TMI Blog2012 (12) TMI 1060X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the expenditure has been crystallised during the year under consideration. The CIT(A) has allowed the claim of the assessee by considering both the AYs . Therefore, in the facts and circumstances of the case, we do not find any error or illegality in the order of the CIT(A), - ITA No. 4389/Mum/2010 - - - Dated:- 19-12-2012 - P. M. Jagtap ( Accountant Member) And Vijay Pal Rao ( Judicial Member) For the Petitioner : Sayadbh Sloparkar For the Respondent : Ajit Kumar Jain, Dinesh Kumar ORDER Vijay Pal Rao ( Judicial Member) This appeal by the revenue is directed against the order dated 24.3.2010 of the CIT(A) for the AY 2004-05. 2 The revenue has raised the following effective grounds in this appeal: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to Rs,1,19,31,647/- by taking a different set of comparables while computing operating margin under benchmarking analysis for Provision of Technical Services.. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to ₹ 58,48,375/-, by taking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me was found to be at arm s length. Consequently, the CIT(A) has deleted the adjustment of ₹ 1,19,31,647/- on this account. 4 Before us, the ld CIT(DR) Shri Ajit Kumar Jain has submitted that the assessee is engaged in the activity of marketing services to its Associated Enterprises (AE) in India and outside India. The assessee provides application research and technical services to its various AEs in the Asia-Pacific Region at the R D centre at Bangalore. The ld DR has pointed out that the assessee has used six comparables and three years data were used for comparables and weighted mean was computed at 12.96%. He has referred the details of international transactions and benchmark to show that the assessee has used two years data for its own margin and multiple years data of the comparables for computing the weighted average margins of the comparables. Whereas the TPO used single year data as provided under the law. The ld DR has referred the order of the TPO and submitted that the TPO has rejected two comparables namely Biotech Consortium India Ltd and ADS Diagnostics for the reasons that these companies are persistently making losses and therefore, the TPO has rightly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and high profit making unit cannot be eliminated from the comparables unless there are specific reasons for eliminating the same, which is other than the general reasons that comparable has incurred loss as abnormal profit. He has also relied upon the decision of this Tribunal in assessee s own case for the Assessment Year 2006-07 as well as the decision of the Bangalore A Bench of the Tribunal in ITA No. 227/Bang/2010 in the case of 24/7 Customer Com Pvt ltd vide order dated 9th Nov 2012 and submitted that the Tribunal has taken a similar view by following the decision of the Tribunal in assessee s own case for the AY 2006-07. He has also relied upon the order dated 19th Oct 2012 of the Bangalore Bench of the Tribunal in the case of ITO vs M/s Nextlink India P Ltd in 454/Bang/2011 and submitted that the Tribunal has dealt with similar issue of super profit making comparables and observed that net margin of 24% was arrived at after taking into account both 40% and also 2% which is lowest in the relevant industry. 40% profit in the ITES industry cannot be held to be extra ordinary or super profit. He has also relied upon the order of the Tribunal in the case of M/s B P India Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason has to be given for taking such action. 4.6 Even, prior to make any adjustment to the ALP, the assessee should have been given an opportunity to rebut the material sought to be relied upon by the TPO. The ld AR has further submitted that loss making companies, which are rejected by the TPO are not abnormally and even as per the OECD guidelines, the same cannot be rejected as a comparable merely on the ground of having negative returns. Even otherwise, the TPO rejected two comparables namely Biotech Consortium India Ltd and ADS Dianostics on the ground of consistent loss maker whereas as per the annual account and other records, it is evident that these two companies namely Biotech Consortium India Ltd and ADS Dianostics are not consistently loss making and in fact made profits in the year ending 31.3.2002. 4.7 The ld AR has further submitted that the other two comparables namely Alphageo (India) Ltd and Vimta Lab Ltd which were rejected by the CIT(A) on the ground of extra profit making companies as computed by the TPO at 51.35% and 61.78% respectively. Apart from highly and abnormally profit making companies, these companies are otherwise incomparable because of vast ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO has calculated the ratio of comparables by taking one year/current year data and arrived at the average ratio of 36.19% after rejecting two of the comparables companies on the ground that these were consistently making losses. The details of the comparables selected by the assessee, operating profit ratio calculated by the assessee and by the TPO are as under: Company Name OP/TC assessee s calculation OP/TC as calculated by this office Remarks 1 Alphageo(India) Ltd 37.03% 51.35% 2 Biotech Consortium India Ltd -17.05% Rejected 3 Tata Projects Ltd - -2.99% 2.34% 4 ADS Diagonstics - -0.89% Rejected 5 N G Industries Ltd 28.67% 29.28% 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost or labour and capital has to be taken into consideration and not the profitability of the comparables. Though, the abnormal profit margin or abnormal persistent loss due to the factor as described under rule 10(b)(2) and (3) can be a decisive factor for selecting the comparables; but in any case the sole extraordinary profit or loss cannot be a decisive factor. 6 The coordinate Bench of this Tribunal, one of us Judicial Member is party to the order dated 10.6.2011 for the AY 2006-07 in the case of the assessee has observed in para 33 (vi) as under: xi) Now, coming to the alternative arguments of the assessee that abnormal profit making unit is also to be eliminated on the same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition. The various case laws relied upon by the assessee lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. The reason for rejecting the two loss making units is not just because they were loss making units but for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of their exclusion from the list of comparable cases and not because there was high loss in such cases. This elimination by itself would not support the omission of HT and DT, being the cases with extreme profit rate. The exclusion by the Id. CIT(A) of these cases on the sole reason of high profits, is not sustainable. Before eliminating such cases from the count, it was incumbent upon him to show that such cases were incomparable on the basis of relevant considerations and not the higher or lower profit rates. It is imperative to note that the list of 12 comparable cases was provided by the assessee and not something created by the TPO as per his own whims and fancies. When the list of comparable cases was furnished by the assessee, it was the turn of the TPO to find out whether such cases were, in fact, comparable or not and if not, then to exclude them after showing how these were not comparable. The Id. CIT(A) was not empowered to order the exclusion of two high profit cases without showing that these were not comparable as per the relevant considerations, which we will discuss infra. 12.4. A case is a comparable when it satisfies the prescription of Rule 1OB(2), whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables. 12.7. Now let us examine the facts of the case of Quark System (supra), which is the trump card of both the Id. CIT(A) as well as the assessee. In that case it was contended on behalf of the assessee, by way of an additional ground, that a particular case with high profit rate was not comparable with that of the case before the Bench on account of positive reasons pointed out and hence the same be excluded. The Bench, while holding that the assessee could not be estopped from pointing out that such case was wrongly taken as a comparable, remitted the matter to the AO for de novo examination of the assessee s claim in this regard. Thus it is palpable that the decision of the case is not as has been projected, that the special bench of the tribunal ordered for the exclusion of high profit rate case from the list of comparables supplied by the assessee. On the contrary, we find that it remitted the matter to the AO for examination of the claim as to whether such high profit case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved and held as under: We have carefully considered the submissions made seeking the exclusion of this company as a comparable for the reason that it has high profits of 63.27% and that it has various segmental apart from ITES and that there were a catera of decisions in support of the assessee s proposition. A similar matter of Super Profits was considered by a coordinate Bench of this Tribunal in the case of M/s Netlinx India Pvt Ltd (ITA No.454/Bang/2011) to which both of us were a party. In that order, it was held that the word super is a superlative word which denotes something extraordinary and noted that in all the cases / decisions where these super profit making companies were directed to be excluded, the TPO was comparing cases like Infosys, Wipro, etc. where the turnover was more than 10 times that of the assessee or the profit margin was abnormally high. In the case of Exxon Mobile Company India Pvt Ltd Vs. DCIT (ITA No.8311/Mum/2015 dt.10.6.2011), the Income Tax Appellate Tribunal Mumbai held that: A comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the case of the said comparable company having 113% profit due to abnormal development in the overall financial capital and structural change consequent to merger/de-merger. Therefore, the said case cannot be applied, in general when the high profit or loss is not because of some exceptional development in the financial condition, which is covered under the factor as prescribed under Rule 10B(2) and (3). 7 In view of the above discussions as well as the decisions of this Tribunal on the point of exclusion of the comparables due to high profit margin or loss, we find that the action of the TPO excluding the two comparables on the ground that these companies are persistent loss making concluded merely on the basis of two years data and without going into the details whether the loss is because of factors as prescribed under Rule 10B(2) r.w. sub rule (3) is not justified. 7.1 Similarly, the elimination of two more comparables by the CIT(A) on the ground of high profit making companies is also not inconformity with the provisions of law. Further, the concept of inter-quartile range of the comparables set is not recognized in the Indian Income Tax Law because when mean averag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rejected 8 MCS Ltd 7.19% Rejected 9 Max Health scribe Ltd 9.57% Rejected 10 Tata Services Ltd 4.07% 12.11% 11 Tulsyan Technologies 5.91% Rejected 12 Weal Infotech 10.16% Rejected Segmental Information 13 Carborundum Universal Ltd 28.18% Rejected 14 Mukand Enggrs Ltd -2.58% Rejected 15 Tricom India 51.30% Rejected 16 Ultramarine Pigments Ltd 7.98% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermination of the transfer price of the transactions being compared, the question of taking into consideration data other than the current year s data does not arise. 8.3 The issue of rejecting certain comparables on the ground of persistent loss making and high profit making by the TPO and CIT(A) respectively is common as in respect of application research and technical services. We have dealt with the issue in the foregoing paragraphs. Accordingly, this issue is set aside to the record of the Assessing Officer for examining and considering the same afresh.. 9 Ground no.3 is regarding disallowance in respect of global support service charges. 9.1 The assessee has debited its P L Account an amount of ₹ 38,26,277/- as the global service charges payable to M/s Exxon Mobil Asia Pacific Pte Ltd.,(EMCAP) Singapore for services pertaining to the period Jan 2003 to March 2003. It was contended by the assessee before the Assessing Officer that the debit note in respect of that amount was received by the assessee during the financial year ended on 31.3.2004 in pursuant to the agreement dated 3.10.2003 entered into with EMCAP, Singapore. Therefore, the expenditure has been c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at year on merit. 10 We have heard the ld DR as well as the ld AR and considered the relevant material on record. The ld DR has submitted that the assessee has not furnished any record that the services were actually rendered. On the other hand, the ld AR has referred the order of the CIT(A) for both the AYs 2003-04 and 2004-05 and submitted that when the CIT(A) has considered all the facts and particularly the relevant material filed before the TPO as this issue was referred to the TPO and no adjustment was made on this account by the TPO after examination of the relevant material, then the claim of the assessee cannot be disallowed. He has relied upon the following decisions: i) Saurashtra Cement and Chemical Industries Ltd. v. CIT - 213 ITR 523 ii) CIT v. Tamilnadu Dairy Development Corporation Ltd.250 ITR 273 ii) Commissioner of Income-tax v. Phalton Sugar Works Ltd. -162 ITR 622 10.1 Having considered the rival submissions and careful perusal of the relevant material on record, we note that the Assessing Officer has disallowed the claim of the assessee on the ground of prior period expenses. The Assessing Officer has not disputed the rendering of services and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on mercantile basis and that it related to a transaction of the previous year. The true profits and gains of a previous year are required to be computed for the purpose of determining tax liability. The basis of taxing income is accrual of income as well as actual receipt. If for want of necessary material crystallizing the expenditure is not in existence in respect of which such income or expenses relate, the mercantile system does not call for adjustment in the books of account on estimate basis. It is actually known income or expenses, the right to receive or the liability to pay which has come to be crystallized, which is to be taken into account under the mercantile system of maintaining books of account. An estimated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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