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Income Tax Appellate Tribunal, BENGALURU BENCH B, BENGALURU
Before: SHRI. A. K. GARODIA & SHRI. LALIET KUMAR
PER LALIET KUMAR, JUDICIAL MEMBER :
This appeal filed by the assessee is arising out of the ACIT, Circle -4(1)(2), Bengaluru, dt.29.12.1014, passed u/s.143(3) r.w.s.144C(5) of the Act, in pursuance to the directions of the DRP, for the assessment year 2010-11, on the following grounds of appeal :
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Ground no.1, 2 and 3 are general therefore need no adjudication by the Bench. Grounds 4 to 7 of appeal pertains TP adjustment and specific grievance is regarding the direction of the DRP to adopt 0% RPT filter and eliminating comparable with less than 1 crore turnover and considering other comparable with high turnover in selecting the comparables. Assessee has also one more grievance that the DRP has not directed to give standard deduction at the rate of 5% under proviso to Section 92C(2) of the Act.
At the outset, the bench had informed to the parties that the Tribunal is restoring the cases, back to the file of the TPO / AO for fresh consideration and adjudication, where the assessee / revenue are raising the grounds for application of turnover filter / high profit filter, in the light of the judgment of Hon’ble Delhi High Court in the matter of Chryscapital Investment Advisors (India) P. Ltd V. DCIT [(2015) 56 taxmann.com 417]. In the said judgment Hon’ble High Court has held that though turnover cannot be a criteria for inclusion / exclusion of the comparable, but it is for the DRP / TPO to examine whether the turnover has affected the price or margin of the comparable with that of the assessee or not. If the turnover has not affected the margin or price of the comparable and the comparable is otherwise comparable on the test-stone of FAR, then it cannot be included / excluded merely on the ground of turnover.
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In view of the above the Ld AR and DR had agreed that, the case be remanded back for consideration to TPO/ AO for applying the judgment of Hon’ble Delhi High Court in the matter of Chryscapital Investment Advisors (India) P. Ltd V. DCIT(supra) . In view thereof we deem it appropriate to remand the entire TP issue to the file of DRP of examine a fresh functional similarity and application of the turnover filter with a direction to adjudicate the grounds in the light of the observations made in the matter of Chriscapital Investment Advisors (India) P. Ltd (supra).
Apropos RPT filter the bench has also pointed out that the Tribunal is directing taking 25% RPT filter as against 0% in its order in the matter of ACI Worldwide Solutions P. Ltd (IT(TP)A.262/Bang/2015, dt.26.07.2017, has extensively dealt with the issue of RPT filter, to the following effect : “12. We have heard the rival contentions and perused the record. We would like to bring on record that the assessee has not raised the objection with regard to RPT either at the stage of TPO or before the DRP. Therefore, the DRP did not have the occasion to examine the RPT of L & T Ltd, with its other related parties. Nonetheless, the Tribunal in its order in Electronics for Imaging India Ltd (supra), has not disputed that RPT of L & T Ltd was 18.66% and therefore, in para 65 of the order has directed to apply 15% of RPT in respect of all comparables. 12. Further we notice Bengaluru ITAT in a recent decision in the matter of SunGard Solutions (India) P. Ltd [IT(TP)A.1041, 1379, 1106/Bang/2011, dt.28.04.2017] has held in Para 5 as under: 5. RPT filter of 0%:- We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The TPO applied IT(TP)A.260/Bang/2015 Page - 6
the filter of 25% of RPT while selecting the comparables. Whereas the CIT(A) has applied a filter of 0% RPT. We find that 0% related party transaction is a impossible situation and therefore if the said filter is applied then the comparable companies will not be available for determining the arms length price. Thus to avoid this practical difficulty of selecting the comparable companies this Tribunal in a series of decisions have taken a view that a tolerance range of related party transaction can be considered from 5% to 25% depending upon the facts and circumstances of each case particularly the availability of the comparable companies. In ordinary circumstances when there is no difficulty of selecting the comparable companies the tolerance range of 15% of related party is considered to be proper. Only in extreme and exceptional circumstances when the comparable companies are not easily available or found then this tolerance range is relaxed up to 25%. Therefore in the case of the assessee where neither the TPO nor the assessee has made out a case of exceptional difficulty in searching the comparable companies then the normal tolerance range of 15% shall be taken as proper. Hence we set aside the order of the CIT(A) qua this issue of related party transaction filter and also modify the order of the TPO on this issue and hold that 15% tolerance range of related party is reasonable and proper in the case of the assessee.
Following the principles laid down by Bench in the above noted case , it was suggested objections raised regarding the suitability of comparables have to be examined considering this decision, along with other aspects.
The Ld. DR fairly submitted to the suggestion of Bench that the entire TP matter should go back to the TPO for fresh decision with suitable directions.
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On the contrary, the Ld. AR has agitated that these grounds are to be decided on the basis of the decided cases based on the precedence.
We have heard the rival contention of the parties and perused the material on record. In our view, the entire matter is required to be restored back to the file of the TPO with a direction that the TPO should decide the entire TP issues after applying the ratio of 25% or 15% RPT filter as laid down by the coordinate bench of the Tribunal in ACI Worldwide Solutions P. Ltd (supra).
9. Regarding standard deduction under proviso to Section 92C(2) of the Act, we hold that after amendment, the benefit is allowable only if the ALP is within the range of + / - 5% and no benefit is allowable if the difference exceeds + / - 5%.
10. At this stage, we would like to deal with one of the contention raised by the Ld. AR that the present case should be decided based on the other decision referred by the assessee at bar, alleging the issue is covered by said decisions . In this regard we may point out a decision of the coordinate bench in the matter of Aircom International [2017] 84 taxmann.com 218 (Delhi - Trib.) [ITA.6402/Delhi/2012, dt.02.08.2017], wherein at paras 8 to 12, wherein the bench had repelled similar contention of the assessee by giving the following reasoning :
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8. At this stage, it is also essential to deal with a submission advanced by the ld. AR, which is common to most of the companies under challenge, to the effect that certain Benches of the Tribunal in other cases have held them to be not comparable. In that view of the matter, it was urged that those companies, being ex facie incomparable, be excluded from the list of comparables drawn by the TPO.
We express our reservations in accepting such a broad proposition. It is axiomatic that if company 'A' is functionally different from company 'B', then, such a company cannot be considered as comparable. Two companies can be treated as comparable when both are discharging overall similar functions, though there may be some minor differences in such functions, not marring the otherwise comparability. Notwithstanding the functional similarity, many a times a company ceases to be comparable because of other reasons as well. To cite an example, if company 'A', though functionally similar to company 'B', but has related party transactions (RPTs) breaching a particular level, then, such company cannot be considered as comparable to company 'A' in the year in which the RPTs breach such a level. If, however, in the subsequent year, the related party transactions fall below that barrier, then such company would again become comparable. In the like manner, a company might have been treated as non-comparable due to the TPO adopting its entity level results for comparison with the segmental results of the case before him, but in a later case, the TPO may take only the related segment results. In such a later case, the company treated as non-comparable to the first company may become comparable to the second company. To put it simply, if company 'A' has been held to be incomparable vis-a-vis company 'B', then it is not essential that company 'A' would be incomparable to company 'C' also. What is relevant to consider is, firstly, the functional profile of company 'A' vis- a-vis company 'C'. If both are functionally similar, then notwithstanding the fact that company 'A' was held to be incomparable to company 'B', it may still be comparable to company 'C'. Despite the fact that company 'A' is functionally similar to company 'B', it still might have been declared as incomparable to company 'B' because of other relevant reasons. If company 'A' passes the same reasons vis-a-vis company 'C', then company 'A' will find its place in the list of comparables of company 'C', notwithstanding the fact that it was held to be incomparable to company 'B'. The crux of the matter is that the mere fact that company 'A' has been held to be not comparable in a judicial order passed in the case of company 'B', does not per se make it incomparable in all the subsequent cases to follow. Not only company 'A' held to be incomparable to company 'B' can be comparable to company 'C', but company 'X' held to be comparable to company 'Y' can also be incomparable to company 'Z', depending upon the functional profile and the applicability or otherwise of the related factors. Thus, it is clearly deductible that if a particular company has been held to be not comparable in the case of another company, then such former company may not always be non-comparable to the assessee company also. The comparability of each company needs to be ascertained only after matching the functional profile IT(TP)A.260/Bang/2015 Page - 9 and the relevant reasons of the other company. Ergo, this preliminary contention raised on behalf of the assessee is rejected as devoid of merits.
We would also deal with another preliminary legal contention raised by the ld. AR. It was submitted that the TPO, during the course of proceedings before him, received information u/s 133(6) of the Act from various companies. Relying on such information, the TPO made certain inclusions/exclusions from the list of comparables which, in the opinion of the ld. AR, was not warranted. He stated that the TPO should not have collected information u/s 133(6) or used the same against the assessee in deciding the comparability or otherwise of the companies before him. This was strongly opposed by the ld. DR.
11. We are not convinced with the argument of the ld. AR for prohibiting the TPO from collecting any information u/s 133(6) for the purpose of determining the comparability and then using the same. Section 92(1) of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C empowers the Assessing Officer to determine the arm's length price of the international transactions. Sub-section (3) provides that the AO may proceed to determine the ALP of an international transaction, where he 'on the basis of material or information' or documents in his possession, is of the opinion that the price charged or paid in an international transaction is not at arm's length price etc. Section 92CA provides that the Assessing Officer may refer the determination of ALP in relation to the international transactions to the Transfer Pricing Officer (TPO). Sub-section (3) of section 92CA provides that the TPO shall pass order determining the ALP of the international transaction "… after taking into account all relevant materials which he has gathered." Sub-section (7) of section 92CA explicitly provides that: "the Transfer Pricing Officer may, for the purposes of determining the arm's length price under this section, exercise all or any of the powers specified in …….. sub-section (6) of section 133 ……..". In view of the clear-cut provision enshrined under sub-section (7) empowering the TPO to collect information, inter alia, u/s 133(6) of the Act read in conjunction with sub- section (3) of section 92CA, there remains no doubt whatsoever that the TPO is fully empowered to seek information u/s 133(6) of the Act for the purpose of determining the arm's length price. There is no embargo on his powers in collecting information from the relevant companies for seeing if they are really comparable/incomparable. In our considered opinion, it is not the prerogative, but, the duty of the TPO to collect vital missing information necessary for determining the comparability of the companies considered or to be considered as comparable with the assessee company. It is possible that sometimes important information concerning the exact functional profile or that of a relevant segment may not be available in the database or may not emanate from the annual report available in the public domain and such missing information is essential. Similarly, there may be a lack of proper disclosure of the related party transactions or any other information necessary for determining the comparability. Some otherwise comparable companies IT(TP)A.260/Bang/2015 Page - 10 may have a different financial year ending and sometimes it becomes essential to obtain the data for the year matching with the assessee. Similarly, there may be several other situations warranting collection of information from the companies u/s 133(6) of the Act. The information so collected can always be lawfully used for or against the assessee provided the assessee is confronted with such information and has been given opportunity of explaining its stand on the same. If the information so collected by the TPO u/s 133(6) of the Act has been confronted and the assessee given an opportunity to explain its position qua such information, there can be no fetter on the powers of the TPO to validly take cognizance of the same. The information for the relevant year, available as such in the public domain or so collected, is always more authentic than the information available on the website of the comparable company, which is normally taken during the course of proceedings before the TPO. Such information on the website is ordinarily germane to the date when it is taken, which is normally after a period of few years from the end of the relevant assessment year. In contrast to that, the information collected by the TPO u/s 133(6) of the Act is for the year in question, which is authentic and reliable.
12. Adverting to the facts of the instant case, we find from page 135 of the TPO's order that: "the copies of notice u/s 133(6) issued to the companies as well as the copy of the replies received from the companies were, in fact, given to the tax payer in a soft copy for its comments." Not only that, the decision of the TPO based on the information collected was also communicated to the assessee vide his show cause notice. Under these circumstances, we fail to countenance the contention of the ld. AR for not relying on such information as obtained by the TPO u/s 133(6) of the Act. The contention raised by the ld. AR in this regard is, therefore, jettisoned.
From a perusal of the above, it is clear that any comparable which has been deleted treating that such comparable as functionally not similar to the assessee, cannot be a ground for excluding the comparable in another case. Therefore, the contention of the Ld. AR for deciding the matter on merit relying upon the other case laws, is rejected.
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In the result, appeal of the assessee is allowed for statistical purpose.