9911796707
TMI Blog2015 (9) TMI 644X X X X Extracts X X X X X X X X Extracts X X X X ..... e computation of operating profit, then the items of non-operating expense should also be excluded. One-sided exercise has been done with the obvious reason to bring down the OP/TC of EIL at 6.98%. The net effect of the exercise carried out by the assessee in calculating OP/TC of EIL at 6.98% by taking the figure of operating income on one hand and total expenses (both operating and non-operating) on the other is patently misleading, inasmuch as the figure of profit so computed is neither operating profit nor net profit. It lies somewhere between the two as it has become excess of operating income over total expenses (both operating and non-operating). In our considered opinion, the view canvassed by the ld. CIT(A) in accepting the corre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in its Form No.3CEB. The only international transaction disputed in the present appeal is Conducting market survey activities and related advisory services for which the assessee was paid ₹ 4,89,60,262/-. The other three international transactions were accepted by the TPO at arm s length price (ALP). The assessee adopted Transactional net margin method (TNMM) as the most appropriate method, with Profit level indicator (PLI) of Operating Profit to Total Cost (OP/TC), to demonstrate that the international transaction was at arm s length price. Twelve companies were selected by the assessee as comparable. By adopting the multiple-year data of these companies, the assessee computed their average operating profit margin at 4.46% and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with rectification application. The ld. CIT(A) concurred with the submissions advanced on behalf of the assessee and ordered for the adoption of OP/TC of EIL at 6.98%. After considering the fact that the resultant average margin of the eight companies, with new margin of EIL at 6.98%, came within (+)/(-) 5% range, he ordered for the deletion of the addition. The Revenue is aggrieved against the deletion of this addition to the extent as aforestated. 6. We have heard the rival submissions and perused the relevant material on record. Shorn of unnecessary factual details, it is noticed that the core of the controversy before us is the calculation of OP/TC of EIL. There is no dispute on the fact that the EIL has been taken as a comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his argument for evaluation, but appears to have been swayed by the delineation of the correctness of this figure, without either independently properly examining the same at his end or obtaining a remand report from the AO/TPO on this aspect of the matter. An analysis of the Profit Loss Account of EIL, which is available on page 285 of the paper book, in conjunction with such calculation given through Annexure-1 on page 109 of the paper book, divulges some apparent inconsistencies. It can be seen that the amount of Other incomes has been taken in the Annexure-I at ₹ 174.64 lacs, whereas the actual amount of Other income in the Profit Loss Account of this company stands at ₹ 4,809.63 lacs. On being questioned from the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating income, also extends with full vigor to the expense side. In other words, not only the non-operating items of income are required to be excluded, but the items of non-operating expense should also be expelled from the calculation of the operating profit of a company. Ignoring the items of non-operating income without simultaneously reducing the items of non-operating expense, gives a distorted figure of operating profit. 8. Coming back to the facts of the instant case, we find that the major item of Other income is Interest income aggregating to ₹ 3,776.65 lac, which rightly deserves exclusion from the operating profit. When we compare other figures from the Profit Loss account of EIL and the Annexure-I, it comes to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating). In our considered opinion, the view canvassed by the ld. CIT(A) in accepting the correctness of the assessee s calculation of OP/TC of EIL at 6.98% at its face value, cannot be sustained because of the apparent flaws as discussed above. Under these circumstances, we set aside the impugned order on this issue and remit the matter to the file of the AO/TPO for a correct de novo determination of the OP/TC of EIL. After doing this exercise, the TPO will compute ALP of the international transaction as per law. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. 9. In the result, the appeal is allowed for statistical purposes. The order pronounced in the open court on 13.11.2014. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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