TMI Blog2017 (4) TMI 1491X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables. Thus, following the ratio of the decision of the Pune Bench of the Tribunal in the case of Bobst India (P.) Ltd. (supra), we deem it fit and proper to direct the TPO/Assessing Officer to include the said concern in the final set of comparables. Correction of margin of one of the concerns included in the final set of comparables, i.e., Creative Eye Ltd. - margin of the said concern has been adopted at 7.33%, whereas the stand of the appellant is that the correct margin of the said concern is 0.47% and that the lower authorities have erred in calculating the margin at 7.33%. - HELD THAT:- As per the tabulation furnished by the assessee as Annexure - B to the written submissions it is clear that in the case of other comparable concerns, the Total Operating Expenses have been calculated after taking into account the Depreciation and Provision of FBT; and, that it is only in the case of Creative Eye Ltd. the same have been excluded. Quite clearly, the determination of margin in the case of all the comparable concerns needs to be uniformly done, so as to impart rationality to the comparability analysis. Having regard to the material on record, we are satisfied that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lea of assessee for exclusion of Access India Advisors Ltd. from the final set of comparables. Having admitted the plea of assessee seeking exclusion of Access India Advisors Ltd. from the final set of comparables, and for the reason that such a plea was hitherto not before the lower authorities, we deem it fit and proper to remand the matter back to the file of Assessing Officer/TPO for an appropriate verification. AO/TPO shall verify the working of the Operating margins of Access India Advisors Ltd. furnished by the assessee for the various years and if it is found to be volatile without reflecting any normal business condition, then, the Assessing Officer/TPO shall exclude the same from the final set of comparables. Segment of Provision of General management and support services is to seek inclusion of Educational Consultants (India) Ltd. - HELD THAT:- The said concern has been accepted as a comparable even in the assessments finalised u/s 143(3) of the Act. Be that as it may, it is also clearly emerging from the order of TPO that the said concern has been excluded by merely making a bald assertion about the dissimilarity of functions. Notably, such an observation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason for which proper reconciliation could not be made. In the said communication, assessee had explained that the ITS details was founded on the basis of name and address of the parties and the amount and date entered by the other party in its book of accounts. It has been pointed out that in the absence of PAN of other party, the relevant invoice number and date, it is difficult to exactly match the entries appearing in the assessee's book of accounts. The relevance of the aforesaid has also been brought out in some detail by the assessee in its communication to the Assessing Officer. One pertinent point which stands out is the assertion of the assessee before the Assessing Officer that wherever in case of a party the amount of revenue recorded in the Profit Loss Account of the assessee was found lower than the ITS details, assessee explained that same is merely on account of timing difference inasmuch as assessee would have credited such sum to the Profit Loss Account of the other year. Assessee also asserted before the Assessing Officer in its communication dated 12.12.2011 that in respect of the parties mentioned in the ITS details, on an overall basis, the revenues ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, maintained under Section 92D of the Act read with Rule 10D(4) of Rules and determining the arm's length operating margin for these transactions using only the updated Financial Year 2007-08 operating margins of the comparable companies, as available at the time of the assessment. 4. The learned TPO / AO erred in rejecting loss making comparables while determining the arm's length operating margin for the international transaction of supply and support of content. 5. Without prejudice to the ground number 4, the learned TPO / AO erred in not excluding companies earning super normal profits, where loss making companies are excluded, while determining the arm's length operating margin for the international transaction of supply and support of content. 6. The learned TPO / AO erred in computing the operating margin of Creative Eye Limited (comparable company) while determining the arm's length operating margin for the international transaction of support and supply of content. 7. The learned TPO / AO erred in considering the 'media division' as the comparable segment instead of 'health care division' for In House Productions Limited while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the normal provisions of the Act whereas the income returned u/s 115JB of the Act has been varied. Be that as it may, even the assessment made under the normal provisions of the Act has resulted in scaling down of the loss returned by the assessee on account of certain additions, primarily on account of the transfer pricing adjustment of ₹ 3,41,85,321/-. The appellant-company was found to have entered into certain international transactions within the meaning of Sec. 92B of the Act with its associated enterprises and, therefore, the Assessing Officer had referred the matter to the Transfer Pricing Officer (TPO) for determination of the arm's length price of the international transactions. The TPO vide order dated 27.10.2010 passed u/s 92CA(3) of the Act, after considering the material and submissions put forth by the assessee, has differed with the determination of arm's length price in relation to two segments of the international transactions entered with the associated enterprises. The transfer pricing adjustment worked out by the TPO formed the basis of the Assessing Officer to pass a draft assessment order dated 26.12.2011 against which the assessee carrie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee is compensated at cost + mark-up basis for these services and the mark-up over cost is stated at 10%. In its Transfer Pricing Study, assessee had selected the Transactional Net Margin (TNM) method as the most appropriate method to benchmark the said international transactions and the Profit Level Indicator (PLI) was characterised as Operating profit/Operating cost. Though, in the Transfer Pricing Study, assessee had used the average of the multiple year's data of the comparables to calculate the average margins, but in the course of the proceedings before the TPO, assessee had furnished the revised margins based on the single year's data corresponding to the financial year under consideration, and on this aspect there is no dispute. The average margin of the comparable concerns selected by the assessee came to 10.92%, which compared favourably with the stated margin of assessee at 11.75%, and on that basis, it was asserted by the assessee that the stated value of the international transactions in the Content supply and Support segment was at an arm's length price and, therefore, it did not require any further adjustment. The TPO has accepted the stand of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that in the final assessment order passed after considering the directions of the DRP, the adjustment has been worked out at ₹ 2,77,08,038/-, whereas the TPO had worked out the adjustment of ₹ 2,07,08,038/-. The difference in the two figures is on account of revised margin of two of the ten comparables and, in any case, the same is not the subject matter of dispute before us, therefore, we proceed further on the premise that the adjustment of ₹ 2,77,08,038/- has been made on this count. 7. In this background, the learned representative for the assessee had made two points with regard to the concerns included in the final set of comparables. The first grievance is against the stand of the TPO in excluding Twenty Twenty Television Company Ltd. from the final set of comparables. The learned representative had referred to point (x) of Part A of para 7 of the order of TPO, to point out that the said concern has been excluded by the TPO on the ground that it had incurred an operating loss. It has been canvassed that the action of the TPO to exclude the said concern is not well-founded inasmuch as incurrence of loss is a normal business incidence and, in any case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bench noted that in one of the last three years, the concern was in profits and, therefore, in this background it inferred that such a concern could not be considered as a persistent loss-maker. At the time of hearing, the learned representative for the assessee had drawn our attention to a tabulation prepared for three years ending 31.3.2006, 31.3.2007 and 31.3.2008, which shows that in the year ending 31.3.2006, the said concern had made a profit while there was loss in the other two years. In this background, therefore, it could not be said that as on the year ending 31.3.2008, which corresponds to the assessment year before us, such a concern was a persistent loss-maker so as to exclude it from the final set of comparables. Thus, following the ratio of the decision of the Pune Bench of the Tribunal in the case of Bobst India (P.) Ltd. (supra), we deem it fit and proper to direct the TPO/Assessing Officer to include the said concern in the final set of comparables. 11. The only other point raised before us is with regard to correction of margin of one of the concerns included in the final set of comparables, i.e., Creative Eye Ltd. As the tabulation enumerated in the earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gin of Creative Eye Ltd. is to be taken as 0.47% and that the DRP has unjustifiably rejected the plea of the assessee. As a consequence, we direct the TPO/Assessing Officer to consider the margin of Creative Eye Ltd. at 0.47%, and thereafter rework the determination of arm's length price. 15. At the time of hearing, the learned representative for the assessee submitted that if the plea for inclusion of Twenty Twenty Television Company Ltd. and the corrected margin of Creative Eye Ltd. is accepted, then, the margin of the resultant comparables would fall within the + 5% of the stated margin of the assessee and the necessity of making any adjustment would be obviated in terms of Sec. 92C(2) of the Act. Since we have accepted the aforesaid two pleas of the assessee, therefore, the other issues raised in the Grounds of appeal with regard to the Content and Support segment are rendered academic and are not being adjudicated for the present. 16. In the result, insofar as the Content and Support segment is concerned, the TPO/Assessing Officer is directed to re-work the arm's length price of the international transactions in accordance with the aforesaid directions. 17. No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence in the figure of adjustment worked out by the TPO and that by the Assessing Officer (post the directions of the DRP) is on account of revision of the margins in the case of two of the concerns out of the six comparables. Therefore, we proceed further on the basis that the adjustment on account of determination of arm's length price of international transactions for Provision of general management and support services has been determined at ₹ 64,77,283/-. 19. In this background, the first plea of the assessee is by way of an additional Ground of appeal in terms of which it is canvassed that Access India Advisors Ltd. be excluded from the final set of comparables. The learned representative for the assessee explained that the said concern deserves to be excluded on the ground that its margins have wide fluctuations over the years and in this context, he referred to page 492 of the Paper Book wherein the margin of the said concern from the years 2005 to 2010 have been tabulated. The learned representative for the assessee justified the admission of the said plea, which was hitherto not raised before the lower authorities on the ground that the necessary information s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45.97% 2009 6.62% 2010 -74.60% The above tabulation enumerates the Operating margin of Access India Advisors Ltd., and the trend clearly suggests that the margins fluctuate quite widely over the years. For instance, in the assessment year under consideration, the margin of the said concern is reported at 45.97%, which is significantly in variance with the margin in the succeeding and preceding assessment years. In fact, in the year 2010, it has reported a negative margin. Ostensibly, the significant variation in the margins does not render the said concern to be a reliable comparable unless it can be made out that the variation is on account of a normal business condition. 24. We may now take up the argument raised by the ld. CIT-DR to the effect that the said concern has been included by the assessee itself as comparable. Ostensibly, in the Transfer Pricing Study, the assessee had carried out the comparability analysis by adopting multiple year's data of the comparables which would have off-set the wide fluctuations. It is only in the course of proceedings before the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded from the final list of comparables for carrying out the comparability analysis. We hold so. 25. As per the Pune Bench of the Tribunal, the onus is on the assessee to justify exclusion of a concern from the final set of comparables, if initially the same concern has been adopted as a comparable by the assessee. In the present case, assessee has sought exclusion of Access India Advisors Ltd. on the ground that the profit margins of the said concern fluctuate widely and in the instant assessment year itself it is quite high at 45.97%, which goes down to 6.62% in the next year and thereafter there is a negative margin of 74.60%. Similarly, with regard to the earlier three years, the margin levels are quite in variance not only in comparison with the level of margin in the instant assessment year but also in relation to the subsequent two years. Be that as it may, the financial data of the succeeding years, which is essential to examine any abnormal profit trends, was not available to the assessee at the time of carrying out its Transfer Pricing Study and, therefore, once such an information is available in public domain, it is only thereafter that the assessee can feasibly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard and only thereafter the Assessing Officer/TPO shall pass an appropriate order afresh on this limited aspect. 28. Another plea of the assessee with regard to the segment of Provision of General management and support services is to seek inclusion of Educational Consultants (India) Ltd. in the final set of comparables. The exclusion of the said concern has been sought to be justified by the ld. CIT-DR based on the discussion of TPO in points (viii) and (ix) of part A of para 7. Notably, the TPO has observed that Educational Consultants (India) Ltd. is functionally dissimilar and, therefore, the same is liable to be excluded. The ld. CIT-DR has emphasised the aforesaid discussion in the order of TPO to justify the stand of the Revenue. 29. The plea of the appellant is that the said concern has been found to be a comparable in the preceding three Assessment Years of 2005-06 to 2007-08. The learned representative for the assessee also pointed out that between Assessment Years 2009-10 to 2013-14, the said concern has also been accepted as a comparable and in Assessment Years 2010-11 and 2013-14, the assessments were completed u/s 143(3) of the Act. In sum and substance, the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng features considering that the said concern was taken as a comparable in the past years. Such a burden has clearly not been discharged by the TPO as is evident from the discussion in the order and, therefore, we find no reason to uphold his stand for excluding the said concern from the final set of comparables. Therefore, on this aspect also, assessee succeeds. 31. Apart from the aforesaid, the only other ground argued by the assessee in relation to the General management and support services segment is relating to allowing of suitable adjustment for risks. The aforesaid plea of the assessee was raised before the DRP, but it was declined on the ground that where the comparability analysis is being carried out by applying TNM method, there was no requirement for allowing adjustment for risks. 32. Before us, the learned representative for the assessee has relied upon the following decisions for allowability of risk adjustment :- (i) Intellinet Technologies India (P.) Ltd. v. ITO [2012] 53 SOT 92/22 taxmann.com 28 (Bang.). (ii) Schlumberger Global Support Centre Ltd v. Dy. DIT [2015] 64 taxmann.com 322 (Pune - Trib.) 33. The learned representative also referred to pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by applying the TNM method, suitable risk adjustments are permissible if the facts of the case so warrant. Ostensibly, the workings referred by the assessee before us culling out justification for allowing working capital and risk adjustments have not been verified by the lower authorities. Therefore, while we uphold the stand of the assessee in-principle, so however, it would be imperative for the assessee to factually demonstrate the justifiability of the adjustments on account of difference in working capital and risks assumed vis-a-vis the comparables before the lower authorities. Therefore, the matter is set- aside to the file of TPO/Assessing Officer with directions to consider the plea of the assessee in accordance with law. Thus, on this aspect, assessee succeeds for statistical purposes. 37. Insofar as the issue relating to the transfer pricing adjustment is concerned, no further arguments have been raised by the assessee and accordingly, we direct the Assessing Officer to re-determine the arm's length price of international transactions on the basis of our aforesaid directions. 38. The next Ground is with regard to addition of ₹ 77,13,648/- made by the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the addition is sustainable. 41. We have carefully considered the rival submissions. No doubt, the onus is on the assessee to reconcile the details, so however, the reconciliation is to be based on availability of appropriate details. At the time of hearing, the assessee-company had referred to a communication dated 12.12.2011 addressed to the Assessing Officer which succinctly details the reasons for the difference and the reason for which proper reconciliation could not be made. In the said communication, assessee had explained that the ITS details was founded on the basis of name and address of the parties and the amount and date entered by the other party in its book of accounts. It has been pointed out that in the absence of PAN of other party, the relevant invoice number and date, it is difficult to exactly match the entries appearing in the assessee's book of accounts. The relevance of the aforesaid has also been brought out in some detail by the assessee in its communication to the Assessing Officer. For instance, it is pointed out that in some cases names of certain individuals are mentioned in the ITS details whereas assessee would have recorded the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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