(292.3 KiB, 955 DLs)

Transfer Pricing TNMM must be applied to transaction margins and not to enterprise level margins. Adjustments must be confined to international transactions

The assessee, engaged in the business of manufacture and export of diamonds and jewellery, claimed that having regard to the nature of the product, none of the transfer pricing methods were applicable for benchmarking the international transactions with associated enterprises. The TPO rejected the argument on the ground that the Transactional Net Margin Method (TNMM) was applicable and made an adjustment by comparing the enterprise level operating margins. This was upheld in principle by the CIT(A). On appeal to the Tribunal, HELD:

(i) It is mandatory for an assessee to follow one of the methods prescribed in Rule 10B and demonstrate that the international transactions entered into by it with an associated enterprise are at arms’ length. The argument that no method is applicable is unsustainable;

(ii) However, the TPO is wrong in adopting the enterprise level margins as the TNMM. U/s 92F (ii) r.w.s. 10B(e), TNMM requires comparison of net profit margins realized by an enterprise from an international transaction(s) and not comparison of operating margins of enterprises;

(iii) Further, the adjustments arising due to computation of ALP should be restricted only to the international transactions and not to the entire turnover of the assessee. No addition can be made to local transactions under Chapter X of the Act.