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TMI Blog2018 (9) TMI 2015X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate method for computation of ALP. 3. The DRP erred in holding that CPM is the most appropriate method, when the assessee is a full-fledged manufacturer bearing significant risk in which case, TNMM will be the most appropriate method for computation of ALP Trading segment : 4. The DRP erred in rejecting the TNMM and applying RPM as the most appropriate method, when the assessee has performed higher functions such as marketing and business promotion, whose costs had not been included in the cost base for RPM analysis and therefore, TNMM is the most appropriate method for computation of ALP 5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 6. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal." 2. The Assessee has filed cross-objections against the very same order of the AO. The grounds raised in the CO reads thus:- "1. The Ld. TPO/ Ld. DRP has erred in not appreciating that the losses incurred during the year are on account of economic and busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding company AOS Netherlands, and (b) the transaction of trading in water heaters manufactured by the wholly owned holding company were an international transactions and income from such transactions had to pass the ALP test u/s.92(1) of the Act. 6. Sec.92C(1) lays down 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 transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe , namely :- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. Sec.92C(2) lays down that the most appropriate method referred to in subsection (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed as follows:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction [or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. 9. The Assessee filed its Transfer Pricing documentation to support its claim that the price paid in the international transaction was at Arm's Length. As far as the transaction of trading in water heaters by the Assessee after purchase from the AE, the Assessee adopted Resale Price Method (RPM) as the Most Appropriate Method (MAM) for determination of ALP. As far as the transaction of purchase of raw materials from AE is concerned, the Assessee adopted CPM a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Length Cost @P00-5.99=94.01M 319,270,879 Cost involved in international transaction 398,458,438 Adjustment u/s 92CA 79,187,559 Trading Segment: Arithmetic mean PLI : 3.57% on Sales Descriptions Amount Operating Revenue 75,887,398 Arms Length Margin 3.57% on sales Arms Length Cost @1100-3.57=96.43%] 73,178,218 Cost involved in international transaction 89,611,448 Adjustment u/s 92CA 16,433,230 Total Adjustment: Manufacturing Segment 79,187,559 Trading Segment 16,433,230 Total Adjustment 95,620,789 Thus the above shortfall of Rs. 95,620,798/- (Rupees Nine Crores, fifty six Lakhs, Twenty Thousand, Seven Hundred and Eighty Nine Only) is treated as transfer pricing adjustment u/s. 92CA of the Income-tax Act, 1961." 14. Aggrieved by the order of the TPO which was incorporated by the AO in the draft order of assessment, the Assessee preferred objections before the DRP. Before DRP the Assessee submitted that if the adjustments proposed by the TPO is accepted then it will result in very abnormal profit level of the Assessee. The Assessee gave the following details in this regard:- Manufacturing Segment Gross Margin as per TP Documentation Gross mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment level) which result in denial of the entire import, is not a most appropriate method. Therefore, in our view, the objection of the assessee in rejection of the CPM for manufacturing segment and RPM for trading segment is acceptable. In view of the above, we direct the A.O. to compute the ALP by applying CPM for manufacturing segment and RPM for the trading segment by using the data relevant to F.Y. 2010-11 based on the comparables used by the TPO for application of the TNMM in respect of the above two segments." 16. Aggrieved by the order of the DRP as aforesaid, the revenue has preferred the present appeal before the Tribunal. 17. We have heard the rival submissions. The ld. DR submitted that the basis on which the DRP deleted the TP adjustment made by the AO was not correct. In this regard, the ld. DR submitted that the requirement of section 92(1) of the Act for determination of ALP in respect of an international transaction has to be followed and merely for the reason that on such determination, the profit margin of the assessee will be exorbitant cannot be the basis to delete the addition made on account of determination of ALP. His submission that if the DRP finds tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g CPM as MAM cannot be sustained. 20. As far as international transaction of trading in water heaters is concerned, this Tribunal has already taken a view in assessee's own case for AY 2010-11 that RPM is the MAM. Following the aforesaid order, we hold that the TPO is not correct in rejecting the RPM as MAM. 21. As far as determination of ALP for both international transactions are concerned, we are of the view that the provisions of section 92 mandate determination of ALP. The fact that after carrying out such exercise, the profit margins of the assessee would be abnormal cannot be the basis to accept the price paid in the international transactions as at arm's length. In other words, it is mandatory to determine the ALP in the manner contemplated by the Act and the Rules. In our view, the DRP fell into an error in accepting the price received by the assessee in international transactions as at arm's length without carrying out such an exercise. We therefore feel it proper to set aside the order of DRP and remand to the AO/TPO for fresh consideration the determination of ALP on the basis of MAM as adopted by the assessee in its TP study. 22. The ld. counsel for the assessee sub ..... X X X X Extracts X X X X X X X X Extracts X X X X
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