TaxTMI 
TaxTMI 
2013 (8) TMI 670
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....n 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 incorporated in the document in Form 3CEB solely on th....
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....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 nature and no specific finding is required as it dependents upon the findin....
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....dings 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 provision. Now under what circumstances, Assessing Officer would consider it "necessary" or ....
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....ara-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 Transfer Pricing Officer is expected to perform the same exercise as envisaged under section 92C(1)....
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....l 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 the objection raised by the assessee and determination the ALP by taking into consideration, three comparables including M/s Gemini Communication Ltd. as added by the TPO and arrived ....
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....i 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 suffered losses. He has contended that no comparable can be rejected solely on the ground of suffering losses. Thus, the rejection of the Punjab Communication Ltd. on the basis of the financial ....
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....n 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 current year and further proposed to exclude Punjab Communication Ltd. (PCL) from the comparable on the ground that it is a loss making company and in place the TPO propose to include Gemini Communication as comparable. Thus the TPO has comp....
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....sp; 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 conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making corn parables that satisfy the comparability analysis should not however be rejected on the sole ....
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....ks 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 inclusion and exclusion of the comparables cannot be decided on the basis of the factors other than the factor specified under Rule 10B(2). Hence, in views of the above discussion we do not accept the objections of the assessee that because of the abnormal profit margin this company should be reje....
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..... 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 the profit and loss account which has been countered by the Ld. AR by referring the notes on account and the annual report to show that the cost of material relates to the value of imparted material consumed in providing services. All these aspects have not been examined by the authorities below while deciding ....
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....rs 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 company is in the business of various different segments namely Telecom, Power, Infrastructure for Power & Telecom, Water & Waste Water and Oil & Gas. He has further submitted that even under Telecom segments, the said company is involved in designing, engineering, procurement and erection of telecom towers and telecom shelt....
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....nd 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 under Rule 10B(4) r.w.s Rule 10D(4) that contemporaneous information and documents should be considered as far as possible for the purpose of comparing uncontrolled transaction with the international transaction. Therefore, the comparability of an uncontrolled and unrelated transaction with the international transaction has t....
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....s 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 the Act has not provided for any cut off date up to which only the information in the public domain has to be taken into consideration by the TPO while arriving at the ALP or making TP adjustments. Both the assessee and Revenue being bound by the provision of the Act and Rules are required to take into consideration contemporaneous dat....
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....und 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 would have been the prices of said transaction between the assessee and unrelated party. The comparison is always in the context of the effect of the related party transaction and unrelated party transaction at the hand of the assessee. Therefore, the financial results of the AE are not at all relevant for the purpose of determination of arm&#....