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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI N.K. PRADHAN, HONBLE
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals) – 15 Mumbai [hereinafter in short “Ld.CIT(A)”] dated 15.07.2014 for the A.Y. 2009-10.
Assessee has raised the following grounds in its appeal: -
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of Ld. AO. who has in conformity with the order of the Transfer Pricing Officer u/s. 92CA(3) arbitrarily rejected the following two comparable companies, without (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., any cogent reason, from out of the comparables selected by the appellant, while working out the operating profit margin: i. M/s. Hiran Orgochem Ltd. ii. M/s. Roselabs Industries Ltd.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the action of Ld. AO. who has in conformity with the order of the Transfer Pricing Officer u/s. 92CA(3) made an addition of Rs. 1,77,117/- in the commission income from Associated Enterprises.”
Coming to Ground No. 1 of grounds of appeal, the Ld. Counsel for the assessee submits that the Transfer Pricing Officer [TPO] rejected the two comparable companies namely M/s. Hiran Orgochem Ltd., and M/s.Roselabs Industries Ltd., on the ground that these two companies are abnormal loss making companies. Ld. Counsel for the assessee submits that in fact these companies are not continuous loss making companies. Referring to the Page Nos. 3 to 5 of the Paper Book which is the data relating to comparable companies namely M/s. Hiran Orgochem Ltd., and M/s.Roselabs Industries Ltd., submits that the operating profit of these comparable companies for the year ending 2008, 2009 and 2010 are as under: Name of the company 2008 2009 2010 M/s. Hiran Orgochem Ltd., 14.38 -13.11 21.93 M/s. Roselabs Industries Ltd., 0.31 -0.75 -1.87
Therefore, referring to the above data the Ld. Counsel for the assessee submits that the comparables selected by the assessee are not consistently loss making companies or abnormally loss making
(A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., companies as observed by the TPO and therefore they should not be rejected. Reliance was placed on the decision in the case of Syngenta India Limited v. Additional CIT [71 taxmann.com 259] and Sungard Solutions (India) (P.) Ltd v. Asst. DIT [68 taxmann.com 89].
Ld. DR vehemently supported the orders of the authorities below. He further submits that there is a decline in the trend of profits of the comparable and therefore they are not good comparables.
We have heard the rival submissions, perused the orders of the authorities below. On a perusal of the data furnished before us, we find that in the case of M/s. Roselabs Industries Ltd., the operating profit shown by this company right from June 2002 to March 2007 was profit making and further in the year ending March 2011 again this company has shown operating profits. In the case of M/s. Hiran Orgochem Ltd., we observe that this company has sown profits from the year ending March 04 to till March 08 and again for the year end March 2010 the company has shown operating profit. In the circumstances, we can hold that these two companies are not consistently loss making companies or abnormal loss making companies.
We find as to whether the comparable company can be rejected for the reason that it is loss making company has been considered by the (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., Mumbai Bench of the Tribunal in the case of Syngenta India Limited v. Additional CIT (supra) and it has been held as under: “17. ……..As pointed out by the Ld. Counsel, the Special Bench in case of DCIT v Quarks Systems P Ltd. (supra) it has been held that merely because comparable company is loss making it cannot be rejected from the list of comparables for the purpose of computation of ALP. Similar view has been echoed by other decisions as already cited above. OECD guidelines of extreme results and comparability consideration have given following guidelines:- “3.64 An independent enterprise would not continue loss generating activities unless it had reasonable expectations of future profits. See paragraphs 1.70 to 1.72. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that lossmaking transactions can never be comparable. In general, all relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of lossmaking comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result. 3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses”. On the strength of the decisions relied by the ld. Counsel and also the OECD guidelines which have some persuasive value, we also hold that, if the loss making comparables otherwise satisfies the comparability analysis, the same cannot be rejected. The facts and circumstances associated with a given industry and FAR analysis should be the determinative factor. Thus, this reason given by the TPO cannot be the criteria or ground for rejection from the comparability list.”
(A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., 7. Similarly, in the case of Sungard Solutions (India) (P.) Ltd v. Asst. DIT (supra) the Pune Bench of the Tribunal held as under: - “6. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. We have also considered the decisions on which the ld. AR of the assessee has placed reliance. The first issue raised by the assessee before us is the rejection of comparables by the TPO merely on the ground that the comparable companies have incurred losses. The ld. AR has submitted that Astro Bio Systems Limited, Maars Software International Limited and Megasoft Ltd. have incurred losses only in one year. The loss making company shall be considered as bad comparable only if it is having consistent loss for the three years. The reliance has been placed on the decision of Co-ordinate Bench of the Tribunal in the case of M/s. Bobst India Private Limited Vs. Dy. CIT (supra). The relevant extract of the findings of the Co-ordinate Bench on this issue are as under: “5.3 We also find that ITAT, Pune ‘A’ Bench in the case of Cummins Turbo Technologies Limited vs. DDIT in for A.Y. 2006-07 held that some of the comparables for the purpose of PLI adopted by the assessee was showing loss, but burden was on TPO to prove where those companies were consistently loss making companies. Moreover, except unsupported reasoning, no data was brought on record by the TPO for excluding comparables selected by the assessee in transfer pricing study. Therefore, the Tribunal held that no justification to adjustment made u/s.92CA(3) of the Act and directed to delete the same. 5.4 Further, we find in the case of Goldman Sachs (India) Securities Pvt. Ltd. vs. ACIT, which has been decided by ITAT, Mumbai ‘K’ Bench, wherein the TPO rejected Capital Trust as comparable because of two out of last three years taken into consideration. Capital Trust was in the red and not because the nature of business had any variance with that of the assessee. The Tribunal looked into the business segment of Capital Trust and found that in the foreign consultancy segment with which the Bench was concerned in the year 2004-05, it had operative profit / operative cost at 27.25%. Since the nature of services rendered by comparable were exactly on similar lines as that of the assessee, though, during the year, it was in the loss could not be disqualified as nonlegitimate comparable. The Tribunal drew strength from Brigade Global services (supra) for reaching this conclusion and held that the assessee had rightly taken Capital Trust as valid comparable and the Revenue authorities have erred in excluding the same. A similar view has been taken by ITAT,
(A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., Mumbai ‘K’ Bench in the case of Temasek Holdings Advisors vs. DCIT. In sum and substance, all the above cases is that the company making persistent loss for past 3 years is not good comparable. According to us, when loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction. So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003-04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international transactions pertaining to EOU operations. The Assessing Officer is directed accordingly.”
The ratios of the above decisions apply to the facts of the assessee case. Respectfully following the said decisions, we hold that Ld.CIT(A) erred in upholding the findings of the TPO in rejecting the above two comparables on the ground that they are abnormally loss making companies. Thus, we direct the TPO/AO to include the above two companies in the list of comparables as was considered by the assessee for the purpose of arriving arm’s length price on the international transactions. This ground is allowed.
Coming to Ground No.2 of the grounds of appeal, the Ld. Counsel for the assessee submits that assessee company has earned commission income of ₹.12,18,255/- from its Associated enterprises and rate of commission is dependent on type of product and nature of services provided by assessee. Commission rate in case of Aroma Oil Product is (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., 5% and in case of beverages is 10%. Ld. Counsel for the assessee further submitted that it gets 1% commission as a referral commission when sale directly takes place between Associated Enterprise and Third Party and appellant merely acts as facilitator. It was submitted that TPO has erred in applying flat rate of 10% to different types of transactions without considering the peculiar nature of each type of transaction and requested to delete the adjustment of ₹.1,77,117/-.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. This aspect of the matter has been considered by the Ld.CIT(A) with reference to the submissions and evidences furnished before him observing as under: - “5.3 I have considered the facts of the case, submission of the appellant vis-a-vis the observations of the AO, in the order u/s. 144C(3) r.w.sec. 143(3) of the Act. The contentions and submission of the appellant are being discussed and decided as under: - (i) The appellant contended that the rate of Commission as referral commission and in the case of Aroma Oils it is 5% while in the case of beverages it is 10%. In support a chart has been filed. From the chart the contention of the appellant is not verifiable. (ii) Further, it is noted that there is no basis given nor any agreement for a lesser rate of commission in certain items is produced. It is also noted that out of 57 transactions only in 3 transactions the commission is less than 10% for which no suitable explanation is given. Accordingly, I have no reason to deviate with the finding of the AO. (iii) Consequently, the adjustment made by TPO is upheld.
(A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., (iv) This ground of appeal is therefore, dismissed.”
None of these findings have been rebutted with evidences by the assessee. Thus, we do not find any valid reason to interfere with the findings of the Ld.CIT(A) and the decision therein. Thus this ground of appeal is rejected.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on the 30th September, 2019