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2016 (3) TMI 815 - AT - Income TaxTransfer pricing adjustment - whether the international transaction undertaken by the assessee were at Arm’s Length as against the adjustment made by the AO? - adoption of PLI under the TNMM challenged - correctness of the ALP of the international transactions undertaken by the assessee under both the business models of `Indenting’ as well as 'Trading' - Held that:- We have noticed that operating costs of a `Commission agent’ are always exclusive of cost of goods sold, whereas a `Trader’ has to have it as an essential element. Albeit a `Trader’ can ascertain his operating profit margin as a percentage of VAE to be designated as `any other base’, but in our considered opinion that can not be described as a 'relevant’ base, so as to fall within the ambit of the expression 'any other relevant base’ as used in sub-clauses (i) and (ii) of rule 10B(1)(e). The corollary, which ergo follows, is that whereas `any other relevant base’ under the TNMM in case of a `Commission agent’ can be `Value added expenses’, which, in fact, represents his total operating costs alone, but in case of a `Trader’, it can be cost of goods sold plus other operating expenses, which represents his total operating costs and not `Value added expenses’ to the exclusion of cost of goods sold. We, therefore, set aside the impugned order in comparing OP/VAE of the assessee on combined transactions under both the models with OP/OC of the comparables. Having disapproved the view taken by the ld. CIT(A), we need to judge the correctness of the ALP of the international transactions undertaken by the assessee under both the business models of `Indenting’ as well as `Trading’, which are obviously distinct from each other. It can be seen that the assessee tried to demonstrate that its combined international transactions under both the models were at ALP by comparing its PLI of OP/VAE with OP/OC of comparables, which is an incorrect approach. In the like manner, the TPO, though compared the assessee’s PLI of OP/VAE with OP/VAE of the comparables, but he also fell in error by jointly considering the international transactions of both the business models, namely, Indenting and Trading, under one umbrella. We thus hold that both the assessee as well as the TPO fell in error in considering the international transactions under both the models as of uniform character. It has been noticed supra that the ingredients of Operating costs under the Trading model are different from those under Indenting model. Ex consequenti, transactions under both the models are required to be benchmarked separately. We find that there is insufficient information available on record facilitating the determination of ALP of the international transactions under these two business models separately. We, therefore, set aside the impugned order and remit the matter to the file of AO/TPO for processing the international transactions of `Indenting’ and `Trading’ separately under Chapter X of the Act in consonance with our above analysis. Needless to say, the assessee will be allowed an adequate opportunity of hearing in such a de novo determination. - Decided in favour of revenue for statistical purposes.
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