2018 (12) TMI 1563 - AT - Income Tax

TPA - Comparable selection - functinal dissimilarity - admission of the additional ground - Held that - The Ld. CIT(DR) did not object to admission of the additional ground of appeal in view of the Assessee s contention that relevant facts for adjudication of the additional ground of appeal are already on record of assessment proceedings. - the additional ground of appeal admitted. EIL cannot be taken as a suitable comparable company in the absence of its segmental accounts. As regards, comparable of Mahindra we respectfully follow the order of Coordinate Bench of ITAT, Delhi in Assessee s own case for AY 2009-10 and set aside this issue regarding comparable of Mahindra to the file of TPO/AO for fresh order, with the direction to exclude Mahindra as a comparable if the assessee is also to substantiate its claim that most of the work carried out by Mahindra was outsourced whereas the assessee had not or minimal outsourcing.

Summary

Issues Involved:

1. Selection and rejection of comparable companies for transfer pricing adjustments.
2. Denial of working capital and risk adjustments.
3. Initiation of penalty proceedings under Section 271(1)(c).
4. Claim for 100% deduction under Section 10A instead of 90%.

Issue-wise Detailed Analysis:

1. Selection and Rejection of Comparable Companies:

- Selection of New Comparables:
The Tribunal examined the inclusion of "Engineers India Ltd. (EIL)" and "Mahindra Consulting Engineers Ltd." as comparables. It was argued that EIL, being a government entity with significant related party transactions, should not be considered. The Tribunal cited various precedents (e.g., Bechtel India, Thyssenkrupp) to support this exclusion due to high related party transactions and functional dissimilarities. Regarding Mahindra, the Tribunal remanded the issue back to the TPO/AO to verify outsourcing expenses, following the precedent set in the Assessee's own case for AY 2009-10.

- Rejection of Assessee's Comparables:
The Tribunal addressed the rejection of "Petron Engineering Construction Ltd." by the TPO. It was noted that this issue was already settled in the Assessee’s favor in AY 2009-10, where Petron was included as a comparable. The Tribunal directed the inclusion of Petron Engineering Construction Ltd. as a comparable for the current assessment year as well.

2. Denial of Working Capital and Risk Adjustments:

- Working Capital Adjustment:
The Tribunal upheld the DRP's direction to allow working capital adjustments using the OECD methodology. It emphasized that working capital affects margins and should be considered for comparability analysis. The TPO was directed to compute the working capital adjustment using the average of opening and closing balances of inventories, trade debtors/receivables, and trade creditors/payables.

- Risk Adjustment:
The Tribunal noted that the Assessee, being a captive service provider operating in a risk-insulated environment, deserved a risk adjustment. The Tribunal referenced its own decision in the Assessee’s case for AY 2009-10, where the matter was remanded to the TPO/AO to compute the risk adjustment. The Tribunal reiterated the need for a reasonable and accurate risk adjustment based on reliable data, citing various precedents supporting risk adjustments for captive service providers.

3. Initiation of Penalty Proceedings under Section 271(1)(c):

The Tribunal dismissed the ground related to the initiation of penalty proceedings under Section 271(1)(c), stating that initiation of penalty proceedings is not appealable under Section 253 of the Income Tax Act.

4. Claim for 100% Deduction under Section 10A:

The Tribunal admitted the additional ground of appeal regarding the claim for 100% deduction under Section 10A instead of 90%. The Tribunal restored this issue to the file of the AO for verification of facts and a fresh order in accordance with the law, following the principles laid down by the Supreme Court in National Thermal Power Co. Ltd. vs. CIT.

Conclusion:

The Tribunal partly allowed the appeal, directing the exclusion of Engineers India Ltd. as a comparable, remanding the issue of Mahindra Consulting Engineers Ltd. for verification, including Petron Engineering Construction Ltd. as a comparable, and restoring the issue of 100% deduction under Section 10A to the AO for fresh consideration.