AI Drafter 
TaxTMI 
TaxTMI 
2018 (5) TMI 1009
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....nternational transaction of providing support services for sourcing of garments, handicrafts, leather products, etc. amounting to Rs. 147,05,72,472/- with its associated enterprises (AE). For the purpose of benchmarking the said transaction of sourcing services, Transactional Net Margin Method (TNMM) was considered to be the most appropriate method with operating profit to cost (OP/OC) as the Profit Level Indicator (PLI). Six companies were selected by the assessee as comparables for the purpose of benchmarking the international transaction of the provision of sourcing support services. The PLI of the assessee company was computed by the assessee at 7.92% whereas the average PLI of the comparables was computed at 3.76% as per the analysis in the transfer pricing document. Reference was made to the Transfer Pricing Officer (TPO) and a new search process was conducted with the final list having seven comparables and the PLI was computed at 14.35%. After considering the submissions of the assessee, the TPO proposed an adjustment of Rs. 5,75,92,477/- as an adjustment u/s 92CA of the Income Tax Act, 1961 (hereinafter referred to as the 'Act'). 2.2 Aggrieved, the assessee approached t....
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....ellant in terms of Rule 10B(2) of the Income Tax Rules, 1962('Rules'). 2.3 That the DRP erred on facts and in law in excluding ICRA Management Consulting Services Ltd. as comparable observing that "the company has a totally different FAR from the Assessee" ignoring the fact that the said company is engaged in providing business support services of consultancy in the area of transportation and development as well as skill development. 2.4 That the DRP erred on facts and in law in excluding ICRA Management Consulting Services Ltd. as comparable ignoring the fact that the said company has been accepted by the TPO as comparable in the current as well as in the preceding year. 2.5 That the DRP erred on facts and in law in excluding ICRA Management Consulting Services Ltd on the basis that the said company is engaged in providing consultancy services and at the same time accepting HGS Business services Pvt Ltd, a company engaged in provision of consulting services, as comparable. 2.6 That the DRP erred on facts and in law in suo-motto excluding ICRA Management Consulting Services Ltd. as comparable without confronting the assessee by issuing a show cau....
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....he Ld. Authorised Representative drew our attention to the FAR analysis of the assessee company and submitted that the activities and business profile of the assessee were completely different from that of Axis Integrated Systems Ltd. Our attention was also drawn to the annual report of Axis Integrated Systems Ltd. wherein in the Notes forming part of the financial statements it has been mentioned that Axis Integrated Systems Ltd. was engaged in the business of trading in digital certificates and providing liaisoning services such as verification of service tax, Excise, NCBD documents etc. The Ld. Authorised Representative, while drawing attention to the annual accounts of the assessee company as well as those of Axis Integrated Systems Ltd., also submitted that in the profit and loss account it was evident that there was huge increase in the expenses from the earlier year in the case of Axis Integrated Systems Ltd. which was not explainable. It was also submitted that no segmental information was available in the case of Axis Integrated Services Ltd. and a very huge amount had been shown under 'other expenses'. It was also pointed out that the assessee's employee cost was high whe....
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.... as both the companies were providing business support services. However, the Ld. DRP has not elaborated as to how it has reached the conclusion that there was a broad functional similarity between the assessed company and Axis Integrated Systems Ltd. The TPO has mentioned that Integrated Axis Systems Ltd. is engaged in liaisoning services which is in the nature of business support services and exactly resembles the functional profile of the assessee. However, we find that the Ld. DRP as well as the TPO have overlooked the essential requirement that even under TNMM the standard for selection of the comparable transactions cannot be diluted. The Hon'ble Delhi High Court in the case of Rampgreen Solutions (supra), had specifically rejected the proposition that broad functionality was sufficient to find the comparable entity and that the TNMM method allows broad flexibility tolerance in the selection of comparables. The Hon'ble Delhi High Court in paragraph 43 and 44 held as under :- "43. In our view, the aforesaid approach would not be apposite. In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pric....