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TMI Blog2015 (7) TMI 600X X X X Extracts X X X X X X X X Extracts X X X X ..... order to this extent and direct the TPO to adopt the correct figure of operating revenue at ₹ 28,89,60,870/-. Selection of comparable - inclusion of three comparables in the final set of comparables viz., Engineers India Ltd., RITES Ltd., and WAPCOS Ltd - Held that:- It has been brought to our notice that the matter of the preceding year is still pending before the TPO and no final decision has so far been taken on the comparability or otherwise of these three companies. Under such circumstances and respectfully following the precedent, we also set aside the impugned order and remit the matter to the file of TPO/AO for deciding the comparability or otherwise of the above referred three companies in line with his decision pursuant to the tribunal order for the AY 2005-06. Apart from considering the question of inclusion or exclusion of these three companies in the final set of comparables, the TPO will also go into the issue of working capital adjustment as has been directed by the Tribunal in its aforequoted order. Transfer pricing adjustment is against not allowing any risk adjustment - Held that:- Adverting to the facts of the instant case, we find that there is no m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (OP/TC). The assessee calculated OP/TC of this international transaction at 17.90%, which has been extracted from page 10 of the TPO s order, as under : - Table I. Operating expenses Rs.245,906,097 (A) Add: Non operating provision for tax Rs.11,592,050 Provision for FBT Rs.13,363,746 Total expenses Rs.270,861,893 Add: 7% mark up Rs.19,071,560 Total Revenue Rs.289,933,453 (B) Operating profit (B-A) Rs.44,027,356 (C) Margin on cost (C/A) 17.90% 4. The TPO did neither dispute the application of TNMM as the most appropriate method nor reject the PLI of OP/TC. However, in his opinion, the calculation done by the assessee was made by artificially inflating its operating profit. He opined that the non-operating expenses could not be considered for calculation of mark-up and, hence, the mark-up should be calculated only on operating expenses. He, therefore, recast th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod and the adoption of the PLI as Operating profit to Total Costs on the international transaction of `Provision of marketing support services . There is a three-fold attack to the computation of the ALP. First is the determination of the assessee s profit margin by the TPO; second is the selection of some comparables; and third is against not allowing risk adjustment. We will deal with these issues, one by one. 9. First we espouse the aspect of determination of the assessee s profit margin from the international transaction of `Provision of marketing support services . The ld. AR agitated the computation of the assessee s OP/TC. More specifically and to narrow down the core of controversy, it is on the computation by the TPO of Revenue shown as per Table II above calculated at ₹ 26,31,19,523/-. The assessee s contention is that this amount has been erroneously taken by the TPO. 10. It can be seen that the assessee was compensated by its AE for rendering marketing support services at direct and indirect costs incurred with a mark-up of 7% on such total costs. The total amount received by the assessee is to the tune of ₹ 28,89,60,870/-. This figure of revenue wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Rule provides for determining the net operating profit margin realized by the enterprise from an international transaction in relation to some base, which also includes, costs incurred. Sub-clause (ii) states that the net profit margin realized 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. Under sub-clause (iii), the net profit margin as per sub-clause (ii) is adjusted to take into account the differences between the international transaction and the comparables. Sub-clauses (iv) and (v) state that the net operating profit margin realized by the assessee as per sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) and the net profit margin thus established is then taken into account to arrive at an arm s length price in relation to the international transaction. Having determined the ALP of an international transaction as per rule 10B(1)(e), we come back to the second proviso to section 92C(2) which provides that if the variation between the arm's length price so determined and price at which the internation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticed that the price of the international transaction is ₹ 28,89,60,870/-, but the TPO has substituted such price of the international transaction with a figure of ₹ 263,119,523 as per Table II above. By doing so, the TPO is seeking to compare the profit rate (7%) realized by the assessee on total costs (both operating and non-operating) with the profit rate (25.31%) of comparables on operating costs alone, which is an invalid comparison because the base of the assessee s international transaction and that of comparables has become different, which under all circumstances must remain same as per rule 10B(1)(e). As such, we hold that the authorities below were not justified in working out the transfer pricing adjustment by considering the amount of revenue at ₹ 263,119,523, which ought to have been taken at ₹ 28,89,60,870/-. 14. We find from the asessee s Profit Loss Account that the amount of Revenue received from AEs stands at ₹ 28,89,60,870/-. As against that, the assessee calculated its margin at 17.90% by considering operating revenue at ₹ 28,99,33,453/-. It is self evident that the gross revenue received by the assessee from its AE from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly preceding assessment year and the assessee challenged the same before the tribunal. The tribunal has since disposed of the assessee s appeal for the immediately preceding year and a copy of such order dated 4.4.2014 (in ITA No.3236/Del/2011) is available on record. Vide this order, the tribunal has restored the matter to the file of the AO for examining the comparability or otherwise of these companies along with the question of allowability or otherwise of working capital adjustment. It has been brought to our notice that the matter of the preceding year is still pending before the TPO and no final decision has so far been taken on the comparability or otherwise of these three companies. Under such circumstances and respectfully following the precedent, we also set aside the impugned order and remit the matter to the file of TPO/AO for deciding the comparability or otherwise of the above referred three companies in line with his decision pursuant to the tribunal order for the AY 2005-06. Apart from considering the question of inclusion or exclusion of these three companies in the final set of comparables, the TPO will also go into the issue of working capital adjustment as has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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