Sara Sae Pvt. Ltd. Vs ACIT (ITAT Delhi)
The Delhi ITAT partly allowed the assessee’s appeal against the assessment framed under Section 143(3) read with Sections 144C and 92CA(3) for AY 2013-14. The principal dispute concerned a transfer pricing adjustment of ₹3.65 crore relating to the sale of finished goods by the assessee’s Commodity Division to its associated enterprise in the USA. The assessee had benchmarked the transaction under the Transactional Net Margin Method (TNMM) using the operating profit to operating cost (OP/OC) ratio and claimed that the transaction was at arm’s length.
The Tribunal first considered whether foreign exchange gain of ₹2.38 crore formed part of operating income. The Transfer Pricing Officer (TPO) had excluded it as a non-operating item while computing the operating margin. Relying on earlier Tribunal decisions, the ITAT held that foreign exchange gain arising from regular business activities is an operating item and directed that it be included while determining the operating margin.
The Tribunal next examined the allocation of common expenses between the Delhi and Dehradun offices. The assessee had consistently allocated common expenses based on the profit of the respective divisions, whereas the TPO reallocated them according to turnover, reducing the assessee’s operating margin and leading to the transfer pricing adjustment. The ITAT noted that in earlier assessment years the Revenue had accepted allocation based on profits and that there was no change in facts during the year under consideration. Referring to judicial precedent, the Tribunal held that allocation based on gross profit margins, rather than turnover, was the appropriate method and directed the TPO to recompute the operating margin accordingly.
