Vildirect: IncomeTax-caselaws-2016-VIL-973-ITAT-MUM

2016-VIL-973-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

ITA No. 1083/Mum/2015

Date: 22.04.2016

SYNGENTA BIOSCIENCES PRIVATE LIMITED

DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1 (3) , MUMBAI.

For The Appellant : Shri Ajit Kumar Jain
For The Respondent : Shri Akhilendra P. Yadav

BENCH

SHRI MAHAVIR SINGH, JM AND SHRI ASHWANI TANEJA, AM

JUDGMENT

PER MAHAVIR SINGH, JM:

This appeal by assessee is directed against the order of CIT(A)-58, Mumbai in Appeal No. CIT(A)-58/Arr.36/14-15 vide order dated 02.12.2014. Assessment was framed by DCIT-1(3), Mumbai u/s. 143(3) r.w.s. 144(C)(1) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2008-09 vide his order dated 24.01.2012.

2. The first issue in this appeal of assessee is against the order of CIT(A) confirming the action of AO in making adjustment of Arms Length Price (ALP) determined by the assessee in respect to International Transaction in connection with Research & Technical Services (R&T) provided to Associate Enterprises (AE). For this, the assessee has raised following ground no.2:

“2. The Ld CIT(A) has erred in law and on facts in proposing an adjustment of Rs. 1,55,48,991 to the Arm's Length Price ('ALP') determined by the Appellant in respect of the international transaction in connection with Research and Technical services ("R& T) provided by the Appellant to its Associated Enterprise ('AE'). In doing so, the Ld CIT (A) has erred in law and in facts as follows:

2.1 Considering R & T service income as Rs. 24,37,36,200 as against Rs. 25,11,25,447 determined by the Appellant.

2.2 Rejecting the economic analysis/transfer pricing study undertaken by the Appellant.

2.3 Not computing the ALP in respect of the international transaction as computed by the Appellant and Ignoring the provisions of the Rule 10 B(4) of the Income-tax rules 1962 (,Rules') which authorizes usage of multiple year data of comparable companies for the purpose of determination of ALP under Section 92F of the Act.

2.4 Rejecting the grounds raised by the Appellant in relation to selection / rejection of comparable companies while determining the ALP.

2.5 Not allowing an adjustment for the difference between the working capital level of the Appellant and the comparable companies.

2.6 Failing to grant the benefit of +/- 5 percent range as envisaged by the provisions of Section 92C(2) of the Act..”

3. Briefly stated facts are that the assessee is engaged in the business of rendering RTS to Syngenta Group, which is a global player in HYV Seeds & Crop Protection Sciences. It has also a laboratory in Goa. The assessee has disclosed receipt of Rs. 25,11,25,447/- from its AEs and this represents assessee’s entire turnover. The assessee’s activity on R&T includes undertaking certain samples preparation and chemical analysis activities for the agro chemical business. It supplies to its AEs the necessary formula, information and expertise to enable it to provide R&T activities. The assessee furnished the computation of operating margins on operating costs and the bench mark selected for the same was TNMM. The details of the same are as under:

Transaction R&T services income	Method TNMM	PLI OP/TC 20.81% As per submission dated 16.12.2008-TPSR Appendix-G	Assessee’s margin	Comparables’ margin (3 years average) 16.96% TPSR Pg.24	Updated comparables margin for FY 2007-08 19.83% Vide TPSR Annexure F

The assessee selected nine comparables and according to assessee, whose functional profiles are similar to that of the assessee. The assessee has provided TP Study Report and the nature of business of its comparables. The TPO accepted the comparables numbering 4 out of total 9 and balance 5 he rejected as under:

S. No.	Comparables	Nature of Business	Remarks of the undersigned
1.	Alphageo India Ltd.	The company is engaged in conducting seismic surveys and other services for the oil exploration companies. It is also in the business of providing testing/certification services on a contractual basis.	Accepted as Comparable
2.	Choksi Laboratories Ltd.	The company is a commercial testing house engaged in the business of testing products. The company provides various types of analytical services like pharmaceutical analysis (bio analysis, impurity decision, invirto equivalence, etc.), food and beverage analysis, water analysis and construction material analysis. The company also provides clinical research services on a small scale.	Accepted as Comparable
3.	Dolphin Medical Services ltd.	The company provides medical (diagnostic), Services Ltd. ophthalmologic and healthcare services to pharmaceutical companies undertaking clinical trials.	Rejected as Comparable Functional profile dissimilar
4.	Medinova Diagnostic Services Ltd.	The company is engaged in the business of providing diagnostic services like pre-employment check-ups, site health checkups and executive health checkups and related services.	Rejected as Comparable Functional profile dissimilar
5.	N.G. Industries Ltd.	The company has medical centres which are engaged in providing diagnostic services	Rejected as Comparable Functional profile dissimilar
6.	TCG Lifesciences Ltd.	The company is primarily engaged in the business of contract research and testing activities in various disciplines: contract research (clinical and pre-clinical), clinical reference laboratory services (central lab), analytical testing of water, food, drugs, etc. and environmental monitoring and impact assessments studies.	Accepted as Comparable
7.	Vimta Labs Ltd.	The company is a leading life sciences contract research and informatic solutions organisation focused on enabling translational medicine approaches to discovery and development of superior drugs and biologics.	Accepted as Comparable
8.	Max Neeman Medical Intl. Ltd. - Clinical Research Segment	The clinical research segment is into contract research organisation offering a bouquet of services to global pharmaceuticals, biotech and device companies	Related party transaction 25%
9.	Pfizer Ltd. - Services Segment	The services segment of the companies is primarily into conducting clinical research and trials and undertaking data management for new drug development for its group entities	Rejected as Comparable segments A/c

4. The assessee before TPO furnished reply dated 30.06.2011 stating that it has selected its comparable in a scientific manner. The assessee took another ground that in case comparables at Sl. Nos. 3, 4 and 5 (given in above chart) were to be rejected then comparables given at Sl. No. 1 should also be rejected for the reason that it does not undertake any work in laboratories but undertakes field controls, service, designs and planning for oil industry. The assessee before the TPO submitted a fresh list of comparables, TPO out of which, rejected Origin Discovery Technologies Ltd. for the reasons that it has consistently been incurring losses from FYs 2005-06 to 2007-08 and accordingly, it is not considered as comparable company. The TPO after rejecting the comparables and considering the comparables given by assessee originally at Sl. No. 1 i.e. Alphageo (India) Ltd. finally choose set of nine comparable companies as under:

Sl. No.	Name of the Company	OP/OC (unadjusted)
1.	Alphageo (India) Ltd.	41.05%
2.	Choksi Laboratories Ltd.	29.95%
3.	GVK Bioscience Pvt. Ltd.	20.84%
4.	Jubilant Chemsys Ltd.	16.75%
5.	Research Support Intl. Pvt. Ltd.	9.34%
6.	TCG Lifescience Ltd.	29.97%
7.	Siro Clinpharm Pvt. Ltd.	28.84%
8.	Syngene International Ltd.	30.74%
9.	Vimta Labs Ltd.	15.84%
	Arithmetic Mean	24.74%

According to TPO, the OP/OC of the final set of nine companies is at 27.74% and the mean of the same at 24.74% was applied for adjustment. The assessee has disclosed OP/OC at 17.20%, which is less than comparable companies and accordingly, adjustment to ALP was made of Rs. 1,55,48,991/-. Aggrieved, assessee preferred appeal before CIT(A).

5. CIT(A) after considering the functions of Dolphin Medical Services Ltd., Medinova Diagnostic Service and N. G. Industries noted that these three companies are not functionally comparable to the business of the assessee and hence, these have rightly been rejected by TPO. The CIT(A) also rejected the plea of the assessee that Alphageo (India) Ltd. should have also been rejected. He considered the plea and rejected the same and finally upheld the order of TPO/AO vide para 5.4 (iv) to (ix), which read as under:

“iv) the appellant contended that if above three companies are rejected on functional dissimilarity, then Alphageo (India) Ltd. also should have been rejected. In this regard it is mentioned that this company was selected by the assessee itself. In this regard it is mentioned that this company was selected by the assessee itself. The TPO in his order has mentioned that the assessee had categorically stated during final hearing on 04.08.2011 that they have done FAR analysis for the comparables. As quoted from the agreement above, the appellant company is in the business of research activity to be performed on behalf of its AE as per their directions. Similarly in case of Alphageo, research is being conducted which includes 3D, Seismic data acquisition in processing and carrying out analysis and advising/certification services on contractual basis. The function of this company are thus in the area of research activity and hence comparable. Accordingly, contention of the appellant is not acceptable.

v) the appellant stated that the AO has rejected Pfizer Ltd. on the basis of segmental accounts which is not justified. In this regard it is mentioned that as stated by the assessing officer in the order, this company was excluded also on the ground that its annual account was for the period 30.11.2007 and thus only 7 months (April 2007 to November 2007) data was available was overlapping which is not comparable to the full financial year data of the appellant. The companies having different financial year/accounting year data (i.e. other than ending 31st March) are to be rejected because if a tested party ends its accounting year by March then taking companies whose accounting year ends in March only can be comparable. This view has been upheld by Hon’ble ITAT Pune bench in the case of Honeywell Automation India Ltd. (in ITA No. 4/PN/08 order dated 10/2/2009.) Also in the case of Wellwin Industry Ltd., the Hon’ble ITAT Pune upheld the TPO’s view that different accounting year data cannot be used. In view of these judicial pronouncements the contention of the appellant is rejected.

vi) The appellant contended that working capital adjustment should have been allowed to it by TPO. In this regard it is mentioned that Hon’ble ITAT while deciding the appeal in the case of Symentec Software Solutions Pvt. Ltd. for Asst. Year 2006-07 has not granted adjustment for difference in working capital level and functional and risk profile of comparable companies vis-à-vis the Appellant. In this regard, observations of the Hon’ble ITAT in context of risk and working capital adjustment are there in para 14 and para 16 of the order; wherein it has been observed as under:

The Appellant did not make any such adjustment of difference in function and risk profile of the comparables in the Transfer Pricing Study. It is only when the TPO proposed to exclude some of the comparables and to take only current year updated data into consideration for determining the ALP, the Appellant raised these objections.

The calculation of risk and working capital adjustment submitted by the Appellant is also not on the basis of any formula or principle rather it is general in nature. Even otherwise until and unless such difference results in deflation or inflation of financial result of the comparables, it is not general rule of standard adjustment. The appellant has not brought out on record how such functional difference and risk has influenced the result of the comparables with quantified data to the satisfaction of the authorities.

Since it is impossible to have a perfect comparable without any difference or variation regarding turnover risk profile and functional differences; therefore, the legislature has provided a margin of +/- 5% while determining the ALP.

Observing as above the Hon’ble ITAT Mumbai Bench in the case of Symentec Software Solutions Pvt. Ltd. has not allowed the grounds of the appeal in respect of working capital adjustment and risk adjustment. The facts of the case under consideration are also similar. Further there nothing demonstrated by the appellant that the adjustment in any case is essential in the facts of the case. Because what could be mere difference and not material difference would not be requiring adjustments. Further any adjustment which is required to be made would be in terms and in accordance with Rule 10B(1)(e)(iii) and not otherwise. Appellant has not made out any case as to how so called differences are materially affecting the amount of net profit margin in the open market. Further the appellant but for making a technical submission in this regard has not actually given any submission/working of the adjustments as it sought for working capital, which only means that the appellant is only interested in the raising technical issue and not serious on facts in this regard. Accordingly and in view of the decision of the Hon’ble Mumbai tribunal in the case of Symentec Software Solutions Pvt. Ltd. for Asst. Year 2006-07 in ITA No.7894/MUM/2010, the contentions of the appellant regarding the comparability adjustment is not found to be acceptable.

vii) the appellant also objected to the rejection of contemporary documentation and use of multiple year data. In respect of the submission in respect of use of financial information pertaining to the year in question which was not available and assessee’s contention that the data for the earlier years should be used instead, it is stated that Rule 10B(4) of I.T. Rule, 1962 is what gives mandate for the use of data and not rule 10D of the Rules. In respect of the submission in respect of use of financial information pertaining to the year in question which was not available and assessee’s contention that the data for the earlier years should be used instead, it is stated that Rule 10B(4) of I.T. Rules, 1962 is what gives mandate for the use of data, which is reproduced herein under:

“4) the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into.

Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.”

(emphasis supplied)

It can be seen that the Rule 10B(4) prescribes use of data for the FY in which an international transaction has been entered into and in the proviso what has been further permitted is that data relating to a period not being more than two years prior to such FY may also be considered, if conditions given there are satisfied. The word ‘also’ given in proviso of Rule 10B(4) would only mean that under some particular circumstances as has been detailed in the Rule, data for earlier two years can be used in addition to the data for the year in which international transaction has been entered into it cannot be interpreted to mean that even if the data for the year in which the international transaction has been entered into, is not available, then too the data for the two years prior to the F.Y. can be used. The contention of the assessee that the data should be contemporaneous and data available at the time of analysis when the international transaction has been entered into should be used is not acceptable in view of the Rule 10B(4) reproduced above. What the rule provides is use of the data relating to the financial year in which the international transaction has been entered into and does not say anything about contemporaneous of data or anything of the sort that such data should be available at the time of transaction/analysis, Assessee's conclusion is based on the Rule 10D(4) of I.T Rules, 1962. Rule 10D(4) only puts an obligation on the assessee that the information and documents which an assessee is required to maintain “should, as far as possible, be contemporaneous and should exist latest by the specified date” referred to in clause (iv) of section 92F; But this is not indicative or suggestive of the fact that the data to be used for the analysis/benchmarking of international transaction should necessarily exist at the time of undertaking the transaction/analysis conducted by the assessee for its benchmarking and that even if the data for the relevant period is available at the time of conducting analysis by the department, the same cannot be used. Use of data for the purposes of analysis governed by Rule 10B(4) of the I. T. Rules, 1962 and when a specific Rule is given in respect of data to be used for the purposes of comparability of an uncontrolled transaction with an international transaction, then to draw an indirect inference based on the Rule 10D(4) which only encumbers, maintenance of type of information/documents by the assessee, in respect of an international transaction would not only be out of place but incorrect also and further even if the inference is drawn from there then the same can in no way supersede the provision given in the Rule 10B (4) which directly deals with use of data for comparability. In view of the facts as aforesaid and discussion as above, the submission of the appellant regarding impossibility of performance is not found to be acceptable and accordingly the case laws relied upon in support of doctrine of impossibility of performance is not found to be applicable in this case. It may be mentioned that the in the decision of Hon'ble I.T.A. T Delhi in the case of Customer Services India (P) Ltd. vs. ACIT (2009) it has been observed as under:

"Non availability of information in the public database may at best be relevant to explain the discharge of the appellant's obligation of maintaining the prescribed documentation under section 92D(1) of the Act read with Rule 10D of the Rules .”

It therefore clearly means that non-availability of information at the time when appellant conducted its benchmarking is not relevant for the purpose of benchmarking and that the same cannot be imported to understand the meaning of rule 10B(4), which in itself is quite clear and unambiguous. It is further mentioned that the Hon’ble Special bench of ITAT, Chandigarh in the case of Quark Systems Pvt. Ltd. 38 SOT 307 (SB) have clearly given the findings that the comparables which are available in the public domain even after the conduct of the study by appellant can be taken as comparable and can be considered for comparability/benchmarking. Even otherwise appellant has not submitted anything which would necessitable use of multiple year data. Appellant’s submission that use of data for three years decreases any variability/distortions is not coming out of the facts of the case, what are the variability/distortions which are having effect on determining the transfer price of the international transaction? And how are they supposed to be addressed by taking multiple year data? These aspects have not been detailed with any facts and figures. Therefore it is nowhere demonstrated that data pertaining to two years prior to the financial year 2007-08 have any influence on the determination of transfer prices in relation to the transactions being compared. Therefore it is not demonstrated that data pertaining to two years prior to the financial year 2007-08 have any influence on the determination of transfer prices in relation to the transactions being compared. The appellant has also based its arguments on the Para 5.9 of the OECD Guidelines. For the sake of clarity the relevant portion relied upon by the appellant is reproduced as under:

Para 5.9 of the OECD guidelines:

“Tax administrations also should limit requests for documents that became available only after the transaction in question occurred to those that are reasonably likely to contain relevant information as determined under principles governing the use of multiple year data in Chapter 1 or information about the facts that existed at the time the transfer pricing was determined. In considering whether documentation is adequate, a tax administration should have regard to the extent to which that information reasonably could have been available to the taxpayer at the time transfer pricing was established.”

The OECD guidelines at Para 5.9 are in respect of the kind of data which should be asked by Tax Administrator. From the guidelines, it can be seen that it is clearly mentioned there that the relevant document that are reasonably likely to contain the relevant information and which is otherwise available in public domain can be called for by the Tax Administrator. The aforesaid guidelines of the OECD do not suggest that the analysis cannot be conducted based on the information which currently available in the public domain as has been contended by the appellant. Further reliance is placed on the ITAT decision in case of Ranbaxy Laboratory Ltd. Vs. Addl. CIT range- 15, New Delhi (ITA No. 2146 Delhi of 2007, Asst. Year 2004-05) and Mentor Graphics (Noida) Pvt. Ltd. Vs. Dy. Commissioner of Income Tax (ITA No. 1969/D/2006 Asst. Year 2002-03). In a recent judgment in the case of ACIT Vs. Infotech Enterprises Ltd. (2014) 41 taxmann.com 335, it was held by Hon'ble Hyderabad ITAT that TPO cannot determine arms length price under TNM method by relying upon multiple year data where current year data of comparable companies are available in public domain. Accordingly the appellant's contention about use of multiple year data is not found to be acceptable.

viii. The appellant has contended about non fulfillment of any of the conditions mentioned in section 92C(3} and therefore rejection of the benchmarking done by the appellant being not justified. In this regard it is mentioned that the appellant in its T.P. study has considered data for the comparables for earlier two years also and their weighted average of margins has been considered for the purposes of bench marking. Consideration of data for the earlier years without the same being substantiated in terms of proviso to Rule 10B(4) is not in conformity with the Indian transfer Pricing Regulations. Further consideration of weighted average of margins of the comparables is against ht proviso to section 92C(2) of the Act. Accordingly it can be arrived that the benchmarking done by the appellant is not in accordance with the provisions of section 92C(1) & 92C(2) of the Act. Further, the appel,ant had considered company named as Max Neeman Medical International ltd. as a comparable in its Transfer Pricing Study Report, which was not found comparable by TPO and same was accepted by the appellant as not being comparable. Accordingly it can be arrived at that the data/information used by the appellant for the purposes of benchmarking is not reliable or correct. Under such facts and circumstances, the case of the appellant would clearly fall under the clauses (a) and (c) of the section 92C(3) of the Act. Therefore under such facts and circumstances of the case rejection of the benchmarking done by the appellant and the redetermination of the case rejection of the benchmarking done by the appellant and the redetermination of the ALP by the TPO is justified in terms of section 92C(3) of the Act. Contention of the appellant is therefore not acceptable.

ix. With regards to the appellant’s contention that burden of proof rested with the revenue, it is mentioned that in the case of Aztec Software and Technology Services Limited 107 ITD 141, Hon’ble ITAT Bangalore (Special Bench) (which has been upheld by Hon’ble Karnataka High Court) held that the burden to establish that international transaction was carried at Arm’s Length’s Price is on taxpayer. He is also to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing relevant material and documents before the revenue authorities. Further in a recent judgment in the case of CIT Vs. Shatrunjay Diamonds (2003) 261 ITR 258 (Bom) it was held that the intricacies of the transactions are required to be explained by the assessee and the onus is on the assessee to explain the differences while leading proper evidence. This contention of the appellant is therefore not acceptable.

x. In view of the facts and legal position as discussed above the adjustment made by the TPO/AO is upheld.”

Aggrieved, assessee came in second appeal before Tribunal.

6. We have heard rival submissions and gone through facts and circumstances of the case. Before us Ld. counsel for the assessee only made request that in case these three companies viz., Dolphin Medical Services Ltd., Medinova Diagnostic Service and N. G. Industries are removed as comparables as rejected by TPO and confirmed by CIT(A) then the functional aspect of Alphageo (India) Ltd. i.e. given at Sl. No. 1 of the comparables (at para 4 pages 3 and 4 above) should also be rejected or removed as comparables. On query from the Bench, ld. counsel for the assessee explained the functional difference between the assessee and Alphageo (India) Ltd. First of all, Ld. counsel for the assessee took us to pages 148 to 154 of the assessee’s paper book wherein annual report for the year 2007-08 of Alphageo (India) Ltd. is enclosed. He stated that the functions of the Alphageo (India) ltd. is exploration and production of oil. He referred to page 151 of assessee’s paper book, which reads as under:

“At Alphageo, we are helping a number of our exploration and production customers do precisely this.

Through seismic data capture and analysis. Aiding our customers in their quest for oil. And telling them how easiest to extract it. Accelerating exploration investments. Shrinking exploration tenures. Taking the business of our customers ahead.”

Then he took us to page 154 of assessee’s paper book, which reads as under:

“What services we provide

We provide the following 2-D and 3-D seismic services:

- Design and preplanning of 2D and 3d surveys.

- Seismic data acquisition in 2D and 3D

- Seismic data processing/reprocessing/special processing

- Seismic data interpretation

- Generation, evaluation and ranking of prospects

- Reservoir data acquisition

- Reservoir analysis

- Topographic surveys with GPS/RTK

- Digitisation of hard copies of maps, seismic sections and well logs into CGM/SEGY/LAS formats

- Third party quality control for acquisition and processing.”

He then took us to P&L Account of Alphageo (India) ltd. which is given at page 210 of assessee’s paper book, wherein survey expenditure for the year is Rs. 35,51,51,974/- which is a major component of expenditure out of total expenditure of Rs. 61,34,81,150/-. It is to be noted that the depreciation expenses are at Rs. 13,85,43,810/-. He took us to the Schedule 15 to the P&L Account which is given at page 217 of assessee’s paper book which includes expenses of survey and drilling charges which is a major component out of total survey expenses at Rs. 26,49,32,587/-. In view of these facts, Ld. counsel for the assessee took us to the functions of the assessee company which is given in Transfer Pricing Study for the FY 2007-08 relevant to Asst. Year 2008-09 at page 32 of assessee’s paper book. The function analysis is given as under:

“4.2 Overview

4.2.1 SBPL and SCPAG have entered into an arrangement, whereby SBPL has been engaged to perform R&T activities like undertaking certain sample preparation and chemical synthesis activity on behalf of SCPAG who will in turn supply SBPL with the necessary formulae, information and expertise to enable it to do so.

4.2.2. SBPL’s business mainly involves providing R&T services. This involves manufacturing test compounds to be sent to Syngenta Research facilities at Switzerland or the UK. The other activity involves assistance for biological evaluation at the research facilities.

4.2.3. The state of the art research centre, located at Goa, is well equipped to conduct organic chemical research with advanced analytical equipment. Given below are the brief note on the key functions performed by SBPL and further, where relevant, the corresponding functions performed by its AE i.e. SCPAG are also discussed.”

7. He also drew our attention to the functions performed which are given at pages 32 and 33 of assessee’s paper book. In view of these facts, ld. counsel for the assessee before us contended and agreed that Dolphin Medical Services Ltd., Medinova Diagnostic Service and N. G. Industries are functional dissimilar but then Alphageo (India) Ltd. is also not same in view of the above functional dissimilarity with that of the assessee, the same should have been rejected or removed for taking comparables. Finally, he limited his plea only to this extend. Another aspect he argued was that there is need to carry out working capital adjustment between the working capital level of the assessee’s comparable companies. TPO has not allowed working capital adjustment.

8. On the other hand, ld. CIT (DR) argued that the TPO and CIT(A) both have rightly taken Alphageo (India) Ltd. as comparable for the reason that the assessee company is in the business of research activity to be performed on behalf of its AEs. Similarly, Alphageo (India) Ltd. also conducted research which includes 3D seismic data acquisition in processing and carrying out analysis and advising/circulation services on contractual basis. According to Ld. CIT,DR, the functions of Alphageo (India) ltd. are similar to that of the assessee for the reason that the areas of research activity are the same and hence, comparable. Ld. CIT, DR also stated that the assessee himself has taken Alphageo (India) Ltd. as comparable and now he cannot come back from the same.

9. In view of above facts, now limited question remains for adjudication, on this issue, before us is that whether the comparable chosen by assessee i.e. Alphageo (India) Ltd. can be removed for computation of margin and working capital adjustment to the comparables selected by revenue can be allowed while computing margins. We find that the AO has rejected or removed three companies viz., Dolphin Medical Services Ltd., Medinova Diagnostic Service and N. G. Industries as comparables rejected by TPO and confirmed by CIT(A). The assessee’s only plea was that in case these three companies are removed/rejected as comparables in that case the functional aspect of Alphageo (India) Ltd. should also be rejected/removed as comparables can be considered because the assessee from the very beginning before the TPO and before CIT(A) has taken this plea that there is functional difference between the assessee and Alphageo (India) Ltd. We find that the assessee’s activity in R&T includes undertaking certain samples preparation and chemical analysis activities for the agro chemical business. It supplies to its AEs the necessary formula, information and expertise to enable it to provide R&T activities. Whereas on the other hand, Alphageo (India) Ltd. is in the business of exploration and production of oil. We are of the view that these two companies i.e. the assessee and Alphageo (India) Ltd. are functionally not comparables and cannot be taken into consideration. The argument of Ld. Sr. DR that once assessee has chosen Alphageo (India) Ltd. as comparables it cannot back out now without filing multiple year data. We find that the assessee in the case of Alphageo (India) Ltd. has filed the date of three years to show any variability distortions which are having effect on determination of transfer pricing of the international transaction. We are of the view that the comparables which are available in public domain even after the conduction of the studies by assessee can be taken as comparables and considered for benchmarking. The assessee filed complete multiple year data in the case of Alphageo (India) Ltd. in its paper book, which is referred by Ld. Counsel for the assessee in his arguments. This view of ours is also supported by the decision of Hon’ble Special Bench of this ITAT, Chandigarh Bench in the case of Quark Systems Pvt. Ltd. Vs. ITO, (2010) 38 SOT 307 (SB) has held as under:

"25 ... While we agree that merely because a comparable is making loss, it cannot be excluded from the list or comparables (or the purposes of computation or arm's length price. Imercius is a case in which not only functional area is different. Imercius has a negative net worth but also because turnover of the Imercius has no comparison with the assessee companies."

10 In view of the above discussion, we are of the view that the authorities below were not justified in including Alphageo (India) Ltd. as comparable for benchmarking for determining ALP u/s. 92C(1) and 92C(2) of the Act. The TPO is directed to exclude Alphageo (India) Ltd. as comparable for benchmarking for determining ALP. For rest of the comparables for benchmarking as selected by revenue has not been disputed by assessee except claim made that working capital adjustment should be given. The assessee’s contention regarding adjustment for the differences in working capital level of the assessee and comparable companies selected by revenue, we find that the required data in relation to these companies are not available in the orders of the lower authorities or the details filed by the assessee before us. However, we are of the view that the need to carry out the working capital adjustments is for the reason that the differences on account of working capital cycle not only impact the finance cost but it also affects items of P&L Account like expenses, sale price of product, provision for bad debts etc. and in turn it affects the profit before interest and tax. Accordingly, we are of the view that to take into account the difference in the net working capital requirements between the assessee and comparables selected by revenue, appropriate adjustments should be made on account of debtors and creditors. And adjustment to working capital cycle of assessee should be made vis-à-vis the sale and total cost of each of the comparable companies. Let the assessee produce the data and TPO should analyse the same. Ld. Counsel for the assessee has given the computation of margin as taken by revenue of comparables after exclusion of Alphageo (India) Ltd. as under:-

Sl. No.	Name of the Companies	Margin as TPO	Margin post working capital adjustment
1	Alphageo (India) ltd.	Nil	Nil
2.	Chokshi Laboratories Ltd.	29.95%	16.17%
3.	GVK Biosciences Pvt. Ltd.	20.84%	19.74%
4.	Jubilant Chemsys Ltd.	16.75%	14.40%
5.	Research Support Intl. Pvt. Ltd.	9.34%	9.53%
6.	TCG Lifesciences Ltd.	29.97%	24.04%
7.	Siro Clinpharm Pvt. Ltd.	28.84%	23.29%
8.	Syngene International Ltd.	30.07%	29.07%
9.	Vimta Labs Ltd.	15.84%	15.19%
	Average	22.70%	18.93%

In view of the above directions, we restore the issue to the file of the AO/TPO to give adjustment accordingly. This issue of assessee’s appeal is allowed for statistical purposes.

11. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of AO in treating the relinquishment of right as short term capital gain. For this, assessee has raised following ground nos. 3 and 4:

“3. Based on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in considering the refund of deposit of Rs. 1,86,47,800/- received by the Appellant as sale consideration for relinquishment of right and the same is treated as short term capital gains.

4. Without prejudice, to ground no. 3 above, the Appellant prays that if the refund of deposit is considered as sale consideration received for relinquishment of rights, then cost of acquisition should be considered while computing the short term capital gains.”

12. Briefly stated facts are that the assessee has sold its property at Gummidipoondi, Tamilnadu for a sum of Rs. 6.45 cr. as per agreement to sale. The consideration splitted as under:

“i) Rs. 1,86,47,800/- (Rupees one crore eighty six lakh forty seven thousand eight hundred only) towards the amount deposited by the Vendor with the Lessor, which shall stand assigned and transferred to the Purchaser or its Nominee on the Date of Completion and thereupon the Vendor shall absolutely relinquish all right, title & interest thereto and shall forever acquit, discharge and release the Lessor from payment thereof to the Vendor.

ii) Rs. 3,83,52,200/- (Rupees three crore eighty three lakh fifty two thousand two hundred only) towards the Buildings

iii ) Rs. 75,00,000/- (Rupees seventy five lakh only) towards the Plant & Machinery.”

According to AO, the assessee has shown the sale consideration of this block of assets at Rs. 4,58,52,200/- after reducing the cost of acquisition at Rs. 23.31 lacs. The dispute is regarding the amount deposited by assessee with the SIPCOT, Tamilnadu being the differential amount which was not accounted for. The assessee considered the sale consideration at Rs. 4,58,52,200/-. The AO show caused to the assessee as to why the differential amount of Rs. 1,86,47,800/- be not treated as income of the assessee accrued during the year on relinquishment of rights, titles and interest in the said property. The assessee explained that this amount was deposited with SIPCOT, Govt. of Tamil Nadu for leasehold land at Gummidipoondi, Tamilnadu which was sold by the assessee to Sanmar Speciality Chemicals Ltd. Hence, there was a nullifying effect and this was not considered in the consideration. According to AO, the same is income under the head short term capital gain and he taxed this amount of Rs. 1,86,47,800/- accordingly. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AO. Aggrieved, assessee is in second appeal before Tribunal.

13. We have heard rival submissions and gone through facts and circumstances of the case. We find that the assessee has received total consideration of Rs. 6.45 cr. as against the sale of the asset i.e. building and land allotted by SIPCOT at Gummidipoondi, Tamilnadu. The assessee declared sale consideration while computing capital gains at Rs. 4,58,52,200/- and claimed cost of acquisition at Rs. 23.31 lacs. SIPCOT has also adjusted a sum of Rs. 1,86,47,800/- towards refund of deposit made by assessee and assessee reduced this amount from the total consideration. The AO as well as CIT(A) included this amount in total sale consideration and computed capital gains accordingly. Now before us, assessee claimed that in case this adjustment of refund of deposit by SIPCOT is to be treated as sale consideration then the assessee should be allowed this as cost of acquisition for the purpose of computing capital gains. We find the plea of the assessee quite reasonable and accordingly direct the AO to consider this refund of deposit made by assessee with SIPCOT as cost of acquisition for the purpose of computation of capital gains. The AO will verify the adjustment of refund of this deposit made by the assessee with SIPCOT and accordingly allow the claim of the assessee. This issue of assessee’s appeal is set aside to the file of AO in term of the above direction and is allowed for statistical purposes.

14. The next two issues in this appeal of assessee are against the order of CIT(A) confirming the action of AO in disallowing the deduction of Rs. 11,37,500/- for non-deduction of TDS by invoking the provisions of section 40(a)(ia) of the Act and confirming the action of AO in not allowing set off of brought forward losses/unabsorbed depreciation while computing taxable income. For this, assessee has raised following ground no. 5 and 6:

“5. Based on the facts and circumstances of the case and in law, the CIT(A) erred in not allowing a deduction of Rs. 11,37,500/- which was disallowed in the computation of income for Assessment Year 2007-08 on account of Section 40(a) disallowance without assigning any reasons thereto.

6. Based on the facts and circumstances of the case Ld. CIT(A) erred in not allowing set off of brought forward losses/unabsorbed depreciation while computing the taxable income.”

15. We have heard rival submissions and gone through facts and circumstances of the case. We find that the AO has not made any such disallowance in the assessment order and CIT(A) has also recorded the finding as under:

“7.3. I have considered the facts of the case, submission of the appellant as against the findings/observations of the AO in his order u/s. 143(3) r.w.s. 144C(1) of the I. T. Act. The contentions and submissions of the appellant are being discussed and decided here in under:

i) There is no discussion made by the AO on these two issues and hence the same does not arise from the assessment order. Accordingly, same cannot be considered in the appellate proceedings. These grounds of appeal are therefore dismissed.”

In view of the fact that the AO has not made any disallowance u/s. 40(a)(ia) of the Act and not allowing set off of brought forward losses/unabsorbed depreciation as is apparent from the assessment order and CIT(A) has also given finding of fact qua that. Since the issues are not arising out of the orders of the lower authorities, we dismiss these issues of assessee’s appeal.

16. In the result, appeal of assessee is partly allowed for statistical purposes.

Order pronounced in the open court on 22nd April, 2016.

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