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TMI Blog2024 (9) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee's transactions with Non AEs, on the ground that the volume of business with non AEs was too small vis-a-vis business with AEs. As also bearing in mind entirety of the case, the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its transactions with AEs with profit earned wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for our consideration by the appellants, we note that the primary issue pertains to the transfer pricing adjustment as was sought to be made by the Transfer Pricing Officer [ TPO ] and the issue of attribution of profits between the respondent assessee and the foreign Associated Enterprise [ AE ]. 3. The TPO appears to have been influenced by the sheer size of the transaction set which was undertaken between the respondent assessee and its foreign AE. It has, in the aforesaid backdrop, taken the view that internal comparables would not be acceptable. 4. We note, however, that when the matter reached the Income Tax Appellate Tribunal [ ITAT ], it has in its order observed as follows- 8. We have considered the submissions of both the parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. assessee's transactions with independent enterprise), are based on the audited books of accounts or the books of accounts regularly maintained by the assessee. In our considered view, all that is necessary for the purpose of computing arm's length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subject to comparability adjustments affecting net profit margin of uncontrolled transactions, on the same parameters for the transactions with AEs as well as Non AEs, i.e. independent enterprises, and as long as the net profits earned from the controlled transactions are the same or higher than the net profits earned on uncontrolled transactions, no ALP adjustments are warranted. It is not at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated enterprises taking into account the assets used, risk assumed, the contractual terms, the economic circumstances of the parties and the business strategy pursued by the parties. On the question of comparability analysis, the United Nations' Practical Manual on Transfer Pricing in paragraph 5 .1.1 states that the analysis is used to designate two distinct but related analytical steps. First being to understand the economic significant characteristic of the controlled transaction between the two associated enterprises and the respective roles of the parties thereto. This has reference to the 5 characteristics, i.e., (a) characteristic of property or services transferred; (b) functions performed by the parties taking into accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and implies that difference, if any, between controlled and uncontrolled transaction, should not materially affect the conditions being examined given the methodology being adopted for determining the price or the margin. When this is not possible, it should be ascertained whether reasonably accurate adjustments can be made to eliminate the effect of such differences on the price or margin. Thus, identification of the potential comparables is the key to the transfer pricing analysis. As a sequitur, it follows that the choice of the most appropriate method would be dependent upon the availability of potential comparable keeping in mind the comparability analysis including befitting adjustments which may be required. As the degree of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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