BASELL POLYOLEFINS INDIA P.LTD,MUMBAI vs. ASST CIT (OSD) 10(1), MUMBAI

O R D E R

PER RAVISH SOOD, JM

“On the facts and circumstances of the case and in law, 1. The Learned Commissioner of Income Tax (Appeals) - 55 ["the Ld. CIT(A)"] erred in not holding that the order of the Learned Transfer Pricing Officer ("Ld. TPO") u/s. 92CA(3) of the Income-tax Act, 1961 ("the Act") and the consequent order of the Learned Assessing Officer ("Ld. AO") u/s. 143(3) of the Act is bad in law and void ab initio as it has been passed in gross violation of principle of natural justice and without complying with the mandatory conditions of Section 92CA(3) r.w.s. 92C(3) of the Act for the reason that Ld. TPO did not serve upon the Appellant any written show cause notice as required and mandated in terms of proviso to Section 92C (3) r.w.s. 92CA (3) of the Act.

2. The Ld. CIT (A) grossly erred in not entirely deleting the upward transfer pricing adjustment of Rs. 12,017,520/- made by the Ld. AO in pursuance of the order passed by the Ld. TPO in respect of the impugned international transaction of provision of business facilitation service by the Appellant to its Associated Enterprises ("AEs"). In doing so, 2.1 The Ld. CIT (A) grossly erred in not considering the plea of the Appellant that the OP/OC margin of the 4 (four) comparable companies taken by Ld. TPO shall be calculated based on the financial data reported in their audited financial statements and not based on the data reported in the prowess database and thereby grossly erred in upholding the arithmetic mean of the OP/OC margin of the said 4 comparable companies calculated by the Ld. TPO at 19.05 percent instead of 5.86 percent. 2.2 The Ld. CIT(A) grossly erred in upholding the action of Ld. TPO of not considering the infrastructure cost reimbursement received by the Appellant as "Operating Revenue" and thereby grossly erred in upholding the action of the Ld. TPO of computing OP/OC margin of the "Business Facilitation Service" segment of the Appellant at 11.52 percent instead of 14.49 percent as worked out by the Appellant.

2.3 The Ld. CIT (A) grossly erred in upholding the action of the Ld. TPO of removing the upper turnover filter of Rs. 25 Crores applied by the Appellant in selecting the comparable companies. 2.4 The Ld. CIT(A) grossly erred in upholding the action of Ld. TPO of rejecting the following 13 (Thirteen) out of 19 (Nineteen) comparable companies selected by the Appellant based on the fresh search process & 4725/Mum/2016 3 A.Y.2009-10 &2010-11 M/s Basell Polyolefins India Pvt. Ltd. Vs. ACIT(OSD)-10(1) conducted as per the directions of the Ld. TPO without applying the filter of upper turnover limit of Rs. 25 Crores:- a. Datamatics Financial Service Limited. b. PL Worldways limited c. Anand Rathi Insurance Brokers Limited d. Jindal Intellicom Private Limited e. MCS Limited f. Edelweiss Insurance Brokders Limited g. Karvi Insurance Broking Limited h. AegisBPO Services (Gurgaon) Limited. i. Allsec technologies Limited j. Optimus Global Services Limited k. Pipal Research Analytics & Information Services India Private Limited l. Sparsh BPO Services Limited m. India Infoline Marketing Services Limited. 2.5 The Ld. CIT (A) grossly erred in upholding the action of the Ld. TPO of not carrying out following comparability adjustments for material differences between the Appellant vis-à-vis companies selected as comparable, though the Act read with Rule 10B(1)(e)(iii) and 10B(3) of the Income Tax Rules ("the Rules") provide for carrying out such adjustments: i. Risk adjustment, ii. Functional Profile adjustment, and iii. working capital adjustment. 2.6 The Ld. CIT(A) grossly erred in not allowing the benefit of +1- 5% tolerance limit as per the proviso to section 92C(2) of the Act though the comparable companies upheld by him are more than one. 2.7 The appellant order of the ld. CIT(A) suffers from the factual and legal errors and omissions. The appellant craves leave to add, alter, amend or delete all or any of the grounds or sub-grounds of appeal before or during the course of hearing.”

transactions of provision of business facilitation services to the AEs. Out of the aforesaid 19 companies the TPO rejected 15 companies on the ground of functional dissimilarity, and thus, retained 4 companies in the final list of comparables. On appeal, the CIT(A) upheld the exclusion of 13 companies (out of 15 companies) which were excluded by the TPO, and thus, allowed inclusion of 2 insurance broking companies viz. (i) Almondz Insurance Brokers Pvt. Ltd.; and (ii) India Infoline Insurance Brokers Ltd. As a matter of fact, the CIT(A) while concluding as hereinabove had followed the view taken by the DRP in the assessee‟s own case for A.Y. 2011-12. Further, the CIT(A) going by the directions of the DRP in the assessee‟s own case for A.Y. 2011-12 added 3 additional insurance broking companies as comparable to the assessee, viz.(i) Aditya Birla Insurance Brokers ltd.; (ii) Bajaj Capital Insurance Brokers Ltd.; and (iii) Spectrum Business Solutions Ltd. To sum up, the CIT(A) included 5 insurance broking companies in the final list of the comparable companies for benchmarking the international transactions of the assessee. As such, the mean margin of the 9 comparables which found place in the final list of the comparables pursuant to the directions of the CIT(A) worked out at 17.41%, as under :

Sr. No. Company OP/OC Margin as per the erstwhile TPO 1. ICRA Online Limited 20.65% 2. Genins India TPA Ltd. 32.85% 3. IDC (India) Ltd. 10.93% 4. Galaxy Commercial Ltd 11.78% 5. India Infoline Insurance Brokers Ltd. 2.70% 6. Almondz Insurance Brokers Pvt. Ltd. 13.53% 7. Aditya Birla Insurance Brokers Ltd 49.65% 8. Bajaj Capital Insurance Brokers ltd. 4.40% 9. Spectrum Business Solutions Ltd. 10.17% Arithmetic Mean 17.41% Based on the aforesaid details, the TPO revised the arms length OP/OC margin to 17.41 instead of 19.05% that was earlier worked out by him, and thus, recalculated the consequential adjustment at an amount of Rs.93,96,751/-. Accordingly, giving effect to the order of the CIT(A), inter alia based on the report furnished by the TPO dated 30.06.2016, the A.O granted a relief of Rs.26,20,769/- by scaling down the upward transfer pricing & 4725/Mum/2016 6 A.Y.2009-10 &2010-11 M/s Basell Polyolefins India Pvt. Ltd. Vs. ACIT(OSD)-10(1) adjustment that was initially suggested by the TPO at Rs.1,20,17,520/- to an amount of Rs.93,96,751/-, vide his order dated 08.08.2016.

“10. Regarding the submissions advanced by both the parties relating to the inclusion/exclusion of the 2 comparables being Goldiam International Ltd. and Punit Commercials Ltd, it is observed that the annual report submitted by the assessee, was not available on the database at the time of TP proceedings. The plea advanced by the ld. A.R is that, in the event these companies are included then the correct margin as per the annual accounts must be considered. We accordingly, set aside these to the Ld. TPO for verification of the data provided in the annual accounts of these 2 companies and to calculate the gross margin by using the correct figures.” In the backdrop of our aforesaid deliberations we herein restore the matter to the file of the TPO, with a direction, to calculate the OP/OC margin of the aforesaid 4 comparable companies on the basis of the financial data reported in their „annual reports‟ for the year under consideration. The Ground of Appeal No. 2.1 is allowed for statistical purposes.

10. We shall now advert to the claim of the ld. A.R that while for the CIT(A) had observed that insurance broking companies were comparable to the business facilitation service segment of the assessee, and had included 3 additional insurance broking companies as valid comparables for benchmarking its international transactions, but had erred in not directing inclusion of similarly placed 4 insurance broking companies (out of 19 comparable companies) that were selected by the assessee in the course of the proceedings before the TPO. Before dealing with the aforesaid claim of the assessee, we shall briefly cull out the facts to the extent relevant for adjudicating the same. As observed by us hereinabove, the assessee as per & 4725/Mum/2016 9 A.Y.2009-10 &2010-11 M/s Basell Polyolefins India Pvt. Ltd. Vs. ACIT(OSD)-10(1) the directions of the TPO had conducted a fresh search process wherein it had identified 19 comparable companies for benchmarking its international transactions of provision of business facilitation services to the AEs. Out of the aforesaid 19 companies the TPO had rejected 15 companies on the ground of functional dissimilarity, and thus, accepted 4 companies as valid comparables. On appeal, the CIT(A) upheld the exclusion of 13 companies (out of 15 companies which were excluded by the TPO), and allowed inclusion of 2 insurance broking companies viz. (i) Almondz Insurance Brokers Pvt. ltd.; and (ii) India Infoline Insurance Brokers Ltd., as valid comparables for benchmarking the international transactions of the assessee for the year under consideration. As noticed by us hereinabove, the CIT(A) while so concluding had followed the directions of the DRP in the assessee‟s own case for A.Y. 2011-12. Further, the CIT(A) going by the view taken by the DRP in the assessee‟s own case for A.Y. 2011-12 had added 3 insurance broking companies viz. (i) Aditya Birla Insurance Brokers Ltd; (ii) Bajaj Capital Insurance Brokers Ltd; and (iii) Spectrum Business Solutions Ltd. as valid comparables. Resultantly, the CIT(A) on the basis of his aforesaid deliberations had included 5 insurance broking companies in the final list of comparables for benchmarking the international transactions of the assessee for the captioned year. In the backdrop of the aforesaid facts, it is the claim of the assessee, that now when the CIT(A) had concurred with the view taken by the DRP in the assessee‟s own case for A.Y. 2011-12 and being of the view that insurance broking companies were comparable to the business facilitation service segment of the assessee, had directed the TPO to include them for working out the ALP of the international transactions of the assessee for the year under consideration, therefore, the 4 insurance broking companies which were selected by the assessee before the TPO (out of 19 comparable companies), viz. (i) Anand Rathi Insurance Brokers Ltd.; (ii) Edelweiss Insurance Brokers Ltd.; (iii) Karvy Insurance Broking ltd; and (iv) India Infoline Marketing Service ltd., on the same premises and reasoning ought to have been included by him in the final list of comparables. & 4725/Mum/2016 10 A.Y.2009-10 &2010-11 M/s Basell Polyolefins India Pvt. Ltd. Vs. ACIT(OSD)-10(1) 11. We have deliberated at length on the aforesaid issue in the backdrop of the contentions advanced by the representatives for both the parties, and have also perused the orders of the lower authorities. Admittedly, the CIT(A) had observed that insurance broking companies were a valid comparable to the business facilitation service segment of the assessee. Based on its aforesaid observations, the CIT(A) had directed the TPO to include the aforementioned 5 insurance broking companies (which were also held to be comparable by the DRP in A.Y. 2011-12), as comparables for benchmarking the international transactions of the assessee for the year under consideration. In our considered view, now when the aforementioned 5 insurance broking companies viz. (i) Almondz Insurance Brokers Pvt. ltd.; (ii) India Infoline Brokers Ltd; (iii) Aditya Birla Capital Insurance Ltd; (iv) Bajaj Capital Insurance Ltd. and (v) Spectrum Business Solutions Ltd. have been accepted by the CIT(A) as valid comparables for benchmarking the international transactions of the assessee, we find no reason for exclusion of the aforesaid 4 insurance broking companies which were selected by the assessee in the course of the proceedings before the TPO. Accordingly, we are persuaded to subscribe to the claim of the ld. A.R that the aforesaid 4 insurance broking companies (out of 19 companies) which were selected by the assessee in the course of the proceedings before the TPO, viz. (i) Anand Rathi Insurance Brokers Ltd; (ii) Edelweiss Insurance Brokers Ltd.; (iii) Karvy Insurance Broking Ltd.; and (iv) India Infoline Marketing Service ltd., merits to be included in the final list of the comparables for the purpose of determining the ALP of the international transactions of the assessee for the captioned year. Accordingly, we restore the matter to the file of the A.O/TPO for benchmarking the international transactions of the assessee in terms of our aforesaid observations.

ITA Nos.4724 & 4725/Mum/2016 11 A.Y.2009-10 &2010-11 M/s Basell Polyolefins India Pvt. Ltd. Vs. ACIT(OSD)-10(1) A.Y.2010-11

“On the facts and circumstances of the case and in law, 1. The Learned Commissioner of Income Tax (Appeals) - 55 ["the Ld. CIT(A)"] erred in not holding that the order of the Learned Transfer Pricing Officer ("Ld. TPO") u/s. 92CA(3) of the Income-tax Act, 1961 ("the Act") and the consequent order of the Learned Assessing Officer ("Ld. AO") u/s. 143(3) of the Act is bad in law and void ab initio as it has been passed in gross violation of principle of natural justice and without complying with the mandatory conditions of Section 92CA(3) r.w.s. 92C(3) of the Act for the reason that Ld. TPO did not serve upon the Appellant any written show cause notice as required and mandated in terms of proviso to Section 92C (3) r.w.s. 92CA (3) of the Act.

2. The Ld. CIT (A) grossly erred in not entirely deleting the upward transfer pricing adjustment of Rs. 10,584,252/- made by the Ld. AO in pursuance of the order passed by the Ld. TPO in respect of the impugned international transaction of provision of business facilitation service by the Appellant to its Associated Enterprises ("AEs"). In doing so, 2.1 The Ld. CIT (A) grossly erred in not considering the plea of the Appellant that the OP/OC margin of the 3 (Three) comparable companies taken by Ld. TPO shall be calculated based on the financial data reported in their audited financial statements and not based on the data reported in the prowess database and thereby grossly erred in upholding the arithmetic mean of the OP/OC margin of the said 3 comparable companies calculated by the Ld. TPO at 17.42 percent instead of 14.88 percent. 2.2 The Ld. CIT(A) grossly erred in upholding the action of the Ld. TPO of rejecting following 8 (Eight) out of 14 (Fourteen) comparable companies selected by the Appellant:- a. Datamatics Financial Services Limited b. PL Worldways Limited c. Jindal Intellicom Private Limited d. M C S Limited e. Edelweise Insurance Brokers Limited f. Karvy Insurance Broking Limited g. Pipal Research Analytics & Information Services India Private Limited h. Sparsh BPO Services Limited & 4725/Mum/2016 12 A.Y.2009-10 &2010-11 M/s Basell Polyolefins India Pvt. Ltd. Vs. ACIT(OSD)-10(1) 2.3 The Ld. CIT (A) grossly erred in upholding the action of the Ld. TPO of not carrying out following comparability adjustments for material differences between the Appellant vis-à-vis companies selected as comparable, though the Act read with Rule 1013(1)(e)(iii) and 1013(3) of the Income Tax Rules ("the Rules") provide for carrying out such adjustments: i. Risk adjustment, ii. Functional Profile adjustment, and iii. Working capital adjustment. 2.4 The Ld. CIT(A) grossly erred in not allowing the benefit of +/- 5% tolerance limit as per the proviso to section 92C(2) of the Act though the comparable companies upheld by him are more than one.

3. The appellate order of Ld. CIT(A) suffers from the factual and legal errors and omissions. The Appellant craves leave to add, alter, amend or delete all or any of the grounds or sub- grounds of appeal before or during the course of hearing.”