9911796707
TMI Blog2014 (1) TMI 954X X X X Extracts X X X X X X X X Extracts X X X X ..... . Provision of Secondment related services 443,936,257 Transactional Net margin Method ('TNMM') 2. Reimbursement of Expenses to AEs 24,138,429 3. Reimbursement of Expenses from AEs 1,179,634 N. A. 3. The assessee had used TNMM as the most appropriate method and operating Profit/Total Cost ('OP/TC) as its PLI. The assessee had chosen a set of 13 foreign comparables. The average margin, using multiple year data of these comparables was 3.43%. The assessee's margin was 5.8%. On this basis assessee considered the International transactions at arm's length. The Ld. TPO, after detailed discussion, reached at following final set of comparables: S. No. Name of Company OP/TC (%) 1. Overseas Manpower Corporation Ltd. (Recruitment segment) 6.55% 2. Info Edge (India) Ltd. 36.90% 3. EDCIT (India) Limited (Human Resources Development Segment) Prowess-Seg) 10.16% Average 17.87% 4. He, accordingly, determined the average margin at 17.87% and computed the required adjustment u/s 92CA at Rs. 5,12,05,343/- as under: Total cost of the Assessee 42,00,74,319 ALP at a margin of 17.87% 49,51,41,600 Price received 44,39,36,257 Adjustment u/s 92CA 5,12,05,34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purely based on his own conjectures and surmises and thereby concluding that the Appellant assumes significant risks relating to its business operations; 3.5 concluding that the Appellant was undertaking various functions that led to 'creation and maintenance of human capital intangible" based on his own conjectures and surmises; 3.6 rejecting the economic/benchmarking analysis undertaken by the Appellant supported by a detailed FAR analysis by merely concluding that the search for foreign comparables undertaken by the Appellant was "unnecessary and inappropriate" thereby ignoring the fact that at the time of conducting the economic analysis, the data for comparable companies in domestic jurisdiction was not available in databses; 3.7 concurring with the fresh economic/benchmarking analysis undertaken by the Ld. TPO using Indian comparable based on a flawed FAR analysis of the Assessee's business operations purely based on his own conjectures and surmises and thus concluding that with respect to the said transaction the Assessee was undertaking various functions that led to creation and ownership of vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 3.7.8 companies with the ratio of research & development costs to sales less than 3% were selected; * Companies with net worth less than zero were eliminated; * Companies with the ratio of sum of advertising, marketing and distribution expenses to sales less than or equal to 3% were selected. 3.8 holding that the reimbursement of expenses by AE is directly linked to the nature of services provided by the Appellant to its AE and thereby imputing a mark-up on the same and ignoring the business/commercial reality that reimbursement of expenses by AEs is a "pass-through", no revenue generating transaction undertaken by the appellant and based on the Transfer Pricing principles, international guidance and recent case laws no mark-up is required to be earned on such pass through transactions; 3.9 misconstruing the business model of the Appellant which is akin to a Professional Employer Organisation and thereby erroneously comparing the business activities of the Appellant with those of a recruitment agency in spite of Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he buyer and seller. 2. Contractual The employment contract is between the employee (secondee) and the PEO. Employment contract of the personnel to be recruited is between the employer and the prospective employee. The recruitment agency has no role in the employment contract. 3. Revenue model PEOs receive a service fee for the service provided. Recruitment companies receive commission/ income on successfully placing an employee or filling a vacancy for the employer. 4. Costs Employee/ personnel costs are part of the PEO's costs as employees provided to other companies are on its payroll. Employees recruited by customers are not on the rolls of the recruitment agency. Hence, such employee costs do not form part of the cost base of recruitment agency. 7. Ld. Counsel further submitted that the revenue model of a PEO is different from that of recruitment agency as in a PEO model the assessee earns its revenue on fully loaded costs inclusive of the cost of seconded employees vis-à-vis a recruitment agency which does not earn revenue on the cost of employees recommended by it. He submitted that comparing a PEO with a recruitment agency is like comparing a distributor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. EDCIT (India) Ltd. (Human Resource Development Segment) 10.16% Average 8.35% Further, the Appellant presents below its additional contentions against the inclusion of Overseas in the comparables set: * Has a ration of advertisement, marketing and distribution expenses/ Sales of 14% exhibiting the fact that Overseas owns marketing intangibles. Based on the above, if Info Edge and Overseas are excluded form the final comparables set, then the mean margin of comparables work out to 10.16% which is within the 5% range (that works out to 11.25) available to the Appellant. S.No. Company Name OP/TC 1. EDCIL (India) Ltd. Human Resource Development Segment) 10.16% Average 8.35% The above is in line with the approach followed by the Ld. TPO in immediately succeeding Assessment Year 2009-10, wherein the Ld. TPO has determined the Arm's Length Margin ("ALM") using only EDCIL (India) Ltd.'s (Human Resource Development) Segment. The copy of the TPO order for Assessment Year 2009-10 forms part of the compendium enclosed herewith. &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is clear from the above snapshot that the company does not have any reportable related party transactions which have a bearing on the operating profits of the company. However, on a without prejudice basis, even if transaction pertaining to 'interest received' was considered for the computation, then the related party transaction would amount to 0.1 % (i.e. Rs. 0.42 crores/Rs. 375.21 crores) of the revenue, which is below the threshold considered by the Appellant and the Ld. TPO. Rejection of Ma Foi Management Consultants Limited ("Ma Foi") by the Ld. TPO stating the company accounts available in the public domain are of December, 2007 and not March, 2008: Further, the Appellant would like to bring to your Honours' notice that Ld. TPO/DRP had rejected Ma Foi on account of significant related party transactions in Assessment Year 2007-08, although the Appellant demonstrated that RPT for Assessment Year 2007-08 was only 4.95% of sales. However, the Ld. TPO for Assessment Year 2008-09 has rejected the company as a comparable on the ground that the company has financial year ending December and not March. Accordingly, the Ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and PEO performs many more services as the employment contract is between employee seconded and PEO while once employee is recruited by the agency for the client there is no further action. There is no difference, in view of DRP, between Personal Employer Organisation (PEO) and recruitment agency functionally. The revenue model may be different but that is an accounting issue, functionally there is no difference. So we concur with the findings of TPO and these tow comparables are accepted. Also TPO's logic in rejecting foreign comparables is accepted by the DRP. The reason for recruitment from India is to avail, the services at a particular price. Assessee looks at prices prevailing in domestic market and taking locational advantage into account recruits manpower, so the comparables must be domestic. Objection is rejected." 9. He, therefore, submitted that no reasons have been assigned by Ld DRP for arriving at its conclusion. 10. Ld DR submitted that since Ld. DRP has considered the assessee's objections, therefore, the matter need not be restored back to the file of ld DRP as was done in Assessment Year 2007-08. 11. We have considered the rival submis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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