TaxTMI 
TaxTMI 
2013 (8) TMI 670
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....ssessment order as provided u/s 92CA (1) based on which he has reached a conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the ALP. (3) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) erred in rejecting the economic analysis undertaken by the appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm's length price (ALP) of the international transactions. (4) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) erred in making an adjustment to the ALP by enhancing the income of the appellant by Rs. 8,49,29,839/- u/s 92CA(3). (5) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) erred in rejecting one comparable selected by the appellant namely M/s Punjab Communication Ltd (PCL) for computing PU in determination of the ALP in the analytical study ....
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....he Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in not applying the proviso to section 92C(2) of the Act and has failed to allow the appellant the benefit of upward variation of 5 percent in determining ALP. (13) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in not restricting the adjustment to the income of the appellant to the quantum of its international transactions. (14) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in ignoring the fact that the parent company of the appellant has been consistently suffering from operational losses. (15) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in making an addition of Rs. 4,35,673/-on protective basis on account of AIR reconciliation ignoring the fact that the same does not belong to the appellant." 3. Ground No. 1 is general in....
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....r and the proceedings under section 92CA(1) of the Act are not dependent on the proceedings under section 92C(3) of the Act. This is due to historical reasons as two provisions were introduced at different times as noted above. The provisions of section 92C(3) of the Act confers powers on the Assessing Officer to determine the ALP himself where the circumstances mentioned in clauses (a) to (d) of the sub-section exist. This is apparent from a bare reading of the provision. In such cases, the Assessing Officer is not bound to refer the case of the assessee to the TPO. On the other hand, the Assessing Officer may refer the case of the assessee to the TPO if he considers it necessary or expedient to do so. The expression "necessary" or "expedient" is quite distinct from and independent of the circumstances mentioned in section 92C(3). The Assessing Officer may consider it necessary or expedient to refer the case of the assessee to the TPO even without considering existence of circumstances mentioned in section 92C of the Act. The Assessing Officer has only to be satisfied that it is necessary or expedient to make a reference to the T.P.O. No other condition is prescribed in the provis....
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....imilar question. At Page-66 of the report, their Lordships referred to the question in Para-19 as under : "... whether the reference to the Transfer Pricing Officer by the Assessing Officer has to be made by the Assessing Officer only after he is satisfied by going through the steps enlisted at section 92C(1) to (3) and concluding that the price declared by the assessee is not to be accepted or can he make such a reference at an anterior stage ?" The above question was answered by their Lordships at the same page by observing as under: "There is nothing in section 92CA itself that requires the Assessing Officer to first form a considered opinion in the manner indicated in section 92C(3) before he can make a reference to the Transfer Pricing Officer. In our view, it is not possible to read such a requirement into section 92CA(1). However, it will suffice if the Assessing Officer forms a prima facie opinion that it is necessary and expedient to make such a reference. One possible reason for the absence of such a requirement of formation of a prior considered opinion by the Assessing Officer is that the Trans....
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....m associated enterprises 676,626 Comparable uncontrolled Price ('CUP') Total 340,403,509 9. The assessee has claimed that its international transactions are at arm's length price as bench marked by using TNMM as most appropriate method and Profit Level Indicators (PLI) as OP/TC, on the basis of three companies taken as comparables namely Punjab Communication Ltd., Valiant Communication Ltd. and X L Telecom and Energy Ltd. In the transfer pricing report, the assessee reported its profit margin at 8% as against the arithmetic mean of comparables at -3%. The Transfer Pricing Officer asked the assessee to file updated PLI of comparables using the data of only assessment year 2008-09. The TPO rejected M/s Punjab Communication Ltd. as comparable because it was a loss making company and the loss for the year under consideration has been reported at 66.96% apart from the losses in the earlier years. The TPO proposed to include M/s Gemini Communication Ltd. as a comparable. The assessee has raised strong objection against the exclusion of Punjab Communication Ltd. and inclusion of M/s Gemini Communication Ltd. as comparable. The TPO rejected....
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.... & implementation of service and to maintain in the area of Security, Storage, Network management and IT infrastructure etc. Thus, the Ld. AR of the assessee has submitted that M/s Gemini Communication is functionally different from the assessee and, therefore, cannot be considered as a comparable for the purpose of bench-marking the international transaction. He has further submitted that the said company has otherwise earned the profit of 28.07% which is super normal in comparison to the assessee's profit. Therefore, the said company cannot be included in the comparables due to the super normal profit. He has relied upon the decision of the Bangalore Benches in the case of Genisys Integrating Systems (India) Pvt. Ltd., reported in 15 ITR 475. He has also relied upon the decision of this Tribunal in case of Teve India Pvt. Ltd. v. DCIT reported in 57 DTR 212 and submitted that the Tribunal has taken a consistent view that the companies having super normal profit should be excluded from the comparables. 11. The Ld. AR has further submitted that M/s Punjab Communication Ltd. (PCL) has been excluded by the TPO from the comparables on the ground that the said company has suffer....
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.... making company and cannot be considered as a comparable for the purpose of determining of ALP. In support of his contention he has relied upon the decision of this Tribunal dated 8.5.2013 in case of Advance Power Display Systems Ltd. v. ACIT in ITA No. 6732 & 6542/M/2011. 13. We have considered the rival submission as well as the relevant material on record. During the year under consideration the assessee has entered into various international transactions as mentioned in foregoing para No. 5 of this order. The assessee has bench marked its international transactions by using TNMM as most appropriate method and taking the Profit Level Indicator (PLI) as operating profit/total cost (OP/TC). The assessee selected three comparables and determination the arithmetic mean at -3% by using multiple year data as under: Sl.No. Name of Comparable Company PLI as per TP Report (%) Updated PLI for FY 2007-08 (%) 1. Punjab Communication Ltd. -23 -66.69 2. Valiant Communications Ltd. 6 5.98 3. X L Telecom and Energy Ltd. 7 6.12 Arithmetic Mean -3 -18.19 14. The TPO asked the assessee to update the data for a single curre....
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....cific reasons and factors as provide under the Rule 10B, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit making unit or loss making unit because no such factor finds place either in Rule 10B(2) or 103 (3) of IT Rule. 34.5 Even as per OECD TP guidelines, the extreme results might consist of losses or unusually high profits itself cannot be a factor for potential comparables; but further examination would be needed to understand the reasons for such extreme results. If some reasons are detected which indicate a defect in the comparability or exceptional conditions for such an extreme results, then only the case may be excluded from the proposed comparables. The concluding remarks given under the OECD TP guidelines in para 3.65 & 3.66 are as under: "3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions! enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business....
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....bunal has adjudicated this issue in para 1.2.6 as under: "12.6. Thus it is evident that the decisive factors for determining inclusion or exclusion of any case in/from the list of cam parables are the specific characteristics of services provided, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit rate, as presumed by the ld. CIT(A). has been prescribed as the determinative factor to make a case incomparable, Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of corn parables." 34.7 The findings of the coordinate Benches of this Tribunal referred above are clear on this point that ....
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....riables of the assessee. On this issue the assessee has quoted from the annual report of the company which states that the company is engaged into networking services, security solutions, net work management, LAN/WAN, Network search & storage. Gemini consultants are centered on infrastructure and management. Broadly, it can be sated that Gemini Communication is a company in the field of Telecom solutions similar to that of the assessee for the purpose of TNMM analysis." 18. It is clear from the findings of the DRP that M/s Gemini Communication was part of the TP study of the assessee but while selecting the comparables the assessee has not included the said company in the list of comparables without giving any specific reasons for not including in the comparable list. Thus, the assessee has not explained any reason in the TP study for non-inclusion of Gemini Communication in the list of comparables. Though, the assessee has raised an objection before the DRP that the said company is in a different business which includes services and solution of various natures to Telecom companies. The Ld. DR, on the other hand, pointed out that the said company has shown cost of material in th....
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....t that persisting loss making company cannot be considered as a good comparable for the purpose of determination of the ALP." 20. In view of the above discussion and fact and circumstances of the case we hold that the Punjab Communication Ltd. which is suffering persistence loss year after year for last four years cannot be considered as good comparable for the purpose of determination of ALP. 21. Ground No. 7 is regarding not considering M/s Icomm Tele Ltd. as comparable by the DRP. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The Ld. AR of the assessee has submitted that the assessee selected two alternative comparable namely Icomm Tele Ltd. and M-Tech Innovations Ltd. The DRP while considering the issue has accepted M-Tech Innovations Ltd. as comparable but ignored M/s Icomm Tele Ltd. without giving any reason. Thus, the Ld. AR has submitted that when no reason has been given by the DRP for non-inclusion of Icomm Tele Ltd. the same must be considered as a comparable for determination of ALP. 22. On the other hand, the Ld. DR has submitted that M/s Icomm Tele Ltd. is functionally different from the assessee as the said compan....
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.... assessee has filed the details of working capital adjustment at page no. 150 of the paper book. We find that the Transfer Pricing Officer has not examined the details for the purpose of working capital adjustment if any to be made in respect of the comparables. The claim of the assessee was turned out by the TPO on the ground that in the telecommunication industry there is long gestation period and the flow of revenue on sale is generally slow and tardy. Since the issue has not been properly examined by the authorities below, therefore, we remit this issue to the record of the TPO to properly examine the claim of the assessee vis-a-vis the details filed by the assessee and then decide the same as per law. 26. Ground No. 10 is regarding using single year data as against multi year used by the assessee. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. In order to determine the arm's length price in relation to the international transaction, it has to be compared with uncontrolled and unrelated transaction by using the data relating to the financial year in which the international transaction has been entered into. It is stipulated....
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.... into consideration for the purpose of determination the arm's length price were very much available in the public domain as well as with the assessee at the time of determination of ALP by the TPO. The Bangalore Benches of the Tribunal in case of 27/7 Customer Com Pvt. Ltd. has considered and decide an identical in para 8.5 as under: 8.5 Use of data by the TPO after the cut off date. "As regards the data used by the TPO while determining the ALP, we find that it is to be as per the provisions of section 92D of the Act that every person who has entered into international transactions is required to maintain information and documentation thereof. Rule 1OB(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the 'specified date" referred to in section 92F(4) which has the same meaning as 'due date' in Explanation 2 to section 139(1) of the Act. In the assessee's case, this would be '30th day of September' as it is a company. It is clear, after going through the relevant provisions of law, that t....
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....re is no quarrel on the point that the adjustment if any on account of transfer pricing shall be restricted only to the income from international transaction and not to the income of the assessee at entity level. Accordingly the AO/TPO is direct to restrict the adjustment only to the quantum of its international transaction. 32. In the ground No. 14 the assessee has raised the ground that the AE of the assessee has been consistently suffering from operational loss and therefore no adjustment can be made in respect of international transaction. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. Under the Transfer Pricing regulation/provisions the testing party is the assessee and the international transaction entered into by the assessee has to be tested by comparing the same with uncontrolled, unrelated comparable transaction, Therefore, the price of international transaction in the hand of the AE of the assessee is absolutely irrelevant. The concept of Transfer Pricing based on the principle that instead of entering into a transaction with related party if the assessee had entered into a similar transaction with unrelated party what w....