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2015 (11) TMI 1563 - ITAT DELHI

2015 (11) TMI 1563 - ITAT DELHI - TMI - Transfer pricing adjustment - determination of ALP - selection of comparable - A.R. contended that the TPO/ DRP has arbitrarily rejected the functionally comparable companies namely Steewards Lloyed India Ltd. for TP. - Held that:- TPO has rejected the companies on the sole ground that these companies fall in service filter and has service income to sales income ratio of less than 75% whereas a bare perusal of the audited financial statement of the company .....

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denying the benefit of capital utilization adjustment and risk adjustment goes to prove that the objection raised by the tax payer having been mechanically disposed off without returning the specific findings as to how and under what circumstances, the data brought on record is not reliable or robust. TPO/DRP has neither declared the data brought on record by the taxpayer as unreliable nor they have injected fresh data to assess the capital utilization adjustment and risk adjustment as claimed b .....

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tly, Ground No.2 read with Ground No.1.6 are determined in favour of the appellant for statistical purposes and the file is ordered to be restored to the TPO to decide the matter afresh by passing speaking order after providing opportunity of being heard to the parties. - I.T.A. No.1476 /Del/2015 - Dated:- 20-11-2015 - SHRI J. S. REDDY, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER Appellant by : Shri Rahul K. Mitra, CA Respondent by : Smt. Anupama Anand, CIT DR ORDER PER KULDIP SINGH .....

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e Enterprises (AE) the matter was referred by the A.O. to the Transfer Pricing Officer (TPO) New Delhi u/s 92CA(1) of the I. T. Act, 1961 ( the Act ), who has made adjustment of ₹ 6,93,21,169/- vide order dated 08.12.2006. the tax payer aggrieved by the adjustment, carried the matter before Ld. CIT(A) who deleted the addition made by TPO vide order dated 29.07.2011. 3. The Revenue challenged the order dated 29.07.2012 passed by Ld. CIT(A) before the Tribunal who vide order dated 21.12.2012 .....

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ed by A.O., taxpayer has filed the objection before DRP, who after examining the issue, passed directions u/s 144C of the Act to the A.O. to complete the assessment as per the directions of DRP vide order dated 16.12.2014. 4. In accordance with the directions made by the Tribunal vide its order dated 21.12.2012 in I.T.A. No. 4338/Del./2011, TPO passed the order dated 27.12.2014, as under: A reference was received from the DCIT, Circlo 2(1), New Delhi to determine the 'arm's length price& .....

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see(INR) ALP determined by this office (INR) Adjustment u/s 92CA (lNR) 1. Provision of technical consultancy service 439671294 57640710 13,67,89,416 2. Receivable Nil 9,31,52,225 9,31,52,225 Total 22,99,41,641 The Assessing Officer will accordingly enhance the income of the assessee by ₹ 22,99,41, 641/-. This shall be treated as the cumulative adjustment u/s 92CA. No. adverse inference is drawn in respect of the other international transactions undertaken by the assessee during the F. Y.20 .....

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CA/AR of the assessee appeared, filed submissions and reply. The A.O. after considering the submissions and in view of the detailed reasons mentioned in TPO s order dated 27.12.2014 proposed the addition of ₹ 6,22,45,957/-/- to the income of the assessee vide draft assessment order u/s 254 / 143(3) read u/s 144C dated 13.03.2014. The A.O. passed the assessment order in consonance with the directions of DRP /TPO and assessed the income of the assessee at ₹ 8,61,79,070/-. Now, the ass .....

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ion. Undisputedly, the facts of this case are inter alia that there is no dispute between the parties to the appeals qua the earlier year that the method selected for transfer pricing is also not in dispute; that the assessee company was set up in April 1994 and is into the business of engineering support services in respect of engineering design and drawings, for various AEs to support overseas offices on turnkey project execution basis. The taxpayer company also entered into international tran .....

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n of ITAT by conducting fresh search, selected 7 new comparables (providing engineering designs and drawings consultancy) and as such, out of the total 8 comparables, considered by the TPO, one comparable from taxpayer set of 7 new companies noted down whose average margin was 32.47% as against taxpayer (-6.77%). Hence, the A.O./TPO made an addition of ₹ 13,67,89,416/-. 9. TPO also found that the payments from AEs were not received a per the terms of service agreement and a such held that .....

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₹ 9,31,52,225/-. 10. The taxpayer challenged the order of the A.O. before DRP by raising numerous objections duly detailed in para 4 of the impugned order passed by DRP. 11. The functional profile of the company is not an issue. The only dispute raised by the appellant is of exclusion of comparables adopted by the taxpayer / appellant in its transfer pricing and inclusion of comparables by the TPO / DRP without any functional comparables . 12. Undisputedly, out of 9 comparables adopted by .....

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t of comparables based on the application of additional / modified filters. The final comparable adopted by the TPO, lying at page 184 of the appeal file reproduced as under for ready reference: 4.9. The final comparables therefore are as under: S.N. Company name OP/OC 1 HSCC (India) Ltd 104.49 2 Holtec Consulting Pvt. Ltd. 11.97 3 1L & FS Education & Technology Services Ltd. 11.22 4 IL & FS Transportatin Networks Ltd 51.29 5 Rites Ltd. 30.7 6 Stup Consultants Pvt. Ltd. 19.36 7 TCE C .....

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1/-. The operating cost therefore works out to ₹ 43,51,63,214/-. 4.10 Computation of arm s length Operating cost 435163214 Arms Length Margin (%) 32.47% Arms Length Price (ALP) 576460710 Price received 439671294 Shortfall being adjustment u/s 92CA 136789416 14. TPO made the final TP adjustment as under: S.No. Nature of international transaction Appellant s margin (OP/total cost) refer page 152 of paper book Arm s Length margin determined by Ld. TPO (refer page 184 of appeal set) Adjustment .....

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ions to revise arm s length transaction determined by A.O. at 15.34% and accordingly made TP addition amounting to ₹ 6,22,45,957/- on the basis of final set off of comparables adopted by him which are reproduced as under: S.N. Company name Working capital adjustment (OP/Total cost) % 1 Holtec Consulting Pvt. Ltd. 15.26 2 1L & FS Education & Technology Services Ltd. 12.69 3 I L & FS Transportation Networks Ltd 50.86 4 Rites Ltd. 31.88 5 Stup Consultants Pvt. Ltd. 18.77 6 TCE Con .....

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surface transport business. It acts as developer, operator and facilitator of surface transport infrastructure project from conceptualization to operation. It is also involved in operation and maintenance of tolls and collection of tolls The appellant is involved in engineering designs and drawings for various overseas AEs to support the overseas offices turnkey projects execution. The business of the comparable is significantly different from the business of the appellant. 18. The taxpayer file .....

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dly involved in engineering design and drawings for various overseas AEs to support overseas offices turnkey project execution. So the business of comparables is inherently different from the business of the appellant and as such, cannot be adopted for TP. IL & FS Transportation Networks Ltd. taken as comparable by the TPO/DRP has to be excluded having been engaged in different business. 19. RITES Ltd., taken as comparable by DRP/TPO: The taxpayer filed detailed objections to the different o .....

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non consultancy services is less than 75% and this filter is applied by the TPO himself. 20. On other hand, the appellant company is engaged in engineering design and drawing for various overseas AEs to support overseas offices on turnkey project execution basis. Similarly, the cost of export sales and supply services constitutes merely 35.86% of the total cost. So keeping in view the fact that comparable company i.e. RITES Ltd. taken by TPO is functionally distinctive having been engaged in the .....

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orm 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. 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 .....

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rbitrarily rejected the functionally comparable companies namely Steewards Lloyed India Ltd. for TP. TPO s comments for rejection of aforesaid companies are lying at pages 47-48 of the appeal set. TPO has rejected the companies on the sole ground that these companies fall in service filter and has service income to sales income ratio of less than 75% whereas a bare perusal of the audited financial statement of the company for the year ending 31.03.2004 lying at page 48 of appeal set goes to prov .....

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es. 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 appropriate adjustment should be made to eliminate material effect of difference between the international transaction and the comparable transaction to establish comparability. DRP in para 8.2.6 of the impugned order wr .....

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. "reasonable and accurate adjustments" be made only for the enhance comparability. But at the same time such data must be reliable and robust and there should be no scope for mechanical adjustments. 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 accurate adjustment" and further adjustment to the margins of c .....

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availability of an explanation of any adjustments performed the reasons for the adjustments being considered appropriate how they were calculated how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V." Even the various judicial decisions on the issue of adjustments and even OECD guidelines, impresses upon time and again that the adjustment should be "reasona .....

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s 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 co .....

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perusal of the findings returned by TPO/DRP reproduced above denying the benefit of capital utilization adjustment and risk adjustment goes to prove that the objection raised by the tax payer having been mechanically disposed off without returning the specific findings as to how and under what circumstances, the data brought on record is not reliable or robust. TPO/DRP has neither declared the data brought on record by the taxpayer as unreliable nor they have injected fresh data to assess the ca .....

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