TaxTMI 
TaxTMI 
2018 (3) TMI 1565
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.... of the case, the Ld. CIT (Appeals), erred in upholding the exclusion of loss making companies from the set of comparable companies selected by the appellant for justifying the arm's length nature of the international transactions with its Associated Enterprises, even though the Ld. CIT (Appeals)acknowledged the fact that the appellant was in a transition phase and thus migrating to a new business activity in the relevant period and further acknowledgement of the argument that loss making companies should not be rejected merely because they are loss making, after perusing the submissions and documents filed by the appellant before him during the course of the appellate proceedings. 4. That on the facts and in the circumstances of the case, the Ld. CIT (Appeals) on acknowledgement of the fact that the appellant was in a transition phase thus migrating to a new business activity and further acknowledgement of the argument that loss making companies should not be rejected merely because they are loss making, never explored or sought to be explored the functional similarity of the comparables with that of the appellant. 5. Without prejudice to the above grounds, the impugned orde....
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....h its Associated Enterprises (" AEs"). Sl.No. Associated Enterprises Description of Transaction Amount Paid/payable as per books of Accounts(Rs.) Amount received/receivable as per books of Accounts(Rs.) 1. Joy Mining Machinery, UK (a) Sale of Traded spares (b) Commission received (c) Import of finished goods (d) Discount received (e) Advance received 2,16,66,603 2,83,94,403 12,77,232 10,69,578 29,19,710 2. Joy Global Inc., USA Interest on Loan 6,41,559 3. Joy Parntership, UK (a) Sale of Manufactured spares (b) Sale of Traded spares (c) income from refurbishing (d) Income from resource utilization 5,66,007 2,25,55,389 15,52,77814,08,050 4. In view of the provisions of Sec.92, 92C of the Income Tax Act, 1961 ("Act") read with Rule 10B of the Income Tax Rules, 1962 ("Rules"), income arising from international transaction has to be determined having regard to Arms Length Price (ALP). 5. The Assessee filed a Transfer Pricing Documentation Report (TP Report) claiming that the price charged by it or received by it in respect of the international transactions with AE are at Arm's Length as required by Sec.92 of the Act. In this appeal....
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....ervices provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustm....
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....cted two comparable companies (Dee Graves Ltd. and Ricoh India Ltd.) selected by the Assessee in its TP report as according to the TPO loss making companies have to be excluded from the list of comparable companies for comparability of profit margins. After excluding the aforesaid two comparable companies, the TPO determined the GP/VAE of the remaining three comparable companies at 143% and proposed a transfer pricing adjustment amounting to Rs. 50,63,987/- . The final list of comparable selected by the TPO was as follows: Sl.No. Name of the Company GP/VAE 1 Media Video Ltd. 145.83% 2 Positive Electronics Ltd. 108.39% 3 S E S Technologies Ltd. 175.34% Average 143% 10. Based on the adjustment suggested by the TPO in his order, the Assessing Officer ("AO") passed the final AO order on December 29, 2006 adding a sum of Rs. 50,63,987 to the total income of the Assessee. 11. Aggrieved with the order of the AO, the appellant filed an appeal before the CIT(A). The main contention of the Assessee before the CIT(A) was that loss making companies cannot be excluded if they are otherwise comparable based on function, Assets employed and risk....
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....ng the year under consideration. 14. The learned counsel for the Assessee placed reliance on the decision of the Special Bench ITAT, Chandigarh in the case of Quark Systems Pvt. Ltd (38 SOT 307) (CHD) (SB) wherein it was held that a company cannot be merely rejected on the premise that it had incurred losses in the year under consideration. The Special Bench analysed and compared the functions performed and risks undertaken by the company selected as a comparable which was adjudicated. The Special Bench based on the comparability factors rejected the company as it was not comparable to the taxpayer and not for the sole reason that it was merely a loss making company. It was submitted that comparability of companies with that of the tested party has to be done in accordance with Rule 10B(2) of the Rules and the rules do not provide exclusion of a comparable company only on the basis that it was a loss making company. Reliance was also placed on the following decisions, laying down identical proposition as was laid down by the Special bench in the case of Quark Systems Pvt.Ltd., (supra). * Willis Processing Services India Pvt. Ltd[TS-49-ITAT-2013(Mum)-TP], * Exxon Mobil Company In....
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....ot commented adversely on the functional comparability of the two companies that were excluded by him. The TPO has accepted that CPM is the MAM and that the PLI chosen by the Assessee for comparability purposes viz., GP/VAE is appropriate PLI. The only reason for rejecting two comparable companies Dee Greaves Ltd and Ricoh India Ltd out of five was only on the ground of being loss making at the net level i.e. at the Operating Profit level. The fact the two companies that were excluded from the final list of comparable companies were making profits at the gross level is not in dispute. The chart given at paragraph 14 of this order clearly shows that the two companies that were excluded for the purpose of comparability were making profits at the gross level. 18. Where the arm's length price of the international by the assessee is to be determined by applying CPM as MAM then, ALP must be determined with reference to the functions performed, taking into account the assets employed or to be employed and the comparability the risks assumed by the respective parties to the transaction as per rule 10B(2)(b). Rule 10B(3) mandates that a given or select uncontrolled transaction selected in ....