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TMI Blog2017 (5) TMI 1093X X X X Extracts X X X X X X X X Extracts X X X X ..... riginal grounds, assessee has also filed a petition pleading for admission of additional ground, through which it seeks exclusion of one M/s. Mahindra Consulting Engineers Limited from the list of comparables considered by the ld. TPO for fixing the Arms Length Price of the international transactions of the assessee with its Associated Enterprise. Original grounds 1 to 4 also concern transfer pricing issues. First of this is on disallowance of a claim for idle capacity while computing its operating margin and the second seeks exclusion of one M/s. TCE Consulting Engineers Ltd from the list of comparables. 5. Facts apropos are that assessee a wholly owned subsidiary of an M/s.Saipem SA, France was primary engaged in the business of providing engineering design and ancillary services to its Associated Enterprises abroad. During the relevant previous year assessee also provided design services to some domestic third party customers. Assessee was billing its customers on hourly rate on the services provided by it. Assessee had during the relevant previous year established a new engineering process centre at New Delhi as a step towards expanding its service delivery mechanism. Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the details of capacity utilization in the case of comparables are not available and therefore the adjustment has been made to the financials of the tested party by appropriately adjusting its fixed cost. It is appreciated that normally adjustments are made to the profit margin of the comparables to bring it on level with that of the tested party. The prerequisite for making this sort of adjustment is the availability of data in the case of comparables. Therefore, the presumption of the assessee that the comparables are working at 100% of their capacity and its capacity utilization is only 65% and therefore an adjustment is called for is misplaced for the reasons stated in the preceding para. As per the ld. TPO assessee was in business since 2001 and annual reports of the assessee for various financial years demonstrated improved working with better volume of work load, thereby vitiating its claim for idle capacity adjustment. 8. Ld. TPO also analyzed the foreign exchange loss on forward contract claimed by the assessee as extra ordinary which comprised of following items:- ''Loss on foreign exchange 5,53,32,920/- (includes loss on account of forward contract a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineers Ltd 2 4.05 Average 16.15 Since operating margin of the assessee was -4.70% against 16.15% of the comparables, ld. TPO recommended an Arms Length Price adjustment of F22,40,83,198/-. Such ld. Arms Length Price adjustment was worked out by the ld. TPO as under:- ALP Profit considering the above = (Op. Exp x ALP Profit)/100 = (107,48,33,846 x 16.15)/100 = Rs. 17,35,85,666/- ALP Sales considering the ALP profit = Op. Exp x ALP Profit = 107,48,33,846 + 17,35,85,666 = Rs. 124,84,19,512/- ALP Sales = 124,84,19,512 Less : Sales reported = 102,43,36,314 Difference = 22,40,83,168/- 10. When the ld. Assessing Officer made a proposal on the lines recommended by the ld. TPO, assessee chose to move ld. DRP. Before ld. DRP assessee pressed for idle capacity adjustment for working out its operating cost and exclusion of forex loss as non operating in nature while computing its operating margin. Assessee also sought exclusion of TCE Consulting Engineers Ltd from the five comparables selected by the ld. TPO. The ld. DRP in its direction dated 20.12.2013 held that idle time capacity adjustment sought by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knows about its own capacity underutilization but what about capacity utilization in the case of comparables? Further, it is quite possible that in this business it is normal to have this much underutilized capacity. Adjustment for difference in the capacity utilized by the Assessee and the uncontrolled comparables should be made after excluding the normal unutilized capacity in this business. But such details are not, available. This Panel also finds that capacity utilization concept is vague and entity specific. As discussed above in the Cost Plus Method all the costs are taken in to consideration while deciding the contract amount and hence there is nothing as underutilization of capacity, whereas as per Assessee's admission capacity utilization concept comes into vogue in hourly basis' of charge. Therefore, in absence of reasonably accurate details of capacity utilization this Panel upholds the decision of the TPO''. 11. However, ld. DRP was one with the assessee viz-a-viz its claim for exclusion of foreign exchange loss as non-operating, while working out the PLI of the assessee as well the comparables. 12. Viz-a-viz assessee's pleading for exclusion of M/s. TCE Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llable (hrs) April 2008 98,094 60,881 37,213 May 2008 93,616 65,648 27,968 June 2008 94,506 63,321 31,185 July 2008 100,415 62,278 38,137 August 2008 83,907 56,058 27,849 September 2008 92,348 68,690 23,658 October 2008 90,318 64,019 26,298 November 2008 92,646 60,700 31,946 December 2008 107,181 73,145 34,036 January, 2009 70,459 45,673 24,785 February, 2009 99,753 57,688 42,065 March, 2009 143,769 98,019 45,750 Total 1,167,011 776,120 390,891 Contention of the ld. Authorised Representative was that idle capacity work out could not be given by the assessee, in respect of the comparable companies due to lack of such information in public domain. However, according to him by virtue of decision of Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd vs. DCIT (in ITA No.6083/Del/2010, dated 30.03.2012) idle capacity adjustment could be given in service segment. Relying on the decision of Mumbai Bench of the Tribunal in the case of Pangea3 & Legal Database Systems Ltd vs. ITO (in ITA No.2128/M/2014 and 1958/M/2014, dated 06.03.2017) ld. Authorised Representative submitted that even when data for comparables we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than that of an assessee could not considered as a good comparable. Thus, according to ld. Authorised Representative, M/s. Mahindra Consulting Engineers Limited was required to be excluded from the list of comparables. 16. Per contra, ld. Departmental Representative submitted that idle capacity adjustment could not be given since assessee was in service industry and assessee could never demonstrate what would be its 100% capacity level. Further as per ld. Departmental Representative, capacity details of the comparables selected by the assessee were not available and assessee could not demonstrate presence or absence of idle capacity for the comparables. 17. Viz-a-viz M/s. TCE Consulting Engineers Ltd, ld. Departmental Representative submitted that the said company was also in engineering service segment and functionally comparable with the assessee. 18. Viz-a-viz M/s. Mahindra Consulting Engineers Limited, ld. Departmental Representative submitted that said company was assessee's own comparable. Further as per ld. Departmental Representative Bangalore Bench of the Tribunal in the case of Societe Generale Global Solution Centre (P) Ltd vs. DCIT (2016) 69 taxmann.com 336 had held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not demonstrate existence nor nonexistence of idle capacity for the various comparables selected by it. No doubt, as held by Pune Bench of the Tribunal in the case of Skoda Auto India (P) Ltd (supra,) it might always not be possible for an assessee to get all details of comparables, especially when such data not in public domain, and approximations could be made. However, the data provided by the assessee here, could not show the scientific basis on which it had worked out its own capacity level. The question of approximation in our opinion would not therefore arise. As for the reliance placed by the ld. Authorised Representative on the Delhi Bench decision of this Tribunal in the case of Transwitch India Pvt. Ltd (supra) adjustment claimed by the assessee there were for relocation expenses, additional rent and salary paid for unproductive/ idle hours. In the first place the said company was providing software design and development service and not in engineering services. Further, the said company could convincingly demonstrate its normal utilization capacity was 87% to 94% in the relevant financial year. As against this, assessee here has not been able to demonstrate how i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances, we are of the opinion that the question whether M/s. TCE Consulting Engineers Ltd could be considered a good comparable requires a revisit by the TPO/Assessing Officer. We set aside the orders of the lower authorities, in so far as it relates to the question of comparability of M/s. TCE Consulting Engineers Ltd, and it remit back to the ld. Assessing Officer /TPO for consideration afresh in accordance with law. 22. As already mentioned by us, assessee has raised certain additional grounds seeking exclusion of M/s. Mahindra Consulting Engineers Limited from the list of comparables. No doubt this company appeared in the list of comparables selected by the assessee itself. Assessee had taken no grounds before TPO or ld. DRP for its exclusion. However, by virtue of decision of Special Bench in the case of Quark Systems (P) Ltd (supra) we are of the opinion that an assessee could not be estopped from seeking an exclusion of a comparable even before the appellate authority, if it could show that the selected comparable was not really a good comparable. As per assessee M/s. Mahindra Consulting Engineers Limited was having a turnover of F102.43 Crores whereas its own t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forex loss suffered by the assessee on account of cancellation of its forward forex contracts could be considered as operative or non operative in nature. There were two types of forex loss suffered by the assessee. The dispute is only regarding the treatment of the forex loss suffered by the assessee, on cancellation of forward contracts, which came F2,66,47,200/-. Contention of the assessee is that this was extra ordinary in nature and hence to be excluded while working out its PLI. It is an admitted position that the forward contracts were entered by the assessee taking into consideration the quantum of US dollars, it could receive from the Associated Enterprises on its billings. Related chart of forward contract cancellation as appearing in paper book at page 138 is reproduced hereunder:- Month Contract No. Contract Date Value Date Forward cover taken (USD) April 2008 0736206420385 12/28/2007 4/30/2008 1,500,000 May 2008 0736206420388 12/28/2007 5/30/2008 1,500,000 June 2008 0736206420387 12/28/2007 6/30/2008 1,000,000 July 2008 0736505910031 12/28/2007 7/31/2008 2,500,000 August 2008 0736505910017 12/28/2007 8/29/2008 1,700,000 September 2008 07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to entering into forward contract and hence, it is to be reckoned as normal business transaction and any gain or loss in the normal course of business is to be accounted for in the accounts. However, if there is some hedging abnormality or any extraordinary event has occurred qua the tested party (assessee) which materially affects the cost or profit in the relevant financial year, which is not across the industry or is either absent or is of less magnitude in the case of comparable independent parties, then definitely such an abnormality or extraordinary event has to be factored in while computing the cost base or PLI. Before us, the assessee has demonstrated that in this particular financial year there was an extraordinary fluctuation in the Forex rate which was at 27.47% as compared to the average fluctuation of 2.87% in the earlier three financial years (as per the chart reproduced in our earlier part of the order). In the earlier financial year, i.e., in the FY 2007-08 like a normal transaction the assessee had entered into majority of forward contracts when the exchange rate of INR vs. US $ was steady or rather INR was appreciating; however, in the FY 2008-09 the value of IN ..... X X X X Extracts X X X X X X X X Extracts X X X X
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