IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-2 : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND MS SUCHITRA KAMBLE, JM
ITA No.1480/Del/2011
Assessment Year : 2006-07
DCIT, Vs. Fritidsresor Tours & Travels India
Circle-11(1), Pvt. Ltd.,
New Delhi. C-63, Panchsheel Enclave,
New Delhi.
PAN: AAACF9284A
(Appellant) (Respondent)
Assessee By : Shri Ajay Vohra, Sr. Advocate &
Shri Neeraj Jain, Advocate
Department By : Shri Anand Kumar Kedia, CIT, DR
Date of Hearing : 10.11.2015
Date of Pronouncement : 13.11.2015
ORDER
PER R.S. SYAL, AM:
This appeal by the Revenue emanates from the order passed by the
CIT(A) on 31.1.2011 in relation to the assessment year 2006-07.
ITA No.1480/Del/2011
2. The only issue raised in this appeal is against the deletion of
addition of Rs.91,80,340/- made by the Assessing Officer (AO) on
account of transfer pricing adjustment u/s 92CA(3) of the Income-tax
Act, 1961 (hereinafter also called `the Act').
3. Succinctly, the facts of the case as recorded in the assessment order
are that the assessee is a company engaged in the business of inbound
tours and travels. It provides services to foreign tourists in India.
Fritidsresor AB (FAB), the overseas associated enterprise (AE) of the
assessee enters into contracts with tourists for their outbound tours to
India. The assessee organizes the tours in India and raises bills on the
associated enterprise. The assessee reported in its audit report in Form
No.3CEB an international transaction of `Tours and Travel Related and
Customer Handling Services' with transacted value of Rs.14,65,34,048/.
The assessee gave break-up of this amount to the AO as `Third Party
(Pass-through) Costs' of Rs.13,93,79,152/- and `Service fee'
amounting to Rs.71,54,896/-. The assessee followed and reported the
`Cost plus method' in its Audit Report as the most appropriate method.
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For demonstrating that its international transaction was at arm's length
price (ALP), the assessee adopted 14 companies as comparable, the
arithmetic mean of whose profit was arrived at 11.72%. The assessee
computed its NCP Margin (the ratio of Net profit to Total expenses) at
25.87% and claimed that its international transaction was at ALP. This
25.87% was computed as a percentage of Net profit to Total costs. The
`Total costs' comprised only Indirect expenses (Personnel cost,
Operating cost and Exchange rate difference) amounting to
Rs.56,84,165/-. The amount of net profit was computed by deducting
the above amount of Indirect expenses from its Service fee to the tune
of Rs.71.54 lac. The AO did not accept this manner of computation of
profit. He did not concur with the assessee's argument that the expenses
of Rs.13.93 crore were third party costs and hence excludible. He opined
that all such expenses were incurred by the assessee alone for inbound
tour of foreign tourists and were required to be considered in
determining the ALP of the international transaction. By applying profit
rate of 11.72% on such costs of Rs.13.93 crore, the AO proceeded to
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make an addition on account of transfer pricing adjustment amounting to
Rs.91,80,340/-, as under:-
"Total cost incurred by the assessee Rs.13,93,79,152/-
The bills should have been raised applying
the cost plus method of 11.72%, ie., Rs.15,57,14,388/-
The operating profit is worked out (155714388-139379152) = Rs. 1,63,35,236
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
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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 submissions and perused the relevant
material on record. Before considering the merits of deletion of addition,
it is sine qua non to elaborately consider the nature and manner of work
performed by the assessee. A copy of the Transfer pricing study report
of the assessee is placed on pages 32-123 of the paper book. Page 58
gives narration of the Functions performed, assets employed and risks
undertaken by the assessee. Para 4 on page 58 divulges an overview, as
per which the assessee (FITPL) is rendering tour and travel related and
customer handling services to its parent company Fritidsresor AB,
Sweden (FAB). The functions performed, as indicated in this report,
show that the assessee : `mainly caters to the inbound tourist traffic
centred in and around India. The main service performed by FITPL is in
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the field of handling the tourists when they come to India. FAB enters
into tourism contracts for their outbound tours to India. Thereafter, it
enters into a contract with FITPL under which FITPL renders service to
FAB in respect of the tour and travel arrangements to be made in respect
of the tours.' The main tourist centric activities carried out by the
assessee have been broadly classified into two categories in this transfer
pricing report on the same page, which are reproduced as under:-
"Charters: The services provided mainly include to and fro transfers
from the airport to the respective hotels and hotel bookings. The
company handles both the transfers and hotel bookings.
Excursions: While the tourists are in Goa, the Representatives (Reps)
of the overseas tour operators sell various excursions to the tourists
directly, collect money from them, and after deducting the commission
(as agreed) deposit the money with the FITPL which arranges for all
the excursions."
6. Then, there is amplification of risk analysis in the Transfer pricing
study report. It has been mentioned that the assessee bears nominal
market risk, credit risk, foreign exchange fluctuation risk, product price
risk and contract risk associated with this line of business. The entire
service liability risk, namely, relating to non-performance of the services
under the contract has to be borne by the assessee alone.
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7. An overview of the narration given in the assessee's Transfer
pricing study report, more specifically, the activities carried out by it
having been classified in two broader 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
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arrangements for the customers in India on net service fees of Rs.71.54
lac and all the hotels etc. are booked directly by FAB and it is simply
paying such costs and passing through the same to FAB. On being
called upon to substantiate this submission and show how the amount of
its service fee of Rs.71,54,896/- was computed, the ld. AR could not
give any direct reply except for stating that this was in consonance with
certain agreements, but, there was no fixed percentage of commission
settled between the assessee and foreign AE. When the ld. AR was
required to draw our attention towards the Agreement between the
assessee and the foreign AE under which the assessee was rendering
services and receiving remuneration, initially it was stated that there was
no formal agreement between the two AEs, but, later on, the ld. AR
sought time of one day for producing such Agreement, if any. On the
next date of hearing, the ld. AR placed on record a copy of `Rate sheet
for the period 1st October till 16th April, 2005' of the assessee to its
AE, which reads as under:-
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"RATES SHEET FOR 2005 - 2006 - CLASSICAL INDIA TOUR (IND)
NET EFFECTIVE 01 OCTOBER TILL 16th April 2005
NO OF UNITS RATES
Minimum of 10 - 14 Paying USD 600 Per Person
15 - 19 + 1 Free USD 565 Per Person
20 - 24 + 1 Free USD 560 Per Person
25 - 29 + 1 Free USD 555 Per Person
Single room Supplement USD 316 Per Single
Air fare Goa- Delhi - Goa
For minimum 10 Paying & above
using
Sahara Airlines USD 452 Per person
HOTEL ENVISAGED
CITY NAME HOTEL NO OF NIGHTS
Goa Majestic 01
New Delhi Oberoi Maidens 01
Jaipur Country Inn 02
(Radisson)
Agra Jaypee Palace 02
New Delhi Oberoi Maidens 01
Rates include the following:-
A. HOTELS
· 07 Nights/ 08 days accommodation on Twin sharing basis including all existing
taxes.
B. MEALS
·Accommodation on half board basis at all places with meals on fixed menu only.
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C. TRANSPORT.
· Meeting and assistance on arrival / departure by le passage to India
representative
· Transfer from airport to hotel and vice-versa. (Except in Goa)
· Sightseeing, excursion and surface travel as per programme.
· Cost based on using air-conditioned transport as under.
NO OF UNITS TYPE OF TRANSPORT
02 OR 03 PAYING Medium Car
04 - 06 Paying Tempo Traveller
07 - 14 Paying Mini Coach
15 Paying Onward Large Coach
D. PORTEAGE/ENTRANCE
· Porterage of baggage at airport/Hotel.
· Entrance at the places 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)"
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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, it becomes manifest
that the assessee is charging at a specified fixed rate per person for the
tour. For example, if there are 10-14 guests and the tour is of seven
nights and eight days, the assessee gets USD 600 per person. The rate so
charged is quid pro quo for the provision of hotel, meals, transport,
porteage/entrance and guides to the foreign tourists. If the assessee
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manages to get good discount from hotels and economical transportation
etc., its profit correspondingly gets swelled and vice versa. It can be
understood with the help of a simple illustration. If the assessee incurs
expenses on hotels, meals, and transport, etc. to the tune of USD 500 per
person, its profit turns out to be USD 100 per person. If such costs get
reduced to, say, USD 450 per person, the assessee's profit increases to
USD 150 per person. If, on the other hand, such costs go up to, say,
USD 550 per person, the assessee's profit shrinks to USD 50 per person.
Similar is the position regarding the composite charge by the assessee
on account of air fare of Goa-Delhi-Goa for the entire period, namely, 1st
October, 2004 till 16th April, 2005, at USD 452 per person. This is
again a uniform fixed rate irrespective of the actual air fare that the
assessee may have to incur for tourists. It is a common knowledge that
the air fares keep on fluctuating for a variety of reasons over a period of
time. If the assessee manages to obtain air tickets at a lower rate, then, it
adds to its profit and vice versa. To illustrate, if the assessee gets air
tickets at say, 400 USD per person, its profit is 52 USD per person, but
if the air tickets cost 420 USD per person, then its profit stands reduced
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to USD 32 per person. To put it simply, the assessee charges a fixed
composite `all inclusive' amount from its AE, which is irrespective of
the actual costs defrayed by it in providing the services to the tourists at
pre-determined standards. Having received the amount as per `Rate
sheet' from its AE, it becomes the duty of the assessee to arrange and
pay for the provision of the contracted services at its own without any
involvement of the AE. The obligation undertaken by the assessee with
its AE is to provide the desired services to the foreign tourists. The
manner in which such services are to be provided is the duty of the
assessee alone, who has to arrange and pay for such services at its own.
Higher 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
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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 non-
payment 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 crore
incurred on hotel, transportation and air fare etc. for tourists, is pass
through costs, pre-supposes that such expenses are incurred by the
assessee for and on behalf of its foreign AE, which are recoverable as
such from its AE. If the costs are not recoverable from the AE, then such
costs shed the character of pass through costs. We find that the entire
amount of Rs.13.93 crore represents the costs incurred by the assessee in
its role of a principal and not as an agent of its foreign AE inasmuch as
this is not an amount recoverable per se from its AE. Our view is further
fortified and substantiated by copies of certain invoices raised by hotels,
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etc. on the assessee directly. Page no.136 is a copy of invoice dated
7.2.2006 of Radisson Hotel raised on the assessee. Similarly, page no.
138 is a copy of invoice raised by Hotel Crowne Plaza on the assessee.
On the other hand, the assessee has raised invoices on its foreign AE at
the rates as per `Rate sheet', which is a fixed and all inclusive charge
having no link with the actual amount incurred or to be incurred by the
assessee. It is this amount of Rs.14.65 crore received from the AE that
forms its gross revenue, from which all the direct and indirect expenses
on providing services and facilities to the tourists are met by the
assessee, leaving the remainder as its profit. Once this is the correct
position, we fail to appreciate as to how the sum of Rs.13.93 crore
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. Further, we have
noticed supra that the 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
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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.
9. The next question which arises for our consideration is 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 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
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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 be considered for the
purpose.
10. Before addressing the correctness of the approach, we consider it
expedient to note down the relevant provisions in this regard. Section
92(1) of the Act provides that: `any income arising from an international
transaction shall be computed having regard to the arm's length price.'
Section 92C deals with the computation of arm's length price. This
section provides that the ALP of an international transaction shall be
determined by any of the methods given in the provision, which also
includes `(c) Cost plus method'. The manner of determination of ALP
under different methods has been set out in Rule 10B. Clause (c) of
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Rule 10B(1) deals with the determination of ALP under the `Cost plus
method', which reads as under:-
`(c) cost plus method, by which,--
(i) the direct and indirect costs of production incurred by the
enterprise in respect of property transferred or services provided to an
associated enterprise, are determined ;
(ii) the amount of a normal gross profit mark-up to such costs
(computed according to the same accounting norms) arising from the
transfer or provision of the same or similar property or services by the
enterprise, or by an unrelated enterprise, in a comparable uncontrolled
transaction, or a number of such transactions, is determined ;
(iii) the normal gross profit mark-up referred to in sub-clause (ii) is
adjusted to take into account the functional and other differences, if any,
between the international transaction and the comparable uncontrolled
transactions, or between the enterprises entering into such transactions,
which could materially affect such profit mark-up in the open market ;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted
profit mark-up arrived at under sub-clause (iii) ;
(v) the sum so arrived at is taken to be an arm's length price in
relation to the supply of the property or provision of services by the
enterprise ;'
11. Sub-clause (i) provides that the direct and indirect costs incurred
by an enterprise in providing services are first determined. The emphasis
is on considering both the direct and indirect costs in providing services.
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Sub-clause (ii) provides for determining the normal gross profit mark-up
on the direct and indirect costs resulting from the provision of services
by an unrelated enterprise in a comparable uncontrolled transaction.
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 sub-
clause (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.
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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 costs. Personnel expenses, Operating
expenses and Exchange rate difference totaling Rs.56.84 lac are the
indirect costs incurred by the assessee. The assessee has made out a
case that the direct costs incurred totaling Rs.13.93 crore are in the
nature of pass-through costs and hence liable to be ignored. We have
dealt with this contention supra by holding that these are not pass
through costs incurred by the assessee. In fact, these are the direct costs
incurred in providing services to the tourists for which the assessee is
getting revenue from its AE. Going by the language of the rule
10B(1)(c), it is clear that both the direct and indirect costs are to be
considered. The ld. CIT(A) in deleting the addition has ignored the
direct costs and approved the computation of the ALP under this method
by confining himself only to the indirect costs, which is contrary to the
instruction of the rule. It is impermissible to alter the prescription of
Rule 10B(1)(c) by applying the gross profit rate only to the indirect costs
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in total disregard to the mandate of considering both the direct and
indirect costs.
12.2. The ld. AR contended that the manner in which the assessee
recorded the transactions in its books of account by crediting only
service fee of Rs.71.54 lac to its Profit & Loss Account and then
debiting indirect expenses to the tune of Rs.56.84 lac is an accepted
accounting practice which has been approved by the Hon'ble Delhi High
Court in CIT vs. International Travel House Ltd. (2012) 344 ITR 554
(Del). This was countered by the ld. DR by submitting that maintenance
of accounts on `net basis' is one of the permissible methods and the
accounts can be maintained on `gross basis' as well. We find that in the
case before the Hon'ble Delhi High Court, the assessee credited income
after netting discount from gross commission income. The CIT,
exercising his revisional power u/s 263, set aside the assessment order
and directed the AO to verify the net commission transferred to the
Profit & Loss Account. The assessee filed appeal before the Tribunal,
which noticed that gross income was credited to the Profit & Loss
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Account in one case whereas net income was credited in other cases and
the tax effect under both the methods was same and, hence, the exercise
of power u/s 263 was improper. The Hon'ble Delhi High Court
dismissed the appeal filed by the Revenue by observing 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
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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 judgment of the Hon'ble Delhi
High Court dated 30.10.2015 in Johnson Matthey India Pvt. Ltd. vs.
DCIT (ITA No.14/2013) to bolster his argument supporting the
correctness of the assessee's computing profit margin on indirect costs
alone, to the exclusion of direct costs of Rs.13.93 crore. The assessee in
that case, was obliged to procure the raw material on instructions of
MUL at a price dictated by MUL from the sources selected by MUL.
That assessee was entitled to a per unit fixed manufacturing charge over
and above the actual cost of raw material. This shows that the assessee
in that case incurred pass-through costs for and on behalf of MUL which
were recoverable as such and that assessee was entitled only to a fixed
per unit manufacturing charge over and above the actual cost of raw
material. So, in that case the question for consideration was the
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deductibility or otherwise of such pass through costs in determining the
ALP under the Transactional net margin method (TNMM), which has
been answered in the assessee's favour. There can be no doubt that the
pass-through costs are liable to be ignored in computing the ALP under
the TNMM.
12.5. We fail to draw any parallel of this case insofar as the instant
case is concerned for certain reasons set out hereinafter. Firstly, the
amount of Rs.13.93 crore is not a pass-through cost as has been held by
us in an earlier part of the order. Secondly, the Hon'ble High Court in
holding that the denominator should exclude pass through costs took
note of the expression `any other relevant base' occurring in Rule
10B(1)(e)(i) of the IT Rules. It is pertinent to mention that Rule
10B(1)(e) deals with the determination of the ALP under the TNMM.
Sub-clause (i) of rule 10B(1)(e) particularly provides for the
computation of net profit margin in relation to costs incurred or sales
effected, etc. `or having regard to any other relevant base.' The
computation of net profit margin in relation to the expression `any other
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relevant base' is peculiar to the determination of ALP under the TNMM.
In contrast to this, we are concerned with the computation of ALP in the
present case under the `Cost plus method' as per Rule 10B(1)(c). The
manner of computation of the ALP under these two methods, namely,
TNMM and Cost Plus Method, is totally different. There is no
analogous provision in Rule 10B(1)(c) to consider `any other relevant
base' for 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,
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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 amount received by the
assessee from its AE. It is this international transaction of Rs.14.65
crore whose ALP is required to be computed. The action of the ld.
CIT(A) has resulted in restricting the international transaction to a sum
of Rs.71.54 lac, being the amount of service fee alone, which is again
contrary to the statutory provisions. We, therefore, hold that both the
direct and indirect cost are required to be considered in determining the
ALP under the `Cost plus method'.
13. The second reason for our not countenancing the impugned order
is that the ld. CIT(A) has accepted the yardstick of comparing the
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assessee's ratio of `Net profit to Total costs' with the similar ratio of two
comparables. Ratio of `Net profit to total costs' has no place in the
mechanism provided for computing the ALP under the `Cost Plus
method' as can be seen from the extraction of rule 10B(1)(c) above.
Even under the TNMM, the formula is the ratio of `operating profit' to
a suitable base, as has been held by the Hon'ble Apex Court in DIT (I.T.)
VS. Morgan Stanley & Co. (2007) 162 Taxman 165 (SC). What is
relevant under the TNMM is `operating profit' and not `net profit'. The
action of the ld. CIT(A) in accepting the ratio of `Net profit to total
costs' as a profit level indicator has led to the devising of a new method
in its own, which has no sanction of law. As the most appropriate
method in this case is undisputedly the `Cost plus method', we fail to
appreciate as to how the decision of the ld. first appellate authority in
accepting such a ratio as a Profit level indicator under this method can
be sustained. The comparison of this ratio is alien to the Cost plus
method.
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14. The third reason for not upholding the impugned order is affixing
the seal of approval by the ld. CIT(A) to the selection by the assessee of
only two companies as comparable. Relevant part of para 2.9 of the
impugned order provides that : `the appellant was further asked to do an
analysis of the NCP margin of some listed companies with in the same
trade of Tour & Travel'. It is in pursuance to this direction of the ld.
CIT(A) that the assessee came out with two comparable companies,
namely, International Travel House Ltd. and Cox & Kinds (India) Pvt.
Ltd. Selection of only two companies is in sharp contrast to the assessee
earlier choosing 14 companies as comparable in its Transfer pricing
study report. 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.
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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 ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT
(2015) 93 CCH 29 DelHC that the multiple year data should be
ordinarily avoided. Consideration of the single year data was earlier
approved by the Special bench of the tribunal in Aztec Software &
Technology Services Ltd. [(2007) 107 ITD 141 (Bang.) (SB). In spite of
these decisions, the determination of the ALP has been made on the
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basis of multiple year data and not the current year data alone, which is
not correct.
16.3. The AO has worked out addition by way of transfer pricing
adjustment amounting to Rs.91.80 lac by applying the arithmetic mean
of the ratio of `Net profit to Total costs' of the comparables at 11.72% to
the direct and indirect costs incurred by the assessee. As against this, the
Cost plus method contemplates applying 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.
17. 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.
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ITA No.1480/Del/2011
18. In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 13.11.2015.
Sd/- Sd/-
[SUCHITRA KAMBLE] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 13th November, 2015.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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