MOTT MACDONALD CONSULTANTS (I) P.LTD,MUMBAI vs. ASST COT COR 2(2), MUMBAI

During the TP proceeding, the TPO excluded 8 comparable and accepted

On the basis of above set of comparable, the TPO determined that the margin earned by assessee was 22.62% while average margin earned by 11 comparable companies is 30.22%. The 8 comparable excluded by TPO were having negative profit level indicator (PLI) or having PLI of less than 20%. On the basis of the above ALP of purchase of raw-material and components, the TPO computed ALP at Rs. 25,33,59,035/- as against Rs. 23,79,77,891/- and suggested adjustment of Rs. 1,53,81,054/- vide its order dated 19.10.2011 passed under section 92CA(3). On receipt of report of TPO the Assessing Officer passed draft assessment order under section 143(3) r.w.s. section 144C on 21.12.2011.

On receipt of draft assessment, the assessee exercised its option to file objection before the DRP. The objection of assessee was dismissed by DRP vide its order dated 28.09.2012 passed under section 144C(5). The DRP concluded that TPO duly analyzed the comparability of comparable selected by assessee and rightly excluded 8 out of 19 comparable. It was also held that the TPO rejected internal non-AE comparable as there was significant volume different in AE & non-AE segment. The submission of assessee is that difference in the volume is not significant for testing the international transaction with the transaction that the assessee rendered with the unrelated party was also rejected. On receipt of order/ direction of DRP dated 28.09.2011, the Assessing Officer passed the final assessment Mum 2012-Mott. MacDonald Consultants (India) Pvt. Ltd. order under section 143(3) r.w.s. 144C(13). Aggrieved by the order of final Assessing Officer passed under section 143(3) rws 144C(13) dated 29.11.2012, the assessee has filed the present appeal before this Tribunal. 7. We have heard the submissions of the ld. authorised representative (AR) for the assessee and the learned departmental representative (DR) for the revenue and with their assistance gone through the orders of the lower authorities. The ld. AR of the assessee submits that Assessee Company is engaged in engineering consultancy. During the relevant period under consideration the assessee provided consultancy services to its subsidiary in oil and gas projects and also independently provides engineering consultancy services to third parties. The ld AR for the assessee submits that the transaction value of services to AE during the year is of Rs.23,79,77,981/- and to non- AE is of Rs.l,07,76,527/- aggregating to Rs.25.47 cr. The ld. AR for the assessee submits that for bench marking the transaction the assessee adopted CPM. The margin earned on basis of CPM on transactions with AE is 20.04% with non-AE 12.16%. The assessee also benchmarked the international transactions by using Transactional net margin method (TNMM) on basis of 19 comparables selected by the assessee. The average profit level indicator (PLI) of 19 companies is 14.28%. During the assessment the assessing officer made a reference to transfer pricing officer. During the proceeding before the TPO, the TPO rejected CPM for benchmarking international transactions on the 7 Mum 2012-Mott. MacDonald Consultants (India) Pvt. Ltd. ground that projects undertaken for AE and non-AE differ. The TPO Adopted selected 11 comparable out of 19 comparables submitted by assessee and worked out profit level indicator (PLI) @ 30.20% and suggested adjustment of Rs.1,53,81,054. The ld. DRP confirmed the action of TPO.

The ld. AR for the assessee submits that CPM is the most appropriate method. CPM was accepted by the TPO for A.Y.2007-08 and earlier years as well. The projects where the assessee provided consultancy services are of long duration; some projects pertaining to A.Y.2007-08 have extended to A.Y.2008-09. The ld. AR for the assessee further submits that a standard method must be followed for determination of ALP. It should not be discarded unless Revenue can demonstrate fallacies in its application; traditional methods to be preferred over TNMM. In support of her submissions the ld. AR for the assessee relied on the decisions in ACIT v Sonata Software (55 SOT 533), Birla soft India Ltd. v DCIT (44 SOT 664 (Del.) and ACIT Vs MMS India (P.) Ltd. 123 TTJ 657 (Pune)

In alternate submission the ld. AR for the assessee submits that the assessee selected 19 comparable companies from Prowess database and the average margin of comparable were 10.48%. The TPO accepted 11 comparables out of 19 comparable. The ld. TPO applied RPT filter of 25%. If same filter is applied to other comparable the five other comparable viz. 2,3,5,8 and 10 ought to be to be rejected as RPT exceeded 25%. The ld AR for the 8 Mum 2012-Mott. MacDonald Consultants (India) Pvt. Ltd. assessee further submits that Tribunal has adopted tolerance margin @ 15% for RPT filter in case of Sony India (P) Ltd. 114 ITD 448,Wills Processing Service (India) P. Ltd. 57 SOT 34 (URO) and in Tavant Technologies India P .Ltd. (2017) 83 taxmann.com 105 (Bang).

On functional dissimilarity of the remaining 6 comparables, the ld. AR for the assessee submits that comparable No. 1, i.e. Alphaego India Ltd. is functionally not comparable with the assessee. The nature of services provided by Alphaego India Ltd is differ, they provided seismic services in Oil and Gas sector; however, the assessee provided engineering consultancy services to Delhi Metro project etc. Other differentiating features in Alphaego India Ltd is that major expenses are of Survey and drilling charges and has high employee costs Rs.12.26 Crore as against Alphaego's cost is Rs. 4.63 Crore and is a capital intensive company, has huge fixed asset base of Rs.109.48 Cr. The Assessee is an employee intensive company Gross block is of Rs. 4.05 Crore. Further, the ld. AR of the assessee also argued that comparable no.1 i.e. Alphageo India Ltd. is not functionally comparable with the assessee. This company provides services of Sesmic Survey Services Ltd. of Rs. 81.57 crore, whereas the assessee-company provided engineering consultancy services of Rs. 25.47 crore. The assessee is a employee intensive company. Major expenses of Alphageo in survey and drilling charges of Rs. 35.35 crore. This company is more capital intensive and its gross block is of Rs. 109.49 crore and net 9 Mum 2012-Mott. MacDonald Consultants (India) Pvt. Ltd. block is Rs. 70.51 crore, however, the gross block of assessee is Rs. 4.75 crore. The ld. AR for the assessee finally submits that Arithmetic mean of remaining 5 comparables is 26.63% within 5% range of assessee's margin of 22.62%. And if Ashok Leyland Project Services, ICRA Management Consulting Services Ltd. are accepted as comparable the arithmetic mean would work out to 21.95%. The ld. AR for the assessee prayed that the matter may be sent back for consideration by assessing officer/ TPO for benchmarking in view of the above submissions.

On the other hand the ld. DR for the revenue supported the order of the authorities below. The ld. DR for the revenue further submits that the transaction of assessee with its AE is 95% and with non AE is only 5%. All AE’s of assessee are outside India. Geographical position plays an important role in determination of price. The ld. DR for the revenue further submits that the TPO correctly applied the RPT filter of 25%. For exclusion of L&T the ld. DR submits that there was extra ordinary events in the year, therefore, it should be rejected from the final set of comparable.

We have considered the rival submissions of the parties and perused also the orders of the lower authorities carefully. The assessee in its Transfer Pricing Study as reported in Form-3CEB justified its ALP by selecting Mum 2012-Mott. MacDonald Consultants (India) Pvt. Ltd. CPM as most appropriate method, wherein the transaction with AE was shown at 20.04% and with non-AE at 12.16%. The assessee also provided its justification for selecting CPM as most appropriate method. The CPM was rejected by TPO by taking view that there is a significant in function performed, asset deployed and risk assumed in respect of project taken from unrelated party and the services performed to AE. Further, there is significant volume different between two segment i.e. AE segment and non-AE segment. The project with unrelated party have suffered because of problem faced by client in respect of funding and environment clearance and economic adjustment is required to be made for the loss caused in the non-AE segment. The AE segment is purely caters outside India project and that market condition in which buyer and sellers of the services located is an important consideration and has a bearing on the profit margin. The assessee in addition to CPM also benchmarked its international transaction by adopting TNMM on the basis of 19 comparables at average PLI at 14.28%. The ld. TPO while making adjustment excluded 8 comparable selected by assessee and retained only 11 comparable as recorded in para 9 of its order, the ld. TPO working out PLI of 11 comparable @ 30.20% and suggested adjustment of Rs. 1,53,81,054/-. The action of TPO in rejecting CPM was confirmed by ld. DRP. The ld. DRP also confirmed the adjustment suggested by TPO as well as confirmed the exclusion of 8 comparables. 11 ITA No. 7701 Mum 2012-Mott. MacDonald Consultants (India) Pvt. Ltd.

The ld. AR of the assessee vehemently submitted that the TPO applied RPT filter by applying the margin of 25%. It was also canvassed that if same filter is applied then 5 comparable viz. 2,3,5,8 &10 ought to have been rejected as RPT exceed 25%. We find convincing force in the submission of ld. AR of the assessee that margin in comparable no. 2, 3, 5 & 10 are more than 25%. Further, the ld. AR of the assessee also argued that comparable no.1 i.e. Alphageo India Ltd. is not functionally comparable with the assessee. This company provides services of Sesmic Survey Services Ltd. of Rs. 81.57 crore, whereas the assessee-company provided engineering consultancy services of Rs. 25.47 crore. The assessee is an employee intensive company. Major expenses of Alphageo in survey and drilling charges of Rs. 35.35 crore. This company is more capital intensive and its gross block is of Rs. 109.49 crore and net block is Rs. 70.51 crore, however, the gross block of assessee is Rs. 4.75 crore. Considering both the contention of assessee, we direct the Assessing Officer/TPO to exclude comparable no. 1,2,3,5 & 10 from the final list of comparable on the basis of RPT filter applied by TPO, and determined the adjustment accordingly.

In the result, appeal of the assessee is allowed.