9911796707
TMI Blog2016 (3) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... ronic and optical testing and monitoring instruments, systems and solutions. The assessee reported two international transactions in Form No. 3CEB. On a reference made by the Assessing Officer (AO), the Transfer Pricing Officer (TPO) did not dispute second international transaction of `Payment of interest on loan' accepting the same at ALP. First international transaction of 'Facilitation of sales of Agilent products in India' with transacted value of Rs. 76,54,27,667/- was taken up for consideration. The assessee used the Transactional Net Margin Method (TNMM) as the most appropriate method with Profit level indicator (PLI) of Operating profit/Operating cost (OP/OC) at 4.9%. In the Transfer Pricing study report, the assessee also mentioned that its Operating profit/Value added expenses (OP/VAE) stood at 13.96%. Certain comparables were chosen with their weighted average margin of profit at 12.19% to demonstrate that this international transaction was at ALP. The assessee was called upon to file updated margins of the comparables for current year alone, which were filed declaring mean operating profit margin at 5.8% using their OP/OC as the PLI. The TPO observed that though the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d which was accepted by the TPO. The only controversy revolves around the adoption of PLI under the TNMM. The assessee in its TP study report computed and applied OP/OC at 4.9% and also computed its OP/VAE at 13.96%. It compared its OP/OC with the mean of OP/VAE of comparables. The TPO applied OP/VAE of the assessee as well as that of comparables for benchmarking the assessee's international transaction. The ld. CIT(A) compared the assessee's OP/VAE with OP/OC of comparables. It is this point which has been argued by the ld. DR. There is no dispute on inclusion or exclusion of comparables by the lower authorities. 5. At the outset, the ld. AR contended that the ld. DR was not entitled to challenge the finding of the ld. CIT(A) equating the assessee's OP/VAE with OP/OC of comparables as this issue does not arise out of the ground taken in appeal. We are afraid that this objection of the ld. AR is bereft of any force. The only effective ground raised by the Revenue has been reproduced above, from which it is apparent that the assail is to the decision of the ld. first appellate authority in holding `that the international transaction undertaken by the assessee was at Arm's Length'. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates that the net operating profit margin realized by the enterprise or by an unrelated enterprise from the comparable uncontrolled transaction 'is computed having regard to the same base.' On a conjoint reading of subclauses (i) and (ii) of Rule 10B(1)(e), it is vivid that the net operating profit margin realized by the assessee from an international transaction has to be necessarily computed and compared with the net profit margin realized by comparable companies with the same base. In other words, if the operating profit margin of the assessee from international transaction has been computed with the base of `costs incurred', then, the operating profit margin of the comparables has also to be computed with the same base of `costs incurred'. Similarly, if the base adopted by the assessee for its international transaction under the formula in TNMM is 'sales effected', then, similar base of `sales effected' must be necessarily adopted while computing profit margin of comparables. In the like manner, if 'any other relevant base' is adopted for computing the operating profit margin of the assessee, then, similar base should be considered while computing operating profit margin of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To proceed on the premise that the TPO accepted the assessee's OP/VAE as equivalent of OP/OC of the comparables, either expressly or impliedly, is imaginary and without any bedrock. The TPO categorically adopted OP/VAE, both of the assessee and of comparables, for determining the ALP of the international transaction. Thus, it is manifest that the impugned order is based on an incorrect assumption by the ld. CIT(A), which has changed the entire direction of his order, resulting in the ultimate deletion of addition. We are unable to countenance such a view. 9. The ld. AR vehemently argued that the assessee is not a trader, but, simply a commission agent. He stated that the assessee was facilitating sales of Agilent products in India under two transaction models, namely, Indent model and Buy-Sell model. Taking us through the Transfer pricing study report, he contended that whereas under Indent model, the assessee was providing only marketing and sales support services in relation to the direct sales of Agilent products from overseas entities to customers in India without taking any physical possession or title of the goods, under Buy-Sell model, the assessee was importing products f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a trader include cost of goods sold, the same are absent in the case of a commission agent. It is obvious for the reason that while the only element of profit of a commission agent is compensation for the efforts put in by him in effecting sales, the profit of a trader, in addition to that, also includes compensation for the amount invested by him in inventory and debtors etc. That is why, operating profit of a trader can be correctly deduced by considering his operating costs, which always include cost of goods sold; and that of a commission agent by never including cost of goods sold, which he never incuRs. This divulges that operating costs of a trader always include cost of goods sold and operating costs of a commission agent can never have such costs. If there is some Cost of goods sold and Sale appearing in the books of an assessee, then it would mean that the title in goods passed on to him, which he sold as an owner. In that case, he ceases to be characterized as a mere commission agent qua such goods. If a trader computes his operating profit margin by excluding cost of goods sold from the cost base and considering only administrative and selling expenses etc., it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in working capital in the transactions under Buy-Sell model in the same way as is under Indent model. 12. The ld. AR further contended that the assessee was not holding any stock-in-trade and purchases were being made on the basis of confirmed orders with supply directly going to the end customeRs. This position is again, contrary to material on record. Schedule-D of the Balance sheet contains break-up of Inventories. Its perusal shows that as against total Inventories of Rs. 22.98 crore, stock of `Finished goods' is to the tune of Rs. 13.71 crore and that of `Spare parts' at Rs. 9.27 crore. There is further bifurcation available in respect of Finished goods and Spare parts - both 'At warehouse' and 'In transit.' Thus, it is manifest that the argument put forth by the ld. AR about the assessee holding no physical stock at any point of time, is fallacious and contrary to the actual figures reflected in the balance sheet. It is plentifully lucid from the details of `Inventories' given in the balance sheet that the assessee is not only having Finished goods and Spare parts `In transit', but also `At warehouse'. 13. When we consider Profit & Loss Account and Balance sheet of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l operating costs and not `Value added expenses' to the exclusion of cost of goods sold. We, therefore, set aside the impugned order in comparing OP/VAE of the assessee on combined transactions under both the models with OP/OC of the comparables. 15. Having disapproved the view taken by the ld. CIT(A), we need to judge the correctness of the ALP of the international transactions undertaken by the assessee under both the business models of `Indenting' as well as `Trading', which are obviously distinct from each other. 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 with OP/OC of comparables, which is an incorrect approach. In the like manner, the TPO, though compared the assessee's PLI of OP/VAE with OP/VAE 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
