TMI Blog2017 (3) TMI 1533X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee are thus, decided on preliminary issue. Selection of comparables - Held that:- The assessee had provided support services to its associate enterprises i.e. supply based development services, wherein the revenue earned was ₹ 9,34,38,095/-. Further, the assessee had made provision of IT services to the extent of ₹ 59,64,133/- which constitute IT and other business support services. Thus companies dissimilar with that of assessee need to be rejected as comparable. Adjustments made to application engineering services segment - Held that:- The application engineering services was comprised of customization of business of turbocharges to particular vehicle models of different customers, where the best design of turbocharges is already developed and patented and the assessee provides services relating to customization of the best design as per the requirements of customer. Thus companies dissimilar with that of assessee need to be rejected as comparable. - ITA No.2584/PUN/2012 - - - Dated:- 10-2-2017 - MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM For The Appellant : Shri Rajan Vora and Rajendra Agiwal For The Respondent : Shri S.K. Rastogi an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y noncomparable and earning extra-ordinary margin as a comparable company for financial year ended 31 March 2008. . Ground 7 Rejection of Ace Software Exports Ltd ('Ace') as a comparable company Erred in rejecting Ace Software Exports Limited as a comparable company. Ground 8 Selection of companies having super normal profits Erred in including comparable companies with super normal profits. Other grounds of objections Ground 9 Non consideration of contemporaneous data Erred in conducting an analysis based on information subsequently available for determining arm's length price which was not available at the time of complying with the transfer pricing regulations. Ground 10 Denial of adjustment for risk differences Erred in rejecting adjustment on account of differences in the functional and risk profile of comparable companies vis-a-vis the Appellant. Ground 11 Denial of benefit of +/-5% range while computing the adjustment amount Erred in computing the arm's length price, without taking into account the lower 5 per cent variation from the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts Projects Limited, without appreciating the RPT of the said comparable exceeds 25% of total turnover (There is no dispute on filter, i.e. filter of 25% applied by the Appellant is accepted by the TPO); Functionally not similar should be rejected 19. erred in not excluding companies, which are not functionally comparable to the Appellant (i.e Agrima Consultants International Limited, L T Ramboll Consulting Engineers Limited and Mahindra Consulting Engineers Limited); Working capital adjustment 20. erred in not granting working capital adjustment to the operating margins of the comparable companies to account for difference in the working capital of the Appellant in the AE segment vis-a-vis comparable companies be allowed to the Appellant; 4. Briefly, in the facts of the case, the assessee had furnished return of income declaring total income at Nil. The assessee was engaged in the business of sale of Turbo charges and components by getting the same manufactured from its consignment manufacturers. The assessee also re-sells turbocharges and components imported from its associate enterprises and also provide after sales services to the customers. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 47.33% TP adjustment determined by TPO - ₹ 3,63,87,000/- c. Provision of Application Engineering Services: Margins of assessee - 9.85% Mean margins of comparables - 27.14% TP adjustment - ₹ 66,72,350/- 6. The TPO accordingly proposed upward adjustment of ₹ 13,84,17,150/-. The assessee filed objections before the Dispute Resolution Panel (in short the DRP ), who vide its directions dated 05.09.2012, upheld the adjustment made by the TPO. 7. The Assessing Officer consequently, issued order under section 143(3) r.w.s. 144C(13) of the Act by making the aforesaid addition of ₹ 13,84,17,150/-. 8. The assessee has raised several grounds of appeal against the TP adjustment made. The first ground of appeal raised by the assessee is general against the TP adjustment. The other grounds raised are specific on issues of TP adjustments. The first transaction pertaining to Manufacturing segment was held by the TPO to be not at arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring segment as the arm's length price determined by the TPO was within range of +/- 5% of actual revenue from the international transactions pertaining to manufacturing segment. The learned Authorized Representative for the assessee pointed out that in view of the aforesaid ground of appeal, the entire TP adjustment pertaining to overall turbocharges business would get deleted, hence the other grounds of appeal pertaining to the said segment were not being pressed as these would resultantly become academic in nature. 12. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below. 13. We have heard the rival contentions and perused the record. The benchmarking of international transactions have been carried out by the TPO in the case of assessee which in turn has been approved by the DRP and applied by the Assessing Officer while passing the order under section 143(3) r.w.s. 144C of the Act. The assessee was engaged in the business of manufacturing of turbocharges which have application in automobile engines for supply to domestic customers and also to the associate enterprises. The assessee also provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables worked out to 47.33%. 16. The limited plea which was raised before us was the exclusion of certain comparables. The case of the assessee was that in case few of the concerns were excluded / included then, the margins shown by the assessee would be within +/- 5% mean margins of comparables and limited submissions were made by the learned Authorized Representative for the assessee in this regard, which we shall deal with in the following paras. The first concern which the assessee wants to be excluded is ICRA Online Ltd., since it was not only functionally different, but had exceptional year of operations and was earning super normal profits. The learned Authorized Representative for the assessee pointed out that ICRA Online Ltd. was rating agency, which was owned by several institutions and had developed its own tools. The learned Authorized Representative for the assessee pointed out that the said concern was picked up in the preceding year also and against its exclusion, two grounds of appeal were raised i.e. (a) the said concern was functionally different and (b) it had earned abnormal profits. Our attention was drawn to the decision of Tribunal in ITA No.03/PN/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services, wherein the revenue earned was ₹ 9,34,38,095/-. Further, the assessee had made provision of IT services to the extent of ₹ 59,64,133/- which constitute IT and other business support services. The assessee in its TP study report had selected 12 companies as functionally comparable and on the basis of average margins of three years found the transactions entered into by the assessee with its associate enterprises at arm's length price. However, the TPO directed the Assessing Officer to apply only margins of current year in order to work out the margins of comparables. The assessee thus, recomputed the margins of comparables but in the process excluded certain concerns and applied the margins of few concerns and the average margins worked out at 7.85%, which was found to be at arm's length of PLI declared by the assessee. The TPO however, applied the margins of the concerns originally picked up by the assessee as functionally comparable and updated the margins by applying single year s data. The arithmetic mean of final list of comparables worked out to 47.33%, against which the TPO proposed adjustment of ₹ 3,63,87,000/-, against which the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same be rejected while making final analysis in the case of assessee. This issue has been decided by different Benches of Tribunal that the concern which was originally selected by the assessee can be excluded from the final list of comparables if not found functionally comparable. The onus was upon the assessee to establish that the said concern was not functionally comparable. Where the nature of business undertaken by the assessee was provision of specialized base knowledge connected to IT services, then even ICRA Online Ltd. was rate agency and was providing certain services of conducting research and preparing reports which were being provided to its customers. The assessee himself had picked up the said concern to be functionally comparable not only in the year under consideration but also in the earlier years. The said concern was excluded from the final list of comparables by the Tribunal in assessment year 2007-08 on the premise that the said concern for the said year had earned abnormal profits. However, for the year under appeal, the plea of assessee is not of abnormal profits but of it being functionally different. We find no merit in the plea of assessee in this reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee arose before the Tribunal in assessment year 2007-08. Admittedly, in the ea rlier years, the said concern was picked up as comparable but when the financial year data was perused for financial year 2007-08, it was noted that the business profile of the concern had underwent change during that year, wherein the said concern had developed software for pay roll processing and the incomes were earned through such software. The Tribunal in turn, relying on the ratio laid down by Delhi Bench of Tribunal in Premier Exploration Services Pvt. Ltd. Vs. ITO in ITA No.4935/De/2011, relating to assessment year 2007-08, order dated 31.05.2013 applied the said ratio, wherein the Delhi Bench of Tribunal had analyzed the functional profile of TSR Darashaw Ltd. for the same financial year and held that the functions performed by the said company were similar to the companies providing services of IT / ITES. The Tribunal also held that the change in profile of the company in comparison to the earlier two years makes it non-comparable and just because it had been selected by the assessee itself in its TP study, such company could not be made comparable. Following the said decision, the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous kinds of sponsorers. The said functional analysis has been considered by the Delhi Bench of Tribunal in Premier Exploration Services Pvt. Ltd. Vs. ITO (suupra) and various other decisions for assessment year 2008-09 and it has been found to be not functionally comparable to the companies engaged in the business of business support services segment. On this preliminary issue itself, we hold that the said concern is not functionally comparable and hence, cannot be included in the final list of companies and we hold so. We are not addressing the other issues raised in respect of the said concern in view thereof. 28. The last concern which the assessee wants to be excluded in BSS Segment is Access India Advisors Ltd. on the ground that it is super normal profit making concern and by way of additional ground of appeal No.16, being functionally not comparable. The first objection of the TPO for exclusion of the said concern was it is included by the assessee in its TP study report. As was held by us in the paras hereinabove, in case the assessee is able to bring on record any evidence to prove its case that the said concern which was considered to be functionally comparable to it, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng entity, as far as BSS services were concerned, then the adjustment for difference in the risk profile of comparable companies should be allowed to the assessee. The said claim was made by the assessee before the TPO in respect of all international transactions. However, the TPO concluded by stating that the assessee was not risk free entity and no risk analysis was undertaken by the assessee. 31. The learned Departmental Representative for the Revenue fairly admitted that the TPO has failed to address the said issue of whether risk adjustment is to be allowed. 32. Under the TP provisions, where in the facts of the present case, the assessee is risk mitigating entity, wherein all the risks are taken care of by the associate enterprises, then adjustment on account of difference in the risk profile of comparable companies merits to be allowed while benchmarking the international transaction of assessee. The Bangalore Bench of Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT reported in 26 SOT 226 has upheld that the adjustment of risk to be computed as difference between the PLR and the risk free rate of turn. The assessee prepared a summary computation cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 66,72,350/-, against which the assessee is in appeal. 37. The PLI of assessee i.e. while adopting OP/OC was 9.85% and the margins of comparables was worked out by the TPO was 27.14%. The contention raised before us is in respect of inclusion / exclusion of comparables. The first concern i.e. Ace Software Exports Ltd., which was rejected by the TPO being functionally not comparable was sought to be included in the final list of comparables. The said concern was rejected because of its losses at 36.54%. The learned Authorized Representative for the assessee pointed out that in the last year, the same concern was accepted as functionally comparable and where the said concern was not persistently loss making, then the results of the said concerns for the year under consideration should be picked up in the list of comparables for benchmarking international transactions. The second concern which the assessee wants to be excluded from the final list of comparables is Vardan Projects Ltd. for being functionally not comparable and being super normal profits making concern. The learned Authorized Representative for the assessee pointed out that the said concern had varying profits and h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,86,99,104 4,73,47,807 Operating Margin (A/B) 7.92% -7.04% -36.54% 42. The perusal of the above details reflects that the operating margins are varying i.e. in the first year, it was 7.92% but in assessment year 2007-08, it was (-) 7.04% and in this year it is (-) 36.54%. The said concern was accepted as functionally comparable in the preceding year, where its margins were at (-) 7.04%. However, during the year under consideration though there is increase on the volume of business of the said concern, the margins are stead fastly reducing and it has shown operating margins at (-) 36.54%. The said concern was held to be functionally comparable to the assessee in the preceding year. The Revenue has failed to bring on record any evidence to show that there is any change in the functionality of the said concern in the year under appeal and in the absence of the same, there is no merit in the plea of assessee that it is not functionally comparable and hence, to be rejected. The operating margins shown by Ace Software Exports Ltd. do not reflect it to be persistently lo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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