9911796707
TMI Blog2025 (1) TMI 812X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO') while passing order dated 07.04.2021 has failed to give effect to directions of the DRP in so far as computing the margins of comparable companies. He pointed that the Dispute Resolution Panel (DRP) in para 2.5.7 of directions dated 24.03.2021 had directed the TPO to allow working capital adjustment using OECD methodology given in Annexure to Chapter III and apply SBI Prime Lending rate (as on 30th June of the relevant Financial Year) as the interest rate. However, while giving effect the TPO has failed to comply with the directions of DRP in full. 2.2. With regard to ground no. 4, the ld. Counsel submits that the TPO has erred in rejecting comparables selected by the assessee. He contended that at this stage he is restricting his arguments only for inclusion of Magma in the list of comparables. He submitted that the TPO has rejected Magma for the reason that the company has peculiar economic circumstances which are not in line with industry trend and is incurring persistent negative cash flow. Referring to para 8.1 of the TPO order he contended that the TPO has not raised any objection in so far as functional disparity of the said company. The ld. Counsel referring to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rected to comply with directions of the DRP. 3. Per contra, Shri S.K Jhadav representing the Department submits that Magma is not functionally comparables to the assessee. He pointed that Magma is engaged in providing man power services, advisory services, annual maintenance contracts, marketing, market research & analysis, whereas, the assessee is engaged in providing market research and testing services to its Associated Enterprises Honda R & D Japan. The assessee is engaged in R & D activities that cannot be compared to a company providing man power services and advisory services. 4. The ld. Counsel controverting submissions of the ld. DR asserted that the Tribunal in AY 2005-06 in ITA No. 5853/Del/2011 had held that the assessee is engaged in providing R & D Services. The matter travelled to the Hon'ble Delhi High Court in ITA No. 616/2015. The High Court vide order dated 02.08.2016 held that the Tribunal has erred in holding that the assessee is involved in R &D Activities. He explained that the assessee is engaged in providing market research and testing services which lead to better product development by the AE. The assessee does not itself undertake research and deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 52 (Delhi- ITAT), Philips Software (26 SOT 226) (Bangalore- ITAT), Mercer Consulting (India) Pot. Ltd (Delhi ITAT), Sunlife India Service Centre Put. Ltd. Vs DCIT (2015-TII-420-ITAT-DEL-TP), the TPO is directed to give working capital adjustment using the OECD methodology given at it in Annex to Chapter III and apply SBI Prime Lending rate (as on 30th June of the relevant financial year) as the interest rate." The TPO is directed to give effect to the above directions of the DRP in letter and spirit. The ground no. 3 of appeal is thus allowed for statistical purpose. 8. The assessee in ground no. 4 of appeal has limited his arguments to inclusion of Magma in the list of comparables. A perusal of order passed by the TPO reveals that the TPO has excluded Magma from list of comparables solely on the ground that as per annual report of company, the company has peculiar economic circumstances that is persistent negative cash flow. No other reason has been given by the TPO for rejection of said company. Before us, the ld. DR has raised a question of functional disparity of the said company. We have examined the financials of Magma, Annual Report of the company is placed on record at pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch services and testing services which lead to the development of better products by their associated enterprises and that the assessee does not itself develop or undertake research for these products. In our view, the type of R&D by the assessee, cannot be compared to pure science R&D where product is developed, clinically tried, refined and soft marketing intangibles are also created. Even if there is no vertical segregation as claimed by TPO, we find there is a major functional difference. While assessee does analysis and passes it on to its AE for product development, TCG develops the products itself. This fundamental functional difference cannot be ignored To quote from TCG's annual report for FY 2006-07". The Hon'ble High Court after considering the observations of the DRP answered the question in negative and reversed the findings of the Tribunal. The Hon'ble Court concluded that the Tribunal was not justified in concluding that the assessee was involved in R & D activity and not provision of market support services. Thus, objection raised by the DR is rejected. For the reasons recorded above, we direct the AO/TPO to include Magma Advisory Services Ltd. in the list ..... X X X X Extracts X X X X X X X X Extracts X X X X
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