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TMI Blog2017 (5) TMI 1648X X X X Extracts X X X X X X X X Extracts X X X X ..... erent risk profile of comparable companies 2. The learned DCIT (after incorporating Ld. DRP's order) has erred on facts and in law in initiating penalty proceedings u/s 271(1 )(c). 3. The appellant craves leave to add to or modify the above grounds of appeal at or before the hearing of the appeal." 3. The facts, in brief, are that the assessee M/s Haldor Topsoe India Pvt. Ltd., incorporated in India on 3rd October, 2006 is a wholly owned subsidiary of Haldor Topsoe International A/S, (HTIAS), which is a Denmark based company. The parent company i.e. HTIAS is a subsidiary of Haldor Topsoe A/S, Denmark (HTAS). Accordingly, HTAS is the ultimate holding company of assessee. The services of the assessee are being captively consumed by HTAS in terms of an agreement effective from 01.04.2007. According to Clause 6 of this Agreement read with Appendix- II, the assessee is entitled for its services at actual cost plus 12.5%. The assessee is rendering services to industries operating in (1) Fertilizer, (2) Petro-Chemical, and (3) Refinery and Oil & Gas sector. 3.1 During the F.Y. 2008-09, the assessee got transfer pricing study done according to which the average margin of comparable co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17.3% of the consultancy fees as against the filter of 25% adopted by Ld. TPO himself. It was submitted that it is evident from the facts that TPO grossly erred in including the case of Kirloskar in the list of comparable companies. It was further submitted that the profile of Kirloskar shows that it is functionally dissimilar from the assessee company. Kirloskar business continues in business development in Project Management, Environment Engineering & Irrigation whereas the assessee operates in Fertilizer, Petro Chemical & Refinery & Oil & Gas sectors. Further, without prejudice to the aforementioned submissions, it was further submitted that the income of Kirloskar is hugely bolstered by other income of Rs. 1,87,04,039/- and items No. 1-5 thereof aggregating to Rs. 1,86,09,786/- need to be ignored while working out consultancy profits of Kirloskar. The aforesaid other income works out to 18% of the total income of Kirloskar whereas the corresponding figure in the case of the assessee is only 0.64%. It was also submitted that the rent expenses in the case of Kirloskar are only 2.1% of the receipts whereas in the case of the assessee they are 23.3% and this without doubt shows fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dra is providing consultancy in SEZ, industrial park and township, water and waste water, project managements, special projects, public private partnership and environment, transportation infrastructure, tourism infrastructure, social infrastructure etc. The industries in which consultancy is being provided by Mahindra are completely different from the industries in which the assessee is operating as the assessee is operating in Fertilizer, Petro-chemical, Refinery and Oil & Gas industries only. It was submitted that Mahindra cannot be taken as a functionally comparable company. Further a copy of the P&L A/c of Mahindra for the year ended 31.03.2009 and its Schedule J will show that there is substantial outsourcing in the case of Mahindra and, therefore, the business model of Mahindra is also different. In this connection, reliance is placed on the decision of Hon'ble ITAT Bangalore Bench-A in the case of 24/7 Customer.Com (P) Ltd. V. DCIT 28 taxmann.com 258 (Bang.). It was submitted that the Ld. TPO has erred in including the case of Mahindra in the list of comparable companies particularly in view of the decision of Hon'ble Delhi High Court in the case of Ramp Green Solut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross receipts of the company are Rs. 142 crores which includes substantial income towards services, which is evident from the profit and loss account which states that the receipt of Rs. 142 crore is towards supplies and services. It is submitted that it is not justifiable to say that since the company has not provided their segmental reporting, their service income out of total receipts of Rs. 142 crores is less than Rs. 5 crores, considering the fact that the main business of the company is to render engineering services. As mentioned on the company website (http)://www.simonindia.com/) SIL is a Global Engineering and-EPC Company". It was submitted that a copy of Form 23ACA in the case of Simon is placed in the Paper Book at pages 18-22 and a bare perusal of Page19 will show that whereas sale of goods trade is 8.8 crores, the supply of services (domestic & export) amounts to Rs. 142 crores. As such the finding of the Ld. TPO that the service income is less than Rs. 5 crores is factually incorrect. 4.1.3 Petron Engineering Consultants Ltd. (Petron) - It was submitted that this company has been excluded by the Ld. TPO by holding that "The assessee contended that the company is fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that an adjustment on account of a difference in risk profile may be derived by subtracting the risk-free bank rate from the prime lending rate. During the previous year relevant to assessment year 2009-10, such difference works out to appx. 5.50% (i.e. 12.25% less 6.75%)". 4.2.3 The Ld. AR submitted that the aforesaid claim of the assessee was disallowed by the Ld. TPO and the Hon'ble DRP did not allow any risk adjustment vide Para 8.3 (internal pages 15 & 16 of their order) by relying on Para 3.54 of the revised OECD guidelines of 2010 after observing that "From the above 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 adjustments, 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 or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability". The Ld. AR submitted that this is factually incor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctionally not dissimilar and the same should be included in the set of comparables stop on other comparables, the reliance was placed on the reasoning adopted by the Ld. it TPO and the adjudication by the Hon'ble DRP. On the issue of risk adjustment, it was submitted that risk adjustment has to be provided to the compatible companies and not to the assessee. It was also submitted that the assessee was captive service provider whose risk was greater than other comparables and therefore the risk adjustment was not called for. It was submitted that the conclusions arrived at by the Ld. it TPO and confirmed by the Hon'ble DRP should be upheld by the ITAT. 6. We have heard the rival submissions and have perused the relevant material on record. First, we proceed to adjudicate on the arguments of the Ld. authorised representative with respect to the comparables included by the Ld. TPO but objected to by the assessee. 6.1.1 Kirloskar Consultants Ltd - It is the submission of the assessee that employee cost filter of 25% of the engineering and technical services revenue was applied by the Ld. TPO whereas in the case of Kirloskar, the employee cost was only 17.3%. It is also the argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndra was functionally different from that of the assessee company. A perusal of the profile of Mahindra Consulting Engineers placed at page 12 of the paper book shows that Mahindra is in the business of providing consultancy in SEZ, industrial park and township, water and wastewater, project management, special projects, public-private partnership and environment, transport infrastructure, tourism infrastructure, social infrastructure etc whereas the assessee is operating in the field of fertiliser, petrochemicals, refinery and oil and the gas industries only. However, it is our considered opinion that the comparable as well as the tested party, both, are providing services which are functionally similar and we find no reason for the exclusion on this ground. It is also the assessee's contention that Mahindra has a substantial outsourcing which is not so in the case of the assessee company. The ITAT Bangalore Bench in the case of 24/7 Customer.com Private Limited versus DCIT in ITA No. 227/Bang/2010 vide order dated 09/11/2012 has held that where the assessee was carrying out its work by itself whereas in case of a comparable, it was outsourcing most of its work, the said company c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that the value of goods traded by Simon India Ltd is 8.8 crores whereas the supply of services amounts to Rs. 142 crores. Thus, the finding of the Ld. TPO that the service income is less than 5 crores is factually incorrect and we have no hesitation in holding that this filter has been incorrectly applied. We, accordingly, direct that this company be also included in the final list of comparables. 6.2.3 Petron Engineering Consultants Ltd - It is the contention of the Ld. authorised representative that this company was functionally similar as it operated in fields like refinery, petrochemical and fertiliser plants similar to the assessee whereas the same has been excluded by the Ld. TPO on the ground that the company was into installation, construction and commissioning of projects. A perusal of the directors report, relied upon by the Ld. TPO and placed at page 16 of the paper book, shows that Petron is into fabrication, engineering, election, installation of plant, machinery and equipment for a number of business sectors in oil, gas and petrochemicals, power, cement, minerals and metals, chemicals and fertilisers etc. We are of the considered opinion that there is no funct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments should be allowed. 6.3.3 ITAT Hyderabad Bench in the case of it is HSBC Electronic Data Processing India Ltd versus Additional CIT in ITA No. 1624/Hyd/2010 has held that where the assessee operates in a risk mitigated environment vis-a-vis the comparable companies performing entrepreneurial risk-taking functions, adjustment for risk being taken by the comparable should be allowed. 6.3.4 ITAT Bangalore Bench in Philips Software Centre Private Ltd versus ACIT in ITA No. 218/Bang/2008 has also held that adjustment needs to be made to the margins of the comparables to eliminate differences on account of different functions, assets and risks. More specifically, adjustment needs to be made for differences in risk profile, difference in working capital position and differences in accounting policies. 6.3.5 Therefore, in view of the cited precedents and on the facts of the case, it is our considered opinion that the risk taken by an independent entity and the captive service provider are different and since the remuneration of the captive service provider is not linked with the performance, it is not a significant risk and, therefore, a suitable adjustment should be allowed. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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