TaxTMI 
TaxTMI 
2017 (7) TMI 198
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.... eye of law and on facts. 4. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in confirming the action of the TPO in rejecting the comparables, Besant Raj International, Capital Trust Limited and Ujjwal Ltd. selected by the assessee on the basis of persistent loss maker and functional comparability. 5(i) On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in confirming the action of the TPO in rejecting the comparable company, M/s Besant Raj International selected by assessee as a comparable on the basis of functional comparability. (ii) That the Learned DRP has erred in confirming the said action of the AO on the basis of the fact that the comparable does not come through the search process, rejecting the contention of the assessee that the same has been identified as a comparable after a comprehensive search strategy adopted by the assessee. 6. On the facts and circumstances of, the case, the Learned DRP has erred both on and in law in confirming the action of the TPO in rejecting Capital Trust Limited as a comparable selected by the assessee rejecting the ....
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....the correct average of OP/TC of the four comparables considered by the TPO comes to 5.42% as against 11.23% computed by the TPO. 15. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the appellant that after correcting the arithmetical inaccuracies in the margin (OP/TC) of the comparables the average margin will be within the adjustment range of safe harbour in terms of the proviso to Section 92C(2) of the Income Tax Act. 16. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in rejecting the contention of the assessee that the comparison of the assessee company who is in its start up phase with these companies at matured stage is not proper without allowing appropriate adjustment for start up cost. 17. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in not giving proper credit of the prepaid taxes while computing the tax liability of the assessee. 18. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in wrongly calculating the amount of i....
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....nformation and sales support services TNMM OP/OC 112,314,434 2. Receipt of services in relation to application system TNMM OP/OC 769,396 3. Reimbursement of expenses incurred AEs on behalf of SIPL TNMM OP/OC 30,356,363 4. Purchase of fixed assets from AE TNMM OP/OC 6,433,704 5. Reimbursement of expenses incurred by SIPL on behalf of AEs 7,922,897 6. The AO made a reference to the TPO to determine the arm's length price in relation to the aforesaid international transactions which were stated by the assessee to be closely linked to the provision of business information and sales support services rendered by the assessee. The assessee had made itself the tested party for transfer pricing analysis and had used Transaction Net Margin Method (TNMM) as the most appropriate method in the TP report. The Profit Level Indicator (PLI) used was Operating Profit to the Total Cost ratio (OP/TC). The assessee had selected following 11 comparables and computed their weighted mean OP/TC margin as 10.52%, using multiple year data: S. NO. Name of Company OP/OC 1 Agricultural finance corpor....
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....This clearly shows that the company which is having persistent losses, different functional profile and a meager turnover of Rs. 17.34 Lakhs cannot be accepted as a comparable for the assessee. The basic premise behind the comparability is comparison between apple to apple. A company which is selling its assets to overcome the financial difficulties cannot be considered comparable with the assessee. Besant Raj International Limited is thus rejected as comparable. 2. Capital Trust Limited: As regards the rejection of Capital Trust Limited on the basis of different functional profile and non maintenance of segmental accounts, the assessee has given a general reply vide letter dated 06.10.2009 objecting to the approach of rejection of comparables based on the actual activities performed by them during the year It is seen that the company offers consultancy services to Foreign Bank, not having their own branches or representatives offices. It appears that the company's foreign consultancy segment was considered comparable to assessee's provision of business support services. However the kind of services in both the situation would be different leading to different func....
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....ted, Epic Energy Limited and Katan Glitter Industries Ltd are totally different in their activities from the assessee. While Ratan Glitter Industries Ltd shows Consultancy Charges of miniscule amount compared to its total earnings, Electronica Machine Tools Limited and Epic Energy Limited have no activity at all which can be called comparable to that of assessee. In reply dated 06.10.2009 to the show cause for their rejection as comparables, the assessee has given a general reply as under: "Your good self as relied'on the business segment which contributes more towards turnover. On this basis the comparables were rejected. The assessee disagrees with the approach adopted by your good self as the same is subjective and difficult to conclude the functional nature. However, without prejudice to the above, adopting the similar approach, Priya International also cannot be held as comparable." The assessee's reply is not acceptable. The revenue earning activities during the year are indicative of the functions performed by the company and qualification of the descriptions provided in the Director's report. Further the financials of a company are the focal po....
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....nd M/s Ujjawal Ltd. and inclusion of Priya International Ltd. in the set of comparable at page nos. 2 & 3 of the order dated 30.08.2010 by observing as under: "We have gone through the relevant records and TPO's order in this regard. The TPO has discussed this issue at length in para 7.6. It is seen that the assessee in its reply dated 06.10.2009 has accepted that Besant Raj International Ltd, has negative net profit margin and that this comparable was not thrown by any search process performed on "Prowess" or "Capitaline" but was added later to the list of comparables as explained in paragraphs 7.4 and 7.5 of TPO's order. The TPO has given detailed reasons for excluding these comparables on page 15 to 17 of the draft order. As regards Priya International Limited the TPO has stated that 1/4 revenue of this company comes from the activities similar to that of the assessee and therefore it cannot be said that functions are not similar to assessee. Hence, we find no reason to interfere with the approach adopted by the TPO in selection of comparables." 10. Against the said order, the assessee preferred an appeal before the ITAT Delhi Bench 'G', New Delhi in....
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.... found that the company was in losses in the last two years. For A.Y. 2005-06, the margins of the company are found to be at (-)61.82% and for the A.Y. 2006-07 the margins furnished by the assessee are at (-) 15%. The assessee in reply dated 06.10.2009 has accepted that the company has negative net profit margin which is what is being considered for working out the ALP. Further, the Annual Report of the Company reveals that for the year ending March, 2006 the Income from Operations was Rs. 17.34 Lakhs which was derived from Consultancy. The company has accumulated losses which is almost 40% of the share capital of the company. This clearly shows that the company which is having persistent losses, different functional profile and a meager turnover of Rs. 17.34 Lakhs cannot be accepted as a comparable for the assessee. The TPO has held that a company which is selling its assets to overcome the financial difficulties cannot be considered comparable with the assessee. Accordingly, the TPO has rejected Besant Raj International Limited as a comparable. The action of the TPO is upheld. As regards the rejection of Capital Trust Limited on the basis of different functional profile ....
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....of the assessee by observing as under: "This comparable has been used by the assessee in its TP study. Accordingly, it is retained in the final set of comparables. The above ground of objection is rejected." 13. In compliance to the direction dated 30.12.2013 issued by the ld. DRP u/s 144C(5) of the Act, the AO passed the impugned order dated 07.01.2014. 14. Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the TPO and the ld. DRP rejected the comparable companies i.e. M/s Besant Raj International Ltd. on the basis that it was persistent loss making and not functionally comparable. It was contended that merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purpose of computation of ALP, unless it is functionally different and has a negative net worth. The ld. Counsel for the assessee referred to page no. 43 of the assessee's paper book which is the part of TP study of the assessee company wherein the companies which had been declared sick or had persistent negative net worth had already been excluded by the assessee. It was submitted that the action of the TPO, which had further been upheld by the l....
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....was further submitted that the entire income of the said company amounting to Rs. 12,17,29,905/- have been earned from research and survey. A reference was made to page no. 325 of the assessee's paper book which is the copy of Schedule 13 i.e. details of service income earned by M/s IDC India Ltd. and it was stated that Schedule 15 of the said company placed at page no. 325 shows that all the direct expenses amounting to Rs. 6,60,04,508/- had been incurred by M/s IDC India Ltd. in relation to research and survey only. However, no income had been earned from those kinds of services. Therefore, the said company was not comparable to the assessee's company and should have been directed to be excluded. As regards to the M/s Priya International, it was submitted that the said company was engaged mainly in trading of chemicals across the country. A reference was made to page no. 340 of the assessee's paper book which is the copy of profit and loss account of the said company which revealed that the income earned by the said company on account of sales and the commission income too was on account of indenting of chemicals i.e. instead of buying in its own account, it had been got the sale....
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....oreover, its turnover had no comparison with that of the assessee-company, the exclusion of such comparable was quite justified." 19. Therefore, in our opinion, the TPO/DRP was not justified in excluding M/s Besant Raj International Ltd. only on this basis that it was a loss making company, particularly when it was functionally the same and was deriving income from consultancy services as in the case of the assessee. Moreover, the TPO wrongly held that this company had sold off its assets to funds its business, the said observation of the TPO is contrary to the facts mentioned in Schedule of the fixed assets (copy of which is placed at page no. 364 of the assessee's paper book) which revealed that the said company has reduced only a sum of Rs. 12,500/- from the office equipment and no other asset was sold off. Therefore, there was no question of funding the business by selling the assets. Since this company is functionally similar with the assessee and making of the loss cannot be criteria for the exclusion from the list of comparables. We, direct the AO to include this company in the list of the comparables. As regards to the exclusion of M/s Capital Trust Ltd. is concerned, it....
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....sessee and should not have been included in the list of the comparable. We, therefore, direct the AO to exclude M/s Priya International Ltd. from the list of comparables and then work out the OP/TC ratio. 21. Vide Ground Nos. 9 to 13, the assessee has stated that there is calculation mistake in working out OP/TC of Educational Consultants Ltd., M/s Agricultural Finance Corporation Ltd., M/s IDC India Ltd. and M/s Priya International Ltd. The ld. Counsel for the assessee had given the calculation of the PLI (OP/TC) in respect of all the aforesaid companies (which are placed on record) and submitted that the direction may be given to the AO to verify the said calculations and consider the correct one while working out the average for the purpose of Arm's Length Price. 22. The ld. DR although supported the orders of the authorities below but did not object if the direction is given to the AO to verify from the records and consider the calculations given by the assessee. 23. After considering the submissions of both the parties and the material available on the record, we direct the AO to verify working given by the assessee in respect of Educational Consultants Ltd. and M/s A....