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TMI Blog2017 (7) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... s concerned, it is an admitted fact that the said company was engaged in the foreign consultancy but the assessee is not engaged in such activity. Therefore, this company cannot be considered as functionally similar with the assessee, so it was rightly excluded from the list of the comparable. M/s Priya International Ltd. was functionally different from the assessee and should not have been included in the list of the comparable. We, therefore, direct the AO to exclude M/s Priya International Ltd. from the list of comparables and then work out the OP/TC ratio. X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Educational Consultants Ltd. is 3.85% as against 11.78% computed by the TPO. 10. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Agricultural Finance Corporation Ltd. is (-) 6.67% as against 5.34% computed by the TPO. 11. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of IDC India Ltd. is 13.82% as against 14.49% computed by the TPO. 12. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Priya International is 10.69% as against 13.30% computed by the TPO. 13. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the appellant that the OP/TC of the comparables and the assessee need to be computed on the same basis i.e. afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was processed u/s 143(1) of the Act on 25.02.2008. Later on, the case was selected for scrutiny. The AO passed the draft assessment order u/s 144C of the Act on 09.12.2009. Against the said assessment order, the assessee filed objection before the Dispute Resolution Panel (DRP) who passed the order u/s 144C of the Act on 30.08.2010 and dismissed the objection of the assessee. Thereafter, the assessee preferred an appeal to the ITAT Delhi Bench 'G', New Delhi in ITA No. 4912/Del/2010 wherein vide order dated 12.04.2012, the case was restored to the DRP for proper adjudication on all the objection and grounds raised by the assessee. In compliance of the said order, the DRP passed the order dated 30.12.2013 and partly accepted the objections of the assessee. Thereafter, the AO in compliance of the directions issued u/s 144C of the Act by the ld. DRP framed the assessment and passed the impugned assessment order. The assessee is engaged in the business of intending business in chemicals, machinery equipments & parts and in iron ore, the year under consideration is the first year of operation of the assessee. During the year under consideration, the assessee had taken the following in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany was just added to the list of comparables without any reason as is evident from search process explained in Paras 7.4 and 7.5 of this order. Apparently this comparable has been used by the assessee as a result of some search secretly performed and this comparable is in the nature of "Comparable chosen without any search process". One of the filters applied by the assessee in the search process for identifying the comparables was "persistent losses." It is seen from the details furnished in the TP report that except for A.Y. 2004-05, there is no data provided; however on updation it is found that the company was in losses in the last two years. For A.Y. 2005-06, the margins of the company are found to be at (-)61.82% and for the A.Y. 2006-07 the margins furnished by the assessee are at (-) 15%. The assessee in reply dated 06.10.2009 has accepted that the company has negative net profit margin which is what is being considered for working out the ALP. Further the Annual Report of the Company reveals that for the year ending March, 2006 the Income from Operations was ₹ 17.34 Lakhs which was derived from Consultancy. The company has accumulated losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore rejected 3. Ujjawal Limited, As regards the rejection of this company the assessee has referred to its reply regarding its objections to the rejection of persistent loss making comparables. The same is not acceptable as discussed in Para 7.5.ii above. Also the three year margins of the company as provided by the assessee show huge decline in the operating margins with 3.49% in AY 2004-05 to -38.85% in AY 2005-06 and -100% in AY 2006-07. Ujjawal Limited is therefore rejected as comparable of the assessee. 4. IDC India Pvt Ltd, The assessee has sought rejection of this comparable on the basis of RPT of 7.97%. However in view of the Hon'ble ITAT judgment in case of Sony India the RPT being less than 15% and this also being a comparable chosen by the assessee, there is no basis for rejection of this comparable. It is included for calculation of ALP of the assessee. However, CRISIL India which has been shown by the assessee to have related party transactions of over 17%, hence although included in the show cause, is excluded from calculation of ALP of the assessee, on the same logic. 5. As apparent from the product profile table at Para 7.3 above, the three comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Comparables OP/TC 1 Educational Consultants Limited 11.78% 2 Agricultural Finance Corporation Limited 5.34% 3 IDC (India) Limited 14.49% 4 Priya International Limited 13.30% Average 11.23% 8. The TPO worked out average OP/TC margin at 11.23% instead of 10.52% declared by the assessee and proposed the adjustment of ₹ 1,10,02,678/- on accounts of Arm's Length Price as under: Assessee's international transaction of Commission and service income ₹ 114,999,986 Arm's Length Margin ( OP/TC) 11.23% Total Cost of Assessee ₹ 113,866,903 Arm's Length Profit of Assessee at PLI of 11.23 % (A) ₹ 12,784,407 Profit shown by Assessee (B) ₹ 1,781,729 Difference (A-B), to be adjusted ₹ 11,002,678 % variance over assessee's value of transaction is 9.66% 9. The AO on the recommendation of the TPO passed the draft assessment order dated 08.12.2009 and added ₹ 1,10,02,678/- to the total income of the assessee. Against the said draft assessment order, the assessee raised objection before the ld. DRP who rejected the objection relating to exclusion of M/s Besant Raj International Ltd. and M/s Ujjawal Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above facts, we find that the TPO has individually examined each of the comparable, looked into the economic circumstances as to why such comparable was incurring losses and compared the same with the economic circumstance of the tested party, i.e. the assessee. Therefore, we find no reason to interfere with the findings of the TPO and hold that the TPO has appropriately applied this filter. The ground of objection of the assessee in this regard is therefore rejected. As regards Besant Raj International Limited, it may be mentioned that this comparable was not selected by any search process performed on Prowess or Capitaline. This company was just added to the list of comparables by the assessee without any reason as is evident from search process explained in Paras 7.4 and 7.5 of the order passed by the TPO. It is evident that this Comparable has been chosen without any search process. One of the filters applied by the assessee in the search process for identifying the comparables was "persistent losses." It is seen from the details furnished in the TP report that except for A.Y. 2004-05, there is no data provided; however on updation it is found that the company wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsultancy segment are shown at nil. Same position of nil expenses and foreign consultancy income at just 1.87% of the total revenue earned by the company is repeated in the year 2007 when segmental data is available. It is to be noted that a company which has overall profit margin OP/TC as 4% but with very low margins in comparable activities, shows that there is major functional difference or strategic difference in the operations of the company & assessee. Accordingly, the TPO has rejected Capital Trust as a comparable. The DRP upholds the action of the TPO. As regards the rejection of Ujjawal Limited, the assessee has objected to the rejection of persistent loss making comparables. The same is not acceptable as discussed above. Also the three year margins of the company as provided by the assessee show huge decline in the operating margins with 3.49% in AY 2004- 05 to -38.85% in AY 2005-06 and -100% in AY 2006-07. Ujjawal Limited has been correctly rejected by the TPO as a comparable. The DRP upholds the action of the TPO." 12. As regards to the inclusion of M/s Priya International Ltd. as comparable, the DRP also rejected the objection of the assessee by observing as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss as alleged by the TPO which is evident from the Schedule of fixed assets placed at page no. 364 of the assessee's paper book which revealed that there had not been any sale or disposal of fixed assets. As regards to the Capital Trust Ltd., the ld. Counsel for the assessee submitted that the said company had earned income from services, commission, maintenance and other miscellaneous income but the TPO only considered the foreign consultancy segment of the said company and even if the analysis is done on a segmental basis, the fact that a loss in the said segment cannot be a ground to reject the comparable. The ld. Counsel for the assessee submitted that the companies M/s Besant Raj International Ltd. and Capital Trust Ltd. were wrongly excluded by the TPO/DRP from the list of comparables. 16. As regards to the inclusion of M/s IDC India Ltd. and M/s Priya International Ltd. in the list of comparable by the TPO/DRP. The ld. Counsel for the assessee submitted that M/s IDC India Ltd. was engaged mainly into research practices which is evident from page nos. 311 to 334 of the assessee's paper book. It was further submitted that the entire income of the said company amounting to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only limited issue to be adjudicated relates to the exclusion of 2 comparable selected by the assessee, namely, M/s Besant Raj International Ltd. and M/s Capital Trust Ltd. and inclusion of another 2 comparables, namely, M/s Priya International and IDC India Ltd. In the present case, the TPO excluded M/s Besant Raj International Ltd. from the list of the comparables for the reason that the said company was persistent loss maker and of functionally different. In the present case, the assessee itself excluded those companies which had been declared sick or were having negative net worth. However, a company cannot be excluded from the list of comparables if it was a loss making company in view of the decision of the ITAT Special Bench Chandigarh in the case of DCIT Vs Quark Systems (P.) Ltd. (2010) 4 ITR (Trib.) 606 (supra) as under: "Merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purposes of computation of ALP. Where, however, the comparable was a case in which not only functional area was different, but it also had a negative net worth and, moreover, its turnover had no comparison with that of the assessee-company, the exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ading company and earning the revenue on account of sales which is evident from page no. 340 of the assessee's paper book, which is the copy of profit and loss account of this company for the year ending on 31.03.2006 and reveals that M/s Priya International Ltd. was having a sales of ₹ 4,18,49,059/- and cost of material at ₹ 3,12,51,133/- which clearly shows that the said company was mainly a trading company dealing in trade of chemicals. Although the said company was having the commission income of ₹ 1,51,29,001/- but the main revenue was generated from the sales. It is also noticed that M/s Priya International Ltd. was having inventory of furnished goods (chemicals) amounting to ₹ 1,16,83,734/- as on 31.03.2006 which is evident from Schedule-G forming part of the account (copy of which is placed at page no. 344 of the assessee's paper book). On the other hand, the assessee was not engaged either in trading or manufacturing and was earning income only by way of services rendered in accordance with the support activities, therefore, M/s Priya International Ltd. was functionally different from the assessee and should not have been included in the list of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 comparable - thus, the matter remitted back to the TPO for excluding the comparable after allowing the assessee to lay evidence in support of its claim." 25. In view of the above, we do not see any merit in the submission of the ld. DR that once a comparable is taken by the assessee then it is barred from pleading for the exclusion. 26. As regards t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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