TaxTMI 
TaxTMI 
2018 (8) TMI 1201
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....he question framed by this Court is answered in the affirmative by holding that the ITAT ought not have remanded the matter to the TPO for the de novo determination of the ALP of the international transactions in the various segments. This exercise should be performed by the ITAT itself. This is on the basis of the submission of the Assessee that all the details relevant for such determination are already available on record. 18. The impugned order of the ITAT is accordingly set aside. The assessee's appeal ITA No. 6779/DEL/2015 for the concerned A.Y 2011-12 is restored to the file of the ITAT. The said appeal will be listed before it for directions on 21st August 2017". 4. Pursuant to the order of the Hon'ble High Court, representatives of both the sides were heard at length. Having heard the rival contentions, we have carefully perused the orders of the authorities below and with the assistance of the representatives we have considered the documentary evidences and judicial decisions brought on record in the light of Rule 18(6) of the ITAT Rules, 1962. 5. Facts on record show that the assessee - Bechtel India Private Limited [BIPL] was set up as a subsidiary co....
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....e TPO: No Company Name OP/OC % 1 Acropetal Ltd (Eng. Design segment) 14.26 2 Ashok Leyland Project Services Ltd. 24.7 O Bengal S R E 1 Infrastructure Devp. Ltd. 42.14 4 Cades Digitech Pvt. Ltd 5.78 5 Certification Engineers International Ltd. 78.45 6 Global Procurement Consultants Ltd. 30.86 7 Gujarat Industrial & Technical Consultancy Org Ltd. 7.89 8 1BI Chematur (Engineering & Consultancy) Ltd. 25.96 9 Indus Technical & Financial Consultants Ltd. 14.78 10 Kitco Limited 27.48 11 Mahindra Consulting Engineers Ltd. 30.92 12 Mitcon Consultancy &Engg. Services Ltd. 40.19 13 NTPC Electric Supply Company Ltd. 18.01 14 Pailavan Transport Consultancy Services Ltd. 25.59 15 R E C Power Distribution Co. Ltd. 39.44 16 Rites Ltd. 58.27 17 T C E Consulting Engineers Ltd. 29.29 18 Usha Hydro Dynamics Ltd. 29.45 Average 30.19 10. In the FAS, the following comparables were adopted by the TPO: Not Company Name OP/TC % 1 Accentia Technologies Ltd. 29.18% 2 Acropetal technologies Limited(S....
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....ing chart: S. No. Nature of international transaction Tested Party's margin as per segmental redrawn by the Ld. TPO Arm's length margin determined by Ld. TPO Adjustment u/s 92CA 1 Provision of EDS 8.98% 30.19% 27,39,32,965 2 Provision of FAS services 10.52% 25.98% 70,84,259 3 Provision of IT Infra services 14.32% 23.55% 1,21,12,787 4 Receivables N.A. N.A. 33,16,088 Total 29,64,46,099 16. The appellant-company vehemently assailed the draft assessment order before the DRP. The DRP, after considering the facts and detailed submissions of the assessee, directed the TPO to exclude the following comparables from the final comparable set on account of functional dissimilarities: (i) Ashok Leyland Project Services Ltd. (ii) Bengal SREI Infrastructure Development Ltd. (iii) NTPC Electric Supply Company Ltd. (iv) Pallavan Transport Consultancy Services Ltd. 17. In the FAS and IT infra support services, the DRP accepted the approach and the comparable set considered by the TPO, though the working capital adjustment was allowed by the DRP, ....
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....d 17.16% 15 Sankhya Infotech Limited (software development service segment) 26.20% 16 Sasken Communications Technologies Ltd 23.77% 17 Tata Elxsi Ltd 12.94% 18 Thirdware Solution Ltd 18.30% 19 Wipro Technology Services Ltd 54.36% Mean 23.60% 19. We will first take up EDS Segment. SEGMENT I EDS SEGMENT 20. The ld. counsel for the assessee strongly submitted that the following comparables deserve to be excluded from the final comparables set: (i) Kitco Ltd (ii) TCE Consulting Engineering Ltd (iii) Certification Engineering International Ltd (iv) Global Procurement Consultants Limited (v) IBI Chematur [Engineering & Consultancy Ltd] (vi) Mitcon Consultancy & Engineering Services (vii) REC Power Distribution Co. Ltd (viii) RITES Limited (ix) Usha Hydro Dynamics Ltd. 21. We will take up each comparable one by one. (i) KITCO LIMITED 22. The profile of this company shows that it is a 100% Government owned undertaking rendering services primarily to Central/State Government undertaking and PSUs. Most of....
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....td., transactions are primarily with government owned enterprises. Applying the preposition laid down in the case of M/s ThyssenKrupp Industries India Private Limited (supra), we hold that Kitco Ltd., cannot be accepted as a comparable company. Hence the same is directed to be eliminated." 24. Respectfully following the findings of the coordinate bench [supra], we direct to exclude KITCO from the final set of comparables. (ii). TCE CONSULTING ENGINEERS LTD 25. Profile of this company shows that it is involved in activities beyond engineering design extending from concept to commissioning whereas the assessee provides services as a captive unit to its overseas AEs. This company was excluded from the set of comparables in assessee's own case in assessment year 2010-11 in ITA No. 1478/DEL/2015. 26. The relevant findings of the coordinate bench in assessee's own case [supra] read as under: "The comparable company is involved in activities beyond engineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company i....
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....Engineering R. L. Dalai & Co., Agricultural Finance Corporation, RITES, WAPCOS, Kirloskar Consultants and Ion Exchange. GPCL acts as the client's representative in taking on the total responsibility of procurement related advisory services and inter-allied activities for projects in India and abroad. With thorough knowledge of the guidelines and practices stipulated by international funding agencies like the World Bank, African Development Bank and the Asian Development Bank, GPCL is capable of providing to the project authorities, apt and appropriate advice and service in procurement, strictly following the procedures and policies of multilateral funding agencies and authorities. The company is registered with the World Bank, African Development Bank and other financial institutions. The procurement phase is the "key activity" in project cycle. GPCL monitors all procurement activities including project management from concept to commissioning, so as to ensure timely supply and delivery, quality control, thorough inspection, effective cost control and adherence to re schedules. Our expertise will benefit the clients in getting an unbiased cost effective and exclusive profession....
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....ability for the engineering design segment. The comparable company undertakes substantial R&D activities (R&D expense 5.41% of turnover) which is not a function performed by the assessee. Hence this company cannot be accepted as a comparable." 30 Respectfully following the findings of the coordinate bench [supra], we direct to exclude IBI Chematur [Engineering and Consultancy] Ltd. from the final set of comparables. (vi) MITCON CONSULTANCY AND ENGINEERING SERVICES 31. The profile of this company suggests that it provides technical consultancy in various areas such as power division, energy and carbon service division, banking and finance division. This company also renders vocational trainings, IT trainings and laboratory services from which it earns 40% (approx.) of its revenue. From a screen shot of its profile, which is also at page 113 of appeal set, shows that the Ministry of Environment and Forest, Government of India extended its accreditation to the laboratory of this company. It is further seen that this company has also exclusively completed QCI-NABET accreditation process mandatory for EIA consultants. The company has also executed environment monitoring assignm....
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....ng been engaged in the area of engineering consultancy, traffic studies, export of locomotives and maintenance of the locomotives, construction and project management for railway track, electrification together with traffic and software consultancy assignments as against, the appellant company which is engaged in engineering design and drawing for various overseas AEs to support overseas offices on turnkey project execution basis. 21. The appellant also sought exclusion of Engineers India Ltd., a Government company form the list of comparables on the ground that profit motive is not relevant consideration in case of Government undertakings by relying on the judgements cited as M/s. Thyssen Krup Industries India Pvt. 10 ITA No.1476/Del/2015 Ltd. in I.T.A. No. 6460/Mum/2012 New Delhi M/s. Avaya India Private Ltd. in I.T.A. No. 5150/Del/2010 (supra) and contended that the Government companies cannot be taken as comparables for TP by following the law laid down by Hon'ble Jurisdictional High Court in M/s. Avaya India Pvt. Ltd. and M/s. Thyssen Krupp Industries India Pvt. Ltd. (supra). The Government undertakings can even operate on losses in furtherance of social objectives of the ....
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.... of comparables. (ii) ACCUSPEED ENGINEERING SERVICES INDIA LTD 39. We find that in assessment year 2010-11 also, this company was excluded by the TPO but the Tribunal in ITA No. 1478/DEL/2015 included this company in the final set of comparables. The finding of the Tribunal reads as under: "12.8 The ld. TPO in his order, has rejected the said comparable based on its functional profile, holding that the comparable company is involved in software services. The Ld.AR submitted that this comparable company is not into software services, instead, is engaged in providing consultancy activities in Engineering solutions and services covering design, detailed engineering, project construction & management. The ld.AR submitted that this comparable company provides engineering design solutions, and other related services, which is functionally similar to that of the assessee. We observe that the DRP has not given any reasons for rejecting this comparable. On examination of the papers on record, we are in agreement with the submissions of the ld. AR. Hence we direct the A.O to include this company as a comparable." 40. Respectfully following the findings of the coordinate ben....
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....rise to any significant intangibles. The risk assumed can be understood from the following chart: Risk Category and Description Exposure to BIPL Exposure to AEs Market Risk: Market risk arises for a business due to increased competition and relative pricing pressures, change in demand patterns and needs of customers, inability to develop / penetrate in a market, etc. BIPL does not have any direct exposure to this risk because it is a back office support service provider for overseas group companies. All market risks with respect to the services including customer acceptance are borne by overseas group companies. Service liability risk: Risks associated with service failures including non-performance to generally accepted or regulatory standards. This could result in service recalls and possible injuries to end- users. BIPL renders services to the Group Companies. Thus, BIPL is not responsible to the end customers of the Group, and thereby does not have any exposure to this risk. Overseas group companies enter into contracts with end customers and hence bear all the risk associated with service quality. Research & Development ('R&D') risk: R....
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.... thereby adversely impacting profitability. BIPL has exposure towards this risk, since the price pressures in the industry would affect the compensation for its services. The AEs operate in the open market and hence are exposed to this risk. 44. However, when the matter was agitated before the DRP, the DRP observed that "considering the facts and description of services given, it is clear that the assessee is a high- end KPO in this segment". In our considered opinion, considering the services provided by the assessee in this segment, it would be erroneous to conclude that the assessee is a high-end KPO in this segment. Moreover, the FAR analysis given by the appellant was accepted by the TPO in his order. 45. Comparables finally selected by the TPO and confirmed by the DRP are as under: No. Company Name OP/TC % 1 Accentia Technologies Ltd. 29.18% 2 Acropetal technologies Limited(Seg) 14.36% 3 e4e Healthcare Business Services Pvt. Ltd 9.77% 4 Eclerx Services Ltd. 56.82% 5 Infosys B P 0 Ltd. 17.86% 6 Jindal Intellieom Ltd. 13.70% 7 T C S E-Serve Ltd. 69.31% 8 Microgenetics Systems Ltd . ....
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....g(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is also submitted by the ld.AR that segmental information in respect of this company is not available. It has been further brought to our notice that this company has been rejected by the Ld.TPO in the earlier year. The company has also had business restructuring during the year under consideration thereby giving rise to extraordinary circumstances. For all these reasons we direct the Assessing Officer to exclude this company as a comparable." 51. As the co-ordinate bench in the earlier year has rejected ATL as a good comparable, we do not find any reason why the same should be considered this year. We accordingly direct for exclusion of ATL from the final set of comparables. (ii) Eclerx Services Limited [ESL] 52. Eclerx is a KPO engaged in providing data analytics, data solutions services etc. The Hon'ble high court of Delhi in the case of Rampgreen Solutions TS-387-HC-2015(DEL)-TP has held that it would be flawed to benchmark IT enabled service provider using knowledge process outsourcing companies. We find that the Tribunal Special Bench in the case of Maersk Global....
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....perating profits post acquisition. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable." 56. Considering the functional dissimilarities in the light of the findings of the coordinate bench [supra], this company is not a good comparable. We, therefore, direct for exclusion of TCS from the final set of comparables. SEGMENT III IT INFRASTRUCTURE SUPPORT SERVICES SEGMENT 57. The functions performed by BIPL under this segment are as under: "Functions performed by BIPL BIPL has set up an offshore centre at Gurgaon. Presently, BIPL has a team of 600 people approximately who are engaged in providing-IT infrastructure support services. The centre is used to monitor and manage various IT infrastructure components such as servers, networks, storage equipment, messaging etc. The centre is integrated with the Group Companies centre to ensure seamless delivery operations between the two locations. The IT Infrastructure support services typically involve performing the following services: * Data centre and systems management, * Infrastructure management, * Web hosting and inte....
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....have categorically held that the appellant company is not a high-end KPO service provider. 59. Final set of comparables under this segment are as under: Sl. No. COMPANY NAME WC adjusted OP/TC 1 Acropetal Technologies Limited (Information Technology services segment) 22.06% 2 Akshay Software Technologies Limited 2.68% 3 Celstream Technologies Private Limited 14.35% 4 e-Infochips India Private Ltd 55.60% 5 Evoke Technologies Private Ltd 9.36% 6 E-zest Solutions Ltd. 37.03% 7 Igate Global Solutions Ltd 23.93% 8 Infosys Ltd 43.41% 9 Larsen & Toubro Infotech Ltd 19.50% 10 LGS Global Ltd 12.42% 11 Mindtree Ltd 10.29% 12 Persistent Systems & Solutions Ltd 22.24% 13 Persistent Systems Ltd 22.82% 14 R S Software (India) Ltd 17.16% 15 Sankhya Infotech Limited (software development service segment) 26.20% 16 Sasken Communications Technologies Ltd 23.77% 17 Tata Elxsi Ltd 12.94% 60. Before us, the ld. AR vehemently argued for exclusion of the following comparables from the final set of comparables claiming that these comparab....
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....00% of sales. On the given facts of this case, it does not pass the RPT/sales filter of 25% applied by the TPO. This company was rejected as a comparable by the co-ordinate bench in the case of Saxo India Pvt. Ltd ITA No. 6148/DEL/2015. 64. The relevant findings of the co-ordinate bench read as under: "Adverting to the facts of the instant case, we find that Wipro Technology Services Ltd. earned a revenue from Master services agreement with Citigroup Inc. for the delivery of technology infrastructure services. This agreement was, in fact, executed between the assessee's AE, Wipro Ltd., and Citigroup Inc., a third person. This unfolds that the transaction of earning revenue from software development support and maintenance services by Wipro Technology Services Ltd., is an international transaction because of the application of section 92B(2) i.e., there exists a prior agreement in relation to such transaction between Citigroup Inc. (third person) and Wipro Ltd. (associated enterprise). In the light of this structure of transaction, it ceases to be uncontrolled transaction and, hence, Wipro Technology Services Ltd., disqualifies to become a comparable uncontrolled transac....
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..... We direct for exclusion of Sankya Infotech Ltd from the final set of comparables. (v) Sasken Communication Technologies Limited 69. Profile of this company shows that it is engaged in rendering testing, satellite communication and other different services and is also engaged production of software products. This company has spent around 4.20% of its sales on marketing and advertisement expenses. This company is significantly engaged in Research and Development as is evident from Exhibit 1256 & 1259 of the PB. Sasken was not considered as a good comparable IT Infra Support Services Segment by the coordinate benches in the following cases: (i) Saxo India Private Limitged vs ACIT (ITA No. 6148/Del/2015) (ii) ION Trading India Pvt. Ltd. v/s ITO (ITA No. 1035/Del/2015) (iii) Tibco Software (India) P. Ltd. v/s DCIT (ITA No. 94/PN/2014) (iv) Motorola Solutions India Pvt. Ltd. v/s ACIT (48 Taxmann.com 248 70. Considering the dissimilarities in the light of findings of the coordinate benches, we direct for exclusion of Sasken Communication Technologies Limited from the final set of comparables. (vi) EINFOCHIPS INDIA PVT. LTD 71. Profile o....
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....bles. 74. In the light of specific directions in respect of the three segments as discussed hereinabove, we direct the AO /TPO to recomputed the PLI. 75. The next issue relates to economic adjustments on account of risk. 76. We find that the lower authorities have not provided economic adjustments on account of difference in risk profile of the appellant vis a vis comparable companies. We find that the assessee is a captive service provider which gets remunerated on cost plus model and hence insulated from key business risk, while the comparable companies operate as entrepreneur and are subject to all the risks associated with conducting a business. We find that this claim was also accepted by the Tribunal in assessee's own case in A.Y 2004-05 and 2005-06 in ITA Nos. 1476 & 1477/DEL/2015. 77. Relevant findings of the coordinate bench in ITA No. 1476/DEL/2015 reads as under: "23. Regarding ground No.2 read with ground No.1.6, Ld. A.R. has contended that TPO/DRP has erred in denying the adjustment of complete utilization as well as risk adjustment while working on average matching of comparables. Rule 10B(3) read with Rule 10B(1)(e) clarifies that appropria....
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....and how the same would improve the comparability and unless adequate reasons are given for such adjustments, no adjustment can be allowed to the taxpayer. In the present case, except pointing out various risks, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so how these risks affected each of them and whether such adjustment would improve the comparability. Further in respect of comparables no data is 'made available to show at what capacity they are operating at and what is the average strength of the employees on account of which capacity adjustment should be carried out to improve the comparability analysis. Mechanical adjustment cannot be made to the margins of the comparables without knowing which risks were taken by the entity concerned and how its profitability was affected. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustments. The significant of risk depends on its economic significance, likelihood of its realization and "predictability. All" these requires robust and reliable data, both for the taxpayer" and the comparabl....