Tribunal Rules on Profit Margin & Comparable Companies Inclusion

The tribunal ruled in favor of the assessee regarding the determination of profit margin and the inclusion of comparable companies. The tribunal held that the commission paid to Voltas should be included in operating costs, affecting the profit margin calculation. Additionally, the tribunal directed the exclusion of certain companies from the list of comparables due to functional dissimilarities. The tribunal set aside the transfer pricing adjustment, remitting the matter for fresh determination, ensuring the assessee's right to be heard. The appeal was allowed for statistical purposes, with the order pronounced in open court on 11.05.2015.

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Issues Involved:
1. Determination of Assessee’s Profit Margin
2. Inclusion/Exclusion of Comparable Companies

Issue-wise Detailed Analysis:

I. Determination of Assessee’s Profit Margin

The assessee computed its profit margin of OP/OC at 8.70%, which was disputed by the TPO. The TPO took the gross amount of income from operations as operating revenue at Rs. 4.24 crore, while the assessee had calculated it at Rs. 2.23 crore after reducing commission expenses of Rs. 2.00 crore paid to Voltas India Ltd. The TPO considered this commission as an operating expense, reducing the profit margin to 6.34%.

The assessee argued that the commission paid to Voltas was a pass-through cost and should be excluded from the gross revenue. However, the TPO and the tribunal rejected this argument, stating that the commission paid to Voltas was not a recoverable cost from the AE and was a value-added cost, thus should be considered as part of operating expenses. The tribunal concluded that the gross revenue should be taken at Rs. 4.24 crore, and the commission paid to Voltas should be included in operating costs for calculating the profit margin.

II. Comparables

The TPO initially reduced the assessee's nine comparables to one and included additional companies, resulting in a total of 12 comparables. The assessee objected to the inclusion of five companies:

i) Apar Chematek Lubricants Ltd.

The tribunal found that the revenue of Apar Chematek Lubricants Ltd. was entirely from its AE, making it a controlled transaction. As per Rule 10B(1)(e) and Rule 10A(a), controlled transactions cannot be used for comparison. Thus, the tribunal directed the exclusion of this company from the list of comparables.

ii) Info Edge (India) Ltd.

The tribunal noted that Info Edge (India) Ltd. was engaged in internet-based services, owning several websites like naukri.com, jeevansathi.com, and 99acres.com, which are functionally different from the marketing support services provided by the assessee. Hence, the tribunal directed the exclusion of this company from the list of comparables.

iii) Apitco Ltd.

The tribunal observed that Apitco Ltd. provided high-end consultancy services such as project feasibility reports, market studies, and skill development, which were functionally different from the assessee's services. The tribunal cited the judgment of Rampgreen Sales Pvt. Ltd. vs. CIT, emphasizing the need for functional similarity even under TNMM. Therefore, Apitco Ltd. was excluded from the list of comparables.

iv) Global Procurement Consultants Limited

The tribunal found that Global Procurement Consultants Ltd. provided consultancy services related to procurement and procurement audits, which were significantly different from the services provided by the assessee. Thus, the tribunal ordered the exclusion of this company from the list of comparables.

v) TSR Darashaw Limited

The tribunal noted that TSR Darashaw Limited was engaged in BPO activities, including payroll management, record management, and registrar services, which were dissimilar to the assessee's services. Therefore, the tribunal directed the exclusion of this company from the list of comparables.

Apart from disputing the inclusion of these five companies, the assessee challenged the non-inclusion of Kirloskar Consultants Ltd. The tribunal remitted the matter to the TPO/AO for re-evaluation of the RPT to Sales filter and functional similarities/dissimilarities of Kirloskar Consultants Ltd.

In 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, ensuring the assessee is given a reasonable opportunity of being heard.

Conclusion:

The appeal was allowed for statistical purposes, and the order was pronounced in the open court on 11.05.2015.

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