DCIT, New Delhi V. M/s. Agilent Technologies India Pvt. Ltd., New Delhi

ITA 4324/DEL/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7106 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-02-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 04-02-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 29-09-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR; SUDHANSHU DHAR MISHRA
• Keywords: Transfer pricing; Search and seizure; 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.4324/DEL/2011 ASSESSMENT YEAR : 2005-06 DCIT, CIRCLE 1(1), NEW DELHI. VS. AGILENT TECHNOLOGIES INDIA PVT. LTD., TIRUPTI PLAZA, PLOT NO.11, SECTOR-XI, 2 ND FLOOR, DWARKA, 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 : 08.02.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER PASSED BY THE CIT(A) ON 29.7.2011 IN RELATION TO T HE ASSESSMENT YEAR 2005-06. ITA NO.4324/DEL/2011 2 2. THE SOLITARY EFFECTIVE GROUND RAISED BY THE REVE NUE IS AS UNDER:- THE LD.CIT(A) HAS ERRED FACTS AND IN LAW IN HOLDIN G THAT THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSE E WERE AT ARMS LENGTH AS AGAINST THE ADJUSTMENT MADE BY THE AO ON THIS ACCOUNT AT RS.8,35,41,898/-. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE 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 TWO INTERNATIONAL TRANSACTIONS IN FORM NO. 3CEB. ON A REFERENCE MADE BY THE ASSESSING OFFICER (AO), THE TRANSFER PRICING OFFICER (TPO) DID NOT DISPUTE SECOND INTERNATIONAL TRANSACTION OF `PA YMENT OF INTEREST ON LOAN ACCEPTING THE SAME AT ALP. FIRST INTERNATIONA L TRANSACTION OF FACILITATION OF SALES OF AGILENT PRODUCTS IN INDIA WITH TRANSACTED VALUE OF RS.76,54,27,667/- WAS TAKEN UP FOR CONSIDERATION . THE ASSESSEE USED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE M OST APPROPRIATE METHOD WITH PROFIT LEVEL INDICATOR (PLI) OF OPERATI NG PROFIT/OPERATING ITA NO.4324/DEL/2011 3 COST (OP/OC) AT 4.9%. IN THE TRANSFER PRICING STUD Y REPORT, THE ASSESSEE ALSO MENTIONED THAT ITS OPERATING PROFIT/VALUE ADDE D EXPENSES (OP/VAE) STOOD AT 13.96%. CERTAIN COMPARABLES WERE CHOSEN WITH THEIR WEIGHTED AVERAGE MARGIN OF PROFIT AT 12.19% T O DEMONSTRATE THAT THIS INTERNATIONAL TRANSACTION WAS AT ALP. THE ASS ESSEE WAS CALLED UPON TO FILE UPDATED MARGINS OF THE COMPARABLES FOR CURR ENT YEAR ALONE, WHICH WERE FILED DECLARING MEAN OPERATING PROFIT MARGIN A T 5.8% USING THEIR OP/OC AS THE PLI. THE TPO OBSERVED THAT THOUGH THE ASSESSEE STATED THAT IT USED OP/OC AS THE PLI, BUT, IN FACT, IT SHO WED THE FIGURE OF PROFIT MARGIN ON THE BASIS OF OPERATING PROFIT/ VALUE ADDE D EXPENSES (OP/VAE). THE ASSESSEE WAS REQUIRED TO EXPLAIN AS TO WHAT WAS ITS PLI AND WHETHER THE SAME PLI WAS APPLIED FOR THE COMPAR ABLES, APART FROM SEEKING COMMENTS ON THE EXCLUSION OF TWO COMPARABLE S WHICH IN THE OPINION OF THE TPO WERE NOT COMPARABLE. THE ASSESS EE FURNISHED REPLY OBJECTING TO THE EXCLUSION OF TWO COMPARABLES AND A LSO GAVE THREE NEW COMPARABLES. HOWEVER, NO APPROPRIATE REPLY WAS GIVE N ON THE FIRST QUERY ABOUT THE PLI OF THE ASSESSEE AND THAT OF COMPARABL ES. THE TPO EXCLUDED TWO COMPARABLES AS ORIGINALLY OBJECTED T O BY HIM AND TOOK ITA NO.4324/DEL/2011 4 TOTAL OF THREE COMPANIES AS COMPARABLE, NAMELY, EDU CATIONAL CONSULTANTS INDIA LTD., GEEFCEE FINANCE LTD., AND P RIYA INTERNATIONAL LTD.. HE COMPUTED PROFIT FROM THE INTERNATIONAL TR ANSACTION BY ADOPTING THE ASSESSEES PLI OF OP/VAE AT 13.96% AS ALSO SHOW N BY THE ASSESSEE IN ITS TP STUDY REPORT. APPLYING SUCH PLI OF 13.96 % TO THE `VALUE ADDED EXPENSES INCURRED BY THE ASSESSEE AT RS.37.2 6 CRORE, THE TPO DETERMINED THE ASSESSEES OPERATING PROFIT MARGIN A T RS.5.20 CRORE. HE COMPUTED ARITHMETICAL MEAN OF OP/VAE OF SHORTLISTE D THREE COMPARABLE COMPANIES AT 36.38%. TREATING THE SAME AS BENCHMAR K, THE TPO WORKED OUT TRANSFER PRICING ADJUSTMENT OF RS.8,35,4 1,898/-. THE ASSESSEE CHALLENGED THIS ADDITION ON ACCOUNT OF TRANSFER PRI CING ADJUSTMENT BEFORE THE LD. CIT(A), WHO CALLED FOR A REMAND REPORT FROM THE TPO REQUIRING VERIFICATION OF THE OP/OC MARGIN OF THE THREE COMPA RABLE COMPANIES CHOSEN BY THE TPO WITH THEIR MEAN PROFIT MARGIN COM PUTED BY THE ASSESSEE AT 5.32%. HE FURTHER CAME TO HOLD THAT TH E TPO DID NOT OBJECT TO THE PLI OF OP/VAE USED BY THE ASSESSEE. THE LD. CIT(A) NOTED THAT THE ASSESSEE CHARACTERIZED ITSELF AS A SERVICE PROV IDER AND ITS OP/VAE WAS COMPARABLE TO THE OP/OC OF THE SERVICE PROVIDER COMPARABLES, ITA NO.4324/DEL/2011 5 WHICH POSITION, IN HIS OPINION, WAS NOT OBJECTED TO BY THE TPO. BY CONSIDERING AVERAGE OP/OC OF THREE COMPANIES AT 5.3 % AND COMPARING IT WITH OP/VAE OF THE ASSESSEE AT 13.96%, THE LD. C IT(A) HELD THE INTERNATIONAL TRANSACTION AT ALP AND HENCE ORDERED FOR THE DELETION OF ADDITION. THE REVENUE IS AGGRIEVED. 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 UND ER THE TNMM. THE ASSESSEE IN ITS TP STUDY REPORT COMPUTED AND AP PLIED OP/OC AT 4.9% AND ALSO COMPUTED ITS OP/VAE AT 13.96%. IT CO MPARED ITS OP/OC WITH THE MEAN OF OP/VAE OF COMPARABLES. THE TPO AP PLIED OP/VAE OF THE ASSESSEE AS WELL AS THAT OF COMPARABLES FOR BENCHMARKING THE ASSESSEES INTERNATIONAL TRANSACTION. THE LD. CIT(A ) COMPARED THE ASSESSEES OP/VAE WITH OP/OC OF COMPARABLES. IT IS THIS POINT WHICH HAS BEEN ARGUED BY THE LD. DR. THERE IS NO DISPUTE ON INCLUSION OR EXCLUSION OF COMPARABLES BY THE LOWER AUTHORITIES. ITA NO.4324/DEL/2011 6 5. AT THE OUTSET, THE LD. AR CONTENDED THAT TH E LD. DR WAS NOT ENTITLED TO CHALLENGE THE FINDING OF THE LD. CIT(A) EQUATING THE ASSESSEES OP/VAE WITH OP/OC OF COMPARABLES AS THIS ISSUE DOES NOT ARISE OUT OF THE GROUND TAKEN IN APPEAL. WE ARE AFRAID THAT THI S OBJECTION OF THE LD. AR IS BEREFT OF ANY FORCE. THE ONLY EFFECTIVE GROUN D RAISED BY THE REVENUE HAS BEEN REPRODUCED ABOVE, FROM WHICH IT IS APPARENT THAT THE ASSAIL IS TO THE DECISION OF THE LD. FIRST APPELLAT E AUTHORITY IN HOLDING `THAT THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASS ESSEE WAS AT ARMS LENGTH. TREATING INTERNATIONAL TRANSACTION AT ALP COVERS ALL THE ASPECTS OF THE DETERMINATION OF ITS ALP, WHICH OBVIOUSLY IN CLUDE NOT ONLY THE SELECTION OF COMPARABLES AND THEIR PROFIT MARGIN BU T ALSO THE SELECTION OF THE MOST APPROPRIATE METHOD AND DETERMINATION OF TH E CORRECT PLI OF THE ASSESSEE AND THAT OF COMPARABLES. IN FACT, THE LD. DR HAS ARGUED ONLY THIS ASPECT OF DETERMINATION OF THE PLI AND NOTHING ELSE. IF THIS ASPECT IS HELD TO BE NOT EMANATING FROM THE GROUND OF APPEAL, THEN IT WOULD MEAN THAT THE DEPARTMENT HAS ACCEPTED THE DECISION OF TH E LD. CIT(A) AND AS SUCH THERE WAS NO NEED TO FILE SECOND APPEAL BEFORE THE TRIBUNAL, WHICH IS NOT THE CORRECT POSITION. SINCE THE REVENUE HAS FILED APPEAL WITH THE ITA NO.4324/DEL/2011 7 GROUND COVERING ALL THE ASPECTS OF THE TRANSFER PRI CING ADJUSTMENT, WE HOLD THAT THE LD. DR WAS WITHIN HIS RIGHT IN ARGUIN G THIS ASPECT OF THE MATTER. WE, THEREFORE, JETTISON THIS PRELIMINARY O BJECTION RAISED BY THE LD. AR. 6. NOW COMING TO THE MERITS OF THE OBJECTION, W E FIND THAT THE REVENUES CASE IS DIRECTED AGAINST THE FINDING GIVE N BY THE LD. CIT(A) THAT THE ASSESSEES OP/VAE IS COMPARABLE TO THE OP/ OC OF COMPARABLES UNDER THE TNMM. IN ORDER TO APPRECIATE THIS OBJECTI ON, IT WILL BE WORTHWHILE TO HAVE A LOOK AT THE PRESCRIPTION OF TH E RELEVANT PARTS OF RULE 10B(1)(E) OF THE IT RULES, 1962, WHICH IS A MACHINE RY 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 ; (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 ; ITA NO.4324/DEL/2011 8 7. A CURSORY GLANCE AT 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), WHICH IS EQUALLY SIGNIFICANT FOR OUR PUR POSE, STIPULATES THAT THE NET OPERATING PROFIT MARGIN REALIZED BY THE ENT ERPRISE OR BY AN UNRELATED ENTERPRISE FROM THE COMPARABLE UNCONTROLL ED TRANSACTION IS COMPUTED HAVING REGARD TO THE SAME BASE . ON A CONJOINT READING OF SUB- CLAUSES (I) AND (II) OF RULE 10B(1)(E), IT IS VIVID THAT THE NET OPERATING PROFIT MARGIN REALIZED BY THE ASSESSEE FROM AN INTE RNATIONAL TRANSACTION HAS TO BE NECESSARILY COMPUTED AND COMPARED WITH TH E NET PROFIT MARGIN REALIZED BY COMPARABLE COMPANIES WITH THE SAME BASE . IN OTHER WORDS, IF THE OPERATING PROFIT MARGIN OF THE ASSESSEE FROM INTERNATIONAL TRANSACTION HAS BEEN COMPUTED WITH THE BASE OF `COS TS INCURRED, THEN, THE OPERATING PROFIT MARGIN OF THE COMPARABLES HAS ALSO TO BE COMPUTED WITH THE SAME BASE OF `COSTS INCURRED. SIMILARL Y, IF THE BASE ADOPTED BY THE ASSESSEE FOR ITS INTERNATIONAL TRANSACTION U NDER THE FORMULA IN ITA NO.4324/DEL/2011 9 TNMM IS SALES EFFECTED, THEN, SIMILAR BASE OF `SA LES EFFECTED MUST BE NECESSARILY ADOPTED WHILE COMPUTING PROFIT MARGIN O F COMPARABLES. IN THE LIKE MANNER, IF ANY OTHER RELEVANT BASE IS AD OPTED FOR COMPUTING THE OPERATING PROFIT MARGIN OF THE ASSESSEE, THEN, SIMI LAR BASE SHOULD BE CONSIDERED WHILE COMPUTING OPERATING PROFIT MARGIN OF COMPARABLES. TO PUT IT SIMPLY, THE NUMERATOR AND DENOMINATOR IN THE COMPUTATION OF OPERATING PROFIT MARGIN OF THE ASSESSEE MUST BE SIM ILAR TO THOSE OF THE COMPARABLES. IN THE FORMULA GIVEN UNDER THE TNMM, NUMERATOR IS ALWAYS `OPERATING PROFIT, BUT THE CHOICE HAS BEEN GIVEN FOR SELECTING A SUITABLE `DENOMINATOR. HOWEVER, THE CONDITION PRE CEDENT IS THAT WHICHEVER DENOMINATOR IS SELECTED BY THE ASSESSEE F OR WORKING OUT ITS PLI IN TERMS OF SUB-CLAUSE (I) OF RULE 10B(1)(E), S IMILAR 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 PROFIT MARGIN COMPUTED WITH THE BASE OF, SAY, `COST INCURRED WITH THE OPERATING PROFIT MARGIN OF COMPARABLES COM PUTED WITH THE BASE OF, SAY, `SALES EFFECTED OR `ANY OTHER RELEVANT BA SE. EVEN WHEN `ANY OTHER RELEVANT BASE IS ADOPTED, SUCH A BASE SHOULD REMAIN CONSISTENT ITA NO.4324/DEL/2011 10 BOTH IN THE COMPUTATION OF PLI OF THE ASSESSEE AS W ELL AS COMPARABLES. THE ESSENCE OF THE PROVISION IS THAT SQUARES SHOULD BE COMPARED WITH SQUARES AND ROUNDS WITH ROUNDS, SO THAT A RATIONAL AND LOGICAL COMPARISON COULD BE MADE OF THE OPERATING PROFIT RA TE OF THE ASSESSEE AND COMPARABLES. IN OTHER WORDS, BASE OR DENOMINATO R OF THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONT ROLLED TRANSACTIONS MUST BE IDENTICAL. 8. 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 OTH ER RELEVANT BASE AND THE TPO ALSO USED SIMILAR BASE IN THE PLI OF COMPAR ABLES. THE ASSESSEE CLAIMED BEFORE THE LD. FIRST APPELLATE AUTHORITY TH AT `VAE, BEING THE BASE OF THE ASSESSEE IS THE SAME THING AS `OC OF THE CO MPARABLES. THE LD. CIT(A) ACCEPTED THIS CONTENTION BY RECORDING IN PAR A 11.8 OF HIS ORDER THAT: THIS POSITION WAS NOT OBJECTED TO BY THE TPO WHILE PASSING THE ORDER. IN OUR CONSIDERED OPINION, THE POSITION SO RECORD ED IN THE IMPUGNED ORDER IS CONTRARY TO THE ORDER OF THE TPO. IT IS OBVIOUS THAT THE ITA NO.4324/DEL/2011 11 TPO, FIRSTLY, FOUND ON PAGE 2 OF HIS ORDER THAT TH E ASSESSEES OP/VAE STOOD AT 13.96% AND OP/OC AT 4.9%. AND THEN IN THE ULTIMATE ANALYSIS, HE ADOPTED OP/VAE OF THE ASSESSEE FOR THE PURPOSES OF COMPARING IT WITH OP/VAE OF THE COMPARABLES. THE TPO HAS NO WH ERE ADMITTED THAT THE ASSESSEES OP/VAE WAS SIMILAR TO THAT OF OP/OC OF THE COMPARABLES. TO PROCEED ON THE PREMISE THAT THE TP O ACCEPTED THE ASSESSEES OP/VAE AS EQUIVALENT OF OP/OC OF THE COM PARABLES, EITHER EXPRESSLY OR IMPLIEDLY, IS IMAGINARY AND WITHOUT AN Y BEDROCK. THE TPO CATEGORICALLY ADOPTED OP/VAE, BOTH OF THE ASSESSEE AND OF COMPARABLES, FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSA CTION. THUS, IT IS MANIFEST THAT THE IMPUGNED ORDER IS BASED ON AN INC ORRECT ASSUMPTION BY THE LD. CIT(A), WHICH HAS CHANGED THE ENTIRE DIRECT ION OF HIS ORDER, RESULTING IN THE ULTIMATE DELETION OF ADDITION. WE ARE UNABLE TO COUNTENANCE SUCH A VIEW. 9. 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, ITA NO.4324/DEL/2011 12 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 SALE ORDERS BY TAKING TITLE OF GOODS AND, THEN, 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 THE AS SESSEES WORKING CAPITAL WAS NOT INVOLVED IN ANY MANNER. SUM AND SU BSTANCE OF HIS SUBMISSIONS WAS THAT UNDER BOTH THE TRANSACTION MOD ELS, NAMELY, INDENT 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 ITA NO.4324/DEL/2011 13 COSTS AS THE BASE IN THE PLI INSTEAD OF `VALUE AD DED EXPENSES, WHICH IS REALLY RELEVANT FOR SERVICE PROVIDERS. 10. BEFORE DELVING INTO THE POINT FURTHER, WE WA NT 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 T HE 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 PERSON, THEN THE COSTS INCURRED IN RENDERING SUCH SERVICES ARE CALLED VALUED ADDED EXPENSES IN THE HANDS OF PERSON RENDERING SUC H SERVICES. COST OF GOODS SOLD IS IMMATERIAL FACTOR IN THE CASE OF AN A SSESSEE ENGAGED IN COMMISSION BUSINESS, HAVING NO RELEVANCE WHATSOEVER WITH HIS OPERATING COSTS. OPERATING COSTS TO HIM WILL MEAN ONLY ADMINISTRATIVE AND SELLING EXPENSES CONNECTED WITH HIS BUSINESS OP ERATIONS, WHICH ITA NO.4324/DEL/2011 14 COMPRISE OF EFFORT IN FACILITATING SALE OF OTHERS GOODS. THUS IT IS CRYSTAL CLEAR THAT WHEREAS COST OF GOODS SOLD IS AN IMPORTA NT INGREDIENT 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. THE EPITOME 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 INCLU DES COMPENSATION FOR THE AMOUNT INVESTED BY HIM IN INVENTORY AND DEBTORS ETC . THAT IS WHY, OPERATING PROFIT OF A TRADER CAN BE CORRECTLY DEDUC ED BY CONSIDERING HIS OPERATING COSTS, WHICH ALWAYS INCLUDE COST OF GOODS SOLD; AND THAT OF A COMMISSION AGENT BY NEVER INCLUDING COST OF GOODS SOLD, WHICH HE NEVER INCURS. THIS DIVULGES THAT OPERATING COSTS OF A TRADER ALWAYS INCLUDE COST OF GOODS SOLD AND OPERATING COSTS OF A COMMISSION AGENT CAN NEVER HAVE SUCH COSTS. IF THERE IS SOME COST O F GOODS SOLD AND SALE ITA NO.4324/DEL/2011 15 APPEARING IN THE BOOKS OF AN ASSESSEE, THEN IT WOUL D MEAN THAT THE TITLE IN GOODS PASSED ON TO HIM, WHICH HE SOLD AS AN OWNER. IN THAT CASE, HE CEASES TO BE CHARACTERIZED AS A MERE COMMISSION AGE NT 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 SELLING EXPENSES ETC., IT MEANS THAT HIS TOTAL OPER ATING PROFIT, WHICH IS A COMPENSATION NOT ONLY FOR THE SALE OF GOODS BUT ALS O TOWARDS INVESTMENT IN 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 PROF IT MARGIN AS A PERCENTAGE OF VALUE ADDED EXPENSES TO THE EXCLUSION OF COST OF GOODS SOLD, BUT THE REAL THING IS THAT SUCH A PROFIT MARG IN CAN NOT BE COMPARED, FOR THE TRANSFER PRICING PURPOSES, WITH THE PROFIT MARGIN OF COMPARABLES, COMPUTED AS A PERCENTAGE OF TOTAL OPERATING EXPENSE S, WHICH APART FROM VALUE ADDED EXPENSES ALSO INCLUDE COST OF GOODS SOL D. IT IS, THUS, AXIOMATIC THAT THERE IS ALWAYS BOUND TO BE SOME DIF FERENCE BETWEEN OPERATING PROFIT AS A PERCENTAGE OF OPERATING COSTS INCLUDING COST OF ITA NO.4324/DEL/2011 16 GOODS SOLD ON ONE HAND AND EXCLUSIVE VALUE ADDED EX PENSES ON THE OTHER. 11. 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 111 O NWARDS OF THE PAPER BOOK. PROFIT & LOSS ACCOUNT OF THE ASSESSEE RECORD S SALES OF RS.71,13,35,944/- APART FROM `COMMISSION INCOME A MOUNTING TO RS.30.81 CRORE AND INCOME FROM `SUPPORT SERVICES AT RS.7.62 CRORE. DEBIT SIDE OF THE ASSESSEES PROFIT & LOSS ACCOUNT DISCLOSES AN ITEM OF EXPENDITURE OF COST OF TRADE SALES AT RS.65.54 CR ORE AND ALSO `SPARE PARTS CONSUMED AMOUNTING TO RS.3.17 CRORE. THIS SHOWS THAT THE ASSESSEE PURCHASED GOODS TO THE ABOVE EXTENT BY ACQ UIRING THEIR TITLE AND THEREAFTER SOLD THE SAME AS PRINCIPAL AND NOT AS AN AGENT. THE ASSESSEES TP STUDY REPORT ALSO DISCLOSES THAT THE TITLE OF GO ODS PASSED ON TO THE ASSESSEE IN RESPECT OF GOODS SOLD UNDER BUY-SELL MO DEL. WHEN WE ITA NO.4324/DEL/2011 17 PERUSE THE ASSESSEES BALANCE SHEET, IT TURNS OUT T HAT `INVENTORIES HAVE BEEN REFLECTED AT RS.22.98 CRORE ALONG WITH `SUNDRY DEBTORS AT RS.29.65 CRORE. IT SHOWS THAT THE AMOUNT OF SUNDRY DEBTORS AND INVENTORIES STANDS AT RS.52.63 CRORE AS AGAINST SALES OF RS.71.13 CROR E, WHICH IS ROUGHLY 75% OF `SALES. THESE FIGURES LEAVE NOTHING TO DOU BT THAT THERE 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. 12. 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.22.98 CRORE, STOCK OF `FINISHED G OODS IS TO THE TUNE OF RS.13.71 CRORE AND THAT OF `SPARE PARTS AT RS.9.27 CRORE. 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 ITA NO.4324/DEL/2011 18 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 `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. 13. 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 ITA NO.4324/DEL/2011 19 CONTENTION THAT THE TRANSACTIONS UNDER BUY-SELL MOD EL WERE ON COMMISSION BASIS RATHER THAN AS A TRADER. 14. HAVING HELD THAT THE ASSESSEE IS A `COMMISSION AGENT AS REGARDS ITS TRANSACTIONS UNDER THE INDENT MODEL AND A `TRAD ER AS REGARDS ITS 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 THE BAS E OF VALUE ADDED EXPENSES AS DENOMINATOR IN THE COMPUTATION O F OPERATING PROFIT MARGIN FROM COMBINED INTERNATIONAL TRANSACTIONS UND ER BOTH THE MODELS WITH SIMILAR BASE OF COMPARABLES. THE LD. CIT(A) DE LETED THE ADDITION BY COMPARING THE BASE OF OP/VAE OF THE ASSESSEE UNDER BOTH THE MODELS OF TRANSACTIONS IN A COMBINED MANNER WITH OP/OC OF THE COMPARABLES. WE HAVE NOTICED ABOVE THAT OPERATING COSTS OF A `CO MMISSION AGENT ARE ALWAYS EXCLUSIVE OF COST OF GOODS SOLD, WHEREAS A ` TRADER HAS TO HAVE IT AS AN ESSENTIAL ELEMENT. ALBEIT A `TRADER CAN AS CERTAIN HIS OPERATING ITA NO.4324/DEL/2011 20 PROFIT MARGIN AS A PERCENTAGE OF VAE TO BE DESIGNAT ED AS `ANY OTHER BASE, 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 TOT AL OPERATING COSTS ALONE, BUT IN CASE OF A `TRADER, IT CAN BE COST OF GOODS SOLD PLUS OTHER OPERATING EXPENSES, WHICH REPRESENTS HIS TOTAL OPE RATING COSTS AND NOT `VALUE ADDED EXPENSES TO THE EXCLUSION OF COST OF GOODS SOLD. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER IN COMPARIN G OP/VAE OF THE ASSESSEE ON COMBINED TRANSACTIONS UNDER BOTH THE MO DELS WITH OP/OC OF THE COMPARABLES. 15. HAVING DISAPPROVED THE VIEW TAKEN BY THE LD. CI T(A), WE NEED TO JUDGE THE CORRECTNESS OF THE ALP OF THE INTERNATION AL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE UNDER BOTH THE BUSINESS MODELS OF `INDENTING AS WELL AS `TRADING, WHICH ARE OBVIOUS LY DISTINCT FROM EACH ITA NO.4324/DEL/2011 21 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 WITH OP/OC OF COMPAR ABLES, WHICH IS AN INCORRECT APPROACH. IN THE LIKE MANNER, THE TPO , THOUGH COMPARED THE ASSESSEES PLI OF OP/VAE WITH OP/VAE OF THE COM PARABLES, BUT HE ALSO FELL IN ERROR BY JOINTLY CONSIDERING THE INTER NATIONAL TRANSACTIONS OF BOTH THE BUSINESS MODELS, NAMELY, INDENTING AND TRA DING, UNDER ONE UMBRELLA. WE THUS HOLD THAT BOTH THE ASSESSEE AS WE LL AS THE TPO FELL IN ERROR IN CONSIDERING THE INTERNATIONAL TRANSACTIONS UNDER BOTH THE MODELS AS OF UNIFORM CHARACTER. IT HAS BEEN NOTICED SUPRA THAT THE INGREDIENTS OF OPERATING COSTS UNDER THE TRADING MODEL ARE DIFFERE NT FROM THOSE UNDER INDENTING MODEL. EX CONSEQUENTI , TRANSACTIONS UNDER BOTH THE MODELS ARE REQUIRED TO BE BENCHMARKED SEPARATELY. 16. WE FIND THAT THERE IS INSUFFICIENT INFORMAT ION AVAILABLE ON RECORD FACILITATING THE DETERMINATION OF ALP OF THE INTERN ATIONAL TRANSACTIONS UNDER THESE TWO BUSINESS MODELS SEPARATELY. WE, TH EREFORE, SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR ITA NO.4324/DEL/2011 22 PROCESSING THE INTERNATIONAL TRANSACTIONS OF `INDEN TING AND `TRADING SEPARATELY UNDER CHAPTER X OF THE ACT IN CONSONANCE WITH OUR ABOVE ANALYSIS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALL OWED AN ADEQUATE OPPORTUNITY OF HEARING IN SUCH A DE NOVO DETERMINATION. 17. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 08.02.201 6. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 08 TH FEBRUARY, 2015. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.