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As regards the data used by the TPO while determining the ALP, we find that it is to be as per the provisions of section 92D of the Act that every person who has entered into international transactions is required to maintain information and documentation thereof. Rule 10B(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the “specified date” referred to in section 92F(4) which has the same meaning as ‘due date’ in Explanation 2 to section 139(1) of the Act. In the assessee’s case, this would be ’30th day of September’ as it is a company.
In the present case, as we have noted earlier, it is only on account of the manufacturing activity that the activity of commissioning and installation of the equipment arises and pertinently all the aforesaid activities are negotiated and contracted for at one instance.
(d) Companies having super normal profit may have to be examined further to determine the reason for the extra ordinary profits. (e) Companies whose employee or directors are involved in fraud should not be accepted as the financial results are not reliable. (f) Companies having the turnover of less than Rs. one crore or more than Rs.200 crores should not be taken as comparables.
Transfer pricing adjustment in relation to advertisement, marketing and sales promotion expenses incurred by the assessee for creating or improving the marketing intangible for and on behalf of the foreign Associated Enterprises is permissible.
It is seen that the assessee has itself accepted that TNMM is similar to CPM excepting that CPM is based on gross margins whereas TNMM is based on net margins. The assessee has also accepted that if proper selection criteria are adhered to application of TNMM would also result in the fact that the price at which the assessee has undertaken the international transactions are at arm’s length.
TPO has not assigned any valid reason for rejecting the method adopted by the assessee for the determination of ALP with its transaction with ODSI. Where an assessee has followed one of standard methods of determining ALP, such a method cannot be discarded in preference over transactional profit methods,
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.
