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TMI Blog2019 (12) TMI 1468X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of purchase of goods from the AEs under the RPM. If under sub-clause (iii), we proceed to reduce the indirect costs also, meaning thereby, the costs debited to the Profit and loss account of the assessee, the effect would be that we would be comparing the figure of comparables at gross level with the figure of the assessee at net level, distorting the comparability. Sub-clause (iv) talks of even ironing out the differences in the accounting practices of the assessee and comparables. Its rationale is that even after considering all the costs debited to the Trading account of both the assesses and comparables, if still there remains some difference due to following of different accounting practices, then the effect of such difference should also be given to in the determination of the ALP. It may cover a situation in which a comparable may have either debited an item of indirect cost to the Trading account or some direct cost to the Profit and loss account, effect of which is required to be given. There is no prescription what so ever for considering the indirect costs either of the assessee or the comparables in determining the ALP under the RPM. TPO, in the calculation extract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on ble Delhi High Court in CIT VS. Keihin Panalfa Ltd. [ 2016 (5) TMI 203 - DELHI HIGH COURT] . Respectfully following the precedents, we hold that the transfer pricing addition should be restricted only to the international transactions. X X X X Extracts X X X X X X X X Extracts X X X X ..... 17,49,102 C Arms Length Mean Margin (OP/OR) 32.81 D Arms Length Price (ALP) of the international transaction (A)-{(A)*(C)/100} 15,03,27,449 E 0.95% of International Transaction 20,11,61,646 F Adjustment over operating income [D-A] (Shortfall being adjustment u/s.92CA) 6,14,21,652 7. We have gone through the Statement of Profit and loss account of the assessee, which is available at page 64 of the paper book. From there, it can be seen that the TPO has initially taken a figure of total revenue as 'Price charged' standing at ₹ 22,37,34,855/-. Thereafter, he reduced `Operating Cost' amounting to ₹ 21,17,49,102/-, which is the figure of total expenses in the Profit and loss account. This figure of total expenses incurred by the assessee includes not only the purchase costs but also Employees' benefits, Depreciation and amortization and Other expenses. On having a glance at the Profit and loss account of the assessee on one hand and the transfer pricing adjustment made by the TPO on the other, it is discernible that the TPO has considered all the direct and indirect expenses of the assessee for the purpose of exclusion from the total revenues. Thus, it can be se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken as an arm's length price of the purchase of property by the enterprise from the associated enterprise. 10. A careful circumspection of sub-clause (ii) of Rule 10B(1)(b) divulges that it is normal `gross profit margin' of the comparables, which is considered for application. Then sub-clause (iii) reveals that the price arrived at after applying the gross profit of the comparables is reduced by the `expenses incurred by the enterprise in connection with the purchase of property'. Sub-clause (iv) talks of adjusting the price as determined under sub-clause (iii) with differences including differences in accounting practices, if any, between the international transaction and the comparable uncontrolled transactions. On a conjoint reading of the relevant parts of above sub-clauses, it is manifested that the RPM compares the transaction at gross profit level, which means considering all the direct costs forming part of the Trading account only. Not only the `gross profit margin' of the comparables is taken for application to the sale price of the goods purchased from the AE, but also the expenses incurred by the assessee in connection with the purchase of goods are then sought to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arables, namely, Larsen and Toubro Ltd. and Siemens Ltd. (i) Larsen and Toubro Ltd : 13. The TPO considered this company as comparable by observing in para 8.5 of his order that he was taking only the Trading segment of L&T. Thereafter, he worked out the gross profit margin of L&T starting with the figure of 'Revenue from trading activity' at ₹ 6389.29 crore with reference to Note (Q)(25)(a)(i) on page 186 of the Annual report of the company. We have perused such report, whose copy has been placed in the paper book. The figure of ₹ 6389.29 crore is given under the major head of `Sales & service' and sub-head of 'Manufacturing, trading and property development activity'. It is this figure which has been considered by the TPO as 'Revenue from Trading activity' for the purpose of computing the gross profit margin of this company. The assessee also contended before the TPO that L&T was engaged in other operations also unlike the assessee engaged only in the trading operations, which was jettisoned by the TPO by observing that he was considering 'the company's only trading segment'. We have also gone through the segmental reporting of L&T Ltd. from which it can be seen that ..... 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