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TMI Blog2015 (11) TMI 1884X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivity of the assessee for which it neither performs any significant functions nor assumes any risks. That is the reason for which such costs are not considered as operating costs. We fail to appreciate as to how the sum incurred by the assessee can at all be construed as `Pass through costs inasmuch as these are not the costs incurred by the assessee for and on behalf of FAB to be recovered as such, but are the costs to be borne by it alone. Such costs are direct charge against its revenue. Pass-through costs do not involve any type of risk on the entity incurring them, as these are recoverable as such from its AE. At the cost of repetition, we reiterate that the assessee is liable to certain risks as discussed above, which has been noted from its own Transfer pricing study report. Under such circumstances, the argument of the ld. AR that a sum of Rs.13.93 crore represents pass-through costs is incapable of acceptance and ergo jettisoned. Whether the ld. CIT(A) was justified in comparing the assessee s net profit rate to total costs at 25.87% based on its service fees of Rs.71.54 lac minus indirect expenses of Rs.56.84 lac with the similar rate of two other comparable companies i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio of `Gross Profit to Total costs and not `Net profit to Total costs . Again to this extent also, the action of the AO is unsustainable. In the given circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of the AO. We order accordingly and direct him to compute the ALP of the international transaction afresh under the Cost plus method in conformity with our above discussion. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,35,236 Less: Operating Profit already shown by the assessee = Rs. 71,54,896/- Suppression of operating profit: = Rs. 91,80,340/- " 4. During the course of first appellate proceedings, the ld. first appellate authority asked the assessee to do an analysis of NCP margin (ratio of net profit to total expenses) of some listed companies within the same trade of tour and travel business. The assessee filed such an analysis before him treating two companies as comparable, namely, International Travel House Ltd., and Cox & Kings (India) Pvt. Ltd. By considering the profit margins of these two companies, that is, percentage of Net Profit to Total expenses (excluding actual costs incurred on hotels, domestic air fare and transportation etc.) at 23.16% and 28.91% respectively, with average at 26.04%, the ld. CIT(A) found the assessee's profit margin, calculated in the same manner, that is, percentage of Net Profit to Total expenses (excluding actual costs incurred on hotels and transportation etc.) at 25.87% , within the permissible range. That is how, the addition made by the AO came to be deleted. The Revenue is aggrieved against this deletion of addition. 5. We have heard the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roader categories, namely, Charters and Excursions, shows that the contracts with tourists are finalized by foreign AE and the assessee has to organize the entire tour in India by raising the bills on the AE. The broader activity of 'Excursions' as set out above indicates that while the tourists are in Goa, the representatives of its foreign AE sell 'various excursions to the tourists directly, collect money from them, and, after deducting their commission (as agreed), deposit the money with the FITPL', being the assessee, which arranges for all the excursions. Going by this mention, it turns out that the foreign AE is simply concerned with arranging customers, finalizing their tours in India and receiving the total revenue from such customers, which after appropriate deductions inclusive of their commission, is handed over to the assessee. On tourists reaching India, the entire exercise of making arrangements for their stay, travel and sightseeing etc. is to be done by the assessee at its cost. The assessee has canvassed a view before the authorities below that its job is confined to making arrangements for the customers in India on net service fees of Rs.71.54 lac and all the hot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of visit. E. GUIDE English speaking accompanying guide from Delhi to Delhi not staying in same hotels. COST DOES NOT INCLUDE • ITEMS OF PERSONAL NATURE - such as laundry, table drinks, telephone bills, tips to room boys, drivers, guides, personal clothing including sleeping bags etc. • Any Air fare (See Supplement- subject to change)" 8. Then, our attention was invited towards page 1 of the Paper Book, which is a copy of invoice dated 19.1.2006 raised by the assessee on FAB in respect of services provided at the rates which are in conformity with the 'Rate sheet' as reproduced above. Albeit the Transfer pricing study report states that the Excursions are sold by the representatives of the foreign AE, who after deducting its commission, give the deposit amount to the assessee, we find that there has been improper reporting in such report. The correct position, as borne out from the `Rate sheet' and the corresponding invoices raised by the assessee on its AE, is that the assessee gets a composite fixed amount from its AE and it has to bear all the costs in making arrangements for the stay and travel of tourists in India. When we peruse the aforequoted Rate sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igher the actual costs incurred in providing such pre-settled services, lower the profit and vice versa. In other words, all the costs in providing the services are to be borne by the assessee alone and the AE has no relation with that. The assessee has made out a case that the expenses incurred in providing such services to the tourists amounting to Rs.13.93 crore are pass through costs and hence the same be ignored in computing the ALP of the international transaction. We find this contention to ill-founded and devoid of any merit. Pass-through costs, in the context of transfer pricing provisions, are ordinarily the costs for which payment is made by an Indian entity to third party on behalf of its foreign AE and the amount so paid to third party is recovered from the foreign AE and in this process there is no assumption of risk of nonpayment by the foreign AE. These are non value-adding costs, which are incidental to the primary business activity of the assessee for which it neither performs any significant functions nor assumes any risks. That is the reason for which such costs are not considered as operating costs. The contention of the ld. AR that the expenditure of Rs.13.93 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice fees of Rs.71.54 lac minus indirect expenses of Rs.56.84 lac with the similar rate of two other comparable companies in determining the ALP of the international transaction of `Tours and Travel Related and Customer Handling Services'. There is no dispute on the fact that the assessee applied the `Cost plus method' for demonstrating that its international transaction was at ALP. The AO has also accepted the application of this method. Further, there was no challenge before the ld. CIT(A) as to the application of this method. This evidences that there is no dispute on the application of `Cost plus method' as the most appropriate method. The making and deletion of addition by the AO and ld. CIT(A) respectively has not been due to any conflict on the decision in the choice of the most appropriate method but due to the application of the `Cost plus method' in one way by the AO and in the other by the ld. CIT(A). Whereas the AO has computed the ALP by taking the total costs incurred by the assessee at Rs.13.93 crore, the ld. CIT(A) has upheld the assessee's contention that this amount should be ignored in totality and only the indirect costs incurred totaling Rs. 56.84 lac should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. Here again, the emphasis is on determining the normal gross profit mark up earned in a comparable uncontrolled situation on both direct and indirect costs of providing services. Sub-clause (iii) calls for making adjustment to the normal gross profit mark-up as computed under subclause (ii) on account of differences between the international transaction and comparable uncontrolled transaction. Sub-clause (iv) provides that the direct and indirect costs incurred by the assessee in providing services to its AE are increased by the adjusted profit mark-up arrived at under sub-clause (iii), which is taken as the ALP of the provision of services by the enterprise. 12.1. On going through the mandate of rule 10B(1)(c), it is explicit that for determining the ALP under the `Cost plus method', both the direct and indirect costs of providing services are to be considered in the hands of the assessee as well as comparable uncontrolled companies. Adverting to the facts of the instant case, we find that a sum of Rs.13.93 crore is in the nature of hotel, transport expenses and local air fare expenses etc. incurred by the assessee in providing services to the tourists, which are the direct cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that both the accounting systems, namely, gross as well as net, are tax neutral. 12.3. We are unable to understand as to how this case justifies the assessee's stand of considering only the indirect costs in the computation of the ALP under the `Cost plus method'. Obviously, we are not dealing with a situation in which the dispute is about the net or gross method of accounting to be followed. Rather, the controversy is the determination of ALP of the international transaction of `Tours and travel related and customer handling services' with transacted value of Rs.14.65 crore. The manner in which accounts are maintained cannot be determinative of computing the ALP of an international transaction. The ALP is required to be computed in accordance with the prescription of the methods given under Rule 10B(1), which is irrespective of the method in which accounts are maintained. When this position was put across, the ld. AR was fair enough to concede that the judgment in the case of International Travel House Ltd. (supra) is only relevant in so far as accounting practice is concerned and it has nothing to do with the transfer pricing provision. 12.4. The ld. AR heavily relied on the ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining the ALP under the `Cost plus method'. Au contraire, this Rule specifically provides a modus operandi for determining the ALP by considering both the direct and indirect costs. In contrast to the facts of Johnson Matthey India Pvt. Ltd. (supra), the extant assessee has neither incurred any pass through costs nor used the TNMM as the most appropriate method. Thus, this judgment has no application to the facts of the instant case. 12.6. The ld. AR has relied on some other orders of the Tribunal, all of which are based primarily on the application of TNMM in which the pass through costs were actually incurred and such costs have been directed to be excluded. These decisions, in our considered opinion, again have no relevance in so far as the issue under consideration is concerned. 12.7. Another factor which needs to be accentuated is that the international transaction as per the assessee's audit report in Form No. 3CEB is `Tours and Travel Related and Customer Handling Services' with transacted value of Rs.14.65 crore. This amount is a sum total of direct costs incurred in providing services amounting to Rs.13.93 crore and service fee of Rs.71.54 lac. This is the total a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By directing to do an analysis of `some' and not `all' the comparable companies, the ld. CIT(A) allowed the assessee to do cherry-picking by choosing only such companies which suit its purpose. Neither, there is an indication in the impugned order that the ld. CIT(A) himself ensured that no comparable company was left out, nor did he ask the AO to find out other comparable companies. This has put the exercise done by the assessee during the course of first appellate proceedings, open to question. 15. In view of the foregoing reasons, we are unable to persuade ourselves to approve the reasoning given by the ld. CIT(A) in deleting the addition. 16.1. We find that there are certain flaws in the determination of the ALP by the AO as well. 16.2. A casual look at the 14 companies tabulated at page 4 of the assessment order giving weighted average profit rate of 11.72% applied by the AO divulges that such profit rate has been computed on the basis of the figures of these companies for three years. The Hon'ble Delhi High Court, after considering the mandate of Rule 10B(4) r .w. r. 10D(4) has held in Chrys Capital Investment Advisors (India) P. Ltd. VS. DCIT (2015) 93 CCH 29 DelHC that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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