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Income Tax Appellate Tribunal, PUNE BENCH, ‘C’ PUNE
Before: SHRI R.S. SYAL & SHRI S.S.VISWANETHRA RAVI
आदेश / ORDER
PER R.S. SYAL, VP : This appeal by the assessee is directed against the order dated 13-02-2020 passed by the CIT(A)-13, Pune in relation to the assessment year 2010-11. 2. The appeal is time barred by 57 days. The assessee filed the appeal on 29-06-2020. Prima-facie, the delay period pertains to Covid-19 Pandemic and hence, covered by the judgment of Hon’ble Supreme Court in Cognizance for Extension of Limitation, In re 438 ITR 296 (SC) read with judgment in
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Cognizance for Extension of Limitation, In re 432 ITR 206 (SC)
dated 08-03-2021 and 421 ITR 314 where the Hon’ble Apex
Court took a suo motu cognizance of the situation arising out of
the challenges faced by the country on account of COVID-19
Virus and resultant difficulties that could be faced by the litigants
across the country and accordingly extended the time limit for
filing of the appeals. We, therefore, condone the delay in filing
the instant appeal and admit the same for disposal on merits.
Succinctly, the facts of the case are that the assessee is
engaged in providing after-sales support and market support
services in respect of machines sold by its foreign related entities
in the territory of SAARC region. The assessee also carries out
Trading of spares and tools and Job work. Instantly, we are
concerned only with the five international transactions of
receipt/rendition of services grouped as one transaction for
benchmarking , comprising of Provision of after-sales and market
support services (Receipt) amounting to Rs.4,58,03,483/-;
Provision of IT services (Payments) Rs.32,91,958/-; Cost
Allocation (Payments) Rs.11,18,258/-; Recovery/Reimbursements
Expenses (Receipts) Rs.1,23,12,159/-; and Reimbursements
Expenses (Payments) Rs.44,10,011/-. The assessee aggregated
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the above five transactions and applied the Transactional Net
Margin Method (TNMM) for determining its Arm’s Length Price
(ALP). Calculating its Operating Profit/Operating Cost (OP/OC)
as Profit Level Indicator (PLI) at 4.20% from the above five
transactions, the assessee chose certain comparables giving lower
similar average PLI for demonstrating that the international
transaction was at ALP. The Transfer Pricing Officer (TPO)
changed the composition of comparables and shortlisted ten
companies as comparables with their average OP/OC at 25.30%.
On this basis, he determined the amount of transfer pricing
adjustment at Rs.1,26,70,656/-. The AO initially notified the
draft order incorporating the transfer pricing adjustment as
proposed by the TPO and thereafter passed the final assessment
order. The assessee filed appeal before the ld. CIT(A) and got
certain reliefs. The ld. DR has not brought to our notice any
appeal having been filed by the Department against the impugned
order. In the instant appeal, the assessee is aggrieved by the
exclusion of two companies and inclusion of one company
from/to the final tally of comparables.
I. Ma Foi Global Search Services Limited and Ma Foi
Management Consultants Ltd. :
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These two companies were included by the assessee in the
list of comparables. The TPO excluded them, inter alia, on the
ground that they maintained their accounts following calendar
year as against the assessee following financial year. The ld.
CIT(A) echoed the assessment order on this count.
Having heard both the sides and gone through the relevant
material on record, it is seen that this issue is no more res integra
in view of the judgment of the Hon’ble jurisdictional High Court
in CIT Vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 176 (Bom.)
holding that two companies with different financial year endings
cannot be considered as comparable. The ld. AR was fair enough
to accept the position against the assessee. We, therefore,
countenance the exclusion of these two companies from the list of
companies.
II. ICC International Agencies Limited (Segment) :
The assessee included this company in the list of
comparables, which was not disputed by the TPO. The assessee
raised a contention before the ld. CIT(A) that this company was
wrongly included. The ld. CIT(A) remained unconvinced, which
has brought the assessee before the Tribunal.
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In principle, there can be no bar on the assessee seeking
exclusion of a company which was inadvertently included in the
list of comparables. What is relevant for consideration is the
comparability and not the suo motu inclusion or exclusion by the
assessee. The way in which the TPO can exclude certain
companies, included by the assessee in the list of comparables,
which are actually not found out to be so, the assessee can also
seek exclusion of a company which was wrongly treated by it as
comparable. Our view is fortified by the judgment of the Hon’ble
jurisdictional High Court in CIT Vs. Tata Power Solar Systems
Ltd. (2017) 298 CTR 197 (Bom.).
Now comes the question as to whether ICC International
Agencies Ltd. is really not comparable so as to qualify for
exclusion? The TPO accepted the segmental financials of the
company which are germane to the functional profile of the
assessee in the international transaction under consideration. This
fact is not disputed by the ld. AR as well. The TPO computed
OP/OC of this company at 106.80%. The assessee urged before
the ld. CIT(A) that this company should be excluded because of
its inconsistent profitability trend. To buttress this contention, the
assessee submitted the PLI (OP/OC ratio) of this company, as
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recorded on page 27 of the impugned order, at 187% for the year
2008; 38% for the year 2009; 96% for the year 2010; 34% for the
year 2011; and 27% for the year 2012. The assessee also made a
mention that the OP/OC for the year 2010, namely the year under
consideration, was wrongly taken by the TPO at 106% as against
the correct profit rate of 96%. It is on the strength of this
fluctuation in the profit margins over the period that the assessee
is seeking exclusion of this company from the list of comparables.
At this stage, it is relevant to note that the computation of
arm's length price under the Indian transfer pricing provisions is
embodied in section 92C of the Act. Sub-section (1) of this
section provides that the arm's length price in relation to an
international transaction shall be determined by any of the given
methods, being the most appropriate method, having regard to
certain factors. Proviso to sub-section (2), which assumes
significance for the present purpose, states that : ‘where more than
one price is determined by the most appropriate method, the arm's
length price shall be taken to be the arithmetical mean of such
prices’. Whereas some countries have adopted the inter-quartile
range for the ALP determination, which is also called the
midspread or middle fifty, India has adopted the arithmetic mean.
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It is quite natural that two or more companies operating in the
same field, which are otherwise comparable, tend to have
different profit margins. The rationale behind averaging of the
profit margins of the comparables, under the Indian legislature, is
to iron out the fluctuations so as to reach at a benchmark profit
margin. When average of the margins of all the comparables is
adopted to find out the arm’s length margin, it takes care of the
individual high profit or lower profit margin companies which are
otherwise comparable. This deciphers that a company which is
otherwise similar to the assessee and passes all the tests of
comparability, cannot be excluded from the list of comparables
simply because of its high or low profit margin. There is no
mention in the language of the provision for the exclusion of
potential comparable companies simply on account of high or low
profit rate. The only caveat, in our considered opinion, is to look
at the reasons for the high or low profit margins returned by such
otherwise comparable companies. If the abnormal profit/loss
occurs because of some abnormal business conditions of that
company for the relevant year, then it would require exclusion.
If, on the other hand, the high profit or high loss reflects the
normal business conditions, then such company has to be
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included in the list of comparables. The decisive test, therefore, is
the existence or otherwise of some abnormal business conditions
prevailing in the relevant year leading to the high or low profit
margin and not per se such high or low profit margin. If we
concur with the view point of the ld. AR that the high margin
companies de hors any other reason, should be excluded, then the
entire exercise of determining the ALP would be thwarted and the
selection of comparables will be restricted only to few select
companies throwing the very concept of the ALP to the winds.
Ex consequenti, it is held that a potential comparable cannot be
excluded merely on the ground of its high or low profit margin
unless such rate of margin is because of abnormal business
conditions prevailing during the year in question.
Adverting to the facts of the instant case, we find that the
TPO considered ten comparable companies including the relevant
segment of ICC International Agencies with OP/OC at 106.80%.
Apart from that, the TPO also green-signaled the inclusion of two
more companies with negative profit margins, namely, Overseas
Manpower Corporation Limited with OP/OC at (-)23.31% and
Times Innovative Media Limited with OP/OC at (-)11.35%. This
shows that the approach of the TPO in treating the otherwise
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comparable companies for the purposes of inclusion in the list of
comparables by the TPO is consistent, irrespective of their having
earned high profits or incurred losses.
Though the TPO recorded OP/OC of ICC International
Agencies at 106.80%, the assessee contended before the ld.
CIT(A) that its correct profit margin was 96%. Now a
diametrically opposite stand is being taken by the ld. AR
contending that the actual profit margin of this company is more
than 106.80%. To support such a contention, he put forth certain
unverified calculations, which were not before any of the
authorities below. In support of his contention urging for the
exclusion of this company on the ground of high profit, he relied
on a Tribunal order in Cummins Turbo Technologies Ltd., UK Vs.
DDIT (IT) (ITA Nos.161 & 269/PUN/2013) in which the Tribunal
ordered the exclusion of a company with higher profit margin.
At the cost of repetition, we reiterate that an otherwise
comparable company with a high or low profit margin cannot be
excluded just because of low or high profit rate. It would merit
exclusion if it is proved that such high or low profit margin was
because of some abnormal business conditions relevant to the
year under consideration. Apart from contending that this
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company returned higher OP/OC for the year, no specific
argument was put forth by the ld. AR to show that such profit
margin was not the normal incidence of business. The assessee
has not disputed the functional comparability of this company or
the FAR analysis. The ld. AR failed to bring to our notice the
company not passing any of the filters. Reliance on Cummins
Turbo Technologies (supra) is again misplaced. In that case, the
company reported loss of 6.47% for the F.Y. 2003-04; loss of
69.07% for the F.Y. 2004-05; and loss of 44.21% for the F.Y.
2005-06 and there was positive margin of 3.67% for the F.Y.
2007-08 with the F.Y. 2006-07 under consideration. The
Tribunal, on the facts of that case ordered the removal of the
company but by accentuating that a company cannot be excluded
only because of high profit margin. In view of the fact that the ld.
AR has simply harped on the high profit margin as a reason for
seeking exclusion without pointing out any abnormal business
conditions existing with that company for the year under
consideration, we find no reason to disturb the conclusion drawn
by the ld. CIT(A) in echoing the inclusion of ICC International
Agencies Ltd. (Segment) in the list of comparables.
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Ground No.3 about the levy of interest is consequential and
Ground No.4 about the initiation of penalty proceedings is
premature.
In the result, the appeal is dismissed. Order pronounced in the Open Court on 15th September,
2022.
Sd/- Sd/- (S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 15th September, 2022 सतीश आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The respondent 2. 3. The CIT(A)-13, Pune 4. The PCIT-5, Pune 5. DR, ITAT, ‘C’ Bench, Pune गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
ITA No.442/PUN/2020 Trumpf (India) Private Limited
Date 1. Draft dictated on 14-09-2022 Sr.PS 2. Draft placed before author 15-09-2022 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.
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