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TMI Blog2016 (9) TMI 1484X X X X Extracts X X X X X X X X Extracts X X X X ..... 4C(5), pursuant to directions of ld. DRP. 2. Brief facts of the case are that assessee company, incorporated on 18.3.2004, as subsidiary of WSP GR Cyprus Holding Ltd., Nicosia Cyprus, a global business provider, in the assessment year under consideration, was providing design engineering, management consultancy services across the built and nature environment worldwide. The company provided services to transform the built environment and restore the natural environment and its expertise ranged 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. 3. During the year under consideration the assessee had entered into following international transactions:- No. Nature of transaction Method Value of transaction 1 Purchase of software TNMM 1,83,125 2 Engineering consultancy services TNMM 8,49,15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following comparables for bench marking the international transactions: No Company Name OP/OC (%) 1 Ashok Leyland Project Services Ltd. 24.70% 2 Bengal SREI Infrastructure Devp. Ltd. 42.14% 3 Certification Engineers International Ltd. 78.45% 4 Global Procurement Consultants Ltd. 30.85% 5 HSCC (India) Ltd. 21.04% 6 Indus Technical Financial Consultants Ltd. 14.78% 7 Kitco Ltd. 27.48% 8 Mahindra Consulting Engineers Ltd. 30.92% 9 Mitcon Consultancy Engg. Services Ltd. 40.19% 10 Pallavan Transport Consultancy Services Ltd. 25.59% 11 TCE Consulting Engineers Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 105385530 85981307 191363837 Operating expenses Personnel expenses 50752252 64088120 114840372 Operating Admin expenses 56488436 9058951 65547387 Depreciation and amortization 4490454 3982100 8472554 Finance charges 31610 - 31610 Profit before prior period adjustment and tax (6380222) 8852137 2471914 OP/OC -5.71% 11.48% 1.31% 10. With reference to the aforementioned table, ld. TPO pointed out that assessee had not submitted basis of allocation of expenses. He further pointed out that nowhere in the audit report such segmental was mentioned. He, accordingly, rejected the contention of assessee in this regard. 11. After conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Accordingly, after giving effect to ld. DRP s directions, adjustment of ₹ 38754545/- was made by AO. 14. Being aggrieved, the assessee is in appeal before us against the final assessment order passed by AO and has taken following grounds of appeal: 1. On facts, circumstances of the case and in law, the Learned Deputy Commissioner of Income Tax, Circle -27(2) ( Ld. AO ) erred in completing the assessment under section 143(3) read with section 144C(4) of the Income-tax Act, 1961 ( the Act ) by making an adjustment of INR 38,754,545 under section 92CA(4) of the Act, on account of the arm's length price of the international transaction pertaining to provision of back end support in respect of engineering and designing services rendered by its AEs. 2. On facts and in law, the Learned Dispute Resolution Panel- 2, New Delhi. ( Hon'ble DRP ), Ld. AO and Deputy Commissioner of Income Tax, Transfer Pricing Officer - III(1)(1) ( Ld. TPO ) erred in disregarding the Appellant's use of multiple year/ prior years' data in contravention of the provision of section 92C of the Act read with Rule l0B and Rule 10D(4) of the Income Tax Rules, 1962 ( the Rules ) thereby ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee submitted that assessee is a back end support service provider and was providing architectural consultancy services to its AE. Ld. counsel pointed out that assessee was also engaged in provision of end to end structural engineering and consultancy services to third parties in India under direct contract and as a full-fledged entrepreneur engaged in negotiation of prices, conclusion of contracts, sub-contracting of work based on further negotiations where required, assuming project risk, capacity utilization risks etc. He pointed out that 47% of the revenue was derived from AE and 53% revenue was derived from independent third parties. As regards the service rendered to AE, ld. counsel pointed out that assessee operated as a limited risk service provider with respect to provision of back end support services wherein AEs were engaged in front ending design and engineering business with third parties. These constituted only 47% of the total revenue. 16. Ld. counsel pointed out that assessee had presented segmental P L A/c before TPO, which was rejected without assigning any basis and the only reason was that they were not audited. Ld. counsel pointed out that whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (B)-(A)*47% 67,001,169 Arm s length price at a margin of 18.10% =(B)+18.10%(B) 79,128,381 International Transaction of receipt on account of consultancy services (D) 85,981,307 Proposed adjustment u/s 92CA (G)=(D)-(E) No adjustment 19. Ld. counsel has filed additional evidence in the PB in support of its contention that segmental margin of the assessee is to be considered. Ld. counsel submitted certain documents before us, which, inter alia, includes details in relation to design and consultancy expenses which were solely incurred for independent third party business. Ld. counsel pointed out that for the purpose of executing such independent third party contracts, assessee in turn availed services of sub-contractors and consultants and incurred D C expenses which showed that 100% of such amount was sub-contracted to others. In the paper book assessee has submitted following documents: Back-up documentation such as back-to-back trail of contracts undertaken by the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f expenses to the percentage of revenue from the AE. Therefore, if certain expenses were not at all incurred with reference to earning of AE s revenue, then those expenses had to be excluded for correct computation of 47% of expenses attributable to AE. This exercise has not been carried out by ld. TPO because no such plea was taken before him. However, the entire data is available on record and, therefore, in order to arrive at correct computation the assessee s plea regarding sub-contracting expenses 100% attributable to non AE business has to be examined. The assessee has filed additional evidence in support of its contention and, therefore, it would be in the interest of justice that the additional evidence is admitted for arriving at proper computation of ALP. We, accordingly, admit the additional evidence and restore the matter back to the file of Ld. TPO to examine the assessee s plea in this regard. In case it is found that D E expenses were attributable 100% to independent third party transaction then the same has to be excluded for computing the operating cost of the assessee because operating cost pertaining to AE only has to be considered. 26. In the result assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gy segment, therefore, this comparable could not be said to be mainly in technical consultancy business and, hence, this was not functionally comparable to assessee. Moreover, during the year there was extraordinary event being merger of ALPSL with Ashok Leyland Wind Project Services Ltd. due to which there was clear possibility of differential advantage in respect of profitability of this comparable. We, therefore, direct for exclusion of this comparable from the list of comparables. Global Procurement Consultants Ltd. ( GPCL ): 32. Ld. counsel for the assessee pointed out that this company was promoted by the EXIM Bank of India and provides procurement related services and inter-allied activities for projects in India and abroad. It dealt in industries like power, hydro, transportation infrastructure etc. Further acted as the client s representative in taking on the total responsibility of procurement activities, by providing a comprehensive range of procurement related advisory services and inter allied activities for projects in India and abroad. Ld. counsel submitted that this comparable has government connection and, therefore, should be excluded. He pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue authorities in regard to this comparable. Kitco Limited: 35. Ld. counsel for the assessee pointed out that Kitco is held by Small Industries Development Bank of India (SIDBI) with 49% shares of the company and, thus, it is a government connection company and, therefore, in view of the decision of Hon ble High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. (ITA no. 2218/2013), it should be excluded. He further pointed out that the major service offered by Kitco were project consultancy, detailed engineering project execution, technical services, environmental engineering and HRD consultancy. Further, assessee was expanding its business activities by introducing more verticals like sea ports, urban planning and financial services etc. Further, Kitco was also engaged in infrastructure activities. He submitted that there was no segmental information available in the annual report. Ld. counsel relied on the order of the ITAT in the case of Bechtel India Pvt. Ltd. Vs. DCIT dated 21.12.2015 in ITA no. 1478/Del/2015, wherein after taking note of the fact that Kitco was a 100% government owned undertaking, rendering services primarily to Central/ State governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Emerson Process Management Power Water Solutions India Pvt. Ltd. Vs. ACIT, rendered in 6816/Del/2015, wherein this comparable was excluded. 40. We have considered the submissions of both the parties and have perused the record of the case. As far as reliance placed on the decision of Emerson Process Management Power Water Solutions India Pvt. Ltd. (supra) is concerned, we are of the opinion that the said decision is of little assistance to assessee as in that case assessee was engaged in providing application engineering, software development and related services for aviation control systems. However, in the present case assessee is primarily engaged in providing highly technical consultancy services and, therefore, this comparable was rightly selected by ld. TPO. Ld. counsel has referred to certain peculiar economic circumstances noticed in his argument but the effect on profitability of these circumstances has not been demonstrated and, therefore, merely because shares of assessee was acquired by same organization will not be of any significance. We, therefore, reject the assessee s contention on this count. Mitcon Consultancy Engineering Services Ltd.: 41. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctionally different as it was primarily providing commissioning services. We do not find much substance in this plea of assessee considering the functional profile of assessee, because this company was also providing highly technical services primarily for commissioning of project. 49. As far as ld. counsel s submission regarding turnover is concerned, the same cannot be accepted because that does not affect the profit margin derived by a company. We, therefore, confirm the order of ld. TPO as confirmed by ld. DRP. IBI Chematur (Engineering and consultancy) Ltd.: 50. Ld. TPO has observed that assessee objected to this comparable on the ground of non-comparable functions as the company provided a range of services-detailed engineering, intelligent 3D plant modeling, 2D conversion services, smart plant instrumentation, smart plant electrical, piping stress analysis, procurement assistance, process simulation, process equipment design, inspection services, project planning and management and erection supervision. He rejected the plea of assessee in view of his finding in general discussion, wherein after considering the assessee s functional profile, the companies which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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