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TMI Blog2011 (1) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... adopted the Transactional net margin method (TNMM) as the most appropriate method for determining the arm's length price for the above mentioned international transactions. The Assessee had identified certain companies as comparables in relation to the present international transactions. These companies were engaged in the business of providing R&D and other business support services. In this regard, the Assessee submitted that it had conducted a search for companies engaged in the business of R&D; however, since it did not get adequate number of comparables, the search had to be widened. Hence, a search was conducted for companies that performed similar functions at a broad level. Accordingly, comparables providing other business support services were selected. The assessee also submitted that financial data for the FY 2003-04 for all the comparable companies was not available at the time of undertaking the transfer pricing study. Hence, financial data for FY 2001-02 and FY 2002-03 was used for some comparables. Based on the analysis, the arithmetic mean of the margins earned by the comparable companies was worked out at 8.59 percent on operating cost. During the FY 2003-04, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the search process was accordingly widened by using keywords like "Market research services", "commission agent's services", "legal services", "advertising", "other consultancy", etc. which threw inter-alia the said five comparables. It was further submitted that TNMM requires that net margins from an international transaction should be compared with net margins from an uncontrolled transaction. It does not require product-wise/service-wise product comparability. Given that under TNMM, net margins are compared, the method is more tolerant towards such differences. It was submitted that this view is supported by OECD guidelines of transfer pricing and OECD draft on comparability wherein it is indicated that for TNMM, more emphasis should be put on functions similarity rather that on product similarity. It was contended that in case of TNMM, it is thus important to look for comparables which perform similar functions, assume similar risks and use similar assets and product comparability is not relevant. 5. It was also submitted on behalf of the assessee before the learned CIT(A) the search strategy and methodology adopted by it was not challenged by the AO. The same was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that it was never the case of the TPO/AO that this comparable is functionally different or that there is any difference in the business/functions of Ujjwal Limited since last year. It was contended that the rejection of Ujjwal Limited as comparable by the TPO/AO on the ground that it is functionally different thus is erroneous. 7. With regard to exclusion of Kitco Limited as comparable, the Assessee submitted before the learned CIT(A) that in order to arrive at the correct arm's length price, it would be inappropriate to ignore comparable companies incurring losses, since doing so would amount to cherry picking. As per the proviso to sub-section (2) to section 92 C of the Act, where more than one price is determined by the most appropriate method, the arm's length price cannot be tied to the arithmetic mean of the operating margins of only profitable comparable companies in any industry, even when that industry contains some or many unprofitable companies that are equally comparable. The Assessee further submitted that all other companies in the comparable set have positive average operating margins. Further, comparable companies such as Choksi Laboratories and the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore be rejected. Further, the Learned TPO on one hand has excluded loss making entity, Kitco Limited on the grounds of loss making criteria, however on the other hand the Learned TPO has included Vimta Laboratories which is a very high profit making entity. We respectfully submit that in case loss making companies are proposed to be rejected, even high profit making companies like Vimta Laboratories should be eliminated based on the decision of the ITAT, Delhi bench in the case of Mentor Graphics (Noida) (P.) Ltd. (109 LTD 101) which has observed as under:" "We are not taking into account high profit or high loss making companies as comparables."- 9. As regards the action of the TPO/AO in not allowing relief by way of adjustment of (+/-) 5% to the arms length price computed by him while determining the amount of transfer pricing adjustment, the Assessee submitted that as per the proviso to section 92C(2) of the Act, it has the option of charging a price to its associated enterprises, which may vary from the arm's length price by (+/-) 5%. The assessee contended that it should be allowed the benefit of (+/-) 5% variation from the arms length price as per section 92C(2) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emaining the same in the subject year, the same should not have been excluded by the TPO in AY 2004-05. Hence, Ujjwal Limited should be included in the comparable set following the principle of consistency. On the same footing as inclusion of Ujjwal in the comparable set, Vimta Labs (which was a part of the comparable set of AY 2003-04) should be included in the comparable set of AY 2004-05. Judicial propriety demands consistency unless there are compelling for not doing so. There were valid reasons with the TPO for excluding Kitco Ltd. as it was observed that it had incurred losses for all the three years under consideration. This issue has been dealt with in the case of the Assessee in AY 2003-04 and the same order is followed." 12. As regards the claim of the assessee that it should be provided a deduction/cover of 5% and any adjustments if made should be over and above it and not including it, the learned CIT(A) did not find the same to be acceptable and relying on his appellate order in the case of the Assessee for AY 2003-04, he rejected the same. He also rejected the claim of the assessee made during the appellate proceedings for risk adjustment of 5.25% following the rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese four parties were rejected as comparables by TPO merely because functions performed by them were found to be different from the functions performed by the assessee company. He invited our attention to page No. 10 of the CIT(A)'s order where submissions made by the assessee justifying inclusion of the said four cases as comparables has been reproduced by the ld. CIT(A) and strongly relied on the same. He also took us through page No. 55 to 58 of his paper book to point out the various criteria applied by the assessee to select the comparable cases. He contended that other comparable cases selected by the assessee by applying the same criteria was accepted by the TPO/AO mainly because the profit margin shown by them was higher. He contended that these four parties selected as comparables by applying the same criteria however were rejected by them without giving any convincing reasons. 18. The ld. D.R., on the other hand, submitted that the exact nature of the assessee's business has to be taken into consideration to ascertain that the cases selected are comparable or not. He submitted that the important aspect of the assessee's business is consultancy and that too in the field ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in progress, finished goods and consumables hence this clause is not applicable to the company 6. However, the company has physically verified this stock of uniform and printing and stationery at the end of the year" This entity therefore being in the business of providing security guards and labour cannot be treated as comparable to assessee's line of business which is coordinating the R&D and bio-related services provided by Independent Indian companies to the Ivax Group entities. Hence, this entity is found to be not comparable to assessee's line of business. (b) M/s Tanu Health Care Ltd. This entity has returned a sale of about Rs. 12 crores. The sales of this company are from Pharma Division, Finance & Investment Division, Media division. Its other income includes advertising income, loan processing fee, sale of DEPB licences, dividend and interest. In total external sale of Rs. 11.60 crores, the other income as discussed in the previous sentence is Rs. 2.04 crores, sales in Media Division which started this year is Rs. 55 lakh, sales in Finance Division have been shown at Rs. 1.89 crores and sales in Pharma Division have been shown as Rs. 8.95 crores. This company M/s Tannu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices in the field of research and development. Similarly, M/s Times Infotainment India Ltd. was in the business of event management and M/s Tannur Healthcare Ltd. was found to be carrying various business activities including manufacturing and trading of pharma products, trading of shares, dealing in TV serials etc. which was not even remotedly closed or similar to the business of the assessee company. Moreover, the services rendered by these parties were in the non-technical field whereas assessee company was found to be rendering services in the technical field of research and development. As rightly held by the authorities below, the said concerns thus were functionally different from the assessee company and there was no justifiable reason to select the same as comparables for transfer pricing analysis. We therefore find no infirmity in the impugned or of the CIT(A) on this issue and upholding the same, we dismiss ground Nos. 1 & 2 of the assessee's appeal. 21. In ground No. 2, the assessee has challenged the disallowance of benefit of 5% variation claimed by it. After considering the rival submission and perusing the relevant material on record, it is observed that a simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included the same later when the Assessing Officer asked for fresh list of comparables based on latest data. CIT(A) had given a clear finding that Ujjwal Ltd. met the functional test and there is nothing before us to controvert the said finding. Therefore Ujjwal Ltd. cannot be excluded only on the ground that it was not included by the assessee in the original submission when the Assessing Officer himself asked for the revised list based on latest data which by then was available. The order of CIT(A) holding that Ujjwal Ltd. has to be included as a comparable is upheld." 25. As the issue involved in the year under consider as well as all the material facts relevant are similar to that of A.Y. 2003-04, we respectfully follow the order of the Tribunal for 2003-04 and uphold the impugned order of the ld. CIT(A) allowing including of M/s Ujjawal Ltd. as comparable case for transfer pricing analysis. Ground No. 2 of the Revenue's appeal is accordingly dismissed. 26. In ground No. 1 of its appeal, the Revenue has challenged the action of the ld. CIT(A) in deleting the addition of Rs. 40,85,021 made by the A.O. in respect of unrealised foreign exchange gain. 27. After considering the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ld. CIT(A) and allow the relief to the assessee. Ground No. 1 of the Revenue's appeal is accordingly dismissed. 29. During the course of hearing before us, the assessee has moved an application seeking admission of the following additional ground: "The learned CIT(A ) has erred in law and on facts by confirming inclusion of Vimta Labs Ltd. as comparable merely for the reason that the same was taken as comparable by the Appellant in Assessment Year 2003-04, without appreciating differences in Functional-Asset-Risk ('FAR') profile of Vimta Labs Ltd. as compared to the Functional-Asset-Risk (FAR) of the Appellant." 30. In support of the case of the assessee for admission of the above additional ground, the ld. Counsel for the assessee has submitted that the said ground is arising from the impugned order of the ld. CIT(A) and the same as remained to be raised in the original grounds inadvertently. He also submitted that all the required facts for adjudication of the said ground are already available on record and it does not call for investigation into new facts. He has relied inter alia on the decision of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X
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