TMI Blog2017 (10) TMI 1488X X X X Extracts X X X X X X X X Extracts X X X X ..... tity makes high/extremely high profits/losses does not, ipso facto , lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable. Current year vs. Multiple year data - Data of only the relevant year should be considered for comparison. This is what Rule 10B(4) prescribes. In order to analyze comparability of an uncontrolled transaction with an international transaction, data relating to the financial year in which the international transaction or specified domestic transaction has been entered into should be used. Proviso to Rule 10B(4) carves out the exception i.e. data relating to two years prior to such financial year may be considered if such data reveals facts which could have an influence on determination of transfer prices. In Chryscapital Investment Advisors (India) Pvt. Ltd. vs. DCIT [ 2015 (4) TMI 949 - DELHI HIGH COURT] has held that while determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n law, the learned TPO erred in treating BHN Shipping Company Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's Length price. 2. On the facts and circumstances of the case and in law, the learned TPO erred in treating Five Star Shipping Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price. 3. On the facts and circumstances of the case and in law, the learned TPO erred in treating SVS Marine Services Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price. 4. On the facts and circumstances of the case and in law, the learned TPO erred in treating Bippy Ship Management (India) Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price. 5. On the facts and circumstances of the case and in law, the learned TPO erred in treating Ashapura Logistics Pvt. Ltd. as not comparable to the Appellant Company and thereby excluding the same while determining arm's length price. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s length price of the assessee. The TPO vide order u/s 92CA(3) dated 29.01.2015 made an adjustment of ₹ 83,90,834/-. The AO, accordingly, in his draft assessment order u/s 144C (1) r.w.s. 143(3) dated 23.03.2015 made a TP adjustment by adding the above sum of ₹ 83,90,834/- to the income shown by the assessee. After receipt of the draft assessment order, the assesseecompany filed its objection before the Dispute Resolution Panel (DRP)-1 Mumbai. The DRP vide its order dated 29.12.2015 directed the AO to consider only Sealion Sparkle Port and Terminal Services (Dahej) Ltd. as suitable comparable to benchmark the international transaction of the assessee for the purpose of computing arm s length price. The AO following the direction of the DRP passed the assessment order u/s 143(3) r.w.s 144C(13) dated 24.02.2016 making an addition of ₹ 1,18,34,132/- as TP adjustment. 4. Aggrieved by the order of the AO, the assessee has filed the present appeal before the Tribunal. The assessee company is a branch of the British Marine PLC United Kingdom (BMPLCUK). As per the corporate background, BMPLCUK is an international ocean freight transportation group, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. 4.3 We extract below the submission of the assessee-company in defence of its five comparables: 1. BHN Shipping Company Private Limited Reasons for rejection by TPO Functionally dissimilar and diversified business operations as can be seen from page 29 of the paper book. Financials and segmental details were not provided by the Applicant. Weighted average PLI used to arrive at final PLI. Applicant's Contention The TPO has erred in functionally comparing the business description of another group company I. e. BHN Shipping Offshore Company Private Limited, with that of the Applicant. This is evident from the website of the group as attached in pages 292 to 293 of the paper book. The Applicant had submitted the financials of the company vide submission dated 28th July 2014, as seen in pages 61 to 67 of the paper book. The TPO has erred in not considering the Director's Report of the Company submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014 as seen on pages 68 to 90 of the paper book 4. Bibby Ship Management (India) Pvt. Ltd. Reasons for rejection by TPO TPO has stated in his transfer pricing order that the company is engaged in technical management, crew management, supply, training, marine business and travel and training services. This is the description of the Bibby ship management group as evidenced from the website extract on page 297 of the paper book. In the absence of financials, the TPO has not been able to verify the functional business of the company. The company has been making losses persistently for FY 2008-09 and FY 2009- 10 and that the Applicant hasn't provided updated margins for FY2010-11 Applicant s Contention The Applicant had submitted the financials of the company vide submission dated 28thJuly 2014 as pages 52 to 60 of the paper book. The company is not persistently loss making since the director's report shows that there was a profit in the FY 2010- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er book. Further, the financial statements of the company for the year ended March 31, 2011, discloses 'ships and vessels' amounting to 95.9 crores as 'Fixed Assets'. Hence, the Company is a ship owner and not engaged in ship management services, evidenced in the fixed asset schedule, attached as page 301 of the paper book. Thus, it is submitted that the company is engaged in port related services rather than ship management services. The Applicant has placed reliance on a few case laws of the jurisdictional Mumbai Tribunal, wherein it was held that companies having dissimilar functional profile could not be taken as comparables for determining the arm's length price. These case laws have been enlisted in page 21 of the paper book. Significant Related Party Transaction The learned TPO failed to take into consideration the fact that the company has significant related party transactions i.e. 44.39% (RPT Expenses as a percentage of total operating expenses) and hence such company could not be selected as comparable. The working has been attached as page 303 of the paper book. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable ALP. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in PLI must trigger further investigations/analysis. (ii) Operating Profit The Operating Profit, for the purposes of TNMM, is the net profit of the Tested Party from the controlled transaction; and the net profit of Uncontrolled Comparable Enterprises from comparable uncontrolled transactions. The income and expenses of only operating nature are taken into account for working out the Operating Profit of the Tested Party from the controlled transaction. And the Operating Profit of the Uncontrolled Comparable Enterprises from comparable uncontrolled transactions is also worked out on similar basis. (iii) Loss making Comparables In CIT v. Welspun Zucchi Textiles Ltd. (2017) 391 ITR 211 at page 215-216 (Bom.), the Hon ble Bombay High Court has held that Rule 10B(2) does not require exclusion of a compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and not on aggregate basis. It has been held in LG Soft India (P.) Ltd. DCIT (2014) 48 taxmann.com 237 (Bangalore-Trib.) that in absence of segmental details, a company cannot be taken into account for comparability analysis. In M/s Panasonic India Pvt. Ltd. v. ITO (2010) TII-47-ITAT-DEL-TP, aggregation of transactions are upheld where functions, assets and risks underlying those transactions are similar. (vii) Economic adjustments In Mentor Graphics (P) Ltd. v. DCIT 109 ITD 101 (Del ITAT), adjustment is permitted in (a) working capital, (b) risk and growth, (c) R D expenses. However, it has been held that, if differences are so material that adjustment cannot be made then the company should be rejected. TNMM is more tolerant to minor functional and risk level differences. Certain significant risks like market risks, contract risks, credit and collection risks, infringement of intellectual property right etc. are material and can lead to major difference in the value of transaction. (viii) Mean It is the Mean PLI of Comparable which is arrived at. In view of the above, we set aside the order of the TPO/AO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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