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Income Tax Appellate Tribunal, DELHI BENCH “I-1” NEW DELHI
Before: SHRI S.V. MEHROTRA : & SHRI KULDIP SINGH :Shri Atul Jain CA &
Date of hearing : 11/08/2016. Date of order : 15/09/2016. O R D E R PER S.V. MEHROTRA, A.M:
This appeal, preferred by the assessee, is directed against the assessment order dated 30.11.2015, passed by the Assessing Officer u/s 143(3) read with section 144C(5), pursuant to directions of ld. DRP.
Brief facts of the case are that assessee company, incorporated on 18.3.2004, as subsidiary of WSP GR Cyprus Holding Ltd., Nicosia Cyprus, a global business provider, in the assessment year under consideration, was providing design engineering, management consultancy services across the built and nature environment worldwide. The company provided services to transform the built environment and restore the natural environment and its expertise ranged from environmental remediation to urban planning from engineering iconic buildings to designing sustainable transport networks and from developing the energy sources of the future to enabling new ways to extracting essential resources.
During the year under consideration the assessee had entered into following international transactions:-
No. Nature of transaction Method Value of transaction 1 Purchase of software TNMM 1,83,125 2 Engineering consultancy TNMM 8,49,15,100 services 3 IT support services/ TNMM 3,35,10,245 design support services 4 Reimbursement of - 17,38,165 expenses incurred by AE on behalf of company 5 Reimbursement of - 19,31,512 expenses incurred by company on behalf of AE
The assessee had justified the ALP of its international transactions in regard to engineering consultancy services and IT support services provided to the AEs by applying transactional net margin method (TNMM). The operating profit to total cost (OP/TC) was taken as PLI in the TNMM analysis. PLI of the company was arrived at 1.31% on cost whereas the average PLI of the comparable was arrived at 1.01% as per the analysis in the TP report. The assessee had selected following comparables in the engineering consultancy services and IT support service in its TP study report:-
No. Name of company FY 2010-11 FY 2009-10 FY 2008— Weighted 09 average 1 Indo Asian Projects Ltd. 0.71 1.43 - 0.21 3.07 2 ITD Cementation NA 2.74 2.09 2.43 India Ltd. 3 SRS Real 1.17 0.54 - 0.39 Infrastructure Ltd. 3.43
Ld. TPO issued a detailed show cause notice in which he, inter alia, pointed out that the finances charges amounting to Rs. 31,610/- was taken as operating expenses and provision for losses written back of Rs. 7093239/- was taken as operating income, which were to be considered as non- operating.
He, accordingly, show caused as to why the PLI of the assessee be not taken as -2.43%. Ld. TPO further pointed out that since the nature of services provided were technical in nature, hence, comparables providing technical services were to be used for bench mark the transactions relating to engineering/ consultancy/ designing support services. Ld. TPO after deciding the filters to be applied proposed following comparables for bench marking the international transactions:
No Company Name OP/OC (%) 1 Ashok Leyland Project Services Ltd. 24.70% 2 Bengal SREI Infrastructure Devp. Ltd./ 42.14% 3 Certification Engineers International Ltd. 78.45% 4 Global Procurement Consultants Ltd. 30.85% 5 HSCC (India) Ltd. 21.04% 6 Indus Technical & Financial Consultants Ltd. 14.78% 7 Kitco Ltd. 27.48% 8 Mahindra Consulting Engineers Ltd. 30.92% 9 Mitcon Consultancy & Engg. Services Ltd. 40.19% 10 Pallavan Transport Consultancy Services Ltd. 25.59% 11 TCE Consulting Engineers Ltd. 29.29% 12 Usha Hydro Dynamics Ltd. 29.45% 13 Gujarat Industrial & Technical Consultancy 7.89% Org Ltd. 14 IBI Chematur (Engineering & Consultancy) 25.96% Ltd. 15 Rites Ltd. 58.27% 16 NTPC Electric Supply Company Ltd. 18.01% Average 31.56%
Ld. TPO also considered the working capital adjustment claimed by assessee and pointed out that the working capital adjustment may be worked out considering the trade payables and receivables only of the taxpayer vis a vis those of the comparable companies.
The assessee in its reply to the show cause notice took following contentions, as noticed by ld. TPO:-
“3.2.1 The assessee has stated that TPO has not considered segmental operating profit of the company, The assessee has submitted details of domestic transaction and transaction with AEs.
3.2.2. Assessee has argued that services provided by it are in the nature of business support services in relation to engineering disciplines.
3.2.3. Assessee has objected against the use of current year data.
3.2.4. Objection against finance charges and provision of losses written back considered as non-operating by the TPO.
3.2.5. Objection against filters applied by the TPO.
3.2.6. Assessee has objected on rejection of comparables selected by it.
3.2.7. Assessee has objected against the additional comparables proposed by the TPO. 9. As regards assessee’s contention regarding segmental profitability submitted before TPO, he pointed out that assessee had never submitted segmental profitability before show cause notice. Ld. TPO has reproduced the segmental profitability submitted by the assessee, which was as under:
Particulars Domestic Transaction Total transaction with AEs amount as per P&L Income from 98289291 85981307 184270 consultancy fee Other income 7093239 - 7093239 Total 105385530 85981307 191363837 Operating expenses Personnel 50752252 64088120 114840372 expenses Operating & 56488436 9058951 65547387 Admin expenses Depreciation 4490454 3982100 8472554 and amortization Finance 31610 - 31610 charges Profit before (6380222) 8852137 2471914 prior period adjustment and tax OP/OC -5.71% 11.48% 1.31%
With reference to the aforementioned table, ld. TPO pointed out that assessee had not submitted basis of allocation of expenses. He further pointed out that nowhere in the audit report such segmental was mentioned. He, accordingly, rejected the contention of assessee in this regard.
After considering other objections raised by assessee, ld. TPO finally selected following comparables for benchmarking the international transactions:
No Company Name OP/OC (%) 1 Ashok Leyland Project Services Ltd. 24.70% 2 Bengal SREI Infrastructure Devp. Ltd./ 42.14% 3 Certification Engineers International Ltd. 78.45% 4 Global Procurement Consultants Ltd. 30.85% 5 Indus Technical & Financial Consultants Ltd. 14.78% 6 Kitco Ltd. 27.48% 7 Mahindra Consulting Engineers Ltd. 30.92% 8 Mitcon Consultancy & Engg. Services Ltd. 40.19% 9 Pallavan Transport Consultancy Services Ltd. 25.59% 10 TCE Consulting Engineers Ltd. 29.29% 11 Usha Hydro Dynamics Ltd. 29.45% 12 Gujarat Industrial & Technical Consultancy 7.89% Org Ltd. 13 IBI Chematur (Engineering & Consultancy) 25.96% Ltd. 14 Rites Ltd. 58.27% 15 NTPC Electric Supply Company Ltd. 18.01% Average 32.27%
Ld. TPO determined the ALP of international transaction relating to engineering services as under:
Operating cost 18,88,60,313 OP/OC% 32.27% Arm’s Length Price (ALP) 24,98,05,536 Price shown in the international transactions 18,42,70,598 Shortfall being adjustment u/s 92CA 6,65,34,938
Ld. DRP after considering assessee’s objections directed the TPO to exclude and include certain companies as comparable in calculating ALP. Accordingly, after giving effect to ld. DRP’s directions, adjustment of Rs. 38754545/- was made by AO.
Being aggrieved, the assessee is in appeal before us against the final assessment order passed by AO and has taken following grounds of appeal:
1. On facts, circumstances of the case and in law, the Learned Deputy Commissioner of Income Tax, Circle -27(2) ("Ld. AO") erred in completing the assessment under section 143(3) read with section 144C(4) of the Income-tax Act, 1961 (“the Act") by making an adjustment of INR 38,754,545 under section 92CA(4) of the Act, on account of the arm's length price of the international transaction pertaining to provision of back end support in respect of engineering and designing services rendered by its AEs.
2. On facts and in law, the Learned Dispute Resolution Panel- 2, New Delhi. ("Hon'ble DRP"), Ld. AO and Deputy Commissioner of Income Tax, Transfer Pricing Officer - III(1)(1) ("Ld. TPO") erred in disregarding the Appellant's use of multiple year/ prior years' data in contravention of the provision of section 92C of the Act read with Rule l0B and Rule 10D(4) of the Income Tax Rules, 1962 ("the Rules") thereby erred in disregarding the doctrine of impossibility of performance in contravening Section 92D of the Act. 3. On facts and in law, the Ld. AO/ Ld. TPO erred in not following the directions issued by the Hon’ble DRP to re- compute and restrict the Transfer Pricing ("TP") adjustment, on proportionate basis, to the value of international transactions only. 4. On facts and in law, the Ld. AO/ Ld. TPO erred in not following the directions issued by the Hon'ble DRP to correctly compute the operating profit margins of the finally selected companies, thereby ignored the correct computation provided by the Appellant during the course of proceedings 5. On facts and in law, the Hon'ble DRP erred in upholding the Ld. AO/ Ld. TPO's rejection of the comparability analysis undertaken by the Appellant in its TP Documentation; and conducting a fresh comparability analysis based on application of additional! revised filters in determining the ALP of the international transactions.
6. On facts and in law, the Hon'ble DRP and Ld. AO/ Ld. TPO erred in including certain new companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed, thereby contravening the provisions of the Rule 10B(2) of the Income Tax Rules, 1962 ("the Rules").
7. On facts and in law, the Hon'ble DRP and Ld. AO/ Ld. TPO erred in incorrectly computing the Appellant's margin by using the following approach; 1. Using entity level margin of the Appellant instead of the segmental margin provided for the Appellant's international transactions with the thereby contravening the provisions of Rule 10B(l) of the Rules; and Annexure AO 2. Considering Provision for unforeseen losses written back as non-operating in nature. 8. On facts and in law, the Hon'ble DRP and Ld. AO/ Ld. TPO erred in not allowing a risk adjustment under Rule lOB(l)(e) for determination of the ALP to account for the difference in the risk profile of the Appellant and of comparable companies. " 9. On facts, circumstances of the case and in law, the Ld. AO has erred in computing the interest. 10. On facts and in law, the Ld. AO/ Ld. TPO erred in initiating penalty proceedings under Section 271(1)(c) of the Act when the facts of the case and provision of the law do not warrant such initiation of penalty proceedings. 15. Ld. counsel for the assessee submitted that assessee is a back end support service provider and was providing architectural consultancy services to its AE. Ld. counsel pointed out that assessee was also engaged in provision of end to end structural engineering and consultancy services to third parties in India under direct contract and as a full-fledged entrepreneur engaged in negotiation of prices, conclusion of contracts, sub-contracting of work based on further negotiations where required, assuming project risk, capacity utilization risks etc. He pointed out that 47% of the revenue was derived from AE and 53% revenue was derived from independent third parties. As regards the service rendered to AE, ld. counsel pointed out that assessee operated as a limited risk service provider with respect to provision of back end support services wherein AEs were engaged in front ending design and engineering business with third parties. These constituted only 47% of the total revenue.
16. Ld. counsel pointed out that assessee had presented segmental P&L A/c before TPO, which was rejected without assigning any basis and the only reason was that they were not audited. Ld. counsel pointed out that while DRP did not accept the segmental analysis provided by the assessee, it did provide relief by providing proportional adjustment to the assessee vis- a- vis entity wise adjustment proposed by the TPO i.e. limiting the amount of expenses to the % of revenue from the AEs i.e. 47%. Ld. counsel referred to page 15 to 17 of the PB, wherein the order u/s 154/143(3) read with section 144C(4) dated 16.2.2016 is contained in which proposed adjustment u/s 92CA was determined at Rs. 1,88,49,387/-. The assessee has given in the synopsis its working as under:
Particulars Reference TPO’s computation Operating Cost of the (A) 142,555,679 appellant Add: Design Consultancy (B) 46,304,634 Expenses (relates to independent third party transactions) Total operating costs of ©=(A)+(B) 188,860,313 the appellant (including design consultancy expenses) Operating Costs (D)=©*47% 88,764,347 pertaining to AE transactions Arm’s length price at a (E)=(D)+18.10%(D) 104,830,693 margin of 18.10% International Transaction (F) 85,981,307 of Receipt on account of consultancy services Proposed adjustment u/s (G)=(e)-(F) 18,849,387 92CA
Ld. counsel pointed out that designing and consultancy expenses related to independent third party transactions and, therefore, could not form part of operating cost of the assessee.
Ld. counsel further pointed out that if the D&E expenses incurred solely for independent third party transactions are excluded then ALP of international transaction on account of consultancy services would be Rs. 79,128,381 as against the amount received at Rs. 85,981,307, thus requiring no adjustment. Ld. counsel has submitted following details in this regard:
Particulars Reference Assessee’s computation Operating cost of the (A) 142,555,679 appellant Operating cost pertaining (B)-(A)*47% 67,001,169 to AE transactions Arm’s length price at a ©=(B)+18.10%(B) 79,128,381 margin of 18.10% International Transaction (D) 85,981,307 of receipt on account of consultancy services Proposed adjustment u/s (G)=(D)-(E) No adjustment 92CA
Ld. counsel has filed additional evidence in the PB in support of its contention that segmental margin of the assessee is to be considered. Ld. counsel submitted certain documents before us, which, inter alia, includes details in relation to design and consultancy expenses which were solely incurred for independent third party business. Ld. counsel pointed out that for the purpose of executing such independent third party contracts, assessee in turn availed services of sub-contractors and consultants and incurred D&C expenses which showed that 100% of such amount was sub-contracted to others. In the paper book assessee has submitted following documents:
“Back-up documentation such as back-to-back trail of contracts undertaken by the Appellant with third parties and sub- contracted to others parties has been submitted;
Invoices raised by sub-contractors and consultants on WSP CIPL;
A tabulation providing details to establish that such D&C expenses related to third party projects; and A certificate issued by the Statutory Auditors of WSP CIPL (for FY 10-11) providing the total amount incurred on "Design Consultancy" expenses and the break-up thereof has been submitted.
Ld. counsel further referred to page 350 of the PB wherein the reply of the assessee before ld. TPO is contained in which segmental operating profitability of the company was submitted before him. Ld. counsel further referred to page 371 of the PB, wherein details of domestic non AE and AE cost is summarized.
Ld. counsel, therefore, submitted that the entire adjustment should be recalculated after excluding the non AE cost. He submitted that the matter may be restored back to the file of AO/ TPO to examine the additional evidence.
Ld. DR submitted that AE’s business cost cannot be segregated from nonAE’s business cost. He pointed out that comparables were also rendering similar services. He pointed out that ld. DRP has granted sufficient relief to assessee and the issue of exclusion of sub-contracting expenses was not taken before DRP.
Ld. counsel for the assessee submitted that Rule 10 deals with determination of income in the case of non-resident. Ld. counsel referred to Rule 10B(1)(e) which deals with TNM method for determining the ALP. He pointed out that the net profit margin realized by the enterprise is to be computed for international transactions and, therefore, expenses which do not pertain to AE cannot be taken into consideration. He further pointed out that none of the comparables entered into transaction with AE.
Ld. counsel for the assessee has advanced arguments in regard to various comparables included/ excluded by ld. TPO which we will consider after deciding the issue regarding additional evidence furnished by assessee.
As is evident from ld. DRP’s direction, it has accepted the assessee’s contention regarding limiting the expenses to the percentage of revenue from the AE i.e. 47%. Thus, though ld. DRP did not accept the segmental analysis submitted by the assessee but in principle agreed that adjustment proposed by ld. TPO is to be limited to the amount of expenses to the percentage of revenue from the AE. Therefore, if certain expenses were not at all incurred with reference to earning of AE’s revenue, then those expenses had to be excluded for correct computation of 47% of expenses attributable to AE. This exercise has not been carried out by ld. TPO because no such plea was taken before him. However, the entire data is available on record and, therefore, in order to arrive at correct computation the assessee’s plea regarding sub-contracting expenses 100% attributable to non AE business has to be examined. The assessee has filed additional evidence in support of its contention and, therefore, it would be in the interest of justice that the additional evidence is admitted for arriving at proper computation of ALP. We, accordingly, admit the additional evidence and restore the matter back to the file of Ld. TPO to examine the assessee’s plea in this regard. In case it is found that D&E expenses were attributable 100% to independent third party transaction then the same has to be excluded for computing the operating cost of the assessee because operating cost pertaining to AE only has to be considered.
In the result assessee’s petition under Rule 29 of the Income Tax (Appellate Tribunal) rules, 1963 for admission of additional evidence is allowed and matter restored to file of ld. TPO/AO for consideration.
Before we examine the contention of assessee in regard to various comparables, it would be proper to first consider the functional profile of assessee to which we have referred to earlier also, in order to find out whether assessee is merely imparting back office services or imparting services which require expertise of high technical nature.
Ld. TPO in para 2.2 has noted that assessee provided services to transform the built environment and restore the natural environment and its expertise ranged from environmental remediation to urban planning from developing the engineering iconic buildings to designing sustainable transport networks and from developing the energy source of the future to enabling new ways to extracting essential resources. This clearly shows that assessee is imparting services of very high technical nature and, therefore, the comparables which are imparting technical consultancy services were the right comparables selected by ld. TPO. In the backdrop of these observations now we proceed to examine the various comparables disputed by assessee.
Ashok Leyland Project Services Ltd. : 29. Ld. counsel for the assessee submitted that this comparable has wrongly been included because it is functionally not comparable to assessee.
Further, there were peculiar economic circumstances during the year inasmuch as ALPSL merged with Ashok Leyland Wind Energy Ltd. He further pointed out that there were other income aggregating to Rs. 66,84,745/-. Ld. counsel further pointed out that this company has earned revenue mainly from wind energy segment and there was loss in the project service division. Ld. counsel relied on the decision of Hon’ble Delhi High Court in the case of ChrysCapital Investment Advisors (India) Pvt. Ltd. in dated 27.4.2015 and Techbooks International Pvt. Ltd. in ITA no. 240/2015 for AY 2010-11.
Ld. CIT(DR) submitted that wind energy segment is only one part of whole business. However, this was also providing power block communication and service transport infrastructure services etc.
We have considered the submissions of both the parties. Since major part of the revenue was derived from wind energy segment, therefore, this comparable could not be said to be mainly in technical consultancy business and, hence, this was not functionally comparable to assessee. Moreover, during the year there was extraordinary event being merger of ALPSL with Ashok Leyland Wind Project Services Ltd. due to which there was clear possibility of differential advantage in respect of profitability of this comparable. We, therefore, direct for exclusion of this comparable from the list of comparables.
Global Procurement Consultants Ltd. (“GPCL”): 32. Ld. counsel for the assessee pointed out that this company was promoted by the EXIM Bank of India and provides procurement related services and inter-allied activities for projects in India and abroad. It dealt in industries like power, hydro, transportation infrastructure etc. Further acted as the client’s representative in taking on the total responsibility of procurement activities, by providing a comprehensive range of procurement related advisory services and inter allied activities for projects in India and abroad. Ld. counsel submitted that this comparable has government connection and, therefore, should be excluded. He pointed out that ld. DRP excluded on this count only seven comparables. He relied on the order dated of the ITAT dated 15.2.2016 in the case of Marubeni Itochu Steel India Pvt. Ltd. Vs. DCIT in wherein the majority revenue was derived from government enterprises and World Bank. Ld. counsel relied on the decision of Hon’ble Delhi High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. in ITA no. 2218/2013 dated 28.3.2016 and also on the order of ITAT in the case of Adidas Technical Services P. Ltd. Vs. DCIT in ITA no. 1233/Del/2015.
Ld. DR submitted that government companies cannot be excluded particularly when they were making profits. As regards the reliance placed by ld. counsel for the assessee on the decision of Marubeni Itochu Steel India Pvt. Ltd. (supra), ld. DR submitted that the said company was involved in steel business so was not comparable to Global Procurement Consultants Ltd. However, this company is comparable to tested party.
We have considered the submissions of both the parties and have perused the record of the case. In the case of Marubeni Itochu Steel India Pvt. Ltd. (supra) in para 11.1 the Tribunal has noticed the assessee’s objection raised before ld. TPO that this company was engaged in providing consultancy services and review of procurement processes for various projects funded by the World Bank. In para 11.2 the Tribunal has noticed that as per the annual report, this company was promoted by Export-Import Bank of India in association with leading Indian Public Sector and Private Sector consultancy organizations on the basis of public-private partnership model that offers collective Indian experience and expertise through the provision of a range of advisory services with particular focus on procurement. From this it is evident that this was not a government company and, therefore, the decision relied upon by ld. counsel for the assessee are of little help to it. Further we find that this comparable was imparting primarily consultancy services in regard to procurement management which was technical in nature. The assessee is also rendering consultancy services which are highly technical in nature and, therefore, we are not inclined to accept the contention of the ld. counsel for the assessee for exclusion of this comparable from the list of comparable. Accordingly, we uphold the order of lower revenue authorities in regard to this comparable.
Kitco Limited: 35. Ld. counsel for the assessee pointed out that Kitco is held by Small Industries Development Bank of India (SIDBI) with 49% shares of the company and, thus, it is a government connection company and, therefore, in view of the decision of Hon’ble High Court in the case of Thyssen Krupp Industries India Pvt. Ltd. (ITA no. 2218/2013), it should be excluded. He further pointed out that the major service offered by Kitco were project consultancy, detailed engineering & project execution, technical services, environmental engineering and HRD consultancy. Further, assessee was expanding its business activities by introducing more verticals like sea ports, urban planning and financial services etc. Further, Kitco was also engaged in infrastructure activities. He submitted that there was no segmental information available in the annual report. Ld. counsel relied on the order of the ITAT in the case of Bechtel India Pvt. Ltd. Vs. DCIT dated 21.12.2015 in wherein after taking note of the fact that Kitco was a 100% government owned undertaking, rendering services primarily to Central/ State government undertaking and PSUs and the majority revenue and profitability of the company came from government (state or centre) run projects and that the company derived benefit out of its parental relation with the Government in getting contract, excluded this comparable following the order of the ITAT in the case of M/s ThyssenKrupp Industries India Pvt. Ltd. ITA no. 6460/Mum/2012.
We have considered the submissions of both the parties and have perused the record of the case. In the case of Bechtel India Pvt. Ltd. (supra), in para 12.2 the Tribunal has noticed the assessee’s submission that Kitco was a 100% government owned undertaking. However, ld. counsel has pointed out that only 49% shares are held by SIDBI and, therefore, this cannot be held to be a government company. Ld. DR has very rightly pointed out that it is a government connection company and not a government company. However, advantage of getting government projects has an influence on its profitability. Therefore, since major revenue was derived from government run projects, therefore, in view of the decision in M/s ThyssenKrupp Industries India Pvt. Ltd. (supra), we direct for exclusion of this comparable from the list of comparables.
Mahindra Consulting Engineering Ltd. (‘MCEL’): 37. Ld. TPO included this comparable on the ground that this company was engaged in various engineering and infrastructure activities, which were in the nature of technical services, as rendered by assessee also. He, therefore, treated this company as comparable to assessee.
Ld. DRP confirmed the TPO’s action.
Ld. counsel for the assessee submitted that this company is functionally different and renders diversified activities. He pointed out that this company provided consultancy services in wide area of water, engineering, urban mobility, transportation and logistics industrial plants and systems, agriculture, food and rural infrastructure. He further submitted that peculiar economic circumstances existed inasmuch as strategic partnership with SAFEGE of France to achieve exponential growth and enhance its market share was entered into and in the process SAFEGE along with M&M and MCET purchased shares of company. Further, sub-consultancy cost to total personnel cost was 10.9-% and technical know-how to total fixed assets was 30.08%. He relied on the decision of ITAT dated 13.6.2016 in the case of Emerson Process Management Power & Water Solutions India Pvt. Ltd. Vs. ACIT, rendered in 6816/Del/2015, wherein this comparable was excluded.
We have considered the submissions of both the parties and have perused the record of the case. As far as reliance placed on the decision of Emerson Process Management Power & Water Solutions India Pvt. Ltd. (supra) is concerned, we are of the opinion that the said decision is of little assistance to assessee as in that case assessee was engaged in providing application engineering, software development and related services for aviation control systems. However, in the present case assessee is primarily engaged in providing highly technical consultancy services and, therefore, this comparable was rightly selected by ld. TPO. Ld. counsel has referred to certain peculiar economic circumstances noticed in his argument but the effect on profitability of these circumstances has not been demonstrated and, therefore, merely because shares of assessee was acquired by same organization will not be of any significance. We, therefore, reject the assessee’s contention on this count.
Mitcon Consultancy & Engineering Services Ltd.: 41. Ld. TPO noticed in the annual report for AY 2010-11 that this company was engaged in providing engineering services which were in the nature of technical services. He reproduced the extracts from annual report in his order. He, therefore, included this company as good comparable.
Ld. DRP confirmed the TPO’s action in view of similar FAR.
Ld. counsel for the assessee pointed out that this company provides technical services in diversified fields. Moreover, it earned 37.87% revenue from diversified activities, namely, vocational trainings, IT trainings and laboratories. Further, various capital grants were received from govt. of India. He, therefore, submitted that this cannot be considered as good comparable.
We have considered the submissions of both the parties and have perused the record of the case. Since this comparable is deriving less than 75% of revenue from consultancy services, therefore, this cannot be considered as a good comparable with assessee, which is primarily deriving almost entire revenue from consultancy services. We, therefore, direct for exclusion of this comparable from the list of comparables. TCE Consulting Engineers Ltd.: 45. Ld. TPO noted from the website of this company that it was engaged in various project engineering services which were in the nature of technical services and, therefore, it was a good comparable to taxpayer. He has reproduced the contents from the website in his order.
Ld. DRP confirmed the action of TPO, observing that it was a good comparable in view of similar FAR.
Ld. counsel for the assessee pointed out that the other income derived by this company was 104.34 lacs which included misc. receipts to the extent of Rs. 103.44 lacs and recoveries of bad debts written off Rs. .90 lacs.
Further provision for bad and doubtful debts and advances and other provision aggregated to Rs. 588.42 lacs. He pointed out that the turnover was Rs. 416.02 crores which is 22 times more than the assessee’s turnover of Rs. 18.42 crores. Ld. counsel relied on various decisions where this comparable has been excluded.
We have considered the submissions of both the parties and have perused the record of the case and find that primarily the assessee is pleading for its exclusion on the ground of financial results. Moreover, his contention is also that this company is functionally different as it was primarily providing commissioning services. We do not find much substance in this plea of assessee considering the functional profile of assessee, because this company was also providing highly technical services primarily for commissioning of project.
As far as ld. counsel’s submission regarding turnover is concerned, the same cannot be accepted because that does not affect the profit margin derived by a company. We, therefore, confirm the order of ld. TPO as confirmed by ld. DRP.
IBI Chematur (Engineering and consultancy) Ltd.: 50. Ld. TPO has observed that assessee objected to this comparable on the ground of non-comparable functions as the company provided a range of services-detailed engineering, intelligent 3D plant modeling, 2D conversion services, smart plant instrumentation, smart plant electrical, piping stress analysis, procurement assistance, process simulation, process equipment design, inspection services, project planning and management and erection supervision. He rejected the plea of assessee in view of his finding in general discussion, wherein after considering the assessee’s functional profile, the companies which were providing technical services with similar employee profile (engineers and technical people) as that of taxpayer, irrespective of their size and range of services were included, inter alia, observing that finding company’s rendering exactly similar services as that of taxpayer was a very difficult and impossible exercise.
Ld. DRP confirmed the TPO’s action observing that this was good comparable in view of similar FAR.
52. Ld. counsel for the assessee pointed out that this company was engaged in diversified activities since apart from detailed engineering, the company also provided project planning and management services. Further, he pointed out that this company was engaged in significant R&D activities and no segmental information was available.
Having heard both the parties, we do not find any reason to interfere with the orders of lower revenue authorities in regard to this comparable because this company was also providing primarily highly technical consultancy in various fields. The contention of ld. counsel that only those comparables should have been taken into consideration, which were performing almost similar technical consultancy services as assessee, is difficult to accept because ide-ntical replica of assessee could not be found.
Under TNMM it is broad comparability of comparables which has to be taken into consideration. It is quite impossible that two companies will be rendering same services. Accordingly, action of ld. TPO on this count is upheld.
Before parting we may point out that we have considered in detail the comparables also as both the parties had advanced arguments on these aspects, but first the ld. TPO has to examine the additional evidence admitted by us and if the assessee is able to substantiate its claim, then as per submissions of assessee, no addition would be called for. After carrying out this exercise only the comparables should be considered for determining the ALP.
In the result, assessee’s appeal is partly allowed for statistical purposes. Order pronouncement in open court on 16/09/2016.