R.C. Sharma, Accountant Member - This is an appeal filed by the Revenue and Cross Objection by the assessee against the order passed under Section 143(3) read with Section 144C(13) of the IT. Act, 1961, giving effect to the order of DRP passed u/s.144C(5) of the I.T. Act, wherein following grounds have been taken by the Revenue:—
"(i) |
Whether on the facts and circumstances of the case and in law, the Hon'ble DRP was correct in directing the TPO to exclude Basiz Fund Services Pvt. Ltd., Cameo Corporate Services Ltd., Cyber Media Research Ltd., ICRA Management Consulting Services Ltd. And Rockman Advertising & Marketing India Ltd. as comparables for determining ALP? |
(ii) |
Whether on the facts and circumstances of the case and in law, the Hon'ble DRP was correct in directing the Assessing Officer to exclude the comparables without appreciating the fact that the assessee company as also the comparables were functionally similar in so far as marketing support services are concerned ? |
|
2. The appellant prays that the order of the DRP on the above grounds be set aside and that of the A.O. be restored." |
Grounds taken in Cross Objection by the assessee read as under :—
| "1. |
In respect of Comparable companies selected by the Respondent: |
|
On the circumstances of the case and in law, the Hon'ble DRP has erred in directing the learned AO/TPO to exclude 2 comparable companies i.e., ICRA Management Consulting Services Ltd. and Rockman Advertising & Marketing (India) Ltd. selected by the respondent, on the basis that these comparables are consistently loss marking companies. The respondent submits that these 2 comparables have earned operating profits in the immediate preceding 2 years & only in the year under consideration these companies have suffered operating losses and hence, the directions of the Hon'ble DRP is factually incorrect. |
2. |
In respect of Comparable companies selected by the learned TPO: |
|
Without prejudice to the above, on the circumstances of the case and in law, the Hon 'ble DRP has erred in directing the learned AO/TPO to retain 2 comparable companies i.e., H C C A Business Services Pvt. Ltd. and TSR Darashaw Ltd. selected by the learned TPO, on the basis that these comparables are functionally comparable to the activity of the respondent. The respondent submits that these 2 comparables are not functionally comparable to the marketing activities of the respondent, and hence should be excluded from the comparable list." |
2. At the outset, it was contended by the learned AR that tax effect in the appeal filed by the Revenue is below Rs.3 lakhs, therefore, as per CBDT Circular, appeal of the Revenue is not maintainable and deserves to be dismissed on the ground of low tax effect only. He further contended that the DRP has selected three comparable of TPO and brought back 9 comparable of assessee as against 11 Comparables originally proposed by the assessee. By reading grounds of appeal filed by the Revenue, learned AR contended that the Revenue has come in appeal for exclusion of comparables by the DRP, which is not justified.
3. In the cross objection the assessee has taken the ground to the effect that the DRP has erred in directing the AO/TPO to exclude 2 comparable companies i.e. ICRA Management Consulting Services Ltd. and Rockman Advertising & Marketing (India) Ltd. selected by the assessee. The assessee has also taken the ground with regard to the direction of DRP to retain two comparable companies i.e. HCCA Business Services Pvt. Ltd. and TSR Darashaw Ltd. selected by the TPO.
4. Rival contentions have been heard and record perused. Facts in brief are that assessee M/s Rolls-Royce Group (Marine Division) (in short 'RRM') is a global leader in power propulsion and motion control systems. It offers a product portfolio ranging from vessel design and gas turbine engines to water jets and deck handling equipment. RRM India is part of Marine division of Rolls-Royce Group. RRM India is engaged in the of providing marketing & sales support, assembling services and after sales services to the Group for its activities in India and to third party clients. The various international transactions entered into by RRM India were categorized into 3 segments based on the nature of activities and functions performed i.e. after sales services, Assembly and Delivery Management Services and Marketing & sales support services. RRM India prepares a 'Transactional Profit & Loss Account' for ascertaining the margins earned by it from each category of the transactions.
5. In respect of its international transaction, the assessee had adopted TNMM method as most appropriate method and identified 11 companies as comparables to its Marketing & Sales support service segment. As per the assessee's calculation, the operating margin earned by RRM India was 13.44% on costs as against the operating margins of comparable companies of 8.96% on costs. However, the TPO has accepted the ALP computed by the assessee for all transactions except for Marketing & Sales support services. The contention of the assessee before the DRP was that the TPO had selected a set of 5 companies which are not at all functionally comparable to the assessee. The comparables selected by the TPO are into payroll processing, fund management and related business as compared to RRM India which provides marketing & sales support services to its AEs. Thus, the TP addition of Rs.93,83,628/- in respect of marketing and sales support services was disputed by the assessee before the DRP.
6. By the impugned order, the DRP observed that TPO has not given reason for rejection of comparables selected by the assessee. The DRP further observed that ICRA Management Consulting Services Ltd. and Rockman Advertising & Marketing (India) Ltd. are consistently loss making companies and therefore needs to be excluded. Therefore, directed the AO/TPO to exclude these two comparables also from the list and then work out the +5% margin and appropriate adjustment will be made only if the assessee remains beyond the range after giving effect to the above directions in respect of the comparability. The precise observation of the DRP was as under :—
"7. The TPO's arguments and the assessee's submission are analyzed vis-a-vis each of the comparables under dispute and the ORP's directions are also given in the following paras.
1. Basiz Fund Service Private Limited (referred to as 'Basiz Fund')
As per Schedule 13 on 'Revenue from Operations' to the Profit & Loss A/c, Basiz Fund is into different streams of operations such as "Preparation of Financial statements, Liquidity Monitoring Services, NAV Accounting for International funds, Consulting Charges, US Taxation, Domestic PMS Accounting". The different streams of business operations are apparent from Accounting Policies and Notes to Accounts, which states the objective of the company. It can also be inferred from the Revenue recognition policy mentioned. Further, the extracts from the website of Basiz Funds, it is very clear that the current line of services rendered by the company are towards financial reporting, NAV support services, investment accounting, etc. Basiz Fund is into developing its own intellectual property/process etc. Accordingly, since Basiz Fund is functionally different from RRM India, it cannot be said to be comparable to RRM India's business operations.
Discussion and directions of DRP: —
The DRP has considered this comparable. The segment for which the adjustment has been proposed is provision of marketing and sales support service in India in respect of sales of new marine equipments. As against this the comparable sought to be substituted by the Ld. TPO is engaged in financial reporting, NAV support services, investment accounting etc.. The functions are thus very different and it is held that this' company cannot be taken as comparable. The AO/TPO is directed to exclude the same.
2. Cameo Corporate Services Limited (referred to as 'Cameo Corporate')
As per the Annual Report, Cameo Corporate provides services in the areas of Registry and Transfer Agency services, Data archival and retrieval services and Medical Transcription services. The fact that this company acts as Registry & Share Transfer Agent and also provides services of Document Management and Medical Transcription is verified from the information available on its website.
The earning in foreign exchange of Cameo Corporate is only about 20% of its total service income and hence, this company is predominantly earning from domestic sources and not from exports.
Table for calculation of ratio of export income:
Particulars |
Amount in Rs. |
Total Sales |
243,667,920 |
Export Sales |
48,791,787 |
% of Export sales to Total sales |
20.02% |
Accordingly, since Cameo Corporate is functionally different from RRM India, it cannot be said to be comparable to RRM India's business operations .
Discussion and directions of DRP: -
The DRP has considered the assessee's contention.• It is further seen that the TPO has given no reason for inclusion of this in the list of comparables except that the said comparable was checked in Capitaline. Since it is functionally different from the assessee's operations, the Ld. AO/TPO is directed to exclude the same.
3. Cyber Media 'Research Limited (referred to as 'Cyber Media') [Earlier known as IDC (India) Limited]
The assessee claimed that it is engaged in 'Market Research and Management Consultancy'. The fact that Cyber Media is offering market research and management consultancy services can also be inferred from the information available on its website.
The earning in foreign exchange of Cyber Media is only about 36% of its total service income and hence, this company is predominantly earning from domestic sources and not from exports.
Table for calculation of ratio of export income:
Particulars |
Amount in Rs. |
Total Sales |
168,532,370 |
Export Sales |
61,357,000 |
% of Export sales to Total sales |
36.41% |
As per the Director's Report, it is clear that Cyber Media has its own brand. The extract from the Director's Report is as under:
"Recognitions: The IDC brand was ranked amongst the top ten firms in consultancy space in year 2009 in a survey conducted by Business Today-Cirrus."
Accordingly, since Cyber Media is functionally different from RRM India, it cannot be said to be comparable to RRM India's business operations.
Discussion and directions of DRP: -
The DRP has considered the comparability of the assessee with this company. The assessee has not been able to demonstrate how the functional difference or export element is so different to warrant its exclusion in the face of broad similarity of functions. In any case the margin of this company is 10.44% which is fairly close but lower than the margin of the assessee. Since the assessee has pressed for its exclusion, the TPO is directed to exclude the same.
4. HCCA Business Services Pvt. Ltd. (referred to as 'HCCA Business') [Now known as HGS Business Services Pvt. Ltd.]
The assessee claimed that HCCA Business is into rendering the Payroll processing services. The fact that HCCA Business is offering Payroll processing services can also be inferred from the information available on its website. As per the website, HCCA Business is offering Payroll processing and Compensation structuring, Support-HR Administration, Payroll regulatory compliance, ete:
Financials of HCCA Business does not provide any information on whether it's earning arc from exports or local and there is no mention about the foreign exchange earnings in the Notes to Accounts to the Financials.
Accordingly, since HCCA Business is functionally different from RRM India, it cannot be said to be comparabie to RRM India's business operations.
Discussion and directions of DRP: -
The DRP has considered the comparability of the assessee with this company. The only reason that the assessee is providing for its exclusion is that HCCA's earning from exports is not clear from its financials. The company is functionally fairly comparable and there is no reason to exclude a company which is admittedly offering pay roll processing services, The action of the TPO in inclusion of this company is upheld.
5 TSR Darashaw Limited (referred to as 'TSR')
TSR is into 'Payroll process outsourcing' activities. In addition to this, TSR also provides Share Registry and Transfer services and-Records management services. The business activities of TSR can also be understood from the Revenue recognition policy mentioned by it in Note No.4 of Schedule K on Significant Accounting Policies. Revenue recognition policy mentioned is as under:
"Income from Services - share registry and transfer services, depository services, record management, payroll and provident fund management, corporate and fixed deposit management are recognized on the basis of services rendered. II Further, the financial statements of TSR discloses the segmental information as required by AS 17 for the above stated 3 categories of services i.e., Share Registry and Transfer Services, Payroll services and Records management services.
The fact that TSR is a Business Process Outsourcing organization is also inferred from the information available on its website. As per the website, TSR offers services such as payroll processing, record management, registrar &. share agency services, etc.
Schedule L on Notes to Accounts of the Financials of TSR clearly mentions that its operations are primarily in India. Also, there is no mention about the foreign exchange earnings in the Notes to Accounts to the Financials. Therefore, it is clear that TSR is predominantly. earning its revenues from domestic sources.
This company is part of the TAT A Group. Therefore, it enjoys the brand name and in a position to leverage on the corporate reputation/brand name of Tata group in the market.
Accordingly, since TSR is functionally different from RRM India, it cannot be said to be comparable to RRM India's business operations.
Discussion and directions of DRP: -
The DRP has considered the comparability of the assessee with this company. This company is also' engaged in share registry and transfer services, depository services, record management, pay roll and provident fund management, corporate and fixed deposit management etc., which is fairly comparable to the assessee's activity in marketing and sales support. The comparable belongs to Tata Group which has a brand name and this is one of the reasons for claim of its exclusion by the assessee. Obviously, a comparable cannot be excluded for such a reason and the inclusion thereof by the TPO is upheld.
8. Objection 1.1.2 specifically restoration of assessee's comparables. Therefore, this also needs to be dealt with. The fact of the matter is that the Ld. TPO has given no reason for rejection of these comparables. However, it is seen that ICRA Management Consulting Services Ltd. and Rockman Advertising & Marketing (India) Ltd. are consistently loss making companies and therefore needs to be excluded. The Ld. AO/TPO is directed to exclude these two comparables also from the list and then work out the +5% margin and appropriate adjustment will be made only if the assessee remains beyond the range after giving effect to the above directions in respect of the comparability."
7. We have considered rival contentions, gone through the orders of the authorities below and found that assessee has rendered marketing, sales support and coordination services to the group companies for their sales in India. The main transactions of assessee are in the nature of marketing and various sales support services, offers and quotes received from groups' customers in India, providing information to group companies on market opportunities, trends follow up for payments and deliveries, etc. For the purpose of computing ALP, assessee has taken 11 comparables and computed margin which comes to 13.44%, however, the TPO has rejected all these 11 comparables and has taken its own 5 comparables arithmetic mean of which comes at 23.85%. In the TP study, the TPO made an adjustment of Rs.93,83,628/-, which was more than +5% of the value of international transaction of Rs.10,23,92,957/-. Accordingly, this transaction of assessee was considered to have not been entered at ALP. Since assessee's case does not fall within + 5% range, an adjustment of Rs.93,83,628/- was made. Assessee approached to the DRP, who has excluded Basiz Fund Services Pvt. Ltd., Cameo Corporate Services Ltd., Cyber Media Research Ltd., ICRA Management Consulting Services Ltd. And Rockman Advertising & Marketing India Ltd. as comparables for determining ALP. The DRP also directed for exclusion of ICRA Management Consulting Services Ltd. and Rockman Advertising & Marketing (India) Ltd. since these were loss making companies. The DRP directed the TPO to exclude these comparables from the list and work out + 5% margin and appropriate adjustment should be made only if the assessee remained beyond the range after giving effect to the directions given at paras 4 to 8 of his order.
8. The Revenue is in appeal before us against the direction of DRP for exclusion of these comparables. We found that DRP has excluded these companies from comparables on the plea that these companies are functionally different from that of assessee company. The DRP has recorded finding with regard to functions of each and every company and thereafter reached to the conclusion that functionally assessee company RRM is different from these companies. In respect of ICRA Management and Rockman Advertising &Marketing (India) Ltd., the DRP found that since these two companies were loss making companies, hence, these two comparables were also excluded and DRP directed to recompute the appropriate adjustment and find out if the same is + 5% margin. During the course of hearing before us, learned AR submitted a chart, according to which even if the Revenue's appeal is allowed for not excluding these comparables, the arithmetic mean will come to 14.74% as against assessee's margin of 13.44%, which falls within + 5% . As per the chart, if the Revenue's appeal is allowed partly, the arithmetic mean will come to 15.08%, which also falls within + 5%. We found that ICRA Management and Rockman Advertising & Marketing (India) Ltd., which were selected as comparables by assessee, was rejected by TPO. The DRP has also confirmed the action of TPO for exclusion of these two comparables. Since the DRP has confirmed the action of TPO, there is no reason for revenue to come in appeal before us for said exclusion. Accordingly, we do not find any merit in the appeal filed by the Revenue, subject to the verification of chart filed by the Ld. AR. Accordingly, we dismiss the appeal filed by the Revenue with liberty to the AO to verify the chart filed first time before us, copy of which was also handed over the ld. DR.
9. As we have dismissed the appeal of the Revenue, therefore, the grievance of the assessee in Cross Objection remains academic and the same is also dismissed.
10. In the result, both appeal of the Revenue as well as Cross Objection of the assessee are dismissed.