WESTERN UNION SERVICES INDIA P.LTD,MUMBAI vs. DCIT CIR 10(1), MUMBAI

On the receipt of report of TPO, the AO passed draft assessment order under section 143(3) rws 144C(3), copy of which was served on the assessee. The assessee, on receipt of draft assessment order, filed objection before dispute resolution penal (DRP). The DRP, rejected the objections filed by the assessee and upheld the upward adjustment suggested by TPO vide its direction dated 29-09-2012.

On the facts and in the circumstances of the case, the learned Transfer Pricing Officer ('TPO') and the learned Assessing Officer ('AO') under the directions of the Hon'ble Dispute Resolution Panel ('DRP') erred on facts and in law in making an addition of Rs. 15,494,736 to the provision of support services transaction of the Appellant based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act').

The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law by arbitrarily rejecting two of the lower margin companies from the set of comparables arrived at by the Appellant, thereby resorting to cherry picking those companies with higher margins and arbitrarily deleting two lower margin comparables without appreciating the broader comparability required under the transactional net margin method. 3. The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in not allowing appropriate adjustments namely; risk adjustment to the comparables as is required to be done in accordance with the provisions of Rule 10B(l)(e)(iii) of the Income-tax Rules, 1962 to account for difference between the risk profile of the Appellant and the alleged comparables selected by the learned AO/TPO. 4. The learned AO/TPO under the directions of the Hon'ble DRP erred on facts and in law in upholding / confirming the action of the TPO of arbitrarily rejecting the without prejudice contention of the Appellant to provide the benefit / reduction of 5 percent from the arithmetic mean as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price for the international transaction.” 4. We have heard the learned authorised representative (Ld. AR) of the assessee and learned departmental representative (Ld. DR) for the revenue and perused the material available on record. The Ld.AR of the assessee submits that Ground No. 1 of the appeal is 5 ITA 7619/Mum/2012 Western Union Services India P Ltd general and needs no specific adjudication. Considering the statement of the Ld.AR of the assessee the Ground No.1 of the appeal is dismissed, as being general in nature.

Ground 2 relates to selection / exclusion / inclusion of comparables. The Ld. AR of the assessee submits that he presses only for the exclusion of Agrima Consultants Ltd. from final set of comparables. The Ld.AR further submits that in case of Agrima Consultants Ltd is excluded from final set of comparables, the margin of assessee would be within the tolerance range and he would not press for inclusion or exclusion of other comparable and any other grounds of appeal. The Ld.AR for the assessee further submits that this comparable chosen by assessee while making Transfer Pricing Study Report (TPSR). However, later on, the assessee realised that in fact, this comparable is actually not comparable with the assessee. The function performed by this comparable is entirely different. Agrima Consultants Ltd is engaged in the area such as sugar, cement, chemical engineering, power transmission and is in the field of market research and intelligence governing; hence different from the activities of 6 ITA 7619/Mum/2012 Western Union Services India P Ltd marketing support services of the assessee. There is difference in the salary cost in the business module.

The Ld.AR further submits that there is no bar in the law to seek the exclusion of comparables, if the same is selected by assessee and in fact is not comparable with the functions of the tested party.

On functional dissimilarity, the Ld.AR submits that the assessee company (tested party) is mainly engaged in marketing support services and the services rendered by the assessee to its associate enterprises are not disputed by the AO. The Ld.AR submits that in the following cases, Agrima Consultants Ltd held to be not comparable with the company engaged in marketing support services:-  Haworth (India)(P) Ltd vs DCIT (2017) 88 taxmann.com 316 (Pune Trib) AY 2009-10  Dover India (P) Ltd vs DCIT (2017) 81 taxmann.com 245 (Pune Trib) AY 2009-10  Dover India (P) Ltd vs DCIT (2015) 59 taxmann.com 53 (Pune Trib) AY 2009-10

In alternative submission, the Ld.AR submits that due to high fluctuation of its revenue in earlier and subsequent assessment year this comparable was rejected/ excluded. The Ld.AR submits that profit margin of this comparable in AY 2006-07 was -.62% in A.Y. 2007-08; it was .51% in AY 2008-09; it was 35.08%; no data for AY 2009-10 is available; however, in AY 2010-11, the profit margin was again -79.43%. The Ld.AR submits that various benches of Tribunal in following cases held that wide fluctuation in margin earned by the said concern over a period of time, therefore, cannot be included for comparison.  Rampgreen Solutions Pvt Ltd vs CIT (2015) 60 taxmann.com 355 (Delhi HC),  Exxon Mobil Co Ltd (2011) 12 taxmann.com 84 (Mumbai Trib)  Maersk Global Centres (India)(P) Ltd vs ACIT (2014) 43 taxmann.com 100 (Mum)(SB)  Lubrizol Advanced Materials India P. Ltd vs DCIT (2015) 64 taxmann.com 135 (Ahd) (Legal PB Pg.167.Para 17)  Cummins Turbo Technologies Limited &269/PN/2013 9. On the other hand, the Ld. DR for the revenue supported the order of TPO / DRP. The Ld. DR for the revenue submits that at pages 22 & 23 of the TPSR, the assessee itself has shown it as a primary consultancy service provider. M/s Agrima Consultants Ltd is also providing consultancy services. The Ld. DR further submits that 8 ITA 7619/Mum/2012 Western Union Services India P Ltd assessee itself selected this comparable. The assessee has not objected to the inclusion either before the TPO or before DRP.

In the rejoinder submission, the Ld.AR of the assessee submits that at page 27 of TPSR in functional analysis, the assessee has clearly mentioned that the assessee has entered into support services agreement with its AE for rendering consultancy and ancillary support services. The function performed by assessee is carrying out market research, statistical analysis, identifying new location, sub contract and execution of sub representative agreement in compliance with standard agreement. The ld.TPO in his report has clearly accepted that the function of assessee primarily comprise assisting in appointment of sub representative agreement, maintaining existing representative relationship, marketing and promotion, training and support and business support to AE as recorded at para 3 of report / order of TPO.

We have considered the submission of both the parties and have gone through the orders of lower authorities. We have also deliberated on various case laws relied upon by representatives of the parties. We have noted that the function performed / undertaken by assessee is duly identified by Ld. TPO at para 3 of his order, which consists of assisting in appointment of sub- representative agreement, maintaining existing representative relationship, marketing and promotion, training and support and business support to AE. The international transaction reported by assessee is also related with consultancy and ancillary support services, thus, the assessee in the year under consideration is in primarily in supported services. In our view, the only short dispute in present appeal is, if the comparable company, Agrima Consultants Ltd is liable to be retained in final set of comparables or to be excluded, on the basis of functional dissimilarity and fluctuating margin and / or different business module.

There is no dispute that this comparable was initially selected / included by assessee itself while preparing TPSR. Before us, the Ld. AR of the assessee vehemently submitted that this comparable company is not at all comparable with the assessee as the same is engaged in different business, so far as the exclusion of assessee’s own comparable is concerned. The Hon’ble jurisdictional High Court in CIT vs Tata Power Solar Systems Ltd (supra) while considering the question of law if the a comparable selected by the assessee, in the list of comparables for the purpose of arriving at the ALP in respect of its international transactions with its AE and later on sought to withdraw the comparable from the list of comparables on the ground of functional difference, the Hon’ble Court held that there is no bar in law from withdrawing from the list of comparables, and if the same is found to be included on account of mistake, as of facts is not comparable. Hon’ble High Court held that comparison has to be made between like companies and require carrying out of Function undertaken, Asset employed and Risk assumed (FAR) analysis to find out to find the same and in case of FAR analysis found with comparable are not comparable

Further, the Hon’ble jurisdictional High Court in Visteon Engineering Centre (India) Pvt Ltd (supra), while considering similar question of law held that withdrawing of a comparable company selected by assessee as a comparable, is no longer res Integra in view of its earlier decision on CIT vs Tata Power Solar Systems Ltd (supra). Thus, considering the aforesaid factual and legal position, we are of the view that under law, there is no bar to seek the exclusion of comparable, if it is found not functionally comparable with the assessee company.

Now adverting to the functional comparability of Agrima Consultants Ltd, the Ld.AR of the assessee while making his submission has drawn our attention on the business profile of Agrima Consultants Ltd as extracted from website of this comparable, wherein this comparable is shown to have engaged in cement and building material, rigid packaging, sugar, horticulture and floriculture, engineering, consultancy in agro chemical financial services international trade, support entertainment and food services. The P&L account of this comparable is also placed

The learned Departmental Representative for the Revenue referred to the orders o authorities below and pointed out that Agrima Consultants International Limited was broadly comparable to the functions undertaken by the assessee.

So far as the high fluctuating margin is concerned, this comparable has shown negative margin profit margin of 8.62% in AY 2006-07, 0.51% in A.Y. 2007-08 and 25.0-8% in the current assessment year. The Hon’ble Delhi High Court in Rampgreen Solutions Pvt Ltd Vs CIT (supra) held that it is necessary to keep in mind that supernormal profit may in certain cases indicates a functional dissimilarity or dissimilarity with respect to a feature that has a material bearing on the profitability.

Further, the Mumbai Tribunal in Exxon Mobil Co Ltd (2011) 12 taxmann.com 84 (Mumbai) accepted the exclusion of comparable on account of abnormal fall in turnover. Further, the Ahmedabad Tribunal in Lubrizol Advanced Materials India P. Ltd Vs DCIT (supra) excluded the comparable due to fluctuating margin. In view of the aforesaid factual and legal discussion, we direct the AO / TPO to exclude Agrima Consultants Ltd from the final set of comparables and recompute the ALP on the basis of remaining comparable companies.

Considering the fact that we have accepted the primary and foremost contention of Ld.AR of the assessee that in case Agrima Consultants Ltd is excluded from the final set of comparables, the other grounds of appeal