The order of the Bench was delivered by
R.S. SYAL, AM:-This appeal by the Revenue arises out of the order passed by the CIT(A) 29.11.2010 in relation to the assessment year 2004-05.
2. The only issue raised in this appeal is against the deletion of addition of Rs. 45,41,519/- on account of transfer pricing adjustment.
3. Briefly stated, the facts of the case are that Exxon Mobil is a multi-national group of companies engaged in oil and gas industry. It conducts business in almost 200 countries. Its major business is to discover, access, develop, refine and market oil and gas resources. The assessee, an Indian company, is part of this group, which conducts market survey activities and renders related advisory services to its associated enterprises (AEs). Four international transactions were reported by the assessee in its Form No.3CEB. The only international transaction disputed in the present appeal is ‘Conducting market survey activities and related advisory services’ for which the assessee was paid Rs. 4,89,60,262/-. The other three international transactions were accepted by the TPO at arm’s length price (ALP). The assessee adopted Transactional net margin method (TNMM) as the most appropriate method, with Profit level indicator (PLI) of Operating Profit to Total Cost (OP/TC), to demonstrate that the international transaction was at arm’s length price. Twelve companies were selected by the assessee as comparable. By adopting the multiple-year data of these companies, the assessee computed their average operating profit margin at 4.46% and, accordingly, showed that its international transaction was at ALP. The TPO rejected the use of multiple-year data and resorted to the current year data alone. In doing so, he noticed that only eight companies were left out of those twelve chosen by the assessee because the current year data of the remaining four companies was not available. The TPO computed average of OP/TC margin of these eight companies for the financial year 2003-04, at 17.96%. By applying this profit margin, a transfer pricing adjustment of Rs. 45,41,519/- was proposed, which amount was added by the AO in the assessment order.
4. At this juncture, it is pertinent to mention that there is no dispute on any aspect of the addition on account of transfer pricing adjustment other than the calculation of OP/TC margin of Engineers India Ltd. (EIL), one of the companies chosen by the assessee as comparable in its transfer pricing study by showing its margin of 37.41% for the current year, which stood adopted by the TPO as such without any alteration.
5. The assessee filed a rectification application before the TPO, urging that the correct OP/TC margin of EIL was 6.98% and the same be taken. The TPO rejected this contention on the ground that the assessee had itself worked out the profit margin of EIL at 37.41% for the current year. The same issue was espoused before the ld. CIT(A), arguing that the OP/TC of EIL should be taken at 6.98%, as was demonstrated by the assessee through Annexure-I filed along with rectification application. The ld. CIT(A) concurred with the submissions advanced on behalf of the assessee and ordered for the adoption of OP/TC of EIL at 6.98%. After considering the fact that the resultant average margin of the eight companies, with new margin of EIL at 6.98%, came within (+)/(-) 5% range, he ordered for the deletion of the addition. The Revenue is aggrieved against the deletion of this addition to the extent as aforestated.
6. We have heard the rival submissions and perused the relevant material on record. Shorn of unnecessary factual details, it is noticed that the core of the controversy before us is the calculation of OP/TC of EIL. There is no dispute on the fact that the EIL has been taken as a comparable company on entity level and not on a segment level. Simply put, the issue before us is cabined to the extent of calculation of correct OP/TC of EIL for the purposes of inclusion in and ex consequenti averaging the same in respect of the eight comparable companies. We want to clarify that the action of the TPO in using the current year data of comparables, as against the multiple-year data initially chosen by the assessee, is not agitated on behalf of the assessee. From the multiple year data of OP/TC of EIL, it can be seen that the assessee had itself shown the margin for the current year at 37.41% in its TP study and the same figure was adopted by the TPO in its order. Now, the assessee is putting forth an argument that this profit percentage is not correct.
7. In principle, we find no reason to restrict the right of the assessee to assail the correctness of the figures submitted in its TP study. If a figure was wrongly taken by the assessee inadvertently, there should be no disqualification to later on contending that it should be substituted with a correct figure. The appropriateness of such a contention, if made, needs to be judged at the end of the Revenue, without rejecting it at the outset. Precisely, this is the argument which was raised by the assessee before the TPO in rectification proceedings asserting that the OP/TC of EIL at entity level should be correctly taken at 6.98% instead of 37.41% shown in its TP study. The ld. CIT(A), was albeit right in accepting this argument for evaluation, but appears to have been swayed by the delineation of the correctness of this figure, without either independently properly examining the same at his end or obtaining a remand report from the AO/TPO on this aspect of the matter. An analysis of the Profit & Loss Account of EIL, which is available on page 285 of the paper book, in conjunction with such calculation given through Annexure-1 on page 109 of the paper book, divulges some apparent inconsistencies. It can be seen that the amount of ‘Other incomes’ has been taken in the Annexure-I at Rs. 174.64 lacs, whereas the actual amount of ‘Other income’ in the Profit & Loss Account of this company stands at Rs. 4,809.63 lacs. On being questioned from the ld. AR about the reasons for the difference in such figures, which ultimately culminated into the overall difference in the calculation of OP/TC, the ld. AR submitted that the figure given in the Profit & Loss Account contains both operating and non-operating incomes, whereas the calculation under TNMM calls for the adoption of operating income. It was submitted that out of the total ‘Other income’ of Rs. 4,809.63 lac, the operating ‘Other income’ was Rs. 174.64 lac, which was taken up for calculation. We have perused the details of ‘Other income’ given on page 293 of the paper book, being Schedule-G to the Annual accounts of EIL. One of the items contained in this schedule is ‘Miscellaneous income’ amounting to Rs. 173.54 lac, which, in the opinion of the ld. AR constituted the lone operating income that was included in the calculation of OP/TC at 6.98%. We agree with the contention of the ld. AR that TNMM contemplates the taking of operating profit to a suitable base and in this process the items of non-operating income are liable to be excluded. At this stage, one needs to appreciate the difference between the operating profit and net profit. Whereas, operating profit is excess of operating revenue over operating costs, net profit encompasses the effect of both the streams, viz., operating and non-operating. Revering to the operating profit, it represents the difference between the operating income and operating expense. The argument of the ld. AR for adoption of operating income, also extends with full vigor to the expense side. In other words, not only the non-operating items of income are required to be excluded, but the items of non-operating expense should also be expelled from the calculation of the operating profit of a company. Ignoring the items of non-operating income without simultaneously reducing the items of non-operating expense, gives a distorted figure of operating profit.
8. Coming back to the facts of the instant case, we find that the major item of ‘Other income’ is Interest income aggregating to Rs. 3,776.65 lac, which rightly deserves exclusion from the operating profit. When we compare other figures from the Profit & Loss account of EIL and the Annexure-I, it comes to light that the figures of all the expenses tally. To put it simply, the assessee took all the expenses, including the non-operating expenses, in the calculation of operating profit of EIL. It is but natural that if the items of non-operating income are to be excluded from the computation of operating profit, then the items of non-operating expense should also be excluded. One-sided exercise has been done with the obvious reason to bring down the OP/TC of EIL at 6.98%. Prima facie, it appears from page 295, being Schedule-H containing details of ‘Corporate cost’, that it includes Bank charges to the tune of Rs. 172.79 lac. It is manifest that the bank interest expenditure, like bank interest income, also assumes the same character of non-operating nature. It is not too far to seek the reasons for the omission of such cost from the total operating costs. Similarly, there can be other non-operating expenses as well, finding their place in the details of total expenses incurred by EIL, which have not been excluded by the assessee. The net effect of the exercise carried out by the assessee in calculating OP/TC of EIL at 6.98% by taking the figure of operating income on one hand and total expenses (both operating and non-operating) on the other is patently misleading, inasmuch as the figure of profit so computed is neither operating profit nor net profit. It lies somewhere between the two as it has become excess of operating income over total expenses (both operating and non-operating). In our considered opinion, the view canvassed by the ld. CIT(A) in accepting the correctness of the assessee’s calculation of OP/TC of EIL at 6.98% at its face value, cannot be sustained because of the apparent flaws as discussed above. Under these circumstances, we set aside the impugned order on this issue and remit the matter to the file of the AO/TPO for a correct de novo determination of the OP/TC of EIL. After doing this exercise, the TPO will compute ALP of the international transaction as per law. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.
9. In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 13.11.2014.