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TMI Blog2016 (5) TMI 1442X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise 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. The assessee filed its return declaring total income of Rs. 29,88,565/- accompanied by audit report in Form No.3CEB detailing nine international transactions. The assessee used Transactional Net Margin Method (TNMM) as the most appropriate method for demonstrating that its international transactions were at arm's length price (ALP). It used Profit level indicator (PLI) of Operating Profit/Operating Cost (OP/OC). The assessee computed its OP/OC at 8.7% with the weighted average margin of nine comparable companies chosen by it, at 13.44%. That is how, it was shown that the international transactions entered into by the assessee with its AEs were within the permissible +/- 5% range and, hence, at arm's length price (ALP). The AO made a reference to the Transfer Pricing Officer (TPO) for determining the ALP of these international transactions. The TPO observed that in the year in question the assessee rendered Marketing and sales support services to its parent company. Such support services have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two counts, viz., the computation of profit margin of the assessee and inclusion/exclusion of certain companies in the final tally of comparables. We will espouse these issues in seriatim. I. DETERMINATION OF ASSESSEE'S PROFIT MARGIN. 4.1. The assessee computed its profit margin of OP/OC at 8.70%, the working of which has been incorporated on page 4 of the TPO's order. In calculating its operating profit margin, the assessee adopted the amount of its gross revenue, being 'Income from sales commission' at Rs. 2,23,72,709/-, by mentioning that such figure was deduced after reducing commission expenses of Rs. 2,00,76,132/-. The TPO took the gross amount of income from operations as operating revenue at Rs. 4,24,48,841/-. There is no dispute on any aspect of the determination of the assessee's profit margin at 6.34% except for the consideration of commission payment of Rs. 2.00 crore to Voltas India Ltd. as deductible or not from the gross revenue earned by the assessee from its AE. 4.2. The facts leading to this controversy are that the assessee entered into an Agreement dated 10.3.2011, effective from 1.10.2010, with its associated enterprise (AE) for rendering Market support/cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es. Pursuant to this Agreement, Voltas Ltd. agreed to provide the following services:- * "Providing customer support services to KCI in relation to the business dealings of KCI's associated enterprises in respect of existing clients and potential clients in India; * Providing assistance in product support (both parts and service), training to dealers and customers, assistance in relation to marketing/compilation of customer/market data; * Providing administrative/facilitation assistance to the dealers/customers of KCI/KCL. * Communicating any potential business opportunity to KCI for its evaluation and scrutiny. * It is expressly agreed upon by the Parties to the Agreement that Voltas India's role shall be limited to providing assistance in marketing and customer support services opportunities in India and it shall not have any authority to execute any contracts for or on behalf of KCI nor bind KCI in any other manner whatsoever in India." 4.4. Clause 4 of this Agreement provides that in performance of the Services under this Agreement, Voltas Ltd. shall be paid commission by the assessee, which may be mutually decided by both the parties. It is pursuant to this Agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee received revenue of Rs. 4.24 crore as commission for rendering marketing support services to its AE. There is no agreement with the AE for outsourcing of such services from Voltas Ltd. It was only between the assessee and Voltas Ltd. that the assessee sub-contracted the provision of services to Voltas Ltd. Further, it is not the case that the assessee simply sub-contracted the services and enjoyed revenue from its AE without making any further effort. It can be seen from the assessee's Profit & Loss Account that as against the total operating expenses of Rs. 4.06 crore, the assessee incurred other operating expenses at Rs. 2.06 crore and paid only a sum of Rs. 2.00 crore to Voltas Ltd. The assessee is not involved in any other business activity except rendering services to its AE. Thus, all the costs incurred by it, including payment of commission to Voltas Ltd., are directed towards rendering of marketing support services to its AE. Neither there was any agreement between the assessee and its AE for outsourcing of the services from Voltas Ltd., nor the assessee's AE attributed any particular sum in respect of service rendered by Voltas Ltd. On a pointed query, the ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant material on record. Though the DRP has recorded in its order that the assessee simply objected to high profit margin earned by this company, but, when we peruse a copy of objections filed before the DRP, it transpires that the assessee objected to the inclusion of this company on the basis of its Related Party Transactions (RPTs). This is apparent from page 66 of the objections filed before the DRP, wherein it has been mentioned that Apar Chematek Lubricants Ltd., taken by the TPO as comparable, is a subsidiary of Apar Industries Ltd., and it fails the RPT filter proposed by the TPO as the entire revenue of the former was earned from the latter, holding 50% of the share capital in the former. Even the relevant extracts showing this position have also been reproduced in the objections taken before the DRP. We have also perused the Annual accounts of this company, a copy of which is available on pages 388 onwards of the paper book. When we go through the financials of Apar Chematek Lubricants Ltd., it is seen that its gross revenue is `Marketing fees' amounting to Rs. 22,79,57,211/-, which was paid by Apar Industries Ltd. Schedule 17 on page 474 contains, 'Operating and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offline executive search www.quadranglesearch.com Related sites in this business are a professional networking site www.brijj.com and a fresher hiring site www.firstnaukri.com. Matrimony - This comprises online matrimony classifieds www.jeevansathi.com and 14 offline Jeevansathi Match Points. Real Estate - this comprises online real estate classifieds www.99acres.com a real estate brokerage business www.allcheckdeals.com, housed in a subsidiary named Allcheckdeals.com India Private Limited. Education - This comprises online education classifieds www.shiksha.com. The sites provides tools that enable its users make a well informed decision by interacting with other Shiksha users, domain experts and college/school alumni. For e.g., a Shiksha user can start a discussion at "Shiksha Cafe", an ask & answer section, in order to seek opinion of other Shiksha users and domain experts including alumni and fellow students or the Institute itself." 7.3. A careful perusal of several websites which are owned by this company delineates that it is primarily in the business of internet based services. Anyone can have access to these websites on payment. For example, through www.naukri.com, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Rs. 60,50,759." 8.3. A careful perusal of the operations carried out by Apitco Limited deciphers that this company is providing services in the nature of Project report preparation, Technical and economic studies, Feasibility studies, Micro enterprise development, Skill development, Project management consulting, Industrial cluster development, Environmental management consulting, Energy management consulting, Market and social research and Asset reconstruction management services. No segment-wise profitability data of these services is available. The TPO has considered this company as comparable on entity level. We find that there is a tiny resemblance of some of the functions performed by this company with the overall activities undertaken by the assessee. Under such circumstances, we fail to appreciate as to how all the above listed services taken together as one unit can be considered as comparable with the services provided by the assessee as listed above. 8.4. The ld. DR strenuously argued that all the activities done by this company are basically `Business services' and the assessee is also rendering business services. He submitted that differentiation of function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Annual report. From such services, it can be noticed that it is conducting Independent Procurement Review of multilaterally funded projects spread across the globe. It also undertakes Procurement audits. This company is providing full time advice on procurement and contract related aspects to several agencies across the globe. For example, in Georgia, the World Bank directly approached it for conducting any independent procurement review of contracts selected from two projects in transportation and municipal infrastructure sector. In Moldova, this company was assigned the task of conducting an independent procurement review of 75 contracts including asset verification. That apart, this company also undertook Valuation Assignments as listed on page 25 of its Annual report in addition to rendering Financial Advisory services as discussed on 26 of its Report. When we go through the nature of services provided by this company, which basically aims at providing advice on procurement and also carrying out procurement audit, it becomes palpable that there is an absolute mismatch with the services provided by the assessee. The services provided by Global Procurement Consultants Ltd. are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h ECS or Physical Warrants. * Reconciliation of Payment of Interest Registry Related Services: * Registrar to Issues * Public/Rights/Bonus Issues * Special Projects Buy-back of Shares Open Offers Mergers & De-mergers Sub-division & Exchange Redemption of Debt Instruments Bulk Processing & Printing Customer/Investor Analytical Surveys Assisting Client Companies in conducting meetings AGM/EGM/Court Convened Meetings Postal Ballot Handling Poll related activities" 10.3. A narration of the activities undertaken by this company abundantly shows that there are striking dissimilarities with the assessee's activities. We, therefore, order for the exclusion of this company from the final set of comparables. 11.1. Apart from disputing the inclusion of the above five companies by the TPO, the assessee has also challenged non-inclusion of one company, namely, M/s Kirloskar Consultants Ltd., in the list of comparables. The ld. AR submitted that this company chosen as comparable was wrongly rejected by the TPO on the ground that it failed its RPT to Sales filter. The ld. AR submitted that, but for that, there is no discussion in the order passed by the TPO about ..... X X X X Extracts X X X X X X X X Extracts X X X X
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