TaxTMI 
TaxTMI 
2014 (2) TMI 682
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....ce filed by the appellant identifying new companies as comparable. 4. That on the facts and circumstances of the case and in law, the learned TPO/AO/DRP has erred in law by considering a very narrow approach resulting in rejection of certain companies considered comparable by the appellant. 5. The Hon'ble DRP has committed a gross error by endorsing the approach followed by the TPO who has erroneously accepted ICC International Agencies Ltd. a super normal profit making company as comparable. 6. Without prejudice to out other grounds of appeal, the addition to the income of the Appellant has been made without providing for appropriate adjustments for differences in level of working capital employed by the appellant vis-à-vis other companies. 7. Without prejudice to out other grounds of appeal, the addition to the income of the Appellant has been made without providing for appropriate adjustments for differences in level of risk undertaken by the appellant vis-à-vis other companies. 8. Without prejudice to out other above grounds, ....
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....d that grounds 8 & 9 are against the assessee. In the said background, it was submitted that he would be arguing grounds 3, 4 & 5. 4. Addressing ground no-5 first, which was stated to be the major ground, our attention was invited to page 1 of the appeal set which contains the order of the TPO passed u/s 92C(3). Inviting attention to para 2 of the same, it was submitted that the AE of the assessee is a Branch office of Panasonic Industrial Pte. Ltd. Singapore ("PIAPL" or ' Head Office') and was established on September 7, 2002 pursuant to receipt of necessary approval from Reserve Bank of India ('RBI'). It was stated that the assessee was further granted a certificate of establishment of place of business in India by the Registrar of Companies on 26.09.2002. The international transactions reported by the assessee in form no-3CEB were as under :- "3. The international transactions reported by the assessee in Form 3CEB are given below:- S.No. Nature of transaction Method used by Assessee Value of transaction Method PLI 1. Provision of support services TNMM OP/OC 70,545,187/- 2. Reimbursement of expenses NA....
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.... the updated margins of the 16 comparables given by the assessee, the TPO observed that the assessee itself rejected 7 of those and out of the remaining 9 companies, only 2 were finally selected for bench-marking purposes. It was submitted that although the assessee had agitated before the DRP the rejection of the comparables however in the present proceedings, the Ld. AR submitted that he would be confining his arguments only to the grounds highlighted in his opening arguments. In line with this stand it was submitted that from the 11 comparables ultimately only 2 comparables were chosen by the TPO i.e. IDC (India) Ltd. as is evident from page 5 & 6 of the TPO's order. It was submitted that considering the submissions dated 14.10.2011 advanced by the assessee to the TPO two more comparables suggested by the assessee were also chosen namely:- S.No Name of the Company OP/TC 1. TechnieCom Chemie Ltd. 07.32% (calculation reproduced below) 2. ICC International Agencies Ltd. 55.28%(given by the assessee) 4.3 It was submitted that TechnieCom Ltd. was taken as a comparable accepting the arguments of the assessee that during the preparation of the Transfer Pri....
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....wing machines was made remained identical i.e the State Policy and the margins remained high. It was submitted that this is evident from that fact that as opposed to 82.92% profit in 2007-08 assessment year and 55.28% profit in the year under consideration i.e the succeeding assessment year the profit thereafter when the Government policy was not in operation plunged to 6.92% i.e when the special circumstances operating ceased to exist. In the circumstances it was his request that the said comparable be excluded as the onus to establish extraordinary circumstances has been discharged by the assessee. 4.5 The Ld. DR, on the other hand contended that the arguments have no merit as it cannot be wished away that this was a comparable given by the assessee itself and the DRP has rightly held that it cannot be excluded. It was his submission that in a TNMM situation, it is very difficult to find an exact replica of the comparable of the assessee and for this specific purpose the statute and the rules have provided for an arithmetic mean which would ensure that the differences if any would get ironed out and thereafter the safe harbour rules are also available. The said comparable it w....
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....cedures for determination and computation of arm's length price in relation to an international transaction. 5.1 The relevant Rules of the Income Tax Act 1962 relating to the procedure for determination of arm's length price under section 92C need to be referred to and examined. A perusal of the same shows that Rule 10B(1)(a) to (e) are sub-clauses which address various methods by which arm's length price in relation to an international transaction shall be determined. In the facts of the present case since the appropriateness of the method for such determination under sub-clauses (a) to (e) to Rule 10B(1) is not under challenge consequently no further reference to the same is required here. The challenge in the present proceedings is limited to judicially determining the criteria to be adopted for assessing the comparability of an international transaction with an uncontrolled transaction for the purpose of sub-Rule (1) of Rule 10B. Judging such comparability necessarily postulates a determination after careful consideration and deliberation of factor set out in sub-Rules (2), (3) and (4) of Rule 10B which reads as under : "(2) For the purposes of su....
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.... the comparability of an international transaction with an uncontrolled transaction. These factors are set out in clauses (a) to (d) of Rule 10B(2). Whereas a detailed FAR analysis is required to be done in compliance with clauses (a) to (c) Rule 10B(2) which elaborated means an analysis based on contractual terms and conduct of the functions performed, assets utilized and risks assumed by the assessee and the comparables. Role of clause (d) of Rule 10B in the facts of the present case needs a specific elaboration in the context of the present dispute. It is seen that reference in clause (d) is made inter alia to conditions prevailing in the market etc. and in particular specifically include "the laws and the Government orders in force." In view of the requirement of the above Statutory Rules which mandate that in order to judge the comparability of an international transaction with an uncontrolled transaction "shall' be comparable to an "international transaction" which warrants a consideration of not only what is set out in clauses (a) to (c) of Rule 10B(2) but also clause (d) of the said Rule. It is further seen that Sub rule (4) of rule 10B mandates that the data to be used in ....
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....deration also. It is seen that the Rules, in the quest of searching and enabling relevant data/material, enables the analysis, under sub-rule (4) to Rule 10B, of data used in analysing the comparability of an uncontrolled transaction with an international transaction which generally has to be relating to the financial year in which the international transaction has been entered into and the proviso to sub-rule (4) of Rule 10B enables a consideration and analysis of data which may not pertain to the relevant period if the data reveals facts that it had an influence on the determination of transfer prices being compared provided the data provided is not of a period more than two years prior to such financial year. Having addressed the provisions and the several factors necessarily to be considered by the Tribunal for judicially determining the proper legal affect of the facts that stand proved on record in arriving at the ultimate conclusions, we must now turn to the case law relied upon by the parties for deciding the issues under consideration in the facts and circumstances of the case. 5.4 It is an admitted position that the comparable ICC International Agencies is a functional....
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....f its business having offered the said comparable as a functional comparable it should not, now, be allowed to resile from its stated position purely on account of high profitability. Relying on the decision of Navisite India Pvt. Ltd. (cited supra) emphasis has been laid on the proposition that the profits are a result of function and the simple fact of earning high profits shall not make a functional comparable an incomparable. 5.6 Accordingly it is seen that the respective parties have supported their stand for excluding and retaining the said comparable relying on the decisions rendered in American Express and Navisite India Pvt. Ltd. which both have been authored by the Ld. Accountant Member in the present proceedings. 5.7 Notwithstanding the above, in the light of the respective stands of the parties before the Bench on the facts and circumstances of the case, we hold that as profit is a result of function, accordingly the approach to purely be guided by high profits or low profits for the purposes of seeking an exclusion of a comparable has to be avoided. We further hold that the said approach is an anathema to the Indian Transfer Pricing Rules and provisions as adequa....
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.... to be considered and verified and cannot be outrightly rejected taking a specious plea that the comparable was proposed by the assessee itself. As examined in the earlier part of this order the Statutory Rules specifically mandate that the data for two years prior to the year in which transaction took place can be considered if it is revealed that these facts could have an influence on the determination of transfer prices in relation to the transactions being compared. It has also been seen that sub-Rule (3)(i) requires a certain degree of comparability vis-à-vis the differences remaining and clause (d) of sub-Rule (2) of Rule 10B amongst others mandate that conditions prevailing in the market include amongst others criteria a consideration of laws and Government orders is force at the relevant point of time. 5.10 We are of the view that the assessee cannot be barred from pleading for the exclusion of a comparable when it pleads the existence of extra-ordinary circumstances. The existence of such a fact would make a specific period creating extraordinary circumstances in the case of a functional comparable an incomparable. The argument that since it was proposed by the a....
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....ther of the assessee or the Revenue. No case law is required to appreciate the basic principle that what cannot be taken as a comparable under the provisions of the Act cannot became a comparable just because of the admission of the assessee. Once a plea is raised, which prima facie appears to be bona fide and is found to be supported by facts, the same necessarily needs to be considered. We are firmly of the view that too hold otherwise would defeat the very purpose of having Appellate Forums if on the mere proposal of a functional comparable by the assessee it is to be held as a comparable ignoring facts to the contrary. Whenever the comparability of a comparable company is called into question then it is the duty of the Court to apply its mind and come to a conclusion, on a due consideration of the facts whether it is a comparable or not a comparable and accordingly disposal of the case by blindly placing reliance on admission or waiver by the assessee or the Revenue to out minds cannot be said to be a proper discharge of judicial function. We do not see any logic in persuading ourselves to come to the conclusion that de-horse the data in the public domain the assessee, after ha....
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....ted attention to form no-35A which contains the objections before the DRP which are placed on pages 27-93 in the appeal set. Specific attention was invited to paper book page 43 internal page 17 para 5.2.9 wherein the assessee had suggested the following 4 comparables companies applying the very same filters of the TPO, these are:- i. Relic Technologies Limited ii. Killick Agencies & Marketing Limited ("KAML") iii. Publicity Society of India Limited ("PSIL") iv. NYK Line (India) Limited ("NYK") 6.1 It was submitted that the DRP has erred in holding that additional evidence cannot be entertained. The fact of non-admission of fresh evidence is evident from the order of the DRP placed at pages 95-100 in the appeal set in specific para 4.6 internal page 6 (page -100 of the appeal set). Apart from this fact, it was also submitted that a perusal of para 4.1 internal page-3 (page 97 of the appeal set) would show that the Remand Report had been sought from the TPO which was not considered by the DRP on the reasoning that fresh comparables could not be taken at that stage. This....
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.... and it is the assessee who has come up with the comparable which were considered to be functionally comparable and as such the need for addressing fresh comparable at this stage was questioned. Accordingly it was his submission that Ground no-3 deserved to be dismissed. 6.3 In reply, the Ld. AR contended that after having called for the Remand Report, the DRP was not justified in not considering the same. It was his submission that the comparables have been arrived at after applying the filters of the TPO and the order of the ITAT in the case of ShahRukh Khan v. DCIT in ITA 202/Mum/2003 placed at Serial No.-11 page 237 of the paper book supports the case of the assessee. 7. We have heard the rival submissions and perused the material available on record. While considering the ground, we have also been called upon to adjudicate upon the action of the DRP in not considering the 4 comparables which came up as a result of the assessee applying the filters upheld by the TPO which the assessee proposed before the DRP. Admittedly these comparables were not furnished before the TPO and were furnished by the assessee before the DRP. Briefly the objection posed on behalf of the assess....
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....cer] has been allowed a reasonable opportunity- (a) to examine the evidence or document or to cross-examine the witness produced by the appellant, or (b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant. (4) Nothing contained in this rule shall affect the power of the [Deputy Commissioner (Appeals)] [or, as the case may be, the Commissioner (Appeals)] to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271." (emphasis provided by the Bench) 7.1 A perusal of the same shows that the assessee is not barred even at the Appellate stage before the CIT(A) to seek permission to produce additional evidence which the Rules mandate can be ....