INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Value of international transactional vis-a-vis entire turnover of assessee--Assessee was a member of 'T' a business segment of a Germany-company. In TP study, assessee had bench marked its transactions with AEs, using TNMM method at entity level on 9 comparables which earned a mean profit margin of 4.12 per cent, as against its margin of 5.19 per cent. Assessing officer referred matter to TPO. TPO arrived at revised mean margin of 6.29 and made adjustment on entire turnover of assessee's entity as whole. Held: Not justified. TPO was not justified in making adjustment on entire turnover of entity and it would be restricted to AE transactions only.

There is no dispute with reference to applying TNMM method and assessee, being a tested party, applying the profit margin on the operating expenses at the entity level. On various propositions made by the counsel, Tribunal agrees with the argument that the adjustments are to be restricted to international transactions alone and cannot be applied to the entire turnover of the company. On the facts of the case, assessee's transactions with third parties constitute more than 95% and with AEs less than 5%. Therefore, adjustment made by the TPO on the entire turnover of the entity without restricting to the international transactions is not correct according to facts and law. [Para 13] Whatever be the method followed or adopted for arriving at the ALP, the ALP can only be determined on the value of international transactions alone and not on the entire turnover of assessee at entity level. If this sort of adjustment is permitted, this will result in increasing the profit of assessee on the entire non-AE transactions also, which is not according to the provisions of Transfer Pricing mandated by the Act. In view of this, the action of the TPO supported by the DRP in making the adjustment of Rs. 9,67,80,000 is not correct. This should be restricted to the AE transactions only. As rightly pointed out, the finally comparables margin on the updated data arrived at by the TPO was 6.29% as against assessee's margin of 5.19%. Therefore, the addition on margin of 1.10% can only be determined on the AE transactions. [Para 15] The variation between the arm's length price for AE transaction, i.e., Rs. 35.10 crores and the value of international transaction i.e. Rs. 35.50 crores does not exceed 5% of the former and is within the range. Accordingly, assessee has after exercising its option as per the proviso to section 92C(2) complies with the arm's length standard required by the Transfer Pricing Regulations. [Para 16] Since the ALP determined at Rs. 35.10 crores is within the + 5% range of the AE transactions of Rs. 35.5 crores, there is no need for any adjustment to be made on the said transactions. In view of this, the adjustment proposed at Rs. 9,67,80,000 requires to be cancelled. [Para 17]