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TMI Blog2014 (2) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... ra-ordinary circumstances - The existence of such a fact would make a specific period creating extraordinary circumstances in the case of a functional comparable an incomparable - only like can be compared with like and once the existence of unique circumstances is raised by a party even if the comparable was proposed by the said party itself if the party based on information subsequently available in the public domain, is able to show the existence of unique circumstances – thus, there is nothing in law which bars the assessee to move the authorities or the Appellate Forums to look into and seek an adjudication on the issue. A comparable can be taken as a comparable purely and simply only for the reason that it is a comparable and alternately it most definitely cannot be "declared" to be a comparable only on the ground that it has been offered as a comparable by a party to the proceedings ignoring the arguments that it was offered on a mistaken belief of law and facts – there was no statutory or legal impediment in the stand of the assessee as to why the said comparable should not be excluded and also do not see any reason as to why the assessee be saddled with the said compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in law, the DRP/AO/TPO erred in by not exercising its power of making further enquiry under section 144C of the Act and refusing to consider the additional evidence filed by the appellant identifying new companies as comparable. 4. That on the facts and circumstances of the case and in law, the learned TPO/AO/DRP has erred in law by considering a very narrow approach resulting in rejection of certain companies considered comparable by the appellant. 5. The Hon'ble DRP has committed a gross error by endorsing the approach followed by the TPO who has erroneously accepted ICC International Agencies Ltd. a super normal profit making company as comparable. 6. Without prejudice to out other grounds of appeal, the addition to the income of the Appellant has been made without providing for appropriate adjustments for differences in level of working capital employed by the appellant vis- -vis other companies. 7. Without prejudice to out other grounds of appeal, the addition to the income of the Appellant has been made without providing for appropriate adjustments for differences in level of risk undertaken by the appellant vis- -vis other companies. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. In the said background, it was submitted that he would be arguing grounds 3, 4 5. 4. Addressing ground no-5 first, which was stated to be the major ground, our attention was invited to page 1 of the appeal set which contains the order of the TPO passed u/s 92C(3). Inviting attention to para 2 of the same, it was submitted that the AE of the assessee is a Branch office of Panasonic Industrial Pte. Ltd. Singapore ("PIAPL" or ' Head Office') and was established on September 7, 2002 pursuant to receipt of necessary approval from Reserve Bank of India ('RBI'). It was stated that the assessee was further granted a certificate of establishment of place of business in India by the Registrar of Companies on 26.09.2002. The international transactions reported by the assessee in form no-3CEB were as under :- "3. The international transactions reported by the assessee in Form 3CEB are given below:- S.No. Nature of transaction Method used by Assessee Value of transaction Method PLI 1. Provision of support services TNMM OP/OC 70,545,187/- 2. Reimbursement of expenses NA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the remaining 9 companies, only 2 were finally selected for bench-marking purposes. It was submitted that although the assessee had agitated before the DRP the rejection of the comparables however in the present proceedings, the Ld. AR submitted that he would be confining his arguments only to the grounds highlighted in his opening arguments. In line with this stand it was submitted that from the 11 comparables ultimately only 2 comparables were chosen by the TPO i.e. IDC (India) Ltd. as is evident from page 5 6 of the TPO's order. It was submitted that considering the submissions dated 14.10.2011 advanced by the assessee to the TPO two more comparables suggested by the assessee were also chosen namely:- S.No Name of the Company OP/TC 1. TechnieCom Chemie Ltd. 07.32% (calculation reproduced below) 2. ICC International Agencies Ltd. 55.28%(given by the assessee) 4.3 It was submitted that TechnieCom Ltd. was taken as a comparable accepting the arguments of the assessee that during the preparation of the Transfer Pricing Study (hereinafter referred to as the "TP Study/TP Report") there was insufficient f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made remained identical i.e the State Policy and the margins remained high. It was submitted that this is evident from that fact that as opposed to 82.92% profit in 2007-08 assessment year and 55.28% profit in the year under consideration i.e the succeeding assessment year the profit thereafter when the Government policy was not in operation plunged to 6.92% i.e when the special circumstances operating ceased to exist. In the circumstances it was his request that the said comparable be excluded as the onus to establish extraordinary circumstances has been discharged by the assessee. 4.5 The Ld. DR, on the other hand contended that the arguments have no merit as it cannot be wished away that this was a comparable given by the assessee itself and the DRP has rightly held that it cannot be excluded. It was his submission that in a TNMM situation, it is very difficult to find an exact replica of the comparable of the assessee and for this specific purpose the statute and the rules have provided for an arithmetic mean which would ensure that the differences if any would get ironed out and thereafter the safe harbour rules are also available. The said comparable it was his argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination and computation of arm's length price in relation to an international transaction. 5.1 The relevant Rules of the Income Tax Act 1962 relating to the procedure for determination of arm's length price under section 92C need to be referred to and examined. A perusal of the same shows that Rule 10B(1)(a) to (e) are sub-clauses which address various methods by which arm's length price in relation to an international transaction shall be determined. In the facts of the present case since the appropriateness of the method for such determination under sub-clauses (a) to (e) to Rule 10B(1) is not under challenge consequently no further reference to the same is required here. The challenge in the present proceedings is limited to judicially determining the criteria to be adopted for assessing the comparability of an international transaction with an uncontrolled transaction for the purpose of sub-Rule (1) of Rule 10B. Judging such comparability necessarily postulates a determination after careful consideration and deliberation of factor set out in sub-Rules (2), (3) and (4) of Rule 10B which reads as under : "(2) For the purposes of sub-rule (1), the comparability of an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses (a) to (c) Rule 10B(2) which elaborated means an analysis based on contractual terms and conduct of the functions performed, assets utilized and risks assumed by the assessee and the comparables. Role of clause (d) of Rule 10B in the facts of the present case needs a specific elaboration in the context of the present dispute. It is seen that reference in clause (d) is made inter alia to conditions prevailing in the market etc. and in particular specifically include "the laws and the Government orders in force." In view of the requirement of the above Statutory Rules which mandate that in order to judge the comparability of an international transaction with an uncontrolled transaction "shall' be comparable to an "international transaction" which warrants a consideration of not only what is set out in clauses (a) to (c) of Rule 10B(2) but also clause (d) of the said Rule. It is further seen that Sub rule (4) of rule 10B mandates that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction "shall be the data relating to the financial year in which the international Transaction has been entered into". However the statute g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction with an international transaction which generally has to be relating to the financial year in which the international transaction has been entered into and the proviso to sub-rule (4) of Rule 10B enables a consideration and analysis of data which may not pertain to the relevant period if the data reveals facts that it had an influence on the determination of transfer prices being compared provided the data provided is not of a period more than two years prior to such financial year. Having addressed the provisions and the several factors necessarily to be considered by the Tribunal for judicially determining the proper legal affect of the facts that stand proved on record in arriving at the ultimate conclusions, we must now turn to the case law relied upon by the parties for deciding the issues under consideration in the facts and circumstances of the case. 5.4 It is an admitted position that the comparable ICC International Agencies is a functional comparable proposed by the assessee during the proceedings before the TPO which it now seeks to exclude on the ground that the said comparable, though functionally similar, has in the year under consideration shown extraordinary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (cited supra) emphasis has been laid on the proposition that the profits are a result of function and the simple fact of earning high profits shall not make a functional comparable an incomparable. 5.6 Accordingly it is seen that the respective parties have supported their stand for excluding and retaining the said comparable relying on the decisions rendered in American Express and Navisite India Pvt. Ltd. which both have been authored by the Ld. Accountant Member in the present proceedings. 5.7 Notwithstanding the above, in the light of the respective stands of the parties before the Bench on the facts and circumstances of the case, we hold that as profit is a result of function, accordingly the approach to purely be guided by high profits or low profits for the purposes of seeking an exclusion of a comparable has to be avoided. We further hold that the said approach is an anathema to the Indian Transfer Pricing Rules and provisions as adequate safeguards in a TNMM situation have been provided by the Statutory provisions which mandate the consideration of only the arithmetic mean which can iron out the differences which may arise when the comparables show extreme cases. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the data for two years prior to the year in which transaction took place can be considered if it is revealed that these facts could have an influence on the determination of transfer prices in relation to the transactions being compared. It has also been seen that sub-Rule (3)(i) requires a certain degree of comparability vis- -vis the differences remaining and clause (d) of sub-Rule (2) of Rule 10B amongst others mandate that conditions prevailing in the market include amongst others criteria a consideration of laws and Government orders is force at the relevant point of time. 5.10 We are of the view that the assessee cannot be barred from pleading for the exclusion of a comparable when it pleads the existence of extra-ordinary circumstances. The existence of such a fact would make a specific period creating extraordinary circumstances in the case of a functional comparable an incomparable. The argument that since it was proposed by the assessee as such should not be excluded solely on this ground has no merit. To hold so would be not in compatibility with the scheme of the Act as the very purpose of having Appellate Forums would be defeated if it is held that once a function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Once a plea is raised, which prima facie appears to be bona fide and is found to be supported by facts, the same necessarily needs to be considered. We are firmly of the view that too hold otherwise would defeat the very purpose of having Appellate Forums if on the mere proposal of a functional comparable by the assessee it is to be held as a comparable ignoring facts to the contrary. Whenever the comparability of a comparable company is called into question then it is the duty of the Court to apply its mind and come to a conclusion, on a due consideration of the facts whether it is a comparable or not a comparable and accordingly disposal of the case by blindly placing reliance on admission or waiver by the assessee or the Revenue to out minds cannot be said to be a proper discharge of judicial function. We do not see any logic in persuading ourselves to come to the conclusion that de-horse the data in the public domain the assessee, after having proposed a company as a comparable is barred permanently from canvassing to the contrary relying on information and knowledge available in the public domain. We do not see any statutory or legal impediment in the stand of the assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following 4 comparables companies applying the very same filters of the TPO, these are:- i. Relic Technologies Limited ii. Killick Agencies Marketing Limited ("KAML") iii. Publicity Society of India Limited ("PSIL") iv. NYK Line (India) Limited ("NYK") 6.1 It was submitted that the DRP has erred in holding that additional evidence cannot be entertained. The fact of non-admission of fresh evidence is evident from the order of the DRP placed at pages 95-100 in the appeal set in specific para 4.6 internal page 6 (page -100 of the appeal set). Apart from this fact, it was also submitted that a perusal of para 4.1 internal page-3 (page 97 of the appeal set) would show that the Remand Report had been sought from the TPO which was not considered by the DRP on the reasoning that fresh comparables could not be taken at that stage. This fact is evident from para 4.6 of the impugned order which is extended hereunder :- "4.6. The assessee has requested for inclusion of 4 additional comparables. These comparables were neither included in the TP document of the assessee nor did it request to include them as a comparables in the proceedings before the TPO i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort, the DRP was not justified in not considering the same. It was his submission that the comparables have been arrived at after applying the filters of the TPO and the order of the ITAT in the case of ShahRukh Khan v. DCIT in ITA 202/Mum/2003 placed at Serial No.-11 page 237 of the paper book supports the case of the assessee. 7. We have heard the rival submissions and perused the material available on record. While considering the ground, we have also been called upon to adjudicate upon the action of the DRP in not considering the 4 comparables which came up as a result of the assessee applying the filters upheld by the TPO which the assessee proposed before the DRP. Admittedly these comparables were not furnished before the TPO and were furnished by the assessee before the DRP. Briefly the objection posed on behalf of the assessee has been that the DRP on record has sought a Remand Report from the AO and thereafter the DRP has refused to consider the same. The said action is assailed on the ground that it is not permissible in law. Before we deal with the specific objection of the assessee, we deem it appropriate to refer to the facts on record. A perusal of the same shows th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the [Assessing Officer]) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271." (emphasis provided by the Bench) 7.1 A perusal of the same shows that the assessee is not barred even at the Appellate stage before the CIT(A) to seek permission to produce additional evidence which the Rules mandate can be admitted on the fulfillment of the conditions set out in clauses (a) to (d) in sub-rule (1) of Rule 46A. In the facts of the present case, it is seen that the condition set out in clause (c) is fulfilled. The First Appellate Authority while admitting additional evidence is required to pass an order in writing recording the reasons for admitting the evidence as per sub-rule (2) of Rule 46A and thereafter by sub-rule (3) is required to confront the same to the AO. In the facts of the present case the fact that evidence is confronted to the AO and a Remand Report has been obtained and there being no challenge to the absence of reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's objection, has refused to consider the Remand Report on a mistaken understanding of law. As such for the reasons given hereinabove we set aside the conclusion of the DRP and deem it appropriate to restore the issue back to the TPO to consider, the 4 fresh comparables which are stated to have come up applying the search criteria of the TPO. We also deem it appropriate to observe that in the Remand Report the objection has been posed by the TPO on the ground that segmental data etc. were not available. Accordingly we hold that it is for the assessee to make available relevant segmental data to show how the factual situation fits in with the facts of the present case warranting an inclusion of a comparable on which reliance is placed. The mere argument that a comparable has been accepted in some year is not sufficient by itself to warrant an inclusion of such comparable. Hence while restoring the issue, we direct the assessee to address the 4 comparables it seeks to be included backed by segmental data including specific facts and information to support its claim instead of merely reiterating for the inclusion of the 4 comparables stated to be thrown up applying the search ..... X X X X Extracts X X X X X X X X Extracts X X X X
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