TMI Blog2011 (5) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible with the others who are dealing in the similar activity not following such method - Thus, the AO has rightly rejected the method of working out profit margin by the assessee." The decision of the Hon'ble Delhi High Court in the case of Vodafone Essar Ltd. as well as that of the coordinate bench of this Tribunal in the case of Gap International Sourcing India (P.) Ltd. and having regard to the fact that the DRP has passed the order giving directions to the AO under section 144C without giving proper consideration to the elaborate submissions made on behalf of the assessee on the main preliminary issue - Hence, set aside the said order and remit the matter to the file of the DRP with a direction to consider the objections of the assessee on this issue as well as the other issues once again and pass a proper and speaking order giving direction u/s 144C. - IT APPEAL NO. 7361 (MUM.) OF 2010 - - - Dated:- 18-5-2011 - P.M. JAGTAP, V. DURGA RAO, JJ. Rahul Mitra and Kanchan Kaushal for the Appellant. Narendra Singh for the Respondent. ORDER P.M. Jagtap, Accountant Member. ‑ This appeal filed by the assessee is directed against the order of Dy. Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the AO vide an order dated 5-8-2010 passed under section 144C(5). Accordingly, assessment order under section 143(3) read with section 144C was passed by the AO making addition on account of TP adjustment of Rs. 25,21,77,854. Aggrieved by the said order, the assessee has preferred this appeal before the Tribunal. 4. Although several grounds are raised by the assessee in this appeal, the learned counsel for the assessee has submitted that the main preliminary issue involved in this case is raised in ground No. 2.4 which reads as under : "The Ld. DRP has grossly erred in agreeing with the Ld. Transfer Pricing Officer's (TPO) action of failing to appreciate the economic rationale of using "Operating Profit/Value Added Expenses" as the Profit Level Indicator ('PLI'), and instead using "Operating Profit/Total Cost" as the PLI. The said approach is not in accordance with section 92 of the Act read with Rule 10B(1)(e) of the Rules, and the OECD TP Guidelines." 5. The learned counsel for the assessee submitted that the main preliminary issue involved in ground No. 2.4 relates to the determination of proper and appropriate "price level indicator" that is to be applied in the facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons) separately since a logistics service provider's efficiency can be measured by the adequacy of the gross margin (Service income less direct third party costs) over value adding expenses. However the return on total costs does not measure this efficiency as it disregards the composition of costs. It effectively assumes a common markup on all costs including direct costs, which may differ from time to time depending on the volume of business. This will present a skewed picture of the Appellant's profitability and therefore cannot be considered as an appropriate PLI. [Please refer Page No. 271 of the paper book for the analysis of the direct costs and total costs]. The return on value-adding expenses is an appropriate measure for companies where the cost of service inputs obtained from third parties is significant (however, little or no value is added by the company in respect of such inputs-as is the case of the Appellant). A variation in value-adding expenses reflects different levels of operating capacity employed by the Appellant to arrange/coordinate the services of third parties. Therefore, this measure can be thought of as an approach to account for differences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such a case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable date being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. For example, an associated enterprise may incur the costs of renting advertising space on behalf of group members costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass on these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function." The facts of the Appellant are similar. To illustrate this point, when the assessee delivers goods by air for a customer, it contracts with the custo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VAE is merely an alternative way to conceptualise the Berry Ratio. The Appellant would also like to draw your kind attention to the relevant extract of the revised OECD Guidelines wherein the concept of Berry Ratio has been deliberated: 2.100 "Berry ratios" are defined as ratios of gross profit to operating expenses. Interest and extraneous income are generally excluded from the gross profit determination; depreciation and amortization may or may not be included in the operating expenses, depending in particular on the possible uncertainties they can create in relation to valuation and comparability. 2.101 The selection of the appropriate financial indicator depends on the facts and circumstances of the case. In order for a Berry ratio to be appropriate to test the remuneration of a controlled transaction (e.g. consisting in the distributor of products), it is necessary that: The value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is proportional to the operating expenses. The value of the functions performed in the controlled transaction (taking account of assets used and risks assumed) is not mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... international transactions undertaken by the Company during the year. 6. The learned DR, on the other hand, mainly relied on the order passed by the DRP overruling the objections raised by the assessee in this regard and upholding the action of the AO in adopting the OP/TC as the correct and appropriate price level indicator. The relevant portion of the order of the DRP dealing with this issue, as relied upon by the learned DR, is reproduced hereunder : "The assessee has objected to the AO's method, on the ground that there is no element of profit in the freight. The DRP does not agree with the view of the assessee, because for working out proper margins, the gross receipts and the gross expenses are the proper figures and there is no provision for excluding any item of expenses or receipt from the gross sales or gross expenses on the ground that such receipts or expenses does not represent any element of profit. There is no provision for segregating the accounts for excluding such items because it will give distorted picture and comparison will not be possible with the others who are dealing in the similar activity not following such method. Thus, the AO has rightly rejected t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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