Commissioner of Income-tax v. Nortel Networks India P. Ltd
[Citation -2015-LL-0224-3]

Citation 2015-LL-0224-3
Appellant Name Commissioner of Income-tax
Respondent Name Nortel Networks India P. Ltd.
Court HIGH COURT OF DELHI AT NEW DELHI
Relevant Act Income-tax
Date of Order 24/02/2015
Judgment View Judgment
Keyword Tags transactional net margin method • transfer pricing officer • information technology • business activity
Bot Summary: The Dispute Resolution Panel concurred with the view of the Transfer Pricing Officer and held as follows: Thus, the Transfer Pricing Officer held that Capital Trust Ltd. is not a comparable company. Therefore a company with a small turnover of Rs. 25 lakhs cannot be taken as a comparable. Recently, the Income-tax Appellate Tribunal Delhi in the case of Haworth Pvt. Ltd. v. Deputy CIT 2011 11 ITR 757 has held that three comparable having small turnover cannot has held that three comparable having small turnover cannot be considered even if segmental information is available particularly when the comparable's main activity is different. The Income-tax Appellate Tribunal reversed the findings of the Transfer Pricing Officer with respect to the inclusion of M/s. Capital Trust Ltd. as a comparable and held as follows (page 109 of 40 ITR (Trib : 7. We are of the considered view that a company cannot be excluded from the comparables merely for the reason of having low turnover. The comparable has been excluded because the total turnover of this comparable is Rs. 13.92 crores. The Income-tax Appellate Tribunal corrected the position and noticed that not having applied the turnover filter at the initial stage, the Revenue cannot take advantage, in the facts of the case, particularly when the turnover filter is not a test even in respect of the surviving comparable which are concededly part of the record.


JUDGMENT judgment of court was delivered by S. Ravindra Bhat J.-The Revenue is in appeal against common order of Income-tax Appellate Tribunal ("the ITAT") in I. T. A. Nos. 4765/Del/2011 and 427/Del/2013 (Nortel Networks India P. Ltd. v. Addl. CIT [2015] 40 ITR (Trib) 102 (Delhi)). Income-tax Appellate Tribunal had allowed assessee's appeals. question of law urged in this case is: "Whether Income-tax Appellate Tribunal fell into error in directing inclusion of data and particulars pertaining to Cyber Media Events Ltd. in transfer pricing studies to determine arm's length price (ALP) for purpose of income-tax?" assessee is engaged in installation, maintenance, repairing, sales and supply of plant, equipment and apparatus for purpose of communication of all kinds. It also provides marketing and after sales services to Nortel group of companies. As it was obliged to, assessee submitted transfer pricing report (TPR) for assessment years 2007-08 and 2008-09. Transfer Pricing Officer (TPO) accepted arm's length price of all international transactions except one provision of marketing and after sales support services, concluding that transaction was not at arm's length. In this segment of assessee's activities, it had entered into service agreement for provision of marketing and after sales service on cost mark-up basis. assessee provides marketing and after sales services to associated enterprises (AEs) in relation to sale of telecommunication equipment, software and other information technology products to customers in India. assessee adopted transactional net margin method (TNMM) indicating rule 10B(1)(e) of Income-tax Rules as most appropriate method and benchmark for turnover, taking operating profit/operating cost as profit level indicator (PLI). Transfer Pricing Officer, even while accepting transactional net margin method as most appropriate, rejected its analysis so far as it related to interpretation of comparables. assessee had, in this context, relied upon data relating to seven comparable enterprises whose average unadjusted profit margin worked to 11.5 per cent. Transfer Pricing Officer determined that two out of these seven were not comparables. This determination, as it pertained to M/s. Cyber Media Events P. Ltd. was accepted by assessee. other-M/s. Capital Trust Ltd. was held not to be comparable on account of its low revenue. related party turnover in respect of this comparable exceeded 25 per cent. and was diminishing revenue. Assessing Officer incorporated report and framed final assessment order. assessee approached Dispute Resolution Panel. Dispute Resolution Panel accepted Transfer Pricing Officer's reasoning that segment turnover of excluded company, i.e., M/s. Capital Trust Ltd. was only Rs. 25 lakhs and constituted less than 2 per cent. of total turnover of company and, therefore, assessee could not use its data. Dispute Resolution Panel concurred with view of Transfer Pricing Officer and held as follows: "Thus, Transfer Pricing Officer held that Capital Trust Ltd. is not comparable company. We are in agreement with Transfer Pricing Officer. We decline to interfere and hold that Capital Trust Ltd. is not comparable company because its revenue from'foreign consultancy' (not from marketing and sales support service) is only Rs. 25 lakhs. Though we agree that in service industry turnover as such does not play significant role and normally there is no discernible link between turnover and margins but companies with very low sales base it may not lead to proper comparability as data of these companies is not reliable due to their low cost/sale base. Further, reliability of financial data for companies with low levels of sales/operating income can be significantly reduced because same persons are often both major shareholders and also key employees, thereby obliterating economic distinction between profits and salaries. Also companies having very small turnover are to be excluded because margins earned by these companies fluctuate to extremes because of narrow base. Such companies lack competitive strength, lack operational efficiencies and also lack human resources, which is main strength of service sector. Therefore company with small turnover of Rs. 25 lakhs cannot be taken as comparable. Recently, Income-tax Appellate Tribunal Delhi in case of Haworth (India) Pvt. Ltd. v. Deputy CIT [2011] 11 ITR (Trib) 757 (Delhi) has held that three comparable having small turnover (Rs. 18.78 lakhs) cannot has held that three comparable having small turnover (Rs. 18.78 lakhs) cannot be considered even if segmental information is available particularly when comparable's main activity is different. This decision also pertains to MSS and squarely applies to facts of this case. Transfer Pricing Officer thus has rightly rejected this comparable." Income-tax Appellate Tribunal reversed findings of Transfer Pricing Officer with respect to inclusion of M/s. Capital Trust Ltd. as comparable and held as follows (page 109 of 40 ITR (Trib)): "7. We have heard rival contentions and perused material available on record. Apropos Capital Trust comparable, Transfer Pricing Officer has observed that primary business of this company is automobiles sales and service. We are of considered view that company cannot be excluded from comparables merely for reason of having low turnover. It is to be appreciated that no turnover filter was applied by either of parties. comparable has been excluded because total turnover of this comparable is Rs. 13.92 crores. analysis needs to be carried out on basis of functional profile and not on arbitrary or ad hoc criteria. From facts on record and argument advanced before us, it emerges that functional profile of Capital Trust Ltd.'s consultancy segment is similar to that of Nortel India same needs to be included in final comparables for working arm's length price. Assessing Officer will accordingly apply this comparable while working out arm's length price, this ground of assessee is allowed." It is submitted by Revenue that reason for exclusion of M/s. Capital Trust Ltd. data is sound and reasonable and that Income-tax Appellate Tribunal should not have placed over-emphasis on question of size of turnover, in relation to segmental business activity of comparable company. assessee, which is represented and has been heard on advance notice, on other hand, highlights that record indicates-and in fact Income-tax Appellate Tribunal noticed that no turnover filter was applied by either of parties at any stage and that Revenue ought not to highlight this as question of law in these given circumstances. We are of opinion that Income-tax Appellate Tribunal's order does not raise substantial question of law. As observed in impugned order, as to whether turnover filter is appropriate one and applicable cannot be answered in abstract and is entirely fact dependent. In given facts of this case, record indicates that Transfer Pricing Officer chose to apply that filter but used it to exclude data pertaining to M/s. Capital Trust Ltd. This inconsistency went unnoticed even by Dispute Resolution Panel. Income-tax Appellate Tribunal corrected position and noticed that not having applied turnover filter at initial stage, Revenue cannot take advantage, in facts of case, particularly when turnover filter is not test even in respect of surviving comparable which are concededly part of record. For above reasons, no question of law arises. appeal is accordingly dismissed along with pending applications. *** Commissioner of Income-tax v. Nortel Networks India P. Ltd
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