TMI Blog2015 (11) TMI 1884X X X X Extracts X X X X X X X X Extracts X X X X ..... risks. That is the reason for which such costs are not considered as operating costs. We fail to appreciate as to how the sum incurred by the assessee can at all be construed as `Pass through costs inasmuch as these are not the costs incurred by the assessee for and on behalf of FAB to be recovered as such, but are the costs to be borne by it alone. Such costs are direct charge against its revenue. Pass-through costs do not involve any type of risk on the entity incurring them, as these are recoverable as such from its AE. At the cost of repetition, we reiterate that the assessee is liable to certain risks as discussed above, which has been noted from its own Transfer pricing study report. Under such circumstances, the argument of the ld. AR that a sum of Rs.13.93 crore represents pass-through costs is incapable of acceptance and ergo jettisoned. Whether the ld. CIT(A) was justified in comparing the assessee s net profit rate to total costs at 25.87% based on its service fees of Rs.71.54 lac minus indirect expenses of Rs.56.84 lac with the similar rate of two other comparable companies in determining the ALP of the international transaction of `Tours and Travel Related a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l costs . Again to this extent also, the action of the AO is unsustainable. In the given circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of the AO. We order accordingly and direct him to compute the ALP of the international transaction afresh under the Cost plus method in conformity with our above discussion. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. - ITA No.1480/Del/2011 - - - Dated:- 13-11-2015 - SHRI R.S. SYAL, AM AND MS SUCHITRA KAMBLE, JM Assessee By : Shri Ajay Vohra, Sr. Advocate Shri Neeraj Jain, Advocate Department By : Shri Anand Kumar Kedia, CIT, DR ORDER PER R.S. SYAL, AM: This appeal by the Revenue emanates from the order passed by the CIT(A) on 31.1.2011 in relation to the assessment year 2006-07. 2. The only issue raised in this appeal is against the deletion of addition of Rs.91,80,340/- made by the Assessing Officer (AO) on account of transfer pricing adjustment u/s 92CA(3) of the Income-tax Act, 1961 (hereinafter also called `the Act ). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost plus method of 11.72%, ie., Rs.15,57,14,388/- The operating profit is worked out (155714388-139379152) = Rs. 1,63,35,236 Less: Operating Profit already shown by the assessee = Rs. 71,54,896/- Suppression of operating profit: = Rs. 91,80,340/- 4. During the course of first appellate proceedings, the ld. first appellate authority asked the assessee to do an analysis of NCP margin (ratio of net profit to total expenses) of some listed companies within the same trade of tour and travel business. The assessee filed such an analysis before him treating two companies as comparable, namely, International Travel House Ltd., and Cox Kings (India) Pvt. Ltd. By considering the profit margins of these two companies, that is, percentage of Net Profit to Total expenses (excluding actual costs incurred on hotels, domestic air fare and transportation etc.) at 23.16% and 28.91% respectively, with average at 26.04%, the ld. CIT(A) found the assessee s profit margin, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciated with this line of business. The entire service liability risk, namely, relating to non-performance of the services under the contract has to be borne by the assessee alone. 7. An overview of the narration given in the assessee s Transfer pricing study report, more specifically, the activities carried out by it having been classified in two broader categories, namely, Charters and Excursions, shows that the contracts with tourists are finalized by foreign AE and the assessee has to organize the entire tour in India by raising the bills on the AE. The broader activity of Excursions as set out above indicates that while the tourists are in Goa, the representatives of its foreign AE sell various excursions to the tourists directly, collect money from them, and, after deducting their commission (as agreed), deposit the money with the FITPL , being the assessee, which arranges for all the excursions. Going by this mention, it turns out that the foreign AE is simply concerned with arranging customers, finalizing their tours in India and receiving the total revenue from such customers, which after appropriate deductions inclusive of their commission, is handed over to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maidens 01 Jaipur Country Inn 02 (Radisson) Agra Jaypee Palace 02 New Delhi Oberoi Maidens 01 Rates include the following:- A. HOTELS 07 Nights/ 08 days accommodation on Twin sharing basis including all existing taxes. B. MEALS Accommodation on half board basis at all places with meals on fixed menu only. C. TRANSPORT. Meeting and assistance on arrival / departure by le passage to India representative Transfer from airport to hotel and vice-versa. (Except in Goa) Sightseeing, excursion and surface travel as per programme. Cost based on using air-conditioned transport as under. NO OF UNITS TYPE OF TRANSPORT 02 OR 03 PAYING Medium Car 04 - 06 Paying Tempo Traveller 07 - 14 Paying Mini Coach 15 Paying Onward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire period, namely, 1st October, 2004 till 16th April, 2005, at USD 452 per person. This is again a uniform fixed rate irrespective of the actual air fare that the assessee may have to incur for tourists. It is a common knowledge that the air fares keep on fluctuating for a variety of reasons over a period of time. If the assessee manages to obtain air tickets at a lower rate, then, it adds to its profit and vice versa. To illustrate, if the assessee gets air tickets at say, 400 USD per person, its profit is 52 USD per person, but if the air tickets cost 420 USD per person, then its profit stands reduced to USD 32 per person. To put it simply, the assessee charges a fixed composite `all inclusive amount from its AE, which is irrespective of the actual costs defrayed by it in providing the services to the tourists at pre-determined standards. Having received the amount as per `Rate sheet from its AE, it becomes the duty of the assessee to arrange and pay for the provision of the contracted services at its own without any involvement of the AE. The obligation undertaken by the assessee with its AE is to provide the desired services to the foreign tourists. The manner in whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be incurred by the assessee. It is this amount of Rs.14.65 crore received from the AE that forms its gross revenue, from which all the direct and indirect expenses on providing services and facilities to the tourists are met by the assessee, leaving the remainder as its profit. Once this is the correct position, we fail to appreciate as to how the sum of Rs.13.93 crore incurred by the assessee can at all be construed as `Pass through costs inasmuch as these are not the costs incurred by the assessee for and on behalf of FAB to be recovered as such, but are the costs to be borne by it alone. Such costs are direct charge against its revenue. Further, we have noticed supra that the pass-through costs do not involve any type of risk on the entity incurring them, as these are recoverable as such from its AE. At the cost of repetition, we reiterate that the assessee is liable to certain risks as discussed above, which has been noted from its own Transfer pricing study report. Under such circumstances, the argument of the ld. AR that a sum of Rs.13.93 crore represents pass-through costs is incapable of acceptance and ergo jettisoned. 9. The next question which arises for our conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market ; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ; (v) the sum so arrived at is taken to be an arm s length price in relation to the supply of the property or provision of services by the enterprise ; 11. Sub-clause (i) provides that the direct and indirect costs incurred by an enterprise in providing services are first determined. The emphasis is on considering both the direct and indirect costs in providing services. Sub-clause (ii) provides for determining the normal gross profit mark-u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of considering both the direct and indirect costs. 12.2. The ld. AR contended that the manner in which the assessee recorded the transactions in its books of account by crediting only service fee of Rs.71.54 lac to its Profit Loss Account and then debiting indirect expenses to the tune of Rs.56.84 lac is an accepted accounting practice which has been approved by the Hon ble Delhi High Court in CIT vs. International Travel House Ltd. (2012) 344 ITR 554 (Del). This was countered by the ld. DR by submitting that maintenance of accounts on `net basis is one of the permissible methods and the accounts can be maintained on `gross basis as well. We find that in the case before the Hon ble Delhi High Court, the assessee credited income after netting discount from gross commission income. The CIT, exercising his revisional power u/s 263, set aside the assessment order and directed the AO to verify the net commission transferred to the Profit Loss Account. The assessee filed appeal before the Tribunal, which noticed that gross income was credited to the Profit Loss Account in one case whereas net income was credited in other cases and the tax effect under both the methods was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no doubt that the pass-through costs are liable to be ignored in computing the ALP under the TNMM. 12.5. We fail to draw any parallel of this case insofar as the instant case is concerned for certain reasons set out hereinafter. Firstly, the amount of Rs.13.93 crore is not a pass-through cost as has been held by us in an earlier part of the order. Secondly, the Hon ble High Court in holding that the denominator should exclude pass through costs took note of the expression any other relevant base occurring in Rule 10B(1)(e)(i) of the IT Rules. It is pertinent to mention that Rule 10B(1)(e) deals with the determination of the ALP under the TNMM. Sub-clause (i) of rule 10B(1)(e) particularly provides for the computation of net profit margin in relation to costs incurred or sales effected, etc. or having regard to any other relevant base. The computation of net profit margin in relation to the expression any other relevant base is peculiar to the determination of ALP under the TNMM. In contrast to this, we are concerned with the computation of ALP in the present case under the `Cost plus method as per Rule 10B(1)(c). The manner of computation of the ALP under these two metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VS. Morgan Stanley Co. (2007) 162 Taxman 165 (SC ). What is relevant under the TNMM is `operating profit and not `net profit . The action of the ld. CIT(A) in accepting the ratio of `Net profit to total costs as a profit level indicator has led to the devising of a new method in its own, which has no sanction of law. As the most appropriate method in this case is undisputedly the `Cost plus method , we fail to appreciate as to how the decision of the ld. first appellate authority in accepting such a ratio as a Profit level indicator under this method can be sustained. The comparison of this ratio is alien to the Cost plus method. 14. The third reason for not upholding the impugned order is affixing the seal of approval by the ld. CIT(A) to the selection by the assessee of only two companies as comparable. Relevant part of para 2.9 of the impugned order provides that : `the appellant was further asked to do an analysis of the NCP margin of some listed companies with in the same trade of Tour Travel . It is in pursuance to this direction of the ld. CIT(A) that the assessee came out with two comparable companies, namely, International Travel House Ltd. and Cox Kinds (India ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
