Tribunal directs recalculating Arm's Length Price using Cost Plus Method under Rule 10B(1)(c)

The tribunal allowed the appeal for statistical purposes, directing the AO to recompute the Arm's Length Price (ALP) of the international transaction under the Cost Plus Method. The tribunal emphasized the consideration of both direct and indirect costs and the use of single year data in determining the ALP, as mandated by Rule 10B(1)(c). The previous deletion of the addition on account of transfer pricing adjustment was set aside, and the AO was instructed to compute the ALP afresh in accordance with the tribunal's directives.

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Issues Involved:

1. Deletion of addition on account of transfer pricing adjustment.
2. Determination of Arm's Length Price (ALP) under the Cost Plus Method.
3. Consideration of direct and indirect costs in computing ALP.
4. Use of multiple year data versus single year data.
5. Correctness of the approach by the CIT(A) and AO in determining ALP.

Detailed Analysis:

1. Deletion of Addition on Account of Transfer Pricing Adjustment:

The appeal by the Revenue challenges the deletion of the addition of Rs. 91,80,340/- made by the Assessing Officer (AO) on account of transfer pricing adjustment under Section 92CA(3) of the Income-tax Act, 1961. The AO made this addition by applying a profit rate of 11.72% to the total costs incurred by the assessee, which included both direct and indirect costs. The CIT(A) deleted this addition by comparing the assessee's net profit margin to that of comparable companies, excluding direct costs from the computation.

2. Determination of Arm's Length Price (ALP) under the Cost Plus Method:

The assessee, engaged in the business of inbound tours and travels, reported an international transaction of `Tours and Travel Related and Customer Handling Services' with a transacted value of Rs. 14,65,34,048/-. The assessee adopted the Cost Plus Method to demonstrate that its international transaction was at arm's length price (ALP). The AO, however, did not accept the assessee's method of computing profit by excluding direct costs and made an addition based on the total costs incurred by the assessee.

3. Consideration of Direct and Indirect Costs in Computing ALP:

The CIT(A) asked the assessee to analyze the net profit margin of comparable companies within the same trade. The assessee provided an analysis treating two companies as comparable. The CIT(A) found the assessee's profit margin within the permissible range and deleted the addition. However, the tribunal held that both direct and indirect costs must be considered in determining the ALP under the Cost Plus Method, as mandated by Rule 10B(1)(c). The tribunal rejected the assessee's contention that the direct costs incurred were pass-through costs, emphasizing that these costs were borne by the assessee alone and were not recoverable from the AE.

4. Use of Multiple Year Data versus Single Year Data:

The AO computed the ALP using multiple year data, which the tribunal found incorrect. The tribunal referred to the Hon'ble Delhi High Court's decision in Chrys Capital Investment Advisors (India) P. Ltd. vs. DCIT, which held that multiple year data should ordinarily be avoided, and single year data should be considered.

5. Correctness of the Approach by the CIT(A) and AO in Determining ALP:

The tribunal found flaws in both the CIT(A)'s and AO's approaches. The CIT(A) erred by comparing the net profit margin to total costs and ignoring direct costs, which is contrary to Rule 10B(1)(c). The AO, on the other hand, incorrectly used multiple year data and applied the ratio of net profit to total costs instead of gross profit to total costs. The tribunal set aside the impugned order and directed the AO to compute the ALP afresh under the Cost Plus Method, considering both direct and indirect costs and using single year data.

Conclusion:

The tribunal allowed the appeal for statistical purposes, directing the AO to recompute the ALP of the international transaction under the Cost Plus Method, considering both direct and indirect costs and using single year data, in conformity with the tribunal's discussion. The order was pronounced in the open court on 13.11.2015.

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