NOV INDIA P.LTD,NAVI MUMBAI vs. CIT (A) 17, MUMBAI

Brief facts of the case are that the assessee-company is engaged in the business of support services and sale of spares. The assessee, while filing return of income has reported international transactions with its Associate Enterprises (AE) of Rs. 5,68,26,271/- with regard to providing business support services to its AE. Mum 2015-M/s Nov India Pvt. Ltd.

The value of the international transaction was less than Rs. 15 crores, thus, no reference was made to TPO for computation of ALP. The assessee, for benchmarking its transactions with its AE adopted Transactional Net Margin Method (TNMM) as most appropriate method. On the basis of 9 comparable companies selected by the assessee, the assessee has shown mean margin of comparables at 8.04% against the assessee’s PLI at 12.37% and claimed that international transaction under this segment is at ALP. The Assessing Officer after carrying out its research, rejected 2 comparables and included 5 new comparables and on the basis of 11 final set of comparables, made the benchmarking of the international transaction and suggested the upward adjustment of Rs. 19,967,880/- in the following manner:

Operating Cost (a) Rs. 54463937/- Arm’s Length Mean Margin 41% on Cost Arm’s Length Price (b) = 141% of (a) Rs. 7,67,94,151/- Revenues shown in international transactions (c) Rs. 5,68,26,271/- Shortfall being adjustment u/s 92CA (d) = (b) – (c) 1,99,67,880/-

Aggrieved by the additions in the assessment order, the assessee filed appeal before the ld. CIT(A). Besides challenging the inclusion/exclusion of comparables, the assessee challenged the PLI calculated by Assessing Officer at 5.16% against the PLI shown by assessee at 12.37%, by excluding various operating income and expenses. The ld. CIT(A) after considering the contention of the assessee directed the Assessing Officer to verify the mistake in computing PLI and after verifying the same to recompute PLI in Mum 2015-M/s Nov India Pvt. Ltd. para-1.3.9 of his order. However, the exclusion and inclusion of various comparable was upheld. Thus, further aggrieved, the assessee has filed this appeal before us.

We have considered the submission of ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the revenue and perused the material available on record. 6. At the outset of hearing, the ld. AR of the assessee submits that ground no.1 is general in nature, and he is not pressing ground no.2, 7, 8 & 11.

Ground No.3 & 4 relates to rejection/exclusion of comparable company namely Foi Global Services on the ground of abnormal losses and Overseas Manpower Corporation on the ground of consistence loss making company. The ld. AR of the assessee submits that losses suffered by comparable company cannot be a ground for rejection; the losses have occurred due to global slowdown thereby a general market trend in the concerned Assessment Year, which cannot be termed as abnormal. The ld. AR submits that the relevant data is available at page no. 460 of Paper Book. In support of his submission, the ld. AR of the assessee relied upon the decision of Hon’ble Delhi High Court in Rampgreen Solutions P. Ltd. ITA No. 102/2015. For Overseas Manpower Corporation, the ld. AR of the assessee submits that this company is not persistently loss making company. This 3 Mum 2015-M/s Nov India Pvt. Ltd. company has shown a profit in A.Y. 2008-09 and cannot be said to be a persistently loss making company. The ld. AR further submits that three year losses to be considered for persistent loss making factor. In support of his submission, the ld. AR relied upon the decision Sandvik Asia P. Ltd. In ITA No. 1088/2015 (Bom. High Court).

On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld. DR submits that the Assessing Officer has clearly brought on record that Foi Global suffered abnormal losses and Overseas Manpower Corporation was consistently loss making company.

We have considered the submission of both the parties and have gone through the orders of lower authorities. It is undisputed fact that assessee engaged in providing business support services and sales of spares. The assessee provided business support services to its AE for importing finished goods and resale. The assessee in its TP Study report benchmarked its international transaction by adopting Transaction Net Margin Method (TNMM). The method adopted by assessee is not disputed by Assessing Officer. The assessee has shown its PLI at 12.37%. The assessee selected following 11 comparable which are broadly in similar nature of business.

Therefore, considering the decision of Hon’ble Delhi High Court in Rampgreen Solutions Pvt. Ltd. (supra) and Hon’ble Bombay High Court in Mum 2015-M/s Nov India Pvt. Ltd. Sandvik Asia P. Ltd. (supra), we direct the Assessing Officer to include Foi Global and Overseas Manpower Corporation in final set of comparable. No contrary fact or low is brought to our notice for non-inclusion of these two comparables. In the result, ground no.3 & 4 are allowed.

Ground No.5 & 6 relates to exclusion of five comparable included by Assessing Officer while making T.P. Adjustment. Against the inclusion of Crisil Ltd., the ld. AR of the assessee submits that the comparable company is functionally different and is a globally diversified analytical company providing ratings and research services. It is India’s largest rating agency.

For exclusion of Sumedha Fiscal Services Ltd. The ld. AR of the assessee submits that the comparable is functionally different and the company provides corporate services, investment services and wealth management services. The company has income from investments banking and capital market operations. The assets employed by this comparable are huge and cannot be compared with the assessee. The company has Net Fixed Assets of Rs. 4,81,86,676/- whereas the assessee has NFA of Rs. 12,11,800/-. The company’s net fixed assets are 39 times than that of the assessee thereby, the same cannot be treated as a valid comparable. In support of his submission, the ld. AR relied upon the decisions of M/s General Atlantic P.

For exclusion of Brescon Corporate Advisors P. Ltd., the ld. AR of the assessee submits that this comparable is functionally different. The ld. AR of the assessee further submits that the company has maintained a high 7 ITA No. 2832 Mum 2015-M/s Nov India Pvt. Ltd. recall value in the field of financial restructuring. The Income of the company is from “fee based financial services” i.e., debit resolution and debt syndication. The ld. AR of the assessee submits that the company does not have segmental information. In support of his submission, the ld. AR relied upon the decisions of TPG Global India P. Ltd. in ITA No. 880/Mum/2013 (Mum Trib.), Goldman Sachs (I) Securities P. Ltd. in ITA No. 6912/Mum/2012 (Mum Trib.), Avenue Asia Advisors P. Ltd. in ITA No. 350/2016 (Del. HC), De Shaw India Advisory Services P. Ltd. in ITA No. 1681/Mum/2014 (Mum Trib.), M/s Blackstone Advisors India Pvt. In ITA No. 1582/Mum/2014 (Mum Trib.), Saxo India P. Ltd. in ITA No. 682/Mum/2016 (Del HC) and Cashedge India P. Ltd. in ITA No. 279/2016 (Del HC).

For exclusion of ICRA Online Limited., the ld. AR of the assessee submits that this comparable/company is functionally different and into three lines of business i.e. outsourced services, information services and software products & services. The ld. AR submits that no segmental information is available. The assets employed are huge-cannot be compared.

For exclusion of Futura Capital Investment Advisors Ltd., the ld. AR of the assessee submits that the company is in the business of investment advisory. The income from operations of the company is from investment advisory fees. In support of his submission, the ld. AR relied upon the decision of New Silk Route Advisors Pvt. Ltd. in ITA No. 1327/Mum/2014 (Mum Trib.).

In alternative submission, the ld. AR of the assessee submits that the Assessing Officer issued show-cause notice for the first time vide notice dated 20.03.2013 for determination of ALP and proposed adjustment of Rs. 1.99 crore to the ALP of international transaction. The assessee filed its reply dated 22.03.2013. The Assessing Officer has extracted the contents of reply in para-5.5 of the assessment order. No proper and fair opportunity was given on exclusion and inclusion of various comparable and no material with regard to inclusion of various comparable was provided to the assessee.

On the other hand, the ld. DR for the revenue supported the order of lower authorities. The ld. DR further submits that the Assessing Officer has given detailed reasoning while including five comparable which are comparable with the assessee. The two comparable excluded by Assessing Officer was not a valid comparable as there was abnormal losses in both the companies.

In the rejoinder submission, the ld. AR of the assessee submits that the direction given by ld. CIT(A) in para-1.3.9 is not specific and prayed to pass appropriate direction to the Assessing Officer for recomputation of PLI.

We have considered the rival submission of the parties and have gone through the orders of authorities below. We have also deliberated on various case law relied by ld. representative of the parties. So far as exclusion of Crisil Ltd. is concerned. The ld. AR of the assessee submitted that this comparable is functionally different being a globally diversified analytical company providing rating and research services being India’s largest rating agency. This comparable was included by Assessing Officer on the ground that assessee omitted to consider other comparable dealing in similar nature 10 Mum 2015-M/s Nov India Pvt. Ltd. of business support services and included by treating it as a valid comparable. Before ld. CIT(A), the assessee objected about the inclusion of this comparable on the ground of functional dissimilarity. The ld. CIT(A) has not given any finding while sustaining the inclusion of this comparable.

So far as Sumedha Fiscal Services Ltd. is concerned this comparable was included by Assessing Officer on the ground that assessee omitted to include/consider other company dealing in similar support services. The assessee objected for inclusion of this comparable before the ld. CIT(A).

ICRA Online. This comparable was included by Assessing Officer on the ground that assessee omitted to include/consider other company dealing in 13 ITA No. 2832 Mum 2015-M/s Nov India Pvt. Ltd. similar support services. The assessee objected for inclusion of this comparable before the ld. CIT(A). However, no specific finding for affirming the inclusion of this comparable was given by ld. CIT(A). The ld. AR of the assessee vehemently argued that this comparable company is into three line of business; outsource services, information services and software product. No segmental information is available. Asset employed by this company are huge comparative to the assessee. We have noted that co- ordinate bench of Tribunal in AGM India Advisor P. Ltd. vs. DCIT (supra) held that this comparable is engaged in merchant banking activities and cannot be accepted as a valid comparable to a company providing non- binding investment advisory services. Considering the decision of Tribunal wherein this comparable company was held to be not comparable with a company providing non-binding investment advisory services. Therefore, we direct the Assessing Officer to exclude this comparable from final set of comparable.

Future Capital Investment Advisors Ltd. This comparable was included by Assessing Officer on the ground that assessee omitted to include/consider other company dealing in similar support services. The assessee objected for inclusion of this comparable before the ld. CIT(A).

Ground No. 9 & 10 relates to computation of operating margin of comparable and assessee. The ld. AR of the assessee submits that assessee determined its PLI on the basis of OP/OC and shown its PLI at 12.37%. The PLI of comparable was at 8.04%. The Assessing Officer recomputed the PLI by taking view that the assessee has not excluded non-operating income and arrived at PLI at 5.16%. Similarly, PLI of comparable was also 15 ITA No. 2832 Mum 2015-M/s Nov India Pvt. Ltd. recomputed. The Assessing Officer has not given any show-cause or opportunity before disturbing/recomputation of PLI of assessee and the comparable. The assessee during the first appellate stage raised specific ground of appeal