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TMI Blog2019 (5) TMI 1706X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12 [ 2019 (4) TMI 412 - ITAT DELHI] , we direct the TPO to examine if non-cenvat-able customs duty of import paid by the taxpayer is materially affecting the PLI of taxpayer company as per mandate of Rule 10B(3) then suitable adjustment be provided to the taxpayer. X X X X Extracts X X X X X X X X Extracts X X X X ..... he loss was not attributable to the international transactions undertaken by the Appellant with the AEs. 10. The TPO, AO and DRP have erred, in law and facts, by not providing for suitable adjustments for differences like underutilization of capacity, excessive customs duty to account for differences in the capacity utilisation and other adjustments for economic and commercial reasons by the Assessee vis-a-vis the com parables. By not doing so, neglecting the Indian transfer pricing regulations and the OECD guidelines on transfer pricing and judicial precedence. 11. The learned TPO and the learned AO have erred, in law and in facts, by not restricting the transfer pricing adjustment in respect of the import of raw materials transaction to the value of consumption of materials of the Assessee. Grounds common to both EDS and Manufacturing segments 12. The TPO, AO and DRP have erred, in law and in facts, by determining the arm's length margin / price using only FY 2009- 10 data which was not available to the Assessee at the time of complying with the transfer pricing documentation requirements. 13. The TPO, AO and DRP have erred, in not allowing the benefit under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejected all the comparables selected by the taxpayer and on the basis of fresh search chosen, 10 new comparables with average PLI at 28.20% and thereby made an adjustment of ₹ 62,57,762/-. 6. Ld. TPO has not given adjustment claimed by the taxpayer on account of capacity utilization and customs duty and order of the ld. TPO in this regard has been confirmed by the ld. DRP. Ld. TPO as well as AO has also not allowed restricting the transfer pricing adjustment in respect of import of raw material transaction to the value of consumption of materials by the taxpayer, which has been confirmed by the ld. DRP. 7. The taxpayer carried the matter before the ld. DRP by way of filing objections who has retained the final set of comparables chosen by the TPO by dismissing the objections raised by the taxpayer. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 & 2 9. Grounds No.1 & 2 are genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision rendered by the coordinate Bench of the Tribunal in case of Boeing International Corporation India Pvt. Ltd. vs. DCIT in ITA No.1127/Del/2015 dated 30.10.2018 and decision rendered by Hon'ble Bombay High Court in case of CIT vs. Thyseen Krupp Industries Pvt. Ltd. (2016) 385 ITR 612. On the other hand, ld. DR for the Revenue supported the retention of EIL by the ld. TPO and contended that there is no bar to select Government company as comparable unless its entire revenue is from the Government. 18. Perusal of the annual report of EIL shows that it is providing complete range of services ranging from conceptualization, planning, design, engineering and construction activities to meet with the specific requirement of its clients in the several fields - petroleum refining, petro-chemicals, pipelines, offshore oil & gas, onshore oil & gas, terminals & storages, mining & metallurgy; and infrastructure. EIL is also executing turnkey projects of Lump Sum Turn Key (LSTK) mode or on the recently introduced concept of Open Book Estimate. EIL is also having Government contracts in its hand pertaining to High-Density Polyethylene (HDPE)/ Linear Low-Density Polyethylene (LLDPE) Swi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decisions of the coordinate Bench of the Tribunal in (i) taxpayer's own case in ITA No.6783/Del/2015 for AY 2011-12 dated 26.03.2019; (ii) BG Exploration and Production India Ltd. vs. JCIT in ITA No.1170/Del/2015 dated 24.04.2017; (iii) Bechtel India P. Ltd. vs. DCIT in ITA No.1478/Del/2015 dated 21.12.2015; and (iv) ITO vs. Colt Technology Services India (P.) Ltd. - (2014) 146 ITD 46. 22. However, on the other hand, ld. DR for the Revenue contended that in engineering design services, R&D expenditure are inbuilt in every company and as such, it cannot be excluded on the basis of the fact that it has incurred significant R&D expenditure. Ld. DR also emphasized that there is no need for separate segmentation keeping in view the fact that the entire income is from engineering service charges to profit & loss account, available at page 371 of the paper book. 23. When we examine annual report under the head "Review of Performance" at page 361 of the paper book, it shows that IBI Chematur has progressed on use of Summary Plant Suite of Software. All engineers are trained about new software and the company has undertaken continuously upgrading technologies and also improving compete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company, wherein the Engineering Service charges of the company are shown at ₹ 18,88,21,452/-, out of the total revenue of the company of ₹ 29,74,92,912/-. Therefore, the service/revenue ratio of the company comes out to 63.47%, which is less than 75%, which is one of the filters adopted by the TPO himself. Moreover, no segmental information with regard to the different segments of the company is available in the financial statements. This company has been considered by the ITAT Delhi Bench in the case of Bechtel India (P.) Ltd. v. DCIT in ITA No.1478/Del/2015 dated 21.12.2015 and in the case of BG Exploration & Production India Ltd. v. JCIT in ITA Nos. 1170 & 1581/Del/2015 dated 24.04.2017 wherein it has been held to be not a good comparable. Taking into consideration all the above facts, we are of the view that this company is not a good comparable with that of the assessee company and, accordingly, we direct the AO to exclude this comparable." 28. Coordinate Bench of the Tribunal in case cited as BG Exploration and Production India Ltd. vs. JCIT, International Taxation, Dehradun for AY 2010-11 (supra) also ordered to exclude IBI Chematur in identical set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat this company is engaged in the business of high-end engineering services which is based and supported by the use of a specific technologies and huge research and development expenditure along with an R&D centre. In view of this, the functions performed by this comparable company are not comparable with the Assessee's functions. For this reason only, we direct the Ld. Transfer Pricing Officer/AO, rejecting this comparable, to exclude the same for the comparability analysis." 29. In view of what has been discussed above, we are of the considered view that IBI Chematur is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. MAHINDRA CONSULTING & ENGG. SERVICES LIMITED (MAHINDRA) 30. The taxpayer sought exclusion of Mahindra on grounds inter alia that in the absence of segmental information, it cannot be considered as a valid comparable; that Mahindra recognizes its revenue on percentage completion method which is not in the case of taxpayer; and relied upon the decisions rendered by the coordinate Benches of the Tribunal in taxpayer's own case for AY 2011-12 (supra), Alcatel Lucent India Ltd. vs. ITO in ITA Nos.2154 7 2209/Del/2014 dated 06.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, integrated, single roof services in transportation infrastructure sector and export packages for supply of locomotives, coaches, spare parts and modernization of workshops. Company is also intending to expand the rolling stock leasing business activities in domestic market. The company is exploring business opportunities in captive railway systems in India through equity participation with other stake holders, with a main focus to prove total transportation solution as against pure consultancy assignment). The company has secured new orders worth of ₹ 972.59 crores during the year 2009-10. So, functional profile of Rites Ltd. goes to prove that it is dissimilar to taxpayer being diversified services like providing single roof services in transportation infrastructure sector and export packages for supply of locomotives, coaches, spare parts and modernization of workshop. It is also getting into business of captive railway systems in India having a preferential treatment in business avenue being a Government company. 36. Similarly, Kitco Ltd. is also a 100% Government owned company. Profile of Kitco Ltd., available at the website of this company, shows that its technical s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the paper book, shows that it is into various other services apart from engineering services like providing services of designing, development of new product and Computer Aided Designing (CAD), but its segmental financials are not available. 41. Coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra) ordered to exclude TCE Consulting from final set of comparables on two grounds, viz., (i) it does not satisfy the upper turnover filter of ₹ 200 crores; and (ii) that brand name of the company has enabled this company to capture major Government contracts and other high end customers. 42. So far as question of excluding this company on ground of upper turnover filter is concerned, this filter has not been applied by the taxpayer as well as TPO during the year under assessment. However, we are of the considered view that it is not a valid comparable on account of functional dissimilarity and nonavailability of its segmental financials. Moreover, in 2009-10, TPO himself excluded TCE Consulting from final set of comparables on raising objections by the taxpayer and since then, taxpayer's business profile has not undergone any change. 43. Coordinate Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egmental information is required. 48. Comparability of Kirloskar has been examined by the coordinate Bench of the Tribunal vis-à-vis routine engineering design service provider and found to be not a suitable comparables in case cited as BG Exploration and Production India Ltd. for AY 2010-11 (supra) by returning following findings :- "This comparable is selected by the Ld. Transfer Pricing Officer which is engaged in the area of engineering consultancy, project management services and architectural consultancy. The comparable company specializes in conceptualizing, designing and executing architectural, civil, structural, electrical, mechanical fire and life safety, water supply, drainage, storm water management, networking, surveillance, telephone and building management systems required for any large integrated project. According to the Ld. Authorised Representative, this company is engaged in the high-end service provider segment and it was also stated that he does not have the segmental information pertaining to the segment in which the Assessee operates, and therefore, this cannot be accepted as a comparable. We have carefully considered the rival contention and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the coordinate Bench of the Tribunal in BG Exploration and Production India Ltd. for AY 2010-11 (supra) vis-à-vis routine engineering designs service provider and has found to be not a suitable comparable by returning following findings :- "This comparable selected by the Ld. Transfer Pricing Officer is engaged in the business of service in the area of energy manner and developing energy efficiency and energy projects with focus on reducing the energy cost and deriving of consequent environment benefiting the various sectors of economy in India and abroad. The comparable company adopts a multiproject approach when the individual customer defines the scope and structure of the services beginning with relatively simple projects, depending on the comfort level of the client, the scope and complexity of the service is expanded to multitier product package. The Ld. Authorised Representative objected to the inclusion of the above company as comparable for the simple reason that it did not have the financial available in the public domain. Neither the Ld. Transfer Pricing Officer nor the Ld. DRP has considered this aspect that when the financial of the comparable is not availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent, the same order cannot be relied upon and a company having income from products though rendering software engineering services, in the absence of segmental information cannot be a suitable comparable. So, the contention of the taxpayer to include Neilsoft Ltd. in the final set of comparables is not sustainable, hence we confirm the order passed by the TPO as well as DRP. VAMA INDUSTRIES LTD. (VAMA) 57. The taxpayer sought to include Vama in the final set of comparables being functionally similar on the ground that the taxpayer has considered software development and services segment for the purpose of comparability. However, TPO has rejected this comparable on the ground that it is engaged in providing information technology and computer service activities. 57.1 Perusal of the annual report of Vama particularly its financial highlights at page 8 shows that out of the total turnover of ₹ 903.17 lakhs, Vama has earned income from software development and ITES to the tune of ₹ 561.86 lakhs. The ld. AR for the assessee contended that in its TP analysis the taxpayer has considered software development and service segment for the purpose of comparability. However, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. The structure and organization of the group and more particularly the judicial relationship between different entities of same group are to be seen. The function that need to be identified while carrying comparison as per OECD guidelines include design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financial and management activities. It is also necessary to examine as to what is the principal function of the entities. The analysis of comparison should consider total assets employed and assets used to earn profit. The risk assumed by respective parties is a very important consideration. It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparable identified are not correct as appropriated adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered. However, it can always be sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for AY 2011-12 (supra) dealt with the issue in question by returning following findings :- "3.5.14 Now, coming to the methodology to be adopted for allowing the capacity adjustment in this case. The Ld. DRP has taken cognizance of the same but instead of allowing the adjustment on account of capacity utilization, it has directed to exclude depreciation and repairs of machinery from the comparables as well as the assessee. We are of the view that capacity adjustment is not limited to depreciation and repair of machinery. In a business entity, there are certain fixed overheads such as rent, administrative expenses etc., which have to be incurred irrespective of the percentage of capacity utilization. There are variable expenditures which are in direct proportion to the production i.e. the capacity utilized. The net margin of an entity will vary with that of another entity in case there is a difference in the capacity utilization. If there is higher capacity utilization, then the fixed overheads get spread over such higher capacity utilization with the result that the net margin of such entity will be much higher as compared to the another entity where the capacity utilization is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s paid by the assessee is materially affecting the PLI of the assessee company and if he finds that this payment of non-cenvat-able custom duty is materially affecting the transaction with that of the comparables then he will suitably make adjustment thereof." 67. The taxpayer has brought on record the impact of customs duty on profitability of the taxpayer company in tabulated form which is as under : (Rs. in lakhs) A.Y. Import Sales Import/Sales in Ratio 2010-11 1586.44 1302.01 121.85% 2011-12 5573.74 9882.41 56.40% 2012-13 8070 19954 40.44% 2013-14 10914 23257 46.93% 2014-15 7060.64 21916.36 32.22% 68. Following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra), we direct the TPO to examine if non-cenvat-able customs duty of import paid by the taxpayer is materially affecting the PLI of taxpayer company as per mandate of Rule 10B(3) then suitable adjustment be provided to the taxpayer. GROUND NO.11 69. TPO/DRP have not restricted transfer pricing adjustment in respect of import of raw material transaction to the value of consumption of material of the taxpayer, which is challenged by the taxpay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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