TMI Blog2016 (4) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... milar companies as comparable - Held that:- From the given guidelines it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, 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 by the comparables or not and if so how these risks affected each of them and whether such adjustment would improve the comparability It may also be mentioned that it is incorrect to say that the taxpayer is working Virtually in a risk free environment. As mentioned above the taxpayer too bears several risks like technology risk, foreign exchange risk, manpower risk, etc. No doubt, the assessee company has claimed risk adjustment during TP proceedings for benchmarking with the comparable companies but the detail of the risk adjustment sought for by the assessee is not available on the file. So, we are of the considered view that assessee is to provide the details of the risk adjustment sought for and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication engineered software development and related services does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of: 4.1 not appreciating that none of the conditions set out in section 92C(3) of the Act were satisfied in the present case; 4.2 disregarding the ALP as determined by the Appellant in the Transfer Pricing (,TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (,Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant; 4.3 disregarding multiple year / prior years' data as used by the Appellant in the TP documentation and holding that current year i.e. Financial Year 2007-08 data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 4.4 rejecting comparability analysis in the TP documentation / Appellant's fresh search and instead, conducting a fresh comparability analysis based on the application of erroneous and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion qua the provisions of advisory services at ₹ 19,38,60,164/- as against ₹ 15,39,29,906/- determined by the assessee and thereby called upon the assessee to make adjustment/enhancement of ₹ 3,99,30,258/-. The assessee reiterated its submissions made before the TPO earlier and contended that cost plus method applied by the assessee in determining the arms length price is the most appropriate method having already been accepted by the revenue department in the past. Assessee then carried the matter before the ld. DRP and vide order dated 17.06.2012, the ld. DRP has declined to interfere in the findings returned by the TPO by rejecting all objections raised by the assessee and consequently, adjustment of ₹ 3,99,30,258/- was made to the income of the assessee on account of ALP. 3. Feeling aggrieved with the order passed by the TPO/DRP/AO, the assessee has come up before the Tribunal by filing the present appeal. 4. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 5. At the ver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable companies adopted by the assessee was not necessarily available at the time of preparing transfer pricing study. Then, assessee company selected seven new comparable companies having average OP/TC at 11.12% as against assessee s OP/TC at 10.86% by making use of current year data. 10. However, the TPO after rejecting the filters adopted by the assessee and by adopting additional filters for screening of the comparable companies chosen five new companies as comparables for benchmarking the assessee s contract of engineering export services segment. A final set of comparables adopted by the TPO are as under :- S. No. Name of the company Adjusted Operating profits on operating cost (%) 1. Mahindra Consulting Engineers Ltd. 28.50 2. Alphageo (India) Ltd. 38.48 3. Stup Consultants Pvt. Ltd. 30.52 4. Semac Ltd. 49.00 5. Kirloskar Consultant Ltd. 27.54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Count 5 Average 28.80% 15. Now, on the basis of documents on record, we are to examine as to whether OP/TC margin for financial year 2007-08 of M.N. Dastur Co. Pvt. Ltd. is 8.46% as claimed by the TPO as against 0.18% claimed by the assessee. The ld. AR for the assessee brought on record computation of OP/TC margin of M/s. M.N. Dastur Co. Pvt. Ltd., a comparable company for AY 2008-09 which is reproduced as under for ready reference :- Particulars Amount (in INR) Operating Income (A) 1,32,78,00,000 Fees on engineering jobs 1,32,64,06,080 Fees on computer consultancy 13,93,920 Operating Expenses (B) 1,32,53,55,862 Operating other expenses 1,28,83,36,863 Depreciation 3,70,18,999 Operating Profit (OP) (A) (B) (C) 24,44,138 OP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are of the considered view that the matter is required to be restored to the TPO to decide the matter afresh by taking actual margin of OP/TC by M/s. M.N. Dastur Co. Pvt. Ltd. and then to compute the adjustment of transfer pricing. Consequently, ground no.3 is determined in favour of the assessee. GROUND NO.4 18. Now, the next question arises for determination is as to whether TPO has erred in making addition of ₹ 3,13,01,467/- to the taxable income of the assessee company on account of ALP of the international transactions of provision of application of Engineered Software Development and Related Services by illegally and arbitrarily including functionally dissimilar companies as comparable ? 19. Ld. AR for the assessee contended that the TPO has arbitrarily chosen Mahindra Consulting India Ltd., Stup Consultants Limited, Semac Limited and Kirloskar Consultants Limited, functionally dissimilar companies as comparables. We would like to examine the functional and financial profile of the comparable companies in order to benchmarking international transaction undertaken by the assessee company under consideration one by one. MAHINDRA CONSULTING I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company is into providing application Engineered Software Development and Related Services to its group company which is diametrically dissimilar to the functional profile of the comparable company. 24. The TPO has disposed off both the objections to the inclusion of this comparable company as to the functional dissimilarity as well as a related party transaction to the extent of 15.51% by returning cryptic finding that, the comparable companies is also operating in the area of consultancy only and the company having less than 25% related party transactions and has taken as comparable . However, when admittedly, the comparable company is engaged in infrastructure in the area of special economic zone, water sewerage, solid waste management, urban infrastructure, agri-infrastructure, social infrastructure, ports and harbor offshore terminal, horticulture, coal handling, etc., the same cannot be compared with the assessee company which is into application Engineered Software Development and Related Services . This comparable has been rejected by the coordinate Bench of the Tribunal in case cited as Bechtel India (P.) Ltd. (supra) and restored the file back to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... livery consultancy company,..,.,.,,.-- . Therefore, the company is fully into engineering and technical consultancy and will be taken as comparable. Abnormally high margin: Further, it is submitted that high profit making companies should not be taken as comparables for benchmarking provision of engineering services of the assessee. In this regard, refer arguments furnished by the assessee in case of Alphageo. In light of the above it is submitted that Mitcon with OP/ TC margin of 41.21% should be excluded from the final set of comparables. As discussed above, the reasons for its supernormal profits are not far to seek. The said company has a different functional profile compared to the assessee, which explains why it is earning such abnormally high profit margin compared to assessee. Hence there are valid reasons for its exclusion from the final set of comparables. It is seen from the above that the majority of the income of the company is from Profession fees only. Since, the company is deriving its majority of the income from Profession fees on account of Technical Consultancy, these activities can be considered as comparable to the activities being performed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OUTN FOR THE YEAR ENDING 31 ST MARCH 2008 Also, the Assessee has objected to this company also on account of the company being engaged in non comparable services as the company is primarily engaged in providing range of services in the field of topographical surveys, soil investigation etc. This objection pertains to industry verticals which has been discussed earlier. The Assessee has also objected to this company also on account of the company being a high profit making company. This objection has also been dealt earlier. Since, the company is deriving all of its income from Profession fees on account of Technical Consultancy, these activities are to be considered as comparable to the activities being performed by the assessee and accordingly, this company has been rightly taken as a comparable. 28. A perusal of the annual report at pages 603 to 645 of the paper book apparently shows that this comparable company is providing engineering consultancy services whereas the assessee company proving application Engineered Software Development and Related Services . So, there is a stark difference between application of Engineered Software Development and Related Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny is into software solutions for the mechanical design and manufacturing markets, offerings end-to-end solutions for the CAD/CAM/CAE and collaborative engineering markets. We are of the considered view that this company has been rejected from the list of comparables on the basis of wrong data and assumed functional dissimilarity and as such is required to be reconsidered for inclusion by the TPO. 34. So far as inclusion of Kitco Ltd., as sought for by the assessee, is concerned, the ld. AR again relied upon the order of the ITAT, Delhi Bench in case of Bechtel India (P.) Ltd. (supra) wherein it has been held that Kitko Limited should not have been excluded as other comparables are included by the TPO on the same parameters. This proposition has not been controverted by the ld. DR. So, this comparable is also required to be included by the TPO for TP adjustment by providing opportunity of being heard to the assessee. 35. Ld. AR further contended to include Projects Development India Limited as comparable selected in the fresh search conducted by the assessee during TP proceedings. The TPO rejected this company on the only ground that this company does not show any service ..... X X X X Extracts X X X X X X X X Extracts X X X X
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