SYCOM CORPORATION LTD,MUMBAI vs. DCIT CIR 3(3)(2), MUMBAI

This appeal by the assessee is directed against the final order of assessment for assessment year 2010-11 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 ( in short ‘the Act’) vide order dated 15/1/2015, in pursuance of the directions of the Dispute Resolution Panel (‘DRP’) issued under section 144C(5) of the Act vide order dated 30/10/2014.

(Assessment Year : 2010-11) 2. The facts of the case, briefly, are as under:-

2.1 The assessee company, engaged in the business of value added reseller and manufacturer of Smart Cards, SIM Cards and other related activities, filed its return of income for assessment year 2010-11 on 14/10/2010 declaring income of Rs.17,70,79,806/- under normal provisions of the Act and ‘book profits’ under section 115JB of the Act of Rs.25,46,30,985/-. The return was processed u/s. 143(1) of the Act and the case was subsequently taken up for scrutiny. In view of the international transactions entered into by the assessee with its Associated Enterprises (‘AE’s’), as reported by the assessee in Form No.3CEB, the Assessing Officer made a reference to the Transfer Pricing Officer (‘TPO' ) for determination of the arm’s length price (‘ALP’) thereof.

2.2 From the assessee’s TP Study and documentation, the Transfer Pricing Officer observed that the assessee has taken itself to be the tested party and characterized itself as a routine manufacturer of SIM Cards. The assessee selected the Transactional Net Margin Method (‘TNMM’) as the most appropriate method (‘MAM’) carrying out its comparability analysis on the prowess and capitaline data bases, the assessee selected five companies as comparable with an average profit of 1.09% on cost. As the profit margin of the assessee arrived at 5.31% on cost, was higher than that of the comparable companies, the assessee was of the view that the price charged by it in its international transactions was at arm’s length. The Transfer Pricing Officer examined the assessee’s TP study and rejected

(Assessment Year : 2010-11) the same as he was of the view that it was not reliable. The Transfer Pricing Officer also adopted TNMM as the MAM and after examination of the assessee’s TP Study, rejected four of the five comparables selected by the assessee. The Transfer Pricing Officer after carrying out his own examination and search, finally selected the following comparables, retaining one comparable selected by the assessee:- S.No. Name of the company OP/TC % 1. Gemni Communications Ltd. 17.97 2. M-Tech Innovations Ltd. 10.66 3. Valiant Communications Ltd. 2.71 4. Sharon Solutions Pvt. Ltd. 14.86 Arithmetical Mean 11.55%

In his order u/s.92CA of the Act dated 13/1/2014, the Transfer Pricing Officer proposed a TP adjustment ofRs.17,14,99,900/- to the ALP of international transactions entered into by the assessee with its AE’s. Consequent thereto, the Assessing Officer completed the draft order of assessment u/s. 143(3) r.w.s. 144C(1) of the Act, wherein the income of the assessee was determined at Rs.34,86,99,850/- which, inter-alia, included the proposed TP adjustment of Rs.17,14,99,900/-.

2.3 Aggrieved by the draft order of assessment for assessment year 2010-11, the assessee filed its objections thereto before the DRP. The DRP disposed off the assessee’s objections by issuing certain directions to the Assessing Officer/Transfer Pricing Officer, under section 144C(5) of the Act vide order dated 30/10/2014, whereby the TP adjustment to the ALP of the assessee’s international transactions was re-worked/re- computed by the Transfer Pricing Officer at Rs.10,72,97,970/-. The (Assessment Year : 2010-11) Assessing Officer accordingly proceeded to complete the assessment u/s. 143(3) r.w.s. 144C(13) of the Act vide order dated 15/1/2015, wherein the income of the assessee was determined at Rs.28,44,01,940/- in view of the following additions:- (i) TP Adjustment - Rs. 10,72,97,970/- (ii) Un-recorded AIR - 24,160/-

“(1)On the facts and in the circumstances of the case, the Ld. A.O. erred in framing assessment under section 143(3) r.w.s. 144C(13) making additions aggregating to of Rs 10,73,22,1301- which is completely unjustified and unwarranted in law. (2) On the facts and in the circumstances of the case, the Ld. A.O. erred in making a reference to the Transfer Pricing Officer (TPO) without recording any reasons in the assessment order as provided u/s 92CA(1) based on which he has reached a conclusion that it was "necessary or expedient" to refer the matter to the Ld. TPO for computation of the arm's length price ("ALP"). (3) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the Dispute Resolution Panel ("DRP") erred in rejecting the economic analysis undertaken by the appellant which was in accordance with the provisions of the Act read with the Rules for establishing the ALP of the international transactions.

(4) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the DRP erred in making an adjustment to the ALP by enhancing the income of the appellant by Rs. 10,72,97,970/- u/s 92CA(3). (5) On the facts and in the circumstances of the case, the Ld. AO based on the directions given by the DRP has erred in rejecting M/s Punjab Communication Ltd. for determining the ALP on the ground that the same is functionally incomparable, a public sector undertaking and that it was also rejected by the Hon'ble DRP for AY 2009-10.

(Assessment Year : 2010-11) (6) On the facts and in the circumstances of the case, the Ld. AO based on the directions given by the DRP has erred in rejecting M/s Fibcom India Ltd for determining the ALP on the ground that the same is functionally incomparable, a public sector undertaking and that it was also rejected by the Hon'ble DRP for AY 2009-10. (7) On the facts and in the circumstances of the case, the Ld. AO based on the directions given by the DRP has erred in rejecting M/s Bharati Teleteck Ltd for determining the ALP on the ground that the same is functionally incomparable, a public section undertaking and that it was also rejected by the Hon'ble DRP for AY 2009-10. (8) On the facts and in the circumstances of the case, the Ld. AO based on the directions given by the DRP has erred in rejecting M/s X L Telecom & Energy Ltd for determining the ALP on the ground that it follows a different accounting year as compared to the appellant and that it was also rejected by the Hon'ble DRP for AY 2009-10. (9) On the facts and in the circumstances of the case, the Ld. A.O. based on directions given by the DRP has erred in considering M/s Gemini Communication Ltd as comparable on the ground that it was considered comparable by the DRP in the appellant's own case for AY 2008-09 & 2009-10; without appreciating the functional incomparability of the company which has now also been accepted by the Ld. TPO for AY 2008-09. (10) On the facts and in the circumstances of the case, the Ld. A.O. based on directions given by the DRP has erred in considering M/s Sharon Solutions Pvt Ltd. as comparable on the ground that it was considered comparable by the TPO in the appellant's own case for AY 2009-10, without appreciating the functional incomparability of the company. (11) Without prejudice to the above grounds, based on facts and circumstances of the companies submitted by the appellant during the assessment proceedings; (12) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the DRP has erred in not allowing an adjustment for differences in working capital employed by the appellant vis-a-vis the comparable companies and thereby ignoring the order passed by Hon'ble ITAT in appellant's own case for AY 2008-09. (13) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the DRP has erred in adopting a flawed approach by using single year data as against the multiple year data used by the appellant to compute the ALP of the international transactions of the appellant using TNMM method by holding that the appellant has failed to show any evidence that the earlier year data has influence on the profits and margins of the appellant in determining ALP. (14) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the DRP has erred in considering data not available to the appellant at the time of preparing the transfer pricing documentation, for determining the ALP of the international transactions.

(Assessment Year : 2010-11) (15) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the DRP has erred in not applying the proviso to section 92C(2) of the Act and has failed to allow the appellant the benefit of upward variation of 5 percent in determining ALP and not thus considering the order passed by Hon'ble ITAT in appellant's own case for AY 2008-09. (16) On the facts and in the circumstances of the case, the Ld. A.O. based on the directions given by the DRP has erred in not restricting the adjustment to the income of the appellant to the quantum of its international transactions and thereby ignoring the order passed by Hon'ble ITAT in appellant's own case for AY 2008-09. (17) Without prejudice to the above, on the facts and in the circumstances of the case, which provide separate profitability from transactions with related and unrelated parties;

18) On the facts and in the circumstances of the case, the Ld. AO. erred in making an adjustment of Rs. 24,160/-- on account of non-reconciliation of AIR, without appreciating the fact that the alleged interest income is due to mistake in uploading of data by the bank and does not pertain to AY 2010-11. (19) On the facts and in the circumstances of the case, the Ld. AO has erred in proposing to initiate penalty proceedings u/s 271(1)(c) of the Act against the appellant. (20) On the facts and in the circumstances of the case and in law, the Ld. AO. erred in not allowing TDS credit of Rs. 4,55,426 (Rs. 1,17,09,791 - Rs. 1,12,54,365) to the Appellant. The Appellant prays that the Ld. A O. be given suitable direction to allow T.D.S. credit of Rs. 4,55,426. (21) The Appellant craves to add, alter or delete all or modify any or all the above grounds of appeal.” The Ld. Representative for the assessee, inter-alia, filed a ground wise chart indicating the position on each issue raised in this appeal.

4. The Grounds at S.No.1 to 4 and 21 are general in nature and not being argued before us are rendered infructuous and accordingly dismissed.

5. Ground No.5: Rejection of Punjab Communications Ltd. as comparable.

(Assessment Year : 2010-11) 5.1 In this ground, the assessee assails the orders of the authorities below in rejecting Punjab Communications Ltd. as comparable on the ground that the same is not functionally comparable to the assessee. In this regard, the Ld. Representative for the assessee fairly conceded that the Co-ordinate Bench of this Tribunal in its order in dated 12/7/2013 in the assessee’s own case for assessment year 2008-09 had upheld the orders of the authorities below that Punjab Communication Ltd. cannot be considered as a comparable to the assessee for determination of ALP.

5.2 We have heard both the Ld. Representative for the assessee and the Ld. Departmental Representative appearing for the Revenue in the matter and perused and carefully considered the material on record; including the judicial pronouncement cited(supra). We find that the Co- ordinate Bench of this Tribunal had rejected the assessee’s ground seeking inclusion of Punjab Communication Ltd. as a comparable to the assessee in its order in dated 13/07/2013 for assessment year 2008-09, wherein at paras 19 and 20 thereof it has been held as under:-

“19. As regards, exclusion of Punjab Communication Ltd, we find from the record that the said company is a persistent loss making company. The financial details given at the back side of page no.70 of the paper book show that for the last four years this company has been consistently suffering loss. The persistence loss from year after year itself shows existence of exceptional and extreme circumstances and therefore is a good reason for exclusion of the company from comparables. There is a consistence view of this Tribunal on this point that a company showing persistent losses from year after year cannot be considered as a good comparable for the purpose of determination of ALP. In the case of Advance Power Display Vs. ACIT (supra) one of us the Judicial Member is a party to the said decision has taken a similar view in para 10.2 under:- “10.2 Even otherwise when the comparability of the case has to be tested independently for each year, then without examination of the comparability, no case can be accepted as a comparable, solely on the basis (Assessment Year : 2010-11) that it has been accepted as comparable in the subsequent year. From the annual report of the company M/s.BCC Fuba India Ltd. it is clear that this company is showing persisting loss from year after year and therefore, in view of the series of decisions of this Tribunal on the point that persisting loss making company cannot be considered as a good comparable for the purpose of determination of the ALP.”

5.2.2 The aforesaid decision/finding was followed by the Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2009-10 in its order in dated 13/3/2015. Following the aforesaid decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case for assessment year 2008-09 (supra), we hold that in the facts and circumstances of the case, Punjab Communication Ltd. cannot be considered as a good comparable to the assessee in the case on hand for determination of the ALP of its international transactions. Consequently, Ground No.5 raised by the assessee is dismissed.

6.1 In the course of hearing, the Ld. Representative for the assessee submitted that the grounds raised by the assessee at S.No.6 to 8 and 10 &11 are not being pressed in this appeal. In view of these grounds at S.No.6 to 8 and 10 & 11 not being pressed, they are rendered infructuous and are accordingly dismissed.

(Assessment Year : 2010-11) 7.1 In this ground, the Ld. Representative for the assessee assailed the orders of the authorities below in considering M/s. Gemini Communications Ltd., as a comparable. It was submitted that a Co- ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2008-09 in had restored to the file of the Transfer Pricing Officer to examine the functional comparability of this company to the assessee in the case on hand.

7.2 Per contra, the Ld. Departmental Representative appearing for the Revenue supported the orders of the authorities below for including this company i.e. Gemini Communications Ltd. as a comparable to the assessee.

7.3.1 We have heard both parties and perused and carefully considered the material on record. We find that the Co-ordinate Bench of the Tribunal in the assessee’s own case for assessment year 2008-09 in dated 13/7/2013 has remanded the issue to the file of the Transfer Pricing Officer for fresh examination holding as under at para -18 of its order:-

“It is clear from the findings of the DRP that M/s. Gemini Communication was part of the Transfer Pricing study of the assessee but while selecting the comparables the assessee has not included the said company in the list of comparables without giving any specific reasons for not including in the comparable list. Thus, the assessee has not explained any reason in the Transfer Pricing study for non-inclusion of Gemini Communication in the list of comparables. Though, the assessee has raised an objection before the DRP that the said company is in a different business which includes services and solution of various natures to Telecom companies. The Ld. DR, on the other hand, pointed out that the said company has shown cost of material in the profit and loss account which has been countered by the Ld.AR by referring the notes on account and the annual report to show that the cost of material relates to the value of imparted material consumed in providing services. All these aspects have not been examined by the authorities below while deciding the issue of comparability because the main thrust of the argument of the assessee against the inclusion of Gemini Communication was super normal profit earned by the said company. Therefore, neither the ground of functional non-comparability

(Assessment Year : 2010-11) was seriously raised by the assessee not it was properly examined by the authorities below. Accordingly, in the interest of justice we set aside this issue of functional comparability of M/s. Gemini Communication to the record of the Transfer Pricing Officer for proper examination and adjudication. We may clarify that if only a segment of the business of M/s. Gemini Communication is found as comparable to the assessee then the segmental results may be considered for determination of ALP.”

7.3.2 Following the aforesaid decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2008-09 (supra) we set aside the issue of examination of the functional comparability of Gemini Communications Ltd. to the file of the Transfer Pricing Officer for proper examination and adjudication and also clarify that if only a segment of the business of Gemini Communications Ltd. is found as comparable to the assessee, then the segmental results may be considered for determination of Arm's Length Price . Needless to add, that the assessee be afforded adequate opportunity of being heard and filing details/submissions in this regard, which shall be duly considered. It is ordered accordingly. Consequently, Ground No.9 is treated as allowed for statistical purposes.

(Assessment Year : 2010-11) for assessment year 2008-09 in dated 13/7/2013(supra) on finding that the issue of working capital adjustment has not been properly examined by the authorities below has remitted this issue to the file of the Transfer Pricing Officer for proper examination of the assessee’s claim. Following the aforesaid decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2008-09(supra), we also remit to the file of the TPO the issue of examination of the assessee’s plea for being allowed working capital adjustment in respect of the working capital employed by the assessee vis-à-vis the comparable companies. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to file details/submissions in this regard which shall be duly considered before deciding the matter. It is accordingly ordered. Consequently, Ground No.12 is treated as allowed for statistical purposes.

10.1 In Ground no.14, the assessee contends that the authorities below erred in considering data not available to the assessee at the time of preparation of its Transfer Pricing documentation. We have heard both the Ld. Representative for the assessee and the Ld. Departmental Representative in the matter and have perused the material on record. We find that the Co-ordinate Bench of this Tribunal in its order in dated 13/7/2013 for assessment year 2008-09 in the assessee’s own case has considered this very issue and ruled against the assesee holding as under at para 28 and 29 thereof:- 28. Having considered the rival submissions and relevant record we find that as per the provision of the section 92C(3) of the Income Tax Act, the Transfer Pricing Officer has jurisdiction/power to collect and consider all relevant material and information apart from the information, documents and data produced by the assessee as required under section92D(3) to determine the Arm's Length Price in relation to the international transaction. In the case in hand the Transfer Pricing Officer asked the assessee to furnish single year/current data instead of multi year data which were furnished by the assessee. Therefore, the single year data taken

(Assessment Year : 2010-11) into consideration for the purpose of determination the Arm's Length Price were very much available in the public domain as well as with the assessee at the time of determination of Arm's Length Price by the TPO . The Bangalore Benches of the Tribunal in case of 27/7Customer Com Pvt. Ltd. has considered and decide an identical in para 8.5 as under: 8.5 Use of data by the TPO after the cut off date As regards the data used by the Transfer Pricing Officer while determining the Arm's Length Price, we find that it is to be as per the provisions of section 92D of the Act that every person who has entered into international transactions is required to maintain information and documentation thereof. Rule 10B(4) provides that the information and documents as specified under Rule 10B(1) and 10B(2) should as far as possible be contemporaneous and should exist latest by the ‘ specified date’ referred to in section 92F(4) which has the same meaning as ‘due date’ in Explanation 2 to section 139(1) of the Act. In the assessee’s case, this would be ‘ 30th day of September’ as it is a company. It is clear, after going through the relevant provisions of law, that the Act has not provided for any cut off date up to which only the information in the public domain has to be taken into consideration by the Transfer Pricing Officer while arriving at the Arm's Length Price or making Transfer Pricing adjustments. Both the assessee and Revenue being found by the provision of the Act and Rules are required to take into consideration contemporaneous data relevant to the previous year in which the international transaction has taken place. The assessee is obliged to maintain the information and documentation as required relating to international transactions as per the specified date so that it can be made available to the Transfer Pricing Officer or the Assessing Officer or any other authority in any proceedings under the Act. We are, therefore, of the view that there is no infirmity in the action of the Transfer Pricing Officer in using contemporaneous data at the time of transfer pricing audit, though the same may not have been available to the assessee at the time of preparation of statutory transfer pricing study/documentation.”

10.2 Following the aforesaid decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2008-09 (supra) and the decision of the ITAT Bangalore Bench in the case of 24/7 Customer.com Pvt. Ltd. in 227/ Bang/2012 dated 9/11/2012, we dismiss this ground No.14 raised by the assessee.

(Assessment Year : 2010-11) 11. In Ground No.15, the assessee assails the direction of the DRP in not applying the proviso to Section 92C(2) of the Act and thereby deny the assessee the benefit of upward variation of 5% in determining the Arm's Length Price. This issue is more of an academic nature as the Income Tax Act, 1961 has been amended with retrospective effect from 1/4/2002 by the introduction of a clarificatory amendment in which Section 92C(2A) was inserted as per Finance Act, 2012. The new section 92C(2A) of the Act mandates that if the arithmetical mean price falls beyond ± 5% from the price charged in international transactions, the assessee does not have any option referred to in section 92C(2) of the Act. Thus, as per the above amendment, it is clear that the ± 5% variation is allowed only to justify the price charged in international transactions and not for adjustment purposes. The aforesaid amendment has settled the issue and accordingly the benefit of 5% is not allowable in the assessee’s case. This Ground No.14 raised by the assessee being not maintainable, is accordingly dismissed.

(Assessment Year : 2010-11) 16. In Ground No.20, the assessee contends that the Assessing Officer has erred in not allowing TDS credit of Rs.4,55,246/- to the assessee. After hearing both parties in the matter, we set aside this issue to the file of the Assessing Officer to examine and verify the claim of the assessee and allow TDS credit to the assessee to the extent allowable in accordance with law. 17. In the result, the assessee’s appeal for assessment year 2010-11 is partly allowed.