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TMI Blog2017 (5) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... MBER For The Appellant : Shri G.N. Gupta, ITP, Shri H.P. Agarwal, FCA For The Respondent : Shri T.M. Shivakumar, CIT, Ld. DR Shri B. Ramanjeneyuiy, Sr. DR ORDER PER SUDHANSHU SRIVASTAVA, JM This appeal has been filed by the assessee against the order dated 31/01/2014 passed u/s 143(3) of the Income Tax Act, 1961 (the Act ) read with section 144C of the Act pursuant to the order of the Hon ble Dispute Resolution Panel-I, New Delhi vide order dated 20.12.2013 for assessment year 2009-10. 2. The following grounds have been preferred:- 1. The learned DC1T (after incorporating Ld. DRP s order) has erred on facts and in law in making addition of ₹ 1,06,67,470 on account of adjustment in value of international transaction, on account of following: a) Selecting 3 new comparable companies b) Rejecting 4 comparable companies selected by the assessee c) Rejecting adjustment in margin due to different risk profile of comparable companies 2. 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). 3. The appellant craves leave to add to or modify the ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different risk profile of comparable companies. 4.0 The Ld. AR submitted that three comparables included by the Ld. TPO were being challenged which were as under 4.0.1 M/s. Kirloskar Consultants Ltd. (Kirloskar) It was submitted that this comparable was added by the Ld. TPO to the list of comparable companies in view of his remarks appearing at internal pages 16 17 of his order, wherein the Ld. TPO has specifically stated that this company passed all the filters proposed by the TPO. The TPO's action was confirmed by Hon ble DRP in Para 7.4 of its order (internal page 12-13). It was submitted that the Ld. TPO has applied a filter (Internal page 11) rejecting companies whose employee cost is less than 25% of engineering and technical services revenue. This has been upheld by DRP (Internal Pages 5-6). Now, in the case of Kirloskar, the employee cost is ₹ 1,48,25,884/-whereas consultancy fees is ₹ 8,53,10,642/- . Thus the employee cost is only 17.3% of the consultancy fees as against the filter of 25% adopted by Ld. TPO himself. It was submitted that it is evident from the facts that TPO grossly erred in including the case of Kirloskar in the list of compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wable energy, climate change environmental management sectors besides training courses skill based training programmes and thus the sectors wherein Mitcon operates are totally different from the sectors in which the assessee operates. It was further submitted that the analysis to P L A/c would show that the segmental profits in the consultancy business is only 8.3% as against 37.35% taken by the Ld. TPO. 4.03 Mahindra Consulting Engineers Ltd. (Mahindra) It was submitted that this comparable has been included by the Ld. TPO in the list of comparable companies in view of the reasons recorded by him in his order (Internal page 17) and the Hon ble DRP has confirmed the action of the TPO vide Para 7.4 of his order (Internal page 12). It was submitted that the business of Mahindra is functionally different from the assessee company and, therefore, TPO should not have included Mahindra in the list of comparable companies. A reference to paper book page 13 would show that Mahindra is providing consultancy in SEZ, industrial park and township, water and waste water, project managements, special projects, public private partnership and environment, transportation infrastructure, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounting to ₹ 40.58 crores is not available. The figures are available in the Schedule 8 of the audited account of Chemtex. It was, submitted that the exclusion of the case of Chemtex from the list of comparable companies by the Ld. TPO is clearly erroneous and belies the facts. 4.1.2 Simon India Ltd. (Simon) It was submitted that the learned TPO excluded the case of Simon India Ltd. (Simon) by observing that The assessee contended that the TPO has incorrectly rejected the company on the ground that service income is less than 5 crores. The assessee argued that the gross receipts of the company are ₹ 142 crores towards supply and services. It relied on the fact that rendering of engineering services is the main business of the assessee therefore the income apportioned to this segment must be higher than 5 crores . The Ld. AR submitted that in coming to this conclusion, Ld. TPO rejected the following submissions of the assessee that It is submitted that this observation is factually incorrect. The gross receipts of the company are ₹ 142 crores which includes substantial income towards services, which is evident from the profit and loss account which states ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mahindra Consulting 22.24 6. TCE Consulting 22.45 7. UB Engineers Ltd. 7.25 TOTAL 93.01 AVERAGE 13.29% 4.1.5 It was submitted that since the actual margin in the case of the assessee is 12.99%, Ld. TPO was not justified in making any addition. 4.2.1 Arguing on the ground relating to adjustment for risk profile, the Ld. AR submitted that in the submissions dated 04.01.2013 before the Ld. TPO (PB page 49) and in submissions before the Hon ble DRP (PB pages 82-84), the assessee had submitted that it operates in a risk insulated environment since it operates on a cost - plus model and is compensated for all the costs borne by it. It was also submitted that the assessee being a 100% captive unit operates in risk free environment without incurring any marketing risk or any credit risk. It was also submitted that difference in risk profile of the assessee and the comparable companies are on account of the following factors: - a) Market risk b) Service liability risk c) Research development risk d) Credit risk e) Manpower ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the onus on the assessee in view of the celebrated maxim lex non legit impossibilia. 4.2.4 The Ld. AR further submitted that the reliance placed by Hon ble DRP on the OECD guidelines is clearly misplaced in view of the observations in Para 37 of Hon'ble ITAT Delhi Bench-H contained in their decision dated 02.11.2007 in Mentor Graphics (Noida) Pvt.Ltd. V. DCIT and that this issue is no longer resintegra in view of Para 17 of the decision dated 15.01.2013 of Hon'ble ITAT Bench-A Hyderabad in DCIT V. Hellosoft India Pvt. Ltd. where the facts are on all fours with the facts obtaining in the case of the assessee. Reliance was also placed on the following:- i) Para 17.2 of the decision dated 28.06.2013 of Hon'ble ITAT Bench-B Hyderabad in HSBC Electronic Data Processing India Ltd. V. Addl. CIT . ii) The observations of ITAT Bangalore Bench-B in Philips Software Centre (P) Ltd. V. ACIT. iii) Recent decision of Hon'ble ITAT Delhi Bench-I-2 in Avenue Asia Advisors (P) Ltd. 5. In response, the Ld. CIT DR placed heavy reliance on the order of the Ld. it TPO and the Hon ble DRP and vehemently argued that as far as the issue of applying the filters was concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables. The Hon ble DRP has upheld the application of the employee cost filter but the issue of error in calculation was not before the Hon ble DRP. In such a circumstance, we deem it appropriate to restore this comparable to the file of the learner TPO/AO for reconsideration and direct that this comparable be excluded if the employee cost falls below 25% as demonstrated to us by the Ld. authorised representative. We also direct that the assessee be afforded a proper opportunity of being heard on this issue. 6.1.2 Mitcon Consultancy Private Limited The Ld. authorised representative has argued at length and has submitted that an analysis of the profit and loss account of this company will show that the percentage of consultancy fees in the case of this company is only 58.48% which was much below the filter of 75% applied by the Ld. TPO. On perusal of the profit and loss account, this contention of the assessee appears correct. However, it is seen that this issue was not raised before the Hon ble DRP. In such a circumstance, we deem it fit to restore this comparable also to the file of the Ld. TPO/AO for re-examining the contention of the assessee regarding the error ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in terms of our directions contained in the preceding paragraphs. Thus, ground No. 1.1 (a) stands allowed for statistical purposes 6.2.0 As far as the assessee s objections to exclusion of the three comparables are concerned, the same are being adjudicated as under 6.2.1 Chemtex Gold Engineers (P) Ltd . The Ld. authorised representative has submitted that the contract revenue in case of this comparable was ₹ 40.58 crores which comprises of engineering services fee of ₹ 36.73 crores and contract revenue of ₹ 3.85 crores. It is the submission of the Ld. AR that the Ld. TPO might have taken the figure from the software Prowess where the detailed breakup of the sales figure of ₹ 40.58 crores was not available but the same was available in schedule 8 of the audited accounts of the comparable. It has been submitted that the service income of 5 crores filter was, therefore, wrongly applied. A perusal of page 65 of the paper book shows that the engineering service fees of Chemtex amounted to ₹ 367,304,215 during the year under consideration and thus it was above the 5 crore filter applied by the Ld. TPO. Thus, the observation of the Ld. TPO tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments, no risk adjustment can be allowed to the taxpayer. The Hon ble DRP has further observed that the assessee could not show with evidence as to whether each of the risk was actually undertaken by the comparables and, if so, how these risks affected each of them and whether such adjustment would improve the comparability. It has been further observed by the Hon ble DRP that mechanical adjustment could not be made to the margins of the comparables without knowing which risks were taken by the entity concerned and how the profitability was affected. 6.3.1 Different benches of the ITAT have taken a divergent view on this issue. The ITAT Mumbai Bench in the case of Symantec has held that no separate adjustment is required on account of risk and functional differences whereas ITAT Delhi Bench in the case of Sony India Private Limited versus DCIT reported in 114 ITD 448 has held that deduction on account of ownership of intangibles, risk factors can be allowed. In view of the matter, we are inclined to accept the view favourable to the assessee. 6.3.2 ITAT Delhi Bench in the case of Avenue Asia Advisors Private Limited versus DCIT in ITA No. 6638/DEL/2013 has held that in the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X
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