TMI Blog2011 (1) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... s - HELD THAT:- the nature of business activity carried on by the four parties in question was entirely different from the business activity of the assessee. Moreover, the services rendered by these parties were in the non-technical field whereas assessee company was found to be rendering services in the technical field of research and development. As rightly held by the authorities below, the said concerns thus were functionally different from the assessee company and there was no justifiable reason to select the same as comparables for transfer pricing analysis. We therefore find no infirmity in the impugned or of the CIT(A) on this issue and upholding the same, we dismiss ground of the assessee s appeal. disallowance of benefit of 5% variation claimed - HELD THAT:- we restore this issue to the file of the A.O. with a direction to decide the same afresh in the light of the decision of ITAT in the case of Sony India (P.) Ltd.[ 2008 (9) TMI 420 - ITAT DELHI-H] . claim for adjustment - difference in risks profile - transfer pricing analysis - we restore this issue to the file of the A.O. for deciding the same afresh on the same line as has been directed by the Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt decision rendered in the case of Adobe Systems India (P.) Ltd.[ 2011 (1) TMI 933 - ITAT NEW DELHI] has held that exclusion of companies showing supernormal profits as compared to other comparable is fully justified. We, therefore, set aside the impugned order of the ld. CIT(A) on this issue and restore the matter to the file of the A.O. with a direction to decide the same afresh after taking into consideration the submissions made by the assessee before the ld. CIT(A). - P.M. JAGTAP AND V. DURGA RAO, JJ. M.P. Lohia for the Appellant . Keshava Saxena for the Respondent. ORDER Per P.M. Jagtap, Accountant Member. These two appeals, one by the assessee being ITA No 6107/Mum/09 and other by the Revenue being ITA No. 5707/Mum/09, are cross appeals which are directed against the order of ld. CIT(A), XIX Mumbai dated 17.08.2009. 2. The assessee in the present case is a company which is engaged in the business of Research and Development and Development of pharmaceutical drugs. The return of income for the year under consideration was filed by it on 30-10-2004 declaring total income of Rs. 67,68,933. In the said the year, the Assessee had provided resea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing companies on the basis that these were functionally not comparable. Bombay Intelligence Security (India) Ltd. Tanu Health Care Ltd. Times Infotainment Media Ltd. Tops Security Ltd. Ujjwal Limited. Further, the TPO did not consider one another company namely Kitco Limited on the ground that it was loss making company. The TPO also included a comparable Vimta Labs Ltd. which was included by the Assessee as a comparable in FY 2002-03 but excluded in FY 2003-04 on the ground that it is functionally different. Accordingly, it was held by the TPO/AO that the assessee should have earned a cost plus mark-up of 33.26% on arm s length basis as against 11.73% only shown by it. Transfer Pricing adjustment of Rs. 1,16,66,155 therefore was made by the TPO/AO and the said amount was added to the total income of the assessee in the assessment made u/s 143(3) vide an order dated 30-11-2006. 4. Against the order passed by the AO u/s 143(3), an appeal was filed by the assessee before the learned CIT(A) disputing therein inter-alia transfer pricing adjustment made by the AO. With regard to TPO s action of not considering the five comparables mentioned above, the Assessee submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered so that the arithmetic mean is representative of the normal profits/losses earned by companies in that industry. The ALP cannot be tied to the arithmetic mean of the operating margins of only profitable comparable companies in any industry, even when that industry contains some or many unprofitable or less profitable companies that are equally comparable. 6. As regards the objection of the TPO that Bombay Intelligence Security (India) Ltd. Tanu Healthcare Ltd. Times Infotainment Media Ltd, and Tops Security Ltd. are companies that did not appear in the search set of the previous year, It was submitted on behalf of the assessee before the learned CIT(A) that the databases which are used to screen the companies get continuously updated as and when new data is available. It was submitted that it is thus a normal phenomenon that some comparables from previous year would not be included in the search set if their financial data of the relevant year is not available. Likewise it is also common that some companies, which were not present in the database/whose financial data was not available in the previous year would be included in the relevant year. It was pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of Clinical trials, Environmental Monitoring and Impact assessment, Analytical testing of a wise variety of consumer products. However, based on a review of the financial statements and other information, it is evident that Vimla Laboratories Limited is not a risk-free service provider but performs marketing function, assumes entrepreneurial risks and makes substantial investments in assets. Given hereunder is a chart showing comparison of transactions, ratio analysis and risk analysis between Vimta Labs and Teva India: Particulars Vimta Labs Teva India Nature of activity - whether comparable to Teva India Not comparable Research support Level of activity High-end Low-end Relatively higher investment in total assets Yes No Ratio of Operating Costs to Assets 97.78% 45.87% Marketing/sales function Yes No Bad debt risk Yes No Price/margin risk Yes No Business risk Yes No As submitted above, there are significant differences i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional functions viz. , marketing etc which bear more risks akin to any third party independent service provider vis-a-vis the assessee. It was submitted that the risks such as legal risk, marketing risk, business risk; etc are normally associated with every independent company whereas the assessee is insulated from these risks. It was also submitted that the assessee bears lesser/ no business risk as compared to independent comparables enterprises due to nature of its revenue model such as credit risk etc. The Assessee submitted that the risk profile of the assessee is similar to the risk profile of Philips Software as analysed by the ITAT in case of M/s. Philips Software Centre Private Limited (supra). It was contended that the assessee thus it should be allowed a risk adjustment of 5.25%, being the risk premium as determined by the Hon ble Tribunal in Philips Software case ( supra ) for AY 2004-05. 11. After considering the submissions made on behalf of the assessee in the light of material available on record, the learned CIT(A) decided the issue relating to selection of comparables for transfer pricing exercise vide his impugned order as under : "TPO has rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of Rs. 26,96,847/- to the assessee. Aggrieved by the order of the ld. CIT(A), the Revenue and assessee both are in appeal before the Tribunal. 14. In ground No. 1.1 of its appeal, the assessee company has challenged the action of the authorities below in rejecting M/s Kitco Ltd. as comparable merely on the ground that the said concern was incurring loss. 15. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue was involved in assessee s own case for the immediately preceding year i.e. 2003-04 and the Tribunal vide its order dated 13.10.2010 passed for the said year in ITA No. 1547 1966/M/2009 has restored the same to the file of the A.O. with a direction to decide the same afresh in the light of the decision of Delhi Bench of ITAT in the case of Sony India ( P. ) Ltd. (supra) 53 wherein it was held that a comparable could not be excluded only on the ground of losses except in cases where there are other factors justifying exclusion of the said comparables. Respectfully following the said decision of the Tribunal in assessee s own case for A.Y. 2003-04 on a similar issue, we restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded that even the OECD has insisted on functional similarity for selection of comparables for doing transfer pricing analysis and the functions performed by the four parties in question having been found to be entirely different from the functions performed by the assessee, the said parties were rightly rejected as comparables. 19. We have considered the rival submissions and also perused the relevant material on record. It is observed that functional tests has been applied to select the comparables for the transfer pricing analysis done in the case of the assessee. It is therefore important that functional similarity is there in order to select any case as comparable for the said exercise. As rightly contended by the ld. D.R. in this regard the exact nature of the business of the assessee needs to be taken into consideration vis-a-vis the nature of business activity carried on by the other parties so as to ascertain whether the said parties can be selected as comparable cases for transfer pricing analysis. In this regard it is observed that the business of the assessee is to render consultancy services in the field of research and development whereas the nature of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 71.14 lakhs, interest - about Rs. 10 lakhs, income from telecast rights - Rs. 1.10 crores. The business activities of this entity are event management and outdoor activities such as advertising on bus queue shelters. Thus, this entity is at best into entertainment or advertising or media related activities. Nowhere, is the business of the assessee close to this entity. Accordingly, this entity is found to be not comparable to the assessee s line of business and hence, is being rejected as a comparable. ( d ) M/s Tops Security Ltd. This entity is into security business, the following are its lines of business ( i ) Cash Management Services through its fleet of bullet resistant armored trucks ( ii ) Tops Intelligence - providing specialized investigation in areas such as banking and insurance frauds, asset locations, financial embezzlement and risk management ( iii ) Tops line - this is the emergency response service ( iv ) Tops International Security Academy providing training for guarding people. Nowhere, is the business of the assessee close to this entity. Accordingly, this entity is found to be not comparable to the assessee s line of business and hence is being rejected as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue raised by the assessee in ground Nos. 3 4 relating to its claim for adjustment in respect of difference in risks profile in the transfer pricing analysis, it is observed that a similar issue has also been restored by the Tribunal in A.Y. 2003-04 to the file of the A.O. for deciding the same afresh after obtaining all the necessary details and evidence and after giving proper and sufficient opportunity to the assessee of being heard. Respectfully following the said decision of the Tribunal in assessee s own case A.Y. 2003-04, we restore this issue to the file of the A.O. for deciding the same afresh on the same line as has been directed by the Tribunal in A.Y. 2003-04. Ground nos. 3 4 of the assessee s appeal is treated as allowed for statistical purpose. 23. Now, we shall take up the appeal of the Revenue, ground No. 2 of which challenge the decision of ld. CIT(A) in including M/s Ujjwal Limited as comparable case for transfer pricing analysis. 24. After considering the rival submission and perusing relevant material on record, it is observed that M/s Ujjwal Ltd. was excluded by TPO/A.O. for the purpose of transfer pricing analysis on the ground of functional di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue. The Tribunal vide its order dated 30.9.10 (supra) has already upheld the said order of the ld. CIT(A) for 2003-04 on a similar issue for the following reasons given in para No. 4 of his order: "We have heard both the parties perused the records and considered the matter carefully. We first deal with the disputes raised in the appeal by the revenue. The first dispute raised in revenue s appeal is regarding addition of Rs. 9,09,970 on account of foreign exchange fluctuation gain. The Assessing Officer had made addition being the gain on account of foreign exchange fluctuation relating to the ECB loan treating the same as revenue receipt CIT(A) has held that ECB loan was on capital account and therefore the foreign currency gain was capital in nature and has accordingly deleted the addition. The Learned AR for the assessee reiterated the stand taken earlier that the loan was on capital account. He referred to the loan agreement placed at page 217 of the paper book in which it is clearly mentioned that the assessee had taken the loan to establish a formulation pilot plant, analytical laboratory and office. Loan was therefore obviously for acquisition of capital assets. Any gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however noted that the said entity was functionally similar and the assessee company itself had chosen the same as comparable in transfer pricing analysis for A.Y. 2003-04. It is therefore included the said entity in comparables for transfer pricing analysis. Before the ld. CIT(A), a chart was filed by the assessee showing FAR analysis and on the basis of the said analysis, assessee contended that there was no justification in selecting M/s Vimta Labs Ltd. as a comparable case. The ld. CIT(A) rejected this stand of the assessee without making any discussion or giving any reason. 32. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that although a detail submission was made on behalf of the assessee before the ld. CIT(A) on the basis of FAR analysis to show that the selection of M/s Vimta Labs as comparable is not justified, the ld. CIT(A) has not accepted the stand of the assessee on this issue without giving any cogent or convincing reasons. In its recent decision rendered in the case of Adobe Systems India (P.) Ltd. [IT Appeal No. 5043 of 2000, dated 21-01-2011] (Delhi), Delhi Bench of ITAT has held that exclusi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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