Income Tax Appellate Tribunal - Mumbai
Syscom Corporation Ltd, Mumbai vs Assessee
आयकर अपील य अ धकरण,
धकरण मंुबई यायपीठ 'के' मंुबई ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" BENCH, MUMBAI
सव ी ी पी.एम
पी एम. जगताप लेखा सद य एवं ी वजयपाल राव,
एम जगताप, राव या.स
या स, ।
BEFORE SHRI P.M. JAGTAP,
JAGTAP, AM & SHRI VIJAY PAL RAO, JM
आयकर अपील सं./I.T.
I.T.A.
I.T. A. No.
No . 327/Mum
327/Mum/2013
um/2013
( नधारण वष / Assessment Year: 2008-09)
Syscom Corporation Ltd. बनाम Assistant Commissioner of
बनाम/
714 Raheja Chambers, 213 Income Tax, Circel 3(3),
Vs.
Nariman Point, Mumbai
Mumbai-400021
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AABCS2000C
(अपीलाथ /Appellant
Appellant)
Appellant .. ( यथ / Respondent)
Respondent
अपीलाथ ओर से / Appellant by : Shri Sashi Tulsiyan
यथ क ओर से/Respondent by : Shri Ajeet Kumar Jain
सनवाई
ु क तार ख / D t. o f H e a ri n g : 20th June 2013
घोषणा क तार ख/D
ख t . O f P ro n o u n c em e n t: 12th July 2013
आदे श / O R D E R
PER : वजयपाल राव, या.स. / VIJAY PAL RAO, JM
This appeal by the assessee is directed against the assessment order dated 26.11.2013 passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act in pursuance to the directions of DRP u/s 144C(5) dated 27.9.2012 for the assessment year 2008-09.
2. The assessee has raised the following grounds in this appeal:
"(1) On the facts and in the circumstances of the case, the Ld. A.O. erred in framing assessment under section 143(3) r.w.s.
144C(13) making additions aggregating to of Rs 8,53,65,512/- which is completely unjustified and unwarranted in law. (2) On the facts and in the circumstances of the case, the Ld. A.O. erred in making a reference to the Transfer Pricing Officer 2 ITA No.327/M/2013 Syscom Corporation Ltd.
.
(TPO) without recording any reasons in the assessment order as provided u/s 92CA(l) based on which he has reached a conclusion that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the ALP.
(3) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) erred in rejecting the economic analysis undertaken by the appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm's length price (ALP) of the international transactions. (4) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) erred in making an adjustment to the ALP by enhancing the income of the appellant by Rs. 8,49,29,839/- u/s 92CA(3).
(5) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) erred in rejecting one comparable selected by the appellant namely M/s Punjab Communication Ltd (PCL) for computing PU in determination of the ALP in the analytical study incorporated in the document in Form 3CEB solely on the ground that it has suffered losses.
(6) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in considering M/s Gemini Communications Ltd. as comparable to the appellant for computing PU in determining ALP, without appreciating the functional profile of the company, oblivious to the fact that the company is earning super normal profits.
(7) On the facts and in the circumstances of the case, the Ld. A.O. has erred in not considering M/s Icomm Tele Limited (part of the alternate set of comparables companies submitted by the appellant) without any justification even though the same was found comparable in the order of the DRP.
(8) Without prejudice to the above grounds, based on facts and circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in considering the incorrect margins of the appellant and the comparable companies.
(9) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in not allowing an adjustment for 3 ITA No.327/M/2013 Syscom Corporation Ltd.
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differences in working capital employed by the appellant vis-a- vis the comparable companies.
(10) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in adopting a flawed approach by using single year data as against the multiple year data used by the appellant to compute the ALP of the international transactions of the appellant using TNMM method by holding that the appellant has failed to show any evidence that the earlier year data has influence on the profits and margins of the appellant in determining ALP.
(11) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in considering data not available to the appellant at the time of preparing the transfer pricing documentation, for determining the ALP of the international transactions.
(12) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in not applying the proviso to section 92C(2) of the Act and has failed to allow the appellant the benefit of upward variation of 5 percent in determining ALP. (13) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in not restricting the adjustment to the income of the appellant to the quantum of its international transactions.
(14) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in ignoring the fact that the parent company of the appellant has been consistently suffering from operational losses.
(15) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel (DRP) has erred in making an addition of Rs. 4,35,673/- on protective basis on account of AIR reconciliation ignoring the fact that the same does not belong to the appellant."
3. Ground No. 1 is general in nature and no specific finding is required as it dependents upon the findings on the other grounds. 4 ITA No.327/M/2013
Syscom Corporation Ltd.
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4. Ground No. 2 is regarding the validity of reference made by the Assessing Officer to the Transfer Pricing Officer. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The assessee has challenged the reference made by the Assessing Officer to the Transfer Pricing Officer on the ground that the Assessing Officer has not recorded any reasons in the assessment order on which he has reached at conclusion that it was necessary and expedient to refer the matter to the TPO for computation of arm's length price.
5. On the other hand, the Ld. DR has contended that there is no requirement of writing specific reasons for making reference u/s 92CA(1). Once the Assessing Officer found that the assessee has entered into international transactions then for determination of the arm's length price reference u/s 92CA(1) may be made to the TPO with the approval of the Commissioner. Once the approval of the Commissioner is obtain it is implied that the Assessing Officer considered it necessary and expedient to refer the computation of arm's length price to the Transfer Pricing Officer. He has further submitted that this issue is covered by the decision of special bench of this Tribunal in case of Aztec Software & Tech. Ltd. v. Asstt. CIT (Bang.)(SB) 107 ITD 141.
6. Having considered the rival submission as well as the relevant provisions of the Act, we find that this issue is covered by the decision of the special bench in case of 107 ITD 141 (SB) (supra) wherein the special bench has held as under.
5ITA No.327/M/2013
Syscom Corporation Ltd.
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"26. Rival submissions of the parties have been considered carefully. After giving our deep thoughts to the submissions of the parties, we are of the view that the Assessing Officer is not required to demonstrate the existence of the circumstances set out in clauses (a) to (d) of sub-section (3) of section 92C of the Act before referring the case of the assessee to the TPO for determining the ALP under section 92CA(1) of the Act for the reasons given hereafter.
27. A close reading of sections 92C and 92CA, which already have been reproduced by us in the earlier part of the order, in our opinion, reveals that proceedings in both the sections are quite independent of and distinct from each other and the proceedings under section 92CA(1) of the Act are not dependent on the proceedings under section 92C(3) of the Act. This is due to historical reasons as two provisions were introduced at different times as noted above. The provisions of section 92C(3) of the Act confers powers on the Assessing Officer to determine the ALP himself where the circumstances mentioned in clauses (a) to (d) of the sub-section exist. This is apparent from a bare reading of the provision. In such cases, the Assessing Officer is not bound to refer the case of the assessee to the TPO. On the other hand, the Assessing Officer may refer the case of the assessee to the TPO if he considers it necessary or expedient to do so. The expression "necessary" or "expedient" is quite distinct from and independent of the circumstances mentioned in section 92C(3). The Assessing Officer may consider it necessary or expedient to refer the case of the assessee to the TPO even without considering existence of circumstances mentioned in section 92C of the Act. The Assessing Officer has only to be satisfied that it is necessary or expedient to make a reference to the T.P.O. No other condition is prescribed in the provision. Now under what circumstances, Assessing Officer would consider it "necessary" or "expedient"
would depend upon facts of each case. No doubt, even in cases covered by section 92C(3) of the Act, the Assessing Officer may in appropriate cases consider it necessary or expedient to refer the case of the assessee to the TPO for determining the ALP but that does not mean that powers of the Assessing Officer to refer the case to the TPO is restricted to those cases which are covered by section 92C(3) of the Act. Had the legislature contemplated to refer the case of the assessee to the TPO only in the circumstances mentioned in section 92C(3) then the legislature would have to provide such conditions in place of words "necessary" or "expedient" in sub-section (1) of section 92CA. The requirements under both the sections are quite distinct as procedure to be followed in the sections is different. In the above sub-section 92CA(1) there is no reference to 6 ITA No.327/M/2013 Syscom Corporation Ltd.
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section 92C(3). Moreover it is mandatory for T.P.O. to determine arm's length price in accordance with sub-section (3) of section 92C. If above section to be applied by TPO under section 92CA(3) at the prescribed stage, there is no question of applying the same provision at the stage of making reference. What purpose would be served by applying same provision again and again. Therefore, on plain and clear language of statutory provision, we do not find any force in the claim of the assessee. It would be sufficient for invoking provisions of section 92CA(1) if it is shown that there existed circumstances which prompted the Assessing Officer to consider it necessary or expedient to refer the computation of ALP to the TPO. Once it is shown that there existed circumstances on the basis of which the Assessing Officer could consider it necessary or expedient, the matter ends. The CIT(A) has emphasized on the words "the said international transaction under section 92C". These words, in our opinion, only refers to the transaction in respect of which reference can be made to the TPO but the same does not, in our opinion, lead to the conclusion that the requirement of section 92C(3) can be read into section 92CA(1) of the Act.
28. The view taken by us is also fortified by the decision of the Hon'ble Delhi High Court in the case of Sony India (P.) Ltd. v. CBDT [2006] 288 ITR 521, wherein the Court considered the similar question. At Page-66 of the report, their Lordships referred to the question in Para-19 as under :
"... whether the reference to the Transfer Pricing Officer by the Assessing Officer has to be made by the Assessing Officer only after he is satisfied by going through the steps enlisted at section 92C(1) to (3) and concluding that the price declared by the assessee is not to be accepted or can he make such a reference at an anterior stage ?"
The above question was answered by their Lordships at the same page by observing as under:
"There is nothing in section 92CA itself that requires the Assessing Officer to first form a considered opinion in the manner indicated in section 92C(3) before he can make a reference to the Transfer Pricing Officer. In our view, it is not possible to read such a requirement into section 92CA(1). However, it will suffice if the Assessing Officer forms a prima facie opinion that it is necessary and expedient to make such a reference. One possible reason for the absence of such a requirement of formation of a prior considered opinion by the Assessing Officer is that the Transfer Pricing Officer is expected to perform the same exercise as envisaged under section 7 ITA No.327/M/2013 Syscom Corporation Ltd.
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92C(1) to (3) while determining the ALP under section 92CA(3). The latter part of section 92CA(3) unambiguously states that the Assessing Officer shall "by order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of the section 92C". It will be pointless to have a duplication of this exercise at two stages one after the other." [Emphsis supplied]........
7. Accordingly, we do not find any merit in the objection of the assessee against the reference made to the TPO u/s 92CA(1) of the Income Tax Act.
8. Ground No. 3-6 are related to the transfer pricing adjustment by rejecting some of the comparables of the assessee and including the new comparable by the TPO. The assessee is engaged in the manufacturing and sale of Subscriber Identity Module (SIM) cards in India and provides SIM related solutions to the Mobile telecommunications industry in India and abroad. The assessee company is 100% subsidiary of M/s Smart Chip Ltd. company incorporated in India which in turn is held 95% by Sagem Orga GmbH, Germany. Sagem Orga is a global leader in the Smart card industry. During the year the assessee had purchased and sold goods, provided and received services and also paid rental to its associates enterprises (AE). For the purpose of manufacturing the SIM card, the assessee imported modules from its AE Sagem Orga and purchased card body entirely from third party vendors. The assessee sold the finish product back to Sagem Orga. Apart from purchase and sales of goods, the assessee has also entered into various other transactions with the AE details of which are given by the TPO in para 6 as under:8 ITA No.327/M/2013
Syscom Corporation Ltd.
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Sl. Nature of transaction FY 2007-08 Method adopted
No. by the assessee
1. Purchase of goods 38,430,507 Transaxtion Net
Margin Method
('TNMM')
2. Sale of goods 204,322,530
3. Payment of lease rental 8,266,325
4. Receipt of technical know- 12,77,,000
how
5. Provision of services 1,451,445
6. Receipt of business support 23,544,688
services
7. Receipt of technical support 38,517,513
services
8. Warranty claims 6,305,188
9. Cost recharges to associated 6,118,687
enterprises
10. Cost recharges from 676,626 Comparable
associated enterprises uncontrolled
Price ('CUP')
Total 340,403,509
9. The assessee has claimed that its international transactions are at arm's length price as bench marked by using TNMM as most appropriate method and Profit Level Indicators (PLI) as OP/TC, on the basis of three companies taken as comparables namely Punjab Communication Ltd., Valiant Communication Ltd. and X L Telecom and Energy Ltd.. In the transfer pricing report, the assessee reported its profit margin at 8% as against the arithmetic mean of comparables at -3%. The Transfer Pricing Officer asked the assessee to file updated PLI of comparables using the data of only assessment year 2008-09. The TPO rejected M/s Punjab Communication Ltd. as comparable because it was a loss making company and the loss for the year under consideration has been reported at 66.96% apart from the losses in the earlier years. The TPO proposed to 9 ITA No.327/M/2013 Syscom Corporation Ltd.
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include M/s Gemini Communication Ltd. as a comparable. The assessee has raised strong objection against the exclusion of Punjab Communication Ltd. and inclusion of M/s Gemini Communication Ltd. as comparable. The TPO rejected the objection raised by the assessee and determination the ALP by taking into consideration, three comparables including M/s Gemini Communication Ltd. as added by the TPO and arrived at the arithmetic mean of the comparables at 17.87% in comparison to the assessee's profit margin at 8%. Accordingly, the TPO made an adjustment at ` 13,41,37,029/-. After receiving the order of the Transfer Pricing Officer the AO issued a draft assessment order inter alia proposed to make an addition of ` 13,41,37,029/- on account of TP adjustment. The assessee filed objections before DRP against the draft assessment order. The DRP while passing the directions dated 27.9.2012 has granted partial relief to the assessee by accepting M- Telecommunication Innovations Ltd. as comparable and thereby directed the TPO to re-compute the ALP on the basis of the four comparables including M-Tech Innovations. However, the DRP has rejected the objections of the assessee against the exclusion of Punjab Communication Ltd. (PCL) and inclusion of Gemini Communication Ltd. in the list of comparables. The other objections/grounds raised by the assessee regarding working capital adjustment, single year data as against multiple year data, objection against considering the data by the TPO which were not available to the assessee at the time of preparing the transfer pricing report, benefit of proviso to section 92C(2), not restricting the adjustment 10 ITA No.327/M/2013 Syscom Corporation Ltd.
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to the income from international transactions only and not accepting the ground of the assessee that the parent entity/AE has been consistently suffering from operation losses were rejected by the DRP.
10. Before us the Ld. AR of the assessee has submitted that the TPO has included M/s Gemini Communication as comparable while determining the ALP despite the objection of the assessee that the said company is in a different business and therefore due to difference in the business profile it cannot be considered as a good comparable. He has referred the audit report of Gemini Communication and submitted that the said company is engaged in the business of providing solution for Telecom Companies, managing and maintenance their network to their customers and therefore the said company is in the business of providing services and not in manufacturing activity. The service portfolio of the said company is to design services, consultancy, installation & implementation of service and to maintain in the area of Security, Storage, Network management and IT infrastructure etc. Thus, the Ld. AR of the assessee has submitted that M/s Gemini Communication is functionally different from the assessee and, therefore, cannot be considered as a comparable for the purpose of bench-marking the international transaction. He has further submitted that the said company has otherwise earned the profit of 28.07% which is super normal in comparison to the assessee's profit. Therefore, the said company cannot be included in the comparables due to the super normal profit. He has relied upon the decision of the Bangalore Benches in the case of Genisys Integrating Systems (India) Pvt. Ltd., reported in 15 ITR 11 ITA No.327/M/2013 Syscom Corporation Ltd.
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475. He has also relied upon the decision of this Tribunal in case of Teve India Pvt. Ltd. V DCIT reported in 57 DTR 212 and submitted that the Tribunal has taken a consistent view that the companies having super normal profit should be excluded from the comparables.
11. The Ld. AR has further submitted that M/s Punjab Communication Ltd. (PCL) has been excluded by the TPO from the comparables on the ground that the said company has suffered losses. He has contended that no comparable can be rejected solely on the ground of suffering losses. Thus, the rejection of the Punjab Communication Ltd. on the basis of the financial information of a single year is not justified. The TPO has not pointed out any specific reason being abnormal due to which the Punjab Communication Ltd. has suffered losses and therefore cannot be considered as a comparable.
12. On the other hand, the Ld. DR has submitted that M/s Gemini Communication is in the business of telecom solution and services which is similar to the business of the assessee. He has referred the profit and losses account of Gemini Communication at page No. 131-132 of the paper book and submitted that the major expenditure booked by the said company pertains to the cost of material which shows that the said company was also engaged in the activity of production/manufacturing because in the business of service, the cost of material does not contribute to the major part of the expenditure. He has further pointed out that the said company has the income due to exchange rate difference to 12 ITA No.327/M/2013 Syscom Corporation Ltd.
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the tune of ` 528.53 lacs during the year under consideration which is also in the case of the assessee, as the assessee has also earned profit of foreign exchange fluctuation to the tune of ` 155 lacs during the year under consideration. Thus, the Ld. DR has submitted that Gemini Communication is functionally similar to the assessee and therefore is a good comparable for bench marking the international transaction of the assessee. He has further contended that when the Gemini Communication is otherwise functionally comparable with the assessee then it cannot be excluded only on the basis of high profit margin. In support of his contention he has relied upon the decision of this Tribunal dated 1.3.2013 in case of Willis Processing Services (I) Pvt. Ltd. Vs DCIT in ITA No. 4547 & 4429/M/2012. He has also relied upon the order of the Transfer Pricing Officer. As regards the Punjab Communication Ltd. the Ld. DR has pointed out that this company is a persistent loss making company as evident from the data filed by the assessee at page no. 70 of paper book and back side where the details of financial results from the year 2001-02 to 2007-08 are given. The Ld. DR has submitted that the company has shown loss for last 4 years. Therefore, this company is persistent loss making company and cannot be considered as a comparable for the purpose of determining of ALP. In support of his contention he has relied upon the decision of this Tribunal dated 8.5.2013 in case of Advance Power Display Systems Ltd. Vs ACIT in ITA No. 6732 & 6542/M/2011.
13ITA No.327/M/2013
Syscom Corporation Ltd.
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13. We have considered the rival submission as well as the relevant material on record. During the year under consideration the assessee has entered into various international transactions as mentioned in foregoing para No. 5 of this order. The assessee has bench marked its international transactions by using TNMM as most appropriate method and taking the Profit Level Indicator (PLI) as operating profit/total cost (OP/TC). The assessee selected three comparables and determination the arithmetic mean at -3% by using multiple year data as under:
Sl. Name of Comparable Company PLI as per TP Updated PLI for No. Report (%) FY 2007-08 (%)
1. Punjab Communication Ltd. -23 -66.69
2. Valiant Communications Ltd. 6 5.98
3. X L Telecom and Energy Ltd. 7 6.12 Arithmetic Mean -3 -18.19
14. The TPO asked the assessee to update the data for a single current year and further proposed to exclude Punjab Communication Ltd. (PCL) from the comparable on the ground that it is a loss making company and in place the TPO propose to include Gemini Communication as comparable. Thus the TPO has computed the arithmetic mean of the operating margin of the comparables at 17.87% as under:
Sl. Name of Comparable Company Updated PLI for FY No. 2007-08 (%)
1. Valiant Communications Ltd. 13.01
2. X L Telecom and Energy Ltd. 12.54
3. Gemini Communications Ltd. 28.07 Arithmetic Mean 17.87 Assessee 8 14 ITA No.327/M/2013 Syscom Corporation Ltd.
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15. There is no dispute as regards the comparable namely Valiant Communications Ltd. and X L Telecom and Energy Ltd. at serial no. 1-2 of the above table. The assessee is aggrieved by the action of the TPO in rejecting the PCL and inclusion of Gemini Communication Ltd. The objection against the Gemini Communication Ltd. was raised by the assessee on the ground that the said company is having a super normal profit at 28.07%. We do not agree with the contention of the assessee that the profit at 28.07% is a super normal because the decision relied upon by the assessee in support of its contention are based on the fact where the profit of the comparable as noted by the Tribunal was ranging from 50% to 100% and in those circumstances the Tribunal held that the cases where exceptional profit has been earned and termed as super normal profit should be excluded from the comparables. Therefore, when the profit in case of Gemini Communication does not fall in the category of super normal then merely because of high profits margin cannot be a factor for exclusion from proposed comparables until and unless the extreme results of a case are as a result of exceptional conditions exist. An identical issue has been considered by the coordinate bench of this Tribunal in case of Willis Processing Services (I) Pvt. Ltd. Vs DCIT (supra) and one of us Judicial Member is the party to the said decision. In the said case the Tribunal has decided the issue in para 34.4-34.8 as under:
"34.4 We have considered the rival submissions and carefully perused the relevant material on record. The factors for determining inclusion or exclusion of any case in the list of comparables are specifically provided under Rule 103(2). Therefore, unless and until there are specific reasons and 15 ITA No.327/M/2013 Syscom Corporation Ltd.
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factors as provide under the Rule lOB, an entity cannot be excluded or eliminated from the list of comparables solely on the basis of high profit making unit or loss making unit because no such factor finds place either in Rule 1OB(2) or 103 (3) of IT Rule.
34.5 Even as per OECD TP guidelines, the extreme results might consist of losses or unusually high profits itself cannot be a factor for potential comparables; but further examination would be needed to understand the reasons for such extreme results. If some reasons are detected which indicate a defect in the comparability or exceptional conditions for such an extreme results, then only the case may be excluded from the proposed comparables. The concluding remarks given under the OECD TP guidelines in para 3.65 & 3.66 are as under:
"3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions! enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making corn parables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses. 3.66 A similar investigation should be undertaken for potential corn parables returning abnormally large profits relative to other potential corn parables. Thus, it is clear that even the loss making or high profit making comparables that satisfy comparability analysis should not be rejected on the sale basis that they suffers loss or earned high profit.
34.6 In the case of Exmxon Mobil Company India P Ltd (supra), the Tribunal has discussing the issue in para 31 ((xi) as under: ('xi) Now, coming to the alternative arguments of the assessee that abnormal profit making unit is also to be eliminated on the same analogy 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 16 ITA No.327/M/2013 Syscom Corporation Ltd.
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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 corn parables 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 is dismissed.
34/6 Similarly in the case of M/S B P India Services P Ltd,(supra) the coordinate Benches of this Tribunal has adjudicated this issue in para 1.2.6 as under:
"12.6. Thus it is evident that the decisive factors for determining inclusion or exclusion of any case in/from the list of cam parables are the specific characteristics of services provided, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit rate, as presumed by the Id. CIT(A). has been prescribed as the determinative factor to make a case incomparable, Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 1OB(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of corn parables."
34.7 The findings of the coordinate Benches of this Tribunal referred above are clear on this point that inclusion and exclusion of the comparables cannot be decided on the basis of the factors other than the factor specified under Rule 1OB(2). Hence, in views of the above discussion we do not accept the objections of the assessee that because of the abnormal profit margin this company should be rejected as a comparable. 17 ITA No.327/M/2013
Syscom Corporation Ltd.
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34.8 Similar view has been taken by this Tribunal in the case of Net Linx India P Ltd (supra) and Stream International Services P Ltd (supra) wherein it was held that comparables cannot be deleted on the ground of high margin."
16. We do fully agree with the view taken by the coordinate bench in the above case and accordingly hold that a comparable cannot be rejected merely on the ground of high margin.
17. The another objection of the assessee against the inclusion of Gemini Communication as a comparable is functional non-comparability. The DRP has dealt with this objection of the assessee in para no. 12, 13 as under:
"12. As regards Gemini Communication Ltd. as comparable of the assessee, the TPO has mentioned in his order that Gemini Communication was thrown up among the list of the comparables, in the study conducted by the assessee. Since it has survived the accept/reject matrix in the search process conducted by the assessee, it should be accepted as comparable. The comparable had been rejected by the assessee on qualitative analysis. In his view, since TNMM is a study where broad similarity of functions are required. Gemini Communication Ltd. could be selected as comparable since it is in the business of telecommunication services Ltd. The assessee, however, has vehemently argued that Gemini Communication was not thrown up in the accept/reject matrix study conducted by the assessee. The observation of the TPO is basically wrong on facts. It was pointed out by the assessee that a letter dt. 3.8.2011 had been filed with annexures showing the entire long list of companies thrown up in the search by the assessee from both the Capitaline and Prowess databases.
13. Examination of the copy of annexures filed in the paper book filed by the assessee reveals that the name of Gemini Communication is not included in both the list. The issue however is not whether it was thrown up by the assessee's study, but whether it is comparable in function and other variables of the assessee. On this issue the assessee has 18 ITA No.327/M/2013 Syscom Corporation Ltd.
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quoted from the annual report of the company which states that the company is engaged into networking services, security solutions, net work management, LAN/WAN, Network search & storage. Gemini consultants are centered on infrastructure and management. Broadly, it can be sated that Gemini Communication is a company in the field of Telecom solutions similar to that of the assessee for the purpose of TNMM analysis."
18. It is clear from the findings of the DRP that M/s Gemini Communication was part of the TP study of the assessee but while selecting the comparables the assessee has not included the said company in the list of comparables without giving any specific reasons for not including in the comparable list. Thus, the assessee has not explained any reason in the TP study for non-inclusion of Gemini Communication in the list of comparables. Though, the assessee has raised an objection before the DRP that the said company is in a different business which includes services and solution of various natures to Telecom companies. The Ld. DR, on the other hand, pointed out that the said company has shown cost of material in the profit and loss account which has been countered by the Ld. AR by referring the notes on account and the annual report to show that the cost of material relates to the value of imparted material consumed in providing services. All these aspects have not been examined by the authorities below while deciding the issue of comparability because the main thrust of the argument of the assessee against the inclusion of Gemini Communication was super normal profit earned by the said company. Therefore, neither the ground of functional non-comparability was seriously raised by the assessee nor it was properly examined by the authorities below. Accordingly in the interest of 19 ITA No.327/M/2013 Syscom Corporation Ltd.
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justice we set aside this issue of functional comparability of M/s Gemini Communication to the record of the TPO for proper examination and adjudication. We may clarify that if only a segment of the business of M/s Gemini Communication is found as comparable to the assessee then the segmental results may be considered for determination of ALP.
19. As regards, exclusion of Punjab Communication Ltd., we find from the record that the said company is a persistent loss making company. The financial details given at the back side of page no. 70 of the paper books show that for the last four years this company has been consistently suffering loss. The persistence loss from year after year itself shows existence of exceptional and extreme circumstances and therefore is a good reason for exclusion of the company from comparables. There is a consistence view of this Tribunal on this point that a company showing persistent losses from year after year cannot be considered as a good comparable for the purpose of determination of ALP. In the case of Advance Power Display Vs ACIT (supra) one of us the Judicial Member is a party to the said decision has taken a similar view in para 10.2 as under:
"10.2 Even otherwise when the comparability of the case has to be tested independently for each year, then without examination of the comparability, no case can be accepted as a comparable, solely on the basis that it has been accepted as comparable in the subsequent year. From the annual report of the company M/s BCC Fuba India Ltd., it is clear that this company is showing persisting loss from year after year and therefore, in view of the series of decisions of this Tribunal on the point that persisting loss making company cannot be considered as a good comparable for the purpose of determination of the ALP."20 ITA No.327/M/2013
Syscom Corporation Ltd.
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20. In view of the above discussion and fact and circumstances of the case we hold that the Punjab Communication Ltd. which is suffering persistence loss year after year for last four years cannot be considered as good comparable for the purpose of determination of ALP.
21. Ground No. 7 is regarding not considering M/s Icomm Tele Ltd. as comparable by the DRP. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. The Ld. AR of the assessee has submitted that the assessee selected two alternative comparable namely Icomm Tele Ltd. and M-Tech Innovations Ltd. The DRP while considering the issue has accepted M-Tech Innovations Ltd. as comparable but ignored M/s Icomm Tele Ltd. without giving any reason. Thus, the Ld. AR has submitted that when no reason has been given by the DRP for non-inclusion of Icomm Tele Ltd. the same must be considered as a comparable for determination of ALP.
22. On the other hand, the Ld. DR has submitted that M/s Icomm Tele Ltd. is functionally different from the assessee as the said company is in the business of various different segments namely Telecom, Power, Infrastructure for Power & Telecom, Water & Waste Water and Oil & Gas. He has further submitted that even under Telecom segments, the said company is involved in designing, engineering, procurement and erection of telecom towers and telecom shelters. Therefore, the business profile of the said company is totally different from the assessee. The Ld. DR has 21 ITA No.327/M/2013 Syscom Corporation Ltd.
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filed the details taken from the website of Icomm Tele Ltd. in support of his contention.
23. Having considered the rival submission and carefully gone through the relevant material, we find that the DRP while deciding the issue of inclusion of comparables proposed by the assessee namely Icomm Tele Ltd. and M-Tech Innovations Ltd. has accepted M-Tech Innovations Ltd. as comparables. However, there is no discussion in the impugned order of the DRP about the Icomm Tele Ltd. Therefore, the comparability of Icomm Tele Ltd. has to be considered in view of the relevant facts. As it is evident from the record produced by the Ld. DR that the said company is in the business which is divided in various segments and one of which is Telecom. Therefore, the Telecom segment is only a part of the business and even in the Telecom segment M/s Icomm Tele Ltd. is involved in designing, engineering, procurement and erection of telecom towers, telecom shelters and related passive equipments such as diesel, generator sets, switch mode power supplies, batteries and AC. It is manifest form the business profile of M/s Icomm Tele Ltd. that the said company is functionally different from the assessee which is in the business of manufacturing of SIM cards. Accordingly, we hold that M/s Icomm Tele Ltd. cannot be considered as a comparable of the assessee for the purpose of determination of ALP.
24. Ground No. 8 is regarding incorrect margins of the assessee and comparable. At the time of hearing the Ld. AR of the assessee has stated 22 ITA No.327/M/2013 Syscom Corporation Ltd.
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that the assessee does not press this ground and the same may be dismissed as not pressed. The Ld. DR has no objection if the ground No. 8 is dismissed as not pressed. Accordingly, ground no. 8 of the assessee's appeal is dismissed being not pressed.
25. Ground No. 9 is regarding adjustment for difference in working capital. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. The assessee has filed the details of working capital adjustment at page no. 150 of the paper book. We find that the Transfer Pricing Officer has not examined the details for the purpose of working capital adjustment if any to be made in respect of the comparables. The claim of the assessee was turned out by the TPO on the ground that in the telecommunication industry there is long gestation period and the flow of revenue on sale is generally slow and tardy. Since the issue has not been properly examined by the authorities below, therefore, we remit this issue to the record of the TPO to properly examine the claim of the assessee vis-a-vis the details filed by the assessee and then decide the same as per law.
26. Ground No. 10 is regarding using single year data as against multi year used by the assessee. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. In order to determine the arm's length price in relation to the international transaction, it has to be compared with uncontrolled and unrelated transaction by using the data relating to the financial year in which the international transaction 23 ITA No.327/M/2013 Syscom Corporation Ltd.
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has been entered into. It is stipulated under Rule 10B(4) r.w.s Rule 10D(4) that contemporaneous information and documents should be considered as far as possible for the purpose of comparing uncontrolled transaction with the international transaction. Therefore, the comparability of an uncontrolled and unrelated transaction with the international transaction has to be tested by using current year data. Only when the current year data does not give a true picture of the affairs and results of the comparables due to existence of some abnormal circumstances, the multi year data can be considered. When there is no such abnormal or exceptional circumstances/facts exist for the year under consideration which could have an influence on the results as well as on the determination of transfer prices than the data relating to the financial year in which the international transaction has been entered into shall be used. Accordingly we do not find any force or substance in this ground of the assessee's appeal. The same is dismissed.
27. Ground NO. 11 is regarding considering the data not available to the assessee at the time of preparing the Transfer Pricing Document. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. The Ld. AR has contended that the current year data used by the TPO were not available to the assessee at the time of the TP study prepared by the assessee. On the other hand, the Ld. DR has submitted that the data were available in the public domain and even otherwise when the TPO has determined the arm's length price the data were very much available to the assessee. He has relied upon the decision 24 ITA No.327/M/2013 Syscom Corporation Ltd.
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of Bangalore Benches of this Tribunal in case of 24/7 Customer Com Pvt. Ltd. Vs DCIT in ITA No. 227/Bang/2010 dated 9.11.2012.
28. Having considered the rival submissions and relevant record we find that as per the provision of the section 92C(3) of the Income Tax Act, the Transfer Pricing Officer has jurisdiction/power to collect and consider all relevant material and information apart from the information, documents and data produced by the assessee as required u/s 92D(3) to determine the arm's length price in relation to the international transaction. In the case in hand the TPO asked the assessee to furnish single year/current data instead of multi year data which were furnished by the assessee. Therefore, the single year data taken into consideration for the purpose of determination the arm's length price were very much available in the public domain as well as with the assessee at the time of determination of ALP by the TPO. The Bangalore Benches of the Tribunal in case of 27/7 Customer Com Pvt. Ltd. has considered and decide an identical in para 8.5 as under:
8.5 Use of data by the TPO after the cut off date.
"As regards the data used by the TPO while determining the ALP, we find that it is to be as per the provisions of section 92D of the Act that every person who has entered into international transactions is required to maintain information and documentation thereof. Rule 1OB(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the 'specified date" referred to in section 92F(4) which has the same meaning as 'due date' in Explanation 2 to section 139(1) of the Act. In the assessee's case, this would be '30th day of September' as it is a company. It is clear, after going through the relevant provisions of law, that the Act has not provided for any cut off date up to which 25 ITA No.327/M/2013 Syscom Corporation Ltd.
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only the information in the public domain has to be taken into consideration by the TPO while arriving at the ALP or making TP adjustments. Both the assessee and Revenue being bound by the provision of the Act and Rules are required to take into consideration contemporaneous data relevant to the previous year in which the international transaction has taken place. The assessee is obliged to maintain the information and documentation as required relating to international transactions as per the specified date so that it can be made available to the TPO or the Assessing Officer or any other authority in any proceedings under the Act. We are, therefore, of the view that there is no infirmity in the action of the TPO in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study / documentation."
29. Accordingly, we do not find any error or illegality in the orders of the authorities below on this issue. Further there is no fetter on the powers of the TPO in gathering more relevant information, documents etc. while determining the arm's length price in relation to international transaction. Hence, we reject/dismiss this ground of the assessee.
30. Ground No. 12 is regarding the benefit of proviso to section 92C(2) of the Income Tax Act. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. The benefit of proviso to section 92C(2) is available only when the price of international transaction of the assessee is within the tolerance range of ±5% of the ALP computed by taking the arithmetic mean of more than one price. Thus, it is clear that the benefit under the proviso to section 92C(2) is available only as a tolerance range and not as a standard deduction. Accordingly, we direct the AO/TPO to allow the benefit of the proviso if the prices of the 26 ITA No.327/M/2013 Syscom Corporation Ltd.
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international transaction of the assessee are within the tolerance range of ±5% of the arithmetic mean of more than one comparable prices.
31. Ground No. 13 is regarding the adjustment on account of transfer pricing only to the quantum of the international transactions of the assessee. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. There is no quarrel on the point that the adjustment if any on account of transfer pricing shall be restricted only to the income from international transaction and not to the income of the assessee at entity level. Accordingly the AO/TPO is direct to restrict the adjustment only to the quantum of its international transaction.
32. In the ground No. 14 the assessee has raised the ground that the AE of the assessee has been consistently suffering from operational loss and therefore no adjustment can be made in respect of international transaction. We have heard the Ld. AR as well as the Ld. DR and considered the relevant material on record. Under the Transfer Pricing regulation/provisions the testing party is the assessee and the international transaction entered into by the assessee has to be tested by comparing the same with uncontrolled, unrelated comparable transaction, Therefore, the price of international transaction in the hand of the AE of the assessee is absolutely irrelevant. The concept of Transfer Pricing based on the principle that instead of entering into a transaction with related party if the assessee had entered into a similar transaction with unrelated party what would have been the prices of said transaction 27 ITA No.327/M/2013 Syscom Corporation Ltd.
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between the assessee and unrelated party. The comparison is always in the context of the effect of the related party transaction and unrelated party transaction at the hand of the assessee. Therefore, the financial results of the AE are not at all relevant for the purpose of determination of arm's length price in relation to the international transaction entered into by the assessee. Accordingly, we do not find any merit in the ground raised by the assessee. The same is dismissed.
33. Ground No. 15 is regarding addition on protective basis on account of AIR reconciliation. We have heard the Ld. AR as well as the Ld. DR and consider the relevant material on record. The DRP has adjudicated this issue in para 26-27 as under:
"26. The 12th ground is against adjustment to the income of the assessee on account of AIR reconciliation. The Assessing Officer has added an amount of ` 435,673/- being the difference on account of AIR reconciliation which could not be reconciled by the assessee. The assessee itself stated that after making considerable efforts has been able to trace the entity to which the amount mentioned in the AIR report to which the amount belongs.
27. The ground is disposed off with the direction to the Assessing Officer to take the matter with the concerned authorities managing the AIR information and get the mistake rectified, if any before making the addition."
34. It is clear from the findings of the DRP that the Assessing Officer was directed to take the matter with the concerned authorities managing the AIR information and get the mistake rectified if any before making the addition. The Assessing Officer while passing the impugned order in compliance to the DRP direction has mentioned that if any information 28 ITA No.327/M/2013 Syscom Corporation Ltd.
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received from CIB, Delhi with an indication that the information uploaded by the CIB is not correct/not pertaining to the assessee, the addition made on this account will stand cancelled.
35. In view of the above facts and circumstances and in the interest of justice, we direct the Assessing Officer to get the relevant information in this regard and accordingly decide this issue.
36. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on this day of 12th July 2013 आदे श क घोषणा खले ु यायालय म दनांकः 12th जुलाई को क गई ।
Sd/- Sd/-
पी.एम
पी एम.
(पी एम जगताप)
जगताप ( वजयपाल राव)
लेखा सद य या यक सद य
(P. M. JAGTAP) (VIJAY PAL RAO)
Accountant Member Judicial Member
Place: Mumbai : Dated: 12th July 2013
Subodh
Copy forwarded to:
1 Appellant
2 Respondent
3 CIT
4 CIT(A)
5 DR
/TRUE COPY/
BY ORDER
Dy /AR, ITAT, Mumbai