Rs. 15.02 crore shown under the head "Intangible Assets" in Schedule to the Fixed Assets. The AO/TPO is hereby directed to ascertain the correctness of the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue and expense items, the transfer pricing adjustment can be made by considering either the expense items, such as import of material, other operating costs, cost of services availed on one hand or the revenue items such as sales, consideration for services rendered on the other. Normally, when the expense items are taken up for benchmarking under the TNMM, then PLI of (OP)/(OR) of the comparables is adopted. Such PLI is applied to the Operating revenue of the assessee to find out the ALP of the costs, which is then compared with the actual costs incurred to the AE for ascertaining if any transfer pricing addition is warranted. Per contra, if the international transactions of revenue nature are to be benchmarked, then normally PLI of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vides that: `Any income arising from an international transaction shall be computed having regard to the arm's length price'. Thus it is graphically clear that the ALP and the consequential transfer pricing adjustment are contemplated only in respect of the international transactions and not the entity level transactions. The TPO, in the instant case computed transfer pricing adjustment in respect of entity level transactions and then forgot to restrict it to the international transactions. We have noted above that in a case of combined TNMM, when there are international transactions of the income as well as expenses nature, the transfer pricing adjustment can be made only by considering either the expenses or the incomes. Out of the balanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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