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TMI Blog2012 (12) TMI 1060X X X X Extracts X X X X X X X X Extracts X X X X ..... he debit note in respect of the expenses was also received during the year under consideration therefore, the expenditure has been crystallised during the year under consideration. The CIT(A) has allowed the claim of the assessee by considering both the AYs . Therefore, in the facts and circumstances of the case, we do not find any error or illegality in the order of the CIT(A), X X X X Extracts X X X X X X X X Extracts X X X X ..... e was found to be at arm's length. Consequently, the CIT(A) has deleted the adjustment of ₹ 1,19,31,647/- on this account. 4 Before us, the ld CIT(DR) Shri Ajit Kumar Jain has submitted that the assessee is engaged in the activity of marketing services to its Associated Enterprises (AE) in India and outside India. The assessee provides application research and technical services to its various AEs in the Asia-Pacific Region at the R&D centre at Bangalore. The ld DR has pointed out that the assessee has used six comparables and three years data were used for comparables and weighted mean was computed at 12.96%. He has referred the details of international transactions and benchmark to show that the assessee has used two years data for its own margin and multiple years' data of the comparables for computing the weighted average margins of the comparables. Whereas the TPO used single year data as provided under the law. The ld DR has referred the order of the TPO and submitted that the TPO has rejected two comparables namely Biotech Consortium India Ltd and ADS Diagnostics for the reasons that these companies are persistently making losses and therefore, the TPO has rightly rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh profit making unit cannot be eliminated from the comparables unless there are specific reasons for eliminating the same, which is other than the general reasons that comparable has incurred loss as abnormal profit. He has also relied upon the decision of this Tribunal in assessee's own case for the Assessment Year 2006-07 as well as the decision of the Bangalore 'A' Bench of the Tribunal in ITA No. 227/Bang/2010 in the case of 24/7 Customer Com Pvt ltd vide order dated 9th Nov 2012 and submitted that the Tribunal has taken a similar view by following the decision of the Tribunal in assessee's own case for the AY 2006-07. He has also relied upon the order dated 19th Oct 2012 of the Bangalore Bench of the Tribunal in the case of ITO vs M/s Nextlink India P Ltd in 454/Bang/2011 and submitted that the Tribunal has dealt with similar issue of super profit making comparables and observed that net margin of 24% was arrived at after taking into account both 40% and also 2% which is lowest in the relevant industry. 40% profit in the ITES industry cannot be held to be extra ordinary or super profit. He has also relied upon the order of the Tribunal in the case of M/s B P India Services P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be given for taking such action. 4.6 Even, prior to make any adjustment to the ALP, the assessee should have been given an opportunity to rebut the material sought to be relied upon by the TPO. The ld AR has further submitted that loss making companies, which are rejected by the TPO are not abnormally and even as per the OECD guidelines, the same cannot be rejected as a comparable merely on the ground of having negative returns. Even otherwise, the TPO rejected two comparables namely Biotech Consortium India Ltd and ADS Dianostics on the ground of consistent loss maker whereas as per the annual account and other records, it is evident that these two companies namely Biotech Consortium India Ltd and ADS Dianostics are not consistently loss making and in fact made profits in the year ending 31.3.2002. 4.7 The ld AR has further submitted that the other two comparables namely Alphageo (India) Ltd and Vimta Lab Ltd which were rejected by the CIT(A) on the ground of extra profit making companies as computed by the TPO at 51.35% and 61.78% respectively. Apart from highly and abnormally profit making companies, these companies are otherwise incomparable because of vast difference of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio of comparables by taking one year/current year data and arrived at the average ratio of 36.19% after rejecting two of the comparables companies on the ground that these were consistently making losses. The details of the comparables selected by the assessee, operating profit ratio calculated by the assessee and by the TPO are as under: Company Name OP/TC assessee's calculation OP/TC as calculated by this office Remarks 1 Alphageo(India) Ltd 37.03% 51.35% 2 Biotech Consortium India Ltd -17.05% Rejected 3 Tata Projects Ltd - -2.99% 2.34% 4 ADS Diagonstics - -0.89% Rejected 5 N G Industries Ltd 28.67% 29.28% 6 Vimta Labs Ltd 33.01% 61.78% Average 12.96% 36.19% 5.2 On appeal, the CIT(A), though accepted the action of the TPO so far as taking single year i.e. current year data instead of multiyear data for the purpose of calculated the operating profit rate of comparables; however, the CIT(A) has held that when the loss making comparables are rejected, then on the same analogy, the high margin comparable companies are also be eliminated. The CIT(A) had fortified this view by the concept of taking the inter-quartile range of comparable set. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which loss making units are excluded, we, in principle, do not dispute this proposition. The various case laws relied upon by the assessee lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. If similar reasons existed in the higher profit making unit, then, it is for the assessee to bring out those reasons and seek exclusion of the same. A general argument that, you have to exclude units which have high profit range, in case you exclude units which have made loss is a general submission which cannot be accepted. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Thus, this ground i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was furnished by the assessee, it was the turn of the TPO to find out whether such cases were, in fact, comparable or not and if not, then to exclude them after showing how these were not comparable. The Id. CIT(A) was not empowered to order the exclusion of two high profit cases without showing that these were not comparable as per the relevant considerations, which we will discuss infra. 12.4. A case is a comparable when it satisfies the prescription of Rule 1OB(2), which is as under: Rule l0B (2): For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, remitted the matter to the AO for de novo examination of the assessee's claim in this regard. Thus it is palpable that the decision of the case is not as has been projected, that the special bench of the tribunal ordered for the exclusion of high profit rate case from the list of comparables supplied by the assessee. On the contrary, we find that it remitted the matter to the AO for examination of the claim as to whether such high profit case could be excluded. 12.8. Adverting to the facts of the instant case it is noted that the Id CIT(A), without considering any data of HT and DT or comparing it with the assessee's facts, simply ordered for elimination on sole the reason of their having high profit margins. He failed to test the facts of those cases on the touchstone of the mandate of sub-rule (2) read with sub-rule (3) of rule l0B. As such we are not inclined to uphold the impugned order on this score." 6.2 As held by the Co-ordinate Bench of this Tribunal that only if the higher or lower profit ratio resulted on account of the effect of the factor given in Rule 10(B)(2) r.w.r (3), such case was deserves omission from the comparable list and therefore, even higher profit r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO was comparing cases like Infosys, Wipro, etc. where the turnover was more than 10 times that of the assessee or the profit margin was abnormally high. In the case of Exxon Mobile Company India Pvt Ltd Vs. DCIT (ITA No.8311/Mum/2015 dt.10.6.2011), the Income Tax Appellate Tribunal Mumbai held that: "A comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that the comparable has incurred loss or made abnormal profits." Further, India TP Rules specifically deviate from OECD guidelines in this aspect and specify the Arithmetic Mean for determining ALP. In the Quartile Method, the companies that fall in the extreme quartiles get excluded and only those that fall in the middle quartile are retained for comparability thereby automatically eliminating outliners whereas in the Arithme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata and without going into the details whether the loss is because of factors as prescribed under Rule 10B(2) r.w. sub rule (3) is not justified. 7.1 Similarly, the elimination of two more comparables by the CIT(A) on the ground of high profit making companies is also not inconformity with the provisions of law. Further, the concept of inter-quartile range of the comparables set is not recognized in the Indian Income Tax Law because when mean average of the comparables is taken, then it neutralized the effects of all the extreme cases. Accordingly, the order of the TPO/AO as well as the CIT(A) are not sustainable and hence, set aside. We, therefore, remit the issue to the record of the Assessing Officer for examination of the same and decide the issue afresh as per law. 8 Regarding back office support services, the assessee has shown the margin at 13.59% by using two years data. The assessee has used TNMM as most appropriate method and operating profit as the Profit Level Indicator (PLI). The assessee has selected 16 comparables and computed weighted mean by using three years data of the comparables at 13.79%. The TPO has rejected ten comparables; 4 on the ground of persistent lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." vi) A plain reading of this rule makes it clear that the data relating to the financial year only has to be taken. As an exception, the rule also provides that the data of two years prior to the financial year may be taken, only if, such data reveals the facts which could have influenced the determination of transfer pricing. When the assessee wants to consider previous year's data, then the burden is on the assessee to demonstrate that the previous year's data contained certain facts which would influence the determination of transfer pricing. In the case on hand, no such evidence is laid by the assessee. A general argument is made that, taking more than one year data, would give a better comparable. The rule does not provide for general submissions. In the absence of the assessee specifically demonstrating that the data of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed this amount for the AY 2003-04, as a matter of abandoned precautions, the CIT(A) has decided this issue in paras 2.9 of his order for the AY 2003-04 as under: "2.9 I have perused the facts as well as history of this issue. It is observed that the issue of global support service charges was examined by the TPO while carrying out scrutiny for Assessment Year 2004-05 and no adjustment was made. This was prior to the action of the Assessing Officer. TPO is a senior and specialises in handling International Transactions between Associated Enterprises as he is dedicated for the work only. Once the same was held to be at arms length, it was nor fair and proper to disallow it under general provisions and that too without calling for any evidence or bringing any adverse material on record. The action of the Assessing Officer is arbitrary. However as the charge had crystallised in the FY 2003-04 relevant to Assessment Year 2004-05, the matter has been dealt at length and decided in appellants favour in that year on merits." 9.3 It is observed by the CIT(A) that the charges has crystallised for the FY 2003-04 relevant to AY 2004-05 and the matter has been dealt at length and decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure is not doubted either by the Assessing Officer or the TPO. Even otherwise, there is sufficient authority for the proposition that an expenditure which has crystallised in the particular year does not constitute a prior period item and is required to be allowed as a deduction. In this connection, reliance is placed on the following decisions:- i) Saurashtra Cement and Chemical Industries Ltd. v. CIT - 213 ITR 523 ii) CIT v. Tamilnadu Dairy Development Corporation Ltd.250 ITR 273 ii) Commissioner of Income-tax v. Phalton Sugar Works Ltd. -162 ITR 622 8.1. In the decision of the Gujarat High Court in 213 ITR, it has been held on page 531 as under: "Having considered the material on record, we do not find any justification for the disallowance of the claim of the assessee on such an abstract proposition. Merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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