9911796707
TMI Blog2018 (12) TMI 1563X X X X Extracts X X X X X X X X Extracts X X X X ..... , Judicial Member And Shri Anadee Nath Misshra, Accountant Member For the Assessee : Sh. H.P. Aggarwal, FCA, and Ms. Prashuka Jain, CA For the Revenue : Sh. Sanjay I. Bara, CIT (DR) ORDER PER: ANADEE NATH MISSHRA, AM This appeal by the Assessee is filed directed against the Assessment Order dated 04-12-2014 passed by the Assessing Officer U/s 154/143(3) r.w.s. 144C of the Income Tax Act, 1961 (for short "the Act"). The grounds of appeal are as under:- "i. The learned DCIT(after incorporating Ld. DRP's order) has erred on facts and in law in making addition of ₹ 3,20,93,274/- on account of adjustment in value of international transaction, on account of following: a) Selecting 2 new comparable companies b) Rejecting 4 comparable companies selected by the assessee c) Rejecting adjustment in margin due to different risk profit of comparable companies ii. The learned DCIT (after incorporating Ld. DRP's order) has erred on facts and in law in initiating penalty proceedings u/s 271(1)(c) iii. The appellant craves leave to add to or modify the above grounds of appeal at or before the hearing of the appeal." (1.1) The Assessee has also filed an Additional Ground of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M PLI OP/OC No of Comparables 8 Mean Margin of Comparables 14.45% (2.3) The arm's length price of the international transactions representing Provision of Technical Support services provided to the associated enterprises (AE) was determined by the assessee by applying Transactional Net Margin Method (TNMM), which was stated by the assessee to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio was taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company was arrived at 11.75% on cost whereas the average PLI of the eight ccomparables selected by the assessee was arrived at 14.45% in the analysis in the TP document, as per aforesaid summary of results. As the price charged in its international transactions was more than the said arithmetical mean price, the price charged in the international transactions was treated by the assessee to be at arm's length. (2.4) For international transactions of the assessee related to provision of Technical Support services, the TPO commented as under in respect of the filters used by the assessee in selection of 08 comparables using th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t March 31, 2009) or data of the company does not fall within 12 month period i.e. 01-04-2009 to 31-03-2010, are rejected. As per TPO, If a tested party ends its financial year in March, then taking companies whose financial year ends in March will be an appropriate filter and may lead to a proper comparability. • Companies that are functionally different from the taxpayer are excluded. • Companies that are having peculiar economic circumstances are excluded. As per TPO, any other peculiar circumstances of a company which is divergent from the taxpayer and the environment in which the taxpayer and the comparables are working makes it incomparable. According to TPO, peculiar economic circumstances which are specific to the comparable enterprises are being looked into to check whether the enterprise is going along with the industry trend, if not whether suitable adjustments can be made to that effect, and if suitable adjustments cannot be made, the same is rejected as a comparable. As per TPO, among the peculiar economic circumstances that affect the suitability of a company as a comparable is its being a persistent loss maker or having declining revenues because these a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fails service income filter. Hence, can't be taken as comparable. Rejected (2.6) The comparables selected by the TPO from out of the comparables chosen by assessee are as under: Sl. No Name of the comparable company 1 TCE Consulting Engineers Limited 2 Mukand Engineers Limited 3 Project and Development India Limited 4 UB Engineering Limited (2.7) In the aforesaid show cause notice, the TPO also proposed to include the two comparables, which were not chosen by the Assessee. The reasons stated by the TPO are as under: 1. Mahindra Consulting Engineers Limited You have rejected this company on the ground that 'Funcional/product profile not similar'. However, AR of the company perused and it is seen that this company is enmgaged in the field of providing Technical Support Service. It passes all the filters also. Hence a suitable comparable. 2 Engineers India You have rejected this company on the ground that 'Functionally different Annual Report of the company is perused and it is seen that company operates in two segments 'Consulting and Engineering Project and Lumpsum Turnkey Project'. First segment i.e. Consulting and Engineering project is comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of in the comparability analysis. The taxpayer having adopted net margin or operating profit as the most reliable or viable indicator of profit level; as per TPO, selective argument against some of the comparables was uncalled for. The TPO held that the Comparables selected by the TPO broadly perform functions similar to the taxpayer and are part of the Technical Consultancy & engineering services segment and hence such comparables cannot be rejected simply on the ground of high end activity. As per TPO, it is also to be kept in view that transfer pricing is not an exact science and that it is difficult to find exact comparables particularly under TNMM. As per TPO, this constraint has been accepted by the ITAT, Delhi in the case of ST Microelectronics Ltd (supra) wherein the ITAT held that ALP of an international transaction cannot be determined accurately in accordance with a scientific formula. It is quite difficult to arrive at any firm conclusion with mathematic precision. The TPO also referred to order of ITAT, Hyderabad Bench in the case of Deloitte Consulting India Pvt. Ltd in which it was held that no two comparable companies can be replicas of each other. The appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itte Consulting India Pvt. Ltd ITA No. 1082 and 1084 of 2010 in order dated 22.07.2011 had affirmed the above principle. (2.10.3) Filter of R&D expenses > 3% of total sales: Assessee objected to the rejection of this filter mentioning that it hasn't spent any expenses on R&D activities thus application of this filter is appropriate in its case. As per TPO, there are no uniform standards regarding disclosure of R&D expenditure in the accounts and the nature of R&D is not available from the published accounts. As per TPO, for creating Intellectual Property Rights, research and development is required but the converse is not true i.e. each company spending on research and development automatically is towards creating an IPR. As per TPO, the research and development activity, if any in a Service Industry is to improve the processes in delivering the technical services and not in creating an intangible. The TPO observed that the taxpayer had also not demonstrated that companies having expenditure greater than 3% on R&D were necessarily creating IP products. The TPO was of the view that there were other quantitative filters which would more appropriately segregate companies which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be that these companies are providing services in a niche area while it is providing general technical support services. Hence, according to the TPO, size, range of services etc. will have to be disregarded while making comparisons as long as the employee profile is similar that is of providing technical services. (2.10.5) Central Mine Planning and Design Institute Limited The Assessee submitted that this company is failing service income filter whereas Form 23ACA shows that this company is having 100% service income. As per TPO, contention of the assessee was verified from the information available in the public domain and a few snap shots taken by him were reproduced as under: As per TPO, it was evident from the above that the exploration can't be considered as a service. Moreover, as per TPO, the company was having 100% related party transactions as evident from the following extracts of the annual report as per P-6/AR "Your Company continued to operate with seven Regional Institutes (RI) located at Asansol/Dhanbad, Ranchi, Nagpur, Bilaspur, Singrauli & Bhubaneswar and its headquarters at Ranchi. Seven Regional Institutes designated as RI-I to RI-VII rendered con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n absence of cogent financial data this company can't be considered as suitable comparable." (2.10.9) Regarding new companies selected by the TPO & Added to the list of comparables. (2.10.9.1) Engineers India Limited The assessee objected to this comparable stating that it provides a complete range of project services ranging from conceptualization, planning, design, engineering and construction activities to meet the specific requirements of its clients in the several fields- Petroleum Refining; Petrochemicals; Pipeline; Offshore Oil & Gas; Onshore Oil & Gas; Terminals & Storages; Mining & Metallurgy; and Infrastructure. And further that EIL is engaged into providing services from concept to commissioning in all the sectors listed above and it provides services beyond the commissioning of clients plants through monitoring the operation of each plant and accumulating feedback on its performance; and furthermore, that this company has a much higher turnover than that of taxpayer. Relying on his earlier general discussion; the TPO further r noted that M/s. Project and Development India Limited, a comparable selected by the assessee, is also a government company. As per TPO, Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only by keeping low margin but high turnover. d) Similarly, low turnover does not necessarily mean high margin. Therefore, unless and until it is shown that turnover makes undue difference on the margins, it is not a general rule to exclude such comparables." (2.10.9.1.1.) The TPO also referred to the following decisions in which it was held that the turnover is not a relevant factor for choice of comparables i) Willis processing, Mumbai, ITAT ITA No. 4429/Mumbai and 457/ Mumbai /2012 Dated 01.03.2013 - A.Y. 2007-08 dated 01.03.2013 ii) Capgemini, Mumbai, ITAT ITA No. 786/ Mumbai / 2011 Dated 28.01.2013 A.Y. 2007-08 (2.10.9.1.2.) As regards Abnormal Margins Issue it was argued by the assessee that comparables having 'abnormally' high margins should not be selected. In support of this the taxpayer has referred to certain judicial decision. The above objection of the taxpayer was not accepted by the TPO, stating : " In several decisions the ITATs have accepted so called high margin comparables. For instance, the ITAT, Bangalore in the case of Sap Labs(2010-TII- 44-ITAT-Bang-TP), ITAT, Hyderabad in the case of Deloitte Consulting Pvt. Ltd. confirmed selection of high mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imply because two loss making cases have been excluded from the list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should also be excluded. Rule 10B(l)(e)(ii) clearly refers to 'a comparable uncontrolled transaction or a number of such transactions'. It not only talks of one transaction which is comparable and uncontrolled, but also contemplates a number of such transactions. By using such comparable transactions in plural, it has been made clear that if there are a number of such transactions under consideration, then their average should be adopted as a benchmark. It is obvious that the very rationale of having average in case of more than one transactions is to iron out the effect of extreme cases and finding the profit margin as a representative of the whole lot….. the cases of FI and ME have been held by us to be rightly excluded by the TPO because of their having different product profile and also not satisfying the requirement of Rule 10B read with Rule 10A as uncontrolled transactions. These are the reasons in support of their exclusion from the list of comparable cases and not because there was high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erage, solid waste management, urban infrastructure, Agricultural and Horticultural infrastructure, industrial Infrastructure, renewable energy, etc. for the year under review. According to the TPO, however, this company is engaged in various engineering and project consultancy services which are in the nature of technical services and therefore comparable to taxpayer in view of his General Discussion. (2.10.10.) Regarding Working Capital Adjustment: Assessee sought working capital adjustment to the margins of the comparables as well as in its own case. However, as per TPO, assessee has not demonstrated that there is a difference in the levels of working capital employed by it vis-a-vis the comparables. As per TPO, claim of working capital adjustment is not a matter of right; and as in the case of risk adjustment, it must be based on some data. The TPO referred to OECD guidelines which mention that no adjustment can be allowed in the absence of reliable data. The TPO referred to Paragraph 1.33 of the OECD guidelines, 2010 , in which it is stated : "[.....] To be comparable means that none of the differences (if any) between the situations being compared could materially affe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's result to reflect the tested party's levels of working capital. Alternative calculations are to adjust the tested party's results to reflect the comparables levels of working capital or to adjust both the tested party and the comparables results to reflect "zero" working capital." The TPO also referred to these observations ; Extracted from pages 57-58 of CTPA/CFA(2006)31: " • An issue in making Working Capital Adjustments is what point in time are the Receivables, Inventory and Payables compared between the tested party and the comparables. The example compares their levels on the last day of the financial year. This may not, however, be appropriate if this timing does not give a representative level of working capital over the year. • In the long run Receivables + Inventory - Payables should approach zero for a comparable. If proposed Working Capital Adjustments are significant, consideration may need to be given to whether the proposed comparable is an appropriate one. • A major issue in making Working Capital Adjustments is the question of which interest rate to use. The rate to be used is determined by the tested party. In most cases a borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowing requirement of such payers shoots up. When working capital remains tied up in receivables or inventory for longer than the average period, the company will have to borrow additional capital to meet daily expenses. Given the current scenario of rising interest rates, higher borrowings will increase interest outgo thereby putting pressure on net margins. As has been brought out, the issue of working capital will be relevant when there is a situation of inventory remaining tied up or receivables being held up. Frankly speaking these situations may not be so relevant to the service industry. The assessee, as also the comparables used, shall launch into a project only when they have been awarded a contract. It is not as if these parties have manufactured goods that await buyers. This being the case, there is a serious question on the very need for a working capital adjustment in the service industry. A working capital adjustment will be required only when the varying levels of the working capital deployed is actually making a difference to the margins earned by the assessee and the comparables. This is actually at the heart of every comparability adjustment. The assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the absence of which risk adjustment cannot be considered for enhancing comparability. Thus claim of the assessee is not acceptable." According to TPO, Assessee may object on the computation margin of this comparable company. In this regard TPO mentioned that margin has been computed in accordance with the principles governing the treatment of an item as operating and non-operating has been followed which was issued in CBDT notification SO 2810(E) dt. 19.9.2013, extract of the same is produced below: - (QUOTE) (j) "operating expense" means the costs incurred in the previous year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortization expenses relating to the assets used by the assessee, but not including the following, namely. (i) interest expense; (ii) provision for unascertained liabilities; (iii) pre-operating expenses; (iv) loss arising on account of foreign currency fluctuations; (v) extraordinary expenses; (vi) loss on transfer of assets or investments; (vii) expense on account of income tax; and (viii) other expenses not relating to normal operations of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lution Panel ("DRP" for short) against this draft Assessment Order. The DRP issued directions vide Order dated 25.09.2014 U/s 144C(5) of I.T. Act. Relevant portion of the Order of the DRP is as under: "2. Business activity of the taxpayer company: The taxpayer, Haldor Topsoe India Pvt. Ltd. is an engineering and consultancy service provider to its AE, Haldor Topsoe International A/S, Denmark. The taxpayer claims to provide engineering and technical assistance services to its parent company for their global projects (including projects in India) and thereby serves to augment the total strength of the Topsoe Group. The international transactions entered into are tabulated below:- Sr. No. Nature of transaction Arm's length price as per taxpayer (i) Engineering and Technical Assitance Service rendered Rs.25,00,55,515 (") Purchase.pf fixed assets ₹ 11,87,625 (iii) Reimbursement of expenses (Received ₹ 81,0000 (iv) Reimbursement expenses (paid) ₹ 13,31,078 3. The taxpayer furnished the TP Study and selected TNMM as the most appropriate method to benchmark its international transaction namely engineering and technical assistance service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confirming the deduction at 90%, which was so claimed by the Company inadvertently. 5. From the above grounds of objections relating to transfer pricing following issues emerge which requires consideration of the DRP for issue of direction under section 144C of the Act. Issue I Whether AO/TPO's action by applying various filters, is right in rejecting few of taxpayer's comparables and including new comparables without going into the functionally aspect. Issue II Whether AO/TPO is right in denying any adjustment on account of working capital, risk etc. while working out the average margins of the comparables. Issue III Whether AO/TPO is right in denying any adjustment on account of risk while working out the average margins of the comparables. Each of the issue is discussed hereinafter. 6. Issue I Whether AO/TPO's action by applying various filters, is right in rejecting few of taxpayer's comparables and including new comparables. 6.1 With regard to the above issue the taxpayer's has made the detailed submission contended that TPO was wrong in using following filters to reject the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP has no hesitation in upholding this turnover filter used by the TPO instead of filter of ₹ 1 crore used by the taxpayer. Rejecting companies having RPT of 25% and more For the purpose of comparability analysis, the international transaction should be compared with uncontrolled transaction. Therefore, the comparables companies having more than 25% related party transactions could not be treated as operating in uncontrolled environment and RPT could have substantial impact on margins of such companies. The taxpayer has argued that there is no rational basis for applying the threshold limit of 25% of sales. The AR has referred to the number of ITAT decision in this regard. This panel has carefully considered the above objections of the taxpayer, but are not inclined to interfere in the TPO's action in this regard. Cases having some RPT can be taken as comparable as they do not materially affect the price/margins. This view has been upheld by various ITAT's including ITAT, Delhi. In the case of Sony India Ltd. ITAT, Delhi did not lay down any threshold limit for applying RPT filter. This was clarified by ITAT, Delhi in their subsequent decision in the case of Glob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e required to be carried out in order to bring the data at par with that of the taxpayer: (i) Apportion the data from preceding or subsequent period so as to make data equivalent to the financial year available for comparison with the international transaction. (ii) While apportioning such data, adequate care needs to be taken so that the Profit Level Indicators are computed comparably. Further, for the determination of profit level indicators, certain entries having bearing on the cost and income are- interest, provisions, losses/ gains on account of foreign exchange, etc, which normally as per the business practice are accounted for at the end of the accounting year. Under both the situations, whether the data pertaining to the period prior to the accounting year or subsequent to the accounting year are integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial year data is concerned. Since, there is no requirement as per company law or as per accounting standards that the da'ta pertaining to a particular quarter needs to be closely compartmentalized by providing for various pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of period other than the financial year, for the purpose of determination of ALP. Not rejecting the companies having high turnover filter/super profit The taxpayer has objected to inclusion of high turnover/high margin companies in the set of comparables. We have carefully considered the arguments of the taxpayer. For the purpose of transfer pricing analysis, the comparables are selected which has similar functional profile. The profit margin of any company is not an indicator of its functional profile. Unless, the taxpayer is able to point out any functional differences, there is no reason to exclude a high profit margin company from the set of comparables. Further, high turnover is no criteria to determine the functional comparability. Bigger size may result into higher revenue and not necessarily higher margins. In this highly competitive environment, customer is very demanding and refuses to pay higher rates if he can obtain similar services from other smaller vendors having no brand and small turnover. What matters most in the service sector is the functional similarity, nature of services rendered, and not the brand or size of the company. In the case of Symante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed "comparable" merely appear to be very different from the results observed in other proposed "comparables". 3.64 An 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 a long period of time. This does not mean however that loss- making transactions can never be comparable. In general, all *relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of loss-making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result. 3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable Circumstances in which loss-making transactions/enterprises should be excluded from the list of comparables include ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses are also required to be excluded. This would mean introducing the concept of inter-quartile range which is not provided under the Indian law. Without prejudice to above, in the case of SAPLabs India Ltd [2010-TII-44- ITAT-BANG-TP], the Hon'ble ITAT has held that if cases of abnormal margin on the high side are to be removed then those on the lower side (having margin lower than the taxpayer) also should be removed. The taxpayer has relied on the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. to derive support on its claim that since their turnover is ₹ 25 crores, therefore, the comparables which are having high turnover viz. EIL, should not be considered as comparable. The decision of Hon'ble Delhi High Court in the case of Agnity India Technologies P, Ltd. has been based on the decision of Delhi Bench of the ITAT in the same case in ITA No. 3856/Del/2010 wherein on page 5, para 3.3 of the order, the AR of the taxpayer had submitted a table differentiating the risk profile, nature of services, ownership of branded/ proprietary product, situs of services rendered, expenditure on advertising/ sales promotion and brand b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when more than one price is determined then the arithmetic-a/ mean of such prices shah' be the arm's length price. Therefore, when there is a robust set of severa/ comparables, such set: obviously contains comparables having low margin, norma/ margin and a/so high margin cases. The arithmetica/ mean of such prices takes care of a// kinds of cases including loss or high profit making, low turnover, high turnover, low end-high or end activity, etc. Thus, removing a comparable from such a set simply on the ground of high profit making would neither be as per the Act and nor would it result in a representative set. Without prejudice to the above, if high profit making comparables are to be removed then consequently loss or low profit making companies are also required to be excluded. This view has been upheld by the ITAT, Bangalore in the case of Sap Labs (supra). This would, however, mean the implied application of inter-quartile range concept which is not permissible under the Act, The Act mandates use of arithmetical mean. In this connection reference may. be made to ITAT, Mumbai's decision in the case of Dieageo India Private Limited (2011-TII-94-ITAT-MUM-TP). Similarl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er's margin is not being compared with the margins of these "high-margin'' comparables alone These comparables are only which contains even low margin cases. The margin of the taxpayer is being finally compared with the average margin of the comparables finally selected in this order. Hence, from the above discussions, it is more the amply clear that high turnover and profitability in a service industry has no correlation at all, therefore the taxpayer's reliance on Agnity Technologies (supra) and thereby arguing that the high turnover comparables should be removed does not cut much ice, Ergo, no comparable can be rejected merely on the basis of margins and turnover for the purpose of comparability analysis and Panel declines to interfere with the stand taken by the TPO in this regard. Rejecting companies where export revenues is less than 75% of total income The taxpayer is providing engineering and technical services, therefore in order to select similar comparable which are in the engineering and technical services, TPO has selected this filter. As per Rule 10B(2), it is important to judge any international transaction keeping in mind the "conditions prevailing in the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring Construction Ltd. It is seen that this company is engaged in installation, construction and commissioning of projects as against the taxpayer's business of providing engineering and consulting services, therefore this company is functionally different from that of the taxpayer. Hence, Panel feels that the said company has rightly been excluded for the purpose of comparability analysis. 6.4 As regards taxpayer's objection to the inclusion of 2 companies namely EIL and Mahindra Consultancy Engineers Ltd. is concerned, it is seen that every company tries to put its best face both in its website as well as in annual report. Any person can pickup certain keywords from the website and annual report and may argue that it is providing a sophisticated service, has certain patents, has specialized in certain areas, has obtained excellence in certain areas. However, what needs to be seen whether that is the substantial activity of that company or it is just an area which company wants to develop and do better work. Further, under TNMM1 it is not possible to find companies providing exactly similar services as that of taxpayer because there will not be an independent company in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancials and TPO then is directed to take a call accordingly about the inclusion/exclusion of this company as a comparable. Engineers India The taxpayer primarily wants this comparable to be excluded on account of • RPT more than 25% • Functionally different • Predominantly rendering service to government companies This Panel has gone through the TPO's comments on the above grounds and also during the proceedings the taxpayer was requested to bring the data relating to RPT but inspite of the opportunity the data relating to RPT was not made available showing that it is more than 25%. As regards the arguments relating to catering to government sector/PSU, this Panel is of the view that in today's economic world the government companies/PSU s work as per the market forces and EIL has no advantage on this score and further as mentioned above that in a service industry there is no direct co relation between profitability and high turnover, accordingly, this Panel holds that EIL is a valid comparable. Mahindra Consulting Engineers Ltd. With regard to the inclusion of this company as a comparable, the taxpayer has made similar objections as were made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that the taxpayer has not demonstrated that there is a difference in the levels of working capital employed by it vis-3-vis the comparables which affect prices and consequently profits. With regard to this objection, as discussed above that holding of inventories, trade debtor/ creditors, trade receivable/payable has always an interest cost. Therefore there is definitely a connection in the level of working capital and the price at which one is willing to offer its services/goods. Hence, this ground of rejecting taxpayer's claim of working capital adjustment by the TPO is not tenable. 7.2.3 TPO has also referred to OECD guidelines which state that only reasonably accurate adjustments can be made. In. this respect, TPO has raised the issue of unreliable data and has pointed out that monthly data of comparables as well as segmental data is not available for making reasonably accurate working capital adjustment. Monthly data in respect of comparables would not be available. This DRP is of the view, that the average of opening and closing balance of the inventories and of trade receivable/payable, trade debtors/creditors, for the relevant year may be adopted which may broa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the average margins of the comparables. 8.2 Having gone through the taxpayer's submission in this regard and having considered the facts and evidences on records and case laws relied upon both by the TPO and taxpayer in this regard, this DRP agrees that for the purpose of meaningful comparison, Transfer Pricing provisions do prescribe that the "reasonable and accurate adjustments" be made only if they enhance comparability. But at the same time such data must be reliable and robust and there should be no scope for mechanical adjustments. As regards adjustment sought, it is seen that no claim for working capital has been made before the TPO and therefore no such claim can be entertained now. With regard to the risk adjustment, TPO has discussed in detail in his order as to why this adjustment cannot be carried out. The Panel has carefully considered the facts of the case and the submissions of the taxpayer. As per Rule 10B (2) and 10B (3) of Income Tax Rules, 1962, Indian transfer pricing provisions prescribe only for "reasonable accurate adjustment" and further adjustment to the margins of comparables can be made only if they enhance comparability. But at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cularly when the same has not been quantified; (b) Marubeni India Private Ltd (2011-TII-36-ITAT-Del-TP) in which it was held that as the taxpayer failed to bring any evidence on record to show that there was any difference in risk profiles of comparable companies and since the taxpayer failed to file the details exhibiting risk borne by comparables, no risk adjustment can be given, even on ad hoc basis. (c) ADP Private Limited (2011-TII-44-ITAT-Hyd-TP) wherein the ITAT held that there is no thumb rule for allowance of risk adjustment (d) Symantec Software Solutions Pvt. Ltd. (2011-TII-60-ITATMum-TP): The ITAT held that; (i) Until and unless it is shown that the difference in function and risk results in deflation or inflation of financial results of the comparables, it is not a general rule to grant it as a standard adjustment. (i) The taxpayer could not show how such difference in risk and functions affected the results of the comparables. (e) ST Micro Electronics (2011-TII-63-ITAT-Del-TP): The taxpayers claim that it was a risk free captive sen/ice provider and hence cannot be compared with comparables who were full entrepreneurs was not accepted by the ITAT. (f) Exxon Mob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Referring to the account of printing and stationary for April 2010 (i.e. the subsequent period) it is brought out that the provision was reversed on 9.4.2010 and only net amount remained to be claimed in the financial year 2010-11. It is therefore, requested to delete the proposed addition. 10.4 The Panel has examined the matter. From the submissions of the taxpayer it is evident that provision of ₹ 75,000/- made on 31.03.2010 is with reference to the bills of SS Stationers and Canon India P. Limited. As against the total of such bills at ₹ 78,762/-, the taxpayer made a provision of ₹ 75,000/- on estimate basis. Thus, it cannot be said the provision so made of ₹ 75,000/- during FY 2009-10 was excessive or unsupported by the corresponding claims. The AO has disallowed the claim only for the reason that it was reversed on 9.4.2010 without realizing that by debiting total sum of ₹ 78,762/- corresponding to these invoices and simultaneously crediting ₹ 75,000/- on account of reversal of the said provision, the taxpayer has claimed the expenditure on this account as under: (i) During FY 2009-10 ₹ 75,000/- (ii) During FY 2010-11 ₹ 3,762 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The allegation of the AO has been that the taxpayer has claimed deduction u/s 10A of ₹ 2,65,60,262/- but while doing so interest of ₹ 29,74,264/- was added thereby claiming excess deduction. The Panel has perused the taxpayer's letter dated 31.1:.2014 submitted to the AO where reconciliation of taxable income between STPI and others has been made (PB 148-149). A perusal of the reconciliation shows that interest on bank deposits of ₹ 29,74,264/- has been credited under the column for 'others' and the no income from bank deposit is taken to the STPI unit. Accordingly, the Panel observes that the taxpayer itself has excluded the said interest from bank deposits for computing admissible deduction u/s 10A of the Act. In this scenario, the Panel is of the view that there was no valid reason with the AO to hold otherwise. It appears that the AO has not duly appreciated to the contention of the taxpayer and passed his verdict unilaterally. The Panel therefore, directs the AO to make computation of total income separately for STPI unit and 'others' wherein interest from bank deposits should be taken under the column 'others'. In this process, the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t has been made by the taxpayer to any related person as specified u/s 40A(2)(b). Moreover, the observation of the AO that no margin has been charged on the said payment from the parent company is also irrelevant. This issue relates to calculation of margin which has already been dealt with in Transfer Pricing order by the TPO. 12.4 The Panel has examined the matter. On perusal of the details of office rent expenses (PB 150) it is seen that the taxpayer has taken office premises of STPI from M/s BHL Forex and Finlease Limited whereas other area has been taken from Ms Naseema Lone, Wasim Ahmed Bhatt, Vinay Nagrath and Neera Vinay Nagrath. None of the premises have been taken on rent from the related party specified u/s 40A(2)(b). It is further seen that total rent paid for STPI unit is ₹ 4,20,97,547/- whereas for the other area it is ₹ 1,60,09,554/-. Thus, the AO has apparently considered the rent for 'other area' and computed the disallowance u/s 40A(2)(b) @15% of the said sum of ₹ 1,60,09,554/-. Prima-facie when rent has not been paid to a related party, the Panel fails to understand as to how such disallowance can be proposed by the AO u/s 40A(2)(b) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned above it is clear that the taxpayer has claimed deduction to the extent of 90% of admissible deduction u/s 10A in the computation of total income. No action has been taken by the taxpayer to make any amendment to the total income by filing a revised computation of income within the time permitted u/s 139(4) of the Act. Even no claim was made before the AO during the course of assessment proceedings. The taxpayer has made the claim that it is entitled for 100% of deduction u/s 10A for the first time before this Panel. Needless to reiterate that the said claim has been filed beyond the time to file revised return of income u/s 139(4), therefore, is to be considered as the belated claim Supreme Court of India in the case of Goetze (India) Ltd, 157 Taxmann 1 was seized of a similar issue. In that case after the return was filed, the taxpayer sought to claim a deduction by way of a letter before the AO. The said claim was beyond the time permitted u/s 139(4) of the Act. The deduction was disallowed by the AO on the ground that there was no provision under the Act to make an amendment in the return of income by making application at the assessment stage. The CIT(A) allowed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicable. 14.4.3 Considering the facts and circumstances of the case in totality, the claim of the taxpayer cannot be accepted by the Panel. 14.5 The ground of objection is disposed off accordingly. 15. The taxpayer has cited in its submission various judicial pronouncements which have been considered by this Panel. These are distinguishable from the factual matrix in the case of the taxpayer. Accordingly, a detailed description of such analysis is not being mentioned in this order. (4) The AO passed aforesaid Assessment Order dated 04.12.2014 making addition of ₹ 3,20,93,274 on account of Transfer Pricing Adjustments. Relevant portion of the Assessment Order is as under: " Assessee filed return of income declaring a income of ₹ 43,58,900/- on 30.09.2009. The case was selected for scrutiny and notice under section 143(2) was issued on 30.08.2010. Again notice u/s 143(2) along with questionnaire under section 142(1) was issued on 07.08.2012. In response to notices, Sh. Yogesh Jain, C.A./Authorized Representative appeared from time to time and filed the requisite details which were placed on record and the case was discussed. Assessee is engaged in the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and hot its profitability was affected. Profitability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. In my view assessee cannot be compared to a risk free security. Even other methodology, whether adhoc adjustment as in case of Sony India, CAPM or Sharpe Ratio ( which is a measure of excess return on risk undertaken by an entity investing in a particular asset), as applied y Hyderabad ITAT in the case of ADP Private Ltd. are based on return of capital which is not the PLI adopted by the assessee and the TPO. All this requires robust and reliable data, both for the assessee and the comparable in the absence of which risk adjustment cannot be considered for enhancing comparability. Thus claim of the assessee is not acceptable. 7. Assessee may object on the computation margin of this comparable company. In this regard it is to mention here that margin has been computed in accordance with the principles governing the treatment of an item as operating and non-operating has been followed which was issued in CBDT notification SO 2810(E) dated. 19.09.2013, extract of the same is produced below:- (QUOTE) (j) "operating exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3,767,776 Arm's length price at a Margin of 26.33% 282,685,831 Price Received 250,055,515 105% of International Transaction 262,558,290 Proposed Adjustment u/s92CA 32,630,317 Thus the above different of ₹ 3,26,30,317/- is treated as transfer pricing adjustment for the FY 2009-10. No adverse inference is drawn in respect of the other international transactions undertaken by the assessee during the FY 2009-10. The assessee was afforded reasonable opportunity of being heard. Therefore, an addition of ₹ 3,26,30,317/- was made to the income of the assessee being difference between the Arm's Length Price. Draft Order u/s. 143(3) rws 144(C) of the I.T. Act, 1%1 was passed on 31.01.2014. Penalty proceedings u/s 271(l)(c) of the IT Act, were also initiated on this point for furnishing inaccurate particulars of income. In response, to the Draft Order the assessee filed an appeal before the DRP-I, New Delhi against the draft assessment order passed by the AO. In response to which the Ld. DRPI issued directions on 25.09.2014 u/s 144C (5) for AY 2010-11 with some specific directions. However, till date no order has been passed by the TPO. Since, the final assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O 10 Copy of audited accounts for the year ended 31.03.2010 11 Copy of report u/s 10A in Form 56F dated 25.09.2010 12 Copy of Computation of income for FY 2009-10 (AY 2010-11) 13 Copy of Order dated 02.05.2017 passed by Hon'ble ITAT, New Delhi for AY 2009-10 in the case of assessee 14 Copy of Relevant extract of letter L/161 dated 28.08.2017 filed with TPO for giving appeal effect to ITAT order for AY 2009-10 in the case of assessee 15 Copy of Appeal effect order u/s"254 dated 30.01.2018 passed by TPO for AY 2009-10 in the case of assessee 16 Copy of Relevant extract of Annual report of Mahindra Consulting Engineers Ltd. for FY 2009-10 and profile of the Company downloaded from the website 17 Copy of Relevant extract of Annual report of Engineers India Ltd. for FY 2009-10 18 Copy of Printout of the profile from the website of Petron Engineering Construction Ltd. 19 Copy of Rectification application dated 17.07.2018 filed with TPO 20 Copy of Rampgreen Solutions Pvt. Ltd. v C1T [2015] 60 taxmann.com 355 (Delhi High Court) 21 Copy of Thyssenkrupp Industries India (P.) Ltd. V. Addl. CIT. [2013] 33 taxmann.com 107 (Mumbai - Trib.) 22 Copy of Bechtel India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may be noted that this is 2nd year of transfer pricing assessment, In the preceding year i.e., AY 2009-10. an addition to income was made by ld. TPO / AO. However, after the Hon'ble ITAT order , the same got reduced to NIL. Ground 1(a) The learned DCIT (after incorporating Ld. DRP's order! has erred on facts and in law in making addition of ₹ 3.20.93.274 on account of adjustment in value of international transaction, on account of following: (a) Selecting 2 new comparable companies Brief facts The Ld. TPO has selected following 2 and added the same to the list of final comparable companies : • M/s Engineers India Ltd. (Margin - 67.77%) • M/s Mahindra Consulting Engineers Ltd. (Margin - 23.50%) The detailed factual arguments were submitted to the Hon'ble DRP (refer page 49 to 55 of PB). Our submissions regarding the comparable companies are as follows: Regarding Engineers India Ltd. ["EIL"]: Observations of Ld. TPO / Hon'ble DRP The Ld. TPO has included this company in the final list of comparables and discussed about it at para 5 (7internal page 11 to 13 of the order) (refer page 11 to 13 of the PB). The Ld. DRP has discussed this issue at page 16 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age 43 & 44 of the compilation of cases) ❖ AT & T Communication Services India (P.) Ltd. v. ACIT [2018] 91 taxmann.com 58 (Delhi - Trib.) (para 30 at page 56 & 57 of the compilation of cases) ❖ Honda Trading Corp. (India) (P.) Ltd. V. DCIT [2014] 44 taxmann.com 333 (Delhi -Trib.) • Further, Hon'ble ITAT Delhi in the case of Eli Lily & Co. (India) Ltd. v. ACIT [2018] 98 taxmann.com 380 (Delhi - Trib.) (para 16 at page 128 of the compilation of cases) following Thyssenkrupp (supra) has discussed the comparable - Engineers India Ltd. and has given the various reasons for rejection of EIL as a comparable company. • Second Ground - Scale & Size of the company : The total turnover of EIL was 1984.10 crores, as against the appellant turnover of 25 crores . Thus EIL's turnover is 80 times the turnover of appellant company. Even if turnover of Consulting and Engineering segment is considered, the same is 1055.33 crores, i.e. appx 42 times the turnover of appellant company (refer page 202 of the PB). The appellant did not own any intangibles, has not incurred any expenditure ofn R& D etc. • In support of the proposition that company with very high turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submit that only segmental turnover and profit of the EIL is available in the audited accounts. However, no segmental break up of expenses are available in the audited accounts and further there is some unallocable expenditure for which no justification was provided by Ld. TPO while calculating the margins (refer page 216 of the PB). It is also submitted that the audited accounts do not contain the segmental profit & loss account and balance sheet. Therefore, it is not possible to compute the Working capital adjustment in case of EIL. It may also be noted that the Ld. TPO, while giving effect to the Hon'ble DRP's order has made the wrong calculation of WCA. He has computed the WCA adjustment using the segmental profits but the figures of debtors, creditors and inventory were taken from the consolidated balance sheet (refer page 89 and 194 of the PB). Since segmental accounts are not available, therefore, EIL cannot be taken as a suitable comparable company. In support of this proposition, reliance is placed on the following cases: ❖ Blackrock Services India (P.) Ltd. v. ACIT [2018] 93 taxmann.com 251 (Delhi -Trib.) (refer para 28 at page 74 of compilation of cases) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable company. In support of the above proposition, reliance is placed on Hon'ble Delhi High Court judgement in the case of Rampgreen Solutions Pvt. Ltd. v CIT. [2015] 60 taxmann.com 355 (at para 38 - refer page 16 of Compilation of cases) on account of different business model, namely, more of outsourcing than in-house services. • Without prejudice to above, it is submitted that Mahindra has been specifically excluded by the Hon'ble Delhi tribunal as the comparable company in view of highly technical capabilities of executing infrastructure development projects in the following cases: • Rolls-Royce India (P.) Ltd. v. DCIT [2016] 69 taxmann.com 426 (Delhi - Trib.) • Alcatel-Lucent India Ltd. v. DCIT [2017] 88 taxmann.com 157 (Delhi - Trib.) Ground 1(b) The learned DCIT (after incorporating Ld. DRP's order) has erred on facts and in law in making addition of ₹ 3,20,93,274 on account of adjustment in value of international transaction on account of following: (b) Rejecting 4 comparable companies selected by the assessee Brief facts The Ld. TPO of rejecting following comparable companies selected by the appellant: • Central Mine Planning & Desig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Research & development risk, Credit risk, Manpower risk, Technological obsolescence risk, etc. • Accordingly, an adjustment for difference in risk profile (i.e. captive service provider vs. entrepreneur) is called for (refer page 101 to 102 of the PB). • The Appellant claimed risk adjustment of 5.25%. The adjustment on account of a difference in risk profile was computed by subtracting the risk-free bank rate from the prime lending rate. During the previous year relevant to assessment year 2010-11, such difference worked out to appx. 5.25% (i.e. 11.75% less 6.50%) [refer page 102 of the PB], The appellant has submitted the brief note on the risk adjustment to the Ld. TPO (refer page 106 to 108 of the PB). TPO's observation The Ld. TPO has discussed this issue in para 6 (internal page 16 to 17) of its order dated 17.01.2014 (refer page 16 to 17 of the PB). DRP's Observation The Ld. DRP has discussed this matter in para 8 (internal page 19 to 21) of its order dated 29.09.2014 (refer page 74 to 76 of the PB). The Hon'ble DRP has held that mechanical adjustment cannot be made to the margins of the comparables without knowing which risks were taken by the entity concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8] 90 taxmann.com 367 (Pune -Trib.) ❖ MSC Software Corporation India (P.) Ltd. v. ACIT [2017] 80 taxmann.com 55 (Pune - Trib.) • Further reliance is placed on the following latest judicial decisions of various Tribunals where an adhoc risk adjustment has been granted: ❖ Sony India (P.) Ltd. v. DCIT [2008] 114 ITD 448 (Delhi-Trib) : 20% adhoc adjustment of profit i.e., appx. 2% -3% (refer para 132 at page 113 of Compilation of cases) • KOB Medical Textiles (P.) Ltd. v. DCIT [2017] 81 taxmann.com 223 (Chennai -Trib.) : 2% adhoc adjustment (refer para 6 at page 81 of Compilation of cases) ❖ Finastra Software Solutions (India) (P.) Ltd. v. ACIT [2018] 93 taxmann.com 460 (Bangalore - Trib.) - 1 % adoc (refer para 40 at page 104 of Compilation of cases) • The Ld. TPO has relied on the following cases in support of non-allowance of risk adjustment: ❖ ADP Private Limited (200-TII-44-ITAT-HYD TP) ❖ Symantec Software Solutions Pvt. Ltd. (201 l-TII-60-ITAT-MUM TP) ❖ ST Micro Electronics (201 l-TII-60-ITAT-DEL TP) ❖ Vedaris Technology (2010-TII-10-ITAT-DEL TP) • We would like to submit that all these judgeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny special economic zone, shall be - (i) hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter;" • The assessee raised an objection before the Hon'ble DRP-1 as follows "The learned Assessing Officer has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confirming the deduction at 90%, which was so claimed by the Company inadvertently." The Hon'ble DRP-1 has discussed this objection at para 14.4. lto 14.4.2 of its order dated 25.09.2014. The Hon'ble DRP has rejected the claim of the appellant in light of the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. 157 Taxmann 1 and stated that "... the tax payer has made the claim that is entitled for 100% deduction u/s 10A for the first time before this Panel.." and " ....th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completing the project of IOCL and other Public Sector Undertakings. In that sense of the matter, the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables." The Ld. Counsel for Assessee further submitted that this decision of Mumbai Bench of ITAT has been followed by Co-ordinate Benches of ITAT, Delhi in the cases of Bechtel India (P.) Ltd vs. DCIT [2016] 66 taxmann.com 6 (Delhi-Trib.), AT & T Communication Sevices India (P.) Ltd. vs. ACIT [2018] 91 taxmann.com 58 (Delhi-Trib.) and Honda Trading Corp. (India) (P.) Ltd. vs. DCIT [2014] 44 taxmann.com 333 (Delhi-Trib.). The Ld. Counsel also relied on the decision of Co-ordinate Benches of ITAT, Delhi in the case of Eli Lily & Co. (India) Ltd. vs. ACIT [2018] 98 taxmann.com 380 (Delhi-Trib.) giving the various reasons for rejection of EIL as a comparable company. Moreover, the Ld. Counsel for Assessee submitted that the scale and size of EIL was not comparable with the scale and size of the Assessee. He submitted that the total turnover of EIL was 1984.10 crores, as against the appellant turnover of 25 crores (i.e. EIL's turnover is 80 times ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Related Party Transactions, yet EIL had to compete with other private sector companies and entities to remain in business. Therefore, he contended that the fact that EIL had substantially high Related Party Transactions, was not relevant. Further, he submitted that merely because EIL had high profitability or because its scale and size was large; EIL cannot be rejected as a comparable. (7.2.1) However, the Ld. CIT(DR) failed to bring any distinguishable facts to our notice in respect of the Assessee in appeal before us, to make us consider any departure from view already taken by Co-ordinate Benches of ITAT, Delhi in respect of EIL as a comparable, in the aforesaid precedents, namely Bechtel India (P.) Ltd vs. DCIT (supra), AT & T Communication Sevices India (P.) Ltd. vs. ACIT (supra), Honda Trading Corp. (India) (P.) Ltd. vs. DCIT (supra), Eli Lily & Co. (India) Ltd. vs. ACIT (supra),Blackrock Services India (P.) Ltd. vs. ACIT (supra), and Messe Dusseldorf India (P.) ltd. vs. DCIT (supra). As no material differences on facts have been brought for our consideration by the Ld. CIT(DR), therefore, respectfully following the precedents in the cases of Bechtel India (P.) Ltd vs. DCIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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. (8) In ground 1(b) of appeal the Assessee objected to rejection of four comparables selected by the Assessee, namely Central Mine Planning & Design Institute Ltd., IOT Design & Engg. Ltd., Simon India Ltd. and Petron Engineering Construction Ltd. (8.1) At the time of hearing before us Ld. Counsel for the Assessee submitted that in respect of the first three of these four comparables, the appeal was not pressed. He informed that the appeal was being pressed only in respect of Petron Engineering Construction Ltd. He submitted that the disputed issue regarding selection of Petron Engineering Construction Ltd. as a comparable is covered in favour of the Assessee by order of Co-ordinate Bench of ITAT, Delhi in Assessee's own case for AY 2009-10. He referred to the following relevant portion of order dated 02.05.2017 of Co-ordinate Bench of ITAT, Delhi in Assessee's own case for AY 2009-10 in ITA No. 2133/Del/2014 regarding Petron Engineering Construction Ltd.: "…. We are of the considered opinion that there is no functional d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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