DCIT, New Delhi V. M/s. Fritidsresor Tours & Travels India Pvt. Ltd., New Delhi

ITA 1480/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97850 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 7 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-11-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 10-11-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 24-03-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Tax effect
• Section: 92C; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, AM AND MS SUCHITRA KAMBLE, J M ITA NO.1480/DEL/2011 ASSESSMENT YEAR : 2006-07 DCIT, CIRCLE-11(1), NEW DELHI. VS. FRITIDSRESOR TOURS & TRAVELS INDIA PVT. LTD., 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 Y EAR 2006-07. ITA NO.1480/DEL/2011 2 2. THE ONLY ISSUE RAISED IN THIS APPEAL IS AGAINST THE DELETION OF ADDITION OF RS.91,80,340/- MADE BY THE ASSESSING OF FICER (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 B USINESS OF INBOUND TOURS AND TRAVELS. IT PROVIDES SERVICES TO FOREIGN TOURISTS IN INDIA. FRITIDSRESOR AB (FAB), THE OVERSEAS ASSOCIATED ENTE RPRISE (AE) OF THE ASSESSEE ENTERS INTO CONTRACTS WITH TOURISTS FOR TH EIR OUTBOUND TOURS TO INDIA. THE ASSESSEE ORGANIZES THE TOURS IN INDIA AN D RAISES BILLS ON THE ASSOCIATED ENTERPRISE. THE ASSESSEE REPORTED IN IT S AUDIT REPORT IN FORM NO.3CEB AN INTERNATIONAL TRANSACTION OF `TOURS AND TRAVEL RELATED AND CUSTOMER HANDLING SERVICES WITH TRANSACTED VALUE O F 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 `S ERVICE 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. ITA NO.1480/DEL/2011 3 FOR DEMONSTRATING THAT ITS INTERNATIONAL TRANSACTIO N WAS AT ARMS LENGTH PRICE (ALP), THE ASSESSEE ADOPTED 14 COMPANIES AS C OMPARABLE, THE ARITHMETIC MEAN OF WHOSE PROFIT WAS ARRIVED AT 11.7 2%. THE ASSESSEE COMPUTED ITS NCP MARGIN (THE RATIO OF NET PROFIT TO TOTAL EXPENSES) AT 25.87% AND CLAIMED THAT ITS INTERNATIONAL TRANSACT ION WAS AT ALP. THIS 25.87% WAS COMPUTED AS A PERCENTAGE OF NET PROFIT T O TOTAL COSTS. THE `TOTAL COSTS COMPRISED ONLY INDIRECT EXPENSES (PER SONNEL COST, OPERATING COST AND EXCHANGE RATE DIFFERENCE) AMOUNT ING TO RS.56,84,165/-. THE AMOUNT OF NET PROFIT WAS COMPU TED BY DEDUCTING THE ABOVE AMOUNT OF INDIRECT EXPENSES FROM ITS SER VICE 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 ASSESSEES ARGU MENT 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 ASSESSE E ALONE FOR INBOUND TOUR OF FOREIGN TOURISTS AND WERE REQUIRED TO BE CO NSIDERED IN DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N. BY APPLYING PROFIT RATE OF 11.72% ON SUCH COSTS OF RS.13.93 CRORE, TH E AO PROCEEDED TO ITA NO.1480/DEL/2011 4 MAKE AN ADDITION ON ACCOUNT OF TRANSFER PRICING ADJ USTMENT AMOUNTING TO RS.91,80,340/-, AS UNDER:- TOTAL COST INCURRED BY THE ASSESSEE RS.13,93,79,15 2/- 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 (155714388-1393 79152) = 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 PROCEEDING S, THE LD. FIRST APPELLATE AUTHORITY ASKED THE ASSESSEE TO DO AN ANA LYSIS OF NCP MARGIN (RATIO OF NET PROFIT TO TOTAL EXPENSES) OF SOME LISTED COMPANIES WITHIN THE SAME TRADE OF TOUR AND TRAVEL BUSINESS. THE ASSESS EE FILED SUCH AN ANALYSIS BEFORE HIM TREATING TWO COMPANIES AS COMP ARABLE, NAMELY, INTERNATIONAL TRAVEL HOUSE LTD., AND COX & KINGS (I NDIA) PVT. LTD. BY CONSIDERING THE PROFIT MARGINS OF THESE TWO COMPANI ES, THAT IS, PERCENTAGE OF NET PROFIT TO TOTAL EXPENSES (EXCLUDI NG ACTUAL COSTS INCURRED ON HOTELS, DOMESTIC AIR FARE AND TRANSPORT ATION ETC.) AT 23.16% AND 28.91% RESPECTIVELY, WITH AVERAGE AT 26.04%, T HE LD. CIT(A) FOUND ITA NO.1480/DEL/2011 5 THE ASSESSEES PROFIT MARGIN, CALCULATED IN THE SAM E MANNER, THAT IS, PERCENTAGE OF NET PROFIT TO TOTAL EXPENSES (EXCLUDI NG 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 DEL ETION OF ADDITION. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. BEFORE CONSIDERING THE MERITS O F DELETION OF ADDITION, IT IS SINE QUA NON TO ELABORATELY CONSIDER THE NATURE AND MANNER OF W ORK PERFORMED BY THE ASSESSEE. A COPY OF THE TRANSFER PRICING STUDY REPORT OF THE ASSESSEE IS PLACED ON PAGES 32-123 OF THE PA PER BOOK. PAGE 58 GIVES NARRATION OF THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN BY THE ASSESSEE. PARA 4 ON PAGE 58 DIVU LGES AN OVERVIEW, AS PER WHICH THE ASSESSEE (FITPL) IS RENDERING TOUR AN D TRAVEL RELATED AND CUSTOMER HANDLING SERVICES TO ITS PARENT COMPANY FR ITIDSRESOR AB, SWEDEN (FAB). THE FUNCTIONS PERFORMED, AS INDICATE D IN THIS REPORT, SHOW THAT THE ASSESSEE : MAINLY CATERS TO THE INBO UND TOURIST TRAFFIC CENTRED IN AND AROUND INDIA. THE MAIN SERVICE PERFO RMED BY FITPL IS IN ITA NO.1480/DEL/2011 6 THE FIELD OF HANDLING THE TOURISTS WHEN THEY COME T O 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 CATE GORIES IN THIS TRANSFER PRICING REPORT ON THE SAME PAGE, WHICH ARE REPRODUC ED 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 BOOKIN GS. 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 CO MMISSION (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 ASSESS EE BEARS NOMINAL MARKET RISK, CREDIT RISK, FOREIGN EXCHANGE FLUCTUAT ION RISK, PRODUCT PRICE RISK AND CONTRACT RISK ASSOCIATED WITH THIS LINE OF BUSINESS. THE ENTIRE SERVICE LIABILITY RISK, NAMELY, RELATING TO NON-PER FORMANCE OF THE SERVICES UNDER THE CONTRACT HAS TO BE BORNE BY THE ASSESSEE ALONE. ITA NO.1480/DEL/2011 7 7. AN OVERVIEW OF THE NARRATION GIVEN IN THE ASS ESSEES TRANSFER PRICING STUDY REPORT, MORE SPECIFICALLY, THE ACTIVI TIES CARRIED OUT BY IT HAVING BEEN CLASSIFIED IN TWO BROADER CATEGORIES, N AMELY, CHARTERS AND EXCURSIONS, SHOWS THAT THE CONTRACTS WITH TOURISTS ARE FINALIZED BY FOREIGN AE AND THE ASSESSEE HAS TO ORGANIZE THE ENT IRE 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 T OURISTS DIRECTLY, COLLECT MONEY FROM THEM, AND, AFTER DEDUCTING THEIR COMMISS ION (AS AGREED), DEPOSIT THE MONEY WITH THE FITPL, BEING THE ASSES SEE, WHICH ARRANGES FOR ALL THE EXCURSIONS. GOING BY THIS MENTION, IT TURNS OUT THAT THE FOREIGN AE IS SIMPLY CONCERNED WITH ARRANGING CUSTO MERS, FINALIZING THEIR TOURS IN INDIA AND RECEIVING THE TOTAL REVENU E FROM SUCH CUSTOMERS, WHICH AFTER APPROPRIATE DEDUCTIONS INCLUSIVE OF THE IR COMMISSION, IS HANDED OVER TO THE ASSESSEE. ON TOURISTS REACHING I NDIA, THE ENTIRE EXERCISE OF MAKING ARRANGEMENTS FOR THEIR STAY, TRA VEL 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 ITA NO.1480/DEL/2011 8 ARRANGEMENTS FOR THE CUSTOMERS IN INDIA ON NET SERV ICE 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 SHO W 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 PERCENT AGE OF COMMISSION SETTLED BETWEEN THE ASSESSEE AND FOREIGN AE. WHEN THE LD. AR WAS REQUIRED TO DRAW OUR ATTENTION TOWARDS THE AGREEMEN T BETWEEN THE ASSESSEE AND THE FOREIGN AE UNDER WHICH THE ASSESSE E WAS RENDERING SERVICES AND RECEIVING REMUNERATION, INITIALLY IT W AS 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:- ITA NO.1480/DEL/2011 9 RATES SHEET FOR 2005 - 2006 - CLASSICAL INDIA TOUR (IND) NET EFFECTIVE 01 OCTOBER TILL 16 TH APRIL 2005 NO OF UNITS MINIMUM OF 10 - 14 PAYING 15 - 19 + 1 FREE 20 - 24 + 1 FREE 25 - 29 + 1 FREE SINGLE ROOM SUPPLEMENT AIR FARE GOA- DELHI - GOA FOR MINIMUM 10 PAYING & ABOVE USING SAHARA AIRLINES RATES USD 600 PER PERSON USD 565 PER PERSON USD 560 PER PERSON USD 555 PER PERSON USD 316 PER SINGLE USD 452 PER PERSON HOTEL ENVISAGED CITY NAME GOA NEW DELHI JAIPUR AGRA NEW DELHI HOTEL MAJESTIC OBEROI MAIDENS COUNTRY INN (RADISSON) JAYPEE PALACE OBEROI MAIDENS NO OF NIGHTS 01 01 02 02 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 WI TH MEALS ON FIXED MENU ONLY. ITA NO.1480/DEL/2011 10 C. TRANSPORT . MEETING AND ASSISTANCE ON ARRIVAL / DEPARTURE BY LE PASSAGE TO INDIA REPRESENTATIVE TRANSFER FROM AIRPORT TO HOTEL AND VICE-VERSA. (E XCEPT 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 D ELHI 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) ITA NO.1480/DEL/2011 11 8. THEN, OUR ATTENTION WAS INVITED TOWARDS PAGE 1 OF THE PAPER BOOK, WHICH IS A COPY OF INVOICE DATED 19.1.2006 RAISED B Y THE ASSESSEE ON FAB IN RESPECT OF SERVICES PROVIDED AT THE RATES WH ICH ARE IN CONFORMITY WITH THE RATE SHEET AS REPRODUCED ABOVE. ALBEIT T HE 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 FR OM THE `RATE SHEET AND THE CORRESPONDING INVOICES RAISED BY THE ASSESSEE O N 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 A ND TRAVEL OF TOURISTS IN INDIA. WHEN WE PERUSE THE AFOREQUOTED RATE SHEET, IT BECO MES 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 TH E TOUR IS OF SEVEN NIGHTS AND EIGHT DAYS, THE ASSESSEE GETS USD 600 PE R PERSON. THE RATE SO CHARGED IS QUID PRO QUO FOR THE PROVISION OF HOTEL, MEALS, TRANSPORT, PORTEAGE/ENTRANCE AND GUIDES TO THE FOREIGN TOURIST S. IF THE ASSESSEE ITA NO.1480/DEL/2011 12 MANAGES TO GET GOOD DISCOUNT FROM HOTELS AND ECONOM ICAL 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 T HE TUNE OF USD 500 PER PERSON, ITS PROFIT TURNS OUT TO BE USD 100 PER PERS ON. IF SUCH COSTS GET REDUCED TO, SAY, USD 450 PER PERSON, THE ASSESSEES PROFIT INCREASES TO USD 150 PER PERSON. IF, ON THE OTHER HAND, SUCH COS TS GO UP TO, SAY, USD 550 PER PERSON, THE ASSESSEES PROFIT SHRINKS T O USD 50 PER PERSON. SIMILAR IS THE POSITION REGARDING THE COMPOSITE CH ARGE BY THE ASSESSEE ON ACCOUNT OF AIR FARE OF GOA-DELHI-GOA FOR THE ENT IRE PERIOD, NAMELY, 1 ST OCTOBER, 2004 TILL 16 TH APRIL, 2005, AT USD 452 PER PERSON. THIS IS AGAIN A UNIFORM FIXED RATE IRRESPECTIVE OF THE ACTU AL AIR FARE THAT THE ASSESSEE MAY HAVE TO INCUR FOR TOURISTS. IT IS A CO MMON 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 IT S PROFIT STANDS REDUCED ITA NO.1480/DEL/2011 13 TO USD 32 PER PERSON. TO PUT IT SIMPLY, THE ASSES SEE CHARGES A FIXED COMPOSITE `ALL INCLUSIVE AMOUNT FROM ITS AE, WHICH IS IRRESPECTIVE OF THE ACTUAL COSTS DEFRAYED BY IT IN PROVIDING THE SE RVICES TO THE TOURISTS AT PRE-DETERMINED STANDARDS. HAVING RECEIVED THE AMOUN T AS PER `RATE SHEET FROM ITS AE, IT BECOMES THE DUTY OF THE ASSE SSEE 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 FO REIGN 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 CAS E 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 ITA NO.1480/DEL/2011 14 THE CONTEXT OF TRANSFER PRICING PROVISIONS, ARE ORD INARILY 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 ASSUMPTI ON OF RISK OF NON- PAYMENT BY THE FOREIGN AE. THESE ARE NON VALUE-ADDI NG COSTS, WHICH ARE INCIDENTAL TO THE PRIMARY BUSINESS ACTIVITY OF THE ASSESSEE FOR WHICH IT NEITHER PERFORMS ANY SIGNIFICANT FUNCTIONS NOR ASSU MES 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 O F 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 INCUR RED 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 IN VOICES RAISED BY HOTELS, ITA NO.1480/DEL/2011 15 ETC. ON THE ASSESSEE DIRECTLY. PAGE NO.136 IS A CO PY 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 PLA ZA 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 T O BE INCURRED BY THE ASSESSEE. IT IS THIS AMOUNT OF RS.14.65 CRORE RECEI VED FROM THE AE THAT FORMS ITS GROSS REVENUE, FROM WHICH ALL THE DIRECT AND INDIRECT EXPENSES ON PROVIDING SERVICES AND FACILITIES TO THE TOURIST S 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 O F 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 REV ENUE. FURTHER, WE HAVE NOTICED SUPRA THAT THE PASS-THROUGH COSTS DO NOT INVOLVE ANY TYP E OF RISK ON THE ENTITY INCURRING THEM, AS THESE ARE RECOVER ABLE AS SUCH FROM ITS AE. AT THE COST OF REPETITION, WE REITERATE THAT TH E ASSESSEE IS LIABLE TO ITA NO.1480/DEL/2011 16 CERTAIN RISKS AS DISCUSSED ABOVE, WHICH HAS BEEN NO TED FROM ITS OWN TRANSFER PRICING STUDY REPORT. UNDER SUCH CIRCUMST ANCES, THE ARGUMENT OF THE LD. AR THAT A SUM OF RS.13.93 CRORE REPRESEN TS PASS-THROUGH COSTS IS INCAPABLE OF ACCEPTANCE AND ERGO JETTISONED. 9. THE NEXT QUESTION WHICH ARISES FOR OUR CONSIDER ATION 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 CUSTOM ER HANDLING SERVICES. THERE IS NO DISPUTE ON THE FACT THAT TH E ASSESSEE APPLIED THE `COST PLUS METHOD FOR DEMONSTRATING THAT ITS INTER NATIONAL TRANSACTION WAS AT ALP. THE AO HAS ALSO ACCEPTED THE APPLICATI ON OF THIS METHOD. FURTHER, THERE WAS NO CHALLENGE BEFORE THE LD. CIT( A) AS TO THE APPLICATION OF THIS METHOD. THIS EVIDENCES THAT THE RE IS NO DISPUTE ON THE APPLICATION OF `COST PLUS METHOD AS THE MOST APPRO PRIATE METHOD. THE MAKING AND DELETION OF ADDITION BY THE AO AND LD. C IT(A) RESPECTIVELY ITA NO.1480/DEL/2011 17 HAS NOT BEEN DUE TO ANY CONFLICT ON THE DECISION IN THE CHOICE OF THE MOST APPROPRIATE METHOD BUT DUE TO THE APPLICATION OF TH E `COST PLUS METHOD IN ONE WAY BY THE AO AND IN THE OTHER BY THE LD. CI T(A). WHEREAS THE AO HAS COMPUTED THE ALP BY TAKING THE TOTAL COSTS I NCURRED BY THE ASSESSEE AT RS.13.93 CRORE, THE LD. CIT(A) HAS UPH ELD THE ASSESSEES CONTENTION THAT THIS AMOUNT SHOULD BE IGNORED IN TO TALITY AND ONLY THE INDIRECT COSTS INCURRED TOTALING RS. 56.84 LAC SHOU LD BE CONSIDERED FOR THE PURPOSE. 10. BEFORE ADDRESSING THE CORRECTNESS OF THE AP PROACH, WE CONSIDER IT EXPEDIENT TO NOTE DOWN THE RELEVANT PROVISIONS IN T HIS REGARD. SECTION 92(1) OF THE ACT PROVIDES THAT: ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SECTION 92C DEALS WITH THE COMPUTATION OF ARMS LEN GTH PRICE. THIS SECTION PROVIDES THAT THE ALP OF AN INTERNATIONAL T RANSACTION SHALL BE DETERMINED BY ANY OF THE METHODS GIVEN IN THE PROVI SION, WHICH ALSO INCLUDES `(C) COST PLUS METHOD. THE MANNER OF D ETERMINATION OF ALP UNDER DIFFERENT METHODS HAS BEEN SET OUT IN RULE 10 B. CLAUSE (C) OF ITA NO.1480/DEL/2011 18 RULE 10B(1) DEALS WITH THE DETERMINATION OF ALP UND ER THE `COST PLUS METHOD, WHICH READS AS UNDER:- `(C) COST PLUS METHOD, BY WHICH, (I) THE DIRECT AND INDIRECT COSTS OF PRODUCTION INC URRED BY THE ENTERPRISE IN RESPECT OF PROPERTY TRANSFERRED OR SE RVICES 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) A RISING FROM THE TRANSFER OR PROVISION OF THE SAME OR SIMILAR PROPER TY OR SERVICES BY THE ENTERPRISE, OR BY AN UNRELATED ENTERPRISE, IN A COM PARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS D ETERMINED ; (III) THE NORMAL GROSS PROFIT MARK-UP REFERRED TO I N SUB-CLAUSE (II) IS ADJUSTED TO TAKE INTO ACCOUNT THE FUNCTIONAL AND OT HER DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING I NTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT SUCH PROFIT MARK-UP I N THE OPEN MARKET ; (IV) THE COSTS REFERRED TO IN SUB-CLAUSE (I) ARE IN CREASED BY THE ADJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III) ; (V) THE SUM SO ARRIVED AT IS TAKEN TO BE AN ARMS L ENGTH 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 IND IRECT COSTS INCURRED BY AN ENTERPRISE IN PROVIDING SERVICES ARE FIRST DE TERMINED. THE EMPHASIS IS ON CONSIDERING BOTH THE DIRECT AND INDIRECT COST S IN PROVIDING SERVICES. ITA NO.1480/DEL/2011 19 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 UNCONTRO LLED TRANSACTION. HERE AGAIN, THE EMPHASIS IS ON DETERMINING THE NORM AL 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 CO MPUTED UNDER SUB- CLAUSE (II) ON ACCOUNT OF DIFFERENCES BETWEEN THE I NTERNATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTION . SUB-CLAUSE (IV) PROVIDES THAT THE DIRECT AND INDIRECT COSTS INCURRE D BY THE ASSESSEE IN PROVIDING SERVICES TO ITS AE ARE INCREASED BY THE A DJUSTED PROFIT MARK-UP ARRIVED AT UNDER SUB-CLAUSE (III), WHICH IS TAKEN A S 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 UNCONTR OLLED COMPANIES. ITA NO.1480/DEL/2011 20 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 EX PENSES, OPERATING EXPENSES AND EXCHANGE RATE DIFFERENCE TOTALING RS.5 6.84 LAC ARE THE INDIRECT COSTS INCURRED BY THE ASSESSEE. THE ASSES SEE 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, T HESE 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 IND IRECT COSTS ARE TO BE CONSIDERED. THE LD. CIT(A) IN DELETING THE ADDITIO N HAS IGNORED THE DIRECT COSTS AND APPROVED THE COMPUTATION OF THE AL P UNDER THIS METHOD BY CONFINING HIMSELF ONLY TO THE INDIRECT COSTS, WH ICH IS CONTRARY TO THE INSTRUCTION OF THE RULE. IT IS IMPERMISSIBLE TO AL TER THE PRESCRIPTION OF RULE 10B(1)(C) BY APPLYING THE GROSS PROFIT RATE ON LY TO THE INDIRECT COSTS ITA NO.1480/DEL/2011 21 IN TOTAL DISREGARD TO THE MANDATE OF CONSIDERING BO TH THE DIRECT AND INDIRECT COSTS. 12.2. THE LD. AR CONTENDED THAT THE MANNER IN WH ICH THE ASSESSEE RECORDED THE TRANSACTIONS IN ITS BOOKS OF ACCOUNT B Y CREDITING ONLY SERVICE FEE OF RS.71.54 LAC TO ITS PROFIT & LOSS AC COUNT AND THEN DEBITING INDIRECT EXPENSES TO THE TUNE OF RS.56.84 LAC IS AN ACCEPTED ACCOUNTING PRACTICE WHICH HAS BEEN APPROVED BY THE HONBLE DELHI HIGH COURT IN CIT VS. INTERNATIONAL TRAVEL HOUSE LTD. (2012) 344 ITR 554 (DEL). THIS WAS COUNTERED BY THE LD. DR BY SUBMITTING TH AT MAINTENANCE OF ACCOUNTS ON `NET BASIS IS ONE OF THE PERMISSIBL E METHODS AND THE ACCOUNTS CAN BE MAINTAINED ON `GROSS BASIS AS WEL L. WE FIND THAT IN THE CASE BEFORE THE HONBLE DELHI HIGH COURT, THE ASSES SEE 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 TR ANSFERRED TO THE PROFIT & LOSS ACCOUNT. THE ASSESSEE FILED APPEAL B EFORE THE TRIBUNAL, WHICH NOTICED THAT GROSS INCOME WAS CREDITED TO THE PROFIT & LOSS ITA NO.1480/DEL/2011 22 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 HONBLE DELHI HI GH COURT DISMISSED THE APPEAL FILED BY THE REVENUE BY OBSERV ING THAT BOTH THE ACCOUNTING SYSTEMS, NAMELY, GROSS AS WELL AS NET, A RE TAX NEUTRAL. 12.3. WE ARE UNABLE TO UNDERSTAND AS TO HOW THIS CASE JUSTIFIES THE ASSESSEES STAND OF CONSIDERING ONLY THE INDIRECT C OSTS 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 A ND TRAVEL RELATED AND CUSTOMER HANDLING SERVICES WITH TRANSACTED VALUE O F RS.14.65 CRORE. THE MANNER IN WHICH ACCOUNTS ARE MAINTAINED CANNOT BE DETERMINATIVE OF COMPUTING THE ALP OF AN INTERNATIONAL TRANSACTIO N. THE ALP IS REQUIRED TO BE COMPUTED IN ACCORDANCE WITH THE PRES CRIPTION OF THE METHODS GIVEN UNDER RULE 10B(1), WHICH IS IRRESPECT IVE OF THE METHOD IN WHICH ACCOUNTS ARE MAINTAINED. WHEN THIS POSITION WAS PUT ACROSS, THE ITA NO.1480/DEL/2011 23 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 HONBLE DELHI HIGH COURT DATED 30.10.2015 IN JOHNSON MATTHEY INDIA PVT. LTD. VS. DCIT (ITA NO.14/2013) TO BOLSTER HIS ARGUMENT SUPPORTIN G THE CORRECTNESS OF THE ASSESSEES COMPUTING PROFIT MARG IN 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 SEL ECTED BY MUL. THAT ASSESSEE WAS ENTITLED TO A PER UNIT FIXED MAN UFACTURING CHARGE OVER AND ABOVE THE ACTUAL COST OF RAW MATERIAL. THIS SH OWS 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 ENT ITLED ONLY TO A FIXED PER UNIT MANUFACTURING CHARGE OVER AND ABOVE THE AC TUAL COST OF RAW MATERIAL. SO, IN THAT CASE THE QUESTION FOR CONSIDE RATION WAS THE ITA NO.1480/DEL/2011 24 DEDUCTIBILITY OR OTHERWISE OF SUCH PASS THROUGH COS TS IN DETERMINING THE ALP UNDER THE TRANSACTIONAL NET MARGIN METHOD (TNMM ), WHICH HAS BEEN ANSWERED IN THE ASSESSEES FAVOUR. THERE CAN BE NO DOUBT THAT THE PASS-THROUGH COSTS ARE LIABLE TO BE IGNORED IN COMP UTING 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 HEREI NAFTER. 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 HONBLE HIGH COURT IN HOLDING THAT THE DENOMINATOR SHOULD EXCLUDE PASS TH ROUGH COSTS TOOK NOTE OF THE EXPRESSION ANY OTHER RELEVANT BASE OC CURRING IN RULE 10B(1)(E)(I) OF THE IT RULES. IT IS PERTINENT TO M ENTION THAT RULE 10B(1)(E) DEALS WITH THE DETERMINATION OF THE ALP U NDER THE TNMM. SUB-CLAUSE (I) OF RULE 10B(1)(E) PARTICULARLY PROVI DES FOR THE COMPUTATION OF NET PROFIT MARGIN IN RELATION TO COS TS INCURRED OR SALES EFFECTED, ETC. OR HAVING REGARD TO ANY OTHER RELEV ANT BASE. THE COMPUTATION OF NET PROFIT MARGIN IN RELATION TO THE EXPRESSION ANY OTHER ITA NO.1480/DEL/2011 25 RELEVANT BASE IS PECULIAR TO THE DETERMINATION OF ALP UNDER THE TNMM. IN CONTRAST TO THIS, WE ARE CONCERNED WITH THE COMP UTATION OF ALP IN THE PRESENT CASE UNDER THE `COST PLUS METHOD AS PER RU LE 10B(1)(C). THE MANNER OF COMPUTATION OF THE ALP UNDER THESE TWO M ETHODS, NAMELY, TNMM AND COST PLUS METHOD, IS TOTALLY DIFFERENT. T HERE 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 THROU GH COSTS NOR USED THE TNMM AS THE MOST APPROPRIATE METHOD. THUS, THIS JU DGMENT HAS NO APPLICATION TO THE FACTS OF THE INSTANT CASE. 12.6. THE LD. AR HAS RELIED ON SOME OTHER ORDER S 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 C ONSIDERED OPINION, ITA NO.1480/DEL/2011 26 AGAIN HAVE NO RELEVANCE IN SO FAR AS THE ISSUE UNDE R CONSIDERATION IS CONCERNED. 12.7. ANOTHER FACTOR WHICH NEEDS TO BE ACCENTUATE D IS THAT THE INTERNATIONAL TRANSACTION AS PER THE ASSESSEES AUD IT REPORT IN FORM NO. 3CEB IS `TOURS AND TRAVEL RELATED AND CUSTOMER HAND LING SERVICES WITH TRANSACTED VALUE OF RS.14.65 CRORE. THIS AMOUN T IS A SUM TOTAL OF DIRECT COSTS INCURRED IN PROVIDING SERVICES AMOUNTI NG 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 TRA NSACTION OF RS.14.65 CRORE WHOSE ALP IS REQUIRED TO BE COMPUTED. THE AC TION OF THE LD. CIT(A) HAS RESULTED IN RESTRICTING THE INTERNATIONA L TRANSACTION TO A SUM OF RS.71.54 LAC, BEING THE AMOUNT OF SERVICE FEE AL ONE, WHICH IS AGAIN CONTRARY TO THE STATUTORY PROVISIONS. WE, THEREFOR E, HOLD THAT BOTH THE DIRECT AND INDIRECT COST ARE REQUIRED TO BE CONSIDE RED 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 O F COMPARING THE ITA NO.1480/DEL/2011 27 ASSESSEES RATIO OF `NET PROFIT TO TOTAL COSTS WIT H 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 `O PERATING PROFIT TO A SUITABLE BASE, AS HAS BEEN HELD BY THE HONBLE AP EX COURT IN DIT (I.T.) VS. MORGAN STANLEY & CO. (2007) 162 TAXMAN 165 (SC) . WHAT IS RELEVANT UNDER THE TNMM IS `OPERATING PROFIT AND N OT `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 D EVISING OF A NEW METHOD IN ITS OWN, WHICH HAS NO SANCTION OF LAW. AS THE M OST 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 ALIE N TO THE COST PLUS METHOD. ITA NO.1480/DEL/2011 28 14. THE THIRD REASON FOR NOT UPHOLDING THE IMPUGN ED ORDER IS AFFIXING THE SEAL OF APPROVAL BY THE LD. CIT(A) TO THE SELEC TION BY THE ASSESSEE OF ONLY TWO COMPANIES AS COMPARABLE. RELEVANT PART OF PARA 2.9 OF THE IMPUGNED ORDER PROVIDES THAT : `THE APPELLANT WAS F URTHER 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 COMPARAB LE COMPANIES, NAMELY, INTERNATIONAL TRAVEL HOUSE LTD. AND COX & K INDS (INDIA) PVT. LTD. SELECTION OF ONLY TWO COMPANIES IS IN SHARP C ONTRAST 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 AS SESSEE TO DO CHERRY-PICKING BY CHOOSING ONLY SUCH COMPANIES WHI CH SUIT ITS PURPOSE. NEITHER, THERE IS AN INDICATION IN THE IMP UGNED ORDER THAT THE LD. CIT(A) HIMSELF ENSURED THAT NO COMPARABLE COMPANY W AS LEFT OUT, NOR DID HE ASK THE AO TO FIND OUT OTHER COMPARABLE COMP ANIES. THIS HAS PUT THE EXERCISE DONE BY THE ASSESSEE DURING THE COURSE OF FIRST APPELLATE PROCEEDINGS, OPEN TO QUESTION. ITA NO.1480/DEL/2011 29 15. IN VIEW OF THE FOREGOING REASONS, WE ARE UNA BLE 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 T HE 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 RAT E OF 11.72% APPLIED BY THE AO DIVULGES THAT SUCH PROFIT RATE HAS BEEN C OMPUTED ON THE BASIS OF THE FIGURES OF THESE COMPANIES FOR THREE YEARS. THE HONBLE DELHI HIGH COURT, AFTER CONSIDERING THE MANDATE OF RULE 1 0B(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 YE AR 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 B EEN MADE ON THE ITA NO.1480/DEL/2011 30 BASIS OF MULTIPLE YEAR DATA AND NOT THE CURRENT YEA R DATA ALONE, WHICH IS NOT CORRECT. 16.3. THE AO HAS WORKED OUT ADDITION BY WAY OF T RANSFER PRICING ADJUSTMENT AMOUNTING TO RS.91.80 LAC BY APPLYING TH E 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 ASSES SEE. 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 CO NSIDERED OPINION THAT THE ENDS OF JUSTICE WOULD MEET ADEQUATELY IF THE IM PUGNED 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 TH E INTERNATIONAL TRANSACTION AFRESH UNDER THE COST PLUS METHOD IN CO NFORMITY WITH OUR ABOVE DISCUSSION. NEEDLESS TO SAY, THE ASSESSEE WI LL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PRO CEEDINGS. ITA NO.1480/DEL/2011 31 18. IN THE RESULT, THE APPEAL IS ALLOWED FOR STA TISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 13.11.201 5. SD/- SD/- [SUCHITRA KAMBLE] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 13 TH NOVEMBER, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.