TMI Blog2023 (2) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... s mainly into analysis and research and is into strategic human capital services. We also notice that the DRP has confirmed the inclusion by stating that the company is into marketing support service and therefore to be included whereas the assessee is mainly into business support services and this fact has been acknowledged by the TPO. In the light of this we are of the considered view that Axience is not functionally comparable to the assessee and we hold accordingly. Platinum Advertising Private Limited (Platinum) is not a comparable company with that of the assessee as Platinum s functions i.e. advertising agency services, and media planning and ancillary services is different from the functional profile of the assessee which is mainly into business support services. We therefore direct the AO/TPO to exclude Platinum from the comparable list. Killick Agencies and Marketing Limited (Killick) and ICC International Agencies Limited (ICC) - We notice that the assessee has not contended the exclusion of ICC before the lower authorities and that the submissions made with regard to exclusion of Killick has not been considered. In view of this we remit the issue back to the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard. It is ordered accordingly. Assessee seeking for considering the correct margins of the comparable - We direct the TPO/AO to consider the correct margins of the final list comparable that will be arrived at after considering the directions given in the above paragraphs of this order after giving a reasonable opportunity of being heard to the assessee. Working capital adjustment - Respectfully following the above decision of the Co-ordinate Bench in the case of Huawei Technologies India (P.) Ltd. [ 2018 (10) TMI 1796 - ITAT BANGALORE ] we hold that the working capital adjustment is to be allowed as per actuals, after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/AO is also directed to consider the submissions made by the assessee in this regard. - IT(TP)A Nos.27/BANG/2020 & 194/BANG/2021 - - - Dated:- 20-10-2022 - SMT BEENA PILLAI., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER For the Assessee : Shri Chavali Narayan, Advocate For the Respondent : Shri Manjunath Karkihalli, CIT(DR)(ITAT), Bengaluru. ORDER Per Padmavathy S., Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order incorporating a TP adjustment of Rs.3,80,67,944 after giving effect to the DRP directions. Aggrieved by the same and to the extent the order of the DRP is unfavourable, the Assessee filed an appeal before the Hon'ble Income Tax Appellate Tribunal ( ITAT ). 5. Assessee raised 9 grounds and two additional grounds contending the TP adjustment. Ground Nos. 1 to 4 are general in nature and does not warrant separate adjudication. Ground no 7 is not pressed by the ld AR during the course of hearing and dismissed as not pressed. Ground Nos.8 9 are consequential. The effective grounds are as extracted below 5. The learned AO/ DRP/ TPO erred, in law and in facts, by accepting/ rejecting certain companies based on unreasonable comparability criteria; a) The learned AO/ DRP/ TPO erred, in law and in facts, by accepting the following companies that cannot be considered as comparable to the Appellant in law and fact on one or more grounds: i) Ugam Solutions Private Limited, ii) Axience Consulting Private Limited; and iii) Platinum Advertising Private Limited. b) The learned AO/ DRP/ TPO erred, in rejecting the following comparable companies sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.49% 4 Priya International Ltd (Segmental) 2.30% 5 Kestone Integrated Marketing Services Private Limited 4.88% 6 MCI Management (India) Limited 5.52% 7 India Tourism Devp. Corpn. Ltd. 8.72% 8 E D C I L (India) Ltd (Segmental) 13.61% 9 Killick Agencies and Marketing Limited 24.77% 35th percentile 2.30% Median 4.88% 65th percentile 5.52% 8. The operating margin computed by the assessee as per the financial statements is as given below Particulars Amount (INR) Revenue from operations 33,81,26,271 Total Operating Cost 30,88,62,246 Operating Profit 2,92,64,025 Ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usion by the Assessee in the final comparable set. The TPO passed the Order giving effect whereby the TP adjustment was enhanced to Rs.3,80,67,944. The AO passed the final assessment order in pursuant to the DRP directions incorporating the revised TP adjustment. Aggrieved the assessee is in appeal before the Tribunal. 12. During the course of hearing, out of the exclusions sought through Ground no.5(a) and additional ground 10, the ld AR presented arguments with regard to Ugam Solutions Private Limited, Axience Consulting Private Limited, Platinum Advertising Private Limited, Killick Agencies and Marketing Limited, and ICC International Agencies Limited. Ugam Solutions Private Limited (Ugam) 13. The ld AR made the following submissions with regard to the company being functionally different. ► As per the annual report for FY 2014-15, Ugam Solutions is engaged in provision of managed analytics services. (Page 509 of Paperbook II) ► Ugam is a leading provider of managed analytics services and solutions combining its proprietory big data platform with a global team of insights and analytics experts. Ugam offers a range of service offerings and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee are classified into Compliance management, supplier management services, staff welfare support and other support functions. The DRP has stated that Ugam s services falls within the ambit of market support services and a proper comparable. We also notice that the coordinate bench of the Tribunal in the case of Epson India has excluded Ugam as a comparable company to Epson based on the functions performed by Ugam. Therefore it is important to analyse the functions performed by Ugam during the year under consideration, before applying the ratio laid down by the Hon ble Tribunal. We therefore remit the issue back to the AO/TPO to look into the functions performed by Ugam based on the various details submitted by the assessee and decide accordingly. Needless to say that the assessee may be given a reasonable opportunity of being heard. It is ordered accordingly. Axience Consulting Private Limited (Axience) 17. The ld AR submitted that the company is in the business of providing consultancy and advisory services in the field of finance, market research business administration to corporate noncorporates. (Page 800 of Paper book II) and therefore not compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further the ld AR submitted that the company derives majority of its revenue from sale of services which includes commission and service income (Page 1052 of Paperbook II). The ld AR also submitted that the exclusion of kellick was argued before the DRP and that the DRP did not consider the submissions made in this regard. The ld AR placed reliance on the decision of the coordinate bench of the Tribunal in the case of Epson India (supra). The ld AR prayed for the exclusion of Killick before us. 22. With regard to exclusion of ICC the ld AR submitted that as per the annual report for FY 2014-15, the company is an indenting agent and reseller of textile machines (Page 935 and 948 of Paperbook II). And that the company operates in two segments - a) commission and servicing activity and b) trading activity, both of which are not comparable to the assessee. (Page 1025 of Paperbook II). The ld AR also submitted that the exclusion of ICC was not sought before the lower authorities. The ld AR further submitted that coordinate bench in assessee s own case [IT(TP)A 421/BANG/2016] has held that ICC be excluded. 23. The ld DR on other hand submitted that Killick and ICC are companies ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relations and as per the Director s report the activities of the company includes advertising, communication and public relations activities. It is also mentioned by the DRP that the company is into marketing support services. We have in earlier part of this order has excluded companies who are into marketing support services for the reason that it is functionally different from the profile of the assessee which is into business support services. Further Concept is in public and media relations which is functionally different from the activities of the assessee. Hence we hold that concept cannot be included as a comparable and the ground raised by the assessee in this regard is rejected. Priya International Ltd 30. The ld AR submitted that ► The company is into three main business segments, namely: - (a) Indenting business,(b) Trading business - chemicals and (c)Trading business - electronics. The identing business segment is comparable to the business of the assessee. (Page 1188, 1194 of Paperbook II) ► The company is involved in sale of products such as, chemical, electronics/ software and other products, and indenting commission. (Page 1188 of Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the above decision is rendered, then follow the decision of the Hon ble Tribunal. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly. 35. Through additional Ground no.11 the assessee is seeking for considering the correct margins of the comparable. We direct the TPO/AO to consider the correct margins of the final list comparable that will be arrived at after considering the directions given in the above paragraphs of this order after giving a reasonable opportunity of being heard to the assessee. Working capital adjustment 36. The ld AR submitted that i. The Rules provide that a transaction can be considered as comparable, if reasonably accurate adjustments can be made to eliminate differences that are likely to materially affect the price or cost or profit between a controlled and an uncontrolled transaction. ii. As per Rule 10B(1)(e), the manner of computation under the Transactional Net Margin Method ( TNMM ) clearly mandates comparison of the net margin (after adjustment, if any) between the comparable companies and the Appellant. Thus, in undertaking such a comparison, the difference, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]: (f).**** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpared could materially effect the condition being examined in the methodology (e.g price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid DECO guidelines, need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year, (ii) Segmental working capital is not disclosed in the annual reports of companies engaged or different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting raters) of interest applicable 10 a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -17, the TPO rejected the comparable chosen by the assessee and based on fresh search arrived at revised set of comparable. Accordingly the TPO made the adjustment as given below Particulars Amount (INR) Operating Cost ( OC ) 32,95,39,570 Arm s Length Price Mean margin 16.60% Arm s Length Price (116.60% * OC) 38,42,43,139 Price received 36,25,85,717 Short fall being adjustment u/s 92CA 2,16,57,422 40. Aggrieved with the draft assessment order passed by AO incorporating the above TP adjustment, the assessee filed its objections before the DRP. The DRP vide its directions dated 09 February 2021, granted partial relief to the assessee by accepting the contentions of the assessee to exclude 2 comparable i.e., Irclass Systems Solutions Private Limited and Aparajitha Corporate Services Pvt. Ltd, which was proposed for exclusion by the assessee in the final comparable set. Accordingly the TP adjustment was recomputed at Rs.1,95,48,368 by the TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces, etc. to deliver powerful insights into the effectiveness of branding, advertising and consumer choices. (Page 911, 912 and 958 of Paperbook II). As per company website, Majestic Research is a market research agency. ii. Majestic Research is engaged in providing services which are different from the support services provided by Lloyds India. Also, it fails the related party filter of 25% of sales for FY 2013-14. 45. The ld AR therefore prayed for exclusion of Majestic. In this regard, the ld AR also placed reliance of the ruling by the Hon'ble Bangalore Tribunal in case of Epson India Pvt. Ltd. [IT(TP)A No. 206/Bang/2021] wherein the said company was rejected. 46. We heard the rival submissions. We notice that the DRP has upheld the inclusion by stating that the company is engaged in market research and is in marketing support services. We have in earlier part of this order have held that the company which is engaged in market support services is functionally different from the assessee which is into business support services. Further it is noticed that the coordinate bench of the Tribunal in the case of Epson India (supra) has held that the company is not fu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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