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TMI Blog2014 (1) TMI 1395X X X X Extracts X X X X X X X X Extracts X X X X ..... g: 1.1 considering data which is not in accordance with Rule 10B(4) and Rule 100(4) of the Income Tax Rules, 1962 for the comparable companies; 1.2 considering wind energy companies (Indo wind Energy Ltd and BF Utilities Ltd) in the comparable set as against the Appellant's business of manufacturing of solar modules; 1.3 considering consolidated financial statement in the case of M/s. BF Utilities Ltd instead of considering standalone financial statement; 1.4 rejecting M/s. Photon Energy Ltd citing reasons that the actual functions of the company was not ascertainable from the annual report of the company; and 1.5 rejecting M/s. Rajasthan Electronics and Instruments Ltd - Electronics & solar segment citing reasons that when direct comparables are available, segment should not be accepted. The Appellant prays that the aforesaid adjustment be deleted. 2. On the facts and in the circumstances of the case, the AO erred in making an adjustment on the total turnover (i.e. controlled as well as un-controlled) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Purchase of Fixed Assets BP Solar Proprietary Ltd., Australia 2,12,589 BP Solar International LLC, USA 2,32,096 BP Solar Espana, SA 4,59,08,100 3. The assessee, in ground no.1 and 2, has disputed the adjustment made with regard to the international transactions undertaken for the export of cells and modules to various A.Es. given in sr. no.2. Under these transactions, the assessee manufactures cells and modules from the raw materials purchased from the A.E. and export the finished products to various A.Es. The aggregate transactions of the export were ' 6,41,49,36,255. For bench marking the margin of these transactions, the assessee had adopted Transactional Net Margin Method (for short "TNMM") as the most appropriate method for substantiating the arm's length price (for short "ALP"). The net margin was shown at 6.80% on cost. For the purpose of comparability analysis in T.P. study report (in short TPR), the assessee had selected seven comparables, with the mean margin of which was arrived at 7.34% and, hence, it was reported that assessee's margin is at ALP as it falls within the tolerance range of +/- 5%. During the course of transfer pricing proceedings, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rgy Systems Ltd., it was stated that they have related party transactions of 37.44% and 50.64% respectively. After raising these objections, the assessee conducted a fresh search and submitted that three more comparables are to be included on FAR analysis as they are good comparables. These companies were as under: - Name of the Company OP/TC Titan Energy Systems Ltd. 8.93% Photon Energy Systems Ltd. 7.74% Rajasthan Electronics & Instruments Ltd. - Segment Electronics and Solar Segment 5.15% 6. The TPO accepted the assessee's contention with regard to the exclusion of Udhaya Semiconductors Ltd. and Websol Energy Systems Ltd. He also accepted one of the comparables from the fresh search given by the assessee i.e., Titan Energy Systems Ltd. However, he rejected the assessee's contention to exclude Indo Wind Energy Ltd. and B.F. Utilities Ltd. on the ground that firstly, the assessee itself has chosen/selected these comparables in its transfer pricing report and secondly, if the data for March 2008 was not available then the data of the company for the financial year of which was ending on 30th June 2008, and other on 30th September 2008, can be very well accepted, as it cove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ared because once there are other comparables which could be bench marked at the entity level, then there is no requirement for comparing on the basis of segmental results of the comparables. Thus, he took following four comparables from the list of the comparables of the assessee for bench marking the ALP. Name of the Comparable F.Y. 2007-08 (OP/OT (%) BF Utilities Ltd. 20.24 Central Electronics Ltd. 4.48 Indo Wind Energy Ltd. 30.26 Titan Energy Systems Ltd. 11.61 Average 16.65 Assessee's PLI 6.80 8. Accordingly, the ALP of the transactions under this segment was determined in the following manner:- Net Sales 909,91,45,631 Total Operating Cost 853,25,59,179 Operating Profit 56,65,86,452 Arm's length mean margin of Comparables OP/OC 16.65 Arm's length profit 142,06,71,103 Arm's length price of sales (116.65% of total OC) 995,32,30,282 Difference being shortfall in sales 85,40,84,651 95% of ALP of sales 945,55,68,768 Transfer pricing adjustment 85,40,84,651 9. The DRP, by an large, rejected the assessee's contention, however, with regard to the year of financial data of Indo Wind Energy Ltd. and B.F. Utilities Ltd., the DRP held that by taking avera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions/exclusions of the comparables have to be based on FAR analysis, and not on the ground that the assessee had selected the comparable initially which has been subsequently demonstrated that such an inclusion were not correct on various counts. The TPO himself has excluded some of the comparables chosen by the assessee after accepting the assessee's objections and, therefore, such a selective approach by the TPO cannot be held to be justifiable. He further brought to our notice that in the assessment year 2009-10, the TPO had issued a show cause notice wherein these two comparables were proposed to be included. However, after entertaining the assessee's detail objections for exclusion based on functional difference, the TPO has excluded these comparables from the comparable listed. Thus, when these comparables have been excluded in the subsequent year based on FAR analysis, then the same cannot be held to be included in this year. 11. As regards the B.F. Utilities Ltd., he submitted that this company is a holding company of various submissions and they are into various kinds of manufacturing. The revenues of all the subsidiary and associates are consolidated and do not give pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO/DRP. 14. On the issue of different financial year, he submitted that the approach of the DRP in taking weighted average of two financial closing is fully correct as once the data for 31st March 2008 is not available, then the approximate data available for the entire year should be taken into consideration. On this issue also, he strongly relied upon the observations and findings of the DRP. Regarding the inclusion and exclusion of the comparable as aforesaid by the TPO in the subsequent year, he submitted that every year is different and the analysis has to be done on the basis of data available for the current financial year. Regarding Rajasthan Electronics and Instruments Ltd., he submitted that the segmental results as placed by the assessee in the paper book does not provide the proper working of the margin and the allocation of the expenses, therefore, the same should not be included. Thus, he strongly relied upon the reasoning given by the TPO/DRP for the exclusion and inclusion of the companies as discussed above. 15. We have heard the rival contentions, perused the relevant findings of the DRP and the TPO authorities below and the material available on record. The o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show the correct arm's length result. Thereafter, it is axiomatic that the taxing authorities/TPO, should scrutinize the assessee's report on arm's length result and the entire process of arriving at the ALP, whether they are based on transfer pricing principles and statutory provisions or not. If he himself founds some irregularity or mistake in any of the process or the steps undertaken, then he is bound to correct in accordance with the settled principles and law. If the assessee points out some mistake or any irregularity in the arm's length result, then it is incumbent upon the TPO to examine and consider the same and if the assessee's contentions are found to be correct or tenable, then he has to accept the same. There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee. The TPO is required under law to analyze every comparables and then only determine the correct ALP based on proper comparability analysis. Thus, we do not find any merit in the contention of the Revenue that simply because the assessee has included these two companies then the assessee is debarred from objecting to the same, if th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been placed in the paper book. These financial data show that the revenue of these companies are mainly from production and sale of solar Photovoltaic modules. Thus, this company is good comparable and is to be included in the comparable list for the benchmarking the transactions. 19. As regards Rajasthan Electronic and Instruments Ltd. (segmental), it is seen from the segmental results (which has been placed in the paper book at Page-384), that it is very difficult to work out the exact margin on OP/TC and also the working of the operating expenses with regard to the said segment. In the absence of proper segmental details for the working of the margin and the operating expenses, we do not find any reason to include the same as comparable in this year. Thus, the assessee's contention of inclusion of such comparable is hereby rejected. 20. In view of the aforesaid discussion, finally, following companies are to be included in the list of comparables. (i) Central Electronics Ltd., as chosen by the assessee and accepted by the TPO; (ii) Titan Energy Systems Ltd. (selected by the assessee in fresh search and accepted by the TPO); a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indra Consulting Engineers Ltd. 28.96% 2. Alphageo (India) Ltd. 41.58% 3. Stup Consultants Pvt. Ltd. 36.72% 4. Semac Ltd. 49.65% 5. Mitcon Consultancy Serices Ltd. 41.21% 6. Kirloskar Consultants Ltd. 21.29% 7. Computronics Financial 38.02% Mean 36.77% 25. The assessee, in response to the show cause notice, objected to the aforesaid comparables which has been dealt by the TPO in Para- 4.8. which the TPO has rejected and held that out of seven companies, six are functionally comparable and after taking the mean margin of six comparables, computed at 36.56% determined the ALP at Rs. 40,04,672 in the following manner:- Receipt for the provisions of services to the A.E. 1,48,12,631 Cost plus margin earned by the taxpayer 7.5% Cost of services 1,37,79,191 Arm's length margin 36,56 Profit earned by the taxpayer 10,33,439 Arm's length profit 50,37,672 Difference 40,04,233 Arm's length value of provision of services 1,88,16,864 Transfer Pricing Adjustment 40,04,672 26. Before us, the learned Counsel submitted that the assessee has not bench marked separately the provisions of services as the assessee's contentions have been that it is direct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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