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TMI Blog2016 (4) TMI 1176X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate application of mind. 2. The Ld. AO I Learned Transfer Pricing Officer (Ld. TPO) and the Ld. DRP erred in ignoring the fact that the reference made u/s 143(2) of the Act by the Ld. AO suffers from jurisdictional error as the Ld AO did not record any reasons in the draft assessment order based on which it was concluded that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's Length Price (,ALP') for the Appellant's international transaction of provision of application engineered software development and related services. 3. The Ld. TPO grossly erred in not considering the correct Operating Profit I Total Cost margin of M/s MN Dastur & Co. Private Limited of 0.18% despite the fact that the correct computation was duly submitted by the Appellant before the Ld. TPO in accordance with the directions of the Ld. DRP and the same was duly checked and verified by the Ld. TPO. 4. The Ld. AO / Ld. DRP erred both on facts and in law in enhancing the income of the Appellant by Rs. 31,301,467 by holding that its international transaction of provision of application engineered software development and related services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing any satisfaction for its initiation. 6. That the Ld. AO grossly erred in facts and in law in not allowing tax credit claimed in the return of income (in respect of prepaid taxes, self assessment tax and relief claimed under section 90 of the Act) totalling to Rs. 7,958,453. 7. That the Ld. AO has grossly erred in levying an interest u/s 234B of the Act to the taxable income of the Appellant." 2. Briefly stated, the facts of this case are : consequent upon the notice issued u/s143(2) of the Income-tax Act, 1961 (hereinafter 'the Act'), during scrutiny proceedings, Ms. Ashima Vadhera, CA put in appearance, attended assessment proceedings, filed submissions and necessary details as requisitioned. Keeping in view the averments made by the assessee in Form 3CAB vide which assessee had entered into international transaction to the tune of Rs. 15,39,29,906/-, the matter was referred to Transfer Pricing Officer (TPO) for determination of Arms Length Price (ALP) u/s 92CA (3), who has passed order dated 31.10.2011. By determining the Arms Length Price (ALP) of the international transaction qua the provisions of advisory services at Rs. 19,38,60,164/- as against Rs. 15,39,29,906/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perating Profit/Total Cost (OP/TC) as Profit Level Indicator (PLI) for determining the arms length nature of its international transaction regarding "Engineered Software Development and Related Services". The TPO has also not disputed that PLI assessed by the assessee at 10.86%. 9. Assessee in order to benchmarking international transactions relating to provisions of application "Engineered Software Development and Related Services", selected TNMM as the most appropriate method with OP/TC as PLI having its own PLI of 10.86%. The assessee has taken five comparable companies and computed from weighted average method at 9.91 %, however during transfer pricing proceedings, assessee in order to meet with the queries raised by the TPO for filing updated current year data of financial year 2007-08 of the comparable companies adopted by the assessee, made a submission to make a fresh search by considering updated data on the ground that updated data of the comparable 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .No. Name of the Company OP / TC margin - FY 2007-08 1 Mahindra Consulting Engineers Limited 28.50% 2 Stup Consultants Limited 30.52% 3 Semac Limited 49.00% 4 Kirloskar Consultants Limited 27.54% 5 MN Dastur & Co. Private Limited 8.46% 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/TC = (C) / (B) 0.18% Add : Non Operating income (D) 19,13,64,978 Dividend income 4,43,30,681 Interest Income 6,52,63,205 Other income 8,17,71, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 INDIA LTD. 20. The ld. AR for the assessee contended that this comparable company is functionally dissimilar, having significant related party transactions and relied upon order passed by Delhi Tribunal in case cited as Bechtel India (P.) Ltd. Vs. Addl.CIT - 146 ITD 733 (Delhi - Trib.). 21. The TPO, while selecting the Mahindra as a comparable company, has returned the following findings :- "The assessee has objected to the use of this company as a comparable on account of being functionally different and submitted that consultancy services provided by this comparable company in multidisciplinary areas. In contrast, the services provided by the Assessee are in of an entirely different nature. Further, the Assessee has provided arguments on application of related party transaction filter to reject companies having controlled transactions in excess of 15% of revenue, the Assessee has submitted that during the FY 2007-08, Mahindra had transactions with its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation "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 the TPO. Ld. DR for the revenue has not controverted the proposition mooted out by the assessee as to the aforesaid decision of the coordinate Bench in Bechtel India (P.) Ltd. (supra). STUP CONSULTANTS PRIVATE LIMITED 25. The ld. AR sought to exclude this comparable on the ground of functional dissimilarity, abnormal growth in turnover/abnormal high margin and again relied upon Bechtel India (P.) Ltd. (supra). The TPO while selecting this company as comparable returned the findings to the following effect :- "15.4 Stup Consultants Put. ltd. " 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 engineering and architecture. The assessee has submitted that the services related to Architectural Consultancy are only comparable to the Assessee However, in the absence of any segmental information reported by the company, it is d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also accepted as a comparable." 26. A perusal of the aforesaid observation returned by the TPO apparently shows that the assessee has raised specific objection as to dissimilarity of this company by highlighting that this company is primarily engaged in providing range of services in field of engineering and architecture and that no segmental information is available but the ld. TPO by relying upon the segment information, lying at page 13 of the Annual Report, rejected the objection raised by the assessee on the ground that the company is engaged in providing consultancy in both the segments i.e. civil and engineering, consultancy and architectural consultancy and is driving its total fee from consultancy only and disposed off the objection of abnormally high margin on the ground that the company has a different functional profile compared to the assessee which explains why it is earning such high profit margin. All these findings are self contradictory because on the one hand, the TPO observed that this company is taken as a comparable and on the other hand, recorded the finding that this company has a different functional profile compared to the assessee company. So, we are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehemently contended that the company's annual report for FY 2007-08 is not available in public domain. Thought the TPO has claimed to have provided annual report to the assessee company at the time of issuance of the showcause notice but the said report is not legible. Not only this, no segmental information is available in the annual report to work out the requisite comparability. Furthermore, undisputedly this company has earned high operating profit margin of 49.00% for FY 2007-08 as per TP order. Ld. AR to exclude this comparable again relied upon Bechtel India (P.) Ltd. (supra) wherein this comparable company has been excluded on ground of illegible annual report. So, we are of the considered view that to arrive at a logical conclusion to select Semac Limited as a comparable company, legible report is required to be examined by the assessee. So, the TPO to reconsider this comparable by supplying legible copy of annual report to the assessee and to decide afresh. 30. Ld. DR has failed to controvert the submissions made by the ld. AR discussed in preceding paras that aforesaid company, namely, Mahindra, Stup Consultants Private Limited and Semac Limited are liable to be exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company, lying at page 115 to 121, it is apparently clear that the major component of the income of this company is from the service income which is 99.92% and is more than 75% as required by the TPO. So, we are of the considered view that this company has been rejected by the TPO/DRP from the list of comparables on flimsy ground without perusing the record and as such, is liable to be included in the final list of comparables. GROUND NO.4.8 36. The ld. AR contended that the ld. AO/DRP has erred in including high profit making companies in the list of final comparables for benchmarking a normal risk bearing company and not allowing a risk adjustment to the assessee company and relied upon Motorola Solutions. 37. The ld. TPO disallowed the risk adjustment as claimed by the assessee company by returning the following findings :- " 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 revised DECO guidelines of 2010 has also stated in Para 3.54 as under: "Ensuring the needed level of transparency of comparability adjustments may depend up ..... 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