2016 (7) TMI 661 - AT - Income Tax

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 of determination of ALP. It is noticed that the assessee clubbed transactions under both the models and determined their ALP by computing OP/VAE on consolidated basis and then compared the same with OP/OC of comparables. The TPO adopted denominator of Operating Costs in the computation of operating profit margin of the assessee from combined international transactions under 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 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 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 at our end. Following the view taken for the preceding year, 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

Issues Involved:
1. Transfer Pricing Adjustment
2. Adoption of Profit Level Indicator (PLI)
3. Comparison of Operating Costs and Value Added Expenses (VAE)
4. Classification of Transactions under Indent and Buy-Sell Models
5. Separate Benchmarking of Transactions

Detailed Analysis:

1. Transfer Pricing Adjustment:
The core issue in the appeal concerns the addition of Rs. 10,11,16,273 on account of transfer pricing adjustment. The assessee, a 100% subsidiary of Agilent Technologies, Europe B.V., reported six international transactions, primarily focusing on the facilitation of sales of Agilent products in India. The Transfer Pricing Officer (TPO) selected two comparables and computed a transfer pricing adjustment of Rs. 10,62,21,565, which was later reduced by the Dispute Resolution Panel (DRP) to Rs. 10,11,16,273.

2. Adoption of Profit Level Indicator (PLI):
The assessee used the Transactional Net Margin Method (TNMM) with a PLI of Operating profit/Value Added Expenses (OP/VAE) at 15.23%. The TPO, however, adopted the PLI of Operating Profit/Operating Cost (OP/OC), leading to the transfer pricing adjustment. The DRP upheld the TPO's adoption of OP/OC for both the assessee and the comparables, affirming the adjustment.

3. Comparison of Operating Costs and Value Added Expenses (VAE):
A significant point of contention was the base used for computing the PLI. The assessee argued for the use of OP/VAE, while the TPO used OP/OC. According to Rule 10B(1)(e) of the IT Rules, 1962, the net operating profit margin must be computed and compared using the same base. The Tribunal emphasized that the base (denominator) used for the assessee must be identical to that used for the comparables to ensure a rational and logical comparison.

4. Classification of Transactions under Indent and Buy-Sell Models:
The assessee operated under two models: Indent and Buy-Sell. Under the Indent model, the assessee facilitated sales without taking title to the goods, while under the Buy-Sell model, the assessee took title to the goods and sold them to customers. The Tribunal noted that the assessee's financial statements showed significant inventory and debtors, indicating that the Buy-Sell transactions involved substantial investment in working capital, contrary to the assessee's claim of being a mere commission agent.

5. Separate Benchmarking of Transactions:
The Tribunal found that the assessee incorrectly combined transactions under both models for transfer pricing purposes. The TPO also erred by not separately benchmarking the transactions under the Indent and Buy-Sell models. The Tribunal held that the transactions under these models should be benchmarked separately due to their distinct nature. The case was remitted to the AO/TPO for separate determination of the ALP of the international transactions under the Indent and Trading models.

Conclusion:
The appeal was allowed for statistical purposes, with the matter remitted to the AO/TPO for de novo determination of the ALP of the international transactions under the Indent and Buy-Sell models. The Tribunal emphasized the need for separate benchmarking of transactions under these models and the use of a consistent base for computing the PLI for both the assessee and the comparables.

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