2019 (2) TMI 163 - AT - Income Tax

TPA - Comparable selection - excluding seven comparables on the ground that all of them are government companies and are, therefore, not good comparables- Held that - The assessee company is engaged in providing design and engineering services property, environment, transport and infrastructure sectors. The assessee provides services to transform the built environment and restore the natural environment and its expertise ranges from environmental remediation to urban planning from engineering iconic buildings to designing sustainable transport networks and from developing the energy sources of the future to enabling new ways to extracting essential resources. Companies whose most of the Revenue comes from government and functions performed are also not comparable with that of the assessee exclusion is upheld.

Summary

Issues Involved:
1. Whether the Dispute Resolution Panel (DRP) erred in directing the Assessing Officer (AO) to reduce the addition to ?3,87,54,545/- from the original recommended Arm’s Length Price (ALP) of ?6,55,34,938/- for international transactions.
2. Whether the DRP erred in directing the Transfer Pricing Officer (TPO) to exclude seven specific companies from the final set of comparables.

Detailed Analysis:

Issue 1: Reduction of Addition by DRP
The primary grievance of the Revenue is that the DRP-2 directed the AO to complete the assessment based on its observations, resulting in a reduced addition to ?3,87,54,545/- instead of the originally recommended ALP of ?6,55,34,938/- for the international transactions undertaken by the assessee company with its associate/parent enterprise.

Issue 2: Exclusion of Specific Comparables
The second issue is the exclusion of seven companies from the final set of comparables by the DRP. The companies excluded were:
1. Bengal SRE Infrastructure Devp. Ltd.
2. Certification Engineers International Ltd.
3. Indus Technical & Financial Consultants Ltd.
4. Pallavan Transport Consultancy Services Ltd.
5. Usha Hydro Dynamics Ltd.
6. Rites Ltd.
7. NTPC Electric Supply Company Ltd.

The DRP excluded these companies on the grounds that they are government companies and, therefore, not good comparables.

Analysis of Comparables:

Bengal SRE Infrastructure Devp. Ltd.
- The company offers Transaction Advisory, Policy Advisory, and Capacity Building services, primarily for government projects.
- Formed as a joint venture with the West Bengal Industrial Development Corporation, a government undertaking.
- Most revenue comes from government projects, and its functions are not comparable with the assessee.
- Exclusion upheld by the DRP.

Certification Engineers International Ltd.
- Provides certification, re-certification, safety audit, and Health and Safety management systems services, primarily to central and state government enterprises.
- 100% shares held by Engineers India Ltd., which is majorly owned by the President of India.
- Revenue is government-driven and functionally not comparable.
- Exclusion upheld by the DRP.

Indus Technical & Financial Consultants Ltd.
- Engaged in financial consultancy, failing the TPO’s filter of companies with revenue less than ?1 crore.
- Diversified income sources with no segmental accounts available.
- Functionally not comparable with the assessee.
- Exclusion upheld by the DRP.

Pallavan Transport Consultancy Services Ltd.
- 100% shares held by the Government of Tamil Nadu.
- Provides consultancy services related to traffic, transportation, and software development to state government bodies.
- Revenue primarily from government projects.
- Exclusion upheld by the DRP.

Usha Hydro Dynamics Ltd.
- Major revenue (around 92%) from cleaning activities, not comparable with the assessee’s business.
- Engaged in trading business.
- Rejected as a good comparable in a previous case (Bechtel India Pvt. Ltd).
- Exclusion upheld by the DRP.

Rites Ltd.
- A Government of India undertaking providing consultancy for public utilities.
- Functionally dissimilar, with cost of sales including cost of finished goods.
- Rejected as a good comparable in previous cases (Bechtel India Pvt. Ltd and Boeing International Corporation).
- Exclusion upheld by the DRP.

NTPC Electric Supply Company Ltd.
- 100% shares held by NTPC, a government-owned PSU.
- Engaged in turnkey projects and consultancy for electricity supply, with significant revenue from government projects.
- Exclusion upheld by the DRP.

Tribunal's Findings:
The Tribunal found that the DRP's exclusion of the seven comparables was justified as they were either government companies or functionally different from the assessee. The Tribunal referenced the assessee's own case for the assessment year 2011-12, where similar exclusions were upheld by the High Court, indicating that such exclusions do not constitute a question of law unless irrelevant considerations were taken into account.

Conclusion:
The Tribunal upheld the DRP's decision to exclude the seven comparables and found no reason to interfere with the DRP's findings. Consequently, the appeal by the Revenue was dismissed.