TaxTMI 
TaxTMI 
2017 (5) TMI 1093
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....ecific adjudication. 4. In addition to the original grounds, assessee has also filed a petition pleading for admission of additional ground, through which it seeks exclusion of one M/s. Mahindra Consulting Engineers Limited from the list of comparables considered by the ld. TPO for fixing the Arms Length Price of the international transactions of the assessee with its Associated Enterprise. Original grounds 1 to 4 also concern transfer pricing issues. First of this is on disallowance of a claim for idle capacity while computing its operating margin and the second seeks exclusion of one M/s. TCE Consulting Engineers Ltd from the list of comparables. 5. Facts apropos are that assessee a wholly owned subsidiary of an M/s.Saipem SA, France was primary engaged in the business of providing engineering design and ancillary services to its Associated Enterprises abroad. During the relevant previous year assessee also provided design services to some domestic third party customers. Assessee was billing its customers on hourly rate on the services provided by it. Assessee had during the relevant previous year established a new engineering process centre at New Delhi as a step towards e....
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....ed as part of the operating cost. It is also admitted that the details of capacity utilization in the case of comparables are not available and therefore the adjustment has been made to the financials of the tested party by appropriately adjusting its fixed cost. It is appreciated that normally adjustments are made to the profit margin of the comparables to bring it on level with that of the tested party. The prerequisite for making this sort of adjustment is the availability of data in the case of comparables. Therefore, the presumption of the assessee that the comparables are working at 100% of their capacity and its capacity utilization is only 65% and therefore an adjustment is called for is misplaced for the reasons stated in the preceding para. As per the ld. TPO assessee was in business since 2001 and annual reports of the assessee for various financial years demonstrated improved working with better volume of work load, thereby vitiating its claim for idle capacity adjustment. 8. Ld. TPO also analyzed the foreign exchange loss on forward contract claimed by the assessee as extra ordinary which comprised of following items:- ''Loss on foreign exchange ....
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.... Ltd 7.23 3 Mahindra Consulting Engineers. 43.49 4 Stewards & Lloyds of India Ltd 6.08 5 TCE Consulting Engineers Ltd 2 4.05 Average 16.15 Since operating margin of the assessee was -4.70% against 16.15% of the comparables, ld. TPO recommended an Arms Length Price adjustment of F22,40,83,198/-. Such ld. Arms Length Price adjustment was worked out by the ld. TPO as under:- ALP Profit considering the above = (Op. Exp x ALP Profit)/100 = (107,48,33,846 x 16.15)/100 = Rs. 17,35,85,666/- ALP Sales considering the ALP profit = Op. Exp x ALP Profit = 107,48,33,846 + 17,35,85,666 = Rs. 124,84,19,512/- ALP Sales = 124,84,19,512 Less : Sales reported = 102,43,36,314 Difference = 22,40,83,168/- 10. When the ld. Assessing Officer made a proposal on the lines recommended by the ld. TPO, assessee chose to move ld. DRP. Before ld. DRP assessee pressed for idle capacity adjustment for working out its operating cost and exclusion of forex loss as non operating in nature while computing its operating margin. Assessee also....
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....om the Assessee that business is done with AEs on same terms and conditions on which they do the business with the Non-AEs. Further, in respect to Capacity Utilization, this Panel finds that the Assessee knows about its own capacity underutilization but what about capacity utilization in the case of comparables? Further, it is quite possible that in this business it is normal to have this much underutilized capacity. Adjustment for difference in the capacity utilized by the Assessee and the uncontrolled comparables should be made after excluding the normal unutilized capacity in this business. But such details are not, available. This Panel also finds that capacity utilization concept is vague and entity specific. As discussed above in the Cost Plus Method all the costs are taken in to consideration while deciding the contract amount and hence there is nothing as underutilization of capacity, whereas as per Assessee's admission capacity utilization concept comes into vogue in hourly basis' of charge. Therefore, in absence of reasonably accurate details of capacity utilization this Panel upholds the decision of the TPO''. 11. However, ld. DRP was one with the assessee viz....
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.... was worked out, considering the numbers of employees at the start of the year, number of employees recruited during the year and number of employees who left during the year. Ld. Authorised Representative submitted that monthly man hours which were billed and which could not be billed were given in detail by the assessee as under:- Month Capacity (hrs) Billable (hrs) Non-billable (hrs) April 2008 98,094 60,881 37,213 May 2008 93,616 65,648 27,968 June 2008 94,506 63,321 31,185 July 2008 100,415 62,278 38,137 August 2008 83,907 56,058 27,849 September 2008 92,348 68,690 23,658 October 2008 90,318 64,019 26,298 November 2008 92,646 60,700 31,946 December 2008 107,181 73,145 34,036 January, 2009 70,459 45,673 24,785 February, 2009 99,753 57,688 42,065 March, 2009 143,769 98,019 45,750 Total 1,167,011 776,120 390,891 Contention of the ld. Authorised Representative was that idle capacity work out could not be given by the assessee, in respect of the comparable companies due to lack of such information in pub....
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....over F102.43 Crores whereas turnover of the assessee was only F8.48 Crores. Turnover of the M/s. Mahindra Consulting Engineers Limited was more than ten times of the assessee and according to him, by virtue of decision of Co-ordinate Bench in the case of Visual Graphics Computing Services India Pvt. Ltd vs. ACIT (in ITA No.2340/Mds/2012, dated 10.02.2017) and that of DCIT vs. M/s. Wabco TVS Ltd (in ITA No.883/Mds/2015, dated 23.09.2016) a company which was having a turnover ten times more or less than that of an assessee could not considered as a good comparable. Thus, according to ld. Authorised Representative, M/s. Mahindra Consulting Engineers Limited was required to be excluded from the list of comparables. 16. Per contra, ld. Departmental Representative submitted that idle capacity adjustment could not be given since assessee was in service industry and assessee could never demonstrate what would be its 100% capacity level. Further as per ld. Departmental Representative, capacity details of the comparables selected by the assessee were not available and assessee could not demonstrate presence or absence of idle capacity for the comparables. 17. Viz-a-viz M/s. TCE Consult....
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.... of loss due to hedging abnormality and whether it could be considered an extraordinary event qua the tested party, when such phenomena was not there across the industry. However, here the claim of the assessee is not for hedging abnormality. It could also not show that idle capacity in service industry was not an across the industry feature. Thus the said decision will not help the assessee for its claim that idle capacity adjustment should be given for working out its PLI. Especially so, since assessee could not demonstrate existence nor nonexistence of idle capacity for the various comparables selected by it. No doubt, as held by Pune Bench of the Tribunal in the case of Skoda Auto India (P) Ltd (supra,) it might always not be possible for an assessee to get all details of comparables, especially when such data not in public domain, and approximations could be made. However, the data provided by the assessee here, could not show the scientific basis on which it had worked out its own capacity level. The question of approximation in our opinion would not therefore arise. As for the reliance placed by the ld. Authorised Representative on the Delhi Bench decision of this Tribunal i....
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....of dissimilar sizes they cannot be assumed to earn comparable margins. As it is difficult to quantify the impact of difference in size of business on the margins, companies of dissimilar sizes cannot be compared. Based on the above differences on account of functional dissimilarity and significantly higher turnover, the Assessee has submitted that TCE cannot be considered as comparables and therefore DRP should give directions to exclude it". Ld. DRP also did not deal with these objections of the assessee. In the circumstances, we are of the opinion that the question whether M/s. TCE Consulting Engineers Ltd could be considered a good comparable requires a revisit by the TPO/Assessing Officer. We set aside the orders of the lower authorities, in so far as it relates to the question of comparability of M/s. TCE Consulting Engineers Ltd, and it remit back to the ld. Assessing Officer /TPO for consideration afresh in accordance with law. 22. As already mentioned by us, assessee has raised certain additional grounds seeking exclusion of M/s. Mahindra Consulting Engineers Limited from the list of comparables. No doubt this company appeared in the list of comparables selected by th....
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....contracts was correctly held as non operational by the ld. DRP. Forward contracts as per the ld. Authorised Representative had to be considered as an extraordinary item. For this contention, reliance was placed on Accounting Standards 11 of Institute of Chartered Accountants of India. Reliance was once again placed on the Mumbai Bench decision of this Tribunal in the case of Pangea3 & Legal Database Systems Pvt. Ltd (supra). 27. We have perused the orders and heard the rival contention. The question before us is 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. There were two types of forex loss suffered by the assessee. The dispute is only regarding the treatment of the forex loss suffered by the assessee, on cancellation of forward contracts, which came F2,66,47,200/-. Contention of the assessee is that this was extra ordinary in nature and hence to be excluded while working out its PLI. It is an admitted position that the forward contracts were entered by the assessee taking into consideration the quantum of US dollars, it could receive from the Associated Enterpri....
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....y of dollars. Hence to say that the forwards contracts were taken by the assessee as an independent activity unrelated to its business would be incorrect. Admittedly such contacts were not entered by the assessee as a part of any speculation business. Considering these aspects we are of the opinion that loss on closure of forward contract was not on account of any hedging abnormality. In the case of Pangea3 & Legal Database Systems Pvt. Ltd (supra) decided by Mumbai Bench of this Tribunal strongly relied by the ld. Authorised Representative, what was held at page 32 & 33 of the order is reproduced hereunder:- "So far as entering into forward contracts to minimize such risks is absolutely no abnormal conduct on part of the assessee, because if the trade receivables or payables are in foreign currency, the parties generally resort to entering into forward contract and hence, it is to be reckoned as normal business transaction and any gain or loss in the normal course of business is to be accounted for in the accounts. However, if there is some hedging abnormality or any extraordinary event has occurred qua the tested party (assessee) which materially affects the cost or profit in ....