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TMI Blog2016 (4) TMI 1177X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,55,48,991 to the Arm's Length Price ('ALP') determined by the Appellant in respect of the international transaction in connection with Research and Technical services ("R& T) provided by the Appellant to its Associated Enterprise ('AE'). In doing so, the Ld CIT (A) has erred in law and in facts as follows: 2.1 Considering R & T service income as Rs. 24,37,36,200 as against Rs. 25,11,25,447 determined by the Appellant. 2.2 Rejecting the economic analysis/transfer pricing study undertaken by the Appellant. 2.3 Not computing the ALP in respect of the international transaction as computed by the Appellant and Ignoring the provisions of the Rule 10 B(4) of the Income-tax rules 1962 (,Rules') which authorizes usage of multiple year data of comparable companies for the purpose of determination of ALP under Section 92F of the Act. 2.4 Rejecting the grounds raised by the Appellant in relation to selection / rejection of comparable companies while determining the ALP. 2.5 Not allowing an adjustment for the difference between the working capital level of the Appellant and the comparable companies. 2.6 Failing to grant the benefit of +/- 5 percent range as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Medinova Diagnostic Services Ltd. The company is engaged in the business of providing diagnostic services like pre-employment check-ups, site health checkups and executive health checkups and related services. Rejected as Comparable Functional profile dissimilar 5. N.G. Industries Ltd. The company has medical centres which are engaged in providing diagnostic services Rejected as Comparable Functional profile dissimilar 6. TCG Lifesciences Ltd. The company is primarily engaged in the business of contract research and testing activities in various disciplines: contract research (clinical and pre-clinical), clinical reference laboratory services (central lab), analytical testing of water, food, drugs, etc. and environmental monitoring and impact assessments studies. Accepted as Comparable 7. Vimta Labs Ltd. The company is a leading life sciences contract research and informatic solutions organisation focused on enabling translational medicine approaches to discovery and development of superior drugs and biologics. Accepted as Comparable 8. Max Neeman Medical Intl. Ltd. - Clinical Research Segment The clinical research segment is into contract research organisation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) Ltd. should have also been rejected. He considered the plea and rejected the same and finally upheld the order of TPO/AO vide para 5.4 (iv) to (ix), which read as under: "iv) the appellant contended that if above three companies are rejected on functional dissimilarity, then Alphageo (India) Ltd. also should have been rejected. In this regard it is mentioned that this company was selected by the assessee itself. In this regard it is mentioned that this company was selected by the assessee itself. The TPO in his order has mentioned that the assessee had categorically stated during final hearing on 04.08.2011 that they have done FAR analysis for the comparables. As quoted from the agreement above, the appellant company is in the business of research activity to be performed on behalf of its AE as per their directions. Similarly in case of Alphageo, research is being conducted which includes 3D, Seismic data acquisition in processing and carrying out analysis and advising/certification services on contractual basis. The function of this company are thus in the area of research activity and hence comparable. Accordingly, contention of the appellant is not acceptable. v) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cord how such functional difference and risk has influenced the result of the comparables with quantified data to the satisfaction of the authorities. Since it is impossible to have a perfect comparable without any difference or variation regarding turnover risk profile and functional differences; therefore, the legislature has provided a margin of +/- 5% while determining the ALP. Observing as above the Hon'ble ITAT Mumbai Bench in the case of Symentec Software Solutions Pvt. Ltd. has not allowed the grounds of the appeal in respect of working capital adjustment and risk adjustment. The facts of the case under consideration are also similar. Further there nothing demonstrated by the appellant that the adjustment in any case is essential in the facts of the case. Because what could be mere difference and not material difference would not be requiring adjustments. Further any adjustment which is required to be made would be in terms and in accordance with Rule 10B(1)(e)(iii) and not otherwise. Appellant has not made out any case as to how so called differences are materially affecting the amount of net profit margin in the open market. Further the appellant but for making a tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in which international transaction has been entered into it cannot be interpreted to mean that even if the data for the year in which the international transaction has been entered into, is not available, then too the data for the two years prior to the F.Y. can be used. The contention of the assessee that the data should be contemporaneous and data available at the time of analysis when the international transaction has been entered into should be used is not acceptable in view of the Rule 10B(4) reproduced above. What the rule provides is use of the data relating to the financial year in which the international transaction has been entered into and does not say anything about contemporaneous of data or anything of the sort that such data should be available at the time of transaction/analysis, Assessee's conclusion is based on the Rule 10D(4) of I.T Rules, 1962. Rule 10D(4) only puts an obligation on the assessee that the information and documents which an assessee is required to maintain "should, as far as possible, be contemporaneous and should exist latest by the specified date" referred to in clause (iv) of section 92F; But this is not indicative or suggestive of the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king. Even otherwise appellant has not submitted anything which would necessitable use of multiple year data. Appellant's submission that use of data for three years decreases any variability/distortions is not coming out of the facts of the case, what are the variability/distortions which are having effect on determining the transfer price of the international transaction? And how are they supposed to be addressed by taking multiple year data? These aspects have not been detailed with any facts and figures. Therefore it is nowhere demonstrated that data pertaining to two years prior to the financial year 2007-08 have any influence on the determination of transfer prices in relation to the transactions being compared. Therefore it is not demonstrated that data pertaining to two years prior to the financial year 2007-08 have any influence on the determination of transfer prices in relation to the transactions being compared. The appellant has also based its arguments on the Para 5.9 of the OECD Guidelines. For the sake of clarity the relevant portion relied upon by the appellant is reproduced as under: Para 5.9 of the OECD guidelines: "Tax administrations also should limit reque ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the Indian transfer Pricing Regulations. Further consideration of weighted average of margins of the comparables is against ht proviso to section 92C(2) of the Act. Accordingly it can be arrived that the benchmarking done by the appellant is not in accordance with the provisions of section 92C(1) & 92C(2) of the Act. Further, the appel,ant had considered company named as Max Neeman Medical International ltd. as a comparable in its Transfer Pricing Study Report, which was not found comparable by TPO and same was accepted by the appellant as not being comparable. Accordingly it can be arrived at that the data/information used by the appellant for the purposes of benchmarking is not reliable or correct. Under such facts and circumstances, the case of the appellant would clearly fall under the clauses (a) and (c) of the section 92C(3) of the Act. Therefore under such facts and circumstances of the case rejection of the benchmarking done by the appellant and the redetermination of the case rejection of the benchmarking done by the appellant and the redetermination of the ALP by the TPO is justified in terms of section 92C(3) of the Act. Contention of the appellant is therefore not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. Shrinking exploration tenures. Taking the business of our customers ahead." Then he took us to page 154 of assessee's paper book, which reads as under: "What services we provide We provide the following 2-D and 3-D seismic services: - Design and preplanning of 2D and 3d surveys. - Seismic data acquisition in 2D and 3D - Seismic data processing/reprocessing/special processing - Seismic data interpretation - Generation, evaluation and ranking of prospects - Reservoir data acquisition - Reservoir analysis - Topographic surveys with GPS/RTK - Digitisation of hard copies of maps, seismic sections and well logs into CGM/SEGY/LAS formats - Third party quality control for acquisition and processing." He then took us to P&L Account of Alphageo (India) ltd. which is given at page 210 of assessee's paper book, wherein survey expenditure for the year is Rs. 35,51,51,974/- which is a major component of expenditure out of total expenditure of Rs. 61,34,81,150/-. It is to be noted that the depreciation expenses are at Rs. 13,85,43,810/-. He took us to the Schedule 15 to the P&L Account which is given at page 217 of assessee's paper book which includes expenses of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c data acquisition in processing and carrying out analysis and advising/circulation services on contractual basis. According to Ld. CIT,DR, the functions of Alphageo (India) ltd. are similar to that of the assessee for the reason that the areas of research activity are the same and hence, comparable. Ld. CIT, DR also stated that the assessee himself has taken Alphageo (India) Ltd. as comparable and now he cannot come back from the same. 9. In view of above facts, now limited question remains for adjudication, on this issue, before us is that whether the comparable chosen by assessee i.e. Alphageo (India) Ltd. can be removed for computation of margin and working capital adjustment to the comparables selected by revenue can be allowed while computing margins. We find that the AO has rejected or removed three companies viz., Dolphin Medical Services Ltd., Medinova Diagnostic Service and N. G. Industries as comparables rejected by TPO and confirmed by CIT(A). The assessee's only plea was that in case these three companies are removed/rejected as comparables in that case the functional aspect of Alphageo (India) Ltd. should also be rejected/removed as comparables can be considered beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g as selected by revenue has not been disputed by assessee except claim made that working capital adjustment should be given. The assessee's contention regarding adjustment for the differences in working capital level of the assessee and comparable companies selected by revenue, we find that the required data in relation to these companies are not available in the orders of the lower authorities or the details filed by the assessee before us. However, we are of the view that the need to carry out the working capital adjustments is for the reason that the differences on account of working capital cycle not only impact the finance cost but it also affects items of P&L Account like expenses, sale price of product, provision for bad debts etc. and in turn it affects the profit before interest and tax. Accordingly, we are of the view that to take into account the difference in the net working capital requirements between the assessee and comparables selected by revenue, appropriate adjustments should be made on account of debtors and creditors. And adjustment to working capital cycle of assessee should be made vis-à-vis the sale and total cost of each of the comparable companies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o thousand two hundred only) towards the Buildings iii ) Rs. 75,00,000/- (Rupees seventy five lakh only) towards the Plant & Machinery." According to AO, the assessee has shown the sale consideration of this block of assets at Rs. 4,58,52,200/- after reducing the cost of acquisition at Rs. 23.31 lacs. The dispute is regarding the amount deposited by assessee with the SIPCOT, Tamilnadu being the differential amount which was not accounted for. The assessee considered the sale consideration at Rs. 4,58,52,200/-. The AO show caused to the assessee as to why the differential amount of Rs. 1,86,47,800/- be not treated as income of the assessee accrued during the year on relinquishment of rights, titles and interest in the said property. The assessee explained that this amount was deposited with SIPCOT, Govt. of Tamil Nadu for leasehold land at Gummidipoondi, Tamilnadu which was sold by the assessee to Sanmar Speciality Chemicals Ltd. Hence, there was a nullifying effect and this was not considered in the consideration. According to AO, the same is income under the head short term capital gain and he taxed this amount of Rs. 1,86,47,800/- accordingly. Aggrieved, assessee preferred app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion while computing the taxable income." 15. We have heard rival submissions and gone through facts and circumstances of the case. We find that the AO has not made any such disallowance in the assessment order and CIT(A) has also recorded the finding as under: "7.3. I have considered the facts of the case, submission of the appellant as against the findings/observations of the AO in his order u/s. 143(3) r.w.s. 144C(1) of the I. T. Act. The contentions and submissions of the appellant are being discussed and decided here in under: i) There is no discussion made by the AO on these two issues and hence the same does not arise from the assessment order. Accordingly, same cannot be considered in the appellate proceedings. These grounds of appeal are therefore dismissed." In view of the fact that the AO has not made any disallowance u/s. 40(a)(ia) of the Act and not allowing set off of brought forward losses/unabsorbed depreciation as is apparent from the assessment order and CIT(A) has also given finding of fact qua that. Since the issues are not arising out of the orders of the lower authorities, we dismiss these issues of assessee's appeal. 16. In the result, appeal of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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