2017 (5) TMI 1648 - AT - Income Tax

Appeal allowed with directions for reconsideration by TPO/AO on comparables & risk adjustment. Penalty proceedings dismissed.

The appeal was allowed, with specific directions for reconsideration and re-examination by the Transfer Pricing Officer (TPO)/Assessing Officer (AO) on ... TPA - adjustment in value of international transaction - comparable selection - Held that:- The assessee is rendering services to industries operating in (1) Fertilizer, (2) Petro-Chemical, and (3) Refinery and Oil & Gas sector, thus companies functionally dissimilar to that of assessee need to be deselected from final list. Risk adjustment - Held that:- The risk taken by an independent entity and the captive service provider are different and since the remuneration of the captive service provider is not linked with the performance, it is not a significant risk and, therefore, a suitable adjustment should be allowed. Accordingly, we restore the matter to the file of the Ld. TPO/AO for examination of the issue and provide suitable adjustment towards risk in accordance to the law. The assessee is directed to extend cooperation to the Ld. TPO in quantification of risk adjustment. Accordingly, this ground stands allowed for statistical purposes. Issues Involved:1. Addition on account of adjustment in value of international transactions.2. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Addition on account of adjustment in value of international transactions:a) Selection of New Comparable Companies:The assessee contested the inclusion of three new comparables by the Transfer Pricing Officer (TPO): Kirloskar Consultants Ltd., Mitcon Consultancy Pvt. Ltd., and Mahindra Consulting Engineers Ltd. The assessee argued that these companies were functionally dissimilar and did not meet the filters applied by the TPO.- Kirloskar Consultants Ltd.: The TPO included this company despite its employee cost being only 17.3% of consultancy fees, below the 25% filter set by the TPO. The Tribunal restored this issue to the TPO/AO for reconsideration, directing that Kirloskar be excluded if the employee cost falls below 25%.- Mitcon Consultancy Pvt. Ltd.: The assessee argued that Mitcon's consultancy fees were only 58.48% of its operating income, below the 75% filter applied by the TPO. This issue was also restored to the TPO/AO for re-examination.- Mahindra Consulting Engineers Ltd.: The Tribunal found that Mahindra was functionally similar to the assessee but noted the claim about substantial outsourcing. This issue was restored to the TPO/AO to verify if Mahindra's work was mostly outsourced, directing exclusion if the claim was substantiated.b) Rejection of Comparable Companies Selected by the Assessee:The assessee objected to the exclusion of Chemtex Gold Engineers Pvt. Ltd., Simon India Ltd., and Petron Engineering Consultants Ltd. by the TPO.- Chemtex Gold Engineers Pvt. Ltd.: The Tribunal found that Chemtex's engineering service fees were above the Rs. 5 crore filter applied by the TPO and directed its inclusion in the final set of comparables.- Simon India Ltd.: The Tribunal noted that Simon's service income was Rs. 142 crores, above the Rs. 5 crore filter, and directed its inclusion.- Petron Engineering Consultants Ltd.: The Tribunal found no functional dissimilarity between Petron and the assessee, directing its inclusion.c) Adjustment in Margin Due to Different Risk Profiles:The Tribunal noted that different benches of the ITAT had divergent views on risk adjustment. Favoring the assessee, the Tribunal referenced several decisions supporting risk adjustments for captive service providers operating in risk mitigated environments. The Tribunal restored the matter to the TPO/AO for examination and quantification of risk adjustment, directing the assessee to cooperate.2. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal dismissed this ground as premature.Conclusion:The appeal was allowed, with specific directions for reconsideration and re-examination by the TPO/AO on the issues of comparables and risk adjustment. The initiation of penalty proceedings was dismissed as premature.