M/S.LM WIND POWER TECHNOLOGIES (INDIA) PVT., LTD.,,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME-TAX, BANGALORE

IT(T)A No.1692(B)/2016 1

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES : “A”, BANGALORE

BEFORE SHRI B.R.BASKARAN, ACCOUNTANT MEMBER AND SMT.BEENA PILLAI, JUDICAL MEMBER ITA No.1692(Bang)/2016 (Assessment year : 2012-13) M/s LM Wind Power Blades (India) Pvt.Ltd., (erstwhile LM Wind Power Technologies (India) Pvt.Ltd., RMZ Infinity, No.801, Tower B, 8th Floor, Old Madras Road, Benniganahalli, Bangalore-560 016 PAN No.AABCL3160C Appellant Vs The Asst. Commissioner of Income Tax, Circle-4(1)(1), Bangalore Respondent Appellant by : Shri T. Suryanarayana, Advocate Revenue by : Dr.P.V.Pradeep Kumar, Addl.CIT Date of hearing : 11-11-2019 Date of pronouncement : 29-11-2019

O R D E R PER BEENA PILLAI, JUDICIAL MEMBER : Present appeal has been filed by assessee against final assessment order dated 25/07/16, passed by Ld.ACIT circle 4 (1), Bangalore for assessment year 2012-13 on following grounds of appeal:

The Appellant most humbly submits as under:

IT(T)A No.1692(B)/2016 2 1.That the Dispute Resolution Panel (`DRP' for short) erred in not appreciating that the order of the learned Additional Commissioner of Income-tax (Transfer Pricing) — 2(1), Bangalore ("learned TPO") passed under Section 92CA of the Income-tax Act, 1961 (`the Act' for short) is contrary to law and thus liable to be quashed.

2.That on facts and in the circumstances of the case, the TPO erred in making an adjustment to the extent of INR 1,67,93,037/- to the transfer price of the Appellant's international transaction with its associated enterprises. The DRP erred in further enhancing it to INR 3,33,72,850/-.

4.That the AO/DRP erred in upholding the learned TPO's approach of disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation while computing the arm's length mark-up on cost/ margin on sales for the comparable companies.

IT(T)A No.1692(B)/2016 3 6. That the AO/DRP erred in upholding the action of the TPO in applying certain arbitrary filters in connection with the international transaction and holding that the Appellant's international transaction is not at arm's length.

IT(T)A No.1692(B)/2016 4 12. The AO/DRP erred in not directing inclusion of Tata Elxsi Ltd, which was selected by the TPO in the show cause notice dated 16.11.2015, in the final list of comparables despite its software development and services segment being similar to the services rendered by the Appellant.

IT(T)A No.1692(B)/2016 5 17. That the AO/DRP erred in upholding the action of the AO/TPO in not providing appropriate adjustments towards differences in risks between the Appellant and the companies selected as comparables. 18. That the AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act. Prayer a) The appellant prays that directions be given to grant all such reliefs arising from the above grounds and also all reliefs consequential thereto. b) The appellant craves leave to add to or alter, by deletion, substitution or otherwise, the above grounds of appeal, at any time before or during the hearing of the appeal. c) The appellant submits that the above grounds are independent of and without prejudice to one another. 2. Brief facts of the case are as under: Assessee filed its return of income for year under consideration on 29/11/12 declaring total income of Rs.6,15,09,110/-. Notice under section 143(2) of the Act was issued along with notice under section 142(1) and questionnaire to assessee. In response to statutory notices, representatives of assessee appeared before Ld.AO and furnished details as called for. Ld.AO observed that assessee undertook international transaction with associated enterprises and therefore, case was referred to Ld.TPO under section 92 CA of the Act. Upon receipt of reference, Ld.TPO called upon assessee to file economic details of international transaction under Form 3 CEB as prescribed under section 92D of the Act.

IT(T)A No.1692(B)/2016 6 Ld.TPO observed that assessee develops and manufactures blades for wind turbines both small onshore wind turbines and large turbines in offshore wind farms. It was observed that assessee develops technology and products with new capabilities to monitor operations, protect against lightening strikes and ensure maximum energy production. In the TP documentation filed by assessee Ld.TPO observed that assessee has been characterised as carrying out research and development of LM Wind Power Group and assessee focuses on development of new technologies to make wind turbines more efficient. It was observed that assessee was compensated on time and material basis for services rendered. Ld. TPO observed that, as per agreement, assessee provides services that include, but not limited to, research and development services. The work relating to research and development services comprise finite element analysis, product equipment design, computational fluid dynamics analysis, reliability analysis and quality testing services in coordination with the specifications, directions and instructions of the AE. Ld.TPO observed that assessee used following four (4) comparables in respect of contract R&D services: Sl.No. Name of the company Weighted Average (%) 1 Cades Digiteh Pvt.Ltd., 7.82 2 I-Design Engineering Solutions Ltd., 12.61 3 Babcock Borsig Softech Pvt.ltd. 12.39 4 Acropetal Technologies Ltd. 27.32 Arithmetical Mean 15.04

IT(T)A No.1692(B)/2016 7 Assessee applied following filters for selecting aforestated comparables: Sl.No. Description 1 Company with sales zero –selected 2 Companies with ratio of other operating income to sales 50% Selected 3 Companies with ratio of research and development expenses to sales 3% selected 4 Companies with ratio of net fixed assets to sales 200% selected 5 Companies that had average sales Rs.1 Crore during the time period - rejected 6 Companies with net worth zero -rejected 7 Companies providing design engineering services – selected 8 Companies with RPT 25% rejected.

TNMM was applied as most appropriate method, by using OP/OC as PLI. Assessee computed average margin of comparables at 15.04% as against 15.37% of assessee. Assessee thus held transaction to be at arms length price. 2.1 Unsatisfied with comparables selected by assessee, Ld.TPO applied various filters and selected comparables that were exclusively engaged in the business of engineering and technical support services. Assessee while submitting reply to show cause notice dated 08/01/16 objected for inclusion of companies functioning in the field of engineering and technical support services. It was submitted by assessee that, it is engaged in providing contract R&D services to its AE and therefore high-end KPO services cannot be compared to functions of assessee. However assessee itself submitted that it should be compared with comparable companies providing engineering design services.

IT(T)A No.1692(B)/2016 8

2.2 Thus, Ld.TPO selected following 11 comparables, including 3 comparables selected by assessee: Sl.No. Name of the Company NCP Margins as per TPO Order (WC- adj)(%) 1 Cades Digitech Pvt.Ltd. 1.16% 2 Holtec Consulting Pvt.Ltd. 56.71 3 I Design Engineering Solutions Ltd.. 13.73 4 Neilsoft Ltd. 2.90 5 Tractbel Consulting Engineers Pvt.Ltd. 36.52 6 Onward Technologies Ltd. 16.65 7 Acropetal Technologies Ltd. 7.27 8 Mahindra Engineering Services Ltd. 30.43 9 IOT Design and Engineering Ltd. 6.43 10 TCE Consulting Engineers Ltd. 18.04 11 Mindtree Ltd. 8.58 18.04 Average Margin

Ld.TPO computed margin of comparables finally selected at 18.04% and proposed adjustment of Rs.1,67,93,037/-. 3. Aggrieved by proposed adjustment, assessee filed objections before DRP. DRP directed to exclude following comparables from final list: 1. Mahindra Engineering Services Ltd. 2. IOT Design and Engineering Ltd., 3. Neilsoft Ltd. 4. I-Design engineering Solutions Ltd., DRP also suo moto rejected Cades Digitech Pvt.Ltd., which was one of assessees comparables selected by Ld.TPO, on the basis that it was predominantly engaged in on-site activities.

IT(T)A No.1692(B)/2016 9 3.1 Based upon directions issued by DRP, Ld.AO passed final assessment order, computing addition in the hands of assessee at Rs.3,33,72 850/-. 3.2 Aggrieved by addition made by Ld. AO, assessee is in appeal before us now. 3.3 At the outset, Ld.AR submitted through written submission filed on 11/11/19 that assessee intends to press Ground No. 12, 13, 14, 16 raised in respect of inappropriate comparables considered by Ld.AO/TPO. We are therefore, considering only aforestated grounds argued by Ld.AR before us. Remaining grounds are either general in nature or challenging various filters, are dismissed as not pressed. 3.4 Ld.AR submitted that assessee do not object, it to be characterized as engineering design services though, it is carrying out its functions in relation to research and development service for its AE’s. Upon analysis of submission by Ld.AR having regard to the records placed before us, it is observed that assessee in the TP documentation selected comparables which are providing engineering solutions and engineering design services. It is very peculiar to note that assessee while short listing comparables used filter of companies having research and development expenses to sales less than 3%. That means assessee is not mainly into providing research and development services to its AE. 3.5 We therefore, do not find any reason why assessee should object to be characterized as providing engineering design services to its AE as it is apparent that assessee itself is not providing research and development services more than 3%. Further, in reply

IT(T)A No.1692(B)/2016 10 dated 08-01-2016 placed at page-652 of paper book assessee admits to the fact that it is engaged in providing R & D contract services to its AEs which is more akin to provision of engineering design services and that it bears minimum risk in provision of engineering design services. At this juncture, it is imperative to understand functions performed, assests deployed and risks assumed by assessee in provision of services to its AEs, from TP study which is as under; Functions performed by LM Wind Power India LM Wind Power India performs the following functions in rendering the R&D services and quality testing services. R & D Services Product Equipment: The product equipment team is responsible for assisting LM Wind Power Group R & D team in designing the moulds, clamps etc. used in the manufacture of rotor blades. For this, the team uses engineering design tools like CAD,CAM etc.2-Dimension/3- Dimension modeling techniques to determining the appropriate structure of the moulds, clamps etc. The process also involves determination of the moulds, which could be used to manufacture blades of different sizes with minimum changes. Aerodynamics: In the design stage, the greatest challenge is to find the perfect balance between aerodynamics and strength, combining all the elements into one single unit. The aerodynamic properties are crucial in determining how

IT(T)A No.1692(B)/2016 11 well the blade can extract energy from the wind. The Aerodynamics team develops and optimizes airfoil shapes which are then used in the design of rotor blades. The team uses sophisticated flow modeling tools to simulate the complex airflows around rotor blades and thereby assist the LM Wind Power manufacturing team in accurate shaping of rotor blades. The designed airfoils are further tested in the LM Wind Tunnel located in Vingen, Denmark and the India team supports the wind tunnel activities as well. The Aerodynamics team also develops tools to improve the productivity of the design team. Reliability: The reliability team performs three functions namely:  Fleet Reliability: It provides information on the wind turbine blades from field in terms of failure rate and warranty cost estimates,  Design Reliability: It assists the design team with the Design Failure Mode and Effects analysis and,  Risk analysis: It carries analysis for any failure mode. Stress Engineering: The Stress Engineering team analyses the reasons for cracks/ structural defects of rotor-blades etc. in the blades by using a technique called the Finite Element method. The Finite Element Analysis ("FEA") allows detailed visualization of where structures bend or twist, and indicates the distribution of stresses and displacements. FEA software

IT(T)A No.1692(B)/2016 12 provides a wide range of simulation options for controlling the complexity of both the modeling and the analysis of a system. Similarly, the desired level of accuracy required and the associated computational time requirements are managed simultaneously to address most engineering applications The process also allows entire designs to be constructed, refined, and optimized before the design is manufactured. The team carries out these activities working in close co-ordination with the teams located in other R&D centers of LM Wind Power Group. The team also assists in identifying solutions for the hindrances/ bottlenecks in the transportation of the rotor blades from the factories to the customers' place. The Stress Engineering team also works on automating and customizing the FEA and other in-house design tools Materials & Process: This team has two functions namely Materials and Process. The Materials group works on developing materials that would go into the blade manufacturing as well as developing materials and standards for repairs. LM Wind Power Group makes blades using a technology called the Vacuum Assisted Resin Transfer Moulding ("VARTM"). The VARTM process involves laying up the glass fibres, covering the material with a vacuum bag, pumping out the air inside the glass layers and infusing resin through the same material. The Process group develops the infusion strategy and helps the manufacturing with implementing the "Infusion Strategy" for a blade. The Process team also uses sophisticated

IT(T)A No.1692(B)/2016 13 simulation software to predict the resin flow and optimize the same in a computer before putting it in the physical blade. Technical Business Development ("TBD"): This team supports the global TBD team in certification and loads assessment. The TBD team comes with the right technical solution for a customer. It could be an existing blade which needs recertification or a new blade that needs to be developed from scratch. The TBD team works closely with the Stress Engineering team to assess the load carrying ability of blades and develops documents that are needed for certifying blades. Project Management: Globally the LM Wind Power Group has a project based way of operation. In this, every project has a project manager who obtains resources from different groups of "Core Engineering" and "Assurance Engineering". The projects managers are responsible for the delivery of project outcome i.e., what is identified in the "project scope". While the project team actually executes the necessary technical tasks, the project managers ensure delivery of results coordinating with different departments. Product Data management (PDM): Product Engineering (PE) and Core Engineering Design (CE-Design) PDM: This team supports global PDM team in terms of managing the master data like CBD, CTQ, vendor code creation, item number creation, bill of material management & implementing

IT(T)A No.1692(B)/2016 14 engineering changes in global ERP system. Lead / support projects related to PDM systems. PE: This team supports global PE team in resolving the engineering changes for all serial production blades, carrying out implementation of solution for all serial production blades from various product improvements projects, technical documentation support, Establishing TIL for new customer variants. Support global PE team on Continuous improvement projects. E-Design: This team support global CE-Design team in following areas: creating and managing the packaging specification, Geometrical Product Specification (GPS) implementation across the organization, checking drawings in accordance with GPS, provide technical support to region and functions and technical documentation support to Global PE team. CE–Design: This team monitors sixteen to twenty blades manufacturediga LM Wind,Powor-Group on a weekly basis. The information relating to the blades manufactured the location where the blades were manufactured, the process details etc. are updated to LM Wind servers by the respective locations. The quality testing team identifies any defects in the process or the blade manufactured and weekly reports will be generated based on set parameters

IT(T)A No.1692(B)/2016 15 relating to the critical quality measures. The quality testing team can also raise a general warning against a particular supplier of materials where analysis reveals defects in the materials used. In addition to the weekly reports, the quality Analysis team also generates monthly reports on the production process for the various locations. All there reports are uploaded into the LM Wind Power Group servers where they can be viewed by the concerned locations. Quality Testing Services LM Wind Power India undertakes quality testing in India as a part of the agreement with the LM Wind Power Group. Under this activity, LM Wind Power India gets a requisition for conducting such tests from its AEs worldwide. The testing division has been established with the objective of vendors Testing wherein the materials are tested for different structural properties such as tangile property, sheer property and fatigue property to confirm whether the same can be used in manufacturing rotor blades by the LM Wind Power Group. In the whole LM Wind Power Group, it is only LM Wind Power India who undertakes testing of glasfiber and resin. The following activities are performed by LM Wind Power India:

IT(T)A No.1692(B)/2016 16 Testing process: The prototype plates are manufactured for testing purpose, and then they are tested for the structural properties. Generally 600mm x 600mm size plates are manufactured for the testing purpose. Samples of different shapes and sizes are cut from the plate for conducting test for different structural properties. Mainly, three types of tests are conducted to check structural properties of the plates which are- tangile property test, fatigue property test and sheer property test. Data Collection and Authentication: LM Wind Power India, post conducting relevant tests, sends the test result to LM Wind Power Group. The test data, sent by LM Wind Power India are thoroughly analysed by them as to whether the plates meet requisite quality test and whether the same can be used in manufacturing rotor blades. Based on the analysis, requisition is raised for materials to vendors across the globe. Assests Deployed: Assessee owns routine assets like plant and machinery, office equipments, furniture & fittings, data processing equipments, leasehold improvement, computer software. Assessee does not own any intangibles and does not undertake research and development on its own that leads to development of

IT(T)A No.1692(B)/2016 17 non-routine intangibles. Thus, it has been stated that assessee does not own any non-routine intangibles. Risks assumed: Assessee do not assume market risks product/service liability risks, credit risk except for foreign exchange risk as remuneration is received by assessee in foreign currency. 5. Ground No. 12 is raised seeking inclusion of Tata Elxsi Ltd., in final list of comparables. 4.1 Ld.AR submitted that this company was shortlisted by Ld.TPO in first show cause notice dated 16/11/15, and subsequently, excluded in final list of Ld. TPO. He submitted that this exclusion was upheld by DRP after calling for reason from Ld.TPO. Ld.AR submitted that in order passed by DRP, it has been recorded that assessee was called upon to offer its comments on observations of Ld.TPO at the time of hearing on 23/03/16, since assessee could not controvert the same, there was no further notice issued to assessee in this regard. Ld.AR submitted that these observations by DRP are not correct, as assessee filed its reply which is placed at page 28 of paper book. Referring to page 30 Ld.AR submitted that assessee therein referred to reply filed on 08/12/16 (which was response to second show cause notice), wherein response for inclusion of Tata Elxsi has been submitted. 4.2 He thus submitted that this comparable may be set aside to Ld.TPO for FAR analysis. 4.3. On the contrary, Ld.CIT, DR submitted that this company is catering into two segments being software development & service segment and System Integration & Support segment. Referring to 1st

IT(T)A No.1692(B)/2016 18 show cause notice dated 16/11/15, she submitted that, this company caters to aerospace, automobile, broadcast, consumer electronics, defence, healthcare, industries, whereas assessee provides contract services to its AE exclusively who are manufacturers and develops blades for both small onshore wind turbines and the large turbines and offshore wind farms. She also submitted that, AE Group develops technology and products with new capabilities to monitor operations, protect against lightning strike and ensure maximum energy production. She thus submitted that Ld.TPO was right in excluding this company in the final list. 5. We have perused submissions advanced by both sides in the light of the records placed before us. 5.1 Upon perusal of the records, placed before us carefully referring to page 30 of paper book which is reply dated 20/05/16 filed by assessee to DRP, it is observed that assessee submitted in respect of Tata Elxsi Ltd. as under: “In addition to the above, the Ld.Panel during the hearing on 28/04/16 had asked us to provide the submissions in respect of Tata Elxi that was filed before the Ld.TPO. In respect of the same, we have enclosed the response in the 2nd show cause notice submission filed on 08/12/16 for the Ld. panels reference: Further, the assessee would like to submit that out of the companies proposed by your good self vide show cause notice dated 16/11/15 (reply filed on 18/12/15) the assessee has accepted Tata Elxi(seg.) and Mindtree Ltd (PE segment) to be

IT(T)A No.1692(B)/2016 19 functionally comparable and hence request you to include the same in the final set of comparable companies. Based on the same, the final set of comparable companies for benchmarking the international transaction is as follows: ……” It is observed that the said reply dated 18/12/15 is placed at page 702 of paper book being 1st submission filed in response to show cause notice dated 16/11/15 issued by Ld.TPO, wherein Tata Elxsi Ltd., has been accepted by assessee without analyzing functional similarity. 5.2 As regards functions carried on by assessee we refer to reply dated 08/01/16 filed by assessee in response to show cause notice dated 23/12/15 placed at page 652 of paper book. In reply, assessee categorically considers itself to be a captive service provider engaged in providing R&D services/design and engineering services to its associated enterprises for which assessee was compensated on time and material basis. It also states that based on analysis of functions performed, risk assumed and assets employed, assessee may be characterized as a limited risk design and engineering service provider. Further in this reply at page 653, it is submitted that assessee is engaged in provision of contract R&D services to its AE which is more akin to provision of engineering design services. Thus it has been stated therein that assessee in provision of engineering design services to its AE bears limited risk therefore comparables bearing high-risk and end to end solutions in their respective business fields cannot be compared with assessee.

IT(T)A No.1692(B)/2016 20 The Annual Report of this company is placed at page 490 of paper book, wherein during year under consideration this company earned total income of Rs. 542.91 crores from 2 main segments being, software development and services and, system integration and support. Further there is no segmental information available. It is also observed that this company owns huge intangibles which is not there in case of assessee. Further, this company bing associated with M/s Tata Group of Companies, have huge brand value. 5.3 Considering the business module this company follows, assets employed and risks assumed we are not of the opinion that this company is anyways comparable with a contract service provider that bears limited risk like that of assessee. We therefore do not find any reason to set aside this issue to Ld. TPO. Accordingly we dismiss this ground raised by assessee. 6. Ground No. 13 has been raised seeking inclusion of Cades Digitech Pvt.Ltd. it has been submitted that this comparable was found come functionally similar with that of assessee by Ld.TPO. He submitted that DRP suo moto excluded this comparable by applying on-site revenue filter which is without any basis. Ld.AR submitted that Ld.TPO did not consider this filter and therefore selectively applying this filter in case of this company is arbitrary. He thus submitted that either this filter is applied for all the comparables in the finalist or should not be applied to any. 6.1 On the contrary, Ld.CIT,DR could not controvert submissions made by Ld.AR, however, supported order passed by authorities below.

IT(T)A No.1692(B)/2016 21 6.2. We have perused submissions advanced by both sides in the light of the records placed before us. It is observed that DRP in order to exclude this company applied on- site revenue filters, which has neither been adopted by Ld. TPO nor DRP applied this filter to all comparables by Ld.TPO the finalist. Such kind of application of comparables on selective basis is not appreciated. We therefore set aside this issue to Ld.AO/TPO with a direction to apply this filter to all the comparables which will be available in the final list as per law. Accordingly this ground raised by assessee stands allowed for statistical purposes. 7. Ground No.14 &16 has been raised seeking exclusion of Holtec Consulting Pvt Ltd and Tractable Consulting Engineers Ltd Holtec Consulting Pvt Ltd Ld.AR submitted that this comparable is providing consultancy services to cement industry as compared to assessee that is into engineering design services which involves preliminary customization of existing design. It has been submitted by him that this company provides wide range of services from concept to commissioning for green field, modernization/ convergence/expansion of cement as well as captive power plant/waste heat recovery based power plant projects. He thus submitted that portfolio of this company is of servicing spans all disciplines of engineering, business consulting, geology and mining, project and construction management, environment management, performance enhancement, logistic etc. Ld.AR placed reliance upon decision of coordinate bench of this Tribunal in case of Bechtel India Pvt.Ltd vs DCIT reported in (2016) 66 Taxmann.com 160 (Del-Trib)

IT(T)A No.1692(B)/2016 22 Referring to annual report at page 1032 of paper book, it has been submitted that this company is engaged primarily in rendering engineering consultancy services which is done on integrated basis across it services, clients and project locations. He thus submitted that this company is not comparable with a contract service provider undertaking limited risk of engineering design. He thus submitted that this comparable is functionally dissimilar with that of assessee. 7.1. On the contrary, Ld.CIT, DR submitted that this company is into consultancy services which encompasses many fields. Referring to the functional profile of assessee, she submitted that assessee is also rendering R&D services and quality testing services, which is a kind of consultancy services provided to AE. Ld.CIT, DR drew attention to page 1056 being annual report of this company wherein details of fixed assets are given. She submitted that the list contains tools and testing equipments and therefore this company also provides testing services to its clients which forms part of consultancy services. She thus supported for inclusion of this comparable. 7.2. We have perused submissions advanced by both sides in the light of records placed before us. At page 1048 of paper book being annual report of this company it is observed that revenue recognition from consultancy is recognized in case of a lump sum contract by reference to stage of completion of contract activity determined by management and is providing engineering consultancy services to its clients located in India and abroad.

IT(T)A No.1692(B)/2016 23 7.3 In our opinion, the activity carried out by this company is quite different from that carried out by assessee functionally. Assessee is said to be assisting AE’s to develop new technology that makes wind turbines more efficient and extends the service life of both, turbines and blades. It also assists in engineering designs of road or blades, assessee in identifying reasons for crack/structural defects with the help of a software called finite element analysis. Assessee carries out all these activities with the help of R & D centre of group AE’s. This in our opinion is quite different from activities carried out by this company and therefore cannot be held to be functionally similar in terms of assets as well as risks assumed in delivering services. Accordingly we direct this comparable to be excluded from the finalist. Tractable Consulting Engineers Pvt.Ltd now known as Chethar Consulting Engineers Ltd., Ld.AR submitted that this company is engaged in provision of engineering and consulting services and energy, water and infrastructure. He submitted that it is engaged in provision of multidisciplinary solutions and energy transition and innovation, nuclear, hydro, power and gas and infrastructure and environment. Referring to the annual report of this company for year under consideration placed at page 1076-1105 of paper book, he submitted that this company has reported its income only from engineering consultancy charges which are KPO in nature. 7.4 On the contrary, Ld.CIT, DR placed reliance upon orders passed by authorities below. 7.5 We have perused submissions advanced by both sides in the light of records placed before us. Annual report of this comparable

IT(T)A No.1692(B)/2016 24 has been placed at page 1076-1105 of paper book. At page 1097 it is observed that this company recognizes its revenue from operations being engineering consultancy charges within clients from India and abroad. It is observed that engineering consultancy services are provided by this company to electrical and electronic manufacturing sectors. In our view the segment in which this company provides the services are very much different with that of assessee as assessee is providing contract services to its AE assisting in limited R&D activities akin to manufacturing of windmills blade. We therefore direct Ld. TPO to exclude this comparable for other reasons as discussed hereinabove. 8. Ground No. 16 has been raised by assessee seeking application of export sales being less than 25% of total sales filter. It has been submitted in this ground that 2 comparables being TCE Consulting Engineers Ltd and Tractable Consulting Engineering Ltd now known as Cethar Consulting Engineering Ltd. He submitted that I- Design Engineering Solutions Ltd and IOT Design and Engineering Ltd also fails this filter which has been excluded by DRP for not satisfying 25% RPT filter. Ld.AR submitted that this filter was applied by DRP for assessment year 2011-12 which attained finality as revenue did not contest the same. He urged for application of this filter in case of this comparable following the rule of consistency. 8.2 On the contrary Ld.CIT DR submitted that this filter has not been applied by Ld.TPO in for any of the comparables and therefore cannot be considered at this stage in selective circumstances.

IT(T)A No.1692(B)/2016 25 8.3 We have perused submissions advanced by both sides in the light of records placed before us. Admittedly, Ld.TPO while finalizing final list of comparables has not considered this filter at all. As we have already mentioned hereinabove that filters not considered/applied by Ld.TPO cannot be applied unless an opportunity is provided to Ld.AO/TPO to verify the same. Further a consistent approach in respect of applicability of filters must be maintained in respect of all comparables for a particular assessment year. Transfer Pricing principles do not allow to cherry pick filters and apply on selective comparables at any stage. DRP rejected assessee’s argument by observing as under: “4.4. As regards application of filter of export sales less than 25% of so total sales, it is noted that neither assessee applied this filter in its own TP study, nor it objected to the non-application of this filter by the TPO during proceedings. The assessee has objected to application of this filter in proceedings for earlier assessment years and has challenged the same before ITAT also. During proceedings before this panel 2, assessee could not explain as to why it was objecting to the action of the TPO when TPO has accepted the claim of assessee itself. Thus, making such claim before this panel for the year under consideration shows the wavering stand of the assessee on the issue. The objection of the tax payer’s thus not accepted.” The observations of DRP regarding assessee’s objection of applying this filter in immediately preceding assessment year and raising a ground for year under consideration for its application itself shows wavering mind of assessee to suit certain circumstances. Assessee itself has not used this filter in TP study and therefore cannot contest for principle of consistency to be followed.

IT(T)A No.1692(B)/2016 26 Further, it is observed that assessee has placed reliance upon decision of coordinate benches of this Tribunal in case of Actis Global Services Pvt. Ltd vs ITO reported in (2017) 81 Taxmann.com 457 (Del-Trib) and DCIT vs GE BE Pvt.Ltd reported in (2014) 42 Taxmann.com 554 (Bang) wherein this filter has been held to be an appropriate filter. This observation has been made because TPO in these cases applied this filter on a different factual matrix. In case of DCIT vs GE BE Pvt.Ltd (supra) facts were that assessee therein objected of comparables chosen by TPO for not having export sales and CIT(A) found merit in argument of assessee. CIT (A) therein observed that TPO selected 2 companies as comparables based on quantitative filters of export earnings without providing any minimum threshold level of such earnings, whereas assessee therein was 100% EOU. CIT(A) thus held that comparison of its gross margin with companies having insignificant proportion of export sales is not likely to yield meaningful results. CIT(A) therein further found that TPO consistently adopted quantitative filter of export revenue to operating revenue being greater than 25% in accordance with comparability criteria laid down in rule 10 B (2) (d). CIT(A) therefore felt that TPO should be directed to apply filter of export revenues to operating revenue is being more than 25% filter and recompute ALP, with a rider that, if TPO can demonstrate that there would be no difference in prising as well as margins between the domestic and export sectors of industry then he can ignore this filter. In case of Actis Global Services Pvt. Ltd vs ITO (supra) the facts are more or less similar to that of GE BE Pvt.Ltd (supra) as assessee was mainly an export-oriented IT enabled service provider, deriving

IT(T)A No.1692(B)/2016 27 100% of its revenues from exports in the segment and TPO therein applied export sales of less than 25% for excluding comparables which were functionally similar with that of assessee. Both these decisions relied upon by Ld.AR are factually not similar with that of assessee as the assessee before us is neither 100% EOU, nor is a case that Ld.TPO failed to apply this filter which was considered by assessee in TP study. We therefore reject this argument raised by Ld.AR. We thus do not find any infirmity in observations of authorities below in not applying this filter. Accordingly we dismiss this ground raised by assessee. 9. Ground No. 18 is in respect of initiation of penalty proceedings which is premature at this stage and therefore not adjudicated. In the result appeal filed by assessee stands partly allowed as indicated hereinabove. Order pronounced in the open court on 29-11-2019

Sd/- Sd/- (B.R.BASKARAN) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 29-11-2019 *am Copy of the Order forwarded to: 1.Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5. DR 6. ITO (TDS) 7.Guard File By Order Asst.Registrar

IT(TP)A No.1692(B)/2016 28