DCIT, CHENNAI V. Saipem India Projects Ltd., CHENNAI

ITA 1400/CHNY/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4912 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-04-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 28-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 03-06-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PATHLAVATH PEERYA
• Assessee Lawyers: SHARATH RAO PRANITH GOLECHA; ANATHAKRISHNAN N C AS
• Keywords: Transfer pricing; International transaction

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , !' . #$#% , & '' ( [BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./I.T.A.NO.985/MDS/2014 / ASSESSMENT YEAR : 2009-2010 SAIPEM INDIA PROJECTS LIMITED, YARLAGADDA TOWERS, 4, FOURTH LANE, OFF. NUNGAMBAKKAM HIGH ROAD, CHENNAI 600 034. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1) CHENNAI. ./ I.T.A. NO. 1400/MDS/2014 & C.O. NO.79/MDS/2014 (IN ITA NO.1400/MDS/2014) / ASSESSMENT YEAR : 2009-2010 THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1) CHENNAI VS. SAIPEM INDIA PROJECTS LIMITED, YARLAGADDA TOWERS, 4, FOURTH LANE, OFF. NUNGAMBAKKAM HIGH ROAD, CHENNAI 600 034. [PAN AAACI 7915F] ( )* / APPELLANT) ( RESPONDENT/CROSS OBJECTOR) ASSESSEE BY : SHRI. SHARATH RAO, PRANITH GOLECHA & ANATHAKRISHNAN N. C.AS. DEPARTMENT BY : SHRI. PATHLAVATH PEERYA, CIT. /DATE OF HEARING : 28.03.2017 /DATE OF PRONOUNCEMENT : 05.04.2017 ITA NOS.985 & 1400, CO 79/2014 :- 2 -: / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THESE ARE CROSS APPEAL OF THE ASSESSEE AND REVENU E RESPECTIVELY AND CROSS OBJECTION OF THE ASSESSEE, ALL DIRECTED AGAINST AN ASSESSMENT ORDER DATED 20.02.2014 PASSED BY LD. ASSESSING OFFICER PURSUANT TO DIRECTIONS BY LD. DISPUTE RESOLUTION PA NEL (IN SHORT THE DRP) U/S. 144C OF THE INCOME TAX ACT, 1961 (IN S HORT THE ACT). 2. LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBMIT TED THAT HE WAS NOT PRESSING THE CROSS OBJECTION. ACCORDING LY, CROSS OBJECTION IS DISMISSED AS NOT PRESSED. 3. ASSESSEE IN ITS APPEAL HAS TAKEN ALTOGETHER SIX GRO UNDS OF WHICH GROUNDS 1 & 6 ARE GENERAL IN NATURE NEEDING N O SPECIFIC ADJUDICATION. 4. IN ADDITION TO THE ORIGINAL GROUNDS, ASSESSEE HAS A LSO FILED A PETITION PLEADING FOR ADMISSION OF ADDITIONAL GROUN D, THROUGH WHICH IT SEEKS EXCLUSION OF ONE M/S. MAHINDRA CONSULTING EN GINEERS LIMITED FROM THE LIST OF COMPARABLES CONSIDERED BY THE LD. TPO FOR FIXING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE. ORIGINAL GROUNDS 1 TO 4 ALSO CONCERN ITA NOS.985 & 1400, CO 79/2014 :- 3 -: TRANSFER PRICING ISSUES. FIRST OF THIS IS ON DISALL OWANCE OF A CLAIM FOR IDLE CAPACITY WHILE COMPUTING ITS OPERATING MARGIN AND THE SECOND SEEKS EXCLUSION OF ONE M/S. TCE CONSULTING ENGINE ERS LTD FROM THE LIST OF COMPARABLES. 5. FACTS APROPOS ARE THAT ASSESSEE A WHOLLY OWNED SUB SIDIARY OF AN M/S.SAIPEM SA, FRANCE WAS PRIMARY ENGAGED IN THE BUSINESS OF PROVIDING ENGINEERING DESIGN AND ANCILLARY SERVICES TO ITS ASSOCIATED ENTERPRISES ABROAD. DURING THE RELEVANT PREVIOUS Y EAR ASSESSEE ALSO PROVIDED DESIGN SERVICES TO SOME DOMESTIC THIRD PAR TY CUSTOMERS. ASSESSEE WAS BILLING ITS CUSTOMERS ON HOURLY RATE ON THE SERVICES PROVIDED BY IT. ASSESSEE HAD DURING THE RELEVANT PREVIOUS YEAR ESTABLISHED A NEW ENGINEERING PROCESS CENTRE AT NEW DELHI AS A STEP TOWARDS EXPANDING ITS SERVICE DELIVERY MECHANISM. ASSESSEE ALSO STARTED ENGINEERING PROCUREMENT AND CONSTRUCTION AC TIVITY ON TURNKEY BASIS DURING THE RELEVANT PREVIOUS YEAR BUT IT SEEM S REVENUE WAS STILL TO BE GENERATED FROM THIS LINE OF ACTIVITY. 6. FOR JUSTIFYING THE PRICING OF ITS INTERNATIONAL TR ANSACTIONS ON ENGINEERING DESIGN SERVICES, TECHNICAL SERVICES CHA RGES AND REIMBURSEMENT OF EXPENSES, ASSESSEE HAD ADOPTED TNM METHOD AS THE MOST APPROPRIATE ONE. ASSESSEE HAD SELECTED A SET OF FOUR COMPARABLES, AND THEIR AVERAGE OPERATING PROFIT TO OPERATING COST ITA NOS.985 & 1400, CO 79/2014 :- 4 -: MARGIN OR PROFIT LEVEL INDICATOR (PLI) CAME TO 13 .5%. ASSESSEE WORKED OUT ITS OWN OPERATING PROFIT TO OPERATING MA RGIN AT 37.5%. THIS PLI OF 37.5% WAS ARRIVED, AFTER EXCLUDING CERT AIN EXPENDITURE CLAIMED BY THE ASSESSEE AS EXTRAORDINARY AND AFTER MAKING ADJUSTMENT FOR IDLE CAPACITY. CLAIM OF THE ASSESSEE WAS THAT I T HAD AN IDLE TIME COST F21,42,52,588/- FOR ITS CHENNAI CENTER. ASSES SEE ALSO CLAIMED DEDUCTION OF EXTRA ORDINARY COSTS IN THE NATURE OF EXCHANGE LOSS OF F2,66,47,200/- FROM FORWARD COVER CONTRACTS WHILE CALCULATING ITS PLI. FORMER CLAIM OF THE ASSESSEE WAS ON A PREMISE THA T IT COULD ONLY UTILIZE 7,76,120 MAN HOURS OUT OF TOTAL BILLABLE M AN HOURS OF 11,67,011 WHICH TRANSLATED TO A CAPACITY UTILIZATIO N OF 66.50 PERCENT. 7. THE LD. TPO HOWEVER DID NOT ACCEPT THE CLAIM FOR ID LE TIME ADJUSTMENT OR EXCLUSION OF FOREIGN EXCHANGE LOSS WH ILE WORKING OUT THE OPERATING PROFIT. OBSERVATION OF THE LD. TPO WIT H REGARD TO THE CLAIM FOR IDLE TIME ADJUSTMENT WERE AS UNDER:- SERVICE INDUSTRIES REQUIRE SKILLED MANPOWER. THE RECRUITMENT AND TRAINING PROCESS ALWAYS INVOLVE A T IME LAG IN GETTING THE RIGHT PEOPLE RECRUITED AT THE RI GHT TIME(MAY BE EVEN THROUGH CAMPUS ABSORPTION) AND TRAINING THEM TO SUIT THE JOB REQUIREMENTS. THE NAT URE OF THE INDUSTRY ITSELF IS SUCH THAT THIS PROCESS IS NO T SOMETHING UNIQUE TO THE ASSESSEE ALONE AND NOT THE SAME IN THE CASE OF THE COMPARABLES. ALL THE PLAYER S IN THE SIMILAR INDUSTRY CANNOT RECRUIT/HIRE PEOPLE ON NEED BASED AND FIRE THEM WHEN THEY ARE NOT REQUIRED. UNSKILLED LABOUR CAN BE HIRED AND FIRED ON A DAY TO DAY NEED BASIS. THE COSTS ASSOCIATED WITH THE PROCESS O F RECRUITING AND RETAINING THEM IN ANTICIPATION OF BU SINESS IS SIMILAR TO A SITUATION IN A MANUFACTURING INDUSTRY WHERE ITA NOS.985 & 1400, CO 79/2014 :- 5 -: NORMAL LOSS AS PART OF THE MANUFACTURING PROCESS I S INEVITABLE AND SUCH A LOSS IS ALWAYS RECKONED AS PA RT OF THE OPERATING COST. IT IS ALSO ADMITTED THAT THE DETAILS OF CAPACITY UT ILIZATION IN THE CASE OF COMPARABLES ARE NOT AVAILABLE AND THERE FORE THE ADJUSTMENT HAS BEEN MADE TO THE FINANCIALS OF THE T ESTED PARTY BY APPROPRIATELY ADJUSTING ITS FIXED COST. IT IS APPRECIATED THAT NORMALLY ADJUSTMENTS ARE MADE TO T HE PROFIT MARGIN OF THE COMPARABLES TO BRING IT ON LEV EL WITH THAT OF THE TESTED PARTY. THE PREREQUISITE FOR MAKING TH IS SORT OF ADJUSTMENT IS THE AVAILABILITY OF DATA IN THE CASE OF COMPARABLES. THEREFORE, THE PRESUMPTION OF THE ASSE SSEE THAT THE COMPARABLES ARE WORKING AT 100% OF THEIR C APACITY AND ITS CAPACITY UTILIZATION IS ONLY 65% AND THEREF ORE AN ADJUSTMENT IS CALLED FOR IS MISPLACED FOR THE REASO NS STATED IN THE PRECEDING PARA. AS PER THE LD. TPO ASSESSEE WAS IN BUSINESS SINCE 2001 AND ANNUAL REPORTS OF THE ASSESSEE FOR VARIOUS FINANCIAL YEARS DEMONSTRATED IMPROVED WORKING WITH BETTER VOLUME OF WORK LOAD, THEREBY VITIATING ITS CLAIM FOR IDLE CAPACITY ADJUSTMENT. 8. LD. TPO ALSO ANALYZED THE FOREIGN EXCHANGE LOSS ON FORWARD CONTRACT CLAIMED BY THE ASSESSEE AS EXTRA ORDINARY WHICH COMPRISED OF FOLLOWING ITEMS:- LOSS ON FOREIGN EXCHANGE (INCLUDES LOSS ON ACCOUNT OF FORWARD CONTRACT AMOUNTING TO INDIAN RUPEES 2,66,47,200/-) 5,53,32,920/- GAIN ON FOREIGN EXCHANGE (FOREX GAIN ON ACCOUNT OF INVOICING AND REALIZATION AND RESTATEMENT OF DEBTORS) 2,80,54,016/- ITA NOS.985 & 1400, CO 79/2014 :- 6 -: ASSESSEE HAD BANKED ITS CLAIM BASED ON A REASONING THAT FORWARD CONTRACTS WERE CANCELLED, WHEN EXPECTED ORDERS DI D NOT MATERIALIZE. ACCORDING TO IT, LOSS ARISING THEREFROM WAS OPERATI ONAL IN NATURE. LD. TPO AFTER VERIFYING THE SUBMISSIONS OF THE ASSESSE E TOOK A VIEW THAT ASSESSEE HAD ELEVEN CONTRACTS OF WHICH EIGHT WERE ENTERED ON 28.12.2007 AND BALANCE THREE ON 09.01.2009. AS PER LD. TPO CONTRACT COMMITMENTS WERE HONOURED BY THE ASSESSEE TO THE EXTENT OF 2/3 RD EVEN IN THOSE CONTRACTS WHERE THERE WERE FORWARD EX CHANGE LOSS. FURTHER, AS PER LD. TPO ASSESSEES EARNING FROM ASS OCIATED ENTERPRISES CAME TO 88% OF ITS TOTAL EARNING AND ITS RECEIVABLE S FROM ASSOCIATED ENTERPRISE HAD GONE UP FROM F9,44,78,840/- TO F33,9 2,88,509/-. AGAIN AS PER LD. TPO, WHEN FORWARD CONTRACTS WERE CANCEL LED DUE TO NON REALIZATION OF THE RECEIVABLES FROM THE ASSOCIATED ENTERPRISE, LOSS ARISING THEREFROM WAS OPERATIONAL IN NATURE. THOUG H THE ASSESSEE STATED THAT INCREASE IN RECEIVABLES WAS DUE TO SAL ES OF F22.76 CRORES RECORDED IN THE MONTH OF MARCH, 2009, LD. TPO WAS O F THE OPINION THAT SUCH CLAIM WAS NOT CAPABLE OF VERIFICATION. THUS, CLAIM OF THE ASSESSEE THAT FOREX LOSS WAS NON OPERATING IN NATURE AND ARO SE ON ACCOUNT OF LOW WORKLOAD WAS NOT ACCEPTED. HE REWORKED THE P LI OF THE ASSESSEE AS UNDER:- ITA NOS.985 & 1400, CO 79/2014 :- 7 -: OPERATING INCOME (AS COMPUTED BY THE ASSESSEE ) 102,43,36,314 OPERATING EXPENSES (INCLUDING EPC SEGMENT & EXCLUDING INTEREST PAID) 107,48,33,846 OPERATING PROFIT -5,04,97,532 OP/ OE (-5097532/107,48,33,846)*100 -4.70% 9. LD. TPO THEREAFTER MADE AN ANALYSIS OF THE FOUR COM PARABLES SELECTED BY THE ASSESSEE FOR ITS TP STUDY. HE R EJECTED ONE OF THE FOUR CALLED M/S. IBI CHEMATUR, BUT ACCEPTED THE OT HER THREE COMPARABLES. HOWEVER IN ADDITION TO THESE THREE COM PARABLES, LD. TPO ALSO SELECTED TWO FRESH COMPARABLES, NAMELY M/S. STEWARTS & LLOYDS OF INDIA LTD AND M/S. TCE CONSULTING ENGINEERS LTD. LD. TPO WORKED OUT THE PLI OF THE FIVE COMPANIES AS UNDER:- SL.NO COMPARABLE COMPANIES OPERATING MARGIN 1 TELECOMMUNICATIONS CONSULTANTS INDIA LTD -0.11 2 M N DASTUR & CO PVT. LTD 7.23 3 MAHINDRA CONSULTING ENGINEERS. 43.49 4 STEWARDS & LLOYDS OF INDIA LTD 6.08 5 TCE CONSULTING ENGINEERS LTD 24.05 AVERAGE 16.15 ITA NOS.985 & 1400, CO 79/2014 :- 8 -: SINCE OPERATING MARGIN OF THE ASSESSEE WAS -4.70% AGAINST 16.15% OF THE COMPARABLES, LD. TPO RECOMMENDED AN ARMS LEN GTH PRICE ADJUSTMENT OF F22,40,83,198/-. SUCH LD. ARMS LENGTH PRICE ADJUSTMENT WAS WORKED OUT BY THE LD. TPO AS UNDER:- ALP PROFIT CONSIDERING THE ABOVE = (OP. EXP X ALP P ROFIT)/100 = (107,48,33,846 X 16.15)/100 = F17,35,85,666/- ALP SALES CONSIDERING THE ALP PROFIT = OP. EXP X AL P PROFIT = 107,48,33,846 + 17,35,85,666 = F124,84,19,512/- ALP SALES = 124,84,19,512 LESS : SALES REPORTED = 102,43,36,314 ------------------- DIFFERENCE = 22,40,83,168/- ------------------ 10. WHEN THE LD. ASSESSING OFFICER MADE A PROPOSAL ON T HE LINES RECOMMENDED BY THE LD. TPO, ASSESSEE CHOSE TO MOVE LD. DRP. BEFORE LD. DRP ASSESSEE PRESSED FOR IDLE CAPACITY ADJUSTME NT FOR WORKING OUT ITS OPERATING COST AND EXCLUSION OF FOREX LOSS AS NON OPERATING IN NATURE WHILE COMPUTING ITS OPERATING MARGIN. ASSES SEE ALSO SOUGHT ITA NOS.985 & 1400, CO 79/2014 :- 9 -: EXCLUSION OF TCE CONSULTING ENGINEERS LTD FROM THE FIVE COMPARABLES SELECTED BY THE LD. TPO. THE LD. DRP IN ITS DIRECTI ON DATED 20.12.2013 HELD THAT IDLE TIME CAPACITY ADJUSTMENT SOUGHT BY T HE ASSESSEE COULD NOT BE ALLOWED AND WAS RIGHTLY DENIED BY THE LD. TP O. AS PER LD. DRP SERVICE INDUSTRY PLAYERS RECRUITED/ HIRED EMPLOYEE S ONLY BASED ON NEEDS AND FIRED THEM WHEN THEY WERE NOT REQUIRED. ACCORDING TO LD. DRP A PRESUMPTION COULD NOT BE TAKEN THAT COMPARABL ES SELECTED BY THE ASSESSEE WORKED AT 100% OF THE CAPACITY AND ASS ESSEE ALONE WORKED AT 65% OF THE CAPACITY. FURTHER, AS PER LD. DRP SETTING UP OF THE NEW PROCESSING CENTRE AT NEW DELHI COULD NOT B E A GOOD REASON FOR CLAIMING IDLE TIME ADJUSTMENT SINCE ASSESSEE W AS IN THE SERVICE SECTOR SINCE LONG. RELATED OBSERVATIONS OF THE LD. DRP IS REPRODUCED HEREUNDER:- THIS PANEL UPHOLDS THE ACTION OF THE TPO TO DENY THE CAPACITY UTILIZATION ADJUSTMENT CLAIMED BY THE ASSE SSEE. LIKEWISE THIS PANEL UPHOLDS THE ACTION OF THE TPO T O DENY THE EXCLUSION OF DELHI OFFICE EXPENDITURE CLAIMED B Y THE ASSESSEE. WHILE UPHOLDING THE ACTION OF THE TPO WE AGREE WITH THE REASONING GIVEN BY THE TPO IN THIS R EGARD. THE ASSESSEE IS IN THE LINE OF ENGINEERING SERVICES AND MAXIMUM BUSINESS IN THIS SEGMENT THE ASSESSEE HAS D ONE WITH THE AES. IN THIS SITUATION ASSESSEE CANNOT CLA IM THE UNILATERAL SHARING OF CAPACITY UTILIZATION AND CAPA CITY EXPANSION RISKS. CAPACITY CREATED OR FACILITIES EXP ANDED TO OTHER REGIONS IS CANNOT BE CONSIDERED AS AN EXTRAOR DINARY EXPENDITURE AND HENCE, CANNOT BE EXCLUDED. ASSESSEE ITA NOS.985 & 1400, CO 79/2014 :- 10 -: CLAIMS THAT IN HOURLY RATE MODEL FOLLOWED BY THE AS SESSEE FOR BILLING THE AES FIXED COSTS WOULD BE UNDER ABSO RBED AND SUCH UNABSORBED COSTS WOULD BE IN THE IN THE NA TURE OF ABNORMAL COSTS. WHEREAS OTHER COMPANIES COMPENSA TED BY THE CUSTOMERS ON A COST PLUS METHOD BASIS WOULD BE INSULATED FROM IDLE CAPACITY RISK. THUS WHETHER COS TS ARE UNABSORBED OR COMPENSATED WITH MARK UP DEPENDS ON T HE MODEL ONE ADOPTS WHILE ENTERING INTO AN AGREEMENT W ITH THE RECIPIENTS OF SERVICES. THIS IS QUITE OBVIOUS IN THE CASE OF ASSESSEE ITSELF. THE ASSESSEE HAS ENTERED INTO AGREEMENTS WITH THE AES ON HOURLY CHARGES BASIS WHE REAS IN RESPECT TO NON-AES THE ASSESSEE HAS FOLLOWED FIX ED PRICE CONTRACT MODEL. THIS DIFFERENCE IN THE BASIS OF SERVICES RENDERED BY THE ASSESSEE MAKES IT CLEAR AP PARENT THAT THE ASSESSEE HAS FAVORED THE AES. IT IS EXPECT ED FROM THE ASSESSEE THAT BUSINESS IS DONE WITH AES ON SAME TERMS AND CONDITIONS ON WHICH THEY DO THE BUSI NESS WITH THE NON-AES. FURTHER, IN RESPECT TO CAPACITY UTILIZATION, THIS PANEL FINDS THAT THE ASSESSEE KNOWS ABOUT ITS OWN CAPACITY UNDERUTILIZATION BUT WHAT ABOUT CA PACITY UTILIZATION IN THE CASE OF COMPARABLES? FURTHER, IT IS QUITE POSSIBLE THAT IN THIS BUSINESS IT IS NORMAL TO HAVE THIS MUCH UNDERUTILIZED CAPACITY. ADJUSTMENT FOR DIFFERE NCE IN THE CAPACITY UTILIZED BY THE ASSESSEE AND THE UNCON TROLLED COMPARABLES SHOULD BE MADE AFTER EXCLUDING THE NORM AL UNUTILIZED CAPACITY IN THIS BUSINESS. BUT SUCH DETAILS ARE NOT, AVAILABLE. THIS PANEL ALSO FINDS THAT CAPACITY UTILIZATION CONCEPT IS VAGUE AND ENTITY SPECIFIC. AS DISCUSSED ABOVE IN THE COST PLUS METHOD ALL THE COSTS ARE TAKEN IN TO CONSIDERATION WHILE DECIDING THE CONTRACT AMOUNT AN D HENCE THERE IS NOTHING AS UNDERUTILIZATION OF CAPAC ITY, WHEREAS AS PER ASSESSEE'S ADMISSION CAPACITY UTILIZ ATION CONCEPT COMES INTO VOGUE IN HOURLY BASIS' OF CHARGE . ITA NOS.985 & 1400, CO 79/2014 :- 11 -: THEREFORE, IN ABSENCE OF REASONABLY ACCURATE DETAIL S OF CAPACITY UTILIZATION THIS PANEL UPHOLDS THE DECISIO N OF THE TPO. 11. HOWEVER, LD. DRP WAS ONE WITH THE ASSESSEE VIZ-A-V IZ ITS CLAIM FOR EXCLUSION OF FOREIGN EXCHANGE LOSS AS NO N-OPERATING, WHILE WORKING OUT THE PLI OF THE ASSESSEE AS WELL THE COM PARABLES. 12. VIZ-A-VIZ ASSESSEES PLEADING FOR EXCLUSION OF M/S. TCE CONSULTING ENGINEERS LTD FROM THE LIST OF COMPARAB LES, OPINION OF THE LD. DRP WAS THAT THE SAID COMPANY WAS RIGHTLY TAKEN AS A COMPARABLE. AS PER LD. DRP ASSESSEE COULD NOT ESTA BLISH THAT M/S. TCE CONSULTING ENGINEERS LTD WAS UNDERTAKING ANY TURN KEY PROJECTS. 13. NOW BEFORE US, LD. AUTHORISED REPRESENTATIVE SUBMIT TED THAT IDLE CAPACITY ADJUSTMENT HAD TO BE GIVEN SINCE ASSE SSEE HAD PROVIDED ALL REQUIRED DETAILS BEFORE LOWER AUTHORITIES. AS P ER LD. AUTHORISED REPRESENTATIVE COST OF IDLE CAPACITY WAS WORKED OU T AS UNDER:- PARTICULARS NO. OF HRS TOTAL BILLABLE & NON BILLABLE HOURS 1,468,371 LESS: LEAVE HOURS (138,764) LESS; SUPPORT HOURS (129,084) (301,361) LESS: EPC RELATED HOURS (33,513) NET CAPACITY HOURS (A) 1,167,011 ITA NOS.985 & 1400, CO 79/2014 :- 12 -: TOTAL BILLABLE HOURS(B) 776,120 % OF CAPACITY UTILIZED (C)=(B)/(A) 66.50% % OF UNUTILIZ ED CAPACITY (D) =1 - (C) 33.50% IDLE CAPACITY ADJUSTMENT AMOUNT (INR) AMOUNT (INR) TOTAL PERSONAL COST INCURRED DURING THE YEAR IN CHENNAI REGION 580,732,926 RENTAL COST TOWARDS CHENNAI REGION 58,921,421 TOTAL FIXED OVERHEAD COST PERTAINING TO CHENNAI REGION 639,654,347 IDLE CAPACITY AS COMPUTED IN (D) 33.50% IDLE CAPACITY ADJUSTMENT (AS MENTIONED IN ANNEXURE 6 OF TP DOCUMENTATION ) (639654347*3 3.5%) 214,252,588 COMPUTATION OF IDLE CAPACITY OF NDPC OFFICE PARTICULARS REF NO. OF PERSONS TOTAL CAPACITY PERTAINING TO NDPC OFFICE (A) 80 AVERAGE NO. OF PERSONS EMPLOYED (B) 33 UNUTILSIED CAPACITY ( C) =(A) (B) 47 IDLE CAPACITY (D) = (C)/(A) 58.65% IDLE CAPACITY ADJUSTMENT TOTAL RENTAL COST PERTAINING TO NDPC 45,225,561 IDLE CAPACITY COMPONENT OF THE RENTAL COST (AS MENTIONED IN ANNEXURE 6 OF TP DOCUMENTATION ) (45225561* 58.65%) 26,522,907 CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT CAPACITY WAS WORKED OUT, CONSIDERING THE NUMBERS OF EMPLOYEES AT THE START OF THE YEAR, NUMBER OF EMPLOYEES RECRUITED DURING THE YEAR AND NUMBER OF EMPLOYEES WHO LEFT DURING THE YEAR. LD. AUTHORISED REPRESENTATIVE ITA NOS.985 & 1400, CO 79/2014 :- 13 -: SUBMITTED THAT MONTHLY MAN HOURS WHICH WERE BILLED AND WHICH COULD NOT BE BILLED WERE GIVEN IN DETAIL BY THE ASSESSEE AS UNDER:- MONTH CAPACITY (HRS) BILLABLE (HRS) NON-BILLABLE (HRS) APRIL 2008 98,094 60,881 37,213 MAY 2008 93,616 65,648 27,968 JUNE 2008 94,506 63,321 31,185 JULY 2008 100,415 62,278 38,137 AUGUST 2008 83,907 56,058 27,849 SEPTEMBER 2008 92,348 68,690 23,658 OCTOBER 2008 90,318 64,019 26,298 NOVEMBER 2008 92,646 60,700 31,946 DECEMBER 2008 107,181 73,145 34,036 JANUARY, 2009 70,459 45,673 24,785 FEBRUARY, 2009 99,753 57,688 42,065 MARCH, 2009 143,769 98,019 45,750 TOTAL 1,167,011 776,120 390,891 CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT IDLE CAPACITY WORK OUT COULD NOT BE GIVEN BY THE ASSESSEE, IN RES PECT OF THE COMPARABLE COMPANIES DUE TO LACK OF SUCH INFORMATIO N IN PUBLIC DOMAIN. HOWEVER, ACCORDING TO HIM BY VIRTUE OF DEC ISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF TRANSWITCH INDIA PVT. LTD VS. DCIT (IN ITA NO.6083/DEL/2010, DATED 30.03.2012) IDLE CA PACITY ADJUSTMENT COULD BE GIVEN IN SERVICE SEGMENT. RELYING ON THE D ECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF PANGEA3 & LEGA L DATABASE SYSTEMS LTD VS. ITO (IN ITA NO.2128/M/2014 AND 1958 /M/2014, DATED 06.03.2017) LD. AUTHORISED REPRESENTATIVE SUB MITTED THAT EVEN ITA NOS.985 & 1400, CO 79/2014 :- 14 -: WHEN DATA FOR COMPARABLES WERE NOT AVAILABLE, IF EFFORTS WERE PUT IN BY THE ASSESSEE FOR GETTING SUCH DATA, A RISK ADJU STMENT COULD BE GIVEN. RELIANCE WAS ALSO PLACED ON THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA (P) LTD VS. ACIT (2009) 30 SOT 319 AND THAT OF CO-ORDINATE BENCH IN THE CASE OF DCIT VS. M/S. DANFOSS INDUSTRIES PVT. LTD (IN ITA NOS.1311, 1132 & 1582/MDS/2016, DATED 23.02.2017). FURTHER AS PER LD. AUTHORISED REPRESENTATIVE, THE CAPACITY UTILIZATION DATA OF THE ASSESSEE FOR THE P RECEDING AND SUCCEEDING YEAR WOULD SHOW THAT THERE WAS AN ABNORM AL CAPACITY DIP IN THE IMPUGNED ASSESSMENT YEAR. 14. WITH REGARD TO HIS GROUNDS SEEKING EXCLUSION OF M /S. TCE CONSULTING ENGINEERS LTD, LD. AUTHORISED REPRESENTA TIVE SUBMITTED THAT THE SAID COMPANY WAS FUNCTIONALLY DIFFERENT. ACCOR DING TO HIM, THE SAID COMPANY UNDERTOOK TURN KEY PROJECTS WHEREAS AS SESSEE WAS ONLY PROVIDING ENGINEERING CONSULTANCY SERVICES. ACCORD ING TO HIM, THIS OBJECTION OF THE ASSESSEE WAS BRUSHED ASIDE BY THE LD. DRP AS WELL AS LD. TPO WITHOUT GIVING ANY REASONS. 15. ON THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE, L D. AUTHORISED REPRESENTATIVE SUBMITTED THAT ASSESSEE W AS SEEKING EXCLUSION OF M/S. MAHINDRA CONSULTING ENGINEERS LIM ITED. AS PER LD. ITA NOS.985 & 1400, CO 79/2014 :- 15 -: AUTHORISED REPRESENTATIVE, IT WAS TRUE THAT ASSESSE E HAD NOT SOUGHT EXCLUSION OF THE COMPANY FROM THE LIST OF COMPARABL ES BEFORE THE LOWER AUTHORITIES. HOWEVER, ACCORDING TO HIM BY VI RTUE OF DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF QUARK SYSTEMS (P) LTD VS. DCIT, 38 SOT 37, SUCH ADDITIONAL GROUND HAD TO BE ADMITTED. AS PER THE LD. AUTHORISED REPRESENTATIVE THE TRANSFER PRIC ING PROVISIONS BEING COMPARATIVELY NEW, ASSESSEE COULD TAKE A GROUND FO R EXCLUSION OF A COMPARABLE SELECTED BY ITSELF IN TP STUDY, IF IT COULD SHOW THAT THE COMPANY WAS OTHERWISE NOT COMPARABLE. ACCORDING TO HIM, M/S. MAHINDRA CONSULTING ENGINEERS LIMITED HAD A TURNOVE R F102.43 CRORES WHEREAS TURNOVER OF THE ASSESSEE WAS ONLY F8.48 CRO RES. TURNOVER OF THE M/S. MAHINDRA CONSULTING ENGINEERS LIMITED WAS MORE THAN TEN TIMES OF THE ASSESSEE AND ACCORDING TO HIM, BY VIRT UE OF DECISION OF CO-ORDINATE BENCH IN THE CASE OF VISUAL GRAPHICS COMPUTING SERVICES INDIA PVT. LTD VS. ACIT (IN ITA NO.2340/MDS/2012, D ATED 10.02.2017) AND THAT OF DCIT VS. M/S. WABCO TVS LTD (IN ITA NO. 883/MDS/2015, DATED 23.09.2016 ) A COMPANY WHICH WAS HAVING A TURNOVER TEN TIMES MORE OR LESS THAN THAT OF AN ASSESSEE COULD NOT C ONSIDERED AS A GOOD COMPARABLE. THUS, ACCORDING TO LD. AUTHORISED REPRESENTATIVE, M/S. MAHINDRA CONSULTING ENGINEERS LIMITED WAS REQU IRED TO BE EXCLUDED FROM THE LIST OF COMPARABLES. ITA NOS.985 & 1400, CO 79/2014 :- 16 -: 16. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT IDLE CAPACITY ADJUSTMENT COULD NOT BE GIVEN SINCE ASSESSEE WAS IN SERVICE INDUSTRY AND ASSESSEE COULD NEVER DEMONSTR ATE WHAT WOULD BE ITS 100% CAPACITY LEVEL. FURTHER AS PER LD. DEP ARTMENTAL REPRESENTATIVE, CAPACITY DETAILS OF THE COMPARABLE S SELECTED BY THE ASSESSEE WERE NOT AVAILABLE AND ASSESSEE COULD NOT DEMONSTRATE PRESENCE OR ABSENCE OF IDLE CAPACITY FOR THE COMPAR ABLES. 17. VIZ-A-VIZ M/S. TCE CONSULTING ENGINEERS LTD, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE SAI D COMPANY WAS ALSO IN ENGINEERING SERVICE SEGMENT AND FUNCTIONALL Y COMPARABLE WITH THE ASSESSEE. 18. VIZ-A-VIZ M/S. MAHINDRA CONSULTING ENGINEERS LIMITE D, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT SAID CO MPANY WAS ASSESSEES OWN COMPARABLE. FURTHER AS PER LD. DEPA RTMENTAL REPRESENTATIVE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF SOCIETE GENERALE GLOBAL SOLUTION CENTRE (P) LTD VS. DCIT ( 2016) 69 TAXMANN.COM 336 HAD HELD THAT TURNOVER COULD NOT BE A RELEVANT CRITERIA IN A SERVICE SECTOR WHERE FIXED OVERHEADS WERE NOMINAL. IN ANY CASE ACCORDING TO HIM THIS WAS A NEW GROUND TAK EN BY THE ASSESSEE AND NEVER RAISED BEFORE ANY OF THE LOWER A UTHORITIES. ITA NOS.985 & 1400, CO 79/2014 :- 17 -: 19. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. IDLE CAPACITY ADJ USTMENT SOUGHT BY THE ASSESSEE FOR WORKING OUT ITS OWN PROFIT MARGIN IS BASED ON A 100% CAPACITY LEVEL CONSIDERED BY THE ASSESSEE AS 11670 11 BILLING HOURS FOR ITS CHENNAI REGION. FOR ITS NDPC OFFICE IT HAD GON E BY A CAPACITY WORK OUT BASED ON NUMBER OF PERSONS. HOWEVER, DETAILED MONTHLY MAN HOUR CAPACITY UTILIZATION GIVEN BY THE ASSESSEE AT PAPER BOOK PAGE NO. 166, WHICH HAS BEEN REPRODUCED BY US PARA 13 ABOV E SHOW THAT THE TOTAL CAPACITY 11,67,011 HOURS HAS BEEN SPENT ON GR OUP AND NON GROUP PROJECT. THUS AT ONE PLACE ASSESSEE STATES TH AT IT HAD LARGE QUANTUM OF TOTAL NET CAPACITY HOURS OF 1167011 WHIC H WAS NOT UTILIZED, WHEREAS AT ANOTHER PLACE IT SAY THESE MAN HOURS WER E SPENT ON GROUP AND NON GROUP PROJECTS. THUS ASSESSEE WAS NOT ABLE TO PLACE BEFORE LOWER AUTHORITIES DATA SHOWING TOTAL BILLABLE HOUR S IN A MANNER WHICH COULD BE OBJECTIVELY ANALYZED . FOR NDPC OFFICE IT WENT BY NUMBER OF PERSONS; WHEREAS FOR CHENNAI REGION IT WENT BY NUM BER OF HOURS. STANDARD FOLLOWED BY THE ASSESSEE ITSELF DIFFERED. TO WORK OUT A CAPACITY LIMIT IN A SERVICE INDUSTRY WHERE BILLING IS DONE ON MAN HOUR BASIS, WOULD NOT ALWAYS BE A FRUITFUL EXERCISE U NLESS CLEAR EMPIRICAL DATA IS AVAILABLE. CONTENTION OF THE ASSESSEE THA T IDLE CAPACITY COST WAS AN EXTRA ORDINARY ONE JUSTIFYING AN ADJUSTME NT FOR WORKING OUT ITA NOS.985 & 1400, CO 79/2014 :- 18 -: ITS PLI, IN OUR OPINION, IS NOT ACCEPTABLE. NO DOU BT, LD.AR HAS PLACED CONSIDERABLE RELIANCE ON MUMBAI BENCH DECISION IN T HE CASE OF PANGEA3 & LEGAL DATABASE SYSTEMS PVT LTD (SUPRA ). BUT IN THE SAID CASE, WHAT WAS CONSIDERED WAS THE NATURE OF LOSS DU E TO HEDGING ABNORMALITY AND WHETHER IT COULD BE CONSIDERED AN EXTRAORDINARY EVENT QUA THE TESTED PARTY, WHEN SUCH PHENOMENA WAS NOT THERE ACROSS THE INDUSTRY. HOWEVER, HERE THE CLAIM OF TH E ASSESSEE IS NOT FOR HEDGING ABNORMALITY. IT COULD ALSO NOT SHOW THAT I DLE CAPACITY IN SERVICE INDUSTRY WAS NOT AN ACROSS THE INDUSTRY FEATURE. THUS THE SAID DECISION WILL NOT HELP THE ASSESSEE FOR ITS C LAIM THAT IDLE CAPACITY ADJUSTMENT SHOULD BE GIVEN FOR WORKING OUT ITS PLI. ESPECIALLY SO, SINCE ASSESSEE COULD NOT DEMONSTRATE EXISTENCE NOR NONEXI STENCE OF IDLE CAPACITY FOR THE VARIOUS COMPARABLES SELECTED BY IT . NO DOUBT, AS HELD BY PUNE BENCH OF THE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA (P) LTD (SUPRA, ) IT MIGHT ALWAYS NOT BE POSSIBLE FOR AN ASSESSEE TO GET ALL DETAILS OF COMPARABLES, ESPECIALLY WHEN SUCH DATA N OT IN PUBLIC DOMAIN, AND APPROXIMATIONS COULD BE MADE. HOWEVE R, THE DATA PROVIDED BY THE ASSESSEE HERE, COULD NOT SHOW THE SCIENTIFIC BASIS ON WHICH IT HAD WORKED OUT ITS OWN CAPACITY LEVEL. TH E QUESTION OF APPROXIMATION IN OUR OPINION WOULD NOT THEREFORE AR ISE. AS FOR THE RELIANCE PLACED BY THE LD. AUTHORISED REPRESENTATIV E ON THE DELHI BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF TRANSWITCH INDIA PVT. ITA NOS.985 & 1400, CO 79/2014 :- 19 -: LTD (SUPRA ) ADJUSTMENT CLAIMED BY THE ASSESSEE THERE WERE F OR RELOCATION EXPENSES, ADDITIONAL RENT AND SALARY PAI D FOR UNPRODUCTIVE/ IDLE HOURS. IN THE FIRST PLACE THE SAID COMPANY WAS PROVIDING SOFTWARE DESIGN AND DEVELOPMENT SERVICE AND NOT IN ENGINEERI NG SERVICES. FURTHER, THE SAID COMPANY COULD CONVINCINGLY DEMONS TRATE ITS NORMAL UTILIZATION CAPACITY WAS 87% TO 94% IN THE RELEVANT FINANCIAL YEAR. AS AGAINST THIS, ASSESSEE HERE HAS NOT BEEN ABLE TO D EMONSTRATE HOW IT HAD ARRIVED THE CAPACITY HOURS. 20. NOW COMING TO THE CLAIM OF THE LD. AUTHORISED REPRESENTATIVE THAT DURING THE FINANCIAL YEAR 2007 -2008 ASSESSEE HAD CAPACITY UTILIZATION OF 75% AND EVEN IN NEXT YEAR A SSESSEE HAD CAPACITY UTILIZATION OF 75%, WHERE FOR FINANCIAL Y EAR 2008-2009 ITS CAPACITY UTILIZATION WAS ONLY 65% THEREBY JUSTIFYIN G AN ADJUSTMENT FOR IDLE CAPACITY, IN OUR OPINION, THIS ALSO CANNOT BE ACCEPTED. REASONS ARE VERY SAME. IT COULD NOT DEMONSTRATE HOW CAPACITY LEVELS WERE ARRIVED AT IN A CONVINCING MANNER USING A RELIABLE METHOD. AS ALREADY MENTIONED BY US, ASSESSEE ITSELF HAD FOLLOWED DIFF ERENT YARDSTICKS FOR WORKING OUT ITS CAPACITY LEVELS AT CHENNAI AND NDP C CENTERS. WE ARE THEREFORE OF THE OPINION THAT LOWER AUTHORITIES WERE JUSTIFIED IN NOT ALLOWING THE ASSESSEE ANY IDLE CAPACITY ADJUSTMENT WHILE WORKING OUT ITS OWN PLI. ITA NOS.985 & 1400, CO 79/2014 :- 20 -: 21. COMING TO THE GROUND TAKEN BY THE ASSESSEE FOR EXCL USION OF M/S. TCE CONSULTING ENGINEERS LTD, ASSESSEE HAD BEF ORE THE LD. TPO AS WELL AS LD. DRP ARGUED THAT SAID COMPANY WAS FUNCTI ONALLY DIFFERENT SINCE IT WAS DOING TURN KEY PROJECTS. IN ITS LETTE R DATED 17.01.2013 ADDRESSED TO THE TPO, ASSESSEE HAD SOUGHT EXCLUSION OF THE SAID COMPANY. BUT LD. TPO IN ITS ORDER HAD NOT DEALT WI TH SUCH OBJECTION. BEFORE LD. DRP ALSO ASSESSEE HAD SPECIFICALLY RAISE D THE FOLLOWING CONTENTION. TCE PROVIDES CONSULTANCY SERVICES & UNDERTAKE TURNKEY PROJECTS, THEY CANNOT BE COMPARED WITH ENGINEERING SERVICES RENDERED BY ASSE SSEE DUE TO DIFFERENCES IN MARKETING STRATEGIES, COMPETITIVE EDGE, OPERATIONAL EFFICIENCY, CASH FLOW TRENDS, CASH FLOW TRENDS, FINANCIAL FLEXIBILITY, GOVERNMENT POLICIES ETC. IN ADDITION COMPANIES OPERATING ON A LARGE SCALE BENEFIT FROM E CONOMIES OF SCALE, HIGHER RISK TAKING CAPABILITIES, ROBUST GLOB AL DELIVERY AND BUSINESS MODELS AS OPPOSED TO THE SMALLER OR MEDIUM SIZED COMPANIES. THEREBY WHERE TWO COMPANIES ARE OF DISSI MILAR SIZES THEY CANNOT BE ASSUMED TO EARN COMPARABLE MARGINS. AS IT IS DIFFICULT TO QUANTIFY THE IMPACT OF DIFFERENCE IN S IZE OF BUSINESS ON THE MARGINS, COMPANIES OF DISSIMILAR SIZES CANNOT B E COMPARED. BASED ON THE ABOVE DIFFERENCES ON ACCOUNT OF FUNCTI ONAL DISSIMILARITY AND SIGNIFICANTLY HIGHER TURNOVER, TH E ASSESSEE HAS SUBMITTED THAT TCE CANNOT BE CONSIDERED AS COMPARAB LES AND THEREFORE DRP SHOULD GIVE DIRECTIONS TO EXCLUDE IT . LD. DRP ALSO DID NOT DEAL WITH THESE OBJECTIONS OF THE ASSESSEE. IN THE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE QUEST ION WHETHER M/S. ITA NOS.985 & 1400, CO 79/2014 :- 21 -: TCE CONSULTING ENGINEERS LTD COULD BE CONSIDERED A GOOD COMPARABLE REQUIRES A REVISIT BY THE TPO/ASSESSING OFFICER. W E SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES, IN SO FAR AS IT RE LATES TO THE QUESTION OF COMPARABILITY OF M/S. TCE CONSULTING ENGINEERS LTD, AND IT REMIT BACK TO THE LD. ASSESSING OFFICER /TPO FOR CONSIDERATION AFRESH IN ACCORDANCE WITH LAW. 22. AS ALREADY MENTIONED BY US, ASSESSEE HAS RAISED CER TAIN ADDITIONAL GROUNDS SEEKING EXCLUSION OF M/S. MAHIND RA CONSULTING ENGINEERS LIMITED FROM THE LIST OF COMPARABLES. N O DOUBT THIS COMPANY APPEARED IN THE LIST OF COMPARABLES SELECTE D BY THE ASSESSEE ITSELF. ASSESSEE HAD TAKEN NO GROUNDS BEFORE TPO OR LD. DRP FOR ITS EXCLUSION. HOWEVER, BY VIRTUE OF DECISION OF SPECI AL BENCH IN THE CASE OF QUARK SYSTEMS (P) LTD (SUPRA) WE ARE OF THE OPINION THAT AN ASSESSEE COULD NOT BE ESTOPPED FROM SEEKING AN EXCL USION OF A COMPARABLE EVEN BEFORE THE APPELLATE AUTHORITY, IF IT COULD SHOW THAT THE SELECTED COMPARABLE WAS NOT REALLY A GOOD COM PARABLE. AS PER ASSESSEE M/S. MAHINDRA CONSULTING ENGINEERS LIMITED WAS HAVING A TURNOVER OF F102.43 CRORES WHEREAS ITS OWN TURNOVE R WAS ONLY F8.48 CRORES. WE ARE OF THE OPINION, THE QUESTION WHETHE R THE TURNOVER FILTER COULD BE APPLIED FOR EXCLUSION OF M/S. MAHINDRA CON SULTING ENGINEERS LIMITED FROM THE LIST OF COMPARABLES, HAS TO BE CON SIDERED BY THE LD. ITA NOS.985 & 1400, CO 79/2014 :- 22 -: ASSESSING OFFICER /TPO. WE REMIT THIS ISSUE BACK T O LD. ASSESSING OFFICER/TPO. 23. NOW, WE TAKE THE APPEAL OF THE REVENUE. 24. REVENUE IS AGGRIEVED ON THE DIRECTIONS GIVEN BY T HE LD. DRP FOR EXCLUDING FOREIGN EXCHANGE LOSS ON CANCELLATION OF FORWARD CONTRACTS WHILE WORKING OUT OPERATING MARGIN OF TH E ASSESSEE. 25. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT A N UMBER FORWARD CONTRACTS WERE CANCELLED BY THE ASSESSEE DU E TO ITS INABILITY TO COLLECT RECEIVABLES FROM ITS ASSOCIATED ENTERPRISE ABROAD. AS PER LD. DEPARTMENTAL REPRESENTATIVE, DEBTORS OF THE ASSESS EE HAD WENT UP BY 260% OVER THE YEAR. SUCH FORWARD CONTRACTS WERE ENTERED BY THE ASSESSEE TO COVER THE LOSS THAT COULD ARISE, IF PAYMENTS WERE DELAYED. ACCORDING TO LD. DEPARTMENTAL REPRESENTAT IVE IT WAS CLEARLY OPERATIONAL IN NATURE. AS PER LD. DEPARTMENTAL REP RESENTATIVE 88% OF THE ASSESSEES REVENUE WERE FROM ASSOCIATED ENTERP RISES AND THE DEBTORS WERE ONLY ASSOCIATED ENTERPRISES. THUS, A CCORDING TO HIM, THE DIRECTIONS GIVEN BY THE LD. DEPARTMENTAL REPRES ENTATIVE IN THIS REGARD WAS INCORRECT. 26. PER CONTRA, LD. AUTHORISED REPRESENTATIVE IN SUPPOR T OF THE ORDER OF THE LD. DRP SUBMITTED THAT THE INCREASE I N DEBTORS WAS NOT ITA NOS.985 & 1400, CO 79/2014 :- 23 -: THE REASON FOR THE FOREX LOSS. AS PER LD. AUTHORI SED REPRESENTATIVE, INCREASE IN RECEIVABLES WERE DUE TO THE SALES DURIN G THE MONTH OF MARCH, 2009 WAS CAME TO F22.76 CRORES. AS PER LD. AUTHORISED REPRESENTATIVE, INCREASE IN DEBTORS FROM F9,44,78, 840/- TO F33,92,88,509/- WAS BECAUSE OF THE SALE TO ASSOCIAT ED ENTERPRISE SALES DURING THE MONTH OF MARCH, 2009. CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE WAS THAT FOREX LOSS ON FORWARD CONTR ACTS WAS CORRECTLY HELD AS NON OPERATIONAL BY THE LD. DRP. FORWARD C ONTRACTS AS PER THE LD. AUTHORISED REPRESENTATIVE HAD TO BE CONSIDERED AS AN EXTRAORDINARY ITEM. FOR THIS CONTENTION, RELIANCE WAS PLACED ON ACCOUNTING STANDARDS 11 OF INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. RELIANCE WAS ONCE AGAIN PLACED ON THE MUMBAI BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF PANGEA3 & LEGAL DATABASE SYSTEMS PVT. LTD (SUPRA) . 27. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL CONT ENTION. THE QUESTION BEFORE US IS WHETHER FOREX LOSS SUFFER ED BY THE ASSESSEE ON ACCOUNT OF CANCELLATION OF ITS FORWARD FOREX CO NTRACTS COULD BE CONSIDERED AS OPERATIVE OR NON OPERATIVE IN NATURE. THERE WERE TWO TYPES OF FOREX LOSS SUFFERED BY THE ASSESSEE. THE DISPUTE IS ONLY REGARDING THE TREATMENT OF THE FOREX LOSS SUFFERED BY THE ASSESSEE, ON CANCELLATION OF FORWARD CONTRACTS, WHICH CAME F2 ,66,47,200/-. CONTENTION OF THE ASSESSEE IS THAT THIS WAS EXTRA ORDINARY IN NATURE ITA NOS.985 & 1400, CO 79/2014 :- 24 -: AND HENCE TO BE EXCLUDED WHILE WORKING OUT ITS PLI . IT IS AN ADMITTED POSITION THAT THE FORWARD CONTRACTS WERE ENTERED B Y THE ASSESSEE TAKING INTO CONSIDERATION THE QUANTUM OF US DOLLA RS, IT COULD RECEIVE FROM THE ASSOCIATED ENTERPRISES ON ITS BILLINGS. R ELATED CHART OF FORWARD CONTRACT CANCELLATION AS APPEARING IN PAPER BOOK AT PAGE 138 IS REPRODUCED HEREUNDER:- MONTH CONTRACT NO. CONTRACT DATE VALUE DATE FORWARD COVER TAKEN (USD) APRIL 2008 0736206420385 12/28/2007 4/30/2008 1,500,000 MAY 2008 0736206420388 12/28/2007 5/30/2008 1,500,000 JUNE 2008 0736206420387 12/28/2007 6/30/2008 1,000,000 JULY 2008 0736505910031 12/28/2007 7/31/2008 2,500,000 AUGUST 2008 0736505910017 12/28/2007 8/29/2008 1,700,000 SEPTEMBER 2008 0736206420386 12/28/2007 9/29/2008 1,700,000 OCTOBER 2008 0736206420383 12/28/2007 10/31/2008 1,800,000 NOVEMBER 2008 0736206420384 12/28/2007 11/28/2008 1,800,000 DECEMBER 2008 JANUARY, 2009 IND 2613346 1/9/2009 1/30/2009 2,000,000 FEBRUARY, 2009 IND 2613348 1/9/2009 2/327/2009 2,000,000 MARCH, 2009 IND 2613350 1/9/2009 3/31/2009 3,200,000 TOTAL 20,700,000 MONTH DELIVERED (USD) NOT DELIVERED FORWARD RATE SPOT RATE CHARGES (INR) APRIL 2008 1,466,918 33,082 39.72 40.44 (23,819) MAY 2008 1,425,789 74,211 39.77 42.55 (206,493) JUNE 2008 482,494 517,506 39.80 43.10 (1,707,771)) JULY 2008 1,615,727 884,273 39.85 42.55 (2,391,958) AUGUST 2008 346,217 1,353,783 39.88 43.81 (5,323,752 ) SEPTEMBER 2008 1,100,000 600,000 39.91 47.04 (4,278,000) OCTOBER 2008 935,939 864,061 39.93 49.10 (7,919,771) NOVEMBER 2008 1,800,000 39.95 49.60 DECEMBER 2008 JANUARY, 2009 2,000,000 48.93 FEBRUARY, 2009 2,000,000 49.05 MARCH, 2009 6 35,489 2,564,511 49.16 51.03 (4,795,636) TOTAL 13,808,571 6,891,429 (26,647,200) ITA NOS.985 & 1400, CO 79/2014 :- 25 -: ASSESSEE WAS EXPECTING TO GET US DOLLARS ON ITS BI LLINGS TO ITS ASSOCIATED ENTERPRISE AND THIS WAS THE REASON WHY I T ENTERED INTO FORWARD CONTRACTS. SUBSTANTIAL PART OF THE FORWARD CONTRACTS EXCEPT FOR THE MONTH OF JUNE, AUGUST, 2008 AND MARCH, 2009 WER E SATISFIED BY DELIVERY OF DOLLARS. HENCE TO SAY THAT THE FORWARD S CONTRACTS WERE TAKEN BY THE ASSESSEE AS AN INDEPENDENT ACTIVITY U NRELATED TO ITS BUSINESS WOULD BE INCORRECT. ADMITTEDLY SUCH CONTAC TS WERE NOT ENTERED BY THE ASSESSEE AS A PART OF ANY SPECULATIO N BUSINESS. CONSIDERING THESE ASPECTS WE ARE OF THE OPINION THA T LOSS ON CLOSURE OF FORWARD CONTRACT WAS NOT ON ACCOUNT OF ANY HEDGING ABNORMALITY. IN THE CASE OF PANGEA3 & LEGAL DATABASE SYSTEMS PVT. L TD (SUPRA) DECIDED BY MUMBAI BENCH OF THIS TRIBUNAL STRONGLY RELIED BY THE LD. AUTHORISED REPRESENTATIVE, WHAT WAS HELD AT PAGE 32 & 33 OF THE ORDER IS REPRODUCED HEREUNDER:- SO FAR AS ENTERING INTO FORWARD CONTRACTS TO MINI MIZE SUCH RISKS IS ABSOLUTELY NO ABNORMAL CONDUCT ON PART OF THE ASSESSEE, BECAUSE IF THE TRADE RECEIVABLES OR PAYAB LES ARE IN FOREIGN CURRENCY, THE PARTIES GENERALLY RESORT T O ENTERING INTO FORWARD CONTRACT AND HENCE, IT IS TO BE RECKON ED AS NORMAL BUSINESS TRANSACTION AND ANY GAIN OR LOSS IN THE NORMAL COURSE OF BUSINESS IS TO BE ACCOUNTED FOR IN THE ACCOUNTS. HOWEVER, IF THERE IS SOME HEDGING ABNORMA LITY OR ANY EXTRAORDINARY EVENT HAS OCCURRED QUA THE TES TED PARTY (ASSESSEE) WHICH MATERIALLY AFFECTS THE COST OR PROFIT IN THE RELEVANT FINANCIAL YEAR, WHICH IS NOT ACROSS THE INDUSTRY OR IS EITHER ABSENT OR IS OF LESS MAGNITUD E IN THE CASE OF COMPARABLE INDEPENDENT PARTIES, THEN DEFINI TELY SUCH AN ABNORMALITY OR EXTRAORDINARY EVENT HAS TO B E FACTORED IN WHILE COMPUTING THE COST BASE OR PLI. B EFORE US, THE ASSESSEE HAS DEMONSTRATED THAT IN THIS PART ICULAR ITA NOS.985 & 1400, CO 79/2014 :- 26 -: FINANCIAL YEAR THERE WAS AN EXTRAORDINARY FLUCTUATI ON IN THE FOREX RATE WHICH WAS AT 27.47% AS COMPARED TO THE AVERAGE FLUCTUATION OF 2.87% IN THE EARLIER THREE F INANCIAL YEARS (AS PER THE CHART REPRODUCED IN OUR EARLIER P ART OF THE ORDER). IN THE EARLIER FINANCIAL YEAR, I.E., IN THE FY 2007-08 LIKE A NORMAL TRANSACTION THE ASSESSEE HAD ENTERED INTO MAJORITY OF FORWARD CONTRACTS WHEN THE EXCHANGE RATE OF INR VS. US $ WAS STEADY OR RATHER INR WAS APPRECIATING; HOWEVER, IN THE FY 2008-09 THE VA LUE OF INR DEPRECIATED SO SHARPLY THAT EVEN THE RBI HAD TO INTERVENE BY PUMPING US $ 84 BILLION IN THE FOREX M ARKET. IN ORDER TO SAVE ITSELF FROM SUCH HUGE LOSS, THE AS SESSEE CANCELLED THE FORWARD CONTRACT SO THAT LOSS CAN BE MITIGATED AND ACCORDINGLY, IN THAT PROCESS ASSESSEE HAD SUFFERED A LOSS OF RS. 2.22 CR. SUCH A LOSS EVEN DU E TO UNTOWARD INCIDENT GENERALLY WOULD HAVE GONE INTO TH E OPERATING COST, HAD IT BEEN DEMONSTRATED THAT IT WA S THE PHENOMENON ACROSS THE INDUSTRY OR IN THE CASES OF COMPARABLE UNCONTROLLED TRANSACTIONS, THAT IS, INDE PENDENT COMPARABLE ENTITIES THIS WAS ALSO THE PECULIAR FEAT URE. IF SUCH A PECULIARITY IS ABSENT OR ITS MAGNITUDE IS LE SS IN THE CASE OF THE COMPARABLES, THEN OSTENSIBLY SUCH PECUL IARITY OR ABNORMALITY HAS TO BE TREATED AS FACTORS MATERIA LLY AFFECTING THE COST AND CONSEQUENTLY, THE PLI OF THE TESTED PARTY FOR WHICH THE REASONABLE ACCURATE ADJUSTMENT SHOULD BE MADE TO ELIMINATE THIS EFFECT, BECAUSE IT HAS TO BE RECKONED AS A DIFFERENCE BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. THERE IS A CLEAR OBSERVATION THAT ENTERING INTO F ORWARD CONTRACT FOR COVERING THE RISKS OF EXCHANGE RATE FALL, WAS A NO RMAL BUSINESS TRANSACTION. OF COURSE THERE INDEED IS AN OBSERVAT ION THAT EXTRAORDINARY FLUCTUATIONS COULD WARRANT AN ADJUST MENT IF IT COULD BE DEMONSTRATED THAT SUCH A PHENOMENA WAS ABSENT FOR COMPARABLE CASES. NOTHING OF THIS SORT WAS DEMONSTRATED BY TH E ASSESSEE HERE. IN SUCH CIRCUMSTANCES WE ARE OF THE OPINION THAT LD. D RP FELL IN ERROR IN ITA NOS.985 & 1400, CO 79/2014 :- 27 -: DIRECTING THE LD. TPO TO EXCLUDE FOREIGN EXCHANGE L OSS/GAIN, CONSIDERING IT TO BE NON OPERATING IN NATURE, WHIL E COMPUTING OPERATING MARGIN OF THE ASSESSEE AS WELL AS THAT OF COMPARABLES. DIRECTIONS GIVEN BY THE LD. DRP IN THIS REGARD ARE SET ASIDE. 28. TO SUMMARIZE THE RESULTS, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE, WHEREAS THAT OF RE VENUE IS ALLOWED. CROSS OBJECTION OF THE ASSESSEE HAVING NOT BEEN PR ESSED IS DISMISSED. ORDER PRONOUNCED ON WEDNESDAY, THE 5TH DAY OF AP RIL, 2017, AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( !' . #$#% ) (ABRAHAM P. GEORGE) & / ACCOUNTANT MEMBER MNO / CHENNAI PQ / DATED: 5TH APRIL, 2017 KV QNR S TU VNU / COPY TO: 1 . WX / APPELLANT 3. Y () / CIT(A) 5. U\] S / DR 2. S_WX / RESPONDENT 4. Y / CIT 6. ]` A / GF