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TMI Blog2018 (5) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus companies functionally dissimilar with that of assessee need to be deselected from final list. Matter remanded back to the file of AO/TPO for a fresh determination of the ALP of the international transaction of ‘Provision of Marketing support services’ in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. - ITA Nos.433 And 6139/Del/2012 - - - Dated:- 11-5-2018 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Assessee : Shri Himanshu Sinha, Advocate,Shri Reena Garg, CA And Shri Bhuvan Dhropar, Advocate For The Department : Shri Sanjay I Bara, CIT, DR ORDER PER R.S. SYAL, VP: These two appeals filed by the assessee relate to the assessment years 2007-08 2008-09. Since some of the issues raised in these appeals are common, we are, therefore, disposing them by this consolidated order for the sake of convenience. Assessment Year 2007-08 2. The assessee is aggrieved against the addition on account of transfer pricing adjustment amounting to ₹ 1,06,56,851/- in the international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he functional profile of the assessee under the international transaction of Provision of marketing support services. The TPO has simply mentioned on page 2 of his order that the assessee is engaged in providing marketing support services and other similar auxiliary sale support/assistance services. There is not much amplification of such services. We have gone through the Transfer pricing study report of the assessee, whose copy is available on page 120 of the paper book. Elaboration of the services rendered by the assessee is contained on page 136 of the paper book. Such services encompass Liaison activities, Market information activities and Sales support to the existing customers in India. Under the Liaison activities, it has been stated that the market in India for alcoholic beverages, being the product which is sold by the Head office in India, is a regulated market and falls in the State List of the Constitution, implying that each State of the country has its own individual policies and regulations. The assessee as a branch office is in rationalization of policies in respect of selling and distribution of alcoholic beverages. Under the head Market information activities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s model of earning Commission on sales and getting remunerated at cost plus basis. Whereas in the case of commission business, no income is earned unless the efforts made by incurring expenses fructify into orders, in the case of Cost plus basis, a company gets remunerated on all the costs incurred with a particular mark-up irrespective of any actual sales made. These two business models, namely, of commission and cost plus basis, cannot, by any standard, be brought on a same pedestal. This basic difference in the two business models results in varying profit margins and distorts comparability. In view of the fact that Priya International Ltd. is following a business model of commission , as against the assessee rendering marketing support services on cost plus basis , we hold that the two cannot be considered as comparable. 8. Apart from that, it is vivid from the Annual report of this company that there is a huge amount of Unallocated expenses , which has been ignored by the TPO in computing the segmental margin of this company for the purposes of comparison. In view of the foregoing facts, we direct to exclude this company from the list of comparables. ( ii) Hightemp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the assessee s objections that it was into conducting Research and survey and management consulting. No relief was allowed by the DRP. 14. On considering the Annual report of this company, whose copy is available in the paper book, it is observed that its operational income of ₹ 13,38,00,870/- has been classified as Sales Service income . Page 65 of the paper book indicates that: The company is a research company, primarily dealing in research and survey services and products. These facts amply prove that not only the nature of services rendered by this company is different, but, it is also engaged in selling products, which is absent in the case of the assessee. As the TPO has adopted entity level figures, which comprise sale and service income both, and no separate figures of service income are available, the company loses comparability. We, therefore, order to remove this company from the list of comparables. ( v) IL FS Ecosmart Ltd. 15. The TPO included this company despite the assessee s objections that it was mainly earning income from advisory and consultancy services. The DRP did not concur with the assessee s submissions. The assessee is aggriev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 1,08,08,028/- with necessary detail in Schedule 5 and the Schedule simply states Professional income. Page 134 of the paper book, being, Balance sheet abstract and company s general business profile shows description of nature of services as Consultancy. Apart from this, there is no discussion in the Director s Report or other documents about the functional profile of this company. In view of the fact that the TPO treated this company as comparable without showing any similarity between the nature of services rendered by this company vis- -vis the assessee and the further fact that the true nature of services is not discernible even from its Annual report, we hold that this company does not qualify inclusion in the list of comparables. The same is, therefore, directed to be excluded. ( vii) RITES Ltd. 19. The TPO treated this company as comparable despite the assessee s objections that it was functionally dissimilar. The DRP upheld the inclusion by observing that it was engaged in providing Technical consultancy . 20. We have gone through the Annual report of this company which is available in the paper book. Page 152 is Schedule L to the Annual acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. and M/s Tecnicom-Chemic (India) Pvt. Ltd., we hold that these two companies were rightly excluded as these are in a different business model vis- -vis the assessee. 25. In so far as Spencer s Travel Services is concerned, we have gone through the Annual report of this company, whose copy is placed on page 200 of the paper book. It is apparent that this company is also engaged in making Sales. Since the assessee company is only rendering Marketing support services and not into Sales, we hold that this company was also rightly excluded. 26. The assessee has raised an additional ground against not allowing working capital adjustment. Despite the fact that such an issue was not raised before the authorities below, we find that there can be no legal impediment in claiming such an adjustment, if it is otherwise admissible. We, therefore, admit this additional ground for disposal on merits. 27. The working capital adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their amounts, which will result into higher interest cost an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddition on account of transfer pricing adjustment, before the DRP, which excluded three companies from the list of comparables drawn by the TPO. The assessee is aggrieved in the instant appeal against the inclusion of two companies, namely, Choksi Lab Ltd. and WAPCOS Ltd. (Seg.). 33. It is an admitted position that the functional profile of the assessee is similar to that of the preceding year. In fact, the same Agreement is stated to be governing the year under consideration as well. As such, there is no need to separately analyze the nature of the functions performed by the assessee under the international transaction of Marketing support services . Thus, the functional profile discussed above while dealing with the appeal for the assessment year 2007-08 is adopted for the purposes of examining the comparability or otherwise of the companies in challenge before us. ( i) Choksi Lab Ltd. 34. The TPO included this company in the list of comparables despite the assessee s objection that it was functionally different. 35. We have gone through the Annual report of this company, which is available in the paper book. Note no. 8 to Part B - Notes forming part of the acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascertained that it is nowhere close to the rendering of marketing support services, which is being done by the assessee under this segment. The nature of activity done by the assessee is quite distinct from this company. We, therefore, direct to exclude WAPCOS Ltd. (Seg.) from the list of comparables. 38. Apart from challenging the inclusion of the above two companies, the assessee has also challenged the exclusion of two companies, namely, Interads Ltd. and PL Worldways Ltd. 39. We have gone through the Annual report of Interads Ltd., whose copy is available on page 93 onwards of the paper book. Page 108 is copy of its Profit Loss Account, which shows Exhibition revenue at ₹ 4.34 crore. This is a major item representing income from operations. Detail of Exhibition revenue is contained in Schedule 12, which divulges that this company is earning income from Participation fee, onsite service fee and other miscellaneous receipts. The nature of services rendered by this company is nowhere close to the rendering of marketing support services as done by the assessee company. We, therefore, hold that this company was rightly excluded by the authorities below. 40. As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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