TMI Blog2016 (5) TMI 1442X X X X Extracts X X X X X X X X Extracts X X X X ..... d., as a part of operating cost for the purpose of calculating the operating profit margin of the assessee. Comparable selection - Assessee incorporated to carry on the business of buying, selling, importing, exporting, developing, designing, manufacturing, assembling or otherwise dealing in all kinds of cranes including used cranes and material handling equipments with other related components. This is the first year of the assessee’s business operations - controlled transactions are not contemplated for comparison with the international transaction undertaken by an enterprise - companies functional dissimlar with that of assessee need to be deselected from final list. Remit the matter to the file of the TPO/AO for confronting the assessee with the calculation of RPT to Sales filter of 25.30%. Apart from that, the TPO will be fully competent to consider the functional similarities/dissimilarities of this company before considering its inclusion or otherwise in the final tally of comparables - Assessee appeal allowed for statistical purposes. - ITA No. 802/Del/2016 - - - Dated:- 11-5-2016 - Shri R. S. Syal, AM And Shri Kuldip Singh, JM For the Petitioner : Shri Mano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing facilities, customs clearance and product support (both parts and service) and training to dealers and customers; - Assistance in relation to marketing/new business development; - Compilation of customer/market data, identification and evaluation of potential business opportunities in India, etc. 2.2. The TPO disputed the calculation of the assessee s own profit margin at 8.70%. He noticed that the assessee s revenue was to the tune of ₹ 4.24 crore, whereas the assessee had calculated its operating profit margin with the figure of gross revenue at ₹ 2.23 crore, which was shown as net of commission expenses amounting to ₹ 2.00 crore. In support of its argument for taking such a reduced figure of revenue, the assessee submitted that it paid commission to Voltas India Ltd. amounting to ₹ 2.00 crore, which was a pass through cost and hence reduced from the gross revenue earned from its AE rather than showing it separately as an item of operating cost. Not convinced with the assessee s submissions, the TPO re-worked out the assessee s profit margin at 6.34% by taking income from operation at a gross figure of ₹ 4.24 crore. Out of nine companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt services to KCL (i.e. its AE) in relation to their business dealings with existing clients and potential clients in India; Providing administrative/facilitation assistance such as inventory of spare parts, arranging facilities, customs clearance, etc., to KCL; Providing product support (both parts and service) and training to dealers and customers, assistance in relation to marketing/new business development, compilation of customer/market data, identification and evaluation of potential business opportunities; KCI (i.e. the assessee) shall communicate any new business opportunity, post evaluation, to KCL in the form of a business proposal; KCL shall be solely responsible to scrutinize such business proposals recommended by KCI and will independently take decision to accept or reject the same; It is expressly agreed upon by the Parties to the Agreement that KCI s role shall be limited to finding business opportunities in India and it shall not have any authority to execute any contracts for or on behalf of KCL nor bind KCL in any other manner whatsoever in India. Liasoning with the technical department of KCL s affiliates (located outside India) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee s operating profit margin. Whereas the assessee computed its profit by excluding the amount of commission paid to Voltas from its gross revenue, being commission earned from its AE, the TPO held that such commission to Voltas Ltd. was to be considered as an operating expense and was not liable to be reduced from the gross revenue. The reason behind this difference of opinion is the impact of such treatment on the computation of profit margin rate of the assessee, albeit the ultimate amount of operating profit remains the same in both the situations. If the revenue is taken at ₹ 2.23 crore because of the shifting of commission payment to Voltas Ltd. from the operating costs, as adopted by the assessee, the percentage of operating profit shoots up to 8.70%. If, on the contrary, this amount of commission is retained as an operating expense, the percentage of operating profit slides to 6.34%. 4.5. It is simple and plain that higher the assessee s operating profit rate, lower is the amount of the transfer pricing adjustment and vice versa. Under such circumstances, we are required to decide as to whether the amount of commission paid to Voltas Ltd. should be rightly consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue earned by the assessee amounting to ₹ 4.24 crore was a one composite amount received against the services outsourced from Voltas Ltd., for which it paid ₹ 2.06 crore and the in-house services, for which it incurred ₹ 2.06 crore. Thus, it is clear that the payment of ₹ 2.00 crore to Voltas Ltd. is not a pass through cost, but, a value added cost. We fail to appreciate any difference between the payment made by the assessee to Voltas Ltd. and to its own employees in the context of the so called pass through costs. If the contention of ld. AR that payment to Voltas India Ltd. made exclusively for rendering services by the assessee to its AE is a pass through cost, is taken to a logical conclusion, then the payment to assessee s own employees, which was also made for the same purpose, should also get a similar tag of a pass through cost. Going a step ahead with the same logic, all other expenses including rent and depreciation should also become pass through costs as these were also incurred in rendering services to the AE. Obviously, it is an absurd proposition. We, therefore, approve the view taken by the TPO in adopting the gross figure of revenue at ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,57,210/-, with the narration of Marketing fees. It has also been mentioned in the Annual accounts of this company that this Marketing fees was paid by Apar Industries Ltd. to Apar Chematek Lubricants Ltd. This manifests that the total revenue of Apar Chematek Lubricants Ltd., taken by the TPO as comparable, is from its AE alone, thereby making it a related party transaction and, hence, a controlled transaction. 6.3. Rule 10B(1)(e)(ii) and (iii) talk of comparing the net profit margin realized by the enterprise from international transaction with the similar net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. An uncontrolled transaction has been defined in Rule 10A(a) to mean: a transaction between enterprises other than associated enterprises, whether resident or non-resident. On going through the mandate of Rule 10B(1)(e) in juxtaposition to Rule 10A(a), it is manifested that the controlled transactions are not contemplated for comparison with the international transaction undertaken by an enterprise. Reverting to the factual position before us, we find that the only source of revenue of Apar Chematek Lubr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted in looking for matrimonial alliance get registered on this website. Similarly, www.99acres.com serves as a real estate agent between the prospective buyers and sellers. As against this, the assessee company is engaged in providing marketing support services to its AE, which are in the nature of providing administrative /facilitation assistance, providing product support and training to dealers and customers; assistance in relation to marketing/new business developments; communicating new business opportunities to AE; and providing assistance in negotiating the price of the products/terms of the contract with the customers. When we see the nature of activities carried out by Info Edge (India) Ltd. on one hand and that carried out by the assessee on the other, we find no difficulty in holding that there is complete mismatch between the two. By no standard, the services rendered by Info Edge (India) Ltd. can be considered as comparable with the services provided by the assessee. We, therefore, direct to exclude this company from the list of comparables. (iii) Apitco Ltd. 8.1. The TPO proposed the inclusion of this company which was objected to by the assessee. It was stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39; umbrella is taken care of under the TNMM. He harped on the contention that there is no requirement to have identical services for the purpose of making comparison under the TNMM. 8.5. We are unable to accept this argument in view of the judgment of the Hon'ble jurisdictional High Court in the case of Rampgreen Sales Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del) in which it has been held that the comparables are to be selected on the basis of similarity even under TNMM. The Hon'ble High Court has laid down that selection of comparables does not differ with the method adopted. Ex consequenti, it is no more open to argue that the functional dissimilarity of the companies under the overall broader category can be ignored under the TNMM. 8.6. In view of the foregoing discussion, we find the functional similarity of Apitco Limited lacking on entity level with the assessee company. As such, we order for its exclusion from the final set of comparables. (iv) Global Procurement Consultants Limited 9.1. The TPO included this company in the list of comparables despite the assessee's objection that it was engaged in providing consultancy services and review of procureme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the assessee. By no standard, Global Procurement Consultants Ltd. can be considered as comparable with the assessee company. We, therefore, order for the elimination of this company from the list of comparables. (v) TSR Darashaw Limited. 10.1. The TPO selected this company as comparable. There is no discussion whatsoever about this company in the order of the TPO. The DRP approved the inclusion of this company. 10.2. Having heard the rival submissions and perused the relevant material on record, we find that this company is a broking and investment banking house. As per its website, TSRDL is one of India's leading Business Process Outsourcing (BPO) organizations certified under ISO 9001:2008 guidelines having a total industry experience of over 35 years. TSRDL has state-of-the-Art IT capabilities and well trained HR which are the key requirements for handling BPO activities. TSRDL's strength, capabilities and infrastructure enables it to handle any large, voluminous, time bound processing activities requiring meeting of stringent quality and service standards in a regulatory environment. Details of products and services provided by this company, as disclose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , but for that, there is no discussion in the order passed by the TPO about the functional similarities or dissimilarities. No relief was allowed by the DRP. 11.2. After considering the rival submissions and perusing relevant material on record, it is found that the TPO has worked out the RPT to Sales ratio of this company at 25.30%, whose correctness has been assailed before us by the ld. AR. The ld. DR also could not point out as to how this percentage was calculated. Under such circumstances, we deem it appropriate to remit the matter to the file of the TPO/AO for confronting the assessee with the calculation of RPT to Sales filter of 25.30%. Apart from that, the TPO will be fully competent to consider the functional similarities/dissimilarities of this company before considering its inclusion or otherwise in the final tally of comparables. 12. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment and remit the matter to the file of AO/TPO for fresh determination of the ALP of the international transaction in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of bein ..... X X X X Extracts X X X X X X X X Extracts X X X X
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