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Income Tax Appellate Tribunal, [ DELHI BENCH: ‘I–1’ NEW DELHI ]
Before: SHRI N. K. BILLAIYAMS. SUCHITRA KAMBLE
The assessee company is engaged in the business of research and development of two wheelers and power producers. Assessee filed its return of income on 28.11.2013 declaring an income of Rs.1,19,16,780/-. During the year under consideration the assessee had undertaken international transaction with its associated enterprises. The case was referred to Transfer Pricing Officer (TPO). The TPO vide order dated 13.10.2016 made an adjustment of Rs.10,28,08,892/-. Subsequently draft assessment order was passed on 24.11.2016 thereby computing the income at Rs.4,10,07,860/-. The assessee filed objection before the Dispute Resolution Panel (DRP). The DRP vide direction dated 25.08.2017 directed the TPO to make verification on certain issues. The TPO vide order giving effect to the DRP passed order dated 18.09.2017 thereby re-computing the ALP adjustment under Section 92CA of the Act. The Assessing Officer passed assessment order dated 28.09.2017 thereby making ALP adjustment / addition of Rs.4,74,55,478/-.
Being aggrieved by the assessment order the assessee filed appeal before us.
The ld. AR submitted that the main issue in the present appeal is related to the exclusion and inclusion of the comparables. Firstly, we are taking up exclusion contested by the assessee:
(a) M/s Aptico Ltd. : The TPO has accepted the sale comparable in the final list of comparables thereby stating that it is in business / market support services. The ld. AR submitted that this particular comparable company is functioning dissimilar as it is engaged in providing high-end technical services. Besides this, the ld. AR pointed out that this company is a Govt. company and cannot be taken into account as comparable. The ld. AR relied upon the decision of Hon’ble Delhi High Court in the case of CIT Vs. Phillip Morris Services Ltd. (ITA. 1468/2018) and also relied upon PCIT Vs. International SOS Services India Pvt. Ltd. (ITA. 454/2016). The ld. AR further relied upon the decision of the Tribunal in the case of Bergen Engines Pvt. Ltd. [TS 305-ITAT-2020 (Del) TP] (Assessment Year 2013-14). The ld. DR submitted that merely being a Govt. company and engaged in providing high-end technical services does not disqualify this comparable as the ratio of 16.82% and cannot be held as non-comparable company.
(b) Axis Integrated System Ltd. : The TPO included this comparable for the reason that it is engaged in market support services. The ld. AR submitted that this functionally dissimilar as this comparable company is engaged in addressing regularly and licensing requirement and act as a license between all related Govt. and regularity agencies. The ld. AR relied upon the decision of the Tribunal in the case of Li & Fung India Pvt. Ltd. [TS 352-ITAT-2018 (Del) TP] (Assessment Year 2013-14) and also relied upon Bergen Engines Pvt. Ltd. (Supra).
The ld. DR submitted that this comparable case has a similar function and is even the merely being a Govt. company and is within the margin i.e. 38.19%. The ld. DR further submitted that the TPO has rightly selected this comparable company in the final list.
(c) Killik Agencies and Marketing Ltd. :
The TPO included this comparable company as it is engaged in support services, Revenue Services and Commission Income) for the reason that it is engaged in market support services. The ld. AR submitted that this comparable company is functionally dissimilar as it is engaged in marketing specialized products. The ld. AR further relied upon further decision of Bergen Engines Pvt. Ltd. (Supra).
The ld. DR submitted that this comparable company is functionally similar to that of assessee company and relied upon the order of the TPO and DRP.
Now coming to the inclusion of the comparable companies contested by the assessee :
(a) Hi-Tech Laboratories Ltd. : The TPO rejected this comparable company for the reason that it pays turnover return of less than Rs.1 crore. The ld. AR submitted that the CIT (Appeals) accepted this comparable in assessee’s own case for assessment year 2005-06 as well as the TPO has accepted this comparable in assessment years 2007-08, 2010-11 and 2011-12. The ld. AR further submitted that the DRP also accepted this comparable in assessment year 2007-08. At these assessment years also this company was having less than Rs.1 crore turnover and in fact in some of the comparables it was selected by the TPO. The turnover is less than Rs. 1 crore and thus this filter was not followed by the TPO himself. The ld. AR submitted that this comparable has to be accepted included as it has a comparable margin to that of 10.76%.
The ld. DR relied upon the order of the TPO and DRP.
(b) ITDC Ltd. : The TPO rejected this comparable observing that this comparable company is functionally dissimilar. The ld. AR submitted that “ARMS & Misc. Operation” segment has been considered comparable to HRID. The ld. AR further submitted that this comparable company continues to operate in functional profile which has been accepted by the CIT (Appeals) and DRP in earlier years. The company was considered as comparable by CIT (Appeals) for assessment year 2005-06 which was further upheld by the Hon’ble High Court in this comparable company’s case. Also company has been accepted by DRP in assessment years 2007-08, 2010-11 and 2011-12 as the profile of the company remains same vis-à-vis past year. The ld. AR further submitted that comparable margins of this comparable company is 11.14%. The ld. DR relied upon the order of the TPO and DRP.
(c) Cyber Media Research Ltd.[formerly known as IDC Ltd.]: The TPO rejected this comparable company thereby observing that it is functionally dissimilar and peculiar economic circumstances has occurred in the present assessment year. The ld. AR submitted that the functions are similar to that of assessee company as this comparable company is within the business of research and consulting firm offering customers strategic and tactical insights in the form of marketing intelligence, market sizing, market eco-system, mapping, advisory and go to market services. The ld. AR submitted that the TPO has accepted this comparable in assessee’s own case in assessment years 2008-09, 2010-11 and 2011-12 and there is no change in business since then. The ld. AR submitted that this company cannot be rejected solely on the reason of abnormal function in margins. The ld. AR relied upon the decision of Chrys Capital Investment Advisors (India) Pvt. Limited (ITA. 417/2014) wherein it is held that if a company is functionally comparable it cannot be rejected merely on the ground that it made high / extremely high profits / losses.
The ld. DR relied upon the order of the TPO and DRP. The ld. DR further submitted that the working capital adjustment has not been properly calculated and, therefore, the issue may be remanded back to the file of the TPO / DRP. The ld. DR relied upon the order of the TPO, DRP and further submitted that the TPO and DRP has rightly executed the three comparables as the functional profile of those comparables was not in consonance with the assessee company’s profile. As regards the working capital adjustment is concerned, the ld. DR submitted that if the re-computation is required, then it is necessary to remand back the issue to the file of the TPO / Assessing Officer.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the comparables which were argued by the assessee to be excluded as a functionally dissimilar cannot be simplicitory included. It can be seen from annual report and the documents provided by the assessee before us that the functional profile was not properly verified by TPO / Assessing Officer. Thus, it will be appropriate to direct the TPO to exclude these three comparables i.e. M/s Aptico Ltd.; Axis Integrated System Ltd. and Killik Agencies and Marketing Ltd. As regards the inclusion prima facie after seeing the documentation of all the three companies it can be seen that the functional profile of each of the company were not exactly similar to the assessee company and besides that there are filters which was taken into account by the TPO during the reference proceedings has not been properly sufficient and comparable to the assessee company. Though the assessee pointed out that these companies have to be included, it needs proper verification as the data before us cannot convey as to how these comparables has to be accepted. Therefore, it will be appropriate to remand back the inclusions to the file of the TPO / Assessing Officer for through verification of these comparable companies and if found comparable, the same should be taken into account.
As regards the working capital issue from the perusal of the order of the TPO / Assessing Officer it can be seen that the computation of the working capital adjustment was not properly done and the same has to be done in accordance with the ALP margins. Therefore, we direct the TPO / Assessing Officer to re-compute the working capital adjustment as per the ALP margins. Needless to say the assessee be given an opportunity of hearing by following principles of natural justice. Hence, the appeal of the assessee is partly allowed for statistical purposes.
In result, appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Open Court on this 15th Day of March, 2021.