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TMI Blog2017 (5) TMI 1632X X X X Extracts X X X X X X X X Extracts X X X X ..... cture of resistors and capacitors which in turn, were used in various electronic applications / products. The assessee had Domestic Tariff Area unit for manufacturing capacitors and low end resistors, and an Export Oriented Unit for manufacturing certain high end resistors which are exported to overseas group entities, thus companies functionally dissimilar with that of assessee need to be deselected. Assessee has applied the filter and rejected the concern whose turnover from capacitors and resistors was less than 75% of the total turnover. Non-exclusion of depreciation while calculating Profit Level Indicator of the assessee as well as the comparable companies arose before the Tribunal - Held that:- the assessee had made submissions for differential depreciation adjustment which was without prejudice to his claim. The assessee claims that the rate of depreciation i.e. depreciation / average written down value charged by the assessee at 17.97% was higher than average rate of depreciation charged by the comparable companies i.e. 12.07%. The assessee submits that excess depreciation should be excluded while computing operating margins of the assessee. We find no merit in the said pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer pricing documentation and non-consideration of the comparability analysis as documented in the transfer pricing study report. Erred on facts and in law by rejecting the transfer pricing documentation maintained by the Appellant and also not considering the data provided in the transfer pricing study report for benchmarking analysis. 3. Non consideration of contemporaneous data Erred on facts and in law by conducting an analysis based on information currently available for determining arms' length price but which was not available at the time of complying with the regulations. 4. Use of single year data Erred in considering the operating margins earned by the companies identified as comparable based on the financial data pertaining to the financial year ended 31 March 2008 only and rejecting the financial data of such companies for prior two years for determining the arms length price of international transactions. 5. Non- consideration of +/-5% range Erred in computing the transfer pricing adjustment from the arm's length price without giving the benefit of the option available to the Appellant under proviso to section 92C(2) of the Act of adopting as arm's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transactions Erred on facts and in law by computing the transfer pricing adjustment with reference to total turnover instead of computing and restricting the same with reference to value of international transactions In connection with back-office activity 12. Selection of certain inappropriate qualitative filters and applying certain filters on selective basis Erred on facts and in law by selecting following inappropriate qualitative filters and also applying certain filters on selective basis: - Use of diminishing revenue filter; - Use of different accounting year filter for comparability analysis; - Rejection of loss making companies; and - Rejection of companies with peculiar circumstances. 13. Rejection of turnover criteria applied by the Appellant Erred on facts and in law by not considering the turnover filter applied by the Appellant of INR 25 crores (ie rejecting companies having turnover exceeding INR 25 crores) as a comparable selection criteria and considering the turnover range of INR 1 cr to INR 200 cr for selecting the comparable companies. 14. Accepting companies having supernormal profits Erred on facts and in law by accepting companies having supern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act Erred in law and on facts in levying interest under section 2348 of the Act to the extent addition is made to the total income of the Appellant on account of transfer pricing adjustment and corporate tax related matters without considering the fact that shortfall in advance tax resulted in view of the proposed additions to total income, which are unanticipated in nature. Without prejudice to the above, the learned Assessing Officer, erred in computing the interest under 234B of the Act. 3. The learned Authorized Representative for the assessee at the outset pointed out that many of the issues raised in the present appeal are covered by the order of Tribunal in assessee's own case relating to assessment year 2007-08 in ITA No.1712/PUN/2011, order dated 10.02.2017. 4. Briefly, in the facts of the case, the assessee had e-filed the return of income declaring Nil Income. The Assessing Officer made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determining the arm's length price with reference to all international transactions reported in Form 3CEB filed by the assessee. The assessee was engaged in the manufacture of resistors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer made the said adnustment. Another addition made by the Assessing Officer was on account of stock written off at ₹ 1,26,57,145/-. 6. The assessee is in appeal against the order of Assessing Officer. 7. The grounds of appeal No.1 and 2 raised by the assessee are general in nature and the same are dismissed. The issue in grounds of appeal No.3 to 10 are in relation to the transfer pricing adjustment in the manufacturing segment. The issue raised by way of ground of appeal No.3 is against reliance on information which was not available at the time of complying with the regulations by the assessee. The learned Authorized Representative for the assessee has pointed out that the said issue is decided against the assessee by the Tribunal in paras 11 to 14 at pages 8 to 15 of the order dated 10.02.2017, wherein the Tribunal had relied on its earlier order in ITA No.133/PN/2011, relating to assessment year 2006-07, order dated 16.05.2016, has decided the issue against the assessee. Following the same parity of reasoning, we dismiss the ground of appeal No.3 raised by the assessee. We make reference to our finding in assessment years 2006-07 and 2007-08. However, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jarat Poly-Avx Electronics Ltd. were persistent loss making concerns; if so, then both the concerns are to be excluded from the final set of comparables while benchmarking international transactions in manufacturing segment. Following the same parity of reasoning, we hold that in the instant case also, the Assessing Officer is directed to follow our directions in assessment year 2007-08 in order to decide the inclusion / exclusion of Keltron Group and Gujarat Poly-Avx Electronics Ltd. in the final set of comparables in the manufacturing segment. Accordingly, the ground of appeal No.6 raised by the assessee is allowed for statistical purposes. 11. The issue in ground of appeal No.7 is against rejection of K Dhandapani and Company Ltd. as comparable company. The assessee is aggrieved by the rejection of said concern though the said concern was accepted to be comparable in assessment year 2007-08. The TPO admits that the said concern was functionally comparable to the assessee but the percentage of sale of capacitors to the total sale was only 51%, so the said concern was rejected as being not comparable by the TPO. 12. The learned Authorized Representative for the assessee pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The TPO has pointed out that in the case of K Dhandapani and Company Ltd., the sale of capacitors was to the extent of 51%; on the other hand, the assessee claimed the same at 59.25% on account of certain exclusion of inter unit transfers from the denominator. However, we find no merit in the plea of assessee as the assessee itself has applied the filter and rejected the concern whose turnover from capacitors and resistors was less than 75% of the total turnover. Accordingly, we hold that K Dhandapani and Company Ltd. is to be excluded from the final list of comparables. The ground of appeal No.7 is thus, dismissed. 15. The issue in ground of appeal No.8 raised by the assessee is against working of credit operating margins of Tibrewala Electronics Ltd. The margins of the said concern Tibrewala Electronics Ltd. were applied by the TPO and the assessee before us is aggrieved by the calculation of operating margins of the said concern. The assessee claims that vide its submission dated 14.10.2011, it had submitted the corrected operating margins of the said comparable company before the TPO and the TPO has not considered the same. The TPO had treated the cost towards curre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Pvt. Ltd. (supra) has held that foreign exchange loss was to be considered as part of operating cost. The learned Departmental Representative for the Revenue has also fairly agreed that in case the assessee was following similar practice of recognizing its income / cost, then the adjustment is to be allowed in the hands of comparables also. While applying the transfer pricing provisions, the TPO has to make sure that like is compared to like. So, in case income or cost is recognized in a particular manner by the assessee and the margins are computed thereunder by the assessee, then similar recognition of income / cost is to be given in the hands of comparables. Accordingly, we remit this issue back to the file of TPO to verify the claim of assessee in this regard and if the assessee has given similar recognition to the foreign exchange income / loss by treating it as operating income / cost respectively, then the margins of comparable M/s.Tibrewala Electronics Ltd., be similarly worked out. The TPO / Assessing Officer shall afford reasonable opportunity of hearing to the assessee. The ground of appeal No.8 raised by the assessee is thus, allowed for statistical purposes. 18. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erification by the Assessing Officer / TPO." 19. Following the same parity of reasoning and since the issue raised in the present ground of appeal is identical to the issue before the Tribunal in assessment year 2007-08, we direct the Assessing Officer to follow our directions in assessment year 2007-08 and decide the issue accordingly. The ground of appeal No.9 is allowed for statistical purpose. 20. The issue in ground of appeal No.10 is for non-allowance of capacity utilization in the hands of comparables which issue was also decided by the Tribunal in assessment year 2007-08 vide paras 50 to 54 at pages 36 to 38 of the order, against assessee. Following the same parity of reasoning, we dismiss the ground of appeal No.10 raised by the assessee. 21. The issue in ground of appeal No.11 is against computation of transfer pricing adjustment with reference to total turnover in respect of computing and restricting the same with reference to the value of international transactions. The learned Authorized Representative for the assessee pointed out that the said issue also arose before the Tribunal in assessment year 2007-08 and the same has been decided in favour of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the business of medical prescription services, which is functionally different from the services provided by the assessee. Accordingly, we hold that the said concern Accentia Technologies Ltd. is to be excluded from the final set of comparables while benchmarking ITES segment. 25. The next concern which as per the assessee is to be excluded is Coral Hubs Ltd., which is engaged in e-publishing and where the employee cost is only 4.3% of its operating and it has substantial vendor payments. 26. The learned Authorized Representative for the assessee placed reliance on the decision of Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015, judgment dated 10.08.2015. 27. The learned Departmental Representative for the Revenue placed reliance on the order of TPO. 28. We have heard the rival contentions and perused the record. The Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) has held that there are different factors which have to be judged with reference to service / product characterization and the same cannot be undermined by using broad classification of ITES. The Hon'ble High Court of Delhi drew the distinction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed which excludes entities that fall in the extreme quartiles for comparability. However, neither Chapter X of the Act nor the Rules made by CBDT provide for exclusion for such statistical reason." The Hon'ble High Court held that supernormal profits may in certain cases indicate a functional dissimilarity or dissimilarity with respect to a feature that has a material bearing on the profitability which need to be analyzed before excluding the concern with higher profitability. Applying the said principle, we find no merit in the said plea of assessee that because of turnover filter, Cross domain Solutions Ltd. should be excluded. However, following the ratio laid down by the Pune Bench of Tribunal in Cummins Turbo Technologies Ltd., UK Vs. DDIT (IT) (supra) vide para 15 of the order, we hold that Cross domain Solutions Ltd. should be excluded from the final set of comparables as functionally not comparable. 32. Similarly, E4e health solutions, which is engaged in the business of providing healthcare services; in other words, being specialized service of knowledge based services are to be excluded on the same line of reasoning. 33. Now, coming to the companies which the learned Au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern had sold its investments and profit on sale of investment of ₹ 3.84 crores was shown, which shows that the assessee has restructured its business operations during the year. The DRP also noted that the total operation receipts were ₹ 3.07 crores as compared to ₹ 19.09 crores in the immediately preceding year and the other income which was not related to the operations was ₹ 4.90 crores. The assessee is aggrieved by the order of TPO/DRP and has pointed out that during the year under consideration, sales were to the tune of ₹ 3.06 crores as against sales of ₹ 4.52 crores in the preceding year and there is no figure of turnover of ₹ 19.90 crores in the preceding year, which has been picked up by the DRP. 38. The learned Departmental Representative for the Revenue referred to the financials of the said concern and pointed out that under Schedule 11, it is pointed out that the said concern is software sourcing concern, so it is outsourcing company plus under Schedule 10, the said concern gives inventory and has also created a data base. The learned Departmental Representative for the Revenue pointed out that Ace Software Exports Ltd. has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services are not functionally comparable to the concerns which are providing BPO services and have directed the TPO to exclude the same. Applying the said ratio, we hold that the TPO has correctly excluded Aditya Birla Minacs Worldwide Ltd. and Informed Technologies India Ltd. from the final list of comparables. In view thereof, the grounds of appeal No.12, 14 to 16 are partly allowed. 44. The limited issue which arises in ground of appeal No.17 is against an error in computation of working capital adjustment, which has been directed to be allowed by the DRP. However, the assessee points out that in the order passed by the Assessing Officer, the computation is wrong, against which the assessee has filed an application under section 154 of the Act, which is not disposed of. The learned Authorized Representative for the assessee seeks directions of the Bench in this regard. Accordingly, we direct the Assessing Officer to dispose of the application moved under section 154 of the Act by the assessee in accordance with directions of DRP. 45. The issue in ground of appeal 18 is with regard to allowing risk adjustment. The plea of assessee before us is that the assessee is operating cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d re-compute the margins of comparables by applying the ratio laid down by Delhi Bench of Tribunal in the case of Sony India Pvt. Ltd. (supra) and compute the TP adjustment, if any, in the hands of assessee." 48. Following the same parity of reasoning, we direct the Assessing Officer to allow the risk adjustment, if any, and re-compute the margins of comparables and compute the TP adjustment, if any, in the hands of assessee. 49. Now, coming to the issue in respect of disallowance of stock written off in Domestic Tariff Area. The learned Authorized Representative for the assessee pointed out that similar issue arose before the Tribunal in assessment year 2007-08, wherein the Tribunal vide para 66 at pages 43 to 44 has remitted the issue back to the file of Assessing Officer with directions. Following the same parity of reasoning, we remit this issue also back to the file of Assessing Officer, who shall follow our directions in assessment year 2007-08 to decide the same. The ground of appeal No.19 is thus, allowed for statistical purposes. 50. The assessee by way of ground of appeal No.20 is aggrieved by the computation of total income, wherein the Assessing Officer has not cons ..... X X X X Extracts X X X X X X X X Extracts X X X X
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