AI Drafter 
TaxTMI 
TaxTMI 
2018 (12) TMI 1563
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....ii. The learned DCIT (after incorporating Ld. DRP's order) has erred on facts and in law in initiating penalty proceedings u/s 271(1)(c) iii. The appellant craves leave to add to or modify the above grounds of appeal at or before the hearing of the appeal." (1.1) The Assessee has also filed an Additional Ground of the appeal, which is reproduced as under: "The learned DCIT (after incorporating Ld. DRP's order) has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confining the deduction at 90% only." (2) The Assessee filed return of income declaring total income of Rs. 43,58,900 on 30.09.2009. The case selected for scrutiny and a reference was made to Transfer Pricing Officer ("TPO" for short). The TPO, vide Order dated 17.01.2014 U/s 92CA(3) of I.T. Act, proposed adjustments of Rs. 3,26,30,317 to the returned income. (2.1) Brief facts of the Case, as noticed by TPO in aforesaid order dated 17.01.2014 of TPO are, the assessee is a fully owned subsidiary in the Topsoe Group (with 99.9% shares being held by HTIAS and 1 share being held by another group company- Subcontinent ammonia Investment Company Aps). The assessee provides Engineering....
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....tional transactions was more than the said arithmetical mean price, the price charged in the international transactions was treated by the assessee to be at arm's length. (2.4) For international transactions of the assessee related to provision of Technical Support services, the TPO commented as under in respect of the filters used by the assessee in selection of 08 comparables using the Prowess database; in show cause notice dated 17.12.2013 of TPO. The filters used by the assessee and remarks of the TPO are as under: SI. No. Particulars Remark of the TPO 1 Financial information not available for year 2009-10, rejected This is an appropriate filter. 2 Companies for which data for 12 months were not available, Rejected An appropriate filter, however, it should be March ending. 3 Companies having marketing expenses greater than and equal to 3% of total sales, Rejected This is not an appropriate filter because there is no correlation of marketing expenses and profit earned in service industry. 4 Companies having R&D expenses greater than equal to 3% of total sales, rejected This is not an appropriate filter. The taxpayer has not exp....
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....ng looked into to check whether the enterprise is going along with the industry trend, if not whether suitable adjustments can be made to that effect, and if suitable adjustments cannot be made, the same is rejected as a comparable. As per TPO, among the peculiar economic circumstances that affect the suitability of a company as a comparable is its being a persistent loss maker or having declining revenues because these are factors that are not in keeping with the industry standard and disqualify the company from being used as a benchmark. (2.4) The TPO proposed, in the aforesaid show cause notice, to use the current year data alone i.e. the data pertaining to the FY 2009-10. As per TPO, the use of earlier year data is not acceptable in the absence of any reasons as to how the earlier year data has an influence on transfer prices. In the absence of any cogent, relevant and reliable evidence to prove that the data for preceding two years revealed facts which could have an influence on the determination of the ALP, in view of proviso to Rule 10B(4) use of the data pertaining to the two earlier years i.e. FY 2007-08 and FY 2008- 09 is not justified, according to TPO. Unless it is s....
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....lar'. However, AR of the company perused and it is seen that this company is enmgaged in the field of providing Technical Support Service. It passes all the filters also. Hence a suitable comparable. 2 Engineers India You have rejected this company on the ground that 'Functionally different Annual Report of the company is perused and it is seen that company operates in two segments 'Consulting and Engineering Project and Lumpsum Turnkey Project'. First segment i.e. Consulting and Engineering project is comparable to assessee and same is considered. This company is passes all filters also. Hence a suitable comparable. (2.8) Thus, the TPO proposed the following list of comparables to determine the arm's length price of the international transaction related to the provision of Market Support Services: SI. No Name OP/OC 1 Mahindra Consulting Engineers Limited 23.50 2 TCE Consulting Engineers Limited 25.88 3 Engineers India 67.77 4 Mukand Engineers Limited 12.87 5 Project and Development India Limited 23.09 6 UB Engineering Limited 9.71 AVERAGE 26.33 (2.9) Proposed Computation of AL....
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....exact science and that it is difficult to find exact comparables particularly under TNMM. As per TPO, this constraint has been accepted by the ITAT, Delhi in the case of ST Microelectronics Ltd (supra) wherein the ITAT held that ALP of an international transaction cannot be determined accurately in accordance with a scientific formula. It is quite difficult to arrive at any firm conclusion with mathematic precision. The TPO also referred to order of ITAT, Hyderabad Bench in the case of Deloitte Consulting India Pvt. Ltd in which it was held that no two comparable companies can be replicas of each other. The application of Rule 10B should be carried out and judged not with technical rigor, but on a broader prospective. Considering these facts and the fact that the taxpayer itself has not gone into the verticals or high end or low end distinction while selecting the comparables and for this very reason selected TNMM as the most appropriate method, the TPO held that it cannot now argue against some of the comparables on this ground. The TPO mentioned that the taxpayer has selected companies operating in various verticals and that TPO has also selected comparables which are broadly ....
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....ights, research and development is required but the converse is not true i.e. each company spending on research and development automatically is towards creating an IPR. As per TPO, the research and development activity, if any in a Service Industry is to improve the processes in delivering the technical services and not in creating an intangible. The TPO observed that the taxpayer had also not demonstrated that companies having expenditure greater than 3% on R&D were necessarily creating IP products. The TPO was of the view that there were other quantitative filters which would more appropriately segregate companies which were rendering comparable services as that of the assessee. In the absence of any supporting data, R&D expenditure @ 3% of the turnover cannot be considered as creating any significant economic intangibles; the TPO held and observed that rejection of this filter does not have material impact in the case of the assessee. (2.10.4) Regarding Comparables selected by the assessee but rejected by the TPO. The TPO started with a general discussion, stating that it is seen that taxpayers argue against or for a company based on the certain keywords rather than seein....
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....e assessee was verified from the information available in the public domain and a few snap shots taken by him were reproduced as under: As per TPO, it was evident from the above that the exploration can't be considered as a service. Moreover, as per TPO, the company was having 100% related party transactions as evident from the following extracts of the annual report as per P-6/AR "Your Company continued to operate with seven Regional Institutes (RI) located at Asansol/Dhanbad, Ranchi, Nagpur, Bilaspur, Singrauli & Bhubaneswar and its headquarters at Ranchi. Seven Regional Institutes designated as RI-I to RI-VII rendered consultancy services to seven corresponding subsidiaries of CIL viz. ECL (RI- 1), BCCL (RI-Il), CCL (RI-111), WCL (RI-IV), SECL (RI-V), NCL (RI-VI), & MCL (Rl- Vll)." As per AR, the company is a subsidiary of Coal India Limited and is also providing services to seven other subsidiaries of Coal India Ltd; the TPO noted. Hence, the TPO held that all the transactions are related party transactions. (2.10.6) Petron Enqineerinq Construction Limited Assessee objected to the rejection of this comparable and submitted that this company is functionally simil....
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.... Gas; Onshore Oil & Gas; Terminals & Storages; Mining & Metallurgy; and Infrastructure. And further that EIL is engaged into providing services from concept to commissioning in all the sectors listed above and it provides services beyond the commissioning of clients plants through monitoring the operation of each plant and accumulating feedback on its performance; and furthermore, that this company has a much higher turnover than that of taxpayer. Relying on his earlier general discussion; the TPO further r noted that M/s. Project and Development India Limited, a comparable selected by the assessee, is also a government company. As per TPO, Related Party Transactions (RPT) of the company is checked and it is within threshold limit. The TPO contended that all government contracts are being bid both by government and private companies on competitive basis and therefore there is no advantage to EIL on this account and that news items regarding the contracts of NTPC being bid competitively by BHEL, L&T, BGR Energy make this point abundantly clear. On the issue of High turnover the TPO observed that the taxpayer's hypothesis that there is a direct corelation between turnover and pro....
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.... ii) Capgemini, Mumbai, ITAT ITA No. 786/ Mumbai / 2011 Dated 28.01.2013 A.Y. 2007-08 (2.10.9.1.2.) As regards Abnormal Margins Issue it was argued by the assessee that comparables having 'abnormally' high margins should not be selected. In support of this the taxpayer has referred to certain judicial decision. The above objection of the taxpayer was not accepted by the TPO, stating : " In several decisions the ITATs have accepted so called high margin comparables. For instance, the ITAT, Bangalore in the case of Sap Labs(2010-TII- 44-ITAT-Bang-TP), ITAT, Hyderabad in the case of Deloitte Consulting Pvt. Ltd. confirmed selection of high margin comparables for service industry. These decisions pertain to the service sector viz. Software development and ITES. In the case of Exxon mobil the ITAT upheld Alpha Geo India Ltd having margin of 47.79% and Vimta Lab having margin of 57.68%. In any case, as per TPO in comparability analysis loss or so called higher margin is not a determining factor unless there are any peculiar economic circumstances in such a case. As per TPO, in favour of loss making companies it is generally argued that such companies should not be rejected ....
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....uch transactions under consideration, then their average should be adopted as a benchmark. It is obvious that the very rationale of having average in case of more than one transactions is to iron out the effect of extreme cases and finding the profit margin as a representative of the whole lot..... the cases of FI and ME have been held by us to be rightly excluded by the TPO because of their having different product profile and also not satisfying the requirement of Rule 10B read with Rule 10A as uncontrolled transactions. These are the reasons in support of their exclusion from the list of comparable cases and not because there was high loss in such cases. This elimination by itself would not support the omission of HT and DT, being the cases with extreme profit rate. The exclusion by the CIT(A) of these cases on the sole reason of high profits, is not sustainable. Before eliminating such cases from the count, it was incumbent upon him to show that such cases were incomparable on the basis Of relevant considerations and not the higher or lower profit rates. It is imperative to note that the list of 12 comparable cases was provided by the assessee and not something created by the T....
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....its own case. However, as per TPO, assessee has not demonstrated that there is a difference in the levels of working capital employed by it vis-a-vis the comparables. As per TPO, claim of working capital adjustment is not a matter of right; and as in the case of risk adjustment, it must be based on some data. The TPO referred to OECD guidelines which mention that no adjustment can be allowed in the absence of reliable data. The TPO referred to Paragraph 1.33 of the OECD guidelines, 2010 , in which it is stated : "[.....] To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate [emphasis added] adjustments can be made to eliminate the effect of any such differences. [....]." For Transactional Net margin method, the TPO also referred to paragraph 3.2 of the Guidelines which state: "[....] the reliability of a method should be assessed taking into account the principles discussed in this Report, including the extent and the reliability [emphasis added] of adjustments to the data used." The TPO also referred to article of ....
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....example compares their levels on the last day of the financial year. This may not, however, be appropriate if this timing does not give a representative level of working capital over the year. * In the long run Receivables + Inventory - Payables should approach zero for a comparable. If proposed Working Capital Adjustments are significant, consideration may need to be given to whether the proposed comparable is an appropriate one. * A major issue in making Working Capital Adjustments is the question of which interest rate to use. The rate to be used is determined by the tested party. In most cases a borrowing rate will be appropriate. In cases where the tested party's working capital balance is negative (that Is Payables > Receivables * Inventory) a lending rate may be considered in some cases. The example uses an interest rate based on what TestCo is able to borrow at in the local market. This example also assumes that the same interest rate is applied to payables, receivables and inventory. * The purpose of Working Capital Adjustments is to improve the reliability of the comparables. There is a question whether Working Capital Adjustments should be made when the results of so....
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....ndustry. The assessee, as also the comparables used, shall launch into a project only when they have been awarded a contract. It is not as if these parties have manufactured goods that await buyers. This being the case, there is a serious question on the very need for a working capital adjustment in the service industry. A working capital adjustment will be required only when the varying levels of the working capital deployed is actually making a difference to the margins earned by the assessee and the comparables. This is actually at the heart of every comparability adjustment. The assessee has not been able to demonstrate that the difference in the working capital deployed is making a difference in the margin earned by the assessee and the comparables." The TPO held that there was no case for working capital adjustment. (2.10.11) Regarding Risk Adjustment The TPO declined to make Risk adjustment. According to TPO, risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins. The TPO quoted To quote him, revised OECD guidelines of 2010 "Ensuring t....
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.... year by the assessee in relation to the international transaction during the course of its normal operations including depreciation and amortization expenses relating to the assets used by the assessee, but not including the following, namely. (i) interest expense; (ii) provision for unascertained liabilities; (iii) pre-operating expenses; (iv) loss arising on account of foreign currency fluctuations; (v) extraordinary expenses; (vi) loss on transfer of assets or investments; (vii) expense on account of income tax; and (viii) other expenses not relating to normal operations of the assessee; (k) "operating revenue" means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations hut not including the following, namely: (i) interest income; (ii) income arising on account of foreign currency fluctuations; (iii) income on transfer of assets or investments; (iv) refunds relating to income-tax; (v) provisions written back; (vi) extraordinary incomes; and (vii) other incomes not r....
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....ide engineering and technical assistance services to its parent company for their global projects (including projects in India) and thereby serves to augment the total strength of the Topsoe Group. The international transactions entered into are tabulated below:- Sr. No. Nature of transaction Arm's length price as per taxpayer (i) Engineering and Technical Assitance Service rendered Rs.25,00,55,515 (") Purchase.pf fixed assets Rs. 11,87,625 (iii) Reimbursement of expenses (Received Rs. 81,0000 (iv) Reimbursement expenses (paid) Rs. 13,31,078 3. The taxpayer furnished the TP Study and selected TNMM as the most appropriate method to benchmark its international transaction namely engineering and technical assistance service rendered. The taxpayer selected a set of 8 companies whose average margin was 14.45% as compared to that of the taxpayer at 11.75%. Since, the taxpayer's margin was within the range of +/-5%, hence taxpayer contended that their international transaction was at arm's length. The TPO however did not agree with the TP study and instead used certain filters and rejected 4 of taxpayer's comparables and ....
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....ction by applying various filters, is right in rejecting few of taxpayer's comparables and including new comparables without going into the functionally aspect. Issue II Whether AO/TPO is right in denying any adjustment on account of working capital, risk etc. while working out the average margins of the comparables. Issue III Whether AO/TPO is right in denying any adjustment on account of risk while working out the average margins of the comparables. Each of the issue is discussed hereinafter. 6. Issue I Whether AO/TPO's action by applying various filters, is right in rejecting few of taxpayer's comparables and including new comparables. 6.1 With regard to the above issue the taxpayer's has made the detailed submission contended that TPO was wrong in using following filters to reject the comparables selected by them and introducing new comparables. * Rejecting companies whose turnover was less than Rs. 5.00 crore * Rejecting companies having RPT of 25% and more * Rejecting companies with different financial year ending. * Not rejecting the companies having high turnover filter/super profit * Rejecting companies where ....
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....anies having more than 25% related party transactions could not be treated as operating in uncontrolled environment and RPT could have substantial impact on margins of such companies. The taxpayer has argued that there is no rational basis for applying the threshold limit of 25% of sales. The AR has referred to the number of ITAT decision in this regard. This panel has carefully considered the above objections of the taxpayer, but are not inclined to interfere in the TPO's action in this regard. Cases having some RPT can be taken as comparable as they do not materially affect the price/margins. This view has been upheld by various ITAT's including ITAT, Delhi. In the case of Sony India Ltd. ITAT, Delhi did not lay down any threshold limit for applying RPT filter. This was clarified by ITAT, Delhi in their subsequent decision in the case of Global Logic India P. Ltd. (2011 TII-35- ITAT-Del-TP). Reference may also be made to ITAT, Hyderabad's decision in the case of ADPP Ltd. (2011-TII-44-ITAT-Hyd-TP) and Deloitte Consulting India P. Ltd ITA No. 1082/Hyd/2010 dated 22.07.2011. In the aforesaid decisions also threshold limit of 25% was accep....
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....nternational transaction. (ii) While apportioning such data, adequate care needs to be taken so that the Profit Level Indicators are computed comparably. Further, for the determination of profit level indicators, certain entries having bearing on the cost and income are- interest, provisions, losses/ gains on account of foreign exchange, etc, which normally as per the business practice are accounted for at the end of the accounting year. Under both the situations, whether the data pertaining to the period prior to the accounting year or subsequent to the accounting year are integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial year data is concerned. Since, there is no requirement as per company law or as per accounting standards that the da'ta pertaining to a particular quarter needs to be closely compartmentalized by providing for various provisions etc. for each quarter, the validity of such data for the purpose of comparability will be a matter of question mark. Also, some of the companies provide for depreciation at the end of the accounting period. ....
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....The taxpayer has objected to inclusion of high turnover/high margin companies in the set of comparables. We have carefully considered the arguments of the taxpayer. For the purpose of transfer pricing analysis, the comparables are selected which has similar functional profile. The profit margin of any company is not an indicator of its functional profile. Unless, the taxpayer is able to point out any functional differences, there is no reason to exclude a high profit margin company from the set of comparables. Further, high turnover is no criteria to determine the functional comparability. Bigger size may result into higher revenue and not necessarily higher margins. In this highly competitive environment, customer is very demanding and refuses to pay higher rates if he can obtain similar services from other smaller vendors having no brand and small turnover. What matters most in the service sector is the functional similarity, nature of services rendered, and not the brand or size of the company. In the case of Symantec Software Solutions P. Ltd. (2011-TII-60-ITATMUM-TP) which was related to market support sen/ice the ITAT has observed as under:- (i) It ....
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.... the results arising from the proposed "comparable" merely appear to be very different from the results observed in other proposed "comparables". 3.64 An independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.70 to 1.72. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that loss- making transactions can never be comparable. In general, all *relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of loss-making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result. 3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable Circumstances in which loss-making transactions/enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurr....
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....ing the concept of inter-quartile range which is not provided under the Indian law. Without prejudice to above, in the case of SAPLabs India Ltd [2010-TII-44- ITAT-BANG-TP], the Hon'ble ITAT has held that if cases of abnormal margin on the high side are to be removed then those on the lower side (having margin lower than the taxpayer) also should be removed. The taxpayer has relied on the decision of Hon'ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. to derive support on its claim that since their turnover is Rs. 25 crores, therefore, the comparables which are having high turnover viz. EIL, should not be considered as comparable. The decision of Hon'ble Delhi High Court in the case of Agnity India Technologies P, Ltd. has been based on the decision of Delhi Bench of the ITAT in the same case in ITA No. 3856/Del/2010 wherein on page 5, para 3.3 of the order, the AR of the taxpayer had submitted a table differentiating the risk profile, nature of services, ownership of branded/ proprietary product, situs of services rendered, expenditure on advertising/ sales promotion and brand building and expenditure on research and devel....
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....ction 92C(2) when more than one price is determined then the arithmetic-a/ mean of such prices shah' be the arm's length price. Therefore, when there is a robust set of severa/ comparables, such set: obviously contains comparables having low margin, norma/ margin and a/so high margin cases. The arithmetica/ mean of such prices takes care of a// kinds of cases including loss or high profit making, low turnover, high turnover, low end-high or end activity, etc. Thus, removing a comparable from such a set simply on the ground of high profit making would neither be as per the Act and nor would it result in a representative set. Without prejudice to the above, if high profit making comparables are to be removed then consequently loss or low profit making companies are also required to be excluded. This view has been upheld by the ITAT, Bangalore in the case of Sap Labs (supra). This would, however, mean the implied application of inter-quartile range concept which is not permissible under the Act, The Act mandates use of arithmetical mean. In this connection reference may. be made to ITAT, Mumbai's decision in the case of Dieageo India Private Limited (2011-TII-94-ITAT-MU....
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....ioned that the taxpayer's margin is not being compared with the margins of these "high-margin'' comparables alone These comparables are only which contains even low margin cases. The margin of the taxpayer is being finally compared with the average margin of the comparables finally selected in this order. Hence, from the above discussions, it is more the amply clear that high turnover and profitability in a service industry has no correlation at all, therefore the taxpayer's reliance on Agnity Technologies (supra) and thereby arguing that the high turnover comparables should be removed does not cut much ice, Ergo, no comparable can be rejected merely on the basis of margins and turnover for the purpose of comparability analysis and Panel declines to interfere with the stand taken by the TPO in this regard. Rejecting companies where export revenues is less than 75% of total income The taxpayer is providing engineering and technical services, therefore in order to select similar comparable which are in the engineering and technical services, TPO has selected this filter. As per Rule 10B(2), it is important to judge any international transaction keeping in mind the "co....
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....ieved from the exclusion of Petron Engineering Construction Ltd. It is seen that this company is engaged in installation, construction and commissioning of projects as against the taxpayer's business of providing engineering and consulting services, therefore this company is functionally different from that of the taxpayer. Hence, Panel feels that the said company has rightly been excluded for the purpose of comparability analysis. 6.4 As regards taxpayer's objection to the inclusion of 2 companies namely EIL and Mahindra Consultancy Engineers Ltd. is concerned, it is seen that every company tries to put its best face both in its website as well as in annual report. Any person can pickup certain keywords from the website and annual report and may argue that it is providing a sophisticated service, has certain patents, has specialized in certain areas, has obtained excellence in certain areas. However, what needs to be seen whether that is the substantial activity of that company or it is just an area which company wants to develop and do better work. Further, under TNMM1 it is not possible to find companies providing exactly similar services as that of taxpayer because th....
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....ide the complete annual report, director's report and financials and TPO then is directed to take a call accordingly about the inclusion/exclusion of this company as a comparable. Engineers India The taxpayer primarily wants this comparable to be excluded on account of * RPT more than 25% * Functionally different * Predominantly rendering service to government companies This Panel has gone through the TPO's comments on the above grounds and also during the proceedings the taxpayer was requested to bring the data relating to RPT but inspite of the opportunity the data relating to RPT was not made available showing that it is more than 25%. As regards the arguments relating to catering to government sector/PSU, this Panel is of the view that in today's economic world the government companies/PSU s work as per the market forces and EIL has no advantage on this score and further as mentioned above that in a service industry there is no direct co relation between profitability and high turnover, accordingly, this Panel holds that EIL is a valid comparable. Mahindra Consulting Engineers Ltd. With regard to the inclusion of this company as a c....
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....ich the reliable data is to be provided by the taxpayer. 7.2.2 The TPO has stated that the taxpayer has not demonstrated that there is a difference in the levels of working capital employed by it vis-3-vis the comparables which affect prices and consequently profits. With regard to this objection, as discussed above that holding of inventories, trade debtor/ creditors, trade receivable/payable has always an interest cost. Therefore there is definitely a connection in the level of working capital and the price at which one is willing to offer its services/goods. Hence, this ground of rejecting taxpayer's claim of working capital adjustment by the TPO is not tenable. 7.2.3 TPO has also referred to OECD guidelines which state that only reasonably accurate adjustments can be made. In. this respect, TPO has raised the issue of unreliable data and has pointed out that monthly data of comparables as well as segmental data is not available for making reasonably accurate working capital adjustment. Monthly data in respect of comparables would not be available. This DRP is of the view, that the average of opening and closing balance of the inventories and of trade receivab....
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....tware (26 SOT 226) (Bangalore- ITAT) 8. Issue III Whether AO/TPO is right in denying any adjustment on account of risk, while working out the average margins of the comparables. 8.2 Having gone through the taxpayer's submission in this regard and having considered the facts and evidences on records and case laws relied upon both by the TPO and taxpayer in this regard, this DRP agrees that for the purpose of meaningful comparison, Transfer Pricing provisions do prescribe that the "reasonable and accurate adjustments" be made only if they enhance comparability. But at the same time such data must be reliable and robust and there should be no scope for mechanical adjustments. As regards adjustment sought, it is seen that no claim for working capital has been made before the TPO and therefore no such claim can be entertained now. With regard to the risk adjustment, TPO has discussed in detail in his order as to why this adjustment cannot be carried out. The Panel has carefully considered the facts of the case and the submissions of the taxpayer. As per Rule 10B (2) and 10B (3) of Income Tax Rules, 1962, Indian transfer pricing provisions prescribe only for "reasonable a....
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....ns are discussed below: (a) Vedaris Technology 2010-TII-10-ITAT-Del-TP: No risk adjustment to be allowed even on ad hoc basis particularly when the same has not been quantified; (b) Marubeni India Private Ltd (2011-TII-36-ITAT-Del-TP) in which it was held that as the taxpayer failed to bring any evidence on record to show that there was any difference in risk profiles of comparable companies and since the taxpayer failed to file the details exhibiting risk borne by comparables, no risk adjustment can be given, even on ad hoc basis. (c) ADP Private Limited (2011-TII-44-ITAT-Hyd-TP) wherein the ITAT held that there is no thumb rule for allowance of risk adjustment (d) Symantec Software Solutions Pvt. Ltd. (2011-TII-60-ITATMum-TP): The ITAT held that; (i) Until and unless it is shown that the difference in function and risk results in deflation or inflation of financial results of the comparables, it is not a general rule to grant it as a standard adjustment. (i) The taxpayer could not show how such difference in risk and functions affected the results of the comparables. (e) ST Micro Electronics (2011-TII-63-ITAT-Del-TP): The taxpayers claim that it was a risk fr....
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.... of the following invoices relating to the month of March 2010: (i) Canon India P. Limited Rs. 46,757/- (i) SS Stationers Rs. 32,005/- Referring to the account of printing and stationary for April 2010 (i.e. the subsequent period) it is brought out that the provision was reversed on 9.4.2010 and only net amount remained to be claimed in the financial year 2010-11. It is therefore, requested to delete the proposed addition. 10.4 The Panel has examined the matter. From the submissions of the taxpayer it is evident that provision of Rs. 75,000/- made on 31.03.2010 is with reference to the bills of SS Stationers and Canon India P. Limited. As against the total of such bills at Rs. 78,762/-, the taxpayer made a provision of Rs. 75,000/- on estimate basis. Thus, it cannot be said the provision so made of Rs. 75,000/- during FY 2009-10 was excessive or unsupported by the corresponding claims. The AO has disallowed the claim only for the reason that it was reversed on 9.4.2010 without realizing that by debiting total sum of Rs. 78,762/- corresponding to these invoices and simultaneously crediting Rs. 75,000/- on account of reversal of the said provision, the taxpayer has claime....
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.... that the disallowance made by the AO may be deleted. 11.4 The Panel has examined the matter. The allegation of the AO has been that the taxpayer has claimed deduction u/s 10A of Rs. 2,65,60,262/- but while doing so interest of Rs. 29,74,264/- was added thereby claiming excess deduction. The Panel has perused the taxpayer's letter dated 31.1:.2014 submitted to the AO where reconciliation of taxable income between STPI and others has been made (PB 148-149). A perusal of the reconciliation shows that interest on bank deposits of Rs. 29,74,264/- has been credited under the column for 'others' and the no income from bank deposit is taken to the STPI unit. Accordingly, the Panel observes that the taxpayer itself has excluded the said interest from bank deposits for computing admissible deduction u/s 10A of the Act. In this scenario, the Panel is of the view that there was no valid reason with the AO to hold otherwise. It appears that the AO has not duly appreciated to the contention of the taxpayer and passed his verdict unilaterally. The Panel therefore, directs the AO to make computation of total income separately for STPI unit and 'others' wherein interest from bank de....
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....AO are not applicable in the present case, as no payment in respect of rent has been made by the taxpayer to any related person as specified u/s 40A(2)(b). Moreover, the observation of the AO that no margin has been charged on the said payment from the parent company is also irrelevant. This issue relates to calculation of margin which has already been dealt with in Transfer Pricing order by the TPO. 12.4 The Panel has examined the matter. On perusal of the details of office rent expenses (PB 150) it is seen that the taxpayer has taken office premises of STPI from M/s BHL Forex and Finlease Limited whereas other area has been taken from Ms Naseema Lone, Wasim Ahmed Bhatt, Vinay Nagrath and Neera Vinay Nagrath. None of the premises have been taken on rent from the related party specified u/s 40A(2)(b). It is further seen that total rent paid for STPI unit is Rs. 4,20,97,547/- whereas for the other area it is Rs. 1,60,09,554/-. Thus, the AO has apparently considered the rent for 'other area' and computed the disallowance u/s 40A(2)(b) @15% of the said sum of Rs. 1,60,09,554/-. Prima-facie when rent has not been paid to a related party, the Panel fails to understand as to ho....
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..... [2008] 306 ITR 42 (Delhi) 14.4.1 The Panel has considered the matter. From the facts mentioned above it is clear that the taxpayer has claimed deduction to the extent of 90% of admissible deduction u/s 10A in the computation of total income. No action has been taken by the taxpayer to make any amendment to the total income by filing a revised computation of income within the time permitted u/s 139(4) of the Act. Even no claim was made before the AO during the course of assessment proceedings. The taxpayer has made the claim that it is entitled for 100% of deduction u/s 10A for the first time before this Panel. Needless to reiterate that the said claim has been filed beyond the time to file revised return of income u/s 139(4), therefore, is to be considered as the belated claim Supreme Court of India in the case of Goetze (India) Ltd, 157 Taxmann 1 was seized of a similar issue. In that case after the return was filed, the taxpayer sought to claim a deduction by way of a letter before the AO. The said claim was beyond the time permitted u/s 139(4) of the Act. The deduction was disallowed by the AO on the ground that there was no provision under the Act to make an amendmen....
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....fore, the decision of Hon'ble Supreme Court in the case of Goetze (India) (supra) would be squarely applicable. 14.4.3 Considering the facts and circumstances of the case in totality, the claim of the taxpayer cannot be accepted by the Panel. 14.5 The ground of objection is disposed off accordingly. 15. The taxpayer has cited in its submission various judicial pronouncements which have been considered by this Panel. These are distinguishable from the factual matrix in the case of the taxpayer. Accordingly, a detailed description of such analysis is not being mentioned in this order. (4) The AO passed aforesaid Assessment Order dated 04.12.2014 making addition of Rs. 3,20,93,274 on account of Transfer Pricing Adjustments. Relevant portion of the Assessment Order is as under: " Assessee filed return of income declaring a income of Rs. 43,58,900/- on 30.09.2009. The case was selected for scrutiny and notice under section 143(2) was issued on 30.08.2010. Again notice u/s 143(2) along with questionnaire under section 142(1) was issued on 07.08.2012. In response to notices, Sh. Yogesh Jain, C.A./Authorized Representative appeared from time to time and filed th....
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....l adjustment cannot be made to the margins of the comparables without knowing which risk was taken by the entity concerned and hot its profitability was affected. Profitability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. In my view assessee cannot be compared to a risk free security. Even other methodology, whether adhoc adjustment as in case of Sony India, CAPM or Sharpe Ratio ( which is a measure of excess return on risk undertaken by an entity investing in a particular asset), as applied y Hyderabad ITAT in the case of ADP Private Ltd. are based on return of capital which is not the PLI adopted by the assessee and the TPO. All this requires robust and reliable data, both for the assessee and the comparable in the absence of which risk adjustment cannot be considered for enhancing comparability. Thus claim of the assessee is not acceptable. 7. Assessee may object on the computation margin of this comparable company. In this regard it is to mention here that margin has been computed in accordance with the principles governing the treatment of an item as operating and non-operating has been followed which was is....
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....ngineers Limited 12.87 5. Project and Development India Limited 23 09 6. UB Engineering Limited 9.71 AVERAGE 26.33 9. Computation of Arm's Length Price: Operating Cost 223,767,776 Arm's length price at a Margin of 26.33% 282,685,831 Price Received 250,055,515 105% of International Transaction 262,558,290 Proposed Adjustment u/s92CA 32,630,317 Thus the above different of Rs. 3,26,30,317/- is treated as transfer pricing adjustment for the FY 2009-10. No adverse inference is drawn in respect of the other international transactions undertaken by the assessee during the FY 2009-10. The assessee was afforded reasonable opportunity of being heard. Therefore, an addition of Rs. 3,26,30,317/- was made to the income of the assessee being difference between the Arm's Length Price. Draft Order u/s. 143(3) rws 144(C) of the I.T. Act, 1%1 was passed on 31.01.2014. Penalty proceedings u/s 271(l)(c) of the IT Act, were also initiated on this point for furnishing inaccurate particulars of income. In response, to the Draft Order the assessee filed an appeal before the DRP-I, New Delhi against the draft assessme....
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....f Order dated 26.11.2014 passed by TPO giving appeal effect to DRP order for AY 2010-11 8 Copy of Order u/s 143(3) dated 27.11.2014 read with rectification order u/s 154 dated 04.12.2014 passed by AO for AY 2010-11 9 Copy of letter no. L/40 dated 31.12.2013 filed with TPO 10 Copy of audited accounts for the year ended 31.03.2010 11 Copy of report u/s 10A in Form 56F dated 25.09.2010 12 Copy of Computation of income for FY 2009-10 (AY 2010-11) 13 Copy of Order dated 02.05.2017 passed by Hon'ble ITAT, New Delhi for AY 2009-10 in the case of assessee 14 Copy of Relevant extract of letter L/161 dated 28.08.2017 filed with TPO for giving appeal effect to ITAT order for AY 2009-10 in the case of assessee 15 Copy of Appeal effect order u/s"254 dated 30.01.2018 passed by TPO for AY 2009-10 in the case of assessee 16 Copy of Relevant extract of Annual report of Mahindra Consulting Engineers Ltd. for FY 2009-10 and profile of the Company downloaded from the website 17 Copy of Relevant extract of Annual report of Engineers India Ltd. for FY 2009-10 18 Copy of Printout of the profile from the website of Petron Engineering Constr....
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....anies was 14.45% (refer page 2 of PB). The actual margin of the assessee for FY 2009- 10 was 11.75%. The Ld. TPO has initially calculated the margin of the comparable companies @ 26.33%. The Ld. DCIT (after incorporating the Hon'ble DRP's order) after giving relief for working capital adjustment has computed the margin of comparable companies @ 26.09% (refer page 87 of PB). It may be noted that this is 2nd year of transfer pricing assessment, In the preceding year i.e., AY 2009-10. an addition to income was made by ld. TPO / AO. However, after the Hon'ble ITAT order , the same got reduced to NIL. Ground 1(a) The learned DCIT (after incorporating Ld. DRP's order! has erred on facts and in law in making addition of Rs. 3.20.93.274 on account of adjustment in value of international transaction, on account of following: (a) Selecting 2 new comparable companies Brief facts The Ld. TPO has selected following 2 and added the same to the list of final comparable companies : * M/s Engineers India Ltd. (Margin - 67.77%) * M/s Mahindra Consulting Engineers Ltd. (Margin - 23.50%) The detailed factual arguments were submitted to the Hon'ble DRP (refer page 49....
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....nies were available, the Hon'ble ITAT on the basis of Directors Report etc. concluded that transaction with government companies was more than 25% and, hence, EIL was not a comparable company. * This decision of Hon'ble Mumbai ITAT has been followed by Hon'ble ITAT Delhi in the case of ❖ Bechtel India (P.) Ltd. v. DCIT [2016] 66 taxmann.com 6 (Delhi - Trib.) (para 12.4 at page 43 & 44 of the compilation of cases) ❖ AT & T Communication Services India (P.) Ltd. v. ACIT [2018] 91 taxmann.com 58 (Delhi - Trib.) (para 30 at page 56 & 57 of the compilation of cases) ❖ Honda Trading Corp. (India) (P.) Ltd. V. DCIT [2014] 44 taxmann.com 333 (Delhi -Trib.) * Further, Hon'ble ITAT Delhi in the case of Eli Lily & Co. (India) Ltd. v. ACIT [2018] 98 taxmann.com 380 (Delhi - Trib.) (para 16 at page 128 of the compilation of cases) following Thyssenkrupp (supra) has discussed the comparable - Engineers India Ltd. and has given the various reasons for rejection of EIL as a comparable company. * Second Ground - Scale & Size of the company : The total turnover of EIL was 1984.10 crores, as against the appellant turnover of 25 crores . Thus EIL's turnover is 80....
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....industry for FY 2009-10 is 9.79% (taken from the Prowess software), The Consulting and Engineering division of EIL has a margin of 67.77% which is clearly an extremely high margin compared to average industry margin. In light of the above, it is submitted that EIL cannot be selected as a comparable company. * Fourth Ground - Segmental accounts not available: We would like to submit that only segmental turnover and profit of the EIL is available in the audited accounts. However, no segmental break up of expenses are available in the audited accounts and further there is some unallocable expenditure for which no justification was provided by Ld. TPO while calculating the margins (refer page 216 of the PB). It is also submitted that the audited accounts do not contain the segmental profit & loss account and balance sheet. Therefore, it is not possible to compute the Working capital adjustment in case of EIL. It may also be noted that the Ld. TPO, while giving effect to the Hon'ble DRP's order has made the wrong calculation of WCA. He has computed the WCA adjustment using the segmental profits but the figures of debtors, creditors and inventory were taken from the consolidated ba....
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....bsp; (in lakhs) Particulars _______________________ HTIND (appellant) ____ Mahindra Total employee & sub-consultancy costs 1000.44 452.02 Sub consultancy costs 0.00 68.90 % of sub-consultancy costs 0% 15.24% From the above, it will be seen that while assessee is rendering services by employing its own employees whereas roughly 16% of the activity carried out by Mahindra has been outsourced. Therefore, its business model is different from appellant and, hence, cannot be selected as a comparable c....
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.... the appellant namely in the field of refinery, petrochemical & fertilizer. * In view of the above, it is humbly prayed that Petron Engineering Construction Ltd should be selected as a suitable comparable and be added in the list of final comparables. Ground 1(c) The learned DCIT (after incorporating Ld. DRP's order) has erred on facts and in law in making addition of Rs. 3,20.93,274 on account of adjustment in value of international transaction, on account of following: (c) Rejecting adjustment in margin due to different risk profile of comparable companies Brief facts * Appellant vide letter No. L/40 dated 31.12.2013 submitted before Ld. TPO that it is a captive service provider to it's AE - Haldor Topsoe A/s. It operates in a risk-insulated environment, since it operates on a cost-plus model and is compensated for all the costs borne by it. The levels of risk borne by third- party comparables (which are entrepreneurs) are much more than those of HT1PL. It was also submitted that difference in risk profile of the appellant and comparable companies are on account of the various risk including Market risk, Service liability risk, Research & development risk, Credi....
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....to submit that this onus placed by Hon'ble DRP on the appellant is an onus which places an impossibility on the shoulders of the appellant in as much as the appellant has no means to ascertain like risks actually undertaken by the various comparables. It is submitted that the DRP thus erred in law in placing the onus on the appellant in view of the celebrated 'maxim lex non legit impossibilia'. Therefore, it is not practically possible to calculate the adjustment on account of each risk factor for every comparable company. * In this connection, we would like to submit that there are scores of judgements on this issue. However, we place reliance on the following latest decisions wherein the risk adjustment has been granted in case of captive service provider: ❖ Nokia India (P.) Ltd. v. DCIT [2018] 91 taxmann.com 288 (Delhi - Trib.) (refer para 7.4 at page 91 of compilation of cases) ❖ DCIT v. Applied Micro Circuits India (P.) Ltd. [2017] 88 taxmann.com 276 (Pune - Trib.) ❖ CAPCO IT Services India (P.) Ltd. v. ITO [2017] 79 taxmann.com 214 (Bangalore -Trib.) ❖ Starent Networks (India) (P.) Ltd. v. ACIT [2018] 90 taxmann.com 367 (Pune -Trib.)....
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.... u/s 10A :Rs. 2,65,60,262 * The report obtained u/s 10A in Form 56F dated 25.09.2010 and its detailed calculation was filed with the Ld. AO at the time of assessment proceedings. The Ld. AO had passed the draft assessment order dated 31.01.2010 allowing the benefit of section 10A and allowed the claim of the appellant of Rs. 2,65,60,262 (being 90% of the amount of the income). * The assessee while filing its objections with Hon'ble Dispute Resolution Panel ["DRP"] realized that while computing total income, the said deduction u/s 10A was inadvertently claimed at 90% of the eligible profit of the undertaking (i.e. 90% of Rs. 2,95,11,402) instead of 100% of the eligible profit as contemplated in Section 10A of the Income-tax Act. * The relevant provision of section 10A is reproduced below for ready reference: "10A(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be - (i) hundre....
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....te Corporation of India Ltd. v. CIT, 187 ITR 688 (SC) and also in the case of National Thermal Power Corporation v. CIT, 229 ITR 383 (SC)." (6.1) The Ld. CIT(DR) did not object to admission of the additional ground of appeal in view of the Assessee's contention that relevant facts for adjudication of the additional ground of appeal are already on record of assessment proceedings. Therefore, the additional ground of appeal is admitted. (7) In ground 1(a) of appeal, the Assessee has objected to selection of two new comparables, namely: Engineers India Ltd. ("EIL" for short) and Mahindra Consulting Engineers Ltd. ("Mahindra" for short). (7.1) As far as the comparable of EIL is concerned, the Ld. Counsel for Assessee contended that this was a Government entity and Related Party Transactions exceeded 25%. He submitted that Mumbai Bench of ITAT, in the case of Thyssenkrupp Industries India (p.) Ltd. vs. Addl. CIT. [2013] 33 taxmann.com 107 (Mumbai - Trib.) affirmed by Hon'ble Bombay High Court in [2016] 68 taxmann.com 248 (Bombay), has held: "The second reason is that Engineers India Limited earned income from turkey project by successfully completing the project of IOCL and ....
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....rvices to its AE alone without acquiring any intellectual property. The Ld. Counsel for Assessee further submitted that EIL had an abnormally high margin at 67.77% which was extremely high compared to average margin of Consulting & Engineering Industry, which was 9.79% and he contended that EIL cannot be selected as a comparable in view of the abnormally high profit margins. The Ld. Counsel for Assessee also submitted that the audited accounts of EIL do not contain segmental profit and loss account and balance sheet due to which it was not possible to compute the working capital adjustment in the case of EIL. Relying on Blackrock Services India (P.) Ltd. vs. ACIT [2018] 93 taxmann.com 251 (Delhi-Trib.) and Messe Dusseldorf India (P.) ltd. vs. DCIT [2018] 90 taxmann.com 159 (Delhi-Trib.), the Ld. Counsel for Assessee contended that EIL cannot be taken as a suitable comparable company in the absence of its segmental accounts. (7.2) The Ld. CIT(DR), in response, submitted that although EIL, a Public Sector Undertaking, had rendered services to other Government companies and to Government entities; and in that sense had a substantially high ratio of Related Party Transactions, ye....
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....n outsourced. Therefore, its business model is different from appellant and, hence, cannot be selected as a comparable company. He further submitted that Mahindra has been specifically excluded by the Hon'ble Delhi Tribunal as the comparable company in view of highly technical capabilities of executing infrastructure development projects in the cases of Rolls-Royce India(P.) Ltd. vs. DCIT [2016] 69 taxmann.com 426 (Delhi-Trib.) and Alcatel-Lucent India (P.) Ltd. vs. DCIT [2017] 788 taxmann.com 157 (Delhi-Trib.). On the other side, the Ld. CIT(DR) submitted that this issue may be remanded back to TPO/AO for this year also, as was done by Co-ordinate Bench of ITAT, Delhi in Assessee's own case for AY 2009-10. As neither side [neither the Ld. Counsel for Assessee, nor the Ld. CIT(DR)] has brought any material facts to our attention to distinguish facts and circumstances of this year from AY 2009-10; we respectfully follow the order of Coordinate Bench of ITAT, Delhi in Assessee's own case for AY 2009-10 and set aside this issue regarding comparable of Mahindra to the file of TPO/AO for fresh order, with the direction to exclude Mahindra as a comparable if the assessee is also to subst....
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....g not maintainable. (10) Coming to the additional ground of appeal, the Ld. Counsel for Assessee submitted that the additional ground of appeal raises a question of law arising from the facts which are already on record of assessment proceedings. He relied on the cases of Jute Corporation of India Ltd. vs. CIT 187 ITR 688 (SC) and National Thermal Power Corporation vs. CIT 229 ITR 383 (SC) in support of prayer for admission of the additional ground of appeal. The Ld. CIT(DR) did not oppose the admission of the additional ground of appeal. However, he submitted that the issue may be restored to the file of the AO for verification with records. In National Thermal Power Co. Ltd. vs. CIT 229 ITR 383 (SC), the Hon'ble Supreme Court held:"... where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee." Respectfully following National Thermal Power Co. Ltd. vs. CIT (supra), we admit the additional ground of appeal and restore t....
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....in Crs.) (in %) Crs.) (in %) (in %) Cressanda 1 Solutions Lid 31-03-2010 1.41 1.41 100 00 0.69 1.74 39.66 1.09 77.30 2.92 #NIA -18.97 Quinlegra 2 Solutions Lid 31-03-2010 37.38 37.38 100 00 27.44 40.94 67.02 33.76 90.32 58.57 #NIA -8.67 3 Allco Embedded 201003 6.93 6.93 100 36 7.2 50.00 6.86 $8.99 5.82 0.00 6.13 HS Software 4 (India) Ltd. 31-03-2010 161.88 161.88 100.00 92 41 147.58 02.02 158.33 97.81 28.35 096 10.29 Cat 5 Technologies 31-03-2010 7.93 100.00 469 7.25 64.69 7.87 99.24 80.7 #N/A 11.31 Lid Sanıklıya Infolech Lid 31-03-2010 40.78 40.78 100.00 25.52 34.49 73.99 33 86 83.03 51.54 #N/A 11.42 Persistent Systems & Solutions Ltd T Merged 31-03-2010 6.67 6.67 100.00 3.78 5.78 65.40 6.67 100.00 2.99 5.40 15.40 8 Mindtree Lid 31-03-2010 1233.7 1233.7 100.00 753.7 1060.8 71.05 1155.8 93.69 646 1.72 16.62 Thinksoft Global 9....