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2017 (2) TMI 1237 - AT - Income TaxTransfer pricing adjustment - manner of apportionment of unallocable costs and not allowing deduction on account of pass through costs - Held that - AR could not adduce the details of Unallocable costs of ₹ 9.79 crore, which is not even available in the TPO s order. In the absence of such details, it cannot be precisely ascertained as to how much is really the amount of unallocable costs. Under these circumstances, we set aside the impugned order and remit the matter to the file of AO/TPO for considering the details of ₹ 9.79 crore. If some cost included in this amount is directly identifiable with one of the three segments, then, it should be excluded from the common pool to be considered separately under the respective segment. The remaining amount should be apportioned amongst the three segments in the ratio of the amount of respective gross margins. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in this regard. Computation of the assessee s PLI - Held that - We find that the so-called pass through cost amounting to ₹ 17.13 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 ₹ 17,13,222/- is rightly includible in the total operating costs incurred by the assessee. The argument of the ld. AR fails on this score. Computation of mean OP/TC of comparables - Held that - 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 adjusted OP/TC of comparables has been computed, so that the assessee may raise objection, if any, to the computation of working capital adjustment. Selection of comparables - comparability analysis - Yassessee is engaged in market research activities/business development and helps its associated enterprises in identifying new projects and business opportunities in India . The assessee also acts as an intermediary between its AEs and clients . Further, it provides technical support/coordination services to its AEs, thus companies functionally dissimilar with that of assessee need to deselected from final list of comparability.
Issues Involved:
1. Transfer pricing adjustment. 2. Computation of assessee’s Profit Level Indicator (PLI). 3. Inclusion of third-party outsourced service costs as operating costs. 4. Computation of mean Operating Profit/Total Cost (OP/TC) of comparables. 5. Selection of comparables. Detailed Analysis: 1. Transfer Pricing Adjustment: The appeal is directed against the transfer pricing adjustment made by the Assessing Officer (AO) based on the order of the Transfer Pricing Officer (TPO). The TPO had determined the Arm's Length Price (ALP) for the transaction 'Receipts for services rendered' and made adjustments leading to a transfer pricing addition of ?2,39,11,122/-. 2. Computation of Assessee’s Profit Level Indicator (PLI): The assessee challenged the computation of its PLI on two counts: - Apportionment of Unallocable Costs: The assessee allocated the unallocable costs based on headcounts, while the TPO used the ratio of gross revenue. The Tribunal rejected both methods and directed the unallocable costs to be apportioned based on gross profit margins. - Non-reduction of Sub-contracted Maintenance Services Costs: The assessee argued that ?17,13,222/- spent on third-party maintenance services should be excluded from operating costs as pass-through costs. The Tribunal disagreed, stating that these costs were not separately reimbursed by the AE and thus could not be considered pass-through costs. 3. Inclusion of Third-Party Outsourced Service Costs as Operating Costs: The Tribunal held that the third-party outsourced service costs amounting to ?17,13,222/- were rightly included in the total operating costs. The argument that these costs should be excluded as pass-through costs was rejected because they were not separately reimbursed by the AE. 4. Computation of Mean OP/TC of Comparables: The TPO's computation of the mean OP/TC of comparables at 34.95% (later adjusted to 31.35%) was challenged. The Tribunal noted that the TPO did not disclose the manner of calculating the working capital adjustment to the assessee. The Tribunal remitted the matter back to the TPO/AO for re-computation of the working capital adjustment after confronting the assessee with the details. 5. Selection of Comparables: The assessee contested the inclusion of six companies as comparables: - Apitco Ltd.: Excluded due to functional dissimilarity and lack of segmental information. - Best Mulyankan Consultants Ltd.: Retained, but the TPO/AO was directed to recompute its PLI after confronting the assessee. - Choksi Lab Ltd.: Excluded due to functional differences as it provides testing services, unlike the assessee’s marketing support services. - Indus Technical and Financial Consultants Ltd.: Retained as no substantial evidence was provided to prove functional dissimilarity. - RITES Ltd.: Retained, but the TPO/AO was directed to recompute its profit margin from the Consultancy services segment. - WAPCOS Ltd. (Seg.): Excluded due to functional dissimilarity as it is engaged in infrastructure development projects, unlike the assessee’s marketing support services. Conclusion: The Tribunal set aside the impugned order on the issue of transfer pricing adjustment and remitted the matter to the AO/TPO for fresh determination of the ALP of the international transaction 'Receipts for services rendered' in line with the Tribunal’s directions. The appeal was allowed for statistical purposes.
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