2017 (5) TMI 1093 - AT - Income Tax

Assessee's Appeal Partially Allowed, Fresh Examination Ordered on Comparability

The Deputy Commissioner of Income Tax, Chennai Versus Saipem India Projects Limited

The Tribunal partially allowed the assessee's appeal, directing a fresh examination of the comparability of M/s. TCE Consulting Engineers Ltd and M/s. ... TPA - exclusion of one M/s. Mahindra Consulting Engineers Limited from the list of comparables considered by the ld. TPO for fixing the ALP - Held that:- No doubt this company appeared in the list of comparables selected by the assessee itself. Assessee had taken no grounds before TPO or ld. DRP for its exclusion. However, by virtue of decision of Special Bench in the case of Quark Systems (P) Ltd (2009 (10) TMI 591 - ITAT, CHANDIGARH) we are of the opinion that an assessee could not be estopped from seeking an exclusion of a comparable even before the appellate authority, if it could show that the selected comparable was not really a good comparable. As per assessee M/s. Mahindra Consulting Engineers Limited was having a turnover of F102.43 Crores whereas its own turnover was only F8.48 Crores. We are of the opinion, the question whether the turnover filter could be applied for exclusion of M/s. Mahindra Consulting Engineers Limited from the list of comparables, has to be considered by the ld. Assessing Officer /TPO. We remit this issue back to ld. Assessing Officer/TPO. Excluding foreign exchange loss on cancellation of forward contracts while working out operating margin of the assessee - whether forex loss suffered by the assessee on account of cancellation of its forward forex contracts could be considered as operative or non operative in nature? - Held that:- There is a clear observation that entering into forward contract for covering the risks of exchange rate fall, was a normal business transaction. Of course there indeed is an observation that extraordinary fluctuations could warrant an adjustment if it could be demonstrated that such a phenomena was absent for comparable cases. Nothing of this sort was demonstrated by the assessee here. In such circumstances we are of the opinion that ld. DRP fell in error in directing the ld. TPO to exclude foreign exchange loss/gain, considering it to be non operating in nature, while computing operating margin of the assessee as well as that of comparables. Directions given by the ld. DRP in this regard are set aside. Issues Involved:1. Idle capacity adjustment.2. Exclusion of foreign exchange loss.3. Exclusion of certain comparables (M/s. TCE Consulting Engineers Ltd and M/s. Mahindra Consulting Engineers Limited).Detailed Analysis:Idle Capacity Adjustment:The assessee sought an idle capacity adjustment, arguing that it had provided all necessary details to justify this adjustment. The assessee claimed that it could only utilize 66.50% of its capacity, leading to idle capacity costs. The TPO rejected this claim, noting that the service industry inherently involves recruitment and training time lags, and comparables' capacity utilization data were unavailable. The DRP upheld the TPO's decision, stating that capacity utilization adjustments require accurate data, which the assessee did not provide. The Tribunal agreed, noting inconsistencies in the assessee's methodology for calculating capacity utilization and the lack of empirical data to support the claim. Therefore, the lower authorities were justified in denying the idle capacity adjustment.Exclusion of Foreign Exchange Loss:The assessee argued that foreign exchange losses from forward contracts should be considered non-operational and excluded from the operating margin calculation. The TPO and DRP disagreed, considering these losses operational since the contracts were related to business transactions with associated enterprises. The Tribunal upheld the DRP's decision, noting that entering forward contracts to mitigate exchange rate risks is a normal business practice. The Tribunal found no evidence that such forex loss was an extraordinary event across the industry. Thus, the DRP's direction to exclude forex losses from the operating margin was set aside.Exclusion of Certain Comparables:1. M/s. TCE Consulting Engineers Ltd:The assessee argued that this company was functionally different due to its involvement in turnkey projects. The TPO and DRP dismissed this objection without detailed reasoning. The Tribunal remitted the issue back to the TPO/Assessing Officer for fresh consideration, noting that the assessee's objections were not adequately addressed.2. M/s. Mahindra Consulting Engineers Limited:The assessee sought to exclude this company based on a significant turnover difference, arguing that it was not a good comparable. The Tribunal allowed the additional ground, citing the Special Bench decision in Quark Systems (P) Ltd, which permits raising new grounds before appellate authorities if a selected comparable is not appropriate. The issue was remitted back to the TPO/Assessing Officer for reconsideration, focusing on whether the turnover filter could justify the exclusion.Conclusion:The Tribunal partially allowed the assessee's appeal for statistical purposes, directed a fresh examination of the comparability of M/s. TCE Consulting Engineers Ltd and M/s. Mahindra Consulting Engineers Limited, and upheld the exclusion of foreign exchange loss as operational. The Revenue's appeal was allowed, and the assessee's cross-objection was dismissed.