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DCIT,Circle-11(1),New Delhi. Vs. Fritidsresor Tours & Travels India Pvt. Ltd., C-63, Panchsheel Enclave, New Delhi.
November, 16th 2015
       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.


                                     2
                                                             ITA No.1480/Del/2011


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



                                    3
                                                                    ITA No.1480/Del/2011


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


                                               4
                                                          ITA No.1480/Del/2011


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


                                    5
                                                               ITA No.1480/Del/2011


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.
                                       6
                                                           ITA No.1480/Del/2011


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
                                     7
                                                          ITA No.1480/Del/2011


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:-




                                     8
                                                               ITA No.1480/Del/2011


"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.




                                        9
                                                                 ITA No.1480/Del/2011


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)"


                                         10
                                                          ITA No.1480/Del/2011




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




                                    11
                                                            ITA No.1480/Del/2011


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
                                     12
                                                           ITA No.1480/Del/2011


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
                                     13
                                                          ITA No.1480/Del/2011


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,
                                    14
                                                          ITA No.1480/Del/2011


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
                                    15
                                                          ITA No.1480/Del/2011


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


                                    16
                                                          ITA No.1480/Del/2011


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


                                    17
                                                                    ITA No.1480/Del/2011


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.


                                          18
                                                          ITA No.1480/Del/2011


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.


                                    19
                                                          ITA No.1480/Del/2011


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
                                    20
                                                        ITA No.1480/Del/2011


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


                                   21
                                                          ITA No.1480/Del/2011


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


                                    22
                                                          ITA No.1480/Del/2011


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


                                    23
                                                         ITA No.1480/Del/2011


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


                                   24
                                                        ITA No.1480/Del/2011


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,





                                      25
                                                         ITA No.1480/Del/2011


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

                                    26
                                                            ITA No.1480/Del/2011


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.




                                     27
                                                          ITA No.1480/Del/2011


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.
                                    28
                                                         ITA No.1480/Del/2011


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



                                   29
                                                           ITA No.1480/Del/2011


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.




                                     30
                                                           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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