TaxTMI 
TaxTMI 
2016 (4) TMI 1176
X X X X Extracts X X X X
X X X X Extracts X X X X
....lant's income by issuing an order without appropriate application of mind. 2. The Ld. AO I Learned Transfer Pricing Officer (Ld. TPO) and the Ld. DRP erred in ignoring the fact that the reference made u/s 143(2) of the Act by the Ld. AO suffers from jurisdictional error as the Ld AO did not record any reasons in the draft assessment order based on which it was concluded that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's Length Price (,ALP') for the Appellant's international transaction of provision of application engineered software development and related services. 3. The Ld. TPO grossly erred in not considering the correct Operating Profit I Total Cost margin of M/s MN Dastur & Co. Private Limited of 0.18% despite the fact that the correct computation was duly submitted by the Appellant before the Ld. TPO in accordance with the directions of the Ld. DRP and the same was duly checked and verified by the Ld. TPO. 4. The Ld. AO / Ld. DRP erred both on facts and in law in enhancing the income of the Appellant by Rs. 31,301,467 by holding that its international transaction of provision of application en....
X X X X Extracts X X X X
X X X X Extracts X X X X
....enalty proceedings u/s 271(1)(C) of the Act mechanically and without recording any satisfaction for its initiation. 6. That the Ld. AO grossly erred in facts and in law in not allowing tax credit claimed in the return of income (in respect of prepaid taxes, self assessment tax and relief claimed under section 90 of the Act) totalling to Rs. 7,958,453. 7. That the Ld. AO has grossly erred in levying an interest u/s 234B of the Act to the taxable income of the Appellant." 2. Briefly stated, the facts of this case are : consequent upon the notice issued u/s143(2) of the Income-tax Act, 1961 (hereinafter 'the Act'), during scrutiny proceedings, Ms. Ashima Vadhera, CA put in appearance, attended assessment proceedings, filed submissions and necessary details as requisitioned. Keeping in view the averments made by the assessee in Form 3CAB vide which assessee had entered into international transaction to the tune of Rs. 15,39,29,906/-, the matter was referred to Transfer Pricing Officer (TPO) for determination of Arms Length Price (ALP) u/s 92CA (3), who has passed order dated 31.10.2011. By determining the Arms Length Price (ALP) of the international transaction qua the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing, however accepted the Transactional Net Margin Method (TNMM) as the most appropriate method to decide Operating Profit/Total Cost (OP/TC) as Profit Level Indicator (PLI) for determining the arms length nature of its international transaction regarding "Engineered Software Development and Related Services". The TPO has also not disputed that PLI assessed by the assessee at 10.86%. 9. Assessee in order to benchmarking international transactions relating to provisions of application "Engineered Software Development and Related Services", selected TNMM as the most appropriate method with OP/TC as PLI having its own PLI of 10.86%. The assessee has taken five comparable companies and computed from weighted average method at 9.91 %, however during transfer pricing proceedings, assessee in order to meet with the queries raised by the TPO for filing updated current year data of financial year 2007-08 of the comparable companies adopted by the assessee, made a submission to make a fresh search by considering updated data on the ground that updated data of the comparable companies adopted by the assessee was not necessarily available at the time of preparing transfer pricing study. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ctions issued by the ld. DRP"? 14. Final set of comparables chosen by the TPO on the basis of DRP's direction are reproduced as under for ready reference :- Sr.No. Name of the Company OP / TC margin - FY 2007-08 1 Mahindra Consulting Engineers Limited 28.50% 2 Stup Consultants Limited 30.52% 3 Semac Limited 49.00% 4 Kirloskar Consultants Limited 27.54% 5 MN Dastur & Co. Private Limited 8.46% Count 5 Average 28.80% 15. Now, on the basis of documents on record, we are to examine as to whether OP/TC margin for financial year 2007-08 of M.N. Dastur & Co. Pvt. Ltd. is 8.46% as claimed by the TPO as against 0.18% claimed by the assessee. The ld. AR for the assessee brought on record computation of OP/TC margin of M/s. M.N. Dastur & Co. Pvt. Ltd., a comparable company for AY 2008-09 which is reproduced as under for ready reference :- Particulars Amount (in INR) Operating Income (A) 1,32,78,00,000 Fees on engineering jobs 1,32,64,06,080 Fees on computer consultancy 13,93,920 Operating Expenses (B) 1,32,53,55,862 Operating & other expenses 1,28,83,36,863 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and Related Services" by illegally and arbitrarily including functionally dissimilar companies as comparable"? 19. Ld. AR for the assessee contended that the TPO has arbitrarily chosen Mahindra Consulting India Ltd., Stup Consultants Limited, Semac Limited and Kirloskar Consultants Limited, functionally dissimilar companies as comparables. We would like to examine the functional and financial profile of the comparable companies in order to benchmarking international transaction undertaken by the assessee company under consideration one by one. MAHINDRA CONSULTING INDIA LTD. 20. The ld. AR for the assessee contended that this comparable company is functionally dissimilar, having significant related party transactions and relied upon order passed by Delhi Tribunal in case cited as Bechtel India (P.) Ltd. Vs. Addl.CIT - 146 ITD 733 (Delhi - Trib.). 21. The TPO, while selecting the Mahindra as a comparable company, has returned the following findings :- "The assessee has objected to the use of this company as a comparable on account of being functionally different and submitted that consultancy services provided by this comparable company in multidisciplinary areas. In c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r, when admittedly, the comparable company is engaged in infrastructure in the area of special economic zone, water sewerage, solid waste management, urban infrastructure, agri-infrastructure, social infrastructure, ports and harbor & offshore terminal, horticulture, coal handling, etc., the same cannot be compared with the assessee company which is into application "Engineered Software Development and Related Services". This comparable has been rejected by the coordinate Bench of the Tribunal in case cited as Bechtel India (P.) Ltd. (supra) and restored the file back to the TPO. Ld. DR for the revenue has not controverted the proposition mooted out by the assessee as to the aforesaid decision of the coordinate Bench in Bechtel India (P.) Ltd. (supra). STUP CONSULTANTS PRIVATE LIMITED 25. The ld. AR sought to exclude this comparable on the ground of functional dissimilarity, abnormal growth in turnover/abnormal high margin and again relied upon Bechtel India (P.) Ltd. (supra). The TPO while selecting this company as comparable returned the findings to the following effect :- "15.4 Stup Consultants Put. ltd. " The assessee has objected to this company also on account of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r its exclusion from the final set of comparables. It is seen from the above that the majority of the income of the company is from Profession fees only. Since, the company is deriving its majority of the income from Profession fees on account of Technical Consultancy, these activities can be considered as comparable to the activities being performed by the assessee and accordingly, the company is also accepted as a comparable." 26. A perusal of the aforesaid observation returned by the TPO apparently shows that the assessee has raised specific objection as to dissimilarity of this company by highlighting that this company is primarily engaged in providing range of services in field of engineering and architecture and that no segmental information is available but the ld. TPO by relying upon the segment information, lying at page 13 of the Annual Report, rejected the objection raised by the assessee on the ground that the company is engaged in providing consultancy in both the segments i.e. civil and engineering, consultancy and architectural consultancy and is driving its total fee from consultancy only and disposed off the objection of abnormally high margin on the ground t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....annual report at pages 603 to 645 of the paper book apparently shows that this comparable company is providing engineering consultancy services whereas the assessee company proving application "Engineered Software Development and Related Services". So, there is a stark difference between application of "Engineered Software Development and Related Services" and Consulting Engineering Services. 29. Moreover, the ld. AR has vehemently contended that the company's annual report for FY 2007-08 is not available in public domain. Thought the TPO has claimed to have provided annual report to the assessee company at the time of issuance of the showcause notice but the said report is not legible. Not only this, no segmental information is available in the annual report to work out the requisite comparability. Furthermore, undisputedly this company has earned high operating profit margin of 49.00% for FY 2007-08 as per TP order. Ld. AR to exclude this comparable again relied upon Bechtel India (P.) Ltd. (supra) wherein this comparable company has been excluded on ground of illegible annual report. So, we are of the considered view that to arrive at a logical conclusion to select Semac Limi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y the TPO for TP adjustment by providing opportunity of being heard to the assessee. 35. Ld. AR further contended to include Projects & Development India Limited as comparable selected in the fresh search conducted by the assessee during TP proceedings. The TPO rejected this company on the only ground that this company does not show any service income. However, perusal of the profit & loss account and schedule 11 of the annual report of the company, lying at page 115 to 121, it is apparently clear that the major component of the income of this company is from the service income which is 99.92% and is more than 75% as required by the TPO. So, we are of the considered view that this company has been rejected by the TPO/DRP from the list of comparables on flimsy ground without perusing the record and as such, is liable to be included in the final list of comparables. GROUND NO.4.8 36. The ld. AR contended that the ld. AO/DRP has erred in including high profit making companies in the list of final comparables for benchmarking a normal risk bearing company and not allowing a risk adjustment to the assessee company and relied upon Motorola Solutions. 37. The ld. TPO disallowe....