Agilent Technologies India Private Ltd., New Delhi V. DCIT, New Delhi

ITA 1487/DEL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7172 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 04-02-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 29-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR; SUDHANSHU DHAR MISHRA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.1487/D/12 ASSESSMENT YEAR :2006-07 AGILENT TECHNOLOGIES INDIA PVT. LTD., VS. DCIT, UNIT NO.105-116, FIRST FLOOR, CIRCLE 1(1), SPLENDOR FORUM, PLOT NO.3, NEW DELHI. DISTRICT CENTRE, JASOLA, NEW DELHI. PAN: AABCA9874A (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI KANCHAN KAUSHAL, CA & SHRI RAVI SHARMA, ADVOCATE DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR & SHRI SUDHANSHU DHAR MISHRA, SR. DR DATE OF HEARING : 04.02.2016 DATE OF PRONOUNCEMENT : 09.02.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (AO) ON 21.01 .2012 UNDER ITA NO.1487/DEL/2012 2 SECTIONS 143(3)/144C(5)/254 OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED `THE ACT) IN RELATION TO THE ASSESSMEN T YEAR 2005-06. 2. THE ONLY ISSUE RAISED IS THIS APPEAL THROUGH VAR IOUS GROUNDS IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.10,11,16,273. 3. SUCCINCTLY, THE FACTS OF THE CASE ARE THAT THE A SSESSEE IS A 100% SUBSIDIARY OF AGILENT TECHNOLOGIES, EUROPE B.V. IT S BUSINESS OPERATIONS COMPRISE OF FACILITATION OF SALES OF AGILENT PRODUC TS IN THE INDIAN MARKET. AGILENT TECHNOLOGIES IS THE WORLDS LEADING DESIGNE R, DEVELOPER, MANUFACTURER AND PROVIDER OF ELECTRONIC AND OPTICAL TESTING AND MONITORING INSTRUMENTS, SYSTEMS AND SOLUTIONS. THE ASSESSEE REPORTED SIX INTERNATIONAL TRANSACTIONS IN FORM NO. 3CEB. ON A REFERENCE MADE BY THE ASSESSING OFFICER (AO), THE TRANSFER PRICING OFFICER (TPO) TOOK UP FOR CONSIDERATION THE INTERNATIONAL TRANSACTION OF FACILITATION OF SALES OF AGILENT PRODUCTS IN INDIA WITH TRANSACTED VALUE OF RS.37,16,57,393/-. THE ASSESSEE USED THE TRANSACTIONAL NET MARGIN METH OD (TNMM) AS THE MOST APPROPRIATE METHOD WITH PROFIT LEVEL INDICATOR (PLI) OF OPERATING ITA NO.1487/DEL/2012 3 PROFIT/VALUE ADDED EXPENSES (OP/VAE) AT 15.23%. F IVE COMPARABLES WERE CHOSEN WITH THEIR WEIGHTED AVERAGE MARGIN OF P ROFIT OF THREE YEARS AT 5.34% TO DEMONSTRATE THAT THIS INTERNATIONAL TRA NSACTION WAS AT ARMS LENGTH PRICE (ALP). THE ASSESSEE WAS CALLED UPON T O FILE UPDATED MARGINS OF THE COMPARABLES FOR CURRENT YEAR ALONE, WHICH WERE FILED DECLARING MEAN OPERATING PROFIT MARGIN AT 10.28%. THE TPO REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE. HE FINALL Y SELECTED TWO COMPANIES AS COMPARABLE, NAMELY, EDUCATIONAL CONSUL TANTS INDIA LTD. (TECHNICAL ASSISTANCE AND HRD SEGMENT: 12.56%) AND PRIYA INTERNATIONAL LTD. (INDENTING SEGMENT: 26.09%) WITH THEIR MEAN OPERATING PROFIT/OPERATING COST (OP/OC) RATE AT 19 .32%. HE COMPUTED THE ASSESSEES PROFIT FROM THE INTERNATIONAL TRANS ACTION BY ADOPTING PLI OF OP/OC AT 7.25% ON PAGE 8 OF HIS ORDER. BY APPLY ING (OP/OC) RATE OF THE COMPARABLES AT 19.32% AS BENCHMARK, THE TPO WORKED OUT TRANSFER PRICING ADJUSTMENT AT RS.10,62,21,565. TH E DISPUTE RESOLUTION PANEL (DRP) VIDE ITS DIRECTION DATED 21.12.2011 GIV EN U/S 144C(5) READ WITH SECTION 254 AFFIRMED THE VIEW OF THE TPO ON AD OPTION OF PLI AS OP/OC OF THE ASSESSEE AS WELL AS COMPARABLES. THE D RP ALSO APPROVED ITA NO.1487/DEL/2012 4 THE SELECTION OF COMPARABLES MADE BY THE TPO. IT HO WEVER, CORRECTED THE FIGURE OF OP/OC OF THESE COMPARABLES, NAMELY, EDUCA TIONAL CONSULTANTS INDIA LTD. (SEGMENTAL: 14.85%) AND PRIYA INTERNATIO NAL LTD. (SEGMENTAL: 22.63%), WITH THEIR MEAN OPERATING PROFIT/OPERATING COST (OP/OC) RATE AT 18.74%. BY APPLYING THIS AVERAGE OP/OC OF COMPA RABLES AT 18.74%, THE DRP REDUCED THE AMOUNT OF TRANSFER PRICING ADJU STMENT TO RS.10,11,16,273. IT IS THIS AMOUNT WHICH HAS BEEN ADDED BY THE AO IN THE FINAL ASSESSMENT ORDER, AGAINST WHICH THE ASSES SEE HAS COME UP IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSEE APPLIED THE TNMM AS THE MOST APPROPRIATE METHOD WHICH WAS ACCEPTED BY T HE TPO. THE ONLY CONTROVERSY REVOLVES AROUND THE ADOPTION OF PLI. THE ASSESSEE IN ITS TP STUDY REPORT APPLIED PLI OF OP/OC OF COMPARABLES AN D OP/VAE OF ITS OWN FOR DETERMINING THE ALP OF THE INTERNATIONAL TR ANSACTION. THE TPO CONSIDERED OP/OC OF THE ASSESSEE AS WELL AS THAT OF COMPARABLES FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTI ON, WHICH LED TO THE ITA NO.1487/DEL/2012 5 MAKING OF ADDITION ON ACCOUNT OF INSTANT TRANSFER P RICING ADJUSTMENT. THE ASSESSEE IS AGGRIEVED AGAINST THE CHANGE MADE B Y THE TPO IN APPLYING ITS PLI OF OP/OC INSTEAD OF OP/VAE AS CONS IDERED BY THE ASSESSEE FOR THE PURPOSES OF MAKING COMPARISON WITH OP/OC OF THE COMPARABLES. NO OTHER POINT WAS ARGUED BY THE LD. A R, SUCH AS SELECTION OF COMPARABLES OR THE ADOPTION OF THE CURRENT YEAR DATA OF COMPARABLES AGAINST THE WEIGHTED AVERAGE OF THREE YEARS. THUS I T IS MANIFEST THAT THE ENTIRE CASE OF THE ASSESSEE RESTS ON THE ADOPTION O F ITS PLI BY THE TPO AS OP/OC AS AGAINST OP/VAE USED BY IT. 5. IN ORDER TO APPRECIATE THIS OBJECTION, IT WI LL BE WORTHWHILE TO HAVE A LOOK AT THE PRESCRIPTION OF THE RELEVANT PARTS OF R ULE 10B(1)(E) OF THE IT RULES, 1962, WHICH IS A MACHINERY PROVISION FOR THE DETERMINATION OF THE ALP UNDER THE TNMM, AS UNDER : - (E) TRANSACTIONAL NET MARGIN METHOD , BY WHICH, (I) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSO CIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE ; ITA NO.1487/DEL/2012 6 (II) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE ; 6. A BARE PERUSAL OF SUB-CLAUSE (I) OF RULE 10B(1) (E) TRANSPIRES THAT THE NET OPERATING PROFIT MARGIN REALIZED BY THE ENT ERPRISE FROM AN INTERNATIONAL TRANSACTION IS COMPUTED IN RELATION T O COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE. SUB-CLAU SE (II) OF RULE 10B(1)(E) STIPULATES THAT THE NET OPERATING PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM THE C OMPARABLE UNCONTROLLED TRANSACTION IS COMPUTED HAVING REGARD TO THE SAME BASE . ON A CONJOINT READING OF SUB-CLAUSES (I) AND (II) O F RULE 10B(1)(E), IT BECOMES EXPLICIT THAT THE NET OPERATING PROFIT MARG IN REALIZED BY THE ASSESSEE FROM AN INTERNATIONAL TRANSACTION HAS TO B E NECESSARILY COMPUTED AND COMPARED WITH THE NET PROFIT MARGIN RE ALIZED BY COMPARABLE COMPANIES FROM THE SAME BASE. IN OTHER WORDS, IF THE OPERATING PROFIT MARGIN OF THE ASSESSEE FROM INTERN ATIONAL TRANSACTION HAS BEEN COMPUTED WITH THE BASE OF `COSTS INCURRED, TH EN, THE OPERATING ITA NO.1487/DEL/2012 7 PROFIT MARGIN OF THE COMPARABLES HAS ALSO TO BE COM PUTED WITH THE SAME BASE OF `COSTS INCURRED. SIMILARLY, IF THE BASE ADOPTED BY THE ASSESSEE FOR ITS INTERNATIONAL TRANSACTION UNDER THE FORMULA IN TNMM IS SALES EFFECTED, THEN, SIMILAR BASE OF `SALES EFFECTED M UST BE ADOPTED WHILE COMPUTING PROFIT MARGIN OF COMPARABLES. IN THE LIK E MANNER, IF ANY OTHER RELEVANT BASE IS ADOPTED FOR COMPUTING THE O PERATING PROFIT MARGIN OF THE ASSESSEE, THEN, SIMILAR BASE SHOULD BE CONSI DERED WHILE COMPUTING OPERATING PROFIT MARGIN OF COMPARABLES. TO PUT IT SIMPLY, THE NUMERATOR AND DENOMINATOR IN THE COMPUTATION OF OPERATING PRO FIT MARGIN OF THE ASSESSEE MUST BE SIMILAR TO THOSE OF THE COMPARABLE S. IN THE FORMULA GIVEN UNDER THE TNMM, NUMERATOR IS ALWAYS `OPERATIN G PROFIT, BUT THE CHOICE HAS BEEN GIVEN FOR SELECTING A SUITABLE `DEN OMINATOR. HOWEVER, THE CONDITION PRECEDENT IS THAT WHICHEVER DENOMINAT OR IS SELECTED BY THE ASSESSEE FOR WORKING OUT ITS PLI IN TERMS OF SUB-CL AUSE (I) OF RULE 10B(1)(E), SIMILAR DENOMINATOR SHOULD BE ADOPTED IN COMPUTING THE PROFIT MARGIN OF COMPARABLES AS PER SUB-CLAUSE (II) OF THE RULE. IT IS IMPERMISSIBLE TO COMPARE THE ASSESSEES OPERATING P ROFIT MARGIN COMPUTED WITH THE BASE OF, SAY, `COSTS INCURRED WI TH THE OPERATING PROFIT ITA NO.1487/DEL/2012 8 MARGIN OF COMPARABLES COMPUTED WITH THE BASE OF, SA Y, `SALES EFFECTED OR `ANY OTHER RELEVANT BASE. EVEN WHEN `ANY OTHER RELEVANT BASE IS ADOPTED, SUCH A BASE SHOULD REMAIN CONSISTENT BOTH IN THE COMPUTATION OF PLI OF THE ASSESSEE AS WELL AS COMPARABLES. THE ESSENCE OF THE PROVISION IS THAT SQUARES SHOULD BE COMPARED WITH S QUARES AND ROUNDS WITH ROUNDS, SO THAT A RATIONAL AND LOGICAL COMPARI SON COULD BE MADE OF THE OPERATING PROFIT RATE OF THE ASSESSEE AND COMPA RABLES. IN OTHER WORDS, BASE OR DENOMINATOR OF THE INTERNATIONAL TRANSACTIO N AND THE COMPARABLE UNCONTROLLED TRANSACTIONS MUST BE IDENTICAL. 7. ESPOUSING THE MAIN CONTROVERSY ONCE AGAIN, WE FI ND THAT THE ASSESSEE USED OP/VAE AS ITS PROFIT LEVEL INDICATOR, BY IMPLIEDLY TREATING BASE OF `VALUE ADDED EXPENSES AS AKIN TO `ANY OT HER RELEVANT BASE. THE TPO CHANGED IT TO OP/OC AND COMPARED IT WITH TH E SIMILAR PLI OF OP/OC OF THE COMPARABLES FINALLY SELECTED. THUS, IT IS APPARENT THAT THE TPO ADOPTED OP/OC, BOTH OF THE ASSESSEE AND OF COMP ARABLES, FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N. ITA NO.1487/DEL/2012 9 8. THE LD. AR VEHEMENTLY ARGUED THAT THE ASSESSE E IS NOT A TRADER, BUT, SIMPLY A COMMISSION AGENT. HE STATED THAT THE ASSE SSEE WAS FACILITATING SALES OF AGILENT PRODUCTS IN INDIA UNDER TWO TRANSA CTION MODELS, NAMELY, INDENT MODEL AND BUY-SELL MODEL. TAKING US THROUGH THE TRANSFER PRICING STUDY REPORT, HE CONTENDED THAT WHEREAS UND ER INDENT MODEL, THE ASSESSEE WAS PROVIDING ONLY MARKETING AND SALES SUP PORT SERVICES IN RELATION TO THE DIRECT SALES OF AGILENT PRODUCTS FR OM OVERSEAS ENTITIES TO CUSTOMERS IN INDIA WITHOUT TAKING ANY PHYSICAL POSS ESSION OR TITLE OF THE GOODS, UNDER BUY-SELL MODEL, THE ASSESSEE WAS IMPOR TING PRODUCTS FROM AGILENT FOR SALE TO DOMESTIC CUSTOMERS, SPECIFICALL Y, AGAINST THE CONFIRMED ORDERS BY TAKING TITLE OF GOODS AND, THE N, SELLING THESE TO THE DISTRIBUTORS AND CUSTOMERS IN INDIA. HE ARGUED THAT THOUGH THE TITLE OF GOODS UNDER BUY-SELL MODEL WAS FORMALLY PASSING TO THE ASSESSEE, BUT, IN FACT, IT WAS NOTHING MORE THAN INDENTING MODEL I N THE SENSE THAT THE SALE WAS MADE ONLY ON THE BASIS OF CONFIRMED ORDERS AND THE ASSESSEE WAS NOT TAKING DELIVERY OF GOODS AND FURTHER NO WOR KING CAPITAL OF THE ASSESSEE WAS INVOLVED IN ANY MANNER. SUM AND SUBST ANCE OF HIS SUBMISSIONS WAS THAT UNDER BOTH THE TRANSACTION MOD ELS, NAMELY, INDENT ITA NO.1487/DEL/2012 10 AND BUY-SELL, THE ASSESSEE WAS EARNING ONLY COMMISS ION AND, THERE WAS NO POINT IN TREATING THE ASSESSEE AS A TRADER SO A S TO CONSIDER `OPERATING COSTS AS THE BASE IN THE PLI INSTEAD OF `VALUE AD DED EXPENSES, WHICH IS REALLY RELEVANT FOR SERVICE PROVIDERS. 9. BEFORE DELVING INTO THE POINT FURTHER, WE WAN T TO HIGHLIGHT DIFFERENCE BETWEEN OPERATING COST (OC) AND VAE (VAL UE ADDED EXPENSES) AND THEIR RESPECTIVE IMPACT ON THE OVERAL L OPERATING PROFIT MARGIN. IN COMMON PARLANCE, OPERATING COSTS ARE TH E EXPENSES WHICH ARE RELATED TO THE OPERATION OF A BUSINESS. IF AN ENTERPRISE IS IN THE BUSINESS OF MANUFACTURING OR TRADING, THEN ITS OPER ATING COSTS WILL ALSO INCLUDE COST OF GOODS SOLD APART FROM OTHER OPERATI NG ADMINISTRATIVE AND SELLING EXPENSES. IF SOME SERVICES ARE REQUIRED TO BE RENDERED BY THE ASSESSEE IN RESPECT OF GOODS ALREADY MANUFACTURED B Y A THIRD PARTY, THEN THE COSTS INCURRED IN RENDERING SUCH SERVICES ARE C ALLED VALUED ADDED EXPENSES IN THE HANDS OF SUCH PERSON RENDERING SERV ICES. COST OF GOODS SOLD IS AN IMMATERIAL FACTOR IN THE CASE OF AN ASSE SSEE ENGAGED IN COMMISSION BUSINESS, HAVING NO RELEVANCE WHATSOEVER WITH HIS ITA NO.1487/DEL/2012 11 OPERATING COSTS. OPERATING COSTS TO HIM WILL MEAN ONLY ADMINISTRATIVE AND SELLING EXPENSES CONNECTED WITH HIS BUSINESS OP ERATIONS, WHICH COMPRISE OF EFFORT IN FACILITATING SALE OF OTHERS GOODS. THUS IT IS VIVID THAT WHEREAS COST OF GOODS SOLD IS AN IMPORTANT ING REDIENT OF TOTAL OPERATING COSTS OF A MANUFACTURER OR TRADER, IT HAS NO RELEVANCE IN THE CASE OF A SERVICE PROVIDER OR A COMMISSION AGENT. OPERATING COSTS OF A COMMISSION AGENT ARE THE COSTS INCURRED IN FACILITA TING SALE OF GOODS, WHICH PATENTLY EXCLUDE COST OF GOODS. SUBSTANCE OF THE MATTER IS THAT WHEREAS OPERATING COSTS IN THE CASE OF A TRADER INC LUDE COST OF GOODS SOLD, THE SAME ARE ABSENT IN THE CASE OF A COMMISSI ON AGENT. IT IS OBVIOUS FOR THE REASON THAT WHILE THE ONLY ELEMENT OF PROFI T OF A COMMISSION AGENT IS COMPENSATION FOR THE EFFORTS PUT IN BY HIM IN EFFECTING SALES, THE PROFIT OF A TRADER, IN ADDITION TO THAT, ALSO INCL UDES COMPENSATION FOR THE AMOUNT INVESTED BY HIM IN INVENTORY AND DEBTORS ETC . THIS DIVULGES THAT OPERATING COSTS OF A TRADER ALWAYS INCLUDE COST OF GOODS SOLD AND OPERATING COSTS OF A COMMISSION AGENT CAN NEVER HAV E SUCH COSTS. IF THERE IS SOME COST OF GOODS SOLD AND SALE APPEARING IN THE BOOKS OF AN ASSESSEE, THEN IT WOULD MEAN THAT THE TITLE IN GOOD S PASSED ON TO HIM, ITA NO.1487/DEL/2012 12 WHICH HE SOLD AS AN OWNER. IN THAT CASE, HE CEASES TO BE CHARACTERIZED AS A MERE COMMISSION AGENT QUA SUCH GOODS. IF A TRADER COMPUTES HIS OPERATING PROFIT MARGIN BY EXCLUDING COST OF GOODS SOLD FROM THE COST BASE AND CONSIDERING ONLY ADMINISTRATIVE AND SELLIN G EXPENSES ETC., IT MEANS THAT HIS TOTAL OPERATING PROFIT, WHICH IS A C OMPENSATION NOT ONLY FOR THE SALE OF GOODS BUT ALSO TOWARDS INVESTMENT I N GOODS, IS BEING WRONGLY MATCHED WITH THE BASE OF EXPENSES INCURRED TO THE EXCLUSION OF COST OF GOODS. HERE WE WANT TO ACCENTUATE THAT THE ISSUE IS NOT THAT A TRADER CANNOT WORK OUT HIS PROFIT MARGIN AS A PERCE NTAGE OF VALUE ADDED EXPENSES TO THE EXCLUSION OF COST OF GOODS SOLD, BU T THE REAL THING IS THAT SUCH A PROFIT MARGIN CAN NOT BE COMPARED, FOR THE T RANSFER PRICING PURPOSES, WITH THE PROFIT MARGIN OF COMPARABLES, CO MPUTED AS A PERCENTAGE OF TOTAL OPERATING EXPENSES, WHICH APART FROM VALUE ADDED EXPENSES ALSO INCLUDE COST OF GOODS SOLD. IT IS, TH US, AXIOMATIC THAT THERE IS ALWAYS BOUND TO BE SOME DIFFERENCE BETWEEN OPER ATING PROFIT AS A PERCENTAGE OF OPERATING COSTS INCLUDING COST OF GOO DS SOLD ON ONE HAND AND EXCLUSIVE VALUE ADDED EXPENSES ON THE OTHER. ITA NO.1487/DEL/2012 13 10. NOW WE WILL EXAMINE AND EVALUATE THE LD. ARS C ONTENTION THAT THE TRANSACTIONS OF THE ASSESSEE UNDER THE BUY-SELL MOD EL ARE IDENTICAL TO THE INDENT MODEL AND THERE IS NO DIFFERENCE BETWEEN THE SALES MADE UNDER BOTH THE MODELS. WE HAVE PERUSED THE ASSESSEES AN NUAL ACCOUNTS FOR THE YEAR, A COPY OF WHICH HAS PLACED AT PAGES 190 O NWARDS OF THE PAPER BOOK. PROFIT & LOSS ACCOUNT OF THE ASSESSEE RECORD S SALES OF RS.44,52,28,224/- APART FROM `COMMISSION INCOME A MOUNTING TO RS.37.16 CRORE. DEBIT SIDE OF THE ASSESSEES PROFIT & LOSS ACCOUNT DISCLOSES AN ITEM OF EXPENDITURE OF COST OF TRADE SALES AT RS.36.62 CRORE AND ALSO `SPARE PARTS CONSUMED AMOUNTING TO RS.9.48 CRORE. THIS SHOWS THAT THE ASSESSEE PURCHASED GOODS TO THE ABOV E EXTENT BY ACQUIRING THEIR TITLE AND THEREAFTER SOLD THE SAME AS PRINCIPAL AND NOT AS AN AGENT. THE ASSESSEES TP STUDY REPORT ALSO DISCL OSES THAT THE TITLE OF GOODS PASSED ON TO THE ASSESSEE IN RESPECT OF GOODS SOLD UNDER BUY-SELL MODEL. WHEN WE PERUSE THE ASSESSEES BALANCE SHEET, IT TURNS OUT THAT `INVENTORIES HAVE BEEN REFLECTED AT RS.22.70 CRORE ALONG WITH `SUNDRY DEBTORS AT RS.30.33 CRORE. IT SHOWS THAT THE AMOU NT OF SUNDRY DEBTORS AND INVENTORIES STANDS AT A STAGGERING FIGURE OF RS .53.03 CRORE, WHICH IS ITA NO.1487/DEL/2012 14 EVEN MORE THAN THE AMOUNT OF SALES OF RS.44.45 CROR E MADE DURING THE YEAR. THESE FIGURES LEAVE NOTHING TO DOUBT THAT THE RE IS A HUGE INVESTMENT OF THE ASSESSEE IN STOCK AND DEBTORS, WH ICH BELIES ITS CLAIM OF HAVING NO INVESTMENT IN WORKING CAPITAL IN THE T RANSACTIONS UNDER BUY-SELL MODEL IN THE SAME WAY AS IS UNDER INDENT M ODEL. 11. THE LD. AR FURTHER CONTENDED THAT THE ASSESS EE WAS NOT HOLDING ANY STOCK-IN-TRADE AND PURCHASES WERE BEING MADE ON THE BASIS OF CONFIRMED ORDERS WITH SUPPLY DIRECTLY GOING TO THE END CUSTOM ERS. THIS POSITION IS AGAIN, CONTRARY TO MATERIAL ON RECORD. SCHEDULE-D OF THE BALANCE SHEET CONTAINS BREAK-UP OF INVENTORIES. ITS PERUSAL SHOW S THAT AS AGAINST TOTAL INVENTORIES OF RS.22.70 CRORE, STOCK OF `FINISHED GOODS IS TO THE TUNE OF RS.11.49 CRORE AND THAT OF `SPARE PARTS AT RS.11.2 1CRORE. THERE IS FURTHER BIFURCATION AVAILABLE IN RESPECT OF FINISHE D GOODS AND SPARE PARTS - BOTH AT WAREHOUSE AND IN TRANSIT. THUS, IT IS MANIFEST THAT THE ARGUMENT PUT FORTH BY THE LD. AR ABOUT THE ASSESSEE HOLDING NO PHYSICAL STOCK AT ANY POINT OF TIME, IS FALLACIOUS AND CONTR ARY TO THE ACTUAL FIGURES REFLECTED IN THE BALANCE SHEET. IT IS PLENTIFULLY LUCID FROM THE DETAILS OF ITA NO.1487/DEL/2012 15 `INVENTORIES GIVEN IN THE BALANCE SHEET THAT THE A SSESSEE IS NOT ONLY HAVING FINISHED GOODS AND SPARE PARTS `IN TRANSIT, BUT ALSO `AT WAREHOUSE. 12. WHEN WE CONSIDER PROFIT & LOSS ACCOUNT AND B ALANCE SHEET OF THE ASSESSEE IN UNISON, IT UNAMBIGUOUSLY FOLLOWS THAT T HE ASSESSEE PURCHASED GOODS UNDER BUY-SELL MODEL AS PRINCIPAL BY ACQUIRIN G TITLE IN THEM AND, THEREAFTER, SOLD THE SAME AS OWNER AND NOT AS AN AG ENT. THE HONBLE DELHI HIGH COURT IN MITSUBISHI CORPORATION INDIA PVT. LTD. VS. ADDL.CIT (2014) 366 ITR 495 (DEL) HAS HELD THAT WHERE TRANSACTIONS OF PURCHASE AND SALE BETWEEN THE ASSESSEE AND A NON-RESIDENT HO LDING COMPANY WERE DONE ON A PRINCIPAL TO PRINCIPAL BASIS AND RECORDED IN BOOKS OF ACCOUNT ON PRINCIPAL TO PRINCIPAL BASIS BY THE ASSESSEE, AC TIVITY UNDERTAKEN BY THE ASSESSEE WAS IN THE NATURE OF TRADING. WE, THEREFOR E, REPEL THE ASSESSEES CONTENTION THAT THE TRANSACTIONS UNDER BUY-SELL MOD EL WERE ON COMMISSION BASIS RATHER THAN AS A TRADER. 13. HAVING HELD THAT THE ASSESSEE IS A `COMMISSION AGENT AS REGARDS ITS TRANSACTIONS UNDER THE INDENT MODEL AND A `TRAD ER AS REGARDS ITS ITA NO.1487/DEL/2012 16 TRANSACTIONS UNDER THE BUY-SELL MODEL, WE AGAIN REV ERT TO THE MOOT POINT OF DETERMINATION OF ALP. IT IS NOTICED THAT THE ASS ESSEE CLUBBED TRANSACTIONS UNDER BOTH THE MODELS AND DETERMINED T HEIR ALP BY COMPUTING OP/VAE ON CONSOLIDATED BASIS AND THEN COM PARED THE SAME WITH OP/OC OF COMPARABLES. THE TPO ADOPTED DENOMIN ATOR OF OPERATING COSTS IN THE COMPUTATION OF OPERATING P ROFIT MARGIN OF THE ASSESSEE FROM COMBINED INTERNATIONAL TRANSACTIONS U NDER BOTH THE MODELS WITH SIMILAR BASE OF COMPARABLES. WE HAVE NOTICED A BOVE THAT OPERATING COSTS OF A `COMMISSION AGENT ARE ALWAYS EXCLUSIVE OF COST OF GOODS SOLD, WHEREAS A `TRADER HAS TO HAVE THEM AS AN ESS ENTIAL ELEMENT. ALBEIT A `TRADER CAN ASCERTAIN HIS OPERATING PROFI T MARGIN AS A PERCENTAGE OF VAE TO BE DESIGNATED AS `ANY OTHER BA SE, BUT IN OUR CONSIDERED OPINION THAT CAN NOT BE DESCRIBED AS A ` RELEVANT BASE, SO AS TO FALL WITHIN THE AMBIT OF THE EXPRESSION ` ANY OTHER RELEVANT BASE AS USED IN SUB-CLAUSES (I) AND (II) OF RULE 10B(1)(E). THE COROLLARY, WHICH ERGO FOLLOWS, IS THAT WHEREAS ` ANY OTHER RELEVANT BASE UNDER THE TNMM IN CASE OF A `COMMISSION AGENT CAN BE `VALUE ADDED EXPENSES, WHICH, IN FACT, REPRESENTS HIS TOTAL OPERATING COSTS ALONE , BUT IN CASE OF A ITA NO.1487/DEL/2012 17 `TRADER, IT CAN BE COST OF GOODS SOLD PLUS OTHER O PERATING EXPENSES, WHICH REPRESENTS HIS TOTAL OPERATING COSTS AND NOT `VALUE ADDED EXPENSES TO THE EXCLUSION OF COST OF GOODS SOLD. 14. NOW LET US EXAMINE WHAT HAS BEEN DONE IN THE IN STANT CASE WITH A VIEW TO JUDGE THE CORRECTNESS OF THE ALP OF THE INT ERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE UNDER BOTH THE BUSINESS MODELS OF `INDENTING AS WELL AS `TRADING, WHICH ARE OBVIOUS LY DISTINCT FROM EACH OTHER. IT CAN BE SEEN THAT THE ASSESSEE TRIED TO DE MONSTRATE THAT ITS COMBINED INTERNATIONAL TRANSACTIONS UNDER BOTH THE MODELS WERE AT ALP BY COMPARING ITS PLI OF OP/VAE ON OVERALL BASIS WIT H OP/OC OF COMPARABLES, WHICH IS AN INCORRECT APPROACH. IN TH E LIKE MANNER, THE TPO, THOUGH COMPARED THE ASSESSEES PLI OF OP/OC WI TH OP/OC OF THE COMPARABLES, BUT HE ALSO FELL IN ERROR BY JOINTLY C ONSIDERING THE INTERNATIONAL TRANSACTIONS OF BOTH THE BUSINESS MOD ELS, NAMELY, INDENTING AND TRADING, UNDER ONE UMBRELLA. WE THUS HOLD THAT BOTH THE ASSESSEE AS WELL AS THE TPO FELL IN ERROR IN CONSIDERING THE IN TERNATIONAL TRANSACTIONS UNDER BOTH THE MODELS AS OF UNIFORM CHARACTER. IT H AS BEEN NOTICED SUPRA ITA NO.1487/DEL/2012 18 THAT THE INGREDIENTS OF OPERATING COSTS UNDER THE T RADING MODEL ARE DIFFERENT FROM THOSE UNDER INDENTING MODEL. EX CONSEQUENTI , TRANSACTIONS UNDER BOTH THE MODELS ARE REQUIRED TO BE BENCHMARKED SEPARATELY. 15. AT THIS STAGE, IT IS PERTINENT TO MENTION T HAT FOR THE IMMEDIATELY PRECEDING YEAR ALSO, THAT IS, THE A.Y. 2005-06, TH E ASSESSEE COMBINED ITS INTERNATIONAL TRANSACTIONS UNDER BOTH THE BUSINESS MODELS AND TRIED TO SHOW THAT THESE WERE AT ALP BY COMPARING ITS PLI OF OP/VAE WITH OP/OC OF COMPARABLES, WHICH WAS NOT ACCEPTED BY THE TPO, WHO HELD THAT OP/VAE OF THE ASSESSEE SHOULD BE COMPARED WITH THE OP/VAE OF COMPARABLES ON A COMBINED BASIS. THE LD. CIT(A) ACC EPTED THE ASSESSEES CONTENTION AND DELETED THE ADDITION BY C OMPARING THE ASSESSEES OVERALL OP/VAE WITH THE OP/OC OF THE COM PARABLES. THE APPEAL OF THE REVENUE FOR THE IMMEDIATELY PRECEDING YEAR HAS BEEN HEARD SIMULTANEOUSLY WITH THE APPEAL OF THE ASSESSE E FOR THE CURRENT YEAR. IN FACT, IT IS THE APPEAL FOR THE EARLIER YEAR WHIC H WAS EXTENSIVELY ARGUED BY BOTH THE SIDES AND THE RIVAL PARTIES HAVE LARGEL Y ADOPTED SUCH ITA NO.1487/DEL/2012 19 ARGUMENTS ADVANCED IN SUPPORT OF THEIR RESPECTIVE S TANDS FOR THE INSTANT APPEAL. WE HAVE DISPOSED OF THE APPEAL FOR THE A.Y. 2005-06 (ITA NO. 4323/DEL/2011) BY A SEPARATE ORDER DATED 08.02.2016 DISAPPROVING THE COMBINED PROCESSING OF THE INTERNATIONAL TRANSACTIO NS UNDER THE INDENT MODEL AND BUY-SELL MODEL AND RESTORED THE MATTER TO THE FILE OF THE AO/TPO FOR SEPARATELY DETERMINING THE ALP OF THE IN TERNATIONAL TRANSACTIONS UNDER THE `INDENTING AND `TRADING MO DELS. 16. WE FIND THAT THERE IS INSUFFICIENT INFORMATI ON AVAILABLE ON RECORD FACILITATING THE DETERMINATION OF ALP OF THE INTERN ATIONAL TRANSACTIONS UNDER THESE TWO BUSINESS MODELS SEPARATELY AT OUR E ND. FOLLOWING THE VIEW TAKEN FOR THE PRECEDING YEAR, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR PROCESSI NG THE INTERNATIONAL TRANSACTIONS OF `INDENTING AND `TRADING SEPARATEL Y UNDER CHAPTER X OF THE ACT IN CONSONANCE WITH OUR ABOVE ANALYSIS. NEED LESS TO SAY, THE ASSESSEE WILL BE ALLOWED AN ADEQUATE OPPORTUNITY OF HEARING IN SUCH A DE NOVO DETERMINATION. ITA NO.1487/DEL/2012 20 17. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 09.02.201 6. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 09 TH FEBRUARY, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.