TMI Blog2019 (12) TMI 1468X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to reduce the indirect costs also, meaning thereby, the costs debited to the Profit and loss account of the assessee, the effect would be that we would be comparing the figure of comparables at gross level with the figure of the assessee at net level, distorting the comparability. Sub-clause (iv) talks of even ironing out the differences in the accounting practices of the assessee and comparables. Its rationale is that even after considering all the costs debited to the Trading account of both the assesses and comparables, if still there remains some difference due to following of different accounting practices, then the effect of such difference should also be given to in the determination of the ALP. It may cover a situation in which a comparable may have either debited an item of indirect cost to the Trading account or some direct cost to the Profit and loss account, effect of which is required to be given. There is no prescription what so ever for considering the indirect costs either of the assessee or the comparables in determining the ALP under the RPM. TPO, in the calculation extracted above, has rightly considered the gross profit margin of the comparables, but stepp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) TMI 203 - DELHI HIGH COURT] . Respectfully following the precedents, we hold that the transfer pricing addition should be restricted only to the international transactions. - ITA No.422/PUN/2017 - - - Dated:- 9-12-2019 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER For the Assessee : Shri Aliasger Rampurwala Shri Pratik Shah For the Revenue : Shri T. Vijaya Bhaskar Reddy ORDER PER R.S.SYAL, VP : This appeal by the assessee emanates from the final assessment order dated 16-12-2016 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called the Act ) in relation to the assessment year 2012-13. 2. The assessee has filed revised grounds, which have not been objected by the ld. DR. As such, we are proceeding with such revised grounds. 3. Succinctly, the factual matrix of the case is that the assessee is engaged in trading, installation and after-sales services of Tank Gauging Equipments. It filed return declaring total income of ₹ 1,28,30,710/-. Certain international transactions were reported in Form No.3CEB. The AO made a reference to the Transfer Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Price charged (operating revenue of the assessee) 22,37,34,855 B Operating Cost (OC) 21,17,49,102 C Arms Length Mean Margin (OP/OR) 32.81 D Arms Length Price (ALP) of the international transaction (A)-{(A)*(C)/100} 15,03,27,449 E 0.95% of International Transaction 20,11,61,646 F Adjustment over operating income [D-A] (Shortfall being adjustment u/s.92CA) 6,14,21,652 7. We have gone through the Statement of Profit and loss account of the assessee, which is available at page 64 of the paper book. From there, it can be seen that the TPO has initially taken a figure of total revenue as Price charged standing at ₹ 22,37,34,855/-. Thereafter, he reduced `Operating Cost amounting to ₹ 21,17,49,102/-, which is the figure of total expenses in the Profit and loss account. This figure of total expenses incurred by the assessee includes not only the purchase costs but also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed enterprise is identified, which is reduced by the amount of normal gross profit margin accruing in a comparable uncontrolled transaction. The price so arrived at is reduced by the expenses incurred by the enterprise in connection with the purchase of property, which is further adjusted to take into account the functional and other differences, if any. The price which follows thereafter is taken as an arm s length price of the purchase of property by the enterprise from the associated enterprise. 10. A careful circumspection of sub-clause (ii) of Rule 10B(1)(b) divulges that it is normal `gross profit margin of the comparables, which is considered for application. Then sub-clause (iii) reveals that the price arrived at after applying the gross profit of the comparables is reduced by the `expenses incurred by the enterprise in connection with the purchase of property . Sub-clause (iv) talks of adjusting the price as determined under sub-clause (iii) with differences including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions. On a conjoint reading of the relevant parts of above sub-clauses, it is man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the direct costs of the assessee so as to bring parity with the gross margin of the comparables under the RPM. Thus the impugned order cannot be sustained to this extent. We, therefore, set-aside the impugned order pro tanto and hold that only the direct costs incurred by the assessee should be considered. 12. The assessee has also disputed the inclusion of two companies in the final set of comparables, namely, Larsen and Toubro Ltd. and Siemens Ltd. (i) Larsen and Toubro Ltd : 13. The TPO considered this company as comparable by observing in para 8.5 of his order that he was taking only the Trading segment of L T. Thereafter, he worked out the gross profit margin of L T starting with the figure of Revenue from trading activity at ₹ 6389.29 crore with reference to Note (Q)(25)(a)(i) on page 186 of the Annual report of the company. We have perused such report, whose copy has been placed in the paper book. The figure of ₹ 6389.29 crore is given under the major head of `Sales service and sub-head of Manufacturing, trading and property development activity . It is this figure which has been considered by the TPO as Revenue from Trading activity for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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