DCIT - 8(2), MUMBAI vs. M/S. MITSUI O.S.K. LINES MARITIME (INDIA) P. LTD., MUMBAI

Sh. Dhanesh Bafna appearing on behalf of the assessee, narrating the facts in the case submitted that this appeal is in second round before the Tribunal. The appeal was earlier decided by the Tribunal vide order dated 27/07/2011. The Tribunal vide aforesaid order restored the matter to the Assessing Officer for fresh adjudication. Aggrieved against remanding of matter, the assessee filed appeal before the Hon'ble Bombay High Court in Income Tax Appeal No.426 of 2012. The Hon'ble High Court vide order dated 17/07/2012 allowed the appeal of assessee and set-aside the order of Tribunal dated 27/07/2011 with a direction to decide the appeal of assessee afresh.

The ld. Authorized Representative of the assessee submitted that the short issue in appeal by the Revenue is selection of comparables. The ld. Authorized Representative of the assessee contended that the assessee during the period relevant to assessment year under appeal had entered into International Transactions with its Associated Enterprises (AEs). The assessee is engaged in providing manning support services to its principal AEs. The assessee applied Transaction Net Margin Method (TNMM) as the most appropriate method to benchmark its international transactions. The same was accepted by the Transfer Pricing Officer (TPO). The PLI of the assessee i.e. OP/TC was 9.32%. The TPO raised no dispute on the margins declared by the assessee. The assessee had selected nine comparables to benchmark its international transactions. The comparables selected by the assesse are engaged in administrative back office support services. The arithmetic mean of the comparables was computed at 5.35%. Out of 9 companies selected by the assesse, the TPO excluded 2 companies on the ground that the companies are consistent loss-making and functionally not comparable. The TPO further excluded 3 companies i.e. AMI Computer (I) Ltd., Mercury Travels Ltd. and Nucleus Netsoft & GIS India Ltd. on the ground that these companies have incurred losses during the year under consideration. After excluding above 5 companies the TPO computed mean of remaining 4 comparable companies at 34.96% and made upward adjustment of Rs.1,41,06,903/-.

Per contra, Shri Uodhal Raj Singh representing the Department vehemently defended the assessment order and the order of TPO. The ld. Departmental Representative submitted that the TPO has rightly excluded loss making companies from the list of comparables.

We have heard the submissions made by Rival sides and have perused the orders of authorities below. This appeal by the Revenue was decided by the Tribunal vide order dated 27/07/2011. The Co-ordinate Bench by placing reliance on the decision of Special Bench, in the case of Quark Systems Pvt. Ltd. reported as 132 TTJ 1 (Chd.)(SB) restored the issue back to the file of Assessing Officer for fresh adjudication. For the sake of completeness, operating part of the Tribunal order is reproduced herein below:-

From the submissions made by rival sides it emerges that the sole dispute in the present appeal is selection of comparables. The assessee in transfer pricing study selected following 9 companies as comparables:

The Hon’ble Jurisdictional High Court in the case of CIT vs. Goldman Sachs (India) Securities P. Ltd. (supra) has upheld the findings of Tribunal in accepting a company as good comparable, where it has not suffered persistent losses. The Tribunal in several cases has held that it is only persistent/continuous loss making companies that are not to be considered as comparables. In other words, a company can be accepted as comparable if it has not suffered persistent losses. The expression ‘persistent loss’ is not defined under the Act or the Rules framed thereunder. The expression has evolved in judicial rulings. One of the initial decisions of Tribunal supporting this principle is Bobst India (P.) Ltd. vs. Dy. CIT, 63 taxmann.com 339 (Pune- Trib). ‘Persistent loss’ means losses in three consecutive financial years including the Financial Year corresponding to the Assessment Year under dispute and immediately two preceding Financial Years. The thumb rule of excluding persistent loss making company has been accepted in various judicial precedents over the period of time.

The assessee has furnished financial statements of the aforesaid three companies for the relevant period. Summary of profits/losses of the said companies in the relevant three financial years is tabulated as under:-

This appeal by the Revenue is directed against the order of CIT (A) XXXII Mumbai, dated 19/9/2008 for AY 2004-05. The assesse has filed cross objections in support of the order impugned by the Department.

The ld. Authorised Representative of the assessee submitted at the outset that in view of CBDT Circular No.17/2019 dated 08/08/2019 appeal of the Revenue in for assessment year 2004-05 is liable to be dismissed on account of low tax effect. He further submitted that if the said appeal of Revenue is dismissed, the cross objections filed by the assessee would become infructuous.

The ld. Departmental Representative fairly admitted that the tax effect involved in the appeal is less than Rs.50.00 lacs.

Both sides heard. After examining the grounds of appeal, we find that the Revenue has raised solitary ground assailing the findings of CIT (A) in deleting transfer pricing adjustment of Rs.40,60,358/-. Undisputedly, tax effect involved in this appeal is less than the monetary limit of Rs.50 Lakhs prescribed by CBDT Circular No. 17/2019 (supra.) for filing of appeals by the Department before the Tribunal. Thus, without going into merits of the issue raised in the appeal, the present appeal by the Revenue is dismissed on account of low tax effect.

Before parting, we clarify here that the Revenue shall be at liberty to approach the Tribunal for restoration of appeal, with the requisite material to show that the appeal is protected by the exceptions prescribed in Para 10 of Circular dated 11-07-2018 and its subsequent amendment dated 20/08/2018.

In the result, appeal by the Revenue is dismissed on account of low tax effect and cross objections of the assesse are dismissed as having become infructuous.

To sum up, both the appeals by the Revenue and cross objections of the assessee are dismissed.