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Before: Shri Bhavnesh Saini & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order passed u/s. 143(3) read with section 144C of the Income-tax Act dated 30.11.2015 on the following grounds :
1) That on the facts and circumstances of the case, the Assessing Officer was not justified in making addition of Rs. 3,01,29,754/- on account of transfer pricing adjustment based on DRP and TPO’s order.
2) That the order of DRP and TPO are without proper appreciation of facts and are in total disregard to past history of the appellant.
3) That the facts being identical, the DRP and TPO were not justified in rejecting the CPM method which was duly considered and accepted in the preceding year by Id.TPO and Assessing Officer.
4) (i) That the TPO has not properly allocated the costs of air charter services to AE and non-AE transactions for the purpose of computation of ALP which is a mistake apparent from record thereby rendering the alleged transfer pricing adjustment incorrect.
(ii) That the TPO was not justified in adopting external comparables instead of the internal comparables as adopted by the assessee.
(iii) That even otherwise, some of the external comparables used by the TPO have very high turnover as compared to the assessee business and as such same are not relevant and it cannot be considered as an appropriate base.
5) That the DRP has totally disregarded the facts and our submission of facts relating to proper allocation of costs and use of comparables.
The only issue involved in this appeal is in respect of adoption of appropriate method for determining the ALP of international transactions. The brief facts of the case are that the assessee filed return of income on 27.09.2011 declaring a loss of Rs.1,24,26,869/-. The case was selected for scrutiny. In the scrutiny proceedings, it was observed that the assessee had undertaken international transactions of Rs.16,02,26,577/-. The assessee had adopted CPM method as the most appropriate method for determination of PLI by GP/OC. The assessee company is engaged in the business of sale of packages for leisure travel where two or more components of travel such as flights, hotels, car rentals, transfer and ground handling services are bundled together in dance and sold to customers. Apart from above, the assessee has an Air Charter business also. The TPO did not accept the Cost Plus Method (CPM) used by the assessee for determination of ALP and applied TNMM as most appropriate method and OP/TC as PLI. He used current year data and selected the following comparables with average PLI of 4.45% and made an upward adjustment of Rs.4,48,48,531/-. Later on by passing the rectification order u/s. 154 dated 03.02.2015, it was reduced to Rs.3,14,02,024/- :
S.No. Company Name OP/TC(%) 1 ACE Tours Worldwide Ltd. 3.8 2 Indo Asia Leisure Services Ltd. 4.57 3 Pearl International Tours & Travels 10.52 Ltd. 4 Roomsxml Solutions Ltd. 1.21 5 Tamarind Tours Pvt. Ltd. 2.15 AVERAGE 4.45 The assessee carried the matter before the DRP by reiterating the same objections filed before the TPO which has been reproduced in the DRP order. The ld. DRP after considering the order of the lower authorities and relying on some case laws, upheld the order of the TPO and directed the Assessing Officer for passing final order. Accordingly, the Assessing Officer made the final order by making upward adjustment of Rs.3,01,29,754/-. Aggrieved, the assessee is in appeal before the Tribunal.
The ld. AR of the assessee submitted that the TPO has wrongly not accepted the CPM as adopted by the assessee on year to year basis. The facts are similar in the preceding and subsequent years and he placed before us assessment orders for preceding assessment year 2010-11 and succeeding assessment year 2013-14 in which CPM has been accepted by the Revenue as most appropriate method for determining ALP. Therefore, CPM should be accepted by the Revenue. He also relied on the following case laws, which are placed in the paper book :
(i). CIT vs. L’oreal India P. Ltd., 276 CTR 484 (Bom)
After having perused the relevant part of the order passed by the Commissioner and the Tribunal on this question, we are in agreement with Mr. Pardiwalla that the Tribunal did not commit any error of law apparent on the face of the record nor can the findings can be said to be perverse. The Tribunal has found that the TPO has passed an order earlier accepting this method. The Tribunal has noted in para 19 of the order under challenge that this method is one of the standard method and the OECD (Organization of Economic Commercial Development) guidelines also state in case of distribution or marketing activities when the goods are purchased from associated entities and there are sales effected to unrelated parties without any further processing, then, this method can be adopted. The findings of fact are based on the materials which have been produced before the Commissioner as also the Tribunal. Further, it was highlighted before the Commissioner as to cost. (ii). Racold Thermo Ltd. v. DCIT, 63 taxmann.com 215 (Pune-Trib)
Undoubtedly, the doctrine of res jiidicata is not applicable to the tax proceedings, but at the same time, where there is no change in the facts in respect of a particular transaction and/or issue or proceedings, then it is the requirement of law that consistency should be maintained and the methodology adopted by the assessee for benchmarking its international transactions should not be disturbed. Where the Revenue from year to year has accepted the method adopted by the assessee for benchmarking its international transactions with its associate enterprises, in the absence of any reasons brought on record, there is no merit in deviating or taking stand contrary to the stand accepted in both the preceding and succeeding years, while benchmarking the international transactions in the hands of the assessee.
(iii). DCIT v. Fritidsresor Tours and Travels India P. Ltd., 157 ITD 495 (Delhi-Trib) The second reason for not countenancing the impugned order is that the Commissioner (Appeals) has accepted the yardstick of comparing the 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 method1 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, What is relevant under the TNMM is 'operating profit’ and not 'net profit’. The action of the Commissioner (Appeals) 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’, it cannot be appreciated as to how the decision of the 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. [Para 12.7] (iv). DCIT v. Sumi Motherson Innovative Engineering Ltd. 30 ITR(T) 367(Delhi-Trib).
However the numerator, being the 'net profit margin is static or fixed. Unlike denominator, no alternatives have been provided for numerator. It remains constant with the varying denominators. It is this percentage of net profit margin derived by the assessee from its international transaction, which is compared with similar adjusted net profit margin with the same base of other comparables for ascertaining whether the 'net profit margin' (or to be more appropriate 'net operating profit margin') from international transactions is at arm's length. In common parlance, the term 'Net profit' refers to the profit of the assessee after depreciation, interest and taxes. But in the context of TNMM, this term restricts itself to 'Net operating profit', which means the profit from business activity after considering all direct and indirect costs and excluding non operating incomes and expenses. To put it simply, it refers to the determination of profit by ignoring non-operating costs and revenues and also extraordinary and exceptional items which are non- recurring in nature. The logic in considering net operating profit margin is simple that the items of income/expense which are not concerned with the business operation of the assessee are taken out with a view to derive a fair picture about the profitability from operations. In this process, all the operating expenses and all the operating revenues are taken into consideration.
On the other hand, the ld. DR relied on the order of the lower authorities and submitted that the res judicata does not apply in the Income-tax Proceedings. Every year is a separate year. Therefore, lower authorities are justified to apply TNMM for determining the ALP in the case of assessee.
After hearing both the sides and perusing the entire materials available on record, we observe that the business model of the assessee is same as in the preceding and succeeding years. The facts are unchanged. It is clear from the Paper book submitted by the assessee that for the assessment year 2010- 11 and 2013-14, the cost plus method has been accepted by the Revenue in the same facts of the case of the assessee. This has not been controverted by the ld. DR. We, therefore, find that rule of consistency should have been adopted by the authorities below as held in the case of Racold Thermo Ltd. vs. DCIT(supra), reproduced above. The decision rendered by Delhi Tribunal in the case of Fritidsresor Tours and Travels India P. Ltd. (supra) is also applicable to the present case, as in that case, the assessee was engaged in the same line of business and CPM has been accepted by the Co-ordinate Bench of Tribunal, as most appropriate method, as reproduced above. Respectfully following the above decisions, we allow the appeal of the assessee.
In the result, the appeal is allowed.
Order pronounced in the open court on 24th October, 2018.