2020 (2) TMI 450 - AT - Income Tax

TP Adjustment - adjustment in value of international transaction (by increasing the margin of comparable companies - comparable selection - HELD THAT - The taxpayer is engaged in activity defined as technical consultancy of engineering services, which can be classified as technical engineering service provider. The taxpayer in order to benchmark its international transactions qua technical support services provided to the Associated Enterprises (AE) applied Transactional Net Margin Method (TNMM) with Operating Profit/ Total Cost (OP/TC) as Profit Level Indicator (PLI) as the Most Appropriate Method (MAM), arrived at its own margin at 12.28% on cost, thus companies functionally dissimilar with that of assessee need to deselected. Risk adjustment - issue of this year is also required to be restored to TPO/AO to decide afresh after providing an opportunity of being heard to the taxpayer as there is no change in the business model of the taxpayer during the year under assessment. The taxpayer is directed to bring on record evidence to prove the risk adjustment vis- -vis comparables in the light of the decisions of the coordinate Bench of the Tribunal in cases of Mentor Graphics (Noida) Pvt. Ltd. vs. DCIT 2007 (11) TMI 339 - ITAT DELHI-H and DCIT vs. Hellosoft India Pvt. Ltd. 2013 (10) TMI 747 - ITAT HYDERABAD Deduction u/s 10A(1A) - AO/TPO/DRP restricting the deduction at 90% instead of 100% as provided in section 10A(1A) of the Act on the ground that the taxpayer has inadvertently claimed deduction at 90% of the eligible profit of the undertaking instead of 100% of the eligible profit - HELD THAT - In AY 2010-11, identical issue was also raised by the taxpayer as additional ground which was allowed as per order dated 26.12.2018 and restored the issue back to the AO for passing order afresh in accordance with law. Since this is a mistake apparent on record on the part of the taxpayer, this issue is required to be restored back to the AO to decide afresh keeping in view the provisions contained u/s 10A(1A) of the Act. Consequently, the AO is directed to decide the issue afresh after providing an opportunity of being heard to the taxpayer. So, ground no.2 is determined in favour of the taxpayer for statistical purposes.

Summary

Issues Involved:
1. Exclusion and inclusion of certain comparables for benchmarking international transactions.
2. Adjustment in margin due to different risk profiles of comparable companies.
3. Restriction of deduction under section 10A(1A) of the Income-tax Act, 1961.
4. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Exclusion and Inclusion of Certain Comparables:

M/s. Mitcon Consultancy & Engineering Services Ltd. (Mitcon):
The taxpayer challenged Mitcon's inclusion on the grounds of functional dissimilarity and failing the 75% revenue filter. The Tribunal excluded Mitcon, noting its diverse services and revenue composition, which did not align with the taxpayer's business model.

M/s. Mahindra Consulting Engineers Ltd. (Mahindra):
Mahindra was excluded due to substantial outsourcing of work and a different profit recognition method, making it functionally dissimilar to the taxpayer, a 100% captive service provider.

HSCC (India) Ltd. (HSCC):
HSCC was excluded as it is a Government of India enterprise with a high margin and functional dissimilarity, failing the 75% service filter applied by the TPO.

M/s. Bengal SREI Infrastructure Development Ltd. (Bengal SREI):
Bengal SREI was excluded due to its joint venture status with the West Bengal Government, substantial outsourcing, and functional dissimilarity.

M/s. Certification Engineers International Ltd. (Certification):
Certification was excluded due to its status as a government entity with high related party transactions and an abnormally high margin, making it functionally dissimilar to the taxpayer.

Inclusion of Comparables:

Petron Engineering Construction Ltd. (Petron):
Petron was included as a comparable due to its functional similarity with the taxpayer, as established in previous assessment years.

M/s. Chemtex Global Engineers Pvt. Ltd. (Chemtex):
The issue of including Chemtex was restored to the TPO for reconsideration, as its financials were now available in the public domain.

2. Adjustment in Margin Due to Different Risk Profiles:
The taxpayer sought a risk adjustment of 5.25%, arguing that it operated in a risk-insulated environment. The Tribunal restored this issue to the TPO/AO for fresh consideration, directing the taxpayer to provide evidence for risk adjustment in line with previous Tribunal decisions.

3. Restriction of Deduction Under Section 10A(1A):
The taxpayer challenged the restriction of deduction at 90% instead of 100%. The Tribunal restored this issue to the AO for fresh adjudication, noting it as a mistake apparent on record.

4. Initiation of Penalty Proceedings Under Section 271(1)(c):
The Tribunal noted this ground as premature and did not provide specific findings.

Conclusion:
The appeal was allowed for statistical purposes, with several issues restored to the AO/TPO for fresh consideration. The Tribunal directed the AO/TPO to provide the taxpayer with opportunities to present evidence and arguments. The order was pronounced on January 31, 2020.