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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 ..... then only determine the correct ALP based on proper comparability analysis - The assessee has object to the comparables taken by hinself if he have cogent reasons. In respect of Indo wind Energy Ltd and BF Utilities Ltd - these comparables were taken on the basis of data of three financial years which is not permissible under the law. Even the approach of the TPO and the DRP for taking the financials for June and September 2008 is not correct as it is not in conformity with the provisions of rule 10B(4) - Once the financial result for the 31st March 2008 of these comparables are not available, then the same should be excluded from the list - At the functional level also, these companies are entirely different from the assessee - These companies are into business of generation of wind energy whereas the assessee is manufacturing the parts which are used in the generation of solar energy - These two functions are entirely different. M/s. BF Utilities Ltd - 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 proper result of the segments - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing grounds: 1. On the facts and circumstances of the case, the learned Deputy Commissioner of Income-tax, Range-7(3), Mumbai ('the AO'), erred in making an adjustment of Rs. 78,50,77,579 in relation to the international transaction relating to the export of cells and modules made to Associated Enterprises. In doing so the AO erred in the following: 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mport of raw materials consumables BP Solar Proprietary Ltd., Aus. 1,34,01,66,094 BP Solar Espana, SA 72,00,09,037 BP Solar International Inc., USA 64,13,02,028 4. Reimbursement of expenses (paid/payable) BP Solar International LLC, USA 98,82,791 BP Solar Espana, SA 5,87,365 5. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, has used the financial data for the year ending 30th June 2007, for the Indowin Energy and for the year ending 30th September 2007 for B.F. Utilities Ltd., whereas the TPO has proposed to use the financial results for the year ending 30th June 2008 and 30th September 2008 which is not in conformity with Rule 10B(4) of the Income Tax Rules, 1962; secondly, from the financial data for B.F. Utility Ltd. the operating margin should be taken on segmental basis i.e., it has to be calculated from stand alone financial of the manufacturing segment and not for the whole entity result and lastly, with regard to Udhaya Semi Conductors Ltd. and Websol Energy 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 Segme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly, for Indo Wind Energy Ltd., the profit margin for financial year ending 30th June 2007 is 31.35% (OP/OC) and for year ending 30th June 2008 is 29.17% (OP/OC) with an average mean OP/OC of 30.26% between these two year-ending dates ,which is being adopted a the margin of the company for the F.Y.2007-08, for determination of ALP." 7. Insofar as the assessee's suggestion of inclusion of three new comparables was concerned, the TPO accepted one comparable, that is, Titan Energy Systems Ltd. and in case of Photon Energy Systems Ltd., he held that financials are not available in the public domain. For Rajasthan Electronic and Instruments Ltd., he held that the segmental details cannot be compared 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the list. Apart from that, he submitted that at the functional level also, these companies are entirely different from the assessee. These companies are into business of generation of wind energy whereas the assessee is manufacturing the parts which are used in the generation of solar energy. These two functions are entirely different. He submitted that even before the TPO the assessee had made very elaborate submissions showing the functional differences between the assessee's manufacturing business and between these two companies who were purely into wind energy generation. These submissions are given in the paper book from Page 118 to 123. The TPO or the DRP has not given any adverse comment or rejected the assessee's submissions which was based on the functional differences but have only included these comparables on the ground that they were included by the assessee in its TPR. He submitted that the inclusions/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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B.F. Utilities Ltd. should be excluded and Photon Energy Systems Ltd. and Rajasthan Electronics and Instruments Ltd. should be included in the final list of comparables. 13. Per contra, the learned Departmental Representative, Mr. Ajit Jain, submitted that the assessee should not be allowed for cherry picking as in the initial transfer pricing report, it has included these two companies namely, Indo Wind Energy Ltd. and B.F. Utilities Ltd. on the basis of FAR analysis. Once the operating margin was not suitable due to financial data of 2008, the assessee is pleading that the same should be excluded. This should not be permitted. He relied upon the decision of the Tribunal, Mumbai Benches, in Kansai Nerolac, ITA no.3858/Mum./2006, wherein the Tribunal has held that the assessee cannot allow to back track its own comparables without any cogent reasons. Regarding functional comparability, he relied upon the order of the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere not correct, it cannot be said that the assessee is out rightly precluded from raising such objections. The ultimate aim of the transfer pricing provisions is to determine the appropriate ALP, which can be done only by bench marking with the proper comparables based on FAR analysis and under the prescribed methods. If in the course of the proceedings, it is found that certain comparables do not stand the test of functional analysis or for some other reasons, then the same should be excluded and we do not find any reason that they should to be included simply because the assessee had included the same initially. If the cogent reasons have been given by the assessee for excluding the same, the same should be considered. The initial onus or duty is cast upon the assessee to carry out the selection of proper comparables based on FAR analysis and by adopting suitable transfer pricing method and then analyse its transaction 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 principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Indo Wind Energy Ltd. and B.F. Utilities Ltd., are to be excluded from the list of final comparables. 17. Regarding other submissions of the assessee on the segmental difference of the company, B.F. Utilities Ltd. and the data for the financial year ending 30th June 2008 and 30th September 2008 are not taken into consideration in view of our above findings. 18. Now coming to the inclusion of Photon Energy Systems Ltd., it is seen that the said company is engaged in the manufacturing of solar photovoltaic modules which is directly comparable to the products manufactured by the assessee company and, hence, it is a direct functionally comparable. Moreover, this company has also been included as comparable by the TPO in the assessment year 2009 10 based on functional similarity and other factors. The financial data for the current financial year i.e., 2007 08 is also available which were placed before the DRP and has also 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 benchmarkin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 1.48 crores. The assessee has aggregated the transactions under the category of provisions of engineering services with the remaining transactions at the entity level for the purpose of bench marking the I.T. Therefore, the assessee had not separately bench marked this transactions. The expenditure incurred by the SESI which is engineering services division rendering engineering services to the group companies across the world, are marked up by 7.5% and charged to the A.E. to whom the services have been rendered by the assessee. The TPO held that the SESI is a different division and separate from solar cell manufacturing division and, therefore, the same cannot be linked to the manufacturing segment for the purpose of bench marking the ALP. To bench mark the same, the TPO selected following seven comparables with operating margins: Sl.no. Company Name OP/TC 1. Mahindra 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e being carried out by a separate division. Even while selecting the comparables for manufacturing segment, the assessee has not taken into consideration the services rendered to its A.E., therefore, such a segment has to be separately bench marked. From the record, it is seen that the TPO has not given any criteria for the search of his comparables and has not examined the comparables submitted by the assessee. The assessee should be given proper opportunity to explain its case as to how these transactions can be bench marked for proper determination of the ALP. Accordingly, we are of the considered opinion that this matter should be restored back to the file of the Assessing Officer/TPO to adjudicate this issue afresh and in accordance with the provisions of law and after providing due and effective opportunity of hearing to the assessee. Thus, ground no,3 raised by the assessee is treated as allowed for statistical purposes. 29. The assessee, in ground no.4, has requested for granting credit of tax deducted at source which has not been done by the Assessing Officer. 30. The learned Counsel submitted that the A.O. has given credit of TDS of Rs. 1,34,30,097, as against the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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