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TMI Blog2018 (1) TMI 1383X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Plan, the action of AO in the present case, where the value of international transactions was to the tune of ₹ 10.42 crores, in not making any reference to the TPO is correct and no fault can be found with the exercise of jurisdiction by AO, under the said facts and circumstances. It may also be put on record that revised Instructions were later issued dated 16.10.2015 being Instruction No.15 of 2015. Thus, the additional ground of appeal raised by the assessee is dismissed. Selection of comparable - functinal profile - deselection of loss making company - Held that:- The accepted principle for benchmarking international transactions is to select the companies which are functionally comparable to the assessee and benchmark the international transactions undertaken by the assessee by comparing the margins shown by the assessee with the margins of selected external comparables. The concern CG-VAK Software and Exports Ltd. no change in the functionality of said concern, hence the said concern passes the first threshold limit of being functionally comparable. The second aspect which had weighed with the Assessing Officer in rejecting the said concern is losses shown by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has erred in proposing and the Dispute Resolution Panel ('the DRP') has erred in confirming the proposed addition to the Appellant's total income of ₹ 1,90,45,982 based on the provisions of Chapter X of Income-tax Act, 1961 ( the Act ). 2 On the facts and circumstances of the case, and in law, the learned AO erred in and the Honourable DRP has further erred in confirming the action of the Ld. AO of disregarding the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules') and thereby rejecting the transfer pricing documentation maintained by the Appellant. 3 On the facts and circumstances of the case, and in law, the learned AO erred in and the Honourable DRP has further erred in confirming the action of the Ld. AO of not providing any reasons to show that the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied before making an adjustment to the income of the Appellant. 4 On the facts and circumstances of the case, and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther erred in confirming the action of the Ld. AO of not allowing an adjustment for the difference between the level of risk borne by the comparables and the appellant as well as other factors as mandated by the provisions of Rule 10B(1)(e)(iii) of the Income-tax Rules, 1962. 12 On the facts and in the circumstances of the case, and in law, the Ld. AO has erred in and the Honourable DRP has further erred in confirming the action of the Ld. AO of considering non-contemporaneous single year data for the margin computation of the comparables which was not available at the time of conducting the TP study; and disregarding contemporaneous multiple year data which was considered by the appellant in accordance with the provisions of Rule 10B (4) of the Income-tax Rules, 1962 ('the Rules'). 13 On the facts and circumstances of the case, and in law, the learned AO erred in and the Honourable DRP has further erred in confirming the action of the Ld. AO of not allowing the appellant the benefit of 5% variation envisaged in the proviso to Section 92C(2) of the Act. 14 On the facts and circumstances of the case, and in law, the learned AO erred in and the Honourable DRP has f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that PLI of assessee on OP/OC was 5.30%. The Assessing Officer selected another set of comparables which are enlisted at pages 8 and 9 of the draft assessment order and the mean margins of said comparables worked out to 26.35%. The Assessing Officer in the assessment proceedings thus, show caused the assessee as to why the adjustment should not be made on account of difference between the margins shown by the assessee and average margins of comparables selected by the Assessing Officer. The assessee objected to the proposal made by the Assessing Officer. However, after discussing margins of various concerns and the additional companies which were identified by the Assessing Officer, final set of comparables was selected by the Assessing Officer, which is tabulated under para 15 at page 28 of the draft assessment order. The mean margin of comparables worked out to 26.35% and the PLI after working capital adjustment was 23.87%. Accordingly, the Assessing Officer made an adjustment of ₹ 1,90,45,982/- in respect of international transactions with its associated enterprises. The Assessing Officer passed the draft assessment order proposing total income of assessee accordingly, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of appeal was purely a question of law and does not require any further enquiries into the facts. 9. The learned Authorized Representative for the assessee further made reference to the CBDT s Instruction, copy of which is placed at pages 2 to 4 of the Paper Book. He further relied on the ratio laid down by the Hon ble High Court of Delhi in Sony India Pvt. Ltd. Vs. CBDT (2006) 288 ITR 52 (Del), wherein the constitutional validity of Instruction No.3 dated 20.05.2003 was challenged. He further placed emphasis on the ratio laid down by the Mumbai Bench of Tribunal in the case of M/s. SG Asia Holdings India Pvt. Ltd. Vs. ACIT in ITA No.2399/Mum/2009, relating to assessment year 2005-06, order dated 22.04.2015, wherein it was held that where the Assessing Officer breaches the mandatory instruction issued by the CBDT, his order was bad in law to the extent of breach. The learned Authorized Representative for the assessee fairly admitted that no such issue was raised before the DRP. He referred to the draft assessment order and the final assessment order and pointed out that total international transactions on account of engineering and back office and web based services was to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiary of Schlumberger Oilfield Holding Ltd., British Virgin Island, which is engaged in providing technical support services i.e. engineering back office services to various group companies outside India. As per the transfer pricing document furnished for the year under consideration, the assessee had entered into international transactions with its associated enterprises totaling ₹ 9,71,79,160/-. The additional revenue recognized as prior period items totaled to ₹ 70,97,513/-, hence the total transactions undertaken by the assessee for the year under consideration were ₹ 10,42,76,673/-. The first jurisdictional issue raised by way of additional ground of appeal is challenging the jurisdiction of the Assessing Officer in making transfer pricing adjustment, wherein the said adjustment was made by the Assessing Officer without any reference to the TPO. The additional ground of appeal raised by the assessee is purely legal and does not involve any investigation of facts, hence the same is admitted for adjudication. The case of assessee before us is that as per Instruction No.3 of 2003 issued by CBDT on 20.05.2003, the Assessing Officer was to make reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons undertaken by the assessee is to be determined, then such exercise can be carried out by the Assessing Officer himself. 14. An interesting feature in this regard is the draft assessment order filed by the assessee relating to assessment year 2009-10. The copy of the said draft assessment order was filed during the course of hearing. The perusal of the draft assessment order during dictation of the present order reflects that in the preceding year, the assessee had shown income from support services at ₹ 10,52,92,835/- and other income of ₹ 49,89,078/-. Vide para 5 of the order dated 30.12.2011, the Assessing Officer holds that international transactions were below ₹ 15 crores, therefore, case was not referred to the TPO. However, the Assessing Officer examined the transfer pricing angle itself and proposed an adjustment to the arm's length price. The assessee filed an appeal against the said transfer pricing adjustment before the Tribunal relating to assessment year 2009-10 in ITA No.86/PN/2013, vide order dated 30.10.2015, copy of which is placed at pages 31 to 61 of Paper Book. We find that the assessee has failed to raise any such issue of Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer. The assessee has also not raised any issue about rejection of comparables except CG-VAK Software and Export Ltd., where the assessee has raised the issue in favour of its inclusion in the final set of comparables. However, the assessee is aggrieved by inclusion of certain comparables, which as per the assessee should be excluded from final list of comparables. The Assessing Officer has drawn the final set of comparables, which read as under:- Sr. No. Name of the comparable company PLI % (OP/OC) PLI % (OP/OC) after working capital adjustment Remarks 1 Cosmic Global Ltd. 16.59% 17.73% as per assessee s working 2 Informed Technologies India Ltd. 24.96% 24.33% as per assessee s working 3 Microgenetics Systems Ltd. 6.49% 6.80% as per assessee s working 4 Jindal Intellicom Pvt. Ltd. 18. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nomic adjustment by way of working capital adjustment, the margins of said concern became negative but the said adjustment which has been allowed, does not determine the profitability of the said concern in the open market. Accordingly, we find no merit in the approach of Assessing Officer in this regard and hold that CG-VAK Software and Exports Ltd., is not persistent loss maker. 18. The Pune Bench of Tribunal in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012, relating to assessment year 2008-09, order dated 10.02.2017 had held that a company which was losing continuously for three years only could be held to be persistent loss making company. 19. Another point on which the Assessing Officer had rejected CG-VAK Software and Exports Ltd. was that it was rejected in assessment year 2008-09. However, we find no merit in the order of Assessing Officer in this regard, where the Assessing Officer himself had selected CG-VAK Software and Exports Ltd. functionally comparable in assessment year 2009-10 i.e. immediately preceding year. 20. The Pune Bench of Tribunal in Brintons Carpets Asia Pvt. Ltd. Vs. DCIT in ITA No.1296/PN/2010, relating to asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study report. We find no merit in the said stand of the Assessing Officer especially in view of the ratio laid down by the jurisdictional High Court in the case of CIT Vs. PTC Software (I) Pvt. Ltd. (supra). As in the case of Jindal Intellicom Pvt. Ltd., Coral Hub Ltd. having different financial year, is to be excluded from the final list of comparables. Another aspect for non-inclusion of Coral Hub Ltd. as pointed out by the assessee was that it was following outsourcing model. In this regard, reliance was placed on the ratio laid down by the Hon ble High Court of Delhi in Rampgreen Solutions (P.) Ltd. Vs. CIT (2015) 60 taxmann.com 355 (Del), wherein it was held as under:- 38 .. Plainly, a business model where services are rendered by employing own employees and using one s own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said entity. 25. The Hon ble High Court had also held as under:- 38. .. In our view, even Vishal could not be considered as a comparable, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rables. 31. The said concern was also directed to be excluded for the extraordinary event of merger of some other equity with the assessee by the Hon ble High Court of Delhi in the case of PCIT Vs. Xchanging Technology Services India P Ltd. in ITA No.813/2015. Further, the said concern is not functionally comparable to the assessee as it is engaged in transcription, hoarding and billing as well as software and hardware integration capabilities to larger hospitals. Such was the declaration by Accentia Technologies Ltd. in its Annual Report, copy of which is placed at page 19 of Paper Book. The assessee is only engaged in providing technical support services to its associated enterprises and hence, the concern Accentia Technologies Ltd. is not functionally comparable to the assessee. Accordingly, we direct the Assessing Officer to exclude the said concern from the final set of comparables. 32. The next and last concern which the assessee wants exclusion is E4e Healthcare Business Services Pvt. Ltd. on the ground that the same is not functionally comparable being engaged in providing healthcare outsourcing services. We find that the Tribunal in HOV Services Ltd. Vs. JCIT (2016) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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