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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI S.V. MEHROTRA & SHRI KULDIP SINGH
Date of Hearing : 19.01.2016 Date of Order : .04.2016
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Emerson Process Management Power & Water Solutions India Pvt. Ltd. (hereinafter referred to as ‘the assessee’), by filing the present appeal sought to set aside the impugned order dated 16.12.2012 passed by the DRP/TPO/AO qua the assessment year 2008-09 on the grounds inter alia that :-
“That on the facts and circumstances of the case, and in law;
The Assessment Order passed in pursuance to the directions issued by the Learned Dispute Resolution Panel ('Ld. DRP') is a vitiated order as the Ld. DRP erred both on facts and in law in confirming part of the addition made by the Ld. Assessing Officer ('AO') to the appellant's income by issuing an order without appropriate application of mind.
2. The Ld. AO I Learned Transfer Pricing Officer (Ld. TPO) and the Ld. DRP erred in ignoring the fact that the reference made u/s 143(2) of the Act by the Ld. AO suffers from jurisdictional error as the Ld AO did not record any reasons in the draft assessment order based on which it was concluded that it was 'necessary or expedient' to refer the matter to the Ld. TPO for computation of the Arm's Length Price (,ALP') for the Appellant's international transaction of provision of application engineered software development and related services.
3. The Ld. TPO grossly erred in not considering the correct Operating Profit I Total Cost margin of M/s MN Dastur & Co. Private Limited of 0.18% despite the fact that the correct computation was duly submitted by the Appellant before the Ld. TPO in accordance with the directions of the Ld. DRP and the same was duly checked and verified by the Ld. TPO.
4. The Ld. AO / Ld. DRP erred both on facts and in law in enhancing the income of the Appellant by Rs.31,301,467 by holding that its international transaction of provision of application engineered software development and related services does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP has grossly erred in agreeing with the Ld. TPO's action of: 4.1 not appreciating that none of the conditions set out in section 92C(3) of the Act were satisfied in the present case; 4.2 disregarding the ALP as determined by the Appellant in the Transfer Pricing (,TP') documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (,Rules') as well as fresh search; and in particular modifying/ rejecting the filters applied by the Appellant; 4.3 disregarding multiple year / prior years' data as used by the Appellant in the TP documentation and holding that current year i.e. Financial Year 2007-08 data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 4.4 rejecting comparability analysis in the TP documentation / Appellant's fresh search and instead, conducting a fresh comparability analysis based on the application of erroneous and inappropriate quantitative and qualitative filters in determining the ALP for the Appellant; 4.5 including certain companies in the final set that were not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 4.6 excluding certain companies on arbitrary/frivolous grounds even though they were comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 4.7 considering foreign exchange fluctuations as operating in nature while calculating the operating margins of the comparables/ Appellant; 4.8 including high-profit making companies in the final comparables' set for benchmarking a normal risk bearing company such as the Appellant and not allowing a risk adjustment to the Appellant; 4.9. collecting information of the companies under section 133(6) of the Act that was not available to the Assessee in the public domain and relying on the same for comparability purposes; 4.10. grossly erred in not providing the benefit of +/- 5% range to the Appellant; and 4.11. disregarding judicial pronouncements in India in undertaking the TP adjustment.
That the Ld. AO has grossly erred in initiating penalty proceedings u/s 271(1)(C) of the Act mechanically and without recording any satisfaction for its initiation.
That the Ld. AO grossly erred in facts and in law in not allowing tax credit claimed in the return of income (in respect of prepaid taxes, self assessment tax and relief claimed under section 90 of the Act) totalling to Rs.7,958,453.
That the Ld. AO has grossly erred in levying an interest u/s 234B of the Act to the taxable income of the Appellant.”
Briefly stated, the facts of this case are : consequent upon the notice issued u/s143(2) of the Income-tax Act, 1961 (hereinafter ‘the Act’), during scrutiny proceedings, Ms. Ashima Vadhera, CA put in appearance, attended assessment proceedings, filed submissions and necessary details as requisitioned. Keeping in view the averments made by the assessee in Form 3CAB vide which assessee had entered into international transaction to the tune of Rs.15,39,29,906/-, the matter was referred to Transfer Pricing Officer (TPO) for determination of Arms Length Price (ALP) u/s 92CA (3), who has passed order dated 31.10.2011. By determining the Arms Length Price (ALP) of the international transaction qua the provisions of advisory services at Rs.19,38,60,164/- as against Rs.15,39,29,906/- determined by the assessee and thereby called upon the assessee to make adjustment/enhancement of Rs.3,99,30,258/-. The assessee reiterated its submissions made before the TPO earlier and contended that cost plus method applied by the assessee in determining the arms length price is the most appropriate method having already been accepted by the revenue department in the past. Assessee then carried the matter before the ld. DRP and vide order dated 17.06.2012, the ld. DRP has declined to interfere in the findings returned by the TPO by rejecting all objections raised by the assessee and consequently, adjustment of Rs.3,99,30,258/- was made to the income of the assessee on account of ALP.
Feeling aggrieved with the order passed by the TPO/DRP/AO, the assessee has come up before the Tribunal by filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 5. At the very outset, ld. AR for the assessee has fairly conceded that the grounds no.1, 2, 5 & 7 are of academic nature and he does not press the same and proceeded to argue on grounds no.3, 4 & 6 only. 6. The assessee company is a subsidiary of M/s. Emerson Electric Company, USA. Emerson today is designing and supplying product technology and delivering engineering services in a wide range of industrial, commercial and consumer markets around the world. Emerson and its subsidiaries had an average of approximately 137,700 employees during 2007. During the financial year under consideration, the assessee was engaged in providing application Engineered Software Development and Related Services to its group companies. 7. Undisputedly, during the assessment year under consideration, the assessee company entered into four international transactions with its Associated Enterprises (AEs), out of which TPO has disputed only one transaction which is to the following effect :-
International Transaction Method Value of International Transaction Application engineering TNMM 15,39,29,906 software development services
TPO has disputed the arms length standard adopted by the assessee for benchmarking, however accepted the Transactional Net Margin Method (TNMM) as the most appropriate method to decide Operating Profit/Total Cost (OP/TC) as Profit Level Indicator (PLI) for determining the arms length nature of its international transaction regarding “Engineered Software Development and Related Services”. The TPO has also not disputed that PLI assessed by the assessee at 10.86%.
Assessee in order to benchmarking international transactions relating to provisions of application “Engineered Software Development and Related Services”, selected TNMM as the most appropriate method with OP/TC as PLI having its own PLI of 10.86%. The assessee has taken five comparable companies and computed from weighted average method at 9.91 %, however during transfer pricing proceedings, assessee in order to meet with the queries raised by the TPO for filing updated current year data of financial year 2007-08 of the comparable companies adopted by the assessee, made a submission to make a fresh search by considering updated data on the ground that updated data of the comparable companies adopted by the assessee was not necessarily available at the time of preparing transfer pricing study. Then, assessee company selected seven new comparable companies having average OP/TC at 11.12% as against assessee’s OP/TC at 10.86% by making use of current year data.
However, the TPO after rejecting the filters adopted by the assessee and by adopting additional filters for screening of the comparable companies chosen five new companies as comparables for benchmarking the assessee’s contract of engineering export services segment. A final set of comparables adopted by the TPO are as under :-
S. Name of the company Adjusted Operating No. profits on operating cost (%) 1. Mahindra Consulting Engineers Ltd. 28.50 2. Alphageo (India) Ltd. 38.48 3. Stup Consultants Pvt. Ltd. 30.52 4. Semac Ltd. 49.00 5. Kirloskar Consultant Ltd. 27.54 Average 34.80
On the basis of study of aforesaid five final comparables chosen by the TPO having average OP/TC at 34.80% made an adjustment of Rs.3,99,30,258/- to the assessee’s taxable income on the ground that international transaction of provision of application “Engineered Software Development and Related Services” was not meeting arms length standard. Pursuant to the TP order passed by the TPO, the AO upheld the TP adjustment of Rs.3,99,30,258/- and issued the draft assessment order. Then the assessee carried the matter before Dispute Resolution Panel (DRP), filed detailed objections, who has directed the TPO to reject M/s. Alphageo (India) Ltd. and include M/s. M.N. Dastur & Company (P.) Ltd. as comparable after verifying their operating profit margin, but rejected all other contentions raised by the assessee.
Since the AO has made an adjustment of Rs.3,99,30,258/- of the assessee without giving effect to the DRP transaction, the said error was got rectified by the assessee by filing application u/s 154 and thereafter, TPO passed an order dated 18.06.2012 by giving effect to the directions issued by the ld. DRP and made an adjustment of Rs.3,13,01,467/- to the taxable income of the assessee.
GROUND NO.3 13. In the backdrop of aforesaid undisputed facts and circumstances of the case, the first question arises for determination qua ground no.3 in this case is “as to whether the TPO has erred in not considering correct OP/TC margin of M/s. M.N. Dastur & Company (P.) Ltd. of 0.18% and thereafter failed to comply with the directions issued by the ld. DRP”?
Final set of comparables chosen by the TPO on the basis of DRP’s direction are reproduced as under for ready reference :-
Sr.No. Name of the Company OP / TC margin – FY 2007-08 1 Mahindra Consulting Engineers Limited 28.50% 2 Stup Consultants Limited 30.52% 3 Semac Limited 49.00% 4 Kirloskar Consultants Limited 27.54% 5 MN Dastur & Co. Private Limited 8.46% Count 5 Average 28.80%
Now, on the basis of documents on record, we are to examine as to whether OP/TC margin for financial year 2007-08 of M.N. Dastur & Co. Pvt. Ltd. is 8.46% as claimed by the TPO as against 0.18% claimed by the assessee. The ld. AR for the assessee brought on record computation of OP/TC margin of M/s. M.N.
Dastur & Co. Pvt. Ltd., a comparable company for AY 2008-09 which is reproduced as under for ready reference :-
Particulars Amount (in INR) Operating Income (A) 1,32,78,00,000 Fees on engineering jobs 1,32,64,06,080 Fees on computer consultancy 13,93,920 Operating Expenses (B) 1,32,53,55,862 Operating & other expenses 1,28,83,36,863 Depreciation 3,70,18,999
Operating Profit (OP) (A) – (B) (C) 24,44,138 OP/TC = (C) / (B) 0.18% Add : Non Operating income (D) 19,13,64,978 Dividend income 4,43,30,681 Interest Income 6,52,63,205 Other income 8,17,71,092
Less : Non operating expenses (E) 2,18,68,513 Excess of cost over fair value of current 2,18,68,513 investments Profit before taxation (C) + (D) – (E) (As per 17,19,40,603 Profit & Loss Account)
Assessee in accordance with the order passed by the ld. DRP and after considering the OP/TC margin of M.N. Dastur & Co. Pvt. Ltd. at 0.18% and given the fresh computation showing OP/TC margin of financial year 2007-08 of the final comparables chosen by the TPO which are reproduced as under for ready reference :-
Sr.No. Name of the Company OP / TC Comparable proposed by margin – the Ld. FY 2007- TPO / 08 Appellant 1 Mahindra Consulting Engineers 28.50% Ld. TPO Limited 2 Stup Consultants Limited 30.52% Ld. TPO 3 Semac Limited 49.00% Ld. TPO 4 Kirloskar Consultants Limited 27.54% Ld. TPO 5 MN Dastur & Co. Private 0.18% Appellant Limited Count 5 Average 27.15%
Undisputedly, during the rectification proceedings filed before TPO u/s 144 by the assessee, correct computation of OP/TC method of M/s. M.N. Dastur & Co. Pvt. Ltd. of 0.18% was filed which was verified by the TPO and has not disputed the same in any manner. At the same time, the AO has also allowed to perpetuate the error committed by the TPO in considering the OP/TC margin of M/s. M.N. Dastur & Co. Pvt. Ltd. by recording its OP/TC margin at 8.46% instead of actual OP/TC margin of 0.18%. So, we are of the considered view that the matter is required to be restored to the TPO to decide the matter afresh by taking actual margin of OP/TC by M/s. M.N. Dastur & Co. Pvt. Ltd. and then to compute the adjustment of transfer pricing.
Consequently, ground no.3 is determined in favour of the assessee.
GROUND NO.4
Now, the next question arises for determination is “as to whether TPO has erred in making addition of Rs.3,13,01,467/- to the taxable income of the assessee company on account of ALP of the international transactions of provision of application of “Engineered Software Development and Related Services” by illegally and arbitrarily including functionally dissimilar companies as comparable”? 19. Ld. AR for the assessee contended that the TPO has arbitrarily chosen Mahindra Consulting India Ltd., Stup Consultants Limited, Semac Limited and Kirloskar Consultants Limited, functionally dissimilar companies as comparables. We would like to examine the functional and financial profile of the comparable companies in order to benchmarking international transaction undertaken by the assessee company under consideration one by one.
The ld. AR for the assessee contended that this comparable company is functionally dissimilar, having significant related party transactions and relied upon order passed by Delhi Tribunal in case cited as Bechtel India (P.) Ltd. Vs. Addl.CIT – 146 ITD 733 (Delhi – Trib.).
The TPO, while selecting the Mahindra as a comparable company, has returned the following findings :-
“The assessee has objected to the use of this company as a comparable on account of being functionally different and submitted that consultancy services provided by this comparable company in multidisciplinary areas. In contrast, the services provided by the Assessee are in of an entirely different nature. Further, the Assessee has provided arguments on application of related party transaction filter to reject companies having controlled transactions in excess of 15% of revenue, the Assessee has submitted that during the FY 2007-08, Mahindra had transactions with its related parties to the extent of 15.51% of the total revenue. Here again the objection of the assessee is mainly on verticals of the company. It has already been discussed earlier in this order. Therefore, this company can also be used as a comparable having regard to assessee’s functional profile. Further the taxpayer has objected this company on the basis of its own contention of RPT filter. This has already been discussed in the relevant para in this order and accordingly the company has less than 25% of RPT. Hence it is retained.”
A perusal of the profile of the aforesaid company lying at page 2 of Compendium of Annual Report shows that this company is into infrastructure sector by providing consultancy services in the areas of Special Economic Zones, Water Supply & Sewerage, Solid Waste Management, Urban Infrastructure, Agri Infrastructure, Social Infrastructure, Ports & Harbour & Offshore Terminal, Industrial Infrastructure, etc. The company has also worked on innovative projects like Centre of excellence for Horticulture, Dedicated Offshore terminal for Coal Handling and is augmenting its efforts to consolidate its position as a front runner in innovative projects.
Similarly, perusal of page 24 of Compendium of Annual Report goes to prove that the comparable company is having related party transactions to the extent of 15.51% of the total value whereas, on the other hand, the assessee company is into providing application “Engineered Software Development and Related Services” to its group company which is diametrically dissimilar to the functional profile of the comparable company.
The TPO has disposed off both the objections to the inclusion of this comparable company as to the functional dissimilarity as well as a related party transaction to the extent of 15.51% by returning cryptic finding that, “the comparable companies is also operating in the area of consultancy only and the company having less than 25% related party transactions and has taken as comparable”. However, when admittedly, the comparable company is engaged in infrastructure in the area of special economic zone, water sewerage, solid waste management, urban infrastructure, agri-infrastructure, social infrastructure, ports and harbor & offshore terminal, horticulture, coal handling, etc., the same cannot be compared with the assessee company which is into application “Engineered Software Development and Related Services”. This comparable has been rejected by the coordinate Bench of the Tribunal in case cited as Bechtel India (P.) Ltd. (supra) and restored the file back to the TPO. Ld. DR for the revenue has not controverted the proposition mooted out by the assessee as to the aforesaid decision of the coordinate Bench in Bechtel India (P.) Ltd. (supra).
STUP CONSULTANTS PRIVATE LIMITED 25. The ld. AR sought to exclude this comparable on the ground of functional dissimilarity, abnormal growth in turnover/abnormal high margin and again relied upon Bechtel India (P.) Ltd. (supra).
The TPO while selecting this company as comparable returned the findings to the following effect :-
“15.4 Stup Consultants Put. ltd. " The assessee has objected to this company also on account of the company being engaged in non comparable services as the company is primarily engaged in providing range of services in the field of engineering and architecture. The assessee has submitted that the services related to Architectural Consultancy are only comparable to the Assessee However, in the absence of any segmental information reported by the company, it is difficult to segregate the cost and revenue allocable to each of these two services rendered by the company. Hence, accepting the company would result in a very subjective analysis. The submission of the assessee has been considered. Here, again the objection of the assessee is mainly on verticals of the company. It has already been discussed earlier in this order. It is seen from Page 13 of the Annual Report : "Segment Information: (a) Company is carrying on profession of Civil Engineering and Architecture Consultancy (b) Fees 2007-08 2006-07 Fees for consultancy services rendered within India 93,90,66,985 60,69,58,122 Fees for consultancy services rendered outside India 6,33,13,896 2,21,28,452 The objection of the assessee is not tenable . A careful reading of the above segment information clearly shows that the company is engaged into providing consultancy in both the segments i.e. civil engineering consultancy and architectural consultancy as it is deriving its total fees from consultancy only. This is also evident from the extract taken by assessee from the website of the assessee that, "STUP is a fail service project delivery consultancy company,..,.,.,,.--". Therefore, the company is fully into engineering and technical consultancy and will be taken as comparable. Abnormally high margin: Further, it is submitted that high profit making companies should not be taken as comparables for benchmarking provision of engineering services of the assessee. In this regard, refer arguments furnished by the assessee in case of Alphageo. In light of the above it is submitted that Mitcon with OP/ TC margin of 41.21% should be excluded from the final set of comparables. As discussed above, the reasons for its supernormal profits are not far to seek. The said company has a different functional profile compared to the assessee, which explains why it is earning such abnormally high profit margin compared to assessee. Hence there are valid reasons for its exclusion from the final set of comparables. It is seen from the above that the majority of the income of the company is from Profession fees only. Since, the company is deriving its majority of the income from Profession fees on account of Technical Consultancy, these activities can be considered as comparable to the activities being performed by the assessee and accordingly, the company is also accepted as a comparable.”
A perusal of the aforesaid observation returned by the TPO apparently shows that the assessee has raised specific objection as to dissimilarity of this company by highlighting that this company is primarily engaged in providing range of services in field of engineering and architecture and that no segmental information is available but the ld. TPO by relying upon the segment information, lying at page 13 of the Annual Report, rejected the objection raised by the assessee on the ground that the company is engaged in providing consultancy in both the segments i.e. civil and engineering, consultancy and architectural consultancy and is driving its total fee from consultancy only and disposed off the objection of abnormally high margin on the ground that the company has a different functional profile compared to the assessee which explains why it is earning such high profit margin.
All these findings are self contradictory because on the one hand, the TPO observed that this company is taken as a comparable and on the other hand, recorded the finding that this company has a different functional profile compared to the assessee company. So, we are of the considered view that this company is not fit for taking as comparable and has to be excluded and fresh search is required to be made by the TPO by providing an opportunity of being heard to the assessee.
SEMAC LIMITED
The TPO selected this comparable despite objections raised by the assessee company for its including for TP study by returning the following findings :-
“15.5 Semac Limited For this comparable, the assessee has stated that the Annual Report is not available in the public domain. No description about this company is provided in the show-cause notice. In the absence of any information to establish comparability, it is requested not to consider Semac Limited as a comparable to the Assessee. In this regard, the annual report M/s Semac Limited was obtained u/s 133(6) and same has been provided to the taxpayer with the show-cause notice.: However, no response has been received from the Assessee Company. However, It is seen from the Annual Report of the company for FY 2007-08 that 100% of the income of the company is from Profession fees only: SEMAC PRIVATE LIMITED, BANGALORE
PROFIT AND LOSS ACCOUTN FOR THE YEAR ENDING 31ST MARCH 2008
Sche- 2008 2007 dule No. 1 2 3 4 5 I. INCOME : Rupees Rupees Rupees PROFESSIONAL FEES Bangalore Office 89,246,536 50,546,796 Hyderabad Office 81,710,542 40,876,015 New Delhi Office 131,372,010 80,001,200 Dubai Office 10,464,069 11,315,628 182,733,639 312,793,156 Miscellaneous Receipts 12 2,539,982 3.909,575 T O T A L 185,273,621 316,702,731 II. EXPENDITURE : Establishment, Administration and 13 205,985,457 144,501,257 Other expenses 4 6,673,677 __________ 5,123,696 T O T A L 212,659,134 149,624,953 PROFIT BEFORE TAXATION 104,043,597 35,648,668
Also, the Assessee has objected to this company also on account of the company being engaged in non comparable services as the company is primarily engaged in providing range of services in the field of topographical surveys, soil investigation etc. This objection pertains to industry verticals which has been discussed earlier.
The Assessee has also objected to this company also on account of the company being a high profit making company. This objection has also been dealt earlier.
Since, the company is deriving all of its income from Profession fees on account of Technical Consultancy, these activities are to be considered as comparable to the activities being performed by the assessee and accordingly, this company has been rightly taken as a comparable.”
A perusal of the annual report at pages 603 to 645 of the paper book apparently shows that this comparable company is providing engineering consultancy services whereas the assessee company proving application “Engineered Software Development and Related Services”. So, there is a stark difference between application of “Engineered Software Development and Related Services” and Consulting Engineering Services.
Moreover, the ld. AR has vehemently contended that the company’s annual report for FY 2007-08 is not available in public domain. Thought the TPO has claimed to have provided annual report to the assessee company at the time of issuance of the show- cause notice but the said report is not legible. Not only this, no segmental information is available in the annual report to work out the requisite comparability. Furthermore, undisputedly this company has earned high operating profit margin of 49.00% for FY 2007-08 as per TP order. Ld. AR to exclude this comparable again relied upon Bechtel India (P.) Ltd. (supra) wherein this comparable company has been excluded on ground of illegible annual report. So, we are of the considered view that to arrive at a logical conclusion to select Semac Limited as a comparable company, legible report is required to be examined by the assessee.
So, the TPO to reconsider this comparable by supplying legible copy of annual report to the assessee and to decide afresh.
Ld. DR has failed to controvert the submissions made by the ld. AR discussed in preceding paras that aforesaid company, namely, Mahindra, Stup Consultants Private Limited and Semac Limited are liable to be excluded by applying the order passed by the ITAT in case Bechtel India (P.) Ltd. (supra).
Ld. AR sought inclusion of three comparables, namely, Projects & Development India Limited, Geometric Limited (formerly known as Geometric Software Solutions Limited) and Kitko Limited, as per TP study/fresh search by applying the modifying parameters in the light of show cause notice issued by the TPO.
TPO rejected Geometric Limited (formerly known as Geometric Software Solutions Limited) on the ground that the service income of this comparable is less than 75% and on the further ground that the company is engaged in software development and as such is functionally different. 33. However, from the profit & loss account of this company from annual report for FY 2007-08 lying at page 186 of the compendium of annual report, it is apparently clear that this company is service company and is earning its income to the extent of 85.66% from service income, which fits into the TPO’s filter that the service income should not be less than 75%. So far as question of functional dissimilarity is concerned, the company is into software solutions for the mechanical design and manufacturing markets, offerings end-to-end solutions for the CAD/CAM/CAE and collaborative engineering markets. We are of the considered view that this company has been rejected from the list of comparables on the basis of wrong data and assumed functional dissimilarity and as such is required to be reconsidered for inclusion by the TPO.
So far as inclusion of Kitco Ltd., as sought for by the assessee, is concerned, the ld. AR again relied upon the order of the ITAT, Delhi Bench in case of Bechtel India (P.) Ltd. (supra) wherein it has been held that Kitko Limited should not have been excluded as other comparables are included by the TPO on the same parameters. This proposition has not been controverted by the ld. DR. So, this comparable is also required to be included by the TPO for TP adjustment by providing opportunity of being heard to the assessee.
Ld. AR further contended to include Projects & Development India Limited as comparable selected in the fresh search conducted by the assessee during TP proceedings. The TPO rejected this company on the only ground that this company does not show any service income. However, perusal of the profit & loss account and schedule 11 of the annual report of the company, lying at page 115 to 121, it is apparently clear that the major component of the income of this company is from the service income which is 99.92% and is more than 75% as required by the TPO. So, we are of the considered view that this company has been rejected by the TPO/DRP from the list of comparables on flimsy ground without perusing the record and as such, is liable to be included in the final list of comparables.
GROUND NO.4.8
36. The ld. AR contended that the ld. AO/DRP has erred in including high profit making companies in the list of final comparables for benchmarking a normal risk bearing company and not allowing a risk adjustment to the assessee company and relied upon Motorola Solutions.
The ld. TPO disallowed the risk adjustment as claimed by the assessee company by returning the following findings :-
“ Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins. The revised DECO guidelines of 2010 has also stated in Para 3.54 as under: "Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed, the reasons for the adjustments being considered appropriate, how they were calculated, how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V." 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 adjustment, 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 by the comparables or not and if so how these risks affected each of them and whether such adjustment would improve the comparability It may also be mentioned that it is incorrect to say that the taxpayer is working Virtually in a risk free environment. As mentioned above the taxpayer too bears several risks like technology risk, foreign exchange risk, manpower risk, etc.”
No doubt, the assessee company has claimed risk adjustment during TP proceedings for benchmarking with the comparable companies but the detail of the risk adjustment sought for by the assessee is not available on the file. So, we are of the considered view that assessee is to provide the details of the risk adjustment sought for and in case, it comes within + / - 5% then no such benefit is to be given. Otherwise, TPO is directed to decide the matter afresh after providing an opportunity of being heard.
In view of what has been discussed above, the present appeal filed by the assessee is hereby allowed for statistical purposes and the file is ordered to be restored to the TPO to decide afresh in pursuance of the observations made hereinbefore by providing opportunity of being heard to the parties.
Order pronounced in open court on this 13th day of April, 2016.