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TMI Blog2017 (12) TMI 196X X X X Extracts X X X X X X X X Extracts X X X X ..... ispute Resolution Panel ('DRP') is bad in law, in as much as it failed to appreciate the facts involved and the applicable law thereon. 2. That on facts and in law, the learned AO has erred in making an addition of Rs. 63,54,367 to the income of the Appellant on account of Transfer Pricing ("TP") adjustment. 3. That on facts and in law, the learned AO/DRP has erred in upholding the rejection of TP documentation of the Appellant by the Transfer Pricing Officer ("TPO "). 4. That on facts and in law, the learned AO/DRP has erred in not rejecting the fresh analysis made by the TPO and use of inappropriate filters to find the comparables. 5. That on facts and in law, the learned AO/DRP has erred in upholding the rejection of use of multiple year data by the Appellant. 6. That on facts and in law, the learned AO/DRP has erred in rejection of comparables adopted by the Appellant and retaining the new comparables adopted by the TPO. 7. That on facts and in law, the learned AO/DRP has erred in completely disregarding the additional comparables proposed by the Appellant for which data was subsequently available during the hearings. 8. That on facts and in law, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The assessee, in its TP documentation, i.e., T.P. study report, has used Transaction Net Margin Method (TNMM) as the most appropriate method and used operating profit (OP) / total cost (TC) as the profit level indicator (PLI). The assessee has used 8 comparables with an average margin of 9.54% using the multiple year data and compared it with margin of the assessee at 9.73% and has submitted that its international transactions are at arm's length. The Id. TPO rejected the transfer pricing documentation of the assessee and applying its own filter, selected 10 comparables with an average PLI of 25.64% and taking into consideration the PLI of OP/OC, i.e., operating profit/operating cost, determined the ALP of international transaction of Rs. 6,91,02,834/- at Rs. 7,93,07,703/-and proposed an adjustment of Rs. 1,02.04,869/-. 5. Grounds No. 1 to 4 of appeal are stated to be covered and general and, therefore, they are not adjudicated separately and hence, dismissed. Ground No.5, which relates to the application of multiple year data is not pressed by the assessee and hence, dismissed. 6. Ground No. 6 is against the rejection by the TPO of EDCIL (India) Ltd. as comparable and inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the company is providing technical support services, procurement services, training and management services etc. Such services are in the nature of business support services and are comparable to the services performed by the assessee. Our view is further supported by the decision of the Coordinate Bench in the case of Eli Lilly & Co. (India) P. Ltd. vs. ACIT (supra) where, on the identical facts, on the said comparable, EDCIL (India) Ltd., the coordinate Bench has held as under: "30. Having considered the rival submissions -we find that the aforesaid company was held to be valid comparable in our own order for Assessment year 2009-10 by holding as under: "19. We have heard the rival submissions and, perused the material on record. In the present case, the assessee wants inclusion of EDCIL. a government company, in the final set of comparable s adopted by TPO/DRP. The assessee inter-alia submitted that in the appellants own case for the assessment year 2008-09. DRP had directed the TPO to consider the aforesaid segment, namely, 'Technical Assistance' and 'Human Resource' as comparable to the assessee and since the business of EDCIL and assessee has remai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n.com 140 wherein it has been held as under: "These comparables and the method of computation of arm's length price has been accepted by the department in the subsequent assessment year i.e. 2004- 05. Therefore in our view comparables selected by the assessee have to be adopted for the purpose of computation of transfer pricing adjustments this year also. " 31. Following the same EDCIL is held to be functionally comparable to the appellant and therefore included in the final set of comparable companies. " Therefore, following the order of coordinate Bench we also hold that EDCIL being functionally similar as per its business profile which remains uncontroverted by the Revenue, requires to be included. 10. The assessee has also challenged the selection of certain companies by the TPO which are not comparable to the assessee as per FAR analysis. The assessee has contested the following comparables included by the Id. TPO. (i). Aptico Limited (ii). TSR Darashaw Limited (iii). Cameo Corporate Services Limited (i). Aptico Limited: 11. The Id. TPO included this company in the final set of comparables. The assessee objected to the inclusion of this company befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l consultancy relating to asset reconstruction companies, management services, micro enterprise development, skill development etc. This is a government company. The fact that its operations are mainly based on the policy requirements of the government and the fact that it is a preferred company of the Government of India for entrustment of works, cannot be ignored. Be it as it may, in our considered opinion, the functional profile of this company is different from that of the assessee company and hence the same should be excluded from the list of comparable companies -while computing the ALP. " Therefore, following the order of the coordinate Bench, we hold that Aptico Limited is functionally different from the assessee and is directed to be excluded from the list of comparables. (ii). TSR Darashaw Limited 15. This comparable was selected by the learned TPO after rejecting the contentions of the assessee regarding functional non-comparability. The learned TPO held that since the clients of the company are in India, it is not, in fact, providing IT enabled services to its group entities but providing them business support services. He held that this company is providing busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the coordinate Bench in the case of Adidas Technical Services P. Ltd. vs. DCIT (supra), wherein on identical facts, TSR Darashaw Ltd. was excluded as a comparable, observing as under: "(d) TSR Darashaw Ltd.:- The TPO included this company on the ground that the company is providing business out sourcing services to clients in India, These services are provided to local clients and not the foreign clients and hence they are not similar to ITES services. The TPO observed that ITES companies have the advantage of location savings, while the business service companies do not have advantage. Since in this case the services are predominantly provided in India, the company is a correct comparable. He also held that the assessee had not gone into the verticals or high end or low end distinctions while selecting the comparables and has selected companies operating in various verticals. The TPO has also selected comparables which are broadly engaged in the field of marketing support services which has similar to the services provided by the assessee. The Ld. Counsel for the assessee on the other hand submitted that the company is not functionally comparable. It is contended that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate Services Limited 19. This comparable was included by the TPO by holding that it was performing business services. He rejected the contentions of the assessee regarding its functional dissimilarity. The Id. DRP also rejected the objections of the assessee against the company's inclusion. 20. Before us, the learned AR relied on the extracts of the company's annual report given on page 23 of the TPO's order and submitted that like TSR Darashaw Ltd., this company is also primarily engaged in the business of registry and share transfer and was therefore not comparable to the assessee. He relied on the decision of the coordinate Bench in the case of Adidas Technical Services Pvt. Ltd. vs. DCIT (ITA No. 862/Del/2016). 21. The learned DR relied on the order of the TPO and referred to the functional profile of the company. It was submitted that the company is engaged in providing business services and is comparable to the assessee. He vehemently submitted that the company should be included in the list of comparables. 22. We have considered the rival submissions and the extracts from the company's Annual Report. In our view, the functional profile of Cameo Corpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded from the list of comparables. 27. We have carefully considered the rival contentions. The short question to be answered regarding this comparable is that where a company reports a separate service segment in its Annual Report, is there a need to apply service income filter. In our view, there is no need of applying such a filter if the segmental data is being used for comparability analysis. Such filter is to be applied only if the entity level profit margin is being considered in the comparability analysis. In the present case, since the service segment of the comparable is being considered in the final analysis, the application of such filter is not required. We therefore direct the TPO to include this company in the list of comparables. (ii). Sporting & Outdoor Ad-Agency Pvt. Ltd. 28. This comparable sought to be included by the assessee was rejected by the TPO on the ground that its revenue is continuously diminishing over the years. 29. Before us, the Id. AR submitted a chart showing the company's revenue over the preceding four financial years (including the relevant financial year. i.e. FY 2010-11). Referring to the chart, it was submitted that the revenue in FY ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities-cannot be subject to a per se standard of loss making company or an "abnormal" profit making concern or huge or "mega" turnover company. As explained earlier, Rule JOB (2) guides the six methods outlined in clauses (a) to (f) of Ride 10B(1), -while judging comparability. Rule JOB (3j on the other hand indicates the approach to be adopted where differences and dissimilarities are apparent. Therefore, the mere circumstance of a company - otherwise conforming to the stipulations in Rule 10B (2) in all details, presenting a peculiar feature - such as a huge profit or a huge turnover, ipso facto does not lead to its exclusion. The TPO, first, has to be satisfied that such differences do not "materially affect the price...or cost"; secondly, an attempt to make reasonable adjustment to eliminate the material effect of such differences has to be made." In light of the above, we direct the TPO to include this company in the list of comparables. (iii). Overseas Manpower Corporation Ltd. 34. This comparable was sought to be included by the assessee. The Id. AR referred to page no. 157 of paperbook-1 and submitted that this company is engaged in providing placement services, which fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97,69,066 -Interest on deposits 9,14,57391 -Interest on staff loans 2,45,839 Operating Income (A) 23,31,08,075 Total Expenditure 19,92,74,343 Less: Non-operating expenses -Provision for Doubtful Debt 2,05,230 -Loss on sale of assets 16,122 Operating Cost (B) 19,90,52,991 Operating Profit (C) [A-B] 3,40,55,084 Operating Profit/Operating Cost [C/B] 17.10% 41. We have carefully considered the rival submissions. We find force in the submission of the Id. counsel for the assessee that bad debts and provision for doubtful debts are made as a part of the operating activities of business governed by the principles of prudence. We, direct the TPO to verify the above profit margin calculation of the comparable submitted by the assessee and to treat the expenses of bad debts and provision for doubtful debts as part of operating expenditure. In the result, ground No. 9 of the appeal is allowed accordingly. 42. Ground No. 10 is with respect to initiation of penalty proceedings and interest u/s. 234 B and 234C of the Act, which are consequential and premature in nature. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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