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TMI Blog2013 (8) TMI 670X X X X Extracts X X X X X X X X Extracts X X X X ..... would consider it "necessary" or "expedient" would depend upon facts of each case. No doubt, even in cases covered by section 92C(3) of the Act, the Assessing Officer may in appropriate cases consider it necessary or expedient to refer the case of the assessee to the TPO for determining the ALP but that does not mean that powers of the Assessing Officer to refer the case to the TPO is restricted to those cases which are covered by section 92C(3) of the Act. Had the legislature contemplated to refer the case of the assessee to the TPO only in the circumstances mentioned in section 92C(3) then the legislature would have to provide such conditions in place of words "necessary" or "expedient" in sub-section (1) of section 92CA. The requirements under both the sections are quite distinct as procedure to be followed in the sections is different. In the above sub-section 92CA(1) there is no reference to section 92C(3) - The CIT(A) has emphasized on the words "the said international transaction under section 92C". These words, only refers to the transaction in respect of which reference can be made to the TPO but the same does not, lead to the conclusion that the requirement of section 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... – Held that:- Data relating to the financial year in which the international transaction has been entered into to be used for computation of Arm’s Length Price - 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 to be tested by using current year data. Only when the current year data does not give a true picture of the affairs and results of the comparables due to existence of some abnormal circumstances, the multi year data can be considered. Use of data by the TPO after the cut off date – Held that:- There is no infirmity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study / documentation Benefit of proviso to section 92C(2) of the Income Tax Act – Held that:- The benefit of proviso to section 92C(2) is available only when the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons in the assessment order as provided u/s 92CA (1) based on 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 ₹ 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 the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning 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 ₹ 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 findings on the other grounds. 4. Ground No. 2 is regarding the validity of reference made by the Assessing Officer to the Transfer Pricing Officer. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 "expedient" would depend upon facts of each case. No doubt, even in cases covered by section 92C(3) of the Act, the Assessing Officer may in appropriate cases consider it necessary or expedient to refer the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) to (3) while determining the ALP under section 92CA(3). The latter part of section 92CA(3) unambiguously states that the Assessing Officer shall "by order in writing, determine the arm's length price in relation to the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aliant 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 at the arithmetic mean of the comparables at 17.87% in comparison to the assessee's profit margin at 8%. Accordingly, the TPO made an adjustment at ₹ 13,41,37,029/-. After receiving the order of the Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 information of a single year is not justified. The TPO has not pointed out any specific reason being abnormal due to which the Punjab Communication Ltd. has suffered losses and therefore cannot be considered as a comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 computed the arithmetic mean of the operating margin of the comparables at 17.87% as under: Sl.No. Name of Comparable Company Updated PLI for FY 2007-08 (%) 1. Valiant Communications Ltd. 13.01 2. X L Telecom and Energy Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 basis that they suffer losses. 3.66 A similar investigation should be undertaken for potential corn parables returning abnormally large profits relative to other potential corn parables. Thus, it is clear that even the loss making or high profit making comparables that satisfy comparability analysis sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ower 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 rejected as a comparable. 34.8 Similar view has been taken by this Tribunal in the case of Net Linx India P Ltd (supra) and Stream International Services P Ltd (supra) wherein it was held that comparables cannot be deleted on the ground of high margin." 16. We do fully agree with the view taken by the coordinate bench in the above case and accordingly hold that a comparable cannot be rejected merely on the ground of high margin. 17. The another objection o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the issue of comparability because the main thrust of the argument of the assessee against the inclusion of Gemini Communication was super normal profit earned by the said company. Therefore, neither the ground of functional non-comparability was seriously raised by the assessee nor it was properly examined by the authorities below. Accordingly in the interest of justice we set aside this issue of functional comparability of M/s Gemini Communication to the record of the TPO for proper examination and adjudication. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout 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 shelters. Therefore, the business profile of the said company is totally different from the assessee. The Ld. DR has filed the details taken from the website of Icomm Tele Ltd. in support of his contention. 23. Having considered the rival submission and carefully gone through the relevant material, we find that the DRP while deciding the issue of inclusion of comparables proposed by the assessee namely Icomm Tele Ltd. and M-Tech Innovations Ltd. has accepted M-Tech Innovations Ltd. as comparables. However, there is no discussion in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to be tested by using current year data. Only when the current year data does not give a true picture of the affairs and results of the comparables due to existence of some abnormal circumstances, the multi year data can be considered. When there is no such abnormal or exceptional circumstances/facts exist for the year under consideration which could have an influence on the results as well as on the determination of transfer prices than the data relating to the financial year in which the international transaction has been entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred 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 data relevant to the previous year in which the international transaction has taken place. The assessee is obliged to maintain the information and documentation as required relating to international transactions as per the specified date so that it can be made available to the TPO or the Assessing Officer or any other authority in any proceedings under the Act. We are, therefore, of the view that there is no infirmity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice 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's length price in relation to the international transaction entered into by the assessee. Accordingly, we do not find any merit in the ground raised by the assessee. The same is dismissed. 33. Ground No. 15 is regarding addition on protective basis on account of AIR reconciliation. We have heard the Ld. AR as well as the Ld. DR and consider the relevant material on record. The DRP has adjudicated this issue in para 26-27 as under: "26. The 12th ground is against adjustment to the income of the assessee on account of AIR reconciliation. The As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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