TMI Blog2017 (2) TMI 1237X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.13 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. Six international transactions were reported in Form No.3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining their arm s length price (ALP). The TPO accepted the ALP of other five transactions except Receipts for services rendered with a transaction value of ₹ 6,39,70,166/-. The assessee applied the Transactional Net Margin Method (TNMM) with the Profit level indicator (PLI) of Operating Profit/Total Cost (OP/TC) for demonstrating that this transaction was at ALP. The TPO accepted the application of the TNMM as the most appropriate method. Apart from making certain changes in the determination of the assessee s own PLI from the international transaction, the TPO also made variations in the companies chosen by the assessee as comparables and also their profitability rates. In the ultimate analysis, the he shortlisted ten companies as comparables with their OP/TC at 21.76% before working capital adjustment and 34.95% after working capital adjustment. By applying such profit rate of 34.95% on total costs incurred by the assessee in provision of the services, the TPO determined ALP at ₹ 9.03 crore, which led to the transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apportionment of the combined `Unallocable costs . He apportioned these costs in the ratio of gross revenue from the three segments. This led to the apportionment of ₹ 5,26,83,863/- to the `Services segment which is under dispute. By such allocation, the assessee s positive OP/TC from this segment got converted into negative of (-) 5%. The case of the assessee is that the combined `Unallocable expenses amounting to ₹ 9.79 crore should have been apportioned in the ratio of head counts. 6. We are unable to countenance the view canvassed by the ld. AR. There can be no rationale in apportioning the costs on the basis of number of persons working in the three segments. A person working at a lower level, such as, a Helper or an Assistant, cannot be compared with a person working at a higher position, such as, a well qualified technician or a marketing expert, drawing more salary. One segment may need more lower staff drawing less salaries and the other segment may have more higher staff with higher salaries. If we consider the number of heads working in each segment, irrespective of their positions etc., and apportion unallocated costs in that ratio, the results are boun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal that a sum of ₹ 17.13 lac should be excluded from the total Operating costs incurred by the assessee in the computation of its PLI as no profit element is embedded in the same. 9. We are not convinced with the submission advanced on behalf of the assessee. There is no doubt that the pass through cost is to be excluded from the total costs for the purposes of determining OP/TC under the TNMM. However, the assessee has needlessly stretched the scope of pass through cost , which refers to such cost as is directly reimbursed by the other side on which no profit is earned by the assessee. Thus, pass through cost pre-supposes its specific and identifiable recovery as such from its AE without any profit element. If a cost is not separately recoverable from AE, then, it sheds the character of pass through cost. An example of the same can be some material supplied by the AE for use in rendering services by the assessee. In such a situation, the AE may raise a bill on the assessee for supply of such material, which will be separately discharged unconcerned with the overall contract value of service. In the alternative, the assessee may incur such cost with a third part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irected the TPO for redoing the same. In the fresh exercise, the TPO though reduced the adjusted OP/TC of comparable companies at 31.35%, but, still, did not confront the assessee with the computation of working capital adjustment. The ld. AR submitted that the second calculation of working capital adjustment by the TPO is also wrong and the same be suitably amended. 12. It is observed that the TPO has allowed the working capital adjustment in a negative manner by enhancing the profit margin of comparables. 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 adjuste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment matters, legal matters, etc. 14. On a specific query, the ld. AR did not place on record a copy of the Agreement pursuant to which such services were rendered, that could have facilitated in finding out the correct nature of work done by the assessee for its AEs. It was submitted that no agreement was executed. We are not inclined to accept this submission. It goes without saying that no work, in the ordinary course, can be carried out between two distinct, even though related, corporate assesses located in different overseas tax jurisdictions without any formal agreement showing, inter alia , the nature of work, responsibilities, obligations and mode of compensation/ remuneration. We are leaving this issue here only after making a mention. 15. On going through the Transfer pricing study report of the assessee, whose copy is available in the paper book, it can be seen that the assessee performed functions of marketing and support services to its AEs, which have been outlined in paras 4.3.6 to 4.3.16 as under :- ` Support services rendered to AEs 4.3.6 In accordance with its primary objective, FIL is performing the function of general marketing and market re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a leg of the SEA-ME-WE 4 (South East Asia- Middle East- Western Europe-4) project. The SEA-MEWE- 4 Cable system project is in relation to optical fibers transmission under sea. As per the agreement. FIL provided assistance to FJ in relation to obtaining the supply contract for the SEA-ME-WE-4 cable system by providing information about Government policies and regulations, competitor analysis, pricing norms etc. FIL was compensated in the form of commission income by FJ, in respect of its various support services with respect to the SE-ME-WE-4 project. 4.3.14 Technical support services rendered to Fujitsu Network Solutions Limited Japan (FNETS) are as under: India Maintenance Support 4.3.15 FNETS has supplied transmission equipment to Power Grid Corporation India Ltd. ('PGCIL') in India. As part of the supply contract, FNETS has to provide maintenance services for these equipments. These services are subcontracted to FIL, which has further subcontracted these services to third parties, with all risks transferred back-to-back, after retaining its margin. The scope of services includes problem solving and attending queries. FIL acts as a coordinator between FNETS a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR was with reference to paras 4.3.15 and 4.3.16 of the Transfer pricing study report. It was submitted that the assessee was not only rendering Marketing support services, but also undertaking Maintenance services. We are, again, not convinced with the ld. DR s submission. As can be seen from para 4.3.15 that FNETS was to provide maintenance services for supply of equipments to Power Grid Corporation of India Ltd. These services were subcontracted to the assessee, which were further subcontracted by the assessee to third party with all risks transferred back to back. Similar position emanates from a reading of para 4.3.16 which shows that FJ was engaged in supplying equipments and providing installation and commissioning support for project of SEA-ME-WE. FJ performed the work of equipments supply and subcontracted the installation and commissioning services part of the contract to FNETS, which subcontracted the entire installation and commissioning of service part to the assessee, which, in turn, subcontracted the same to FOTEL, another group company. This shows that the assessee did not render any installation and commissioning services or maintenance services at its own, but s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t etc. Apart from the above, this company has also earned revenue from Research studies and tourism amounting to ₹ 1.26 crore. From a close look at the activities carried on by this company, it becomes clear that except for Research studies , which partly resembles with the assessee s Marketing research activity, there is no match between all the other activities carried out by this company and what the assessee is doing. There is no segmental information available on this business segment and the company has computed profit on a consolidated basis. In view of the patent mismatching functions performed by this company on a holistic basis vis- -vis the assessee, we cannot deem this company as comparable on entity level. This company is, therefore, ordered to be excluded from the list of comparables. (ii) Best Mulyankan Consultants Ltd. 20.1. The TPO selected this company as comparable. The assessee objected to the same, but the TPO did not concur with the assessee s objections. 20.2. The ld. AR did not press the functional differences of this company with the assessee. The only issue raised was that the TPO had wrongly computed its profit margin at 12.84%. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a the date of closing of the year, which event took place nine years back. No other information/detail has been made available to show that this company is functionally different. In the absence of any such details, we are unable to approve the stand of the assessee. This company is, therefore, held to be rightly included in the list of comparables. (v) RITES Ltd. 23.1. The TPO noticed that this company is primarily a consultancy organization having three business segments, namely, Consultancy services, Export of rolling stock, equipment and spare, Leasing of railway rolling stock and equipment. The TPO considered only the Consultancy services segment of this company for the purpose of inclusion in the list of comparables, against which the assessee is aggrieved. 23.2. Having heard the rival submissions and perused the relevant material on record, we find that only `Consultancy service segment of this company has been considered by the TPO leaving the other business segments aside. Our attention has not been drawn towards any material of substance to indicate that the nature of services rendered by this company cannot be considered as matching with the services provide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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