TMI Blog2017 (7) TMI 198X X X X Extracts X X X X X X X X Extracts X X X X ..... but the assessee is not engaged in such activity. Therefore, this company cannot be considered as functionally similar with the assessee, so it was rightly excluded from the list of the comparable. M/s Priya International Ltd. was functionally different from the assessee and should not have been included in the list of the comparable. We, therefore, direct the AO to exclude M/s Priya International Ltd. from the list of comparables and then work out the OP/TC ratio. - ITA No. 1195/Del/2014 - - - Dated:- 13-12-2016 - Sh. N. K. Saini, AM And Sh. Sudhanshu Srivastava, JM For The Assessee : Sh. Ved Jain, Adv. For The Revenue : Sh. Sanjeev Jain, CIT DR ORDER Per N. K. Saini, AM: This is an appeal by the assessee against the order dated 07.01.2014 of the AO passed on the direction u/s 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the Act) issued by the DRP on 30.12.2013. 2. Following grounds have been raised in this appeal: 1. On the facts and circumstances of the case, the order passed by the Assessing Officer (AO) is bad both in the eye of law and on facts. 2. On the facts and circumstances of the case, the AO has er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Educational Consultants Ltd. is 3.85% as against 11.78% computed by the TPO. 10. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Agricultural Finance Corporation Ltd. is (-) 6.67% as against 5.34% computed by the TPO. 11. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of IDC India Ltd. is 13.82% as against 14.49% computed by the TPO. 12. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the assessee that the correct OP/TC of Priya International is 10.69% as against 13.30% computed by the TPO. 13. On the facts and circumstances of the case, the learned DRP has erred both on facts and in law in ignoring the contention of the appellant that the OP/TC of the comparables and the assessee need to be com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 30.11.2006 declaring an income of ₹ 79,78,500/- which was processed u/s 143(1) of the Act on 25.02.2008. Later on, the case was selected for scrutiny. The AO passed the draft assessment order u/s 144C of the Act on 09.12.2009. Against the said assessment order, the assessee filed objection before the Dispute Resolution Panel (DRP) who passed the order u/s 144C of the Act on 30.08.2010 and dismissed the objection of the assessee. Thereafter, the assessee preferred an appeal to the ITAT Delhi Bench G , New Delhi in ITA No. 4912/Del/2010 wherein vide order dated 12.04.2012, the case was restored to the DRP for proper adjudication on all the objection and grounds raised by the assessee. In compliance of the said order, the DRP passed the order dated 30.12.2013 and partly accepted the objections of the assessee. Thereafter, the AO in compliance of the directions issued u/s 144C of the Act by the ld. DRP framed the assessment and passed the impugned assessment order. The assessee is engaged in the business of intending business in chemicals, machinery equipments parts and in iron ore, the year under consideration is the first year of operation of the assessee. During the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Consultants Limited 3.32% 6 Electronica Machine Tools Limited 0.29% 7 Epic Energy Limited 21.91% 8 IDC (India) Limited 11.62% 9 Priya International Limited 10.40% 10 Ratan Glitter Industries Ltd 23.54% 11 Ujjwal Limited 4.32% Arithmetic mean 10.52% 7. The TPO found 5 companies out of the total set of 11 comparables to fulfill the functional similarity with the assessee and finally selected 4 comparables by observing in paras 7.6 and 8 of the order dated 27.10.2009 u/s 92CA(3) of the Act which read as under: 7.6 Accordingly the individual comparables were analyzed and five companies out of the total set of 11 comparables were found to fulfill the functional similarity with the assessee. The comparables are discussed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany's foreign consultancy segment was considered comparable to assessee's provision of business support services. However the kind of services in both the situation would be different leading to different functions. The functions of this company are not comparable to the assessee. Further, Capital Trust shows losses with negative operating margin of (11.11)% in its foreign consultancy segment. From the financials of the company in public data base it is seen that this company has overall positive margin of 4% in financial year 2005-06; whereas neither Capitaline nor Prowess show any segmental data for this company in this year. Moreover Capital Trust Ltd in its segmental financial available for 2005 indicate foreign consultancy income as just 4.54% of the total revenue earned by the company during the year while the expenses in foreign consultancy segment are shown at nil. Same position of nil expenses and foreign consultancy income at just 1.87% of the total revenue earned by the company is repeated in the year 2007 when segmental data is available. It is to be noted that a company which has overall profit margin OP/TC as 4% but with very low margins in comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the year are indicative of the functions performed by the company and qualification of the descriptions provided in the Director's report. Further the financials of a company are the focal points of comparing the operating margins with the assessee's PLI and these comparisons would be vitiated if the operational activities themselves are mismatch with the activities of the assessee. This is also taken as basis for conducting segmental analysis of the transactions and the logic taken is that apple has to be compared with apple. Moreover there is no such segmental data in above said companies which can compare with that of the assessee. The inclusion of these comparables for calculation of assessee's ALP is thus not justified and so Electronica Machine Tools Limited, Epic Energy Limited and Ratan Glitter Industries Ltd are rejected. The assessee's contention that Priya International be also excluded on the same logic is not justifiable since the facts of this case are totally different to the above three comparables. Priya Ltd earns one fourth revenue from the activities similar to those of the assessee. It is therefore functionally similar and is included in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ative net profit margin and that this comparable was not thrown by any search process performed on Prowess or Capitaline but was added later to the list of comparables as explained in paragraphs 7.4 and 7.5 of TPO's order. The TPO has given detailed reasons for excluding these comparables on page 15 to 17 of the draft order. As regards Priya International Limited the TPO has stated that 1/4 revenue of this company comes from the activities similar to that of the assessee and therefore it cannot be said that functions are not similar to assessee. Hence, we find no reason to interfere with the approach adopted by the TPO in selection of comparables. 10. Against the said order, the assessee preferred an appeal before the ITAT Delhi Bench G , New Delhi in ITA No. 4912/Del/2010 for the assessment year 2006-07 wherein vide order dated 12.04.2012, the matter was restored to the ld. DRP to pass the speaking order by observing in para 7 of the said order as under: 7. As the detailed and proper findings of the DRP are not before us, we are of the opinion that without dealing with the grounds submitted before us, the matter deserves to be remitted back to the DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at for the year ending March, 2006 the Income from Operations was ₹ 17.34 Lakhs which was derived from Consultancy. The company has accumulated losses which is almost 40% of the share capital of the company. This clearly shows that the company which is having persistent losses, different functional profile and a meager turnover of ₹ 17.34 Lakhs cannot be accepted as a comparable for the assessee. The TPO has held that a company which is selling its assets to overcome the financial difficulties cannot be considered comparable with the assessee. Accordingly, the TPO has rejected Besant Raj International Limited as a comparable. The action of the TPO is upheld. As regards the rejection of Capital Trust Limited on the basis of different functional profile and non maintenance of segmental accounts, the assessee has objected to the rejection of comparables based on the actual activities performed by them during the year. The TPO has observed that the company offers consultancy services to Foreign Bank, not having their own branches or representatives offices. It appears that the company's foreign consultancy segment was considered comparable to assessee's provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee submitted that the TPO and the ld. DRP rejected the comparable companies i.e. M/s Besant Raj International Ltd. on the basis that it was persistent loss making and not functionally comparable. It was contended that merely because a comparable is making loss, it cannot be excluded from the list of comparables for the purpose of computation of ALP, unless it is functionally different and has a negative net worth. The ld. Counsel for the assessee referred to page no. 43 of the assessee s paper book which is the part of TP study of the assessee company wherein the companies which had been declared sick or had persistent negative net worth had already been excluded by the assessee. It was submitted that the action of the TPO, which had further been upheld by the ld. DRP/AO was bad-in-law as well as contrary to the facts of the assessee s case. The reliance was placed on the following case laws: * DCIT Vs Nortel Networks India (P.) Ltd. (2016) 176 TTJ 25 (Del.-Trib.) * DCIT Vs Quark Systems (P.) Ltd. (2010) 4 ITR (Trib.) 606 * ACIT Vs Wockhardt Ltd. (2010) 6 Taxmann.com 78 (Mum.- ITAT) * Sony India Vs DCIT (2008) 114 ITD 448 (Del.) * Sapient Corpora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,60,04,508/- had been incurred by M/s IDC India Ltd. in relation to research and survey only. However, no income had been earned from those kinds of services. Therefore, the said company was not comparable to the assessee s company and should have been directed to be excluded. As regards to the M/s Priya International, it was submitted that the said company was engaged mainly in trading of chemicals across the country. A reference was made to page no. 340 of the assessee s paper book which is the copy of profit and loss account of the said company which revealed that the income earned by the said company on account of sales and the commission income too was on account of indenting of chemicals i.e. instead of buying in its own account, it had been got the sale made directly in the name of buyer, taking profit in the transaction as commission n income. A reference was made to Schedule G copy of which is placed at page no. 344 of the assessee s paper book which shows the cost of material sold by the said company. It was submitted that the assessee company had earned income only by way of services rendered in connection with the support activities to the parent company. Therefore, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO wrongly held that this company had sold off its assets to funds its business, the said observation of the TPO is contrary to the facts mentioned in Schedule of the fixed assets (copy of which is placed at page no. 364 of the assessee s paper book) which revealed that the said company has reduced only a sum of ₹ 12,500/- from the office equipment and no other asset was sold off. Therefore, there was no question of funding the business by selling the assets. Since this company is functionally similar with the assessee and making of the loss cannot be criteria for the exclusion from the list of comparables. We, direct the AO to include this company in the list of the comparables. As regards to the exclusion of M/s Capital Trust Ltd. is concerned, it is an admitted fact that the said company was engaged in the foreign consultancy but the assessee is not engaged in such activity. Therefore, this company cannot be considered as functionally similar with the assessee, so it was rightly excluded from the list of the comparable. 20. Now we have to see as to whether the other companies, namely, M/s IDC India Ltd. and M/s Priya International Ltd. were to be retained or to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Ltd. and M/s Priya International Ltd. The ld. Counsel for the assessee had given the calculation of the PLI (OP/TC) in respect of all the aforesaid companies (which are placed on record) and submitted that the direction may be given to the AO to verify the said calculations and consider the correct one while working out the average for the purpose of Arm s Length Price. 22. The ld. DR although supported the orders of the authorities below but did not object if the direction is given to the AO to verify from the records and consider the calculations given by the assessee. 23. After considering the submissions of both the parties and the material available on the record, we direct the AO to verify working given by the assessee in respect of Educational Consultants Ltd. and M/s Agriculatral Finance Corporatn Ltd. which had been considered as comparable but there is no need to do the same exercise for M/s Priya International Ltd. and IDC India Ltd. which we had already directed in the former part of this order, to exclude from the list of the comparables. 24. As regards to the submissions of the ld. DR that M/s Priya International Ltd. was taken as comparable by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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