IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J , MUMBAI BEFORE SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI N.K. PRADHAN, HON'BLE ACCOUNTANT MEMBER ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., v. Dy. CIT-8(2) 103/104, Antariksh (Thakur House) Aayakar Bhavan Marol, Makwana Road Mumbai Marol Naka, Andheri (E) Mumbai 400 059 PAN: AAFCS5952D (Appellant) (Respondent) Assessee by : Shri Devendra Jain Department by : Shri Manish Kumar Singh Date of Hearing : 27.09.2019 Date of Pronouncement : 30.09.2019 ORDER PER C.N. PRASAD (JM) 1. This appeal is filed by assessee against order of Learned Commissioner of Income Tax (Appeals) 15 Mumbai [hereinafter in short Ld.CIT(A) ] dated 15.07.2014 for A.Y. 2009-10. 2. Assessee has raised following grounds in its appeal: - 1. On facts and circumstances of case and in law, Ld. CIT(A) has erred in confirming action of Ld. AO. who has in conformity with order of Transfer Pricing Officer u/s. 92CA(3) arbitrarily rejected following two comparable companies, without 2 ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., any cogent reason, from out of comparables selected by appellant, while working out operating profit margin: i. M/s. Hiran Orgochem Ltd. ii. M/s. Roselabs Industries Ltd. 2. On facts and circumstances of case and in law, Ld. CIT(A) has erred in confirming action of Ld. AO. who has in conformity with order of Transfer Pricing Officer u/s. 92CA(3) made addition of Rs. 1,77,117/- in commission income from Associated Enterprises. 3. Coming to Ground No. 1 of grounds of appeal, Ld. Counsel for assessee submits that Transfer Pricing Officer [TPO] rejected two comparable companies namely M/s. Hiran Orgochem Ltd., and M/s.Roselabs Industries Ltd., on ground that these two companies are abnormal loss making companies. Ld. Counsel for assessee submits that in fact these companies are not continuous loss making companies. Referring to Page Nos. 3 to 5 of Paper Book which is data relating to comparable companies namely M/s. Hiran Orgochem Ltd., and M/s.Roselabs Industries Ltd., submits that operating profit of these comparable companies for year ending 2008, 2009 and 2010 are as under: Name of company 2008 2009 2010 M/s. Hiran Orgochem Ltd., 14.38 -13.11 21.93 M/s. Roselabs Industries Ltd., 0.31 -0.75 -1.87 Therefore, referring to above data Ld. Counsel for assessee submits that comparables selected by assessee are not consistently loss making companies or abnormally loss making 3 ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., companies as observed by TPO and therefore they should not be rejected. Reliance was placed on decision in case of Syngenta India Limited v. Additional CIT [71 taxmann.com 259] and Sungard Solutions (India) (P.) Ltd v. Asst. DIT [68 taxmann.com 89]. 4. Ld. DR vehemently supported orders of authorities below. He further submits that there is decline in trend of profits of comparable and therefore they are not good comparables. 5. We have heard rival submissions, perused orders of authorities below. On perusal of data furnished before us, we find that in case of M/s. Roselabs Industries Ltd., operating profit shown by this company right from June 2002 to March 2007 was profit making and further in year ending March 2011 again this company has shown operating profits. In case of M/s. Hiran Orgochem Ltd., we observe that this company has sown profits from year ending March 04 to till March 08 and again for year end March 2010 company has shown operating profit. In circumstances, we can hold that these two companies are not consistently loss making companies or abnormal loss making companies. 6. We find as to whether comparable company can be rejected for reason that it is loss making company has been considered by 4 ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., Mumbai Bench of Tribunal in case of Syngenta India Limited v. Additional CIT (supra) and it has been held as under: 17. ..As pointed out by Ld. Counsel, Special Bench in case of DCIT v Quarks Systems P Ltd. (supra) it has been held that merely because comparable company is loss making it cannot be rejected from list of comparables for purpose of computation of ALP. Similar view has been echoed by other decisions as already cited above. OECD guidelines of extreme results and comparability consideration have given following guidelines:- 3.64 independent enterprise would not continue loss generating activities unless it had reasonable expectations of future profits. See paragraphs 1.70 to 1.72. Simple or low risk functions in particular are not expected to generate losses for long period of time. This does not mean however that lossmaking transactions can never be comparable. In general, all relevant information should be used and there should not be any overriding rule on inclusion or exclusion of lossmaking comparables. Indeed, it is facts and circumstances surrounding company in question that should determine its status as comparable, not its financial result. 3.65 Generally speaking, loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from list of comparables include cases where losses do not reflect normal business conditions, and where losses incurred by third parties reflect level of risks that is not comparable to one assumed by taxpayer in its controlled transactions. Loss-making comparables that satisfy comparability analysis should not however be rejected on sole basis that they suffer losses . On strength of decisions relied by ld. Counsel and also OECD guidelines which have some persuasive value, we also hold that, if loss making comparables otherwise satisfies comparability analysis, same cannot be rejected. facts and circumstances associated with given industry and FAR analysis should be determinative factor. Thus, this reason given by TPO cannot be criteria or ground for rejection from comparability list. 5 ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., 7. Similarly, in case of Sungard Solutions (India) (P.) Ltd v. Asst. DIT (supra) Pune Bench of Tribunal held as under: - 6. We have heard submissions made by representatives of rival sides and have perused orders of authorities below. We have also considered decisions on which ld. AR of assessee has placed reliance. first issue raised by assessee before us is rejection of comparables by TPO merely on ground that comparable companies have incurred losses. ld. AR has submitted that Astro Bio Systems Limited, Maars Software International Limited and Megasoft Ltd. have incurred losses only in one year. loss making company shall be considered as bad comparable only if it is having consistent loss for three years. reliance has been placed on decision of Co-ordinate Bench of Tribunal in case of M/s. Bobst India Private Limited Vs. Dy. CIT (supra). relevant extract of findings of Co-ordinate Bench on this issue are as under: 5.3 We also find that ITAT, Pune Bench in case of Cummins Turbo Technologies Limited vs. DDIT in ITA No.118/PN/2011 for A.Y. 2006-07 held that some of comparables for purpose of PLI adopted by assessee was showing loss, but burden was on TPO to prove where those companies were consistently loss making companies. Moreover, except unsupported reasoning, no data was brought on record by TPO for excluding comparables selected by assessee in transfer pricing study. Therefore, Tribunal held that no justification to adjustment made u/s.92CA(3) of Act and directed to delete same. 5.4 Further, we find in case of Goldman Sachs (India) Securities Pvt. Ltd. vs. ACIT, which has been decided by ITAT, Mumbai K Bench, wherein TPO rejected Capital Trust as comparable because of two out of last three years taken into consideration. Capital Trust was in red and not because nature of business had any variance with that of assessee. Tribunal looked into business segment of Capital Trust and found that in foreign consultancy segment with which Bench was concerned in year 2004-05, it had operative profit / operative cost at 27.25%. Since nature of services rendered by comparable were exactly on similar lines as that of assessee, though, during year, it was in loss could not be disqualified as nonlegitimate comparable. Tribunal drew strength from Brigade Global services (supra) for reaching this conclusion and held that assessee had rightly taken Capital Trust as valid comparable and Revenue authorities have erred in excluding same. similar view has been taken by ITAT, 6 ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., Mumbai K Bench in case of Temasek Holdings Advisors vs. DCIT. In sum and substance, all above cases is that company making persistent loss for past 3 years is not good comparable. According to us, when loss making company has been selected for comparison in TP study for necessary, which is profit making one, there is need for more attention qua conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for ultimate judgment of comparability of impugned transaction. So, persistent loss making means continuous loss making for more than 3 years but in case before us i.e. Stovec has earned margin of 2.39% in comparable segment in F.Y. 2003-04. Hence, it could not be considered as loss making, so same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international transactions pertaining to EOU operations. Assessing Officer is directed accordingly. 8. ratios of above decisions apply to facts of assessee case. Respectfully following said decisions, we hold that Ld.CIT(A) erred in upholding findings of TPO in rejecting above two comparables on ground that they are abnormally loss making companies. Thus, we direct TPO/AO to include above two companies in list of comparables as was considered by assessee for purpose of arriving arm s length price on international transactions. This ground is allowed. 9. Coming to Ground No.2 of grounds of appeal, Ld. Counsel for assessee submits that assessee company has earned commission income of 12,18,255/- from its Associated enterprises and rate of commission is dependent on type of product and nature of services provided by assessee. Commission rate in case of Aroma Oil Product is 7 ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., 5% and in case of beverages is 10%. Ld. Counsel for assessee further submitted that it gets 1% commission as referral commission when sale directly takes place between Associated Enterprise and Third Party and appellant merely acts as facilitator. It was submitted that TPO has erred in applying flat rate of 10% to different types of transactions without considering peculiar nature of each type of transaction and requested to delete adjustment of .1,77,117/-. 10. Ld. DR vehemently supported orders of authorities below. 11. We have heard rival submissions, perused orders of authorities below. This aspect of matter has been considered by Ld.CIT(A) with reference to submissions and evidences furnished before him observing as under: - 5.3 I have considered facts of case, submission of appellant vis-a-vis observations of AO, in order u/s. 144C(3) r.w.sec. 143(3) of Act. contentions and submission of appellant are being discussed and decided as under: - (i) appellant contended that rate of Commission as referral commission and in case of Aroma Oils it is 5% while in case of beverages it is 10%. In support chart has been filed. From chart contention of appellant is not verifiable. (ii) Further, it is noted that there is no basis given nor any agreement for lesser rate of commission in certain items is produced. It is also noted that out of 57 transactions only in 3 transactions commission is less than 10% for which no suitable explanation is given. Accordingly, I have no reason to deviate with finding of AO. (iii) Consequently, adjustment made by TPO is upheld. 8 ITA NO.1973/MUM/2016 (A.Y: 2009-10) M/s. Sensient India Pvt. Ltd., (iv) This ground of appeal is therefore, dismissed. 12. None of these findings have been rebutted with evidences by assessee. Thus, we do not find any valid reason to interfere with findings of Ld.CIT(A) and decision therein. Thus this ground of appeal is rejected. 13. In result, appeal of assessee is partly allowed. Order pronounced in open court on 30th September, 2019 Sd/- Sd/- (N.K. PRADHAN) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai Dated 30/09/2019 Giridhar, Sr.PS Copy of Order forwarded to: 1. Appellant 2. Respondent. 3. CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. True Copy BY ORDER (Asstt. Registrar) ITAT, Mum Sensient India Pvt. Ltd. v. Dy. CIT-8(2), Mumbai