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DCIT,Circle 11(1), Room No.312, CR Building, New Delhi. Vs. Exxon Mobil Gas (India) Pvt. Ltd.,Suite No.36, The Imperial, Janpath, New Delhi.
November, 14th 2014
               DELHI BENCHES : I : NEW DELHI


                          ITA No.417/Del/2011
                       Assessment Year : 2004-05

DCIT,                      Vs.         Exxon Mobil Gas (India) Pvt. Ltd.,
Circle 11(1),                          Suite No.36, The Imperial,
Room No.312,                           Janpath,
CR Building,                           New Delhi.
New Delhi.
                                       PAN : AABCE1792K

     (Appellant)                           (Respondent)

              Assessee By         :    Shri Mukesh Butani, Advocate
              Department By       :    Shri Yogesh Kumar Verma, CIT,DR



       This appeal by the Revenue arises out of the order passed by

the CIT(A) 29.11.2010 in relation to the assessment year 2004-05.

2.     The only issue raised in this appeal is against the deletion of

addition    of     `45,41,519/-       on   account   of   transfer   pricing

                                                      ITA No.417/Del/2011

3.   Briefly stated, the facts of the case are that Exxon Mobil is a

multi-national group of companies engaged in oil and gas

industry. It conducts business in almost 200 countries. Its major

business is to discover, access, develop, refine and market oil and

gas resources. The assessee, an Indian company, is part of this

group, which conducts market survey activities and renders

related advisory services to its associated enterprises (AEs). Four

international transactions were reported by the assessee 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, accordingly,

                                                     ITA No.417/Del/2011

showed that its international transaction was at ALP.      The TPO

rejected the use of multiple-year data and resorted to the current

year data alone.     In doing so, he noticed that only eight

companies were left out of those twelve chosen by the assessee

because the current year data of the remaining four companies

was not available. The TPO computed average of OP/TC margin of

these eight companies for the financial year 2003-04, at 17.96%.

By applying this profit margin, a transfer pricing adjustment of

`45,41,519/- was proposed, which amount was added by the AO

in the assessment order.

4.    At this juncture, it is pertinent to mention that there is no

dispute on any aspect of the addition on account of transfer

pricing adjustment other than the calculation of OP/TC margin of

Engineers India Ltd. (EIL), one of the companies chosen by the

assessee as comparable in its transfer pricing study by showing

its margin of 37.41% for the current year, which stood adopted by

the TPO as such without any alteration.

5.   The assessee filed a rectification application before the TPO,

urging that the correct OP/TC margin of EIL was 6.98% and the

                                                      ITA No.417/Del/2011

same be taken. The TPO rejected this contention on the ground

that the assessee had itself worked out the profit margin of EIL at

37.41% for the current year.          The same issue was espoused

before the ld. CIT(A), arguing that the OP/TC of EIL should be

taken at 6.98%, as was demonstrated by the assessee through

Annexure-I filed along 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 company on entity level

and not on a segment level. Simply put, the issue before us is

cabined to the extent of calculation of correct OP/TC of EIL for the
                                                     ITA No.417/Del/2011

purposes of inclusion in and ex consequenti averaging the same

in respect of the eight comparable companies. We want to clarify

that the action of the TPO in using the current year data of

comparables, as against the multiple-year data initially chosen by

the assessee, is not agitated on behalf of the assessee. From the

multiple year data of OP/TC of EIL, it can be seen that the

assessee had itself shown the margin for the current year at

37.41% in its TP study and the same figure was adopted by the

TPO in its order. Now, the assessee is putting forth an argument

that this profit percentage is not correct.

7.    In principle, we find no reason to restrict the right of the

assessee to assail the correctness of the figures submitted in its

TP study.     If a figure was wrongly taken by the assessee

inadvertently, there should be no disqualification to later on

contending that it should be substituted with a correct figure. The

appropriateness of such a contention, if made,       needs to be

judged at the end of the Revenue, without rejecting it at the

outset. Precisely, this is the argument which was raised by the

assessee before the TPO in rectification proceedings asserting

that the OP/TC of EIL at entity level should be correctly taken at
                                                        ITA No.417/Del/2011

6.98% instead of 37.41% shown in its TP study. The ld. CIT(A),

was albeit    right in accepting this 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. AR about the reasons for the difference in

such figures, which ultimately culminated into the overall

difference in the calculation of OP/TC, the ld. AR submitted that

the figure given in the Profit & Loss Account contains both

operating and non-operating incomes, whereas the calculation

under TNMM calls for the adoption of operating income. It was

submitted that out of the total `Other income' of `4,809.63 lac,

                                                    ITA No.417/Del/2011

the operating `Other income' was `174.64 lac, which was taken

up for calculation. We have perused the details of `Other income'

given on page 293 of the paper book, being Schedule-G to the

Annual accounts of EIL.     One of the items contained in this

schedule is `Miscellaneous income' amounting to `173.54 lac,

which, in the opinion of the ld. AR constituted the lone operating

income that was included in the calculation of OP/TC at 6.98%.

We agree with the contention of the ld. AR that TNMM

contemplates the taking of operating profit to a suitable base and

in this process the items of non-operating income are liable to be

excluded. At this stage, one needs to appreciate the difference

between the operating profit and net profit. Whereas, operating

profit is excess of operating revenue over operating costs, net

profit encompasses the effect of both the streams, viz., operating

and non-operating. Revering to the operating profit, it represents

the difference between the operating income and operating

expense. The argument of the ld. AR for adoption of 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

                                                            ITA No.417/Del/2011

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 light that

the figures of all the expenses tally.              To put it simply, the

assessee took all the expenses, including the non-operating

expenses, in the calculation of operating profit of EIL. It is but

natural that if the items of non-operating income are to be

excluded from the 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%. Prima facie, it appears from page 295,

being Schedule-H containing details of `Corporate cost', that it

includes Bank charges to the tune of `172.79 lac. It is manifest

that the bank interest expenditure, like bank interest income, also
                                                    ITA No.417/Del/2011

assumes the same character of non-operating nature. It is not too

far to seek the reasons for the omission of such cost from the

total operating costs. Similarly, there can be other non-operating

expenses as well, finding their place in the details of total

expenses incurred by EIL, which have not been excluded by the

assessee. 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 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

                                                            ITA No.417/Del/2011

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.

               Sd/-                                         Sd/-

       [DIVA SINGH]                                   [R.S. SYAL]
     JUDICIAL MEMBER                              ACCOUNTANT MEMBER

Dated, 13th November, 2014.


Copy forwarded to:

     1.   Appellant
     2.   Respondent
     3.   CIT
     4.   CIT (A)
     5.   DR, ITAT

                                                    AR, ITAT, NEW DELHI.

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