TMI Blog2016 (7) TMI 661X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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. 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 on overall basis with OP/OC of comparables, which is an incorrect approach. In the like manner, the TPO, though compared the assessee’s PLI of OP/OC with OP/OC of the comparables, but he also fell in error by jointly considering the international transactions of both the business models, namely, Indenting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction of Facilitation of sales of Agilent products in India with transacted value of ₹ 37,16,57,393/-. The assessee used the Transactional Net Margin Method (TNMM) as the most appropriate method with Profit level indicator (PLI) of Operating profit/Value Added Expenses (OP/VAE) at 15.23%. Five comparables were chosen with their weighted average margin of profit of three years at 5.34% to demonstrate that this international transaction was at arm s length price (ALP). The assessee was called upon to file updated margins of the comparables for current year alone, which were filed declaring mean operating profit margin at 10.28%. The TPO rejected the comparables selected by the assessee. He finally selected two companies as comparable, namely, Educational Consultants India Ltd. (Technical Assistance and HRD segment: 12.56%) and Priya International Ltd. (Indenting segment: 26.09%) with their mean Operating Profit/Operating Cost (OP/OC) rate at 19.32%. He computed the assessee s profit from the international transaction by adopting PLI of OP/OC at 7.25% on page 8 of his order. By applying (OP/OC) rate of the comparables at 19.32% as benchmark, the TPO worked out tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ; 6. A bare perusal of sub-clause (i) of Rule 10B(1)(e) transpires that the net operating profit margin realized by the enterprise from an international transaction is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Sub-clause (ii) of Rule 10B(1)(e) stipulates that the net operating profit margin realized by the enterprise or by an unrelated enterprise from the comparable uncontrolled transaction is computed having regard to the same base . On a conjoint reading of sub-clauses (i) and (ii) of Rule 10B(1)(e), it becomes explicit that the net operating profit margin realized by the assessee from an international transaction has to be necessarily computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similar PLI of OP/OC of the comparables finally selected. Thus, it is apparent that the TPO adopted OP/OC, both of the assessee and of comparables, for determining the ALP of the international transaction. 8. The ld. AR vehemently argued that the assessee is not a trader, but, simply a commission agent. He stated that the assessee was facilitating sales of Agilent products in India under two transaction models, namely, Indent model and Buy-Sell model. Taking us through the Transfer pricing study report, he contended that whereas under Indent model, the assessee was providing only marketing and sales support services in relation to the direct sales of Agilent products from overseas entities to customers in India without taking any physical possession or title of the goods, under Buy-Sell model, the assessee was importing products from Agilent for sale to domestic customers, specifically, against the confirmed orders by taking title of goods and, then, selling these to the distributors and customers in India. He argued that though the title of goods under Buy-Sell model was formally passing to the assessee, but, in fact, it was nothing more than Indenting model in the sense that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors etc. This divulges that operating costs of a trader always include cost of goods sold and operating costs of a commission agent can never have such costs. If there is some Cost of goods sold and Sale appearing in the books of an assessee, then it would mean that the title in goods passed on to him, which he sold as an owner. In that case, he ceases to be characterized as a mere commission agent qua such goods. If a trader computes his operating profit margin by excluding cost of goods sold from the cost base and considering only administrative and selling expenses etc., it means that his total operating profit, which is a compensation not only for the sale of goods but also towards investment in goods, is being wrongly matched with the base of expenses incurred to the exclusion of cost of goods. Here we want to accentuate that the issue is not that a trader cannot work out his profit margin as a percentage of value added expenses to the exclusion of cost of goods sold, but the real thing is that such a profit margin can not be compared, for the transfer pricing purposes, with the profit margin of comparables, computed as a percentage of total operating expenses, which apart f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ₹ 11.21crore. There is further bifurcation available in respect of Finished goods and Spare parts - both At warehouse and In transit. Thus, it is manifest that the argument put forth by the ld. AR about the assessee holding no physical stock at any point of time, is fallacious and contrary to the actual figures reflected in the balance sheet. It is plentifully lucid from the details of `Inventories given in the balance sheet that the assessee is not only having Finished goods and Spare parts `In transit , but also `At warehouse . 12. When we consider Profit Loss Account and Balance sheet of the assessee in unison, it unambiguously follows that the assessee purchased goods under Buy-Sell model as principal by acquiring title in them and, thereafter, sold the same as owner and not as an agent. The Hon ble Delhi High Court in Mitsubishi Corporation India Pvt. Ltd. vs. Addl.CIT (2014) 366 ITR 495 (Del) has held that where transactions of purchase and sale between the assessee and a non-resident holding company were done on a principal to principal basis and recorded in books of account on principal to principal basis by the assessee, activity undertaken by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 15. At this stage, it is pertinent to mention that for the immediately preceding year also, that is, the A.Y. 2005-06, the assessee combined its international transactions under both the business models and tried to show that these were at ALP by comparing its PLI of OP/VAE with OP/OC of comparables, which was not accepted by the TPO, who held that OP/VAE of the assessee should be compared with the OP/VAE of comparables on a combined basis. The ld. CIT(A) accepted the assessee s contention and deleted the addition by comparing the assessee s overall OP/VAE with the OP/OC of the comparables. The appeal of the Revenue for the immediately preceding year has been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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