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2016 (7) TMI 661 - ITAT DELHI

2016 (7) TMI 661 - ITAT DELHI - TMI - Addition on account of transfer pricing adjustment - TNMM applied as the most appropriate method - assessee used OP/VAE as its profit level indicator, by impliedly treating base of 'Value added expenses’ as akin to `any other relevant base’ - Held that:- Having held that the assessee is a 'Commission agent’ as regards its transactions under the Indent model and a 'Trader’ as regards its transactions under the Buy-Sell model, we again revert to the moot point .....

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always exclusive of cost of goods sold, whereas a 'Trader’ has to have them 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 relevan .....

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ts 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 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 .....

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we 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 assessee for statistical purposes - ITA No.1487/D/12 - Dated:- 9-2-2016 - SHRI R.S. SYAL, AM AND SHRI KULDIP SINGH, JM For The Assessee .....

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is against the addition on account of transfer pricing adjustment amounting to ₹ 10,11,16,273. 3. Succinctly, the facts of the case are that the assessee is a 100% subsidiary of Agilent Technologies, Europe B.V. Its business operations comprise of facilitation of sales of Agilent products in the Indian market. Agilent Technologies is the world s leading designer, developer, manufacturer and provider of electronic and optical testing and monitoring instruments, systems and solutions. The as .....

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e 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. (Techni .....

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2.2011 given u/s 144C(5) read with section 254 affirmed the view of the TPO on adoption of PLI as OP/OC of the assessee as well as comparables. The DRP also approved the selection of comparables made by the TPO. It however, corrected the figure of OP/OC of these comparables, namely, Educational Consultants India Ltd. (Segmental: 14.85%) and Priya International Ltd. (Segmental: 22.63%), with their mean Operating Profit/Operating Cost (OP/OC) rate at 18.74%. By applying this average OP/OC of compa .....

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sessee in its TP study report applied PLI of OP/OC of comparables and OP/VAE of its own for determining the ALP of the international transaction. The TPO considered OP/OC of the assessee as well as that of comparables for benchmarking the assessee s international transaction, which led to the making of addition on account of instant transfer pricing adjustment. The assessee is aggrieved against the change made by the TPO in applying its PLI of OP/OC instead of OP/VAE as considered by the assesse .....

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parts of rule 10B(1)(e) of the IT Rules, 1962, which is a machinery provision for the determination of the ALP under the TNMM, as under : - (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction 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 m .....

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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 .....

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of sales effected must be adopted while computing profit margin of comparables. In the like manner, if any other relevant base is adopted for computing the operating profit margin of the assessee, then, similar base should be considered while computing operating profit margin of comparables. To put it simply, the numerator and denominator in the computation of operating profit margin of the assessee must be similar to those of the comparables. In the formula given under the TNMM, numerator is a .....

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operating profit margin of comparables computed with the base of, say, sales effected or any other relevant base . Even when any other relevant base is adopted, such a base should remain consistent both in the computation of PLI of the assessee as well as comparables. The essence of the provision is that squares should be compared with squares and rounds with rounds, so that a rational and logical comparison could be made of the operating profit rate of the assessee and comparables. In other wo .....

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essee 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 service .....

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but, in fact, it was nothing more than Indenting model in the sense that the sale was made only on the basis of confirmed orders and the assessee was not taking delivery of goods and further no working capital of the assessee was involved in any manner. Sum and substance of his submissions was that under both the transaction models, namely, Indent and Buy-Sell, the assessee was earning only commission and, there was no point in treating the assessee as a trader so as to consider Operating costs .....

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will also include cost of goods sold apart from other operating administrative and selling expenses. If some services are required to be rendered by the assessee in respect of goods already manufactured by a third party, then the costs incurred in rendering such services are called valued added expenses in the hands of such person rendering services. Cost of goods sold is an immaterial factor in the case of an assessee engaged in commission business, having no relevance whatsoever with his opera .....

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tly exclude cost of goods. Substance of the matter is that whereas operating costs in the case of a trader include cost of goods sold, the same are absent in the case of a commission agent. It is obvious for the reason that while the only element of profit of a commission agent is compensation for the efforts put in by him in effecting sales, the profit of a trader, in addition to that, also includes compensation for the amount invested by him in inventory and debtors etc. This divulges that ope .....

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ng 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 ma .....

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tention that the transactions of the assessee under the Buy-Sell model are identical to the Indent model and there is no difference between the sales made under both the models. We have perused the assessee s Annual accounts for the year, a copy of which has placed at pages 190 onwards of the paper book. Profit & Loss Account of the assessee records Sales of ₹ 44,52,28,224/- apart from Commission income amounting to ₹ 37.16 crore. Debit side of the assessee s Profit & Loss Ac .....

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t that Inventories have been reflected at ₹ 22.70 crore along with Sundry debtors at ₹ 30.33 crore. It shows that the amount of Sundry debtors and Inventories stands at a staggering figure of ₹ 53.03 crore, which is even more than the amount of sales of ₹ 44.45 crore made during the year. These figures leave nothing to doubt that there is a huge investment of the assessee in Stock and Debtors, which belies its claim of having no investment in working capital in the transa .....

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tune of ₹ 11.49 crore and that of Spare parts at ₹ 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 as .....

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sactions 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 assessee was in the nature of trading. We, therefore, repel the assessee s contention that the transactions under Buy-Sell model were on commission basis rather than as a trader. 13. Having held that the assessee is a Commission agent as regards its transaction .....

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er both the models with similar base of comparables. We have noticed above that operating costs of a Commission agent are always exclusive of cost of goods sold, whereas a Trader has to have them 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 s .....

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instant case with a view 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 on overall basis with OP/OC of comparables, which is an incorrect approach. In the like manner, the TPO .....

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nt 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 asse .....

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