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2017 (2) TMI 1237 - AT - Income TaxTransfer pricing adjustment - manner of apportionment of unallocable costs and not allowing deduction on account of pass through costs - Held that:- AR could not adduce the details of `Unallocable costs’ of ₹ 9.79 crore, which is not even available in the TPO’s order. In the absence of such details, it cannot be precisely ascertained as to how much is really the amount of unallocable costs. Under these circumstances, we set aside the impugned order and remit the matter to the file of AO/TPO for considering the details of ₹ 9.79 crore. If some cost included in this amount is directly identifiable with one of the three segments, then, it should be excluded from the common pool to be considered separately under the respective segment. The remaining amount should be apportioned amongst the three segments in the ratio of the amount of respective gross margins. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in this regard. Computation of the assessee’s PLI - Held that:- We find that the so-called pass through cost amounting to ₹ 17.13 lac was incurred qua third parties. The otherwise nature of such costs, being, operating, has not been disputed. The third party outsourced services cost has ultimately gone into the rendering of services by the assessee which fetched the contracted revenue. On a specifc question about the nature of such costs, it was stated that the assessee did not recover it from its AE and there was no profit element involved in it. This contention automatically shows that the third party outsourced services cost cannot be assigned the character of pass through cost as admittedly it has not been recovered as such from the AE. If the contention of the ld. AR that since there is no profit element in the incurring of such a cost and hence the same be excluded by treating it as a pass through cost, is taken to a logical conclusion, then, all the costs incurred by the assessee to third parties in rendering the services to its AE will find their way out of the ambit of ‘Operating costs’, thereby rendering the concept of `Operating costs’ itself meaningless. This is patently erroneous and unacceptable. Ex consequenti, we hold that the third party outsourced service cost amounting to ₹ 17,13,222/- is rightly includible in the total operating costs incurred by the assessee. The argument of the ld. AR fails on this score. Computation of mean OP/TC of comparables - Held that:- There can be no quarrel on the fact that if figures of Inventory, Receivables and Payables warrant a working capital adjustment in a negative manner to the profit margin of the comparables, the same has to be necessarily carried out in the same manner as it is done if the adjustment leads to reduction of the profit margin of comparables. However, it is essential that any adverse calculation should be confronted to the assessee, so that his objection, if any, could be addressed. As the needful has not been done in this case, we set aside the impugned order on this score and remit the matter to the file of TPO/AO for confronting the assessee with the manner in which the adjusted OP/TC of comparables has been computed, so that the assessee may raise objection, if any, to the computation of working capital adjustment. Selection of comparables - comparability analysis - Yassessee is engaged in market research activities/business development and helps its associated enterprises in identifying new projects and business opportunities in India’. The assessee: `also acts as an intermediary between its AEs and clients’. Further, it: `provides technical support/coordination services to its AEs, thus companies functionally dissimilar with that of assessee need to deselected from final list of comparability.
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