Appeal details
Counselvise Citation
[2022] 106 COUNSELVISE.COM (IT) 6771 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
2 year(s) 2 month(s) 16 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
14-09-2022
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
C
Assessment Year
2010-2011
Appeal Filed On
28-06-2020
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, ‘C’ PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S.VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपील सं. / ITA No.442/PUN/2020 नधा रण वष / Assessment Year : 2010-11 Trumpf (India) Private Limited, Raisoni Industrial Park, S.No.276, Hissa No.1, Village Mann, Taluke Mulshi, Pune 411 057 Maharashtra PAN AACCT8008J Vs. ITO, Ward-7(5), Pune Appellant Respondent आदेश / ORDER PER R.S. SYAL, VP : This appeal by the assessee is directed against the order dated 13-02-2020 passed by the CIT(A)-13, Pune in relation to the assessment year 2010-11. 2. The appeal is time barred by 57 days. The assessee filed the appeal on 29-06-2020. Prima-facie, the delay period pertains to Covid-19 Pandemic and hence, covered by the judgment of Hon’ble Supreme Court in Cognizance for Extension of Limitation, In re 438 ITR 296 (SC) read with judgment in Assessee by Shri Ketan Ved Revenue by Shri Shishir Srivastava Date of hearing 14-09-2022 Date of pronouncement 15-09-2022 ITA No.442/PUN/2020 Trumpf (India) Private Limited 2 Cognizance for Extension of Limitation, In re 432 ITR 206 (SC) dated 08-03-2021 and 421 ITR 314 where the Hon’ble Apex Court took a suo motu cognizance of the situation arising out of the challenges faced by the country on account of COVID-19 Virus and resultant difficulties that could be faced by the litigants across the country and accordingly extended the time limit for filing of the appeals. We, therefore, condone the delay in filing the instant appeal and admit the same for disposal on merits. 3. Succinctly, the facts of the case are that the assessee is engaged in providing after-sales support and market support services in respect of machines sold by its foreign related entities in the territory of SAARC region. The assessee also carries out Trading of spares and tools and Job work. Instantly, we are concerned only with the five international transactions of receipt/rendition of services grouped as one transaction for benchmarking , comprising of Provision of after-sales and market support services (Receipt) amounting to Rs.4,58,03,483/-; Provision of IT services (Payments) Rs.32,91,958/-; Cost Allocation (Payments) Rs.11,18,258/-; Recovery/Reimbursements Expenses (Receipts) Rs.1,23,12,159/-; and Reimbursements Expenses (Payments) Rs.44,10,011/-. The assessee aggregated ITA No.442/PUN/2020 Trumpf (India) Private Limited 3 the above five transactions and applied the Transactional Net Margin Method (TNMM) for determining its Arm’s Length Price (ALP). Calculating its Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI) at 4.20% from the above five transactions, the assessee chose certain comparables giving lower similar average PLI for demonstrating that the international transaction was at ALP. The Transfer Pricing Officer (TPO) changed the composition of comparables and shortlisted ten companies as comparables with their average OP/OC at 25.30%. On this basis, he determined the amount of transfer pricing adjustment at Rs.1,26,70,656/-. The AO initially notified the draft order incorporating the transfer pricing adjustment as proposed by the TPO and thereafter passed the final assessment order. The assessee filed appeal before the ld. CIT(A) and got certain reliefs. The ld. DR has not brought to our notice any appeal having been filed by the Department against the impugned order. In the instant appeal, the assessee is aggrieved by the exclusion of two companies and inclusion of one company from/to the final tally of comparables. I. Ma Foi Global Search Services Limited and Ma Foi Management Consultants Ltd. : ITA No.442/PUN/2020 Trumpf (India) Private Limited 4 4. These two companies were included by the assessee in the list of comparables. The TPO excluded them, inter alia, on the ground that they maintained their accounts following calendar year as against the assessee following financial year. The ld. CIT(A) echoed the assessment order on this count. 5. Having heard both the sides and gone through the relevant material on record, it is seen that this issue is no more res integra in view of the judgment of the Hon’ble jurisdictional High Court in CIT Vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 176 (Bom.) holding that two companies with different financial year endings cannot be considered as comparable. The ld. AR was fair enough to accept the position against the assessee. We, therefore, countenance the exclusion of these two companies from the list of companies. II. ICC International Agencies Limited (Segment) : 6. The assessee included this company in the list of comparables, which was not disputed by the TPO. The assessee raised a contention before the ld. CIT(A) that this company was wrongly included. The ld. CIT(A) remained unconvinced, which has brought the assessee before the Tribunal. ITA No.442/PUN/2020 Trumpf (India) Private Limited 5 7. In principle, there can be no bar on the assessee seeking exclusion of a company which was inadvertently included in the list of comparables. What is relevant for consideration is the comparability and not the suo motu inclusion or exclusion by the assessee. The way in which the TPO can exclude certain companies, included by the assessee in the list of comparables, which are actually not found out to be so, the assessee can also seek exclusion of a company which was wrongly treated by it as comparable. Our view is fortified by the judgment of the Hon’ble jurisdictional High Court in CIT Vs. Tata Power Solar Systems Ltd. (2017) 298 CTR 197 (Bom.). 8. Now comes the question as to whether ICC International Agencies Ltd. is really not comparable so as to qualify for exclusion? The TPO accepted the segmental financials of the company which are germane to the functional profile of the assessee in the international transaction under consideration. This fact is not disputed by the ld. AR as well. The TPO computed OP/OC of this company at 106.80%. The assessee urged before the ld. CIT(A) that this company should be excluded because of its inconsistent profitability trend. To buttress this contention, the assessee submitted the PLI (OP/OC ratio) of this company, as ITA No.442/PUN/2020 Trumpf (India) Private Limited 6 recorded on page 27 of the impugned order, at 187% for the year 2008; 38% for the year 2009; 96% for the year 2010; 34% for the year 2011; and 27% for the year 2012. The assessee also made a mention that the OP/OC for the year 2010, namely the year under consideration, was wrongly taken by the TPO at 106% as against the correct profit rate of 96%. It is on the strength of this fluctuation in the profit margins over the period that the assessee is seeking exclusion of this company from the list of comparables. 9. At this stage, it is relevant to note that the computation of arm's length price under the Indian transfer pricing provisions is embodied in section 92C of the Act. Sub-section (1) of this section provides that the arm's length price in relation to an international transaction shall be determined by any of the given methods, being the most appropriate method, having regard to certain factors. Proviso to sub-section (2), which assumes significance for the present purpose, states that : ‘where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices’. Whereas some countries have adopted the inter-quartile range for the ALP determination, which is also called the midspread or middle fifty, India has adopted the arithmetic mean. ITA No.442/PUN/2020 Trumpf (India) Private Limited 7 It is quite natural that two or more companies operating in the same field, which are otherwise comparable, tend to have different profit margins. The rationale behind averaging of the profit margins of the comparables, under the Indian legislature, is to iron out the fluctuations so as to reach at a benchmark profit margin. When average of the margins of all the comparables is adopted to find out the arm’s length margin, it takes care of the individual high profit or lower profit margin companies which are otherwise comparable. This deciphers that a company which is otherwise similar to the assessee and passes all the tests of comparability, cannot be excluded from the list of comparables simply because of its high or low profit margin. There is no mention in the language of the provision for the exclusion of potential comparable companies simply on account of high or low profit rate. The only caveat, in our considered opinion, is to look at the reasons for the high or low profit margins returned by such otherwise comparable companies. If the abnormal profit/loss occurs because of some abnormal business conditions of that company for the relevant year, then it would require exclusion. If, on the other hand, the high profit or high loss reflects the normal business conditions, then such company has to be ITA No.442/PUN/2020 Trumpf (India) Private Limited 8 included in the list of comparables. The decisive test, therefore, is the existence or otherwise of some abnormal business conditions prevailing in the relevant year leading to the high or low profit margin and not per se such high or low profit margin. If we concur with the view point of the ld. AR that the high margin companies de hors any other reason, should be excluded, then the entire exercise of determining the ALP would be thwarted and the selection of comparables will be restricted only to few select companies throwing the very concept of the ALP to the winds. Ex consequenti, it is held that a potential comparable cannot be excluded merely on the ground of its high or low profit margin unless such rate of margin is because of abnormal business conditions prevailing during the year in question. 10. Adverting to the facts of the instant case, we find that the TPO considered ten comparable companies including the relevant segment of ICC International Agencies with OP/OC at 106.80%. Apart from that, the TPO also green-signaled the inclusion of two more companies with negative profit margins, namely, Overseas Manpower Corporation Limited with OP/OC at (-)23.31% and Times Innovative Media Limited with OP/OC at (-)11.35%. This shows that the approach of the TPO in treating the otherwise ITA No.442/PUN/2020 Trumpf (India) Private Limited 9 comparable companies for the purposes of inclusion in the list of comparables by the TPO is consistent, irrespective of their having earned high profits or incurred losses. 11. Though the TPO recorded OP/OC of ICC International Agencies at 106.80%, the assessee contended before the ld. CIT(A) that its correct profit margin was 96%. Now a diametrically opposite stand is being taken by the ld. AR contending that the actual profit margin of this company is more than 106.80%. To support such a contention, he put forth certain unverified calculations, which were not before any of the authorities below. In support of his contention urging for the exclusion of this company on the ground of high profit, he relied on a Tribunal order in Cummins Turbo Technologies Ltd., UK Vs. DDIT (IT) (ITA Nos.161 & 269/PUN/2013) in which the Tribunal ordered the exclusion of a company with higher profit margin. 12. At the cost of repetition, we reiterate that an otherwise comparable company with a high or low profit margin cannot be excluded just because of low or high profit rate. It would merit exclusion if it is proved that such high or low profit margin was because of some abnormal business conditions relevant to the year under consideration. Apart from contending that this ITA No.442/PUN/2020 Trumpf (India) Private Limited 10 company returned higher OP/OC for the year, no specific argument was put forth by the ld. AR to show that such profit margin was not the normal incidence of business. The assessee has not disputed the functional comparability of this company or the FAR analysis. The ld. AR failed to bring to our notice the company not passing any of the filters. Reliance on Cummins Turbo Technologies (supra) is again misplaced. In that case, the company reported loss of 6.47% for the F.Y. 2003-04; loss of 69.07% for the F.Y. 2004-05; and loss of 44.21% for the F.Y. 2005-06 and there was positive margin of 3.67% for the F.Y. 2007-08 with the F.Y. 2006-07 under consideration. The Tribunal, on the facts of that case ordered the removal of the company but by accentuating that a company cannot be excluded only because of high profit margin. In view of the fact that the ld. AR has simply harped on the high profit margin as a reason for seeking exclusion without pointing out any abnormal business conditions existing with that company for the year under consideration, we find no reason to disturb the conclusion drawn by the ld. CIT(A) in echoing the inclusion of ICC International Agencies Ltd. (Segment) in the list of comparables. ITA No.442/PUN/2020 Trumpf (India) Private Limited 11 13. Ground No.3 about the levy of interest is consequential and Ground No.4 about the initiation of penalty proceedings is premature. 14. In the result, the appeal is dismissed. Order pronounced in the Open Court on 15 th September, 2022. Sd/- Sd/- (S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 15 th September, 2022 सतीश आदेश की ितिलिप अ ेिषत/Copy of the Order is forwarded to : 1. अपीलाथ / The Appellant; 2. थ / The respondent 3. The CIT(A)-13, Pune 4. The PCIT-5, Pune 5. DR, ITAT, ‘C’ Bench, Pune 6. गाड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune ITA No.442/PUN/2020 Trumpf (India) Private Limited 12 Date 1. Draft dictated on 14-09-2022 Sr.PS 2. Draft placed before author 15-09-2022 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *
