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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’, NEW DELHI
Before: Sh. Saktijit DeyDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order dated 25.06.2021 passed by the National Faceless Assessment Centre, Delhi u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961.
2. Following grounds have been raised by the assessee:
“A. General Grounds
1. That on the facts and in law, the Learned AO/TPO erred in assessing the income of the Appellant for the relevant assessment year at INR 2,51,40,768 as against the returned income shown as INR 70,52,530.
2. The Ld. AO has erred in law, facts and circumstances by initiating the penalty proceedings under section 271(1)(c) of the Act against the appellant for concealment of particulars of income.
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3. That on the facts and in law, the Ld. TPO/AO failed to recognize that Appellant is joint venture between two unrelated entities.
B. Inappropriate economic analysis
4. That on the facts and in law, the Learned AO/TPO grossly erred in undertaking an opaque analysis and acting in violation of natural justice by not sharing the search methodology, keywords used, criterions of selection/rejection of companies, number of companies rejected by way of applying various filters applied for identification of comparable companies, for the purpose of making impugned adjustment.
5. That on the facts and in law, the present comparability analysis needs to be discarded and a fresh analysis having regard to the functional profile ought to be undertaken whereby determination of most appropriate method considering appropriate comparable data along with necessary comparability adjustment needs to be undertaken.
6. That on the facts and in law, the Learned AO/TPO did not apply a scientific process of selection of new comparable companies and merely “cherry-picked” companies arbitrarily without providing any cogent reasons for selecting the companies.
7. That on the facts and in law, the Learned AO/TPO erred in selecting inappropriate set of comparables for re-determination of the arm’s length price disregarding the functional profile of the Appellant.
8. That on the facts and in law, the Ld. TPO/AO erred in selecting the comparable data available while determining the most appropriate method.
9. That on the facts and in law, the Ld. TPO/AO erred/failed to provide appropriate comparability adjustments specially when the Appellant was in the initial year of operations and comparability adjustments for the same ought to have been provided. Without prejudice, the Ld. TPO/AO have failed to provide any comparability adjustment to the Appellant.
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C. Specified Domestic Transactions
10. That on the facts and in law, the Ld. TPO/AO erred in determining the arm’s length price of the specified domestic transaction ignoring that the said provision has already been repealed.
11. That on the facts and in law, the Ld. TPO/AO erred in ignoring the fact that the transaction between the related parties for domestic purchases was a revenue neutral transaction as both transacting parties were taxable at maximum marginal rate and no entity was claiming any tax holiday exemptions.
D. International Transactions
12. That on the facts and in law, the Ld. TPO/AO ought to have provided the benefit of proportionate adjustment to the Appellant.
That on the facts and in law, the order passed by the Ld. TPO/AO suffers from various arithmetic computational errors in margin of the comparable companies thereby impacting the determination of ALP and the total income of the Appellant without considering the rectification application submitted by the Appellant.”
3. The assessee is engaged in the business of manufacturing and assembling of setup boxes. During the year in consideration, the assessee has entered into an international transaction with its AE for purchase of raw material.
4. The assessee has mainly argued with regard to three comparables.
5. BCH Electric Ltd. – The main argument of the assessee is that while the assessee is in manufacturing of setup boxes, the comparable is a well recognized, switchgear and low voltage panel manufacturer of low voltage electrical and electronic control. The turnover of the comparable is Rs.281 crores
4 Aggressive Digital Systems Pvt. Ltd. compare to the turnover of the assessee of Rs.48 crores. Though assessee argued on the un-comparable turnover, keeping in view 1:5 ratio of the comparable, we are unable to accept the contention of the assessee on the turnover filter. At the same time, we find that the operation and manufacturing of the assessee is functionally dissimilar to the comparable which is in the manufacturing of voltage panels. Hence, we hold that the comparable doesn’t pass the functional analysis and is liable to be excluded from the list of comparables.
6. Havells India Ltd. – The turnover of the company is Rs.5833 crores and is involved in manufacturing of domestic electronic and electrical products like switches, heaters etc.
It has been decided in number of Tribunal decisions that the companies having a turnover from Rs. 1 Crore to Rs. 200 Crores have to be taken as a particular range. Since the assessee company falls in this range having total turnover of Rs. 18.97 Crores, the companies which have turnover in the range of Rs. 1 Crore to Rs.200 Crores only should be taken into consideration for comparable for the purpose of determining arm’s length price. This proposition is being consistently followed by various benches of the ITAT such as:
Yokogawa IA Technologies India (P.) Ltd. vs. DCIT [2019] 112 taxmann.com 341 (Bangalore — Trib.) Triology e-Business Software India (P.) Ltd. vs. DCIT, Circle 12(4), Bengaluru [2021] 127 taxmann.com 255 Autodesk India (P.) Ltd. v. DCIT, Circle 11(2), Bangalore [2016] 96 taxmann.com 263 (Bangalore - Trib)
5 Aggressive Digital Systems Pvt. Ltd. Tavant Technologies India (P.) Ltd. v. DCIT, Circle 7(1)(1), Bangalore [2020] 120 taxmann.com 122 (Bangalore - Trib.)
It may also be noted that the Hon’ble Karnataka High Court in the case of Acusis Software India (P.) Ltd. v. ITO, Ward-11(1), Bangalore [2018] 98 taxmann.com 183 (Karnataka) approved the decision of ITAT holding that if the turnover of the comparable company is less or more than 10 times the turnover of the assessee, then it cannot be considered as a comparable company.
9. Hence, keeping in view the judicial pronouncements and also the functional profile of the comparable, we hold that the comparable doesn’t pass the functional analysis and turnover filter and hence is liable to be excluded from the list of comparables.
Eddy Current Controls (India) Ltd. – The company is engaged in manufacturing of current variable speed drives, water coo eddy and related control system while the assessee is purely into the manufacturing of setup boxes. Eddy is introduced India’s First indigenously developed electric car “LOVE BIRD.” The company is into manufacturing of Eddy current drive, drives & controls for HTS, Tachogenerator, Dynamometer, platform truck and electric buggy.
Since, there is a stark product differentiation, it cannot be considered as a comparable company and hence is liable to be excluded from the list of comparables.
Before us, the ld. AR submitted that the assessee has not represented before the AO nor filed TPSR hence the matter
6 Aggressive Digital Systems Pvt. Ltd. should be remanded back. The written arguments of the ld. DR are as under:
“Kindly refer to the above. This case was argued by the undersigned. The Assessee submitted Gist of arguments in writing which was provided to the undersigned during the course of hearing through Email. During the hearing I have made following oral submissions:
During the course of hearing Ld. Counsel for the Assessee has said that he is pressing only ground No. 7 of the appeal and has not pressed other grounds. In the instant case assessee has declared a operating profit margin of only 1.67% (AR of the assessee also agreed to this fact). The assessee is in the business of set top boxes manufacturing and apparently a margin of 1.67% is very low on any yard stick for manufacturing sector.
As seen from the TPO order there was repeated non- compliance on the part of the assessee by the TPO. Relevant part of the TPO order is reproduced below:-
S. Notice u/s Date of Date of Summary of Remarks N. /reminder notice/ compliance contents reminder fixed as per the notice 1 92CA(2) and 14.12.2018 26.12.2018 Detailed No compliance 92D(3) questionnaire for and no initiation of TP request for proceedings adjournment either 2 92CA(2) and 17.01.2019 29.01.2019 Detailed -do— 92D(3) questionnaire for TP proceedings 3 92CA(2) and 13.09.2019 19.09.2019 Detailed -do— 92D(3) questionnaire for TP proceedings
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4 271G 20.09.2019 27.09.2019 Notice u/s 271G- -do— penalty notice for failure in compliance 5 92CA{2) and .10.2019 21.10.2019 Detailed -do— 92D(3) questionnaire for TP proceedings
After the repeated non compliance AO had issue detailed show cause notice to the assessee vide notice dated 15.10.2019 however assessee did not submit any reply. After waiting full 15 days the TPO was compelled to pass the order.
The TPO has applied detailed filters while selecting comparables and filters are enumerated in the TPO order as well as in the DRP order.
As per Rule 10D(1) (e),(g),(h),(i) and (j) the assessee was required to do FAR analysis. The assessee was supposed to maintain relevant documents for international taxation and the assessee also required to submit TP study report. However, the assessee has not done any of the above. In gross violation and Rule 10D. Relevant portion of Rule 10D is reproduced below:-
Rule 10D(1) Every person who has entered into an international transaction [or a specified domestic transaction] shall keep and maintain the following information and documents, namely:— (e) a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction [or the specified domestic transaction]; (f) a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or 8 Aggressive Digital Systems Pvt. Ltd. product separately, which may have a bearing on the international transactions [or the specified domestic transactions] entered into by the assessee; (g) a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions [or the specified domestic transactions] entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions [or specified domestic transactions, as the case may be]; (h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction [or specified domestic transaction]; (i) a description of the methods considered for determining the arm's length price in relation to each international transaction [or specified domestic transaction] or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case; (j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions;
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In view of the above it can be seen that the order which has come before the Hon. Tribunal is in the nature of ex-parte of the order. Following judicial pronouncements forbid any change in best judgment assessment- (i) 24 ITR 95 (Del) - Singh Engg. Work - Best judgement Assessment cannot be interfered with by appellate authority or courts unless it is shown to be malafide and capricious. The burden is on Assessee to show AO's order malafide capricious and unreasonable.
(ii) Best judgement of the Assessing Officer cannot be converted into regular assessment at appellate stage by producing fresh material the best judgement of the Assessing Officer cannot be questioned so long as it is not arbitrary & has a nexus with facts.
RAYALA CORPORATION 215 ITR 883 (Madras), 898, SUFALI ABDVLALI 90 ITR 271, 278-280 (SC)
7. Before DRP the assessee has requested for inclusion of three comparables which are in the business of set top box manufacturing:-
A. Laxmi Remove Pvt. Ltd. B. Logic Eastern Pvt. Ltd C. STB Technology Pvt. Ltd It is not clear how the assessee has cherry picked these three manufacturers out of many other parties which are in the business of set top box manufacturing. Some of the prominent manufacturers of set top box during FY2015-16b are Logic Eastern, My box Tech, Discom, Videocon, Amagi and many other.(Annexure A- material downloaded from internet)
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It is not clear how the assessee has offered only these three comparables without doing any FAR study without showing accept reject matrix. Therefore, cherry picking done by the assessee should not be allowed. In case if any comparable is removed at this stage then the TPO may be allowed to include other comparables from the parties which are there in set up box manufacturing. From the written submission given by the assessee today it is apparent that the assessee's only attempt is reduce number of comparables to below seven so that the assessee gets the benefit of 3% range by hook or by crook. Allowing the assessee to reduce number of comparables further at appellate stage will lead to a non compliant assessee being placed in an advantageous position vis-a via complaint assessees.
8. Without prejudice to above arguments it has been held by courts that where AO's investigations is not complete matter should be remanded. It is the duty of appellate authorities to correct the lacune in orders of authorities below and is required to remit the issue to the AO.
KAPURCHAND SRIMAL: 131 ITR 451 (SC), 40 ITR 298 (SC) Guduthur Bro vs ITO
In the written submission the assessee has stated that the product profile of the assessee is different and therefore some of the comparables introduced by the AO should be rejected on the ground of functional difference. This issue has been dealt by Hon. DRP in page 6 para 3.1. 7 and para 3.1.8 of their order the same is reproduced below:-
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The Panel notes that if a company which is otherwise comparable, is also engaged in a minor activity different from the assessee then, this company cannot be excluded from the comparables only because of this minor difference. A perfect comparable is never available and such variations as pointed out by the assessee are not material, as the variations in both directions would balance themselves. This has been recognized by the Hon'ble ITAT in the following decisions:
(i) ST Microelectronics Pvt Ltd v Add! CIT 2011-TII-63-ITAT- DEL-TP (ii) Varient Systems (India) Pvt Ltd v ITO 2015-411-362- ITAT-DEL-TP 3.1.8 Comparable cannot be expected to be a perfect replica A comparable cannot be expected to be a perfect replica. This has been recognized by the Hon'ble ITAT in the following decisions:
(i) DCIT v Deloitte Consulting India Pvt Ltd (2011 -TII-88- ITAT-HYD-TP)
In our considered opinion, no two comparable companies can be replicas of each other. Tire application of Rule 10B should be carried out and judged not with technical rigor, but on c broader prospective.
(ii) ITO v CRM Services India (P) Ltd (2011-TII-80-ITAT-DEL- TP) As is our experience, it is nearly impossible to get comparable cases with no difference at all.
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As discussed in the earlier paras if the comparables are to be rejected on the ground of functional difference in that case AO may be directed to look into all cases of set up boxes manufactures and the assessee may be directed to submit a TP study report and the matter may be set aside.
8. Turnover filter- in following cases Hon. Tribunal has upheld upper and lower turnover of 10 times and 1/10th.
(i) The Tribunal allowed assessee’s plea for exclusion of 4 comparables while benchmarking the provision of software R&D services to AEs during AY 2012-13 and held that the assessee could not be compared to the following companies:
• Infosys Limited, Larsen and Toubro Infotech Limited and Persistent Systems Limited on account of turnover filter. It held that the 3 companies failed the turnover filter of 1/10th and 10 times of assessee’s turnover i.e. 18.45 crores as they had very high turnover i.e.31253 cr. 2960 cr. and 810 cr. respectively.
• Genesys International Corporation Limited on the ground of functional dissimilarity as the company was engaged in development of cutting edge applications by developing state of the art GIS technologies and allied spatial data acquisition, processing and integration techniques to meet the demand of the consumers.
UEI Electronics Pvt. Ltd Vs DCIT [TS-274-ITAT-2017(Bang)-TP - IT(TP)A No.2005 (Bang)/2016 dated 10.03.2017 (ii) The Tribunal relying on the decision of the coordinate bench in the case of Thomson Reuters India Services Pvt. Ltd. [TS-1084-ITAT-2016(Bang)-TP] held that Vishal Information
13 Aggressive Digital Systems Pvt. Ltd. technology ltd was functionally dissimilar as it provided agency services by way of outsourcing to third party vendors and acted as an intermediary between final customer and vendor and directed the AO/TPO to re- adjudicate the issue relating to comparability of Vishal Information Technology Ltd. in respect of assessee’s IT enabled back office services for AY 2005-06. Further, it also upheld Revenue’s adoption of RPT filter of 15% rejecting CIT(A)’s 0% RPT filter noting that the Tribunal had, in a series of decisions, held that the tolerance range of RPT in normal circumstances was 15% and in extreme cases it could be extended upto 25%. Also, relying on the decision in the case of Wipro BPO Solution Ltd., directed TPO to apply turnover filter of 10 times of assessee’s turnover on both sides since it was a consistent view that the if turnover was within range of 1/10th of the turnover or upto 10 times, then the comparable was considered to be a good comparable. Accordingly, it remitted the issue to the file of the AO/TPO to carry out the search afresh pursuant to its directions.
Sykes Enterprises (India) Pvt Ltd [TS-410-ITAT-2017(Bang)-TP] - IT(TP)A No.1034//Bang/2011 dated 28.04.2017 (iii) The Tribunal following the ruling in McAfee India excluded 3 companies viz. L&T Infotech Ltd (turnover of 2.959.55 cr). Persistent Systems Ltd (turnover of 810.36 cr.) and Mindtree Ltd (Turnover of 1255.80cr) from the list of comparables while benchmarking the international transaction of the assesse engaged in the business of software development services as the said companies failed to satisfy the turnover filter of 10 times the assessee’s turnover i.e. 38.07 cr.
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Aptean Software India Pvt Ltd vs DCIT [TS-332-ITAT- 2017(Bang)-TP- I.T(TP).A No. 1826/Bang/2016 dated 15.05.2017 (iv) The Tribunal upheld the application of the turnover filter of 10 and 1/10th times assessee’s turnover and also directed the TPO to adopt a 15% related party transaction filter in view of the fact that there were adequate number of comparable companies. It observed that the entire TP-issue required fresh examination and consideration at AO/TPO’s level as the comparability of the entire set of comparables had to be decided by applying the appropriate filters. Accordingly, it set aside the transfer pricing issue for AY 2008-09 including the issue of selection of comparables to TPO for fresh consideration after giving opportunity of being heard to assessee.
Microchip Technology (India) Pvt. Ltd v ACIT - TS-384-ITAT- 2017(Bang)-TP - I.T.(T.P) A. No.1586/Bang/2012 dated 03.05.2017.
(v) The Tribunal relying on the decision in the case of Thyssen Krupp Industries (P) Ltd [TS-46-ITAT-2013(MUM)-TP] (Confirmed by Bombay High Court [TS-134- HC-2016(BOM)-TP] held that the assessee engaged in the business of providing Engineering Consultancy services in the field of chemicals, petrochemicals, fertilizers, cement, pharmaceuticals and allied industries could not be compared to:-
• Engineers India Ltd and Water and Power Consultancy Ltd as they were Government companies and the contracts between Public Sector Undertakings were not driven by profit motive alone by other consideration also, such as discharge of social obligations.
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Further, it directed the AO to exclude infrastructure and overhead recoveries in the case of L&T Sargent & Lundy Limited, as they were mere reimbursement of expenses incurred by a group concern on behalf of the assessee and hence should not be considered as a commercial transaction involving profit element while computing the percentage of related party transactions. Relying on the decision in the case of McAfee Software India P Ltd [TS-136-ITAT-2016(Bang)] it held that the co-ordinate bench had consistently accepted the turnover filter at 1/10th to 10 times of turnover and the adoption by TPO of filter of 1 /4th to 4 times the assessee’s turnover was arbitrary in nature. Accordingly it directed the AO/TPQ to adopt a filter of 1/10th to 10 times of the turnover of the assessee. It accepted assessee’s argument that Telecommunications Consultants India Ltd was functionally similar to the assessee and held that since it had been accepted as a comparable in the earlier year and subsequent year in the assessee’s own case, the TPO was not justified in rejecting the same during the year under consideration and accordingly restored the issue to the file of the AO with the direction to finalize the comparables.
Jacobs Engineering India Private Limited vs DCIT-TS-428-ITAT- 2017(MUM)-TP- I.T.A.No.7194/Mum/2012 dated 17.05.2017
9. In view of the above it is prayed that the order of the DRP may be upheld alternatively the case may be reminded back to the TPO and the assessee may be directed to submit fresh TP report and thereafter the TPO may carry out TP analysis.”\
13. We find that the reply of the assessee is only with regard to the adjudication of the ld. DRP on the comparables, hence
16 Aggressive Digital Systems Pvt. Ltd. doesn’t amount to any admission or appraisal of new evidences before us. The assessee did not appear before the TPO but appeared before the ld. DRP. Before us, the order of the ld. DRP is being contested. Hence, the objections of the ld. DR as mentioned above is not pertaining to the order before the ld. DRP.
We also were made aware that penalty proceedings for non-compliance have already been initiated by the revenue and hence the issue of non-compliance would be dealt separately based on the outcome of the penalty proceedings. Hence, the submission of the ld. AR is not relevant to the issue that is being adjudicated before us.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 10/01/2022.