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Income Tax Appellate Tribunal, DELHI BENCH ‘Friday/I-1’, NEW DELHI
ORDER
Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 07.01.2014 of the AO passed on the direction u/s 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act) issued by the DRP on 30.12.2013.
2. Following grounds have been raised in this appeal: “1. On the facts and circumstances of the case, the order passed by the Assessing Officer (AO) is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the AO has erred both on facts and in law in making an addition of an amount of Rs.1,10,02,678/- on account of difference in arms' length price as determined by the TPO and confirmed by the Learned DRP.
2 Sojitz India Pvt. Ltd.
On the facts and circumstances of the case, the order passed by the learned DRP is bad both in the eye of law and on facts.
4. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in confirming the action of the TPO in rejecting the comparables, Besant Raj International, Capital Trust Limited and Ujjwal Ltd. selected by the assessee on the basis of persistent loss maker and functional comparability. 5(i) On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in confirming the action of the TPO in rejecting the comparable company, M/s Besant Raj International selected by assessee as a comparable on the basis of functional comparability. (ii) That the Learned DRP has erred in confirming the said action of the AO on the basis of the fact that the comparable does not come through the search process, rejecting the contention of the assessee that the same has been identified as a comparable after a comprehensive search strategy adopted by the assessee.
6. On the facts and circumstances of, the case, the Learned DRP has erred both on and in law in confirming the action of the TPO in rejecting Capital Trust Limited as a comparable selected by the assessee rejecting the evidences and explanation brought on record by the assessee to show that the functions being the same, it is a proper comparable. 7(i) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the appellant that the two comparables viz. IDC India Ltd. and Priya International are significantly different in 3 Sojitz India Pvt. Ltd. function and as such these two comparables need to be rejected. (ii) On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in holding that the comparables included by the assessee cannot be rejected at the assessee's behest.
8. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention that the Rattan Glitter Industries Ltd. is a correct comparable and the TPO has rejected the same wrongly.
9. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Educational Consultants Ltd. is 3.85% as against 11.78% computed by the TPO.
10. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Agricultural Finance Corporation Ltd. is (-) 6.67% as against 5.34% computed by the TPO.
On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of IDC India Ltd. is 13.82% as against 14.49% computed by the TPO.
12. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Priya International is 10.69% as against 13.30% computed by the TPO.
4 Sojitz India Pvt. Ltd.
On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the appellant that the OP/TC of the comparables and the assessee need to be computed on the same basis i.e. after excluding non-operating income from the comparables and well as from the assessee.
14. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct average of OP/TC of the four comparables considered by the TPO comes to 5.42% as against 11.23% computed by the TPO.
On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the appellant that after correcting the arithmetical inaccuracies in the margin (OP/TC) of the comparables the average margin will be within the adjustment range of safe harbour in terms of the proviso to Section 92C(2) of the Income Tax Act.
16. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in rejecting the contention of the assessee that the comparison of the assessee company who is in its start up phase with these companies at matured stage is not proper without allowing appropriate adjustment for start up cost.
17. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in not giving proper credit of the prepaid taxes while computing the tax liability of the assessee.
5 Sojitz India Pvt. Ltd. 18. On the facts and circumstances of the case, the Learned DRP has erred both on facts and in law in wrongly calculating the amount of interest under Section 234D of the Act. 19. The appellant craves leave to add, amend or alter any of the grounds of appeal
.”
3. During the course of hearing the ld. Counsel for the assessee submitted that Ground Nos. 1 to 3, 13 & 19 are general in nature while Ground Nos. 4, 6, 8, 16 & 17 were not pressed, so these ground do not require any comment on our part.
4. Vide Ground No. 5, the grievance of the assessee relates to the rejection of the comparable M/s Besant Raj International selected by the assessee on the basis of functional comparability and vide Ground No. 7, the issue relates to the inclusion of two comparables M/s IDC India Ltd. and M/s Priya International which the assessee wants to be rejected due to significantly different in functions. These two grounds are taken simultaneously.
5. The facts related to the issue raised in these grounds in brief are that the assessee filed the return of income on 30.11.2006 declaring an income of Rs.79,78,500/- which was processed u/s 143(1) of the Act on 25.02.2008. Later on, the case was selected for scrutiny. The AO passed the draft assessment order u/s 144C of the Act on 09.12.2009. Against the said assessment order, the assessee filed objection before the Dispute Resolution Panel (DRP) who passed the order u/s 144C of the Act on 6 Sojitz India Pvt. Ltd. 30.08.2010 and dismissed the objection of the assessee. Thereafter, the assessee preferred an appeal to the ITAT Delhi Bench ‘G’, New Delhi in wherein vide order dated 12.04.2012, the case was restored to the DRP for proper adjudication on all the objection and grounds raised
by the assessee. In compliance of the said order, the DRP passed the order dated 30.12.2013 and partly accepted the objections of the assessee. Thereafter, the AO in compliance of the directions issued u/s 144C of the Act by the ld. DRP framed the assessment and passed the impugned assessment order. The assessee is engaged in the business of intending business in chemicals, machinery equipments & parts and in iron ore, the year under consideration is the first year of operation of the assessee. During the year under consideration, the assessee had taken the following international transaction and reported the same in Form No. 3CEB: S.N. Nature of transaction Method used by Value of transaction Assessee Method PLI
1. Provision of business TNMM OP/OC 112,314,434 information and sales support services
2. Receipt of services in TNMM OP/OC 769,396 relation to application system
3. Reimbursement of expenses TNMM OP/OC 30,356,363 incurred AEs on behalf of SIPL
4. Purchase of fixed assets from TNMM OP/OC 6,433,704 AE
5. Reimbursement of expenses 7,922,897 incurred by SIPL on behalf of AEs 7 Sojitz India Pvt. Ltd.
The AO made a reference to the TPO to determine the arm’s length price in relation to the aforesaid international transactions which were stated by the assessee to be closely linked to the provision of business information and sales support services rendered by the assessee. The assessee had made itself the tested party for transfer pricing analysis and had used Transaction Net Margin Method (TNMM) as the most appropriate method in the TP report. The Profit Level Indicator (PLI) used was Operating Profit to the Total Cost ratio (OP/TC). The assessee had selected following 11 comparables and computed their weighted mean OP/TC margin as 10.52%, using multiple year data: S. NO. Name of Company OP/OC 1 Agricultural finance corporation Ltd. 4.41% 2 Besant Raj International limited 28% 3 Capital Trust Limited -0.60% 4 Crisil Limited 8.57% 5 Educational Consultants Limited 3.32% 6 Electronica Machine Tools Limited 0.29% 7 Epic Energy Limited 21.91% 8 IDC (India) Limited 11.62% 9 Priya International Limited 10.40% 10 Ratan Glitter Industries Ltd 23.54% 11 Ujjwal Limited 4.32% Arithmetic mean 10.52% 8 Sojitz India Pvt. Ltd.
The TPO found 5 companies out of the total set of 11 comparables to fulfill the functional similarity with the assessee and finally selected 4 comparables by observing in paras 7.6 and 8 of the order dated 27.10.2009 u/s 92CA(3) of the Act which read as under: “7.6 Accordingly the individual comparables were analyzed and five companies out of the total set of 11 comparables were found to fulfill the functional similarity with the assessee. The comparables are discussed as under: 1. Besant Raj International Limited. It may be mentioned here that, this comparable was not thrown by any search process performed on Prowess or Capitaline. This company was just added to the list of comparables without any reason as is evident from search process explained in Paras 7.4 and 7.5 of this order. Apparently this comparable has been used by the assessee as a result of some search secretly performed and this comparable is in the nature of "Comparable chosen without any search process". One of the filters applied by the assessee in the search process for identifying the comparables was "persistent losses." It is seen from the details furnished in the TP report that except for A.Y. 2004-05, there is no data provided; however on updation it is found that the company was in losses in the last two years. For A.Y. 2005-06, the margins of the company are found to be at (-)61.82% and for the A.Y. 2006-07 the margins furnished by the assessee are at (-) 15%. The assessee in reply dated 06.10.2009 has accepted that the company has negative net profit margin which is what is being considered for working out the ALP. Further the Annual Report of the Company reveals that for the year ending March, 2006 the Income from Operations was Rs. 17.34 Lakhs which was derived from Consultancy. The company has accumulated losses which is almost 40% of the 9 Sojitz India Pvt. Ltd. share capital of the company. This clearly shows that the company which is having persistent losses, different functional profile and a meager turnover of Rs. 17.34 Lakhs cannot be accepted as a comparable for the assessee. The basic premise behind the comparability is comparison between apple to apple. A company which is selling its assets to overcome the financial difficulties cannot be considered comparable with the assessee. Besant Raj International Limited is thus rejected as comparable.
Capital Trust Limited: As regards the rejection of Capital Trust Limited on the basis of different functional profile and non maintenance of segmental accounts, the assessee has given a general reply vide letter dated 06.10.2009 objecting to the approach of rejection of comparables based on the actual activities performed by them during the year It is seen that the company offers consultancy services to Foreign Bank, not having their own branches or representatives offices. It appears that the company's foreign consultancy segment was considered comparable to assessee's provision of business support services. However the kind of services in both the situation would be different leading to different functions. The functions of this company are not comparable to the assessee. Further, Capital Trust shows losses with negative operating margin of (11.11)% in its foreign consultancy segment. From the financials of the company in public data base it is seen that this company has overall positive margin of 4% in financial year 2005-06; whereas neither Capitaline nor Prowess show any segmental data for this company in this year. Moreover Capital Trust Ltd in its segmental financial available for 2005 indicate foreign consultancy income as just 4.54% of the total revenue earned by the company during the year while the expenses in foreign consultancy segment are shown at nil. Same position of nil expenses and foreign consultancy income 10 Sojitz India Pvt. Ltd. at just 1.87% of the total revenue earned by the company is repeated in the year 2007 when segmental data is available. It is to be noted that a company which has overall profit margin OP/TC as 4% but with very low margins in comparable activities, shows that there is major functional difference or strategic difference in the operations of the company & assessee. Capital Trust as a comparable is therefore rejected 3. Ujjawal Limited, As regards the rejection of this company the assessee has referred to its reply regarding its objections to the rejection of persistent loss making comparables. The same is not acceptable as discussed in Para 7.5.ii above. Also the three year margins of the company as provided by the assessee show huge decline in the operating margins with 3.49% in AY 2004-05 to -38.85% in AY 2005-06 and -100% in AY 2006-07. Ujjawal Limited is therefore rejected as comparable of the assessee.
IDC India Pvt Ltd, The assessee has sought rejection of this comparable on the basis of RPT of 7.97%. However in view of the Hon'ble ITAT judgment in case of Sony India the RPT being less than 15% and this also being a comparable chosen by the assessee, there is no basis for rejection of this comparable. It is included for calculation of ALP of the assessee. However, CRISIL India which has been shown by the assessee to have related party transactions of over 17%, hence although included in the show cause, is excluded from calculation of ALP of the assessee, on the same logic.
As apparent from the product profile table at Para 7.3 above, the three comparables Electronica Machine Tools Limited, Epic Energy Limited and Katan Glitter Industries Ltd are totally different in their activities from the assessee. While Ratan Glitter Industries Ltd shows Consultancy Charges of miniscule amount compared to its total earnings, Electronica 11 Sojitz India Pvt. Ltd. Machine Tools Limited and Epic Energy Limited have no activity at all which can be called comparable to that of assessee. In reply dated 06.10.2009 to the show cause for their rejection as comparables, the assessee has given a general reply as under: "Your good self as relied'on the business segment which contributes more towards turnover. On this basis the comparables were rejected. The assessee disagrees with the approach adopted by your good self as the same is subjective and difficult to conclude the functional nature. However, without prejudice to the above, adopting the similar approach, Priya International also cannot be held as comparable." The assessee's reply is not acceptable. The revenue earning activities during the year are indicative of the functions performed by the company and qualification of the descriptions provided in the Director's report. Further the financials of a company are the focal points of comparing the operating margins with the assessee's PLI and these comparisons would be vitiated if the operational activities themselves are mismatch with the activities of the assessee. This is also taken as basis for conducting segmental analysis of the transactions and the logic taken is that apple has to be compared with apple. Moreover there is no such segmental data in above said companies which can compare with that of the assessee. The inclusion of these comparables for calculation of assessee's ALP is thus not justified and so Electronica Machine Tools Limited, Epic Energy Limited and Ratan Glitter Industries Ltd are rejected. The assessee's contention that Priya International be also excluded on the same logic is not justifiable since the facts of this case are totally different to the above three comparables. Priya Ltd earns one fourth revenue from the activities similar to those of 12 Sojitz India Pvt. Ltd. the assessee. It is therefore functionally similar and is included in the calculation of ALP of the assessee.
On the basis of above discussions following comparables are selected for the purpose of this case for the current year: S.No Comparables OP/TC 1 Educational Consultants Limited 11.78% 2 Agricultural Finance Corporation 5.34% Limited 3 IDC (India) Limited 14.49% 4 Priya International Limited 13.30% Average 11.23% 8. The TPO worked out average OP/TC margin at 11.23% instead of 10.52% declared by the assessee and proposed the adjustment of Rs.1,10,02,678/- on accounts of Arm’s Length Price as under: Assessee's international transaction of Commission Rs 114,999,986 and service income Arm's Length Margin ( OP/TC) 11 .23% Total Cost of Assessee Rs 113,866,903 Arm's Length Profit of Assessee at PLI of 11.23 % (A) Rs 12,784,407 Profit shown by Assessee (B) Rs 1,781,729
Difference (A-B), to be adjusted Rs 11,002,678
% variance over assessee's value of transaction is 9.66%
The AO on the recommendation of the TPO passed the draft assessment order dated 08.12.2009 and added Rs.1,10,02,678/- to the 13 Sojitz India Pvt. Ltd. total income of the assessee. Against the said draft assessment order, the assessee raised objection before the ld. DRP who rejected the objection relating to exclusion of M/s Besant Raj International Ltd. and M/s Ujjawal Ltd. and inclusion of Priya International Ltd. in the set of comparable at page nos. 2 & 3 of the order dated 30.08.2010 by observing as under: “We have gone through the relevant records and TPO's order in this regard. The TPO has discussed this issue at length in para 7.6. It is seen that the assessee in its reply dated 06.10.2009 has accepted that Besant Raj International Ltd, has negative net profit margin and that this comparable was not thrown by any search process performed on "Prowess" or "Capitaline" but was added later to the list of comparables as explained in paragraphs 7.4 and 7.5 of TPO's order. The TPO has given detailed reasons for excluding these comparables on page 15 to 17 of the draft order. As regards Priya International Limited the TPO has stated that 1/4 revenue of this company comes from the activities similar to that of the assessee and therefore it cannot be said that functions are not similar to assessee. Hence, we find no reason to interfere with the approach adopted by the TPO in selection of comparables.”
Against the said order, the assessee preferred an appeal before the ITAT Delhi Bench ‘G’, New Delhi in for the assessment year 2006-07 wherein vide order dated 12.04.2012, the matter was restored to the ld. DRP to pass the speaking order by observing in para 7 of the said order as under:
14 Sojitz India Pvt. Ltd. “7. As the detailed and proper findings of the DRP are not before us, we are of the opinion that without dealing with the grounds submitted before us, the matter deserves to be remitted back to the DRP for proper adjudication on all the objections and grounds raised by the assessee, after fresh hearing of both the parties delivering a speaking elaborate order as per requirement of law and procedure accepted by the courts and also by the authorities working as quasi-judicial functionaries.”
11. In compliance to the said direction, the DRP again rejected M/s Besant Raj International Ltd. and M/s Ujjawal Ltd. as comparable by observing at page nos. 3 & 4 of the order as under: “The DRP has examined this issue. While persistent loss has not been defined, it is relevant to understand the implications when an entity is not performing as per as the growth trends of the industry. It implies there is some peculiar problem and it cannot be taken as a robust and a reliable comparable. Based on the above facts, we find that the TPO has individually examined each of the comparable, looked into the economic circumstances as to why such comparable was incurring losses and compared the same with the economic circumstance of the tested party, i.e. the assessee. Therefore, we find no reason to interfere with the findings of the TPO and hold that the TPO has appropriately applied this filter. The ground of objection of the assessee in this regard is therefore rejected. As regards Besant Raj International Limited, it may be mentioned that this comparable was not selected by any search process performed on Prowess or Capitaline. This company was just added to the list of comparables by the assessee without any reason as is evident from search process explained in Paras 7.4 and 7.5 of the order passed by the TPO. It is evident that this Comparable has been chosen without any 15 Sojitz India Pvt. Ltd. search process. One of the filters applied by the assessee in the search process for identifying the comparables was "persistent losses." It is seen from the details furnished in the TP report that except for A.Y. 2004-05, there is no data provided; however on updation it is found that the company was in losses in the last two years. For A.Y. 2005-06, the margins of the company are found to be at (-)61.82% and for the A.Y. 2006-07 the margins furnished by the assessee are at (-) 15%. The assessee in reply dated 06.10.2009 has accepted that the company has negative net profit margin which is what is being considered for working out the ALP. Further, the Annual Report of the Company reveals that for the year ending March, 2006 the Income from Operations was Rs. 17.34 Lakhs which was derived from Consultancy. The company has accumulated losses which is almost 40% of the share capital of the company. This clearly shows that the company which is having persistent losses, different functional profile and a meager turnover of Rs. 17.34 Lakhs cannot be accepted as a comparable for the assessee. The TPO has held that a company which is selling its assets to overcome the financial difficulties cannot be considered comparable with the assessee. Accordingly, the TPO has rejected Besant Raj International Limited as a comparable. The action of the TPO is upheld. As regards the rejection of Capital Trust Limited on the basis of different functional profile and non maintenance of segmental accounts, the assessee has objected to the rejection of comparables based on the actual activities performed by them during the year. The TPO has observed that the company offers consultancy services to Foreign Bank, not having their own branches or representatives offices. It appears that the company's foreign consultancy segment was considered comparable to assessee's provision of business support services. However the kind of services in both the situation would be different leading to different functions. The 16 Sojitz India Pvt. Ltd. TPO has further observed that the functions of this company are not comparable to the assessee. Further, Capital Trust shows losses with negative operating margin of (11.11)% in its foreign consultancy segment. From the financials of the company in public data base it is seen that this company has overall positive margin of 4% in financial year 2005-06; whereas neither Capitaline nor Prowess show any segmental data for this company in this year. Moreover Capital Trust Ltd in its segmental financial available for 2005 indicate foreign consultancy income as just 4.54% of the total revenue earned by the company during the year while the expenses in foreign consultancy segment are shown at nil. Same position of nil expenses and foreign consultancy income at just 1.87% of the total revenue earned by the company is repeated in the year 2007 when segmental data is available. It is to be noted that a company which has overall profit margin OP/TC as 4% but with very low margins in comparable activities, shows that there is major functional difference or strategic difference in the operations of the company & assessee. Accordingly, the TPO has rejected Capital Trust as a comparable. The DRP upholds the action of the TPO. As regards the rejection of Ujjawal Limited, the assessee has objected to the rejection of persistent loss making comparables. The same is not acceptable as discussed above. Also the three year margins of the company as provided by the assessee show huge decline in the operating margins with 3.49% in AY 2004- 05 to -38.85% in AY 2005-06 and -100% in AY 2006-07. Ujjawal Limited has been correctly rejected by the TPO as a comparable. The DRP upholds the action of the TPO.”
As regards to the inclusion of M/s Priya International Ltd. as comparable, the DRP also rejected the objection of the assessee by observing as under:
17 Sojitz India Pvt. Ltd. “This comparable has been used by the assessee in its TP study. Accordingly, it is retained in the final set of comparables. The above ground of objection is rejected.” 13. In compliance to the direction dated 30.12.2013 issued by the ld. DRP u/s 144C(5) of the Act, the AO passed the impugned order dated 07.01.2014.
Now the assessee is in appeal. The ld. Counsel for the assessee submitted that the TPO and the ld. DRP rejected the comparable companies i.e. M/s Besant Raj International Ltd. on the basis that it was persistent loss making and not functionally comparable. It was contended that merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purpose of computation of ALP, unless it is functionally different and has a negative net worth. The ld. Counsel for the assessee referred to page no. 43 of the assessee’s paper book which is the part of TP study of the assessee company wherein the companies which had been declared sick or had persistent negative net worth had already been excluded by the assessee. It was submitted that the action of the TPO, which had further been upheld by the ld. DRP/AO was bad-in-law as well as contrary to the facts of the assessee’s case. The reliance was placed on the following case laws: � DCIT Vs Nortel Networks India (P.) Ltd. (2016) 176 TTJ 25 (Del.-Trib.) � DCIT Vs Quark Systems (P.) Ltd. (2010) 4 ITR (Trib.) 606 � ACIT Vs Wockhardt Ltd. (2010) 6 Taxmann.com 78 (Mum.- ITAT)
18 Sojitz India Pvt. Ltd. � Sony India Vs DCIT (2008) 114 ITD 448 (Del.) � Sapient Corporation Pvt. Ltd. Vs DCIT (2011) Taxmann.com 69 (Del.-Trib.) � DCIT Vs B.P. India Services (P.) Ltd. (2011) 48 SOT 253 15. As regards to the functional comparability, it was stated that M/s Besant Raj International Ltd. had been included by the assessee after carrying out a comprehensive search strategy, details and information which had been provided in the TP study. A reference was made to page nos. 359 to 367 of the assessee’s paper book. It was contended that the said company was deriving income from consultancy services and in the context of the assessee company, the said company was a comparable as the TPO himself was of the view that the company deriving consultancy income was a comparable to the assessee. It was further submitted that M/s Besant Raj International Ltd. had not sold off its assets to fund its business as alleged by the TPO which is evident from the Schedule of fixed assets placed at page no. 364 of the assessee’s paper book which revealed that there had not been any sale or disposal of fixed assets. As regards to the Capital Trust Ltd., the ld. Counsel for the assessee submitted that the said company had earned income from services, commission, maintenance and other miscellaneous income but the TPO only considered the foreign consultancy segment of the said company and even if the analysis is done on a segmental basis, the fact that a loss in the said segment cannot be a ground to reject the comparable. The ld. Counsel for the assessee submitted that the companies M/s Besant Raj 19 Sojitz India Pvt. Ltd. International Ltd. and Capital Trust Ltd. were wrongly excluded by the TPO/DRP from the list of comparables.
As regards to the inclusion of M/s IDC India Ltd. and M/s Priya International Ltd. in the list of comparable by the TPO/DRP. The ld. Counsel for the assessee submitted that M/s IDC India Ltd. was engaged mainly into research practices which is evident from page nos. 311 to 334 of the assessee’s paper book. It was further submitted that the entire income of the said company amounting to Rs.12,17,29,905/- have been earned from research and survey. A reference was made to page no. 325 of the assessee’s paper book which is the copy of Schedule 13 i.e. details of service income earned by M/s IDC India Ltd. and it was stated that Schedule 15 of the said company placed at page no. 325 shows that all the direct expenses amounting to Rs.6,60,04,508/- had been incurred by M/s IDC India Ltd. in relation to research and survey only. However, no income had been earned from those kinds of services. Therefore, the said company was not comparable to the assessee’s company and should have been directed to be excluded. As regards to the M/s Priya International, it was submitted that the said company was engaged mainly in trading of chemicals across the country. A reference was made to page no. 340 of the assessee’s paper book which is the copy of profit and loss account of the said company which revealed that the income earned by the said company on account of sales and the commission income too was on account of indenting of chemicals i.e. instead of 20 Sojitz India Pvt. Ltd. buying in its own account, it had been got the sale made directly in the name of buyer, taking profit in the transaction as commission n income. A reference was made to Schedule G copy of which is placed at page no. 344 of the assessee’s paper book which shows the cost of material sold by the said company. It was submitted that the assessee company had earned income only by way of services rendered in connection with the support activities to the parent company. Therefore, in no way M/s Priya International could have been considered as comparable to the assessee’s company and thus needs to be excluded.
In his rival submissions the ld. CIT DR strongly supported the order of the TPO/DRP and further submitted that the assessee itself included M/s Priya International in the list of the comparable. Therefore, it was a comparable choosen by the assessee and the TPO was justified for inclusion of the said company in the list of comparable. As regards to the comparables of M/s Besant Raj International Ltd. and M/s Capital Trust Ltd., the ld. CIT DR stated that those companies were rightly excluded by the TPO/DRP because those were not functionally comparable.
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the only limited issue to be adjudicated relates to the exclusion of 2 comparable selected by the assessee, namely, M/s Besant 21 Sojitz India Pvt. Ltd. Raj International Ltd. and M/s Capital Trust Ltd. and inclusion of another 2 comparables, namely, M/s Priya International and IDC India Ltd. In the present case, the TPO excluded M/s Besant Raj International Ltd. from the list of the comparables for the reason that the said company was persistent loss maker and of functionally different. In the present case, the assessee itself excluded those companies which had been declared sick or were having negative net worth. However, a company cannot be excluded from the list of comparables if it was a loss making company in view of the decision of the ITAT Special Bench Chandigarh in the case of DCIT Vs Quark Systems (P.) Ltd. (2010) 4 ITR (Trib.) 606 (supra) as under: "Merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purposes of computation of ALP. Where, however, the comparable was a case in which not only functional area was different, but it also had a negative net worth and, moreover, its turnover had no comparison with that of the assessee-company, the exclusion of such comparable was quite justified."
Therefore, in our opinion, the TPO/DRP was not justified in excluding M/s Besant Raj International Ltd. only on this basis that it was a loss making company, particularly when it was functionally the same and was deriving income from consultancy services as in the case of the assessee. Moreover, the TPO wrongly held that this company had sold off its assets to funds its business, the said observation of the TPO is contrary to the facts mentioned in Schedule of the fixed assets (copy of 22 Sojitz India Pvt. Ltd. which is placed at page no. 364 of the assessee’s paper book) which revealed that the said company has reduced only a sum of Rs.12,500/- from the office equipment and no other asset was sold off. Therefore, there was no question of funding the business by selling the assets. Since this company is functionally similar with the assessee and making of the loss cannot be criteria for the exclusion from the list of comparables. We, direct the AO to include this company in the list of the comparables. As regards to the exclusion of M/s Capital Trust Ltd. is concerned, it is an admitted fact that the said company was engaged in the foreign consultancy but the assessee is not engaged in such activity. Therefore, this company cannot be considered as functionally similar with the assessee, so it was rightly excluded from the list of the comparable.
Now we have to see as to whether the other companies, namely, M/s IDC India Ltd. and M/s Priya International Ltd. were to be retained or to be excluded from the list of the comparable. As regards to the IDC India Ltd., it is noticed that the said company is engaged mainly in research practices which is evident from Schedule 13 annexed to the profit and loss account (copy of which is placed at page no. 325), which revealed that this company has earned Rs.12,17,24,905/- from research and survey and also incurred expenses of Rs.6,60,04,508/- on account of search and survey expenses as mentioned in Schedule 15 but the assessee had not earned any such income or incurred such expenses. Therefore, functionally the company M/s IDC Ltd. was not similar to the 23 Sojitz India Pvt. Ltd. assessee and it cannot be retained in the list of comparable. We direct the AO to exclude this company from the list of the comparables. As regards to M/s Priya International Ltd., it is noticed that the said company was a trading company and earning the revenue on account of sales which is evident from page no. 340 of the assessee’s paper book, which is the copy of profit and loss account of this company for the year ending on 31.03.2006 and reveals that M/s Priya International Ltd. was having a sales of Rs.4,18,49,059/- and cost of material at Rs.3,12,51,133/- which clearly shows that the said company was mainly a trading company dealing in trade of chemicals. Although the said company was having the commission income of Rs.1,51,29,001/- but the main revenue was generated from the sales. It is also noticed that M/s Priya International Ltd. was having inventory of furnished goods (chemicals) amounting to Rs.1,16,83,734/- as on 31.03.2006 which is evident from Schedule-G forming part of the account (copy of which is placed at page no. 344 of the assessee’s paper book). On the other hand, the assessee was not engaged either in trading or manufacturing and was earning income only by way of services rendered in accordance with the support activities, therefore, M/s Priya International Ltd. was functionally different from the assessee and should not have been included in the list of the comparable. We, therefore, direct the AO to exclude M/s Priya International Ltd. from the list of comparables and then work out the OP/TC ratio.
24 Sojitz India Pvt. Ltd.
Vide Ground Nos. 9 to 13, the assessee has stated that there is calculation mistake in working out OP/TC of Educational Consultants Ltd., M/s Agricultural Finance Corporation Ltd., M/s IDC India Ltd. and M/s Priya International Ltd. The ld. Counsel for the assessee had given the calculation of the PLI (OP/TC) in respect of all the aforesaid companies (which are placed on record) and submitted that the direction may be given to the AO to verify the said calculations and consider the correct one while working out the average for the purpose of Arm’s Length Price.
The ld. DR although supported the orders of the authorities below but did not object if the direction is given to the AO to verify from the records and consider the calculations given by the assessee.
After considering the submissions of both the parties and the material available on the record, we direct the AO to verify working given by the assessee in respect of Educational Consultants Ltd. and M/s Agriculatral Finance Corporatn Ltd. which had been considered as comparable but there is no need to do the same exercise for M/s Priya International Ltd. and IDC India Ltd. which we had already directed in the former part of this order, to exclude from the list of the comparables.
As regards to the submissions of the ld. DR that M/s Priya International Ltd. was taken as comparable by the assessee itself, so it cannot be excluded. It is noticed that an identical issue was a subject 25 Sojitz India Pvt. Ltd. matter of the assessee’s appeal in the case of Panasonic Industrial Asia Pte Ltd. Vs Dy. DIT in reported at 2014 (2) TMI 682 (copy of which was furnished by the ld. Counsel for the assessee during the course of hearing). In the said case, a Co-ordinate Bench of ITAT held as under: “The assessee cannot be barred from pleading for the exclusion of a comparable when it pleads the existence of extra-ordinary circumstances. The existence of such a fact would make a specific period creating extraordinary circumstances in the case of a functional comparable an incomparable - only like can be compared with like and once the existence of unique circumstances is raised by a party even if the comparable was proposed by the said party itself if the party based on information subsequently available in the public domain, is able to show the existence of unique circumstances - thus, there is nothing in law which bars the assessee to move the authorities or the Appellate Forums to look into and seek an adjudication on the issue. A comparable can be taken as a comparable purely and simply only for the reason that it is a comparable and alternately it most definitely cannot be "declared" to be a comparable only on the ground that it has been offered as a comparable by a party to the proceedings ignoring the arguments that it was offered on a mistaken belief of law and facts - there was no statutory or legal impediment in the stand of the assessee as to why the said comparable should not be excluded and also do not see any reason as to why the assessee be saddled with the said comparable - thus, the matter remitted back to the TPO for excluding the comparable after allowing the assessee to lay evidence in support of its claim.”
26 Sojitz India Pvt. Ltd. 25. In view of the above, we do not see any merit in the submission of the ld. DR that once a comparable is taken by the assessee then it is barred from pleading for the exclusion.
As regards to the Ground No. 18 relating to the charging of interest u/s 234D of the Act, it was the common contention of both the parties that it is consequential in nature. We order accordingly.
In the result, the appeal of the assessee is partly allowed for statistical purposes. (Order Pronounced in the open Court on 13/12/2016)