2023 (9) TMI 683 - AT - Income Tax

Tribunal Upheld Decision on Comparables, Emphasizing Functional Similarity Over Ownership

The Tribunal upheld the Dispute Resolution Panel's decision on comparables, emphasizing functional similarity over ownership status. It validated capacity ... TP Adjustment - comparable selection - rejection of government owned companies - HELD THAT:- We are of the considered view that there is no thumb rule not to accept the government company for comparability analysis to benchmark the international transactions merely because of the fact that it is a government company. Each and every comparable is to be examined for comparability on its own facts. So the contention of the Ld. DRP for the Revenue as per ground No. 1 is not sustainable. If the profit & loss account of a government company shows some preferential treatment to the government company, impacting profit only then government company can be excluded. Engineers India Ltd.is into providing certification services, project management services, process design services, engineering services, commissioning services, construction management services, procurement services etc. which is not comparable to the assessee. So the Ld. DRP has rightly rejected this comparable chosen by the Ld. TPO. Mahindra Consulting Engineers Ltd. (MCEL) as a comparable to benchmark the international transactions vis-à-vis the assessee is concerned, it is also functionally dissimilar being into project design and engineering including planning and scheduling statutory and laboratory approvals, procurement advisory, venture evaluation, bid process, project supervision etc. whereas the assessee is providing homeland security solution to their customer. As such the Ld. DRP has rightly excluded MCEL as a comparable vis-à-vis assessee. Tata Consulting Engineers Ltd. (TCEL) is shown to be engaged in integrated engineering consultancy solution including commissioning solutions in construction management, advanced technologies, power, nuclear, infrastructure, industrial, mining, minerals, steels and metals, transportation, water, building, manufacturing, spatial planning, environment etc. again which is not comparable to the assessee who is into providing homeland security solutions to their customers. So the Ld. DRP has rightly excluded TCEL as a comparable vis-à-vis assessee. Adjustment on account of capacity utilization - rationale for adjustment is the difference in the level of capacity utilization between the assessee and the four comparables applied by the Ld. TPO - HELD THAT:- We are of the considered view that these grounds raised by the Revenue are not maintainable as the adjustment on account of capacity utilization has been given by the Ld. TPO himself. So when the adjustment with regard to the idle capacity utilization has been given by the Ld. TPO these grounds raised by the Revenue are not maintainable, hence the ground Nos.4 & 5 are dismissed. Issues Involved:1. Appropriateness of comparables selected by the Dispute Resolution Panel (DRP).2. Adjustment on account of capacity utilization.3. Legality of the assessment order and transfer pricing adjustments.4. Validity of the reference to the Transfer Pricing Officer (TPO).5. Acceptance of specific adjustments in computing the assessee's operating margin.6. Inclusion of additional companies as comparables.7. Recalculation of operating margin and arm's length price.Summary:1. Appropriateness of Comparables:The Revenue challenged the DRP's decision to retain Tamil Nadu Ex Servicemen Corporation Ltd. as a comparable while rejecting Engineers India Ltd., Tata Consulting Engineers Ltd., and Mahindra Consulting Engineers Ltd. The Tribunal upheld the DRP's decision, emphasizing that comparability should be based on functional similarity, not merely on the fact that a company is government-owned. The Tribunal found that Engineers India Ltd. and the other rejected companies were functionally dissimilar to the assessee, which provides homeland security solutions and technical support services.2. Adjustment on Account of Capacity Utilization:The Revenue contested the DRP's allowance of an adjustment for capacity utilization amounting to Rs. 10,72,349/-. The Tribunal dismissed this ground, noting that the adjustment was initially granted by the TPO due to the assessee's first year of operations, which justified the need for better comparability with established companies.3. Legality of the Assessment Order and Transfer Pricing Adjustments:The assessee argued that the assessment order under Section 143(3) read with Section 144C(13) was illegal and that the transfer pricing adjustment under Section 92CA was not a charging provision under the Income Tax Act. The Tribunal did not find merit in these arguments as they were not substantiated with sufficient evidence.4. Validity of the Reference to the TPO:The assessee contended that the reference to the TPO was illegal, citing CBDT Instruction No.10/2013 regarding the threshold limit of Rs. 15 Crores. The Tribunal did not address this issue in detail, implying that the procedural aspects were followed correctly.5. Acceptance of Specific Adjustments in Computing Operating Margin:The assessee sought adjustments for 'pass-through cost,' start-up costs, and under-utilization of capacity. The Tribunal did not explicitly address these adjustments, focusing instead on the broader issue of comparability and capacity utilization adjustments.6. Inclusion of Additional Companies as Comparables:The assessee proposed additional comparables such as Cades Digitech Private Limited, Mistral Solutions Private Limited, and Siemens Building Technologies Private Limited. The Tribunal did not find it necessary to include these companies as comparables, given the functional dissimilarity of the initially selected comparables.7. Recalculation of Operating Margin and Arm's Length Price:The Tribunal directed that if the revised operating margin of the assessee is within the 5% tolerance band of the revised arithmetical mean of the operating margin of the final comparable companies, the arm's length price should be accepted. Otherwise, adjustments should be made only in respect of the assessee's international transactions with its AEs.Conclusion:The Tribunal dismissed both the Revenue's appeal and the assessee's cross objections, upholding the DRP's decisions on comparability and capacity utilization adjustments. The Tribunal emphasized functional similarity as the key criterion for selecting comparables and validated the adjustments made by the TPO for capacity utilization.