TMI Blog2011 (7) TMI 636X X X X Extracts X X X X X X X X Extracts X X X X ..... s against 9.32% disclosed by the assessee. Still he has deleted the entire adjustment made by the A.O./TPO which is not correct. As the T.P. issue was in the initial stages in this year and therefore a liberal approach should be taken. Considering the totality of the facts of the case the matter should go back to the file of the A.O. for fresh adjudication with a direction to give sufficient opportunity to the assessee to file fresh comparables of the financial year 2002-03 and make out its case properly - in favour of revenue for statistical purposes. - IT APPEAL NO. 6397(MUM.) of 2006 - - - Dated:- 27-7-2011 - D. MANMOHAN, R.K. PANDA, JJ. Smt. Malathi Shridharan for the Appellant. Kanchan Kaushal, Raju Vakharia and Anand Kankani for the Respondent. ORDER R.K. Panda, Accountant Member. This appeal filed by the Revenue is directed against the order dated 27.09.2006 passed by the CIT(A)-VIII, Mumbai relating to assessment year 2003-04. 2. The only effective ground raised by the Revenue reads as under :- "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 1,41,06,903/-made on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment made by T.P.O.: Description Amount Total cost as reported by the assessee 5,50,22,482 Add: Arm's length return on total cost at 34.96% 1,92,35,860 Operating income at arms' length 7,42,58,342 Less: Operating income reported by the assessee 6,01,51,439 Adjustment on account of charging the AEs below the arm's length price 1,41,06,903 6. During the course of assessment proceedings, the assessee justified the inclusion of the loss making companies in the set of comparables by stating that in any industry there would be a mix of profitable and non-profitable ventures. Although every company would try to maximize its profit it is always not possible that all companies would always earn profit. Further, the assessee should be able to assess the arm's length nature of the transaction undertaken at the point of undertaking the same or at such further point when it is able to take commercial actions to align the transaction with the arm's length standard. For this the maximum time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rresponding extreme profit making companies as well. Such an attempt would be akin to cherry picking, skew the results of the comparable sets and makes it unreliable. It was submitted that every industry has a mixture of profitable and non-profitable ventures. Further, the Indian Transfer pricing regulations do not provide for the elimination of a comparable based on its profitability. It was submitted that exclusion of loss making companies would lead to unrealistic outcome. 8.2 As regards the remark of the AO that the assessee has specifically opted against a downward adjustment for risk, the assessee submitted that it has not opted against a downward adjustment for risk, but has retained the option to make adjustments to reflect the same, if and when warranted. The AO should have recognized that the risks assumed by the uncontrolled comparable companies are significantly high vis- -vis captive service providers, like the assessee. This would further prove that the margins earned by the comparables need to be driven down to adjust for comparability. 8.3 Para 5.9 and 5.10 of the OECD guidelines were brought to the notice of the Ld. CIT(A). It was submitted that the approach of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sts for information/documents made on the assessee u/s. 92D(3) of the Act in the course of the present transfer pricing assessment proceedings. It was accordingly submitted that none of the conditions indicated in section 92C(3) of the Act apply to the assessee and, therefore, it was wholly inappropriate to disregard the transfer pricing analysis carried out by the assessee and to arbitrarily exclude loss making companies to determine the ALP. 9. Based on the various arguments advanced by the assessee, the Ld. CIT(A) directed the AO to delete the addition of Rs. 1,41,06,903/- made on account of adjustments to the ALP of the assessee's international transactions by holding as under :- "The written submissions made on behalf of the appellant, the order of the T.P.O. and the order of the A.O. have been carefully perused and I am of the view that the adjustments made by the T.P.O. which have been incorporated by the A.O. in determining the income of the appellant is erroneous. From the order of the T.P.O., it is seen that there may be fair amount of rationality in excluding the data pertaining to Star Estate Management Ltd. and that of Van Information Ltd. but, even if these two co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rring to the said decision, the ld. D.R. in his alternate contention submitted that the matter should be restored back to the file of the A.O. for his examination in proper perspective. 12. The ld. Counsel for the assessee, on the other hand, while supporting the order of the ld. CIT(A) relied on the following decisions and submitted that not only extreme loss making company but company having abnormal profit should also be excluded from comparable sets since they skew the results and cannot be considered as representative of the industry:- 1. Quark Systems (P.) Ltd. (supra) 2. Adobe Systems India (P.) Ltd. v. Addl. CIT [2011] 44 SOT 49 (Delhi) (URO) 3. Teva India Ltd. v. Dy. CIT [2011] 44 SOT 105 (Mum.)(URO) 4. SAP Labs India (P.) Ltd. (IT Appeal No. 5263 (Delhi) of 2010 dated may 6 2010 5. Sony India (P.) Ltd. v. Dy. CIT [2008] 118 TTJ 865/114 ITD 448 (Delhi) 12.1 Referring to the decision of the Delhi Bench of the Tribunal in the case of Sony India (P.) Ltd. (supra) he submitted that companies having related party transactions in excess of 10 to 15% of total sales cannot be considered as uncontrolled comparable and hence required to be excluded. Referring ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) that a business organization with negative net worth cannot be treated at par with a normal business organization. We find the assessee in its TP study report had included M/s Vans Information Ltd. which is making continuous losses and more than 50% of its net worth has been wiped off, a fact brought on record by TPO and not objected to by the ld. Counsel. Further, the observation of the TPO that certain loss making companies have been included in to comparables as well as entities which are nowhere close to the assessee's business was also could not be controverted by the ld. Counsel for the assessee. We find on being confronted by the TPO the assessee furnished fresh comparables according to which the mean profit comes to 34.96% as against 9.32% reported by the assessee. Even if the contention of the assessee that Hinduja TMT Ltd. which makes abnormal profit of 105.34% and whose turnover is 100.80 croresas against 6.01 crores in the case of the assessee cannot be included as a comparable is accepted still the OP/TC works out to 11.5% as found by the CIT(A) is against 9.32% disclosed by the assessee. Still he has deleted the entire adjustment made by the A.O./TPO which is, in ou ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
