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TMI Blog2017 (11) TMI 1975X X X X Extracts X X X X X X X X Extracts X X X X ..... should be worked out by considering 28.62% margin on costs instead of 10% margin, leading to an addition of Rs. 27,27,007/-. 2.2 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO/TPO erred in holding that Accentia Technologies Limited & Rolta Limited is good comparable for comparing with the assessee's Design Engineering Services. 2.3. The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO erred in holding that KLG Systel Limited is not a good comparable for benchmarking appellant companies design engineering function. 2.4 Alternative and without prejudice to the ground No. 2.3 above, the Hon'ble DRP Pune, TPO & AO erred in law and on facts in not appreciating appellants request for considering segmental OP/TC margins (13.69%) of the said external comparable instead on computing the OP/TC margin on in the totality of the above said facts and circumstances, basis (21.69%). 3. Manufacturing Function (Total addition Rs. 78,98,570/) 3.1 The Hon'ble DRP Pune has erred in law and on facts in accepting and the learned AO/TPO erred in concluding that assessee company sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income declaring total income at Nil. The assessee was engaged in the business of export of computer software and operated different divisions viz. OPW - Fuel components, Heail Trailer, Destaco and Wilden Pumps division and software division and OPW-fluid transfer division. The Assessing Officer made reference to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act to compute arm's length price in relation to various international transactions entered into by the assessee. The TPO noted that the assessee was wholly owned subsidiary of Dover (Switzerland) holding LLC. The assessee during the year under consideration had undertaken various international transactions with its associated enterprises which are tabulated under para 4 at page 2 of the TPO's order. The assessee had applied the TNMM method in benchmarking its international transactions except for payment of interest on External Commercial Borrowings which were benchmarked on the basis of CUP method. The TPO noted that the total sales of assessee company were Rs. 26.59 crores and the assessee had also shown other income of Rs. 4.28 crores. The profit before taxation was Rs. 2.69 crores, which worked o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year for consistent approach was rejected. The TPO was of the view that where the facts of the year were different, there was no bar in taking separate stand on the issue. The assessee during the year had received support payment which was not made available in the last assessment year and it was observed by the TPO that the capacity utilization was nothing but the payment which had been received by the assessee APROPOS its efforts on behalf of the associated enterprises. The TPO held that either there should be no adjustment for capacity under-utilization and adjustment to be worked out following TNMM method as applied by the assessee company or there should be claim of compensation from associated enterprises as happened in subsequent year. The TPO applying the TNMM method as most appropriate method proposed TP adjustment of Rs. 78,98,570/- on account of non receipt of support payment towards marketing expenses and initial start up average charges. 9. In respect of issue of risk adjustment, the TPO held the assessee to be risk bearing entity and the contention of assessee that it was risk free entity in the transfer pricing report was held to be incorrect. However, in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services, following the directions of DRP, the Assessing Officer held that no addition is to be made to the said division. In respect of Manufacturing activity, the addition proposed by the TPO at Rs. 78,98,570/- was confirmed in the hands of assessee by the DRP and hence, the same was added in the hands of assessee. 13. The assessee is in appeal against the order of Assessing Officer in respect of addition of Rs. 27,27,007/- in Design Engineering Services and Rs. 78,98,570/- in Manufacturing Function Division. 14. The first issue raised by the assessee is with regard to Design Engineering Services, the assessee is aggrieved by the order of Assessing Officer/TPO/DRP in holding that Accentia Technologies Ltd. and Rolta India Ltd. were good comparables with the Design Engineering Services segment of the assessee. The assessee is also aggrieved by the order of DRP in holding that KLG Systel Ltd. was not a good comparable. In respect of KLG Systel Ltd., an alternate and without prejudice issue was raised by the assessee that only segmental OP/TC margins at Rs. 13.69% of the said external comparables were to be considered instead of computing OP/TC margin on totality basis at 21.69%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said proposition to the issue raised before us in the instant assessment year, we hold that Rolta India Ltd. having different accounting period cannot be selected as comparable and hence, the same is directed to be excluded from the final list of comparables. 19. Now, coming to the next issue of concern Accentia Technologies Ltd. The learned Authorized Representative for the assessee pointed out that the said concern was never selected as comparable in any of the earlier years and in any case, the said concern was high end KPO service provider and hence, was not comparable. In this regard, he placed reliance on the ratio laid down by the Tribunal in ITO Vs. Systime Global Solutions Ltd. (2017) 79 taxmann.com 151 (Pune-Trib.). 20. The learned Departmental Representative for the Revenue placed reliance on the orders of Assessing Officer and DRP. 21. We find that the issue of exclusion of Accentia Technologies Ltd. from final list of comparables being high end KPO service provider, arose before the Tribunal in ITO Vs. Systime Global Solutions Ltd. (supra) and following the ratio laid down in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT (2016) 72 taxmann.com 352 (Pune-Trib.), the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an endeavour is to determine the arm's length price of said transactions and for that purpose, comparison is made to the margins of unrelated parties, which are functionally similar to the assessee. While benchmarking the international transaction, an endeavour is to be made to select such concerns which are functionally similar and the margins of the said concerns are then, to be applied in order to determine the arm's length price of the international transaction undertaken. The assessee before us was engaged in providing ITES services and while benchmarking international transaction of the assessee with its associate enterprises, the TPO had selected Accentia Technologies Ltd. as functionally similar and had included the margins of said concern in order to work out the arithmetic mean of final set of comparables. 14. We find that the Tribunal in assessee's own case in assessment year 2008-09 in ITA No. 2235/PN/2012, order dated 02.02.2015 had held that the said concern could not be considered as comparable because of certain extraordinary events. The said ratio was also applied in assessee's own case while benchmarking the international transaction of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited (supra) and by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions India Pvt. Ltd. (supra) is squarely applicable to the present case also. The aforesaid Benches of the Tribunal found that during the year under consideration there were extraordinary events that took place in the said concern which warranted exclusion of this company as a comparable. We therefore hold that the said concern cannot be considered as a comparable." 15. Further, similar proposition has been laid down by different Benches of Tribunal while deciding the appeals relating to assessment year 2010-11 and it has been held that because of extraordinary events during the year, the concern Accentia Technologies Ltd. was not comparable to the entities engaged in ITES. Following the same parity of reasoning, we hold that Accentia Technologies Ltd. is to be excluded from the final set of comparables. 13. The issue arising in the present appeal is identical to the issue before the Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT (supra) and since the concern Accentia Technologies Ltd. was engaged in KPO segment and also because of extraordinary event d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of hearing i.e. in respect of concern Neilsoft Ltd. The learned Authorized Representative for the assessee in this regard pointed out that for the past four years, the said concern was being included as being functionally comparable to the assessee. However, the said concern was excluded because of its negative margins during the year at (-) 4.97%. The first point which was raised by the learned Authorized Representative for the assessee was that the said concern was not persistent loss making concern as in all the earlier years, the said concern had shown profits. Further, the learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Welspum Zucchi Textiles Ltd. (2017) 77 taxmann.com 137 (Bom), wherein it has been held that the concerns which were selected as comparable for earlier years could not be excluded on the ground that they were not comparable only because of losses in the said assessment years. The Hon'ble Bombay High Court further held that the enquiry ought to have been done by the Revenue whether loss was symptom of reference points mentioned in Rule 10B(2) of the Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for which carve out should be afforded in the hands of assessee. In respect of support payment received from the associated enterprises, the learned Authorized Representative for the assessee pointed out that the said was voluntary payment made by the associated enterprises and the assessee was not in a position to ask for further support payment. He further stated that since the support given by the associated enterprises was gratuitous, it was not within the power of TPO to make aforesaid adjustment in the hands of assessee. He further pointed out that while deciding similar issue in the preceding year when no gratuitous payment was received from the associated enterprises, the Tribunal allowed the claim of assessee in turn, relying on the ratio laid down by the Hon'ble Bombay High Court in CIT Vs. Whirlpool (2016) 129 DTR 169 (Bom). He further stated that the issue which needs to be adjudicated in the present appeal is vide ground of appeal No. 3.1. The ground of appeal No. 3.2 to 3.4 are not pressed and the ground of appeal No. 3.5 would become academic. 29. The learned Departmental Representative for the Revenue placed reliance on the orders of DRP/Assessing Officer/T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re for domestic market, except to the extent of 10%. However, sourcing for the manufacturing was from the associate enterprises. The assessee was 100% captive service provider to its associate enterprises. During the year under consideration, in the manufacturing unit, the assessee had unadjusted margins of OP/sales at (-) 68.59%. While benchmarking its international transactions by using TNMM method as most appropriate method, the assessee in the TP study report worked out the adjustment on account of capacity under-utilization at Rs. 1,61,09,646/-. Similar adjustment of under-utilization of capacity was carved out and allowed to the assessee by the Assessing Officer in the preceding year. Since this was the first complete year of operation and the manufacturing unit was in the nascent stage, the assessee incurred losses and asked for aforesaid adjustments. During the succeeding year i.e. assessment year 2010-11, there were also losses. The TPO noted that in the succeeding year, the associate enterprises had given compensation to the assessee for under-utilization. The TPO was of the view that similar adjustment should have been allowed by the associate enterprises for the year un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction' would include various transaction of purchase, sale, transfer or lease of tangible or intangible property, capital financing, borrowing, lending, etc. and provision of services including different types of services; and transaction of business restructuring or reorganization, etc. In other words, section 92B of the Act covers such transactions which actually exist between two associate enterprises. None of the limbs of section 92B of the Act or Explanation defining the expression 'international transaction' talks of any hypothetical transaction and in the absence of the same, TPO cannot pre-suppose an international transaction between the assessee and its associate enterprises and the determination of TP adjustment on account thereof. Admittedly, during the year under consideration, the assessee had not received any support payments towards its marketing expenses or the initial start-up overhead charges. There was no agreement between the parties to pay any such support payments or to receive the same. In the absence of the same, addition made on the basis of non-existing agreement, by the TPO, does not stand. The TPO had pre-supposed the said transaction since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on patterns, market behavior and so on. A simplistic approach using one of the modes similar to the ones contemplated by Section 92C may not only be legally impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance." 13. The Hon'ble High Court of Delhi in CIT Vs. Whirlpool of India Ltd. (2016) 129 DTR 169 (Del) has held that Revenue was unable to demonstrate any tangible material to effect that there was international transaction involving AMP expenses between assessee and its associate enterprises. In the absence of first step, question of determining the ALP of such transaction could not arise. In absence of machinery provision it would be hazardous for any TPO to proceed to determine ALP of such transaction since BLT had been negatived by Court as valid method of determining existence of international transaction and thereafter its ALP. Following the said precedent, we delete the addition made of Rs. 1.65 crores on account of TP adjustment. Further, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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