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TMI Blog2017 (11) TMI 1975X X X X Extracts X X X X X X X X Extracts X X X X ..... l set of comparables, the said concern was showing profits and only in this year it had shown marginal loss; hence there is no merit in excluding the said concern from the final set of comparables in the instant assessment year on the ground that it has shown losses. In the absence of Revenue establishing that the said concern was persistent loss making concern, merely because the said concern during the year had shown losses, the margins of the said concern could not be excluded. Accordingly, we hold so and direct the Assessing Officer to include the margins of said concern in order to benchmark international transactions of Design Engineering Services Division of assessee. The ground of appeal No. 2 raised by the assessee is thus, allowed. Exclusion of Manufacturing Division - non-allowance of capacity under-utilization in the Manufacturing Division of the assessee - Though the assessee had received support payments from its associated enterprises at ₹ 3.16 crores but it had still suffered losses because of under-utilization of the capacity. The assessee wanted carve out on account of capacity under-utilization. Following the same parity of reasoning as in assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnative and without prejudice to the ground No. 2.3 above, the Hon'ble DRP Pune, TPO AO erred in law and on facts in not appreciating appellants request for considering segmental OP/TC margins (13.69%) of the said external comparable instead on computing the OP/TC margin on in the totality of the above said facts and circumstances, basis (21.69%). 3. Manufacturing Function (Total addition ₹ 78,98,570/) 3.1 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO/TPO erred in concluding that assessee company should get ₹ 78,98,570/- as a extra support payment from its AE company, against the losses incurred in the manufacturing division over and above support payment received of ₹ 3.21 Crores in A.Y. 2010-11. 3.2 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO/TPO erred in not granting carve out amounting to ₹ 1,39,52,668, for underutilization of capacity in manufacturing division. 3.3 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO/TPO erred in holding that the assessee company cannot alternatively apply Resale Price Metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee during the year under consideration had undertaken various international transactions with its associated enterprises which are tabulated under para 4 at page 2 of the TPO's order. The assessee had applied the TNMM method in benchmarking its international transactions except for payment of interest on External Commercial Borrowings which were benchmarked on the basis of CUP method. The TPO noted that the total sales of assessee company were ₹ 26.59 crores and the assessee had also shown other income of ₹ 4.28 crores. The profit before taxation was ₹ 2.69 crores, which worked out to 8.63% of income and 10.21% on the net sales for the year under consideration. The TPO also noted that the assessee had received support payment of ₹ 3.53 crores from its associated enterprises which was accounted for as other income in its account. The assessee had selected external comparables and using the multiple year data in its TP study report had claimed that international transactions were at arm's length price. The TPO thereafter, considered various divisions of the assessee's business separately and analyzed the functional comparability of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y under-utilization and adjustment to be worked out following TNMM method as applied by the assessee company or there should be claim of compensation from associated enterprises as happened in subsequent year. The TPO applying the TNMM method as most appropriate method proposed TP adjustment of ₹ 78,98,570/- on account of non receipt of support payment towards marketing expenses and initial start up average charges. 9. In respect of issue of risk adjustment, the TPO held the assessee to be risk bearing entity and the contention of assessee that it was risk free entity in the transfer pricing report was held to be incorrect. However, in respect of risk analysis of each of the comparables in comparison with risk matrix of assessee though the TPO notes that the Auditor had not carried out said analysis but in the absence of any finding on this, he was of the view that there was no difference in risk profile of the assessee and the comparables. Accordingly, it was held that there was no case for making comparability adjustment on account of risk. He further examined the contention of assessee for risk adjustment and noted that the claim of assessee lacks critical information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision. 14. The first issue raised by the assessee is with regard to Design Engineering Services, the assessee is aggrieved by the order of Assessing Officer/TPO/DRP in holding that Accentia Technologies Ltd. and Rolta India Ltd. were good comparables with the Design Engineering Services segment of the assessee. The assessee is also aggrieved by the order of DRP in holding that KLG Systel Ltd. was not a good comparable. In respect of KLG Systel Ltd., an alternate and without prejudice issue was raised by the assessee that only segmental OP/TC margins at ₹ 13.69% of the said external comparables were to be considered instead of computing OP/TC margin on totality basis at 21.69%. The learned Authorized Representative for the assessee pointed out that the first objection of assessee was to inclusion of Rolta India Ltd., which had a different year ending. It was pointed out by the learned Authorized Representative for the assessee that the said concern was excluded from the final list of comparables on account of having different year ending. Reference was made to the order of Tribunal in assessment year 2009-10 in this regard. 15. The learned Departmental Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any case, the said concern was high end KPO service provider and hence, was not comparable. In this regard, he placed reliance on the ratio laid down by the Tribunal in ITO Vs. Systime Global Solutions Ltd. (2017) 79 taxmann.com 151 (Pune-Trib.). 20. The learned Departmental Representative for the Revenue placed reliance on the orders of Assessing Officer and DRP. 21. We find that the issue of exclusion of Accentia Technologies Ltd. from final list of comparables being high end KPO service provider, arose before the Tribunal in ITO Vs. Systime Global Solutions Ltd. (supra) and following the ratio laid down in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT (2016) 72 taxmann.com 352 (Pune-Trib.), the Tribunal held as under:- 12. The issue arising in the present appeal regarding exclusion of Accentia Technologies Ltd. from the final list of comparables has been adjudicated by the Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT (supra) and following the same parity of reasoning, it was held as under:- 12. The first contention of the assessee was with regard to exclusion of margins of Accentia Technologies Ltd. from the final list of comparables. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee before us was engaged in providing ITES services and while benchmarking international transaction of the assessee with its associate enterprises, the TPO had selected Accentia Technologies Ltd. as functionally similar and had included the margins of said concern in order to work out the arithmetic mean of final set of comparables. 14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No. 2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of assessee with its associate enterprises in assessment year 2009-10 in ITA No. 267/PN/2014, order dated 29.04.2015. The Tribunal vide order dated 02.02.2015 had held that the concern Accentia Technologies Ltd. could not be included in the final set of comparables holding as under:- 13. Next, assessee had contended that Accentia Technologies Ltd. has been wrongly included by the TPO as a comparable concern. As per the assessee, the said concern was engaged in functionally different acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables. 13. The issue arising in the present appeal is identical to the issue before the Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT (supra) and since the concern Accentia Technologies Ltd. was engaged in KPO segment and also because of extraordinary event during the year, is to be excluded from the final list of comparables. Accordingly, we hold so. 22. Following the same parity of reasoning, we hold that on the ground the selected concern i.e. Accentia Technologies Ltd. was engaged in KPO services, then the margins of same cannot be compared with the margins of assessee being functionally different. Accordingly, we hold so and direct the Assessing Officer/TPO to exclude Accentia Technologies Ltd. from final list of comparables. 23. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was not persistent loss making concern as in all the earlier years, the said concern had shown profits. Further, the learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Welspum Zucchi Textiles Ltd. (2017) 77 taxmann.com 137 (Bom), wherein it has been held that the concerns which were selected as comparable for earlier years could not be excluded on the ground that they were not comparable only because of losses in the said assessment years. The Hon'ble Bombay High Court further held that the enquiry ought to have been done by the Revenue whether loss was symptom of reference points mentioned in Rule 10B(2) of the Income Tax Rules, 1962 making it non comparable. 27. On the perusal of record and comparable chart submitted by the assessee during the course of hearing, we find that Neilsoft Ltd. was selected as comparable in assessment year 2007-08, wherein its margins were 8.1%; then in assessment year 2008-09 with margin of 2.42% and in assessment year 2009-10 with margin of 8.40%. During the year under consideration, the said concern has shown negative margins i.e. (-) 4.97%, because of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he power of TPO to make aforesaid adjustment in the hands of assessee. He further pointed out that while deciding similar issue in the preceding year when no gratuitous payment was received from the associated enterprises, the Tribunal allowed the claim of assessee in turn, relying on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Whirlpool (2016) 129 DTR 169 (Bom). He further stated that the issue which needs to be adjudicated in the present appeal is vide ground of appeal No. 3.1. The ground of appeal No. 3.2 to 3.4 are not pressed and the ground of appeal No. 3.5 would become academic. 29. The learned Departmental Representative for the Revenue placed reliance on the orders of DRP/Assessing Officer/TPO. 30. We have heard the rival contentions and perused the record. The issue which is arising in the present appeal by way of ground of appeal No. 3.1 is against non-allowance of capacity under-utilization by the Assessing Officer in the Manufacturing Division of the assessee. The plea of assessee was that since it has not utilized its capacity to the maximum, adjustment on account of capacity under-utilization should be allowed to the assessee. The un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TP study report worked out the adjustment on account of capacity under-utilization at ₹ 1,61,09,646/-. Similar adjustment of under-utilization of capacity was carved out and allowed to the assessee by the Assessing Officer in the preceding year. Since this was the first complete year of operation and the manufacturing unit was in the nascent stage, the assessee incurred losses and asked for aforesaid adjustments. During the succeeding year i.e. assessment year 2010-11, there were also losses. The TPO noted that in the succeeding year, the associate enterprises had given compensation to the assessee for under-utilization. The TPO was of the view that similar adjustment should have been allowed by the associate enterprises for the year under consideration also. Rejecting the plea of assessee to allow capacity under-utilization adjustment, the TPO was of the view that on using extended CUP method for valuation of support payments, the assessee should have received sum of ₹ 1,65,23,053/- on account of support payments towards marketing expenses and initial start-up overhead charges. Hence, TP adjustment on account of non-receipt of said support payments towards marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 92B of the Act or Explanation defining the expression 'international transaction' talks of any hypothetical transaction and in the absence of the same, TPO cannot pre-suppose an international transaction between the assessee and its associate enterprises and the determination of TP adjustment on account thereof. Admittedly, during the year under consideration, the assessee had not received any support payments towards its marketing expenses or the initial start-up overhead charges. There was no agreement between the parties to pay any such support payments or to receive the same. In the absence of the same, addition made on the basis of non-existing agreement, by the TPO, does not stand. The TPO had pre-supposed the said transaction since such support payment was provided by the associate enterprises to the assessee in the succeeding year. However, in the instant assessment year, no such support payment was provided by the associate enterprises to the assessee. Accordingly, we hold that there is no merit in the order of TPO in making TP adjustment on account of non-receipt of support payment at ₹ 1.65 crores. 12. The Hon'ble High Court of Delhi in Maru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. The Hon'ble High Court of Delhi in CIT Vs. Whirlpool of India Ltd. (2016) 129 DTR 169 (Del) has held that Revenue was unable to demonstrate any tangible material to effect that there was international transaction involving AMP expenses between assessee and its associate enterprises. In the absence of first step, question of determining the ALP of such transaction could not arise. In absence of machinery provision it would be hazardous for any TPO to proceed to determine ALP of such transaction since BLT had been negatived by Court as valid method of determining existence of international transaction and thereafter its ALP. Following the said precedent, we delete the addition made of ₹ 1.65 crores on account of TP adjustment. Further, we also hold that there is no merit in the order of TPO in supposing a transaction which does not exist and in any case, if there is a presumption of support payments from the associate enterprises to assessee, it does not get covered by the definition of international transaction and accordingly, it is beyond the scope of the TPO to make any adjustment in this regard. 14. Now, coming to the second limb of said addition, undoubte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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