M/s. Rolls- Royce India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1310/DEL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97998 (ITAT-DELHI)
• Duration Of Justice: 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-12-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 17-09-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 05-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: R K KAPOOR; ANUBHAV JAGGI
• Keywords: Transfer pricing; Business expenditure; International transaction; Bad and doubtful debts
• Section: 234B; 37(1); 10B; 6

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI A.T. VARKEY: JUDICIAL MEMBER ITA NO. 1310/DEL/2015 ASSTT. YR: 2010-11 ROLLS-ROYCE INDIA PVT. LTD., VS. DCIT, CIRCLE-21(2 ), 2 ND FLOOR, BIRLA TOWER WEST, NEW DELHI. 25, BARAKHAMBA ROAD, NEW DELHI. PAN: AABCR 5277 Q ( APPELLANT ) (RESPONDENT) APPELLANT BY : SH. PRADEEP DINODIA FCA & SHRI R.K. KAPOOR CA. & SHRI ANUBHAV JAGGI CA RESPONDENT BY : SH. AMRENDRA KUMAR CIT (DR) DATE OF HEARING : 17/09/2015. DATE OF ORDER : 03/12/2015. O R D E R PER S.V. MEHROTRA, A.M.. : THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGA INST THE ASSESSMENT ORDER PASSED BY THE DCIT, CIRCLE-15(1), NEW DELHI P URSUANT TO DRP DIRECTIONS U/S 143(3)/144C OF THE INCOME-TAX ACT, 1 961. 2. FOLLOWING GROUNDS HAVE BEEN RAISED: 1. THAT THE LD. TPO AND CONSEQUENTLY DRP/AO HAS ERR ED IN LAW AND ON FACTS IN THE CIRCUMSTANCES OF THE CASE I N CONFIRMING AND ENHANCING THE ADDITION ON ACCOUNT OF ARMS' LENG TH PRICE UNDER SECTION 92CA(3) OF THE INCOME-TAX ACT AMOUNTI NG TO RS. 3,71,14,107/- ON WHOLLY ILLEGAL, ERRONEOUS AND UNTE NABLE GROUNDS. 2 2. THE ORDER OF ASSESSMENT IS BAD IN LAW. 3. THE LEARNED AO'S ORDER BASED ON THE FINDINGS OF THE LEARNED TRANSFER PRICING OFFICER AND THE DIRECTIONS OF THE LEARNED DISPUTE RESOLUTION PANEL U/S.144C(5) OF THE INCOME- TAX, IS ERRONEOUS, UNTENABLE IN LAW AND ON FACTS FO R THE VARIOUS REASONS AND NOT LIMITED TO THE FOLLOWING: - 3.1. THE TPO AS WELL AS THE DRP AND CONSEQUENTLY TH E AO HAVE GROSSLY ERRED IN LAW AND ON FACTS AND IN THE C IRCUMSTANCES OF THE CASE IN ERRONEOUSLY: 3.1.1. REJECTING THE SCIENTIFICALLY THE ASSESSEE W ITHOUT COGENT REASON. 3.1.2. CARRYING OUT A NEW SEARCH PROCESS BASED ON ERRONEOUS FILTERS 3.1.3. CHERRY PICKING II COMPARABLES WITH HIGH MAR GINS 3.2. THE TPO AS WELL AS THE DRP AND CONSEQUENTLY TH E AO HAVE GROSSLY ERRED IN LAW AND ON FACTS AND IN THE C IRCUMSTANCES OF THE CASE FOR THE CHOICE OF COMPARABLE COMPANIES BY ERRONEOUSLY: 3.2.1. ADJUSTING THE ALP OF THE INTERNATIONAL TRAN SACTIONS OF THE ASSESSEE RELATED TO PROJECT MANAGEMENT SERVICES (PMS) AND MARKETING SUPPORT SERVICES (MSS) THAT ARE SUPPORT S ERVICES IN NATURE BY TREATING AND COMPARING THEM TO HIGH END T ECHNICAL SERVICES. 3.2.2. IGNORING THE FACT THAT THE AE SERVICE SEGME NT OF THE ASSESSEE CONSTITUTES OF MORE THAN 90% OF SUPPORT SE RVICES AND THEREFORE COMPARABLE COMPANIES WHICH PROVIDED SIMIL AR SUPPORT SERVICES AND BEAR SIMILAR RISKS TO THE SUPP ORT SERVICE SEGMENT OF THE ASSESSEE SHOULD HAVE BEEN CHOSEN. 3.2.3. IN NOT APPRECIATING THE FACT THAT THE NEW C OMPARABLES CHOSEN BEAR DIFFERENT RISK IN RENDERING TECHNICAL S ERVICES, WHILE 3 THE ASSESSEE IS NON-RISK BEARING ENTITY IN ITS SUPP ORT SERVICES SEGMENT. 3.2.4. IN NOT ALLOWING AN ADJUSTMENT ON ACCOUNT OF DIFFERENCES IN THE FUNCTIONS, ASSETS AND RISKS UNDERTAKEN BETWE EN THE ASSESSEE AND THE COMPARABLE COMPANIES, AS PER THE P ROVISIONS OF RULE 10B OF INCOME TAX RULES WHICH ALLOW REASONA BLE ACCURATE ADJUSTMENTS TO ELIMINATE THE MATERIAL EFFE CTS OF DIFFERENCES. 3.3. THE TPO AS WELL AS THE DRP AND CONSEQUENTLY TH E AO HAVE ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTA NCES IN DETERMINATION OF THE PLI OF THE ASSESSEE AND THE CO MPARABLE COMPANIES BY: 3.3.1. IN APPLYING THE SAFE HARBOR RULES (SAR) NOT IFIED BY CBDT TO THE ASSESSEE WHICH HAVE NO RETROSPECTIVE AP PLICATION TO A Y 2010-11 3.3.2. IN TREATING THE FOREIGN EXCHANGE GAIN/LOSS A S NON- OPERATING NATURE. 3.3.3. IN TREATING THE PROVISION OF DOUBTFUL DEBTS AS NON- OPERATING NATURE 4. THAT THE PROPOSED ADDITION OF RS. 3,71,14,107/- IS BAD IN THE LAW AND IS PRAYED TO BE DELETED. 5. THAT THE LD. AO HAS ERRED ON THE FACTS OF THE AS SESSEE'S CASE IN NOT ALLOWING THE COMPLETE CREDIT OF PREPAID TAXES. 6. THAT THE PENALTY PROCEEDINGS INITIATED U/S SEC 2 71(1)(C) ARE ON WHOLLY ILLEGAL AND UNTENABLE GROUNDS SINCE T HERE WAS NO CONCEALMENT OF ANY INCOME NOR SUBMISSION OF INACCUR ATE PARTICULARS OF INCOME, NOR ANY DEFAULT ACCORDING TO LAW BY THE ASSESSEE. 4 7. THAT THE INTEREST CHARGED U/S SEE 234B AND 234C OF THE ACT IS ON WHOLLY ILLEGAL AND UNTENABLE GROUNDS AND IS PRAYED NOT TO BE UPHELD. 3. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE, A SUB SIDIARY OF ROLLS ROYCE OVERSEAS HOLDING LIMITED, FILED ITS RETURN OF INCO ME DECLARING TAXABLE INCOME OF RS. 20,15,61,520. THE BUSINESS PROFILE OF THE ASSESSEE AS DISCUSSED BY LD. TPO IN PARAS 2.1 TO 2.4 OF HIS ORD ER IS AS UNDER: 2.1 ROLLS ROYCE GROUP PLC IS A COMPANY OPERATING IN THE CIVIL AEROSPACE, DEFENSE, MARINE AND .ENERGY MARKET PROVI DING AERO ENGINES USING GAS TURBINE TECHNOLOGY, ROLLS ROYCE I NTERNATIONAL LTD. IS ENGAGED IN THE FORMULATION OF POLICY AND ST RATEGY FOR THE DEVELOPMENT OF BUSINESS OPPORTUNITY AND PROVIDES MA RKETING, RESEARCH AND COMMERCIAL INFORMATION SERVICES TO ITS AES. 2.2 FURTHER, THE GROUP ALSO OPERATES. IN INDIA THRO UGH ITS LIAISON OFFICE ('RRIL-LO'). RRIL-LO CARRIES OUT THE LIAISON ACTIVITIES FOR THE ROLLS-ROYCE GROUP. IT PROVIDES MARKETING SU PPORT AND OTHER SUPPORT SERVICES SUCH AS PROVISION OF COMMERC IAL INFORMATION AND CO-ORDINATES SERVICE SUPPORT OPERAT IONS. 2.3 THE ASSESSEE COMPANY (RRIPL) UNDERTAKES TRADING OF ROLLS ROYCE ENGINES AND HAS A PRESENCE PRIMARILY IN THE POWER GENERATION AND OIL AND GAS MARKETS, SUPPORTING A RA NGE OF RECIPROCATING ENGINES COVERING GAS ENGINES, HFO ENG INES AND CRUDE OIL ENGINES. IT ALSO FUNCTIONS AS AN INTEGRAT ED SOLUTION PROVIDER FOR THE AFORE-MENTIONED TWO MARKETS. IN TH E OIL AND GAS SECTOR, ROLLS-ROYCE ENGINES ARE USED FOR RUNNING VE RY LARGE PUMPS TO DRIVE CRUDE OIL THROUGH PIPELINES RUNNING SEVERAL HUNDRED MILES AND ALSO PROVIDING ELECTRICAL POWER F OR SUCH PUMPING STATIONS. SIMILARLY, FOR POWER GENERATION, THE ENGINES ARE USED TO RUN GENERATORS CATERING FOR THE CAPTIVE POWER NEEDS AND PROCESS STEAM/HEAT REQUIREMENTS OF VARIOUS INDU STRIAL UNITS. 5 2.4. RRIPL ALSO UNDERTAKES SERVICING CONTRACTS, WHI CH INVOLVE SELLING PARTS PURCHASED FROM INDIAN MANUFAC TURERS AND DISTRIBUTORS, OVERSEAS ROLLS-ROYCE ENTITLES AND OVE RSEAS THIRD PARTIES AS WELL AS PERFORMING SERVICES SUCH AS REPA IR AND MAINTENANCE WORK AND OTHER FIELD SUPPORT. 4. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD ENTERED INTO VARIOUS TRANSACTIONS WITH ITS AES AND, THEREFORE, IN ORDER TO DETERMINE THE ALP OF THE SAID TRANSACTIONS U/S 92CA (3) OF THE INCOME-TAX ACT, REFERENCE WAS MADE TO THE TPO BY THE AO. THE M AIN DISPUTE IN THE PRESENT APPEAL IS IN REGARD TO ADDITION MADE ON ACC OUNT OF THE ALP DETERMINED BY LD. TPO IN REGARD TO PROVISION OF TEC HNICAL PROJECT MANAGEMENT AND MARKETING SUPPORT SERVICES, WHICH HA D BEEN BENCH MARKED USING TNMM METHOD AND ADOPTING OP/OC AS THE PLI. PL I IN ASSESSEES CASE HAD BEEN CALCULATED AT 10.21% BY ASSESSEE AND, ACCORDINGLY, IT WAS CLAIMED THAT THE INTERNATIONAL TRANSACTIONS WERE AT ALP IN VIEW OF THE AVERAGE PLI OF 9.90% IN THE CASE OF 13 COMPARABLES. IN THE SERVICES SEGMENT, THE OP/OC COMPUTED IN THE TP STUDY WAS AS BELOW: PARTICULARS AMOUNT IN INR REVENUE 321856258 EXCHANGE FLUCTUATION 2,74,998 EXCESS PROVISION WRITTEN BACK 3,11,387 TOTAL INCOME 32,24,42,643 TOTAL EXPENSES 29,25,59,385 NET OPERATING PROFIT 2,98,83,258 NET OPERATING PROFIT RATIO BASED ON COST% 10.21% 5. AS PER THE BENCH MARKING ANALYSIS DONE IN THE TP STUDY, FOLLOWING COMPARABLES HAD BEEN TAKEN: 6 S. NO. COMPANY NAME WEIGHTED AVERAGE NCP (PERCENT) 1. BVG INDIA LTD. 22.77 II. EDUCATIONAL CONSULTANTS (INDIA) LTD. 15.03 III. ENTERTAINMENT NETWORK (INDIA) LTD. 0.17 IV. HSCC (INDIA) LTD. 12.84 V. KITCO LTD. 8.22 VI. M.N. DASTUR & COMPANY PVT. LTD. 8.50 VII. OFFICE CARE SERVICES LTD. 4.58 VIII. OVERSEAS MANPOWER CORPN LTD. -0.15 IX. PROJECT & DEVELOPMENT INDIA LTD. 18.98 X. RITES LTD. 18.78 XI. TELECOMMUNICATION CONSULTANT INDIA LTD. 9.64 XII. UP ENGINEERING LTD. 8.34 XIII. VATIKA MARKETING LTD. 1.06 ARITHMETIC MEAN 9.90% 6. LD. TPO NOTICED THAT IN THE TP REPORT IN REGARD TO THE FUNCTIONAL ANALYSIS OF PROVIDING TECHNICAL, PROJECT MANAGEMENT AND MARKET SUPPORT SERVICES, IT WAS MENTIONED AS UNDER: 'RRIPL HAS ENTERED INTO VARIOUS AGREEMENTS WITH ITS ASSOCIATED ENTERPRISES FOR RENDERING VARIOUS SUPPORT SERVICES WHICH FACILITATES THE ROLLS-ROYCE GROUP TO CONDUCT BUSINE SS ILL INDIA. SUCH SERVICES ARE IN THE NATURE OF TECHNICAL SUPPOR T, PROJECT MANAGEMENT AND MARKET SUPPORT SERVICES. IN THIS REG ARD, THE FUNCTIONS PERFORMED BY RRIPL HAVE BEEN ENUMERATED B ELOW: PROVISION OF TECHNICAL SERVICES DURING THE YEAR UNDER CONSIDERATION, RRIPL RENDERED TECHNICAL SERVICES TO ROLLS- ROYCE POWER ENGINEERING PIC, BED FORD 7 'RRPE, BEDFORD'), ROLLS-ROYCE POWER ENGINEERING PIC , DERBY ('RRPE, DERBY'') AND ROLL-ROYCE MARINE AS, NOTWAY('RRMAS, NOTWAY'}. IN THIS REGARD, THE FUNCTI ONS PERFORMED BY RRIPL INCLUDE: - ASSISTANCE AND / OR ADVICE IN REPAIR AND OVERHAUL O F ROLLS- BOYCE ENERGY PRODUCTION AND / OR OIL AND GAS DISTRI BUTION ENGINES MAKING RECOMMENDATIONS WITH RESPECT TO TECH NICAL SOLUTIONS AND WORKFLOWS TO ENHANCE REPAIR AND OVERH AUL CAPABILITY PROVISION OF PROJECT MANAGEMENT SERVICES - IN ADDITION TO THE ABOVE, RRTPL ALSO RENDERED PROJE CT MANAGEMENT SERVICES TO RRMAS, NORWAY. THE NATURE OF SERVICES RENDERED INCLUDES THE FOLLOWING: - REVIEW OF THE INTERNAL OPERATIONS OF THE FIRM WITH THE GOOD PRACTICE FRAMEWORK - CO-ORDINATION FOR PROCUREMENT OF EQUIPMENTS AND SUP PLIES AND EXPEDITING THE PROCESS WITH SUPPLIERS - CO-ORDINATION WITH INDIAN SUPPLIERS ILL RELATION TO SUPPLY OF DRAWINGS AND SPECIFICATIONS - CONTROLLING AND REVIEWING THE EXPENDITURE ALL A PRO JECT AND IDENTIFYING AND CLAIMING ADDITIONAL COSTS FROM CLIE NTS - PLANNING AND SCHEDULING RESOURCE REQUIREMENTS FOR O NGOING AND FUTURE PROJECTS - RAISING INVOICES IN ACCORDANCE WITH PROJECT MILESTO NES, ISSUING INVOICES TO CUSTOMER ONE COLLECTING CASH - ASSISTANCE IN MANAGEMENT OF LOGISTICS FOR RRMAS NOR WAY FOR DELIVERY OF GOODS WITH APPROPRIATE DOCUMENTATIO N FOR THE SAME - MAINTENANCE OF TILE CUSTOMER BASE FOR THE GROUP PROVISION OF MARKET SUPPORT SERVICES. SERVICE RENDERED BY RRIPL IN RELATION TO MARKET SUP PORT SERVICES TO RRMAS NORWAY AND ROLLS-ROYCE INTERNATIO NAL LTD; UK ( INCLUDES THE FOLLOWING. 8 - MAINTENANCE OF BUSINESS AND MARKET RELATION AND PRO VISION OF NECESSARY SUPPORT - IDENTIFICATION A/NEW BUSINESS OPPORTUNITIES AND PR OSPECTIVE CUSTOMERS FAT HE ROLLS ROYCE PRODUCTS - ASSISTANCE IN FORMULATIONS OF EFFECTIVE MARKET AND BUSINESS STRATEGIES - CO-ORDINATION WITH RESPECT TO CUSTOMER COMPLAINTS A ND PROVISION OF NECESSARY INPUTS.' 7. IN COURSE OF PROCEEDINGS BEFORE LD. TPO, THE ASS ESSEE SUBMITTED SEGMENTAL DETAILS IN REGARD TO THE SERVICES PROVIDE D TO THE AE AS UNDER: - O&M SERVICES - PROJECT MANAGEMENT SERVICES - MARKET SUPPORT SERVICES - CORPORATE SERVICES. 8. THE ASSESSEES CONTENTION WAS THAT O&M SERVICES WERE HIGH END SERVICES WHICH CONSTITUTED 10% OF THE AVERAGE SERVI CE SEGMENT. THE REST THREE BEING PROJECT MANAGEMENT SERVICES; MARKET SUP PORT SERVICES; AND CORPORATE SERVICE, CONSTITUTED 90% OF THE SERVICES RENDERED BY ASSESSEE. IT WAS FURTHER POINTED OUT THAT THE PLI OF O&M SERVICE S SEGMENT, WHERE THE ASSESSEE WAS RENDERING TECHNICAL SERVICES, WAS 59.3 2%, WHEREAS FOR OTHER THREE SERVICES, WHICH WERE LOW END SERVICES, THE PR OFIT MARGIN WAS 6.5%. THE ASSESSEES CONTENTION WAS THAT ONLY THOSE COMPA RABLES SHOULD BE TAKEN WHICH WERE PERFORMING NON-TECHNICAL SERVICES AS THE ASSESSEES MAJOR CHUNK OF SERVICES WAS NON TECHNICAL IN NATURE. HOWE VER, LD. TPO DID NOT 9 ACCEPT THE ASSESSEES CONTENTION POINTING OUT THAT THE FILTER OF RATIO OF SERVICE INCOME TO TOTAL INCOME OF AT LEAST 75% WAS A QUANTITATIVE FILTER WHICH HAD BEEN USED TO ARRIVE AT A SET OF COMPANIES WHICH WERE DERIVING SERVICE INCOME. LD. TPO POINTED OUT THAT THE COMPARABLES PA SSING THIS QUANTITATIVE FILTER WERE EXAMINED IN DETAIL WITH RESPECT TO THE BROAD FUNCTIONAL SIMILARITY AS REQUIRED BY THE TNMM FOR BENCHMARKING INTERNATIO NAL TRANSACTIONS. HE POINTED OUT THAT FROM THE TP REPORT IT IS EVIDENT T HAT ASSESSEE WAS ENGAGED IN PROVIDING O&M, PROJECT MANAGEMENT SERVICES; CORPORA TE SERVICES AS WELL AS MARKET SUPPORT SERVICES TO ITS AES. HE FURTHER OBSE RVED THAT IT COULD BE SEEN FROM TP REPORT THAT THE SERVICES PROVIDED BY THE AS SESSEE TO THE AE WERE IN THE NATURE OF MARKETING SUPPORT SERVICES, MANAGERIA L SERVICES AND SOME AMOUNT OF TECHNICAL SUPPORT ALSO. HE OBSERVED THAT WHILE USING TNMM METHOD, COMPANIES PROVIDING APPROXIMATELY SIMILAR S ERVICES CAN BE TAKEN AS COMPARABLE AND, THEREFORE, FUNCTIONAL OR SERVICE LI NE WAS THE TYPE OF FUNCTIONS BEING PERFORMED WHETHER LOW OR HIGH END. HE, THUS, DID NOT ACCEPT THE ASSESSEES CONTENTION THAT THE COMPARABLES PERF ORMING HIGH END AS WELL AS LOW END SERVICES SHOULD BE CONSIDERED SEGMENTAL WISE HAVING REGARD TO THE COMPOSITION OF PROPORTION OF HIGH AND LOW EN D SERVICES RENDERED BY THOSE COMPARABLES. HE WAS OF THE OPINION THAT THOSE COMPARABLES WOULD BE SELECTED WHICH WERE PARTICULARLY PERFORMING FUNCTIO NS SIMILAR TO THE ASSESSEE 10 AND WERE PROVIDING MARKET SUPPORT SERVICE, TECHNICA L AND RELATED BUSINESS SERVICES AND SUCH COMPARABLES COULD NOT BE REJECTED SIMPLY ON THE GROUND OF HIGH END ACTIVITY. THUS, IN SUM AND SUBSTANCE, LD. TPO DID NOT AGREE WITH ASSESSEES CONTENTION OF NOT CLUBBING THE HIGH END AND LOW END SERVICES. THE AO, ACCORDINGLY, DETERMINED THE PLI AT 20.98% AS UN DER: NO. NAME OF THE COMPANY OP/OC(%) I. APTICO LTD. 40.09 II. BVG INDIA LTD. 22.77 III. CRYSTAL HUES LTD. 9.10 IV. CYBER MEDIA RESEARCH LTD. 14.85 V. HSC (INDIA) LTD. 18.32 VI. KITCO LTD. 14.01 VII. M.N. DASTUR & COMPANY PVT. LTD. 7.17 VIII. QUADRANT COMMUNICATIONS LTD. 13.11 IX. RITES LTD. 49.43 AVERAGE 20.98 9. THE AO MADE AN ADDITION OF RS. 3,20,82,086/- AS UNDER: PARTICULARS AMOUNT (IN INR) OPERATING COST 292,559,385 ARMS LENGTH MARGIN (%) 20.98% ARMS LENGTH MARGIN (RS.) 61,378,959 ARMS LENGTH PRICE 353,938,344 PRICE CHARGED BY THE ASSESSEE 321,856,258 105% OF PRICE CHARGED IN INTERNATIONAL TRANSACTION 337,949,071 PRICE LESS CHARGED BY THE ASSESSEE THAN THE ALP AND FOR WHICH ADJUSTMENT IS REQUIRED TO BE MADE. 11 10. BEFORE LD. DRP, THE ASSESSEE REITERATED ITS SUB MISSIONS AND POINTED OUT THAT SHARE OF SUPPORT SERVICE RENDERED TO THE AE VIS A VIS THE TOTAL SERVICE RENDERED TO THE AE WAS 90% AND TECHNICAL SE RVICES WERE ONLY 10%. IT WAS SUBMITTED THAT THE COMPARABLES SELECTED, DIS REGARDING THE ASSESSEES CONTENTION, WAS NOT JUSTIFIED AS THE CHARACTERISTIC AND FUNCTIONS RENDERED AND ASSUMED IN RELATION TO THE SERVICES RENDERED BY THE COMPARABLES WERE IN STAR CONTRAST TO THE ASSESSEE AND, THUS, NOT COMPARABLE. THE ASSESSEE HAD ALSO POINTED OUT THAT CERTAIN COMPARABLES WERE WRONGLY R EJECTED BY LD. TPO THOUGH THEY CONFORMED TO THE FUNCTIONS PERFORMED BY ASSESSEE. 11. LD DRP AFTER CONSIDERING THE ASSESSEES CONTENT ION REJECTED THE SAME AND GAVE RELIEF ONLY IN RESPECT OF TWO COMPARABLES VIZ. BVG INDIA LTD. AND M.N. DASTUR & CO. LTD., INTER ALIA, OBSERVING THAT M.N. DASTUR & CO. LTD. WAS MORE SUITABLE TO ITS O&M SEGMENT. THE AO, ACCOR DINGLY, PASSED THE ASSESSMENT ORDER AND DETERMINED THE AVERAGE PLI AT 22.70% AS UNDER: S.NO. COMPANY NAME ADJUSTED OP/OC (%) 1. APITCO LTD. 40.09 2. CRYSTAL HUES LTD. 9.10 3. CYBER MEDIA RESEARCH LTD. 14.85 4. HSCC(INDIA) LTD. 18.32 5. KITCO LTD. 14.01 6. QUADRANT COMMUNICATION LTD. 13.11 7. RITES LTD. 49.43 AVERAGE 22.70 12 12. THE AO, ACCORDINGLY, DETERMINED THE ALP AS UNDE R: OPERATING COST 29,25,59,385/- ARMS LENGTH MARGIN 22.70% ARMS LENGTH PRICE (ALP) 35,89,70,365/- PRICE SHOWN IN THE INTERNATIONAL TRANSACTION S 32,1 8,56,258/- SHORTFALL 3,71,14,107/- PERCENTAGE DIFFERENCE WITH INTL. TRANSACTION 11.53% 13. LD. COUNSEL FOR THE ASSESSEE NARRATED THE FACTU AL ASPECTS IN REGARD TO THE TWO MAIN SERVICE SEGMENTS VIZ. TECHNICAL SEGMEN T AND THE OTHER BUSINESS SUPPORT SERVICE SEGMENT. HE REFERRED TO PAGE 85 OF THE PB WHEREIN SEGMENT- WISE PROFITABILITY FOR AY 2010-11 HAS BEEN GIVEN IN REGARD TO ALL THE SERVICE SEGMENTS. 14. LD. COUNSEL POINTED OUT THAT ASSESSEE WAS MAINT AINING SEPARATE BOOKS OF ACCOUNT FOR ALL THE FOUR SERVICE SEGMENTS. HE DE MONSTRATED THAT 90% OF THE SERVICE SEGMENT WAS IN REGARD TO PROJECT MANAGE MENT SERVICE, MARKET SUPPORT SERVICE AND CORPORATE SUPPORT SERVICE. ALL THE THREE TOGETHER CONSTITUTED THE BUSINESS SUPPORT SERVICE SEGMENT AN D ONLY 10% WAS IN REGARD TO OPERATION AND MAINTENANCE (TECHNICAL) SERVICES C ONSTITUTING ONLY 10% OF THE SERVICE SEGMENT. 15. LD. COUNSEL REFERRED TO PAGE 127 OF THE PB, WHE REIN THE AGREEMENT BETWEEN ROLLS ROCE MARINE AS AND ROLLS ROYCE ENERGY SYSTEMS INDIA PVT. 13 LTD., FOR THE PROVISION OF SERVICE IS CONTAINED AND REFERRED TO PAGE 137 OF THE PB, WHEREIN THE SCOPE OF SERVICES TO BE PROVIDED BY ASSESSEE ARE CONTAINED. 16. LD. COUNSEL REFERRED TO PAGE 131 OF THE PB AND POINTED OUT THAT IN PARA 5.2 IT IS CLEARLY MENTIONED THAT THE MARK-UP WILL B E 6.52%, WHICH REPRESENTED A MARK-UP APPROPRIATED FOR NON RISK BE ARING SERVICE PROVIDER. HE FURTHER REFERRED TO PAGE 133 OF PB AND REFERRED TO PARA 8.1 OF THE AGREEMENT WHEREIN IT IS MENTIONED AS UNDER: 8.1. WHILST PRESIPL WILL TAKE ALL REASONABLE STEPS TO ENSURE THAT ITS PERFORMANCE OF THE SERVICES IS TO THE STAN DARD REQUIRED BY PRMAS, THEN, EXCEPT AS OTHERWISE PROVIDED IN CLA USE 8.4, ALL RISK OF SHORTFALL IN PERFORMANCE, AND ANY LIABILITY TO THIRD PARTIES ARISING FROM SUCH SHORTFALL IN PERFORMANCE OR FROM DEFECTIVE OR NON-PERFORMANCE OF ITS OBLIGATIONS TO PROVIDE THE SERVICES, SHALL BE AND REMAIN WITH PRMAS AND PRMAS SHALL HOLD PRESIPL HARMLESS FROM ANY SUCH LIABILITY TO TH IRD PARTIES HOWSOEVER CAUSED REGARDLESS OF FAULT. 17. WITH REFERENCE TO THIS CLAUSE, LD. COUNSEL DEMO NSTRATED THAT ASSESSEE IS ESSENTIALLY A NON-RISK BEARING SERVICE PROVIDER. LD . COUNSEL POINTED OUT THAT LD. TPO WRONGLY REJECTED THE ASSESSEES CONTENTION REGARDING SEGMENTAL DETAILS FOR THE FOUR SERVICE SEGMENT OBSERVING THAT PERSONAL COST, BANK CHARGES AND ADMINISTRATIVE COST WERE NOT ALLOCATED TO PROJECT AND MARKET SUPPORT SERVICES. HE REFERRED TO PAGE 13 OF THE PB, WHEREIN SCHEDULE 10 TO THE P&L A/C IS CONTAINED TO DEMONSTRATE THAT THESE COSTS HAD ALREADY BEEN ALLOCATED TO VARIOUS SERVICE SEGMENTS: 14 SCHEDULE 10: DIRECTOR SERVICE COST OPERATION AND MAINTENANCE AND PROJECT COST PERSONNEL COSTS 35,220,913 16,337,585 ADMINISTRATIVE AND OTHER EXPENSES 13,708,174 6,402,467 MATERIAL COSTS 61,550,179 28,205,075 OTHER COSTS 24,657,425 135,136,691 54,389,080 10 5,334,207 PROJECT MANAGEMENT COST PERSONNEL COSTS 1,339,459 2,926,398 ADMINISTRATIVE AND OTHER EXP 1,352,810 3,332,423 MATERIAL COSTS 562,099 1,642,222 OTHER COSTS 243,493 3,497,861 145,211 8,046,254 MARKETING SUPPORT COST PERSONNEL COSTS 5,998,615 7,021,484 ADMINISTRATIVE AND OTHER EXP 6,513,420 5,724,002 OTHER COSTS 971,306 13,483,341 - 12,745,486 _________. __________. 152,117,893 126,125,947 18. HE, THEREFORE, SUBMITTED THAT THE REMARK OF LD. TPO REGARDING NON- ALLOCATION OF COST TO PROJECT MANAGEMENT SERVICES A ND MARKET SUPPORT SERVICE IS NOT CORRECT. HE SUBMITTED THAT LD. DRP H AS NOT DEALT WITH ASSESSEES OBJECTIONS REGARDING SELECTION OF COMPAR ABLES, HAVING REGARD TO THE SEGMENTAL DETAILS. 19. LD. COUNSEL SUBMITTED THAT KEEPING IN VIEW THE NATURE OF SERVICES RENDERED BY ASSESSEE BEING NON-RISK BEARING AND NON -TECHNICAL, THE COMPARABLES SHOULD HAVE BEEN SELECTED ACCORDINGLY, EVEN IF FOR BENCH 15 MARKING THE TNMM METHOD WAS TO BE APPLIED IN RESPEC T OF TECHNICAL AS WELL AS BUSINESS SUPPORT SERVICES. 20. LD. COUNSEL FURTHER REFERRED TO THE DECISION IN 121 ITR 1 TO SUBMIT THAT DOMINANT OBJECTIVE TEST HAS TO BE APPLIED IN SUCH C IRCUMSTANCES. 21. IN SUPPORT OF HIS CONTENTION LD. COUNSEL RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF RAMPGREEN SOLUTIONS PVT. LTD. 2015-TII-33-HC-DELHI-TP, WHEREIN IT HAS BEEN, INTER ALIA, HELD THAT KNOWLEDGE PROCESSING, OUTSOURCING (KPO) CANNOT BE C OMPARED TO BUSINESS PROCESS OUTSOURCING (BPO). IN REGARD TO THE COMPARA BLES, LD. COUNSEL SUBMITTED THAT LD. TPO HAS WRONGLY EXCLUDED TWO COM PARABLES VIZ. ICRA MANAGEMENT AND DENAVE INDIA AND HAS WRONGLY INCLUDE D THREE COMPARABLES VIZ. RITES LTD., APITCO LTD. AND KITCO LTD. 22. AS REGARDS THE EXCLUSION OF ICRA MANAGEMENT AN D DENAVE INDIA LD. COUNSEL POINTED OUT THAT THE SERVICES RENDERED BY T HE ASSESSEE ARE COMPARABLE EITHER TO A SALES AGENT OR CORPORATE AGE NCY WHEREIN GROSS REMUNERATION RANGE FROM 2 TO 4% AS WAS FOUND OUT IN THE CASE OF ICRA MANAGEMENT AND DENAVE INDIA LTD. HE SUBMITTED THAT AS AGAINST THIS THE ASSESSEE HAS GOT 6.52% ASSURED RETURN ON ITS TOTAL COST. HOWEVER, HE DID NOT SERIOUSLY PRESSED FOR EXCLUSION OF THESE TWO COMPAR ABLES. THEREFORE, WE DO NOT GO INTO THIS ASPECT. 16 23. LD. COUNSEL FURTHER SUBMITTED THAT TURN-OVER FI LTER APPLIED BY LD. TPO ALSO SHOULD NOT BE APPLIED IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHRYSCAPITAL INVESTMENT ADVISO RS (INDIA)(P) LTD. VS. DCIT (2015) 277 CTR (DEL) 137. 24. LD. CIT(DR) REFERRED TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF TVONIC INDIA (P) LTD. TS/301 ITAT/20 14 (MUMBAI) AND SUBMITTED THAT A COMPARABLE CAN BE REJECTED ONLY ON THE GROUND OF FUNCTIONAL DISSIMILARLY. HE SUBMITTED THAT RITES LT D. WAS ASSESSEES COMPARABLE AND, THEREFORE, CANNOT BE EXCLUDED. 25. LD. CIT(DR) FILED BEFORE US A COPY OF MAP AGRE EMENT IN THE CASE OF ROLLS ROYCE INDIA PVT. LTD. FOR A.Y. 2008-09 AND 20 09-10, WHICH IS ALSO A SUBSIDIARY OF ROLLS ROYCE INTERNATIONAL LTD. HE POI NTED OUT THAT FOR BOTH THE YEARS THE PLI HAS BEEN TAKEN AT 12.5% AND THE SAME SHOULD BE TAKEN IN ASSESSEES CASE ALSO. 26. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THI S AGREEMENT CANNOT BE APPLIED IN ASSESSEES CASE BECAUSE AS FAR AS ASSESS EE IS CONCERNED, IT IS A SEPARATE ENTITY AND HAS NO RELATION WITH THE ASSESS EE WHICH WAS UNDER CONSIDERATION IN MAP PROCEEDINGS. 27. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. AS FAR AS LD. CIT(D R)S SUBMISSION REGARDING 17 MAP AGREEMENT IN THE CASE OF M/S ROLLS ROYCE INDIA PVT. LTD. FOR AY 2008- 09 AND 2009-10 IS CONCERNED, WE ARE OF THE OPINION THAT THE SAME CANNOT BE IMPORTED IN THE CASE OF THE ASSESSEE, WHICH, AS PER THE STATEMENT MADE BY LD. COUNSEL FOR THE ASSESSEE, IS FOR A DIFFERENT ASSESS EE ALTOGETHER. 28. AT THIS JUNCTURE WE MAY POINT OUT THAT THE NAME OF THE ASSESSEE, AS GIVEN IN THE ORDER OF MAP AGREEMENT, IS SAME AS THA T OF ASSESSEE, BUT IT APPEARS THAT THE NAME OF PRESENT ASSESSEE BEFORE US FORMERLY WAS ROLLS ROYCE ENERGY SYSTEMS INDIA PVT. LTD., WHICH HAS NOW BEEN CHANGED TO ROLLS ROYCE INDIA PVT. LTD. 29. THUS, THERE IS SOME CONFUSION IN REGARD TO THE NAMES OF THE ASSESSEE BUT, BE THAT AS IT MAY, SINCE THE MAP AGREEMENT, IN ANY VIEW OF THE MATTER, IS NOT FOR AY 2010-11, UNDER CONSIDERATION, THEREFO RE, THE SAME CANNOT BE APPLIED IN THE CURRENT ASSESSMENT YEAR. 30. WE NOW PROCEED TO CONSIDER THE MERITS OF THE AR GUMENTS OF BOTH THE PARTIES. 31. THERE IS NO QUARREL WITH THE PROPOSITION ADVAN CED BY LD. CIT(DR) THAT IT IS THE FUNCTIONAL TEST WHICH PLAYS PARAMOUN T ROLE IN SELECTION OF COMPARABLES. IT IS ALSO SETTLED LAW THAT FUNCTIONAL TEST IS TO BE APPLIED HAVING REGARD TO THE SEGMENTAL DETAILS. IF A PARTICULAR SE GMENT IS PERFORMING SPECIFIC FUNCTION, THEN FOR DETERMINING THE ALP THOSE COMPAR ABLES SHOULD BE 18 SELECTED WHICH HAVE CLOSE SIMILARITY WITH THE FUNCT IONAL SEGMENT UNDER CONSIDERATION. WE ARE IN AGREEMENT WITH LD. COUNSEL FOR THE ASSESSEE THAT SUCH COMPARABLES SHOULD BE SELECTED WHICH ARE PROVI DING NON-RISK BEARING BUSINESS SUPPORT SERVICE BECAUSE AS PER THE SEGMENT AL DETAILS, THE PLI OF TECHNICAL SEGMENT IS MORE THAN 59% AND FOR OTHER SE GMENTS, THE ASSESSEE HAD BEEN REIMBURSED AT COST PLUS 6.52%. 32. HAVING REGARD TO THE MAJOR FUNCTIONS PERFORMED BY ASSESSEE, THE ASSESSEE HAS PRIMARILY OBJECTED TO INCLUSION OF THR EE COMPARABLES, NAMELY, RITES LTD., APITCO LTD. AND KITCO LTD. AS FAR AS RI TES LTD. IS CONCERNED, THE SAID COMPANY IS A GOVERNMENT OF INDIA ENTERPRIS E AND IS A MULTI- DISCIPLINARY CONSULTANCY ORGANIZATION IN THE FIELDS OF TRANSPORT, INFRASTRUCTURE AND RELATED TECHNOLOGIES. IT PROVIDES A COMPREHENSI VE ARRAY OF SERVICES UNDER A SINGLE ROOF AND BELIEVES IN TRANSFER OF TEC HNOLOGY TO CLIENT ORGANIZATIONS. IN OVERSEAS PROJECTS, RITES ACTIVELY PURSUES AND DEVELOPS COOPERATIVE LINKS WITH LOCAL CONSULTANTS/ FIRMS, AS MEANS OF MAXIMUM UTILIZATION OF LOCAL RESOURCES AND AS AN EFFECTIVE INSTRUMENT OF SHARING ITS EXPERTISE. THIS BUSINESS PROFILE OF RITES LTD., AS GIVEN IN THE SYNOPSIS OF ASSESSEE, HAS NOT BEEN DISPUTED. THEREFORE, IT IS E VIDENT THAT RITES LTD. IS A PRIMARILY IMPARTING HIGH END TECHNICAL SERVICES, WH ICH CANNOT BE COMPARED 19 WITH LOW END MARKETING BUSINESS SUPPORT SERVICES RE NDERED BY ASSESSEE, WHICH PRIMARILY, ARE AS UNDER: TECHNICAL SERVICES DIVISION OPERATIONS & MAINTEN ANCE MANAGEMENT UNIT: THE UNIT PROVIDES RAILWAY RELATED TECHNICAL SUPPORT TO CAPTIVE RAILWAY SYSTEMS FOR PRIVATE AND PUBLIC SECTORS IN I NDIA FOR POWER INDUSTRY, STEEL AND ALUMINIUM PLANTS, PORTS E TC. THE UNIT HAS SECURED WORKS FROM A NUMBER OF CLIENTS IN THE R ECENT PAST LIKE NTPC, SAIL, PORT COMPANIES, TATAS STEEL & WBPO CL FOR OPERATIONS OF THEIR RAILWAY SYSTEMS, MAINTENANC E OF ROLLING STOCK, TRACK SIGNALING ETC. OF LATE THE UNIT HAS STARTED A NEW BUSINESS OFFERIN G SHUNTING LOCOMOTIVE ON WET LEASE INCLUDING OPERATION AND MAI NTENANCE TO VARIOUS NON-RAILWAY CLIENTS LOCOMOTIVE ON WET LE ASE ARE WORKING AT BANDEL THERMAL POWER STATION, BANDEL AND NTPC, SAIL POWER CO. LTD., BHILAI. RECENTLY, THE UNIT HAS GIVEN TWO LOCOMOTIVES TO DHARMA PORT CO. LTD. AND ONE LOCOMOT IVE TO LLOYDS STEEL INDUSTRIES, WARDHA. THE UNIT HAS ALSO SECURED ORDERS FOR SUPPLYING AND COMMISSIONING DLW MANUFACT URED DG SETS ID DOMESTIC CLIENTS. 33. FURTHER, THIS COMPARABLE HAS BEEN EXCLUDED IN T HE CASE OF M/S VERIZON INDIA PVT. LTD. VS. JCIT 2766/DEL/2010, WHICH HAS B EEN FILED BY THE ASSESSEE IN ITS CASE LAW PB AS ANNEXURE V, WHEREIN IT HAS BEEN, INTER ALIA, OBSERVED IN PARA 23 THAT RITES LTD. IS AN ENGINEERI NG COMPANY AND PROVIDES END TO END SOLUTIONS TO ITS CLIENTS. 34. LD. COUNSEL HAS ALSO POINTED OUT THAT THIS COMP ARABLE HAS ALSO BEEN EXCLUDED IN FOLLOWING CASES: - SHELL INDIA MARKETS PVT. LTD. [TS-430-ITAT-2014(MUM )-TP]; 20 - CHEMTEX GLOBAL ENGINEERS PVT. LTD. [TS-161-ITAT-201 3(MUM)- TP]; YUM RESTAURANTS (INDIA) PVT. LTD. [TS-166-ITAT -2014 (DEL)- TP] AND NORTEL NETWORKS INDIA PVT. LTD. TS-65-ITAT - 2014(DEL)-TP]. 35. WE, THEREFORE, IN VIEW OF ABOVE DISCUSSION, DIR ECT THE AO TO EXCLUDE RITES LTD. FROM THE LIST OF COMPARABLES. 36. THE SECOND COMPARABLE, INCLUSION OF WHICH IS DI SPUTED BY THE ASSESSEE, IS APITCO LTD. IN THE SYNOPSIS FILED BY T HE ASSESSEE IT IS MENTIONED THAT THE SERVICES PROVIDED INCLUDE BUT NOT LIMITED TO THE DOMAINS OF PROJECT REPORT PREPARATION, TECHNO ECONOMIC STUDIES, FEASIB ILITY STUDIES, MICRO ENTERPRISE DEVELOPMENT, SKILL DEVELOPMENT, PROJECT MANAGEMENT CONSULTING, INDUSTRIAL CLUSTER DEVELOPMENT, ENVIRONMENTAL MANAG EMENT CONSULTING, ENERGY MANAGEMENT CONSULTING, MARKET & SOCIAL RESEA RCH AND ASSET RECONSTRUCTION MANAGEMENT SERVICES. THIS COMPANY WA S PROMOTED JOINTLY BY ALL INDIA FINANCIAL INSTITUTIONS (IDBI, IFCI, ICICI ), STATE INDUSTRY DEVELOPMENT CORPORATIONS (APIDC, APSFC) AND COMMERC IAL BANKS (ANDHRA BANK, INDIAN BANK, STATE BANK OF INDIA, SYN DICATE BANK), 37. FROM A BARE PERUSAL OF THE SERVICES RENDERED B Y APITCO LTD. IT IS CLEAR THAT IT IS IMPARTING CONSULTANCY IN ENTIRELY DIFFE RENT FIELD AND IS NOT COMPARABLE TO THE FUNCTIONS PERFORMED BY DIFFERENT SERVICE SEGMENTS OF ASSESSEE. WE, THEREFORE, DIRECTION FOR EXCLUSION OF THIS COMPARABLE FROM THE LIST OF COMPARABLES. 21 KITCOLTD. 38. THE FUNCTIONAL PROFILE OF THIS COMPANY, AS GIVE N IN THE SYNOPSIS FILED BY THE ASSESSEE, IS AS UNDER: 1. KITCO, THE FIRST TECHNICAL CONSULTANCY ORGANIZA TION (TCO) IN INDIA, WAS ESTABLISHED IN 1972 BY INDUSTRI AL DEVELOPMENT BANK OF INDIA, OTHER NATIONAL AND STATE LEVEL FINANCIAL INSTITUTIONS, GOVT. OF KERALA AND 7 PUBLI C SECTOR BANKS FOR RENDERING SERVICES TO ENTREPRENEURS, GOVT . DEPARTMENTAL PSUS, LOCAL BODIES, ETC. PRESENTLY, SM ALL INDUSTRIES DEVELOPMENT BANK OF INDIA (SIDBI) IS THE PRIME SHAREHOLDER WITH 49% SHARES OF THE COMPANY. 2. THE AIM OF SETTING UP OF TCO, WHICH HAD THE BLES SING OF GOVT. OF INDIA AND THE RESERVE BANK OF INDIA, WAS T O PROVIDE PROFESSIONAL TECHNICAL CONSULTANCY ASSISTANCE TO BA NKS BY APPRAISAL OF PROJECTS FOR PRIORITY SECTOR LENDING A ND TO ENTREPRENEURS IN THE 5MB SECTOR BY WAY OF PREPARATI ON OF PROJECT REPORTS & MARKET STUDIES AND CONDUCTING TRA INING PROGRAMMES FOR ENTREPRENEURSHIP DEVELOPMENT. SUBSEQ UENTLY SIMILAR TCOS WERE SET UP IN ALMOST ALL THE STATES W ITH ONE OF THE NATIONAL FINANCIAL INSTITUTIONS (IDBI, IFCI OR ICIC I) AS THE PRIME SHAREHOLDER. 3. KITCO HAS SUCCESSFULLY IMPLEMENTED PROJECTS LIKE COCHIN INTERNATIONAL AIRPORT LTD., TITANIUM SPONGE PROJECT, INTERNATIONAL MARINA, COCHIN SPECIAL ECONOMIC ZONE, ETC AND PRESENTLY IMPLEMENTING A MULTIMODAL MOBILITY HUB AT COCHIN, ALL OF WHICH ARE FIRST OF ITS KIND IN THE COUNTRY I N THEIR OWN RESPECT. KITCO HAS SUCCESSFULLY COMPLETED THE PHASE -1 OF CIAL GOLF COURSE & COUNTRY CLUB AND GHALLAH WENTWOR TH GOLF COURSE AT MUSCAT, SULTANATE OF OMAN, THEREBY E STABLISHING ITSELF IN AN AREA, WHICH WAS CONSIDERED TO BE THE F ORTE OF EUROPEAN CONSULTANTS. THE PRESTIGIOUS OVERSEAS ASSI GNMENTS 22 KITCO SO FAR HAS COMPLETED INCLUDE THE TECHNICAL EV ALUATION OF ELECTRICAL POWER DISTRIBUTION NETWORK AT KING ABDUL AZIZ INTERNATIONAL AIRPORT, JEDDAH. 4. ALL ITS CLIENTS ARE EITHER CENTRAL GOVERNMENT, S TATE GOVERNMENT, PSU ETC. SNAPSHOT ENCLOSED. 5. IT IS WORKING IN DIVISIONS LIKE INFRASTRUCTURE, TOURISM, AVIATION, IT SERVICES, HRD, FINANCIAL SERVICES ETC. WHICH ARE DISSIMILAR TO THE FUNCTIONAL PROFILE OF THE ASSESSE E COMPANY. SNAPSHOT ENCLOSED. 39. FROM THE ABOVE SUBMISSIONS IT IS EVIDENT THAT T HIS COMPARABLE IS NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE BECAUSE I T IS THE NATURE OF SERVICES RENDERED AND NOT PER SE RENDERING OF SERVICES IS RE LEVANT IN ACCEPTING OR REJECTING A COMPANY AS COMPARABLE. THEREFORE, WE DI RECT EXCLUSION OF THIS COMPARABLE FROM THE LIST OF COMPARABLES. 40. NOW COMING TO GROUND NO.3.3 IN REGARD TO THE L D. TPOS ACTION OF EXCLUDING THE FOREIGN EXCHANGE GAINS/ LOSS AND PROV ISION FOR BAD DEBTS, BY CALCULATING THE PLI, TREATING THE SAME AS NON-OPER ATING ITEM. 41. BEFORE WE CONSIDER THESE ISSUES, WE MAY POINT O UT THAT ASSESSEE HAS NOT CHALLENGED THE TREATMENT OF BANK CHARGES AS NON -OPERATIVE INCOME IN GROUNDS OF APPEAL AND, THEREFORE, WE REFRAIN FROM C ONSIDERING THE SAME. 42. THE LEARNED TPO HAS GIVEN THE EXPLANATION FOR T HE EXCLUSION OF ITEMS OF FOREIGN EXCHANGE GAIN/LOSS WHILE CALCULATING THE OP/OC TREATING THE SAME AS NON OPERATING ITEM. 23 43. MAIN CONTENTION OF LD. TPO WAS THAT FOREX GAIN/ LOSS OCCURS IN FOLLOWING TWO SITUATIONS: (I) RECEIPT/ EXPENDITURES ARE BOOKED AT THE TIME O F TRANSACTION WHILE PAYMENT OF FOREIGN EXCHANGE IS RECEIVED AT A LATER POINT OF TIME AND FOREIGN EXCHANGE IS CONVERTED TO INDIAN CURRENCY AT THAT TIME RESULTING INTO FOREX GAIN/LOSS DUE TO VAR IATION IN THE EXCHANGE RATE FROM THE DATE OF TRANSACTION TO THAT OF CONVERSION OF FOREIGN EXCHANGE INTO INDIAN CURRENCY. AN EXPORTER/IMPORTER OF GOODS/SERVICES ENTERS INTO FORWARD CONTRACT FOR SALE/PURCHASE OF FOREX TO HEDGE ITSELF FROM THE FLUCTUATION IN EXCHANGE RATES. 44. HE OBSERVED THAT THE AMOUNT OF FOREX LOSS/ GAIN AND HEDGING COST/PREMIUM IN EACH CASE WOULD DEPEND UPON THE RIS K MANAGEMENT POLICY OF EACH COMPANY AND, THEREFORE, THE PROFIT MARGIN A T THE END OF THE YEAR MAY VARY SUBSTANTIALLY FROM THE EXPECTED PROFIT MARGIN AT THE TIME OF ENTERING INTO PROJECT BECAUSE OF FLUCTUATION IN THE EXCHANGE RATE AND ITS RISK MANAGEMENT POLICY I.E. THE EXTENT OF WHICH ITS FOR EX TRANSACTIONS WERE HEDGED. 45. LD. COUNSEL SUBMITTED THAT ANY GAIN OR LOSS AR ISING OUT OF CHANGE IN FOREIGN CURRENCY RATE IN RESPECT OF TRANSACTION FOR IMPORT OR EXPORT OF GOODS OR SERVICES IS TO TREATED AS PART OF THE PRICE OF I MPORT OR THE VALUE OF EXPORT OF GOODS OR SERVICES. HE RELIED ON THE DECISION OF HON 'BLE SUPREME COURT IN CASE OF CIT V. M/S WOODWARD GOVERNOR INDIA PRIVATE LTD. FOR THIS PROPOSITION HE ALSO REFERRED TO THE DECISION OF BAN GALORE ITAT IN CASE OF 24 M/S SAP LABS INDIA PVT. LTD VS. ACIT [2010-TII-44-I TAT-BANG-TP] WHEREIN IT WAS HELD THAT: 'THE FOREIGN EXCHANGE FLUCTUATION GAINS IS NOTHING BUT AN INTEGRAL PART OF THE SALES PROCEEDS OF AN ASSESSEE CARRYING ON EXPORT BUSINESS. THE COURTS AND TRIBUNALS HAVE HELD THAT FOREIGN EXCHANGE FLUCTUATION GAINS FORM PART OF THE SALE PROCEEDS OF EXPORTER-ASSESSEE. THE FOREIGN EXCHANGE FLUCTUATIONS INCOME CANNOT BE EXCLUDED FROM THE COM PUTATION OF THE OPERATING MARGIN OF THE ASSESSEE COMPANY' 46. LD. COUNSEL POINTED OUT THAT LEARNED TPO HAS S TATED IN ITS ORDER PARA- 22.10 THAT SAFE HARBOUR RULES NOTIFIED BY CBDT ON 1 8.09.2013 GIVES CLEAR INDICATION AS TO WHAT CONSTITUTE THE OPERATING ITEM S OF INCOME AND EXPENSES AND, ACCORDINGLY, DISPOSED OFF THE ASSESSEES OBJEC TION THAT SAFE HARBOUR RULES DO NOT APPLY TO THE YEAR UNDER CONSIDERATION. 47. IN THIS REGARD LD. COUNSEL SUBMITTED THAT DELH I ITAT IN A RECENT DECISION IN CASE OF WESTFALIA SEPARATOR INDIA PVT. LTD. VS. ACIT HAS, INTER ALIA, HELD THAT- 'PARA 4.8 THE LD. AR RELIED ON RULE 10T(J) TO CONTE ND THAT LOSS ARISING ON ACCOUNT OF FOREIGN CURRENCY FLUCTUATIONS CANNOT BE INCLUDED IN THE OPERATING EXPENSE. WE ARE NOT PERSU ADED TO GIVE ANY MILEAGE TO THE LD. AR ON THIS COUNT FOR TH E SIMPLE REASON THAT RULE 10T IS A PART OF SAFE HARBOUR RULE S NOTIFIED ON 18.09.2013 WHICH ARE NOT APPLICABLE TO THE ASSESSME NT YEAR UNDER CONSIDERATION. ' 'PARA 4.10 IN CONTRAST TO THE ABOVE, WE FIND THAT T HERE IS A PLETHORA OF DECISIONS RENDERED BY VARIOUS BENCHES O F THE TRIBUNAL ACROSS THE COUNTRY HOLDING THAT FOREX GAIN /LOSS IS PART OF OPERATING REVENUE/COST. TO CITE A FEW, THE DELHI BENCH OF THE TRIBUNAL IN TECHBOOKS INTERNATIONAL PVT. VS ACIT (T O WHICH ONE OF US, NAMELY, THE AM IS PARTY) HAS HELD VIDE ITS O RDER DATED 25 28.4.2014 THAT FOREIGN EXCHANGE GAIN OR LOSS IS A P ART AND PARCEL OF OPERATING REVENUE/OPERATING COST. THE BAN GALORE BENCH OF THE TRIBUNAL IN SAP LABS INDIA (P) LTD. VS . ACIT (2010) 6ITR (TRIB) 81 (BANG) HAS ALSO HELD THAT FOR EIGN EXCHANGE GAIN SHOULD BE ADDED TO THE OPERATING REVE NUE. THE MUMBAI BENCH OF THE TRIBUNAL IN RUSHABH DIAMONDS, M UMBAI VS. ACIT IN I.T.A. NO. 7217 VIDE ITS ORDER DATED 26 .4.2013 (TO WHICH THE AM IS PARTY) HAS ALSO HELD FOREIGN EXCHAN GE GAIN AS A PART OF OPERATING PROFIT. ' 'PARA 4.11- IN VIEW OF THE FOREGOING DISCUSSION, WE HOLD THAT THE LD. CIT(A) HAS TAKEN AN UNIMPEACHABLE VIEW BY C ONSIDERING THE FOREX LOSS OF' 50.04 LAC AS A PART OF OPERATING COST. THE SAME IS, THEREFORE, COUNTENANCED'. 48. HE ALSO RELIED ON FOLLOWING DECISIONS: - DCIT VS. M/S. LUXOTTICA INDIA EYEWEAR PVT. LTD. [IT A NO.617/DEL/2014], - M/S CAPITAL IQ INFORMATION SYSTEMS (INDIA) PVT. LTD . VS. DCIT [ITA NO. 1961/HYD/2011 ] - M/S BEARING POINT BUSINESS CONSULTING PVT. LTD. VS. DCIT [ITA NO. 1124/BANG/2011 ] 49. LD. CIT(DR) RELIED ON THE TPOS ORDER. 50. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE RECORD OF THE CASE. WE FIND CONSIDERABLE FORCE IN THE SUBM ISSION OF LD. COUNSEL FOR THE ASSESSEE THAT LD. DRP WRONGLY INVOKED SAFE HARB OUR RULE FOR COMING TO THE CONCLUSION THAT FOREX GAIN/ LOSS WAS NOT TO BE TREATED AS OPERATING INCOME/ LOSS FOR CURRENT ASSESSMENT YEAR BECAUSE TH E SAFE HARBOUR RULES, IN ANY CASE, WERE APPLICABLE FROM 18-9-2013 AND PRIOR TO THAT THE SAID RULES 26 COULD NOT BE APPLIED. THAT APART, IT IS NOT DISPUTE D THAT IN THE CASE OF ASSESSEE FOREX GAIN/ LOSS WAS RELATED TO SALE PRICE OF EXPOR T, WHICH WAS IN US DOLLAR. THEREFORE, THE ENTIRE RECEIPTS WERE ON REVENUE ACCO UNT. THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE SUPREME COUR T IN THE CASE OF WOODWARD GOVERNORS (SUPRA), WHEREIN IT HAS BEEN HE LD THAT FOREX GAIN/ LOSS IN THE REVENUE ACCOUNT IS A TRADING RECEIPT, OR, AS THE CASE MAY BE, BUSINESS EXPENDITURE, ALLOWABLE U/S 37(1) OF THE ACT. WE, AC CORDINGLY, DIRECT THAT THE FOREX GAIN/ LOSS BE TREATED AS OPERATING INCOME/ LO SS BOTH IN THE CASE OF TESTED PARTY AS WELL AS COMPARABLE AND THE PLI SHOU LD BE DETERMINED ACCORDINGLY. 51. AS REGARDS PROVISION FOR DOUBTFUL DEBTS, LD. C OUNSEL SUBMITTED THAT PROVISION FOR DOUBTFUL DEBTS ARE A PART OF THE OPER ATING ACTIVITIES OF A BUSINESS. THE ACCOUNTING STANDARDS ISSUED BY THE IC AI REQUIRE THAT ACCOUNTING POLICIES MUST BE GOVERNED BY THE PRINCIP LES OF 'PRUDENCE'. PROVISIONS SHOULD BE MADE FOR ALL KNOWN LIABILITIES AND LOSSES EVEN THOUGH THE AMOUNT CANNOT BE DETERMINED WITH CERTAINTY AND REPRESENTS ONLY THE BASIC ESTIMATE IN THE LIGHT OF AVAILABLE INFORMATIO N. PARA 6 OF ACCOUNTING STANDARD-L DEFINES ACCRUAL AS THE ASSUMPTION THAT R EVENUES AND COSTS ARE ACCRUED, I.E., RECOGNIZED AS THEY ARE EARNED OR INC URRED AND RECORDED IN THE FINANCIAL STATEMENTS OF THE PERIOD TO WHICH THEY RE LATE. 27 52. THUS, GOING WITH THE ABOVEMENTIONED FACTS AND S TATUTORY PROVISIONS, WHEN THE MAKING OF PROVISIONS IS VERY MUCH IN THE I NTEREST OF BUSINESS TO SHOW THE TRUE AND FAIR VIEW AND STATUTORILY REQUIRE D, IT CANNOT BE SAID THAT SUCH PROVISIONS ARE OF NON-OPERATING NATURE. SUCH P ROVISIONS ARE MADE TO COMPLY WITH THE REQUIREMENTS OF STATUTE. 53. THE LEARNED TPO TREATED PROVISION FOR DOUBTFUL DEBTS AS NON-OPERATING REFERRING TO THE SAFE HARBOUR RULES NOTIFIED BY CBD T, WHICH ARE NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION AS MENT IONED ABOVE. 54. LD. CIT(DR) RELIED ON THE ORDER OF TPO. 55. AS REGARDS THE TREATMENT OF PROVISION OF DOUBTF UL DEBTS ALSO, WE FIND THAT THE REASONING GIVEN BY LD. TPO CANNOT BE ACCE PTED BECAUSE HE HAS PRIMARILY RELIED ON SAFE HARBOR RULE FOR TREATING T HIS AS NON-OPERATING EXPENDITURE. WE FIND CONSIDERABLE FORCE IN THE SUBM ISSION OF LD. COUNSEL FOR THE ASSESSEE, CONSIDERED EARLIER, THAT PROVISION FO R DOUBTFUL DEBTS IS A PROVISION WHICH IS TO BE MADE AS A PART OF THE OPER ATING ACTIVITIES OF BUSINESS GOVERNED BY THE PRINCIPLES OF PRUDENCE. WE, ACCORD INGLY, DIRECT THAT THIS PROVISION BE TREATED AS PART OF OPERATING EXPENDITU RE AND TREATMENT BE MADE ACCORDINGLY, BECAUSE, IN ANY VIEW OF THE MATTER, TH E SAFE HARBOR RULE IS NOT APPLICABLE FOR THE CURRENT YEAR UNDER CONSIDERATION . IN THE RESULT, THIS GROUND IS ALLOWED. 28 56. GROUND NO. 4 IS GENERAL IN NATURE. 57. GROUND NO. 5 HAS NOT BEEN PRESSED, HENCE DISMIS SED ACCORDINGLY. 58. GROUND NO. 6, RELATING TO INITIATION OF PENALTY U/S 271(1)(C) IS PREMATURE. 59. AS REGARDS GROUND NO. 7, THE CONTENTION OF LD. COUNSEL FOR THE ASEESSEE IS THAT INTEREST U/S 234B HA WRONGLY BEEN COMPUTED FOR 65 MONTHS AS AGAINST 58 MONTHS, STARTING FROM 1.4.2010 TILL THE DATE OF PASSING OF THE ORDER I.E. JANUARY 2015. THE AO IS DIRECTED TO VERIFY THE ASSE SSEES CONTENTION AND RECALCULATE THE INTEREST ACCORDINGLY. 60. IN THE RESULT, ASSESSEES APPEAL STANDS PARTLY ALLOWED ACCORDINGLY. ORDER PRONOUNCED IN OPEN COURT ON 03/12/2015.. SD/- SD/- (A.T. VARKEY) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 03/12/2015. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.