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TMI Blog2016 (3) TMI 815X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia with transacted value of ₹ 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 assessee stated that it used OP/OC as the PLI, but, in fact, it showed the figure of profit margin on the basis of Operating Profit/ Value Added Expenses (OP/VAE). The assessee was required to explain as to what was its PLI and whether the same PLI was applied for the comparables, apart from seeking comments on the exclusion of two comparables which in the opinion of the TPO were not comparable. The assessee furnished rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . Treating international transaction at ALP covers all the aspects of the determination of its ALP, which obviously include not only the selection of comparables and their profit margin but also the selection of the most appropriate method and determination of the correct PLI of the assessee and that of comparables. In fact, the ld. DR has argued only this aspect of determination of the PLI and nothing el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompared 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 comparables. To put it simply, the numerator and denominator in the computation of operating profit margin of the assessee must be similar to those of the comparables. In the formula given under the TNMM, numerator is always `operating profit , but the choice has been given for selecting a suitable `denominator . However, the condition precedent is that whichever denominator is selected by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from Agilent for sale to domestic customers, specifically, against the confirmed sale orders by taking title of goods and, then, selling these to the distributors and customers in India. He argued that though the title of goods under Buy-Sell model was formally passing to the assessee, but, in fact, it was nothing more than Indenting model in the sense that the sale was made only on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting 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 means that his total operating profit, which is a compensation not only for the sale of goods but also towards investment in goods, is being wrongly matched with the base of expenses incurred to the exclusion of cost of goods. Here we want to accentuate that the issue is not that a trader cannot work out his profit margin as a percentage of value added expenses to the exclusion of cost of goods sold, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule-D of the Balance sheet contains break-up of Inventories. Its perusal shows that as against total Inventories of ₹ 22.98 crore, stock of `Finished goods is to the tune of ₹ 13.71 crore and that of `Spare parts at ₹ 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 the assessee in unison, it unambiguously follows that the assessee purchased goods under Buy-Sell model as principal by acquiring title in them and, thereafter, sold the same as owner and not as an agent. The Hon ble Delhi High Court in Mitsubishi Corporation India Pvt. Ltd. vs. Addl.CIT (2014) 366 ITR 495 (Del) has held that where transactions of purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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. 16. We find that there is insufficient information available on record facilitating the determination of ALP of the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X
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