TMI Blog2017 (8) TMI 1251X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 (5) TMI 203 - DELHI HIGH COURT), has held that the transfer pricing adjustment can be made only with reference to the international transactions and not the transactions with the non-associated enterprises. Similar view has been espoused by the Hon'ble Bombay High Court in CIT vs. Thyssen Krupp Industries India Private Ltd. (2015 (12) TMI 1076 - BOMBAY HIGH COURT). Thus, it is clear that the transfer pricing adjustment cannot be made with reference to the non-AE transactions, but, the same has to be confined only to the international transactions. Since the TPO/AO has made the addition on the basis of transactions even with non-AEs, we direct to restrict the addition only qua the international transactions. Thus we set aside the impugned order and remit the matter to the file of the Assessing Officer/TPO for accordingly redetermining the ALP of the international transaction afresh after allowing a reasonable opportunity of being heard to the assessee. Appeal is partly allowed for statistical purposes. The appeal is partly allowed for statistical purposes. - ITA No.328/Del/2017 - - - Dated:- 13-6-2017 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating income). By applying this rate as an arm s length margin, the TPO computed transfer pricing adjustment u/s 92CA of the Act amounting to ₹ 48,90,27,914/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). The Assessing Officer made the above addition in the final assessment order, against which the assessee has come up in appeal before us. 4. We have heard the rival submissions and perused the relevant material on record. It is observed that the assessee is continuing the business model as a direct marketer since last several years. In the immediately preceding three years also, the assessee applied the RPM as the most appropriate method to prove that its international transaction of purchase of traded goods was at ALP, which was not disputed by the TPO. In such earlier years also, the TPO shortlisted Modicare Ltd. as the only comparable from a list of companies claimed as comparable by the assessee. The view of the AO/TPO in such earlier years was challenged before the tribunal. The assessee, apart from assailing the comparability of Modicare Ltd., also contended before the Tribunal that certain other companies engaged in similar product ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o customers without the involvement of any wholesalers or retailers network. Thus, it is palpable that the business model adopted by the assessee for selling its products cannot, under any circumstance, be compared with those selling their goods through the retail chain. The Hon'ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del), has held that a company which is otherwise similar, but, outsourcing major part of its business activities, cannot be compared with a company not so outsourcing because of difference in business models. The following observations from the judgment merit consideration : Even Vishal could not be considered as a comparable, as admittedly, its business model was completely different . Admittedly, Vishal s expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. . Plainly, a business model where services are rendered by employing own employees and using one s own infrastructure would have a different cost structure as compared to a business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussion made in paras 42 and 43 accentuates the importance of functional similarity even under the TNMM : Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying TNMM method, broad functionality is sufficient and it is not necessary that further effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The DRP held that TNMM allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to Resale Price Method or Comparable Uncontrolled Price Method and, therefore, the functional dissimilarities pointed out by the Assessee did not warrant rejection of eClerx and Vishal as comparables. . In our view, the aforesaid approach would not be apposite. Insofar as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity. Comparability of controlled and uncon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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