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The allowance of any expenditure arising from an international transaction shall also be determined having regard to the ALP. However, in the instant case the assessee has not claimed the expenditure of Rs. 7,42,20,575/- during the impugned assessment year and has itself disallowed the same while computing its taxable income. Therefore, we agree with the submission of the learned counsel for the assessee that the provisions of section 92 are not applicable.
In our opinion, the exercise of ascertaining ALPs has to be done by the TPO keeping in view the well laid down scheme in the relevant provisions of the Act and addition, if any, on account of TP adjustment, has to be made only after doing such exercise. We, therefore, restore this issue to the file of the AO/TPO with a direction to do such exercise and make addition, if any, on this issue after completing such exercise in accordance with law.
The TPO while rejecting the idle capacity, however, did not discuss anything about the arms length margin fixed at 11.96 per cent. This indicates that assessee’s TP study has not been considered by the TPO. The assessee has selected ten comparable companies and summary of net cost + margin varies from -6.04 per cent to 19.06 per cent.
The Explanation to section 92(1) of the Act clarifies that the allowance for any expense or interest arising from an international transaction shall also be determined having regard to the ALP and therefore the disallowance is made under section 92(1) and not under section 40A(2) of the Act.
As seen from the provisions, the CIT has no jurisdiction over the TPO administratively and therefore, the CIT could not have revised the order under section 92C(3) passed by the TPO.
Coming to the applicability of most appropriate method, both the parties have agreed that TNMM Method should be most appropriate method for benchmarking the ALP. The contention of learned CITDR is that before the TPO, even though this plea of applicability of TNMM Method was taken by the assessee by way of corroborated method, has neither considered the same nor examined it properly.
Where neither the TPO nor the DRP have found any fault with audited segmental accounts, the Departmental Representative cannot Canvass rejection of the same before the ITAT on the ground that the same one not prepared or audited as per ICAI guidelines.
The assessee in this case has used multiple year data in computing the arm’s length price. The TPO, the Assessing Officer as well as the Commissioner of Income Tax (Appeals) have held that, such action by the assessee is contrary to the provisions of the Income Tax Act, 1961 and thus it tantamounts to furnishing of inaccurate particulars of income.
Working given by the TPO shows that it is earning 7% commission, whereas as per the industry policy as decided by the AAAI the service on media agency earns commission of 2.5%. On that reason also, since it is an extreme case of earning 7% commission (in our view it is wrongly considered), on the principles that the extreme profit companies are to be excluded, this company cannot be considered as comparable for the purpose of arriving at the average mean.
It was held that :- (a) Companies with extra-ordinary circumstances, like those which suffered events like merger/de-merger, impacting the financial results, could not be treated as comparables. (b) Companies having supernormal profit cannot be considered as comparable; (c) Companies which are functionally dissimilar cannot be taken as comparables. (d) Companies acting merely as intermediary having outsourced its activity cannot be considered as comparable.
