TMI Blog2013 (4) TMI 772X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod the appellant shifted from Cost Plus Method to Transaction Net Margin Method (TNMM). c) The comparables selected by the appellant were on random basis that too not selected on methodical way. d) The appellant could have selected more comparables from companies available in India apart from the selected companies. e) The above such selection by the appellant would give biased results and the same was selected with an intention to show low and negative Profit Level Indicator (PLI). f) The comparables chosen by the TPO was most appropriate particularly as the appellant has also suggested similar comparables. g) The PROWESS is the only public domain and comparables selected there from are an acceptable one and comparables from any other sources are not acceptable. 3. The DRPITPO/AO erred in rejecting the approach adopted for the transfer pricing analysis and contemporaneous documentation maintained by the appellant. 4. The DRP has erred in upholding the comparables chosen by the TPO for determining Arm's Length Price. 5. The DRP/TPO/AO has erred in not considering that the expenses incurred ₹ 77,56, 037 in shifting of office from Adyar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of each element in the steel frame for manufacture and design engineering section which develops the connection patterns for ht steel section. Therefore, the TPO rejected the comparables relied on by the assessee. The TPO further observed that Cost Plus Method cannot be adopted as there was no standard formula adopted by the company to determine the gross profit. The TPO held that comparable Uncontrolled Price (CUP) method, Resale Price Method(RPM), Profit Split Method (PSM) and Cost Plus Method (CPM) are not appropriate methods for determining ALP. He concluded that Transaction Net Margin Method (TNMM) was to be adopted. The TPO proceeded to choose comparables using Prowess and Capitaline data bases and found that IOT Design and Engineering Ltd.(Percentage of profit to cost 10.48%) and L T Valdel Engineering Ltd.(Percentage of profit to cost 24.12%), data can be relied in the case of the assessee for determining the ALP. The TPO also chose the profit level indicator which is operating profit/operating cost. The TPO arrived at the arithmetic mean of the PLI of the comparables at 17.30%. According to the calculation of TPO, PLI of the assessee company was 3.23% and arrived at ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one by the assessee had nothing to do with the basic/primary design function. Connecting design was about identifying how the two steel pieces (members) like column, beam, plates etc. are connected based on the primary design information provided to the assessee. The view of the TPO was that the assessee was executing designing function in Architectural and Engineering activities and related technical consultancy services was based on that understanding. The choice of the comparables was also on that basis by the TPO. It was submitted that TPO did not reveal the analysis made in choosing the particular comparables i.e IOT Design and Engineering Ltd. and L T Valdel Engineering Ltd. It was submitted that the assessee analysed the functions performed by these companies with the public documents filed before the Registrar of Companies and their websites and found that these companies were performing basic/architectural design/primary design function and also as Engineering Procurement Contractor/Engineering Procurement Contract Management. But the TPO could not appreciate the same. 5. The ld. A.R of the assessee further submitted before the DRP that the industries chosen for selec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 Expenses Establishment Expenses 46,670,134 Administrative Overhead 2,984,168 Loss on sale of assets (5,859) Total expenses 46,648,443 81,842,000 Profit (Loss) before depreciation and tax (1,307,307) 9,633,000 Depreciation 3,208,703 5,664,000 Profit (Loss) before tax and without deducting loss on sale of fixed assets -4,510,151 3,969,000 Profit (Loss) before tax/sales % (PLI) -9.33% 4.34% Arithmetic Mean - 2.50% 7. He therefore, argued before the DRP that the TPO was not ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition of the differential amount of ₹ 2,54,30,779/- to the income of the assessee as adjustment to the ALP. 13. On appeal against the order of the Assessing Officer making addition to the ALP of the assessee as opined by the TPO before the DRP, the assessee submitted that two companies relied upon by the TPO were engaged in the business which was quite distinct and different from the business of the assessee and the assessee by its own cited the financial figures of two companies viz. M/s Zamil Steel Engineering India Pvt. Ltd and M/s Blackstone Group Technologies Pvt. Ltd., which, according to the assessee, were engaged in the business which was comparable with the business of the assessee. The DRP called for a remand report from the TPO. The DRP in this respect, observed as under: 18. The matter was referred back to the TPO. The assessee submitted that the TPO agreed to drop the companies IOT Design and Engineering Ltd and the assessee agreed to drop M/s Zamil Steel Engineering India Pvt Limited from the comparables. But the assessee objected to inclusion of even M/s L T Valdel Engineering Ltd, on the grounds of functional dissimilarity. 14. After this, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was a KPO basically engaged in ITes services? Typically, KPO and the designing and engineering companies are two different entities having different capabilities. The assessee should have made up its mind. It seems that it did not carry out its FAR anal sis. It may also lead us to say that the documentation of the assessee was not appropriate. This is also borne out by the fact that the assessee initially stated it was adopting cost plus method but then agreed for TNMM, after the TPO adopted it. All these suggest that the documentation of the assessee was not appropriate. Appropriate action on that needs to be initiated by the TPO on that score. 25. On the issue of two comparables selected by the assessee on its own, there can be case of many more companies in India which can be selected at random by the assessee. Why did the assessee choose only these two companies? It seems that reason could be low or negative PLI for these selected companies. These companies were not selected on the basis of any methodical selection but were selected randomly. Such random selection can often be considered biased, and hence may give biased results. The Panel decided to not consider them. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of the assessee. In our considered opinion, without finding functional comparability or otherwise, the DRP was not justified in rejecting the contentions of the assessee merely on the ground that there may be many more comparable cases without citing such cases. In the above circumstances, in our considered opinion, the DRP should have decided the issue by taking into consideration the functional comparability of all the four cases with the case of the assessee. Further, the DRP has not stated in its order the finding of the TPO in the remand proceedings. We, therefore, set aside the order of the DRP and restore the matter back to the file of the DRP for adjudicating the issue afresh in the light of the discussions made herein above by passing a speaking order. Needless to mention that DRP shall allow reasonable opportunity of hearing to both the parties. Thus, the grounds of appeal of the assessee are allowed for statistical purposes. 19. In Ground No.5 of the appeal, the grievance of the assessee is that the DRP/TPO/AO erred in not considering that the expenses incurred of ₹ 77,56,037/- in shifting of office from Adyar to Perungudi requires adjustment in determini ..... X X X X Extracts X X X X X X X X Extracts X X X X
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