ITO 1(1)(1), MUMBAI vs. AVANA INTEGRATED SYSTEMS LTD, MUMBAI

Present for: Assessee by : Ms. Arati Vissanji, A.R. Revenue by : Shri Mehul Jain, Sr. A.R. Date of Hearing : 15 . 03 . 2023 Date of Pronouncement : 31 . 05 . 2023 O R D E R Per : Kuldip Singh, Judicial Member: For the sake of brevity aforesaid appeal and cross objections emanated from same impugned order passed by the Commissioner of Income Tax, (Dispute Resolution Panel-1), Mumbai [hereinafter 2 CO No.37/M/2016 M/s. Avana Integrated Systems Ltd. referred to as the Ld. DRP] are being taken up for disposal by way of composite order.

2. Appellant Income Tax Officer-1(1)(1), Mumbai (hereinafter referred to as the Revenue) and the cross objector M/s. Avana Integrated Systems Ltd. (hereinafter referred to as the assessee) by filing the present appeal and cross objections respectively sought to set aside the impugned order dated 19.10.2015 passed by the Ld. DRP on identically worded grounds except the difference in amount of addition/disallowance inter-alia that: (Grounds of Revenue): “1. Whether on the facts and circumstances of the case, the DRP erred in retaining a single comparables namely Tamil Nadu Ex Servicemen Corporation Ltd., which is government owned company, contrary to the binding precedent laid down by Jurisdictional ITAT, Mumbal in the case of Novartis Healthcare (P.) Ltd. Vs Additional Commissioner of Income- tax, Range-7(1), Mumbai and in the case of Shell India Markets (P) Ltd. V. Assistant Commissioner of Income-tax, Large Taxpayer Unit, Mumbai, wherein it has been consistently held that Government company cannot be the sole comparable in the final set of comparable. 2. Whether on the facts and circumstances of the case, the DRP erred by adopting different yardstick for undertaking functional analysts of comparable companies namely Engineers India Ltd, Tata Consulting Engineers Ltd, and Mahindra Consulting Engineers Ltd. by testing them against a very high degree of comparability but at the same time not testing the case of Tamil Nadu Ex Servicemen Corporation Ltd., against the same high degree of comparability.

3. Whether on the facts and circumstances of the case, the DRP erred in not appreciating that broadly all these four comparables namely Engineers India Ltd, Tata Consulting Engineers Ltd, and Mahindra Consulting Engineers Ltd and Tamil Nadu Ex Servicemen Corporation Ltd. are functionally comparable to the assessee company. 4. Whether on the facts and circumstances of the case, the DRP was correct in allowing the adjustment on account of capacity utilization at Rs.10,72,349/- failing to note that the rationale for adjustment is the difference in the level of capacity utilization between the assessee and the four comparables applied by the TPO and hence when DRP 3 CO No.37/M/2016 M/s. Avana Integrated Systems Ltd. rejected three of the comparables, the adjustment was also no longer required/ or required calculation.

5. Whether on the facts and circumstances of the case, the DRP erred in giving benefit of adjustment of Rs. 10,72,349/ on account of idle manpower to he assessee, ignoring the fact that Hon'ble ITAT, Mumbai in the case of Deputy Commissioner of Income-tax, Rg-8(2) Vs. Petro Araldite (P) Ltd. and in the case of Philips Software Centre (P.) Ltd. V. Assistant Commissioner of Income-tax, Circle 12(2), held that difference in capacity utilization at level of assessee and at level of comparables affects profit margin, hence, adjustment is to be made to profit margins of comparables unlike in this case, wherein, the direction is given to make adjustment to assessee's profit margin."

CO No.37/M/2016 (Grounds of Assessee): “The Hon'ble Dispute Resolution Panel (DRPYLearned Transfer Pricing Officer (TPO)Learned Assessing Officer (AO), respectively and as the case may be, in the facts and circumstances of the case and in law, erred in 1.1 passing the impugned assessment order Us.143(3) read with Section 144C(13) of the Income Tax Act, 1961 read with 3 proviso of Section 153(1) of the Income-tax Act, 1961 (the Act), which is illegal and bad in law;

1.2 not satisfying himself about the necessity and requirement of referring the matter for determination of arm's length price in respect of the international transaction between the appellant and the AEs and consequently the reference by the Learned AO to the Leamed TPO is illegal and bad in law;

1.3 making the transfer pricing adjustment under the provisions of Section 92CA of the Act though same is not the 13 "charging provision" under the Income Tax Act, 1961 and there is no corresponding provision to charge "such adjustments" as income of the appellant U/s.4 of the Act and U/s5 of the Act;

1.4 making the reference to the Ld. TPO as per the CBDT Instruction No.10/2013 dated 05-08-2013 as regards threshold limit of Rs.15 Crores as the said "administrative limits" under the said Circular had no force in law and the reference made by following the said Circular by the Learned AO was illegal and bad in law;

(a) Reduction of the "pass through cost", being the re-imbursement of travelling and conveyance expenses of Rs.4,98,93,649/- incurred in connection with the personnel sent on deputation of providing technical support services to AEs overseas project(s) from "operating revenue" and from 'operating cost" (b) Reduction of start-up cost of Rs. 1,33,95,000 from operating cost as the same was incurred for conducting a detailed survey for Tata Steel Limited, Jamshedpur Plant, the contract for which materialised in the financial year 2014-2015; and (c) Reduction of operating cost by 5% on account of under utilization of capacity, as the current year was the appellant's first year of operations and the operation of the assessee company were not at its optimum level.

4. Alternatively and without prejudice to any of the above grounds, on the facts and circumstances of the case and in law, the Hon'ble DRP ought to have accepted the following companies as comparables:

(a) Cades Digitech Private Limited; (b) Mistral Solutions Private Limited; and (c) Siemens Building Technologies Private Limited.

5. On the facts and circumstances of the case and in law, the Ground No.4 of the Department’s Appeal in had in law as the adjustment of Rs. 10,72,349/- on account of idle capacity was given by the TPO and not by the Hon’ble Bombay High Courtble DRP and hence the same cannot be appealed against by the department before the Hon. ITAT

6. On the facts and circumstances of the case and in law, if as a consequence of disposing off the Department's Grounds of Appeal, and Cross Objections of the appellant, the appellant's Operating Margin on Cost and the Arithmetical Margin on Cost of the comparable companies have to be re-worked, then-

(a) the AO should be directed to accept the arm's length price of the international transactions with the AEA if the revised operating margin of the appellant is greater than or is within the 5% variation (tolerance band") of the revised arithmetical mean of the operating margin of the final comparable companies

And if the above parameter is not satisfied, then 5 CO No.37/M/2016 M/s. Avana Integrated Systems Ltd. (b) the AO should be directed that the arm's length price adjustment should be made only in respect of appellant's international transactions with its AEs.”

Ground Nos.1 to 3 7. During the transfer pricing proceedings the Ld. TPO finally selected four comparables by accepting the method adopted by the 7 CO No.37/M/2016 M/s. Avana Integrated Systems Ltd. assessee i.e. TNMM at entity level with OP/OC as the PLI as the MAM, which are as under:

SR. NAME OF THE COMPANY OP/OC N0. 1 Tamil Nadu Ex Servicemen Corporation Ltd. 9.40% 2 Mahindra Consulting Engineers Limited 30.85% 3 Tata Consulting Engineers Limited 27.70% 4 Engineers India Limited. 30.20% Arms length margin 24.54%

So far as the question of excluding Mahindra Consulting 12. Engineers Ltd. (MCEL) as a comparable to benchmark the international transactions vis-à-vis the assessee is concerned, it is also functionally dissimilar being into project design and engineering including planning and scheduling statutory and laboratory approvals, procurement advisory, venture evaluation, bid process, project supervision etc. whereas the assessee is providing homeland security solution to their customer. As such the Ld. DRP has rightly excluded MCEL as a comparable vis-à-vis assessee.

Ground Nos.4 & 5 15. The Revenue has challenged the order passed by the Ld. DRP in allowing the adjustment on account of capacity utilization of Rs.10,72,349/- on the ground that the rationale for adjustment is the difference in the level of capacity utilization between the assessee and the four comparables applied by the Ld. TPO. When the Ld. DRP has rejected three of the comparables the adjustment was no longer required.

by the Revenue are not maintainable as the adjustment on account of capacity utilization has been given by the Ld. TPO himself by returning following findings: “The assessee has asked for an adjustment on account of the idle manpower cost. The assessee has worked out this adjustment to 11. CO No.37/M/2016 M/s. Avana Integrated Systems Ltd. Rs.10,72,349/- as per the date of joining and the date of deployment of that person on a project. TPO Comments The assessee's submission is accepted as this is the first year of operations of the assessee, and provision of this adjustment will help in better comparability with the comparable companies who are operating since much before.”

Cross objections by the assessee: 18. Cross objections filed by the assessee do not survive having been become infructuous as candidly admitted by the Ld. A.R. for the assessee.

Order pronounced in the open court on 31.05.2023.