Bechtel India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1476/DEL/2015

• Counselvise Citation: 147620114 RSA 2015
• Duration Of Justice: 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 23-09-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 13-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAMA ANAND
• Assessee Lawyers: RAHUL K MITRA
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2, NEW DELHI) BEFORE SHRI J. S. REDDY, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER I.T.A. NO.1476 /DEL/2015 ASSESSMENT YEAR : 2004-05 M/S. BECHTEL INDIA PVT. LTD., VS. DCIT, CIRCLE 4( 2), 418, NAURANG HOUSE, NEW DELHI 21, K. G. MARG, NEW DELHI GIR / PAN:AAACB2098A (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAHUL K. MITRA, CA RESPONDENT BY : SMT. ANUPAMA ANAND, CIT DR DATE OF HEARING : 23.09.2015 DATE OF PRONOUNCEMENT : 20.11.2015 ORDER PER KULDIP SINGH, JM: THE APPELLANT M/S. BECHTEL INDIA PVT. LTD. BY FILI NG THE PRESENT APPEAL, SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 30.01. 2015 PASSED BY A.O. IN CONSONANCE WITH THE ORDER OF DISPUTE RESOLUTION PAN EL-I (DRP), NEW DELHI DATED 16.12.2014 QUA ASSESSMENT YEAR 2004-05. 2. BRIEFLY STATED THE FACTS OF THIS CASE ARE: THE T AXPAYER FILED ITS RETURN OF INCOME ON 28.10.2004 DECLARING TOTAL INCOME OF RS.1 ,87,61,084/- AND SINCE THE TAXPAYER HAD BEEN INTO INTERNATIONAL TRANSACTIO N WITH THE ASSOCIATE ENTERPRISES (AE) THE MATTER WAS REFERRED BY THE A .O. TO THE TRANSFER PRICING OFFICER (TPO) NEW DELHI U/S 92CA(1) OF THE I. T. ACT, 1961 (THE ACT), WHO HAS MADE ADJUSTMENT OF RS.6,93,21,169/- VIDE ORDER DATED ITA NO.1476/DEL/2015 2 08.12.2006. THE TAX PAYER AGGRIEVED BY THE ADJUSTM ENT, CARRIED THE MATTER BEFORE LD. CIT(A) WHO DELETED THE ADDITION MADE BY TPO VIDE ORDER DATED 29.07.2011. 3. THE REVENUE CHALLENGED THE ORDER DATED 29.07.201 2 PASSED BY LD. CIT(A) BEFORE THE TRIBUNAL WHO VIDE ORDER DATED 21. 12.2012 RESTORED THE MATTER TO THE TPO WITH THE DIRECTION TO DETERMINE T HE ARMS LENGTH PRICE (ALP) AFRESH BY TREATING THE TAXPAYER AS ENGAGED IN THE BUSINESS OF ENGINEERING, DESIGN AND DRAWING SERVICES. BY COMPL YING WITH THE DIRECTION MADE BY THE TRIBUNAL, TPO PROPOSED THE ADDITION OF RS.22,99,41,641/- VIDE ORDER DATED 27.01.2011 AND THE A.O. VIDE HIS DRAFT ASSESSMENT ORDER PROPOSED TO ASSESS THE TAXPAYER AT AN INCOME OF RS. 25,38,74,760/-. THEN, AGGRIEVED WITH THE DRAFT ASSESSMENT ORDER PASSED BY A.O., TAXPAYER HAS FILED THE OBJECTION BEFORE DRP, WHO AFTER EXAMINING THE I SSUE, PASSED DIRECTIONS U/S 144C OF THE ACT TO THE A.O. TO COMPLETE THE ASS ESSMENT AS PER THE DIRECTIONS OF DRP VIDE ORDER DATED 16.12.2014. 4. IN ACCORDANCE WITH THE DIRECTIONS MADE BY THE TR IBUNAL VIDE ITS ORDER DATED 21.12.2012 IN I.T.A. NO. 4338/DEL./2011, TPO PASSED THE ORDER DATED 27.12.2014, AS UNDER: A REFERENCE WAS RECEIVED FROM THE DCIT, CIRCLO~2(1 ), NEW DELHI TO DETERMINE THE 'ARM'S LENGTH PRICE' IN RESPECT OF IN TERNATIONAL TRANSACTIONS' UNDERTAKEN BY THE ASSESSEE DURING THE F. Y. 2003-04. SUBSEQUENTLY ORDER U/S 92CA(3) OF THE IT ACT, WAS P ASSED ON 08. 12.2006 WHEREIN ADJUSTMENT AS PER FOLLOWING DETAILS WERE MADE TOTAL COST 465139145 OPITC OF COMPARABLES 9.43% OPERATING PROFIT 43853318 OPERATING LOSS AS PER BOOKS 25467851 DIFFERENCE 69321169 ITA NO.1476/DEL/2015 3 6. THE CUMULATIVE ADJUSTMENTS MED IN THIS CASE A RE TABULATED BELOW: S.N. NATURE OF INTERNATIONAL TRANSACTION ALP DETERMINED BY ASSESSEE(INR) ALP DETERMINED BY THIS OFFICE (INR) ADJUSTMENT U/S 92CA (LNR) 1. PROVISION OF TECHNICAL CONSULTANCY SERVICE 439671294 57640710 13,67,89,416 2. RECEIVABLE NIL 9,31,52,225 9,31,52,225 TOTAL 22,99,41,641 THE ASSESSING OFFICER WILL ACCORDINGLY ENHANCE THE INCOME OF THE ASSESSEE BY RS.22,99,41, 641/-. THIS SHALL BE TREAT ED AS THE CUMULATIVE ADJUSTMENT U/S 92CA. NO. ADVERSE INFERENCE IS DRAWN IN RESPECT OF THE OTHER INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE DURING THE F. Y.2003-04. THE ASSESSEE WAS AFFORDED REASONABLE OPPORTUNITY OF BEING HEARD, AS MENTIONED ON PAGE 1 OF THIS ORDER. THE ASSESSING OFFICER MAY EXAMINE ISSUE OF INITIATION OF PENALTY U/S 271(1)(C) OF THE ACT IN ACCORDANCE WITH EXPLANATION 7 OF THE SAME.' 5. CONSEQUENTLY, NOTICE U/S 142(1) DATED 10.02.2014 WAS ISSUED CALLING UPON THE ASSESSEE COMPANY TO EXPLAIN AS TO WHY THE AFORESAID ENHANCEMENT SHOULD NOT BE MADE TO THE INCOME OF THE ASSESSEE CO MPANY AND IN COMPLIANCE THERETO, SHRI SANDEEP RASTOGI CA/AR OF T HE ASSESSEE APPEARED, FILED SUBMISSIONS AND REPLY. THE A.O. AFTER CONSID ERING THE SUBMISSIONS AND IN VIEW OF THE DETAILED REASONS MENTIONED IN TPOS ORDER DATED 27.12.2014 PROPOSED THE ADDITION OF RS.6,22,45,957/-/- TO THE INCOME OF THE ASSESSEE VIDE DRAFT ASSESSMENT ORDER U/S 254 / 143(3) READ U /S 144C DATED 13.03.2014. THE A.O. PASSED THE ASSESSMENT ORDER IN CONSONANCE WITH THE DIRECTIONS OF DRP /TPO AND ASSESSED THE INCOME OF THE ASSESSEE AT RS.8,61,79,070/-. NOW, THE ASSESSEE HAS COM E UP BEFORE THE TRIB UNAL ITA NO.1476/DEL/2015 4 AGAINST THE ORDER PASSED BY DRP CONFIRMING ORDER OF THE A.O. CHALLENGING THE TRANSFER PRICING ADJUSTMENT. 6. WE HAVE HEARD LD. AUTHORIZED REPRESENTATIVES OF BOTH THE PARTIES AND HAVE GONE THROUGH THE MATERIAL ON RECORD IN THE LIG HT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 7. AT THE VERY OUTSET, LD. D.R. HAS FAIRLY CONCEDED THAT EXCEPT GROUNDS NO.1.1, 1.2, 1.3, 1.4 AND 1.5 AND GROUND NO.2, REST OF THE GROUNDS ARE OF ACADEMIC IN NATURE AND NEED NO ADJUDICATION. UNDIS PUTEDLY, THE FACTS OF THIS CASE ARE INTER ALIA THAT THERE IS NO DISPUTE BETWEE N THE PARTIES TO THE APPEALS QUA THE EARLIER YEAR THAT THE METHOD SELECTED FOR T RANSFER PRICING IS ALSO NOT IN DISPUTE; THAT THE ASSESSEE COMPANY WAS SET UP IN AP RIL 1994 AND IS INTO THE BUSINESS OF ENGINEERING SUPPORT SERVICES IN RESPECT OF ENGINEERING DESIGN AND DRAWINGS, FOR VARIOUS AES TO SUPPORT OVERSEAS O FFICES ON TURNKEY PROJECT EXECUTION BASIS. THE TAXPAYER COMPANY ALSO ENTERED INTO INTERNATIONAL TRANSACTION AS UNDER: S.NO. NATURE OF TRANSACTION ARMS LENGTH PRICE AS PER TAXPAYER I PROVISION OF ENGINEERING SERVICES AND RELATING SERVICES RS.43.46 CORES II REIMBURSEMENT OF EXPENSES (PAID) RS.0.16 CRORES III REIMBURSEMENT OF EXPENSES (RECEIVED) RS.5.53 CR ORES 8. TO ASSESS THE INTERNATIONAL TRANSACTION REFERRED AT SL. NO.1 ABOVE, THE TAXPAYER HAD SELECTED 9 COMPARABLES IN THE TP STUDY OUT OF WHICH TPO REJECTED 8 COMPARABLES ON ACCOUNT OF USE OF CERTAIN FILTERS AND TPO COMPLYING WITH THE DIRECTION OF ITAT BY CONDUCTING FRESH SEARCH, SELECTED 7 NEW COMPARABLES (PROVIDING ENGINEERING DESIGNS AND DRAWINGS CONSULTANCY) AND AS SUCH, OUT OF THE TOTAL 8 COMPARABLES, CONSI DERED BY THE TPO, ONE ITA NO.1476/DEL/2015 5 COMPARABLE FROM TAXPAYER SET OF 7 NEW COMPANIES NOT ED DOWN WHOSE AVERAGE MARGIN WAS 32.47% AS AGAINST TAXPAYER (-6.7 7%). HENCE, THE A.O./TPO MADE AN ADDITION OF RS.13,67,89,416/-. 9. TPO ALSO FOUND THAT THE PAYMENTS FROM AES WERE N OT RECEIVED A PER THE TERMS OF SERVICE AGREEMENT AND A SUCH HELD THAT THE TAXPAYER HAD PROVIDED BENEFIT TO ITS AES BY WAY OF ADVANCING INT EREST FREE LOANS IN THE GARB OF DELAY OF RECEIPT OF RECEIVABLES. THERE WAS INTERNATIONAL TRANSACTION U/S 92B(1) READ WITH EXPLANATION (1)(C) AND AS SUCH TPO USED CUP METHOD BY TAKING A CREDIT OF CREDIT PERIOD OF 30 DAYS AND BY APPLYING LOADING RATE OF SBI+ 300 BASIS POINT DETERMINED AND UNDER THE RATE OF 14.88% TO BE THE ARMS LENGTH LEVEL AND INTEREST NEEDED TO BE CHARGED FOR THE DEEMED LOAN ADVANCED AND THUS MADE ADJUSTMENT OF RS.9,31,52,225 /-. 10. THE TAXPAYER CHALLENGED THE ORDER OF THE A.O. BEFORE DRP BY RAISING NUMEROUS OBJECTIONS DULY DETAILED IN PARA 4 OF THE IMPUGNED ORDER PASSED BY DRP. 11. THE FUNCTIONAL PROFILE OF THE COMPANY IS NOT AN ISSUE. THE ONLY DISPUTE RAISED BY THE APPELLANT IS OF EXCLUSION OF COMPARABLES ADOPTED BY THE TAXPAYER / APPELLANT IN ITS TRANSFER PRICING AN D INCLUSION OF COMPARABLES BY THE TPO / DRP WITHOUT ANY FUNCTIONAL COMPARABLES . 12. UNDISPUTEDLY, OUT OF 9 COMPARABLES ADOPTED BY T HE APPELLANT IN THE TP STUDY, TPO HAS REJECTED 8 COMPARABLES ON ACCOUNT OF USE OF CERTAIN FILTERS AND TPO ADOPTED 7 NEW COMPARABLES ON THE BASIS OF H IS STUDY AND CAME TO THE CONCLUSION THAT AVERAGE MARGIN OF 8 COMPARABLES WAS 32.47% AS AGAINST TAXPAYER (-) 6.77% THUS MADE AN ADDITION OF RS.1,36 ,78,946/-. 13. LD. A.R. CONTENDED THAT TPO HAS NOT CONSIDERED THE TP STUDY /DETAILED SUBMISSIONS AND WORKING OF EVIDENCES PROV IDED DURING THE TP ITA NO.1476/DEL/2015 6 ASSESSMENT PROCEEDINGS WHO HAS CONSIDERED THE FINAL SET OF COMPARABLES BASED ON THE APPLICATION OF ADDITIONAL / MODIFIED F ILTERS. THE FINAL COMPARABLE ADOPTED BY THE TPO, LYING AT PAGE 184 OF THE APPEAL FILE REPRODUCED AS UNDER FOR READY REFERENCE: 4.9. THE FINAL COMPARABLES THEREFORE ARE AS UNDER : S.N. COMPANY NAME OP/OC 1 HSCC (INDIA) LTD 104.49 2 HOLTEC CONSULTING PVT. LTD. 11.97 3 1L & FS EDUCATION & TECHNOLOGY SERVICES LTD. 11.2 2 4 IL & FS TRANSPORTATIN NETWORKS LTD 51.29 5 RITES LTD. 30.7 6 STUP CONSULTANTS PVT. LTD. 19.36 7 TCE CONSULTING ENGINEERS LTD. 11.79 8 WAPCOS LTD 18.95 AVERAGE 32.47 FOREIGN EXCHANGE FLUCTUATION HAS BEEN CONSIDERED T O BE NON- OPERATING EXPENSES FOR THE DETAILED REASONS GIVEN A BOVE. AS PER SUBMISSIONS DATED 03.08.2006, THE FOREIGN EXCHANGE FLUCTUATION LOSS AMOUNTS TO RS.2,99,75,931/- WHICH IS CONSIDERED AS NON OPERATING IN NATURE. THE OPERATING COST AS SUBMITTED BY THE TAX PAYERS VIDE ITS LETTER DATED 30.08.2006 IS RS.46,51,39,145/-. THIS IS REDUCED BY FOREIGN EXCHANGE LOSS OFRS.2,99,75,931/-. THE OPER ATING COST THEREFORE WORKS OUT TO RS.43,51,63,214/-. 4.10 COMPUTATION OF ARMS LENGTH OPERATING COST 435163214 ARMS LENGTH MARGIN (%) 32.47% ARMS LENGTH PRICE (ALP) 576460710 PRICE RECEIVED 439671294 SHORTFALL BEING ADJUSTMENT U/S 92CA 136789416 14. TPO MADE THE FINAL TP ADJUSTMENT AS UNDER: ITA NO.1476/DEL/2015 7 S . N . NATURE OF INTERNATIONAL TRANSACTION APPELLANTS MARGIN (OP/TOTAL COST) REFER PAGE 152 OF PAPER BOOK ARMS LENGTH MARGIN DETERMINED BY LD. TPO (REFER PAGE 184 OF APPEAL SET) ADJUSTMENT U/S 92CA (IN INR CRORES) (REFER PAGE 198 OF APPEAL SET) 1 PROVISION OF ENGINEERING DESIGN AND RELATED SERVICES 1.04% 32.47% 13.67 2 N.A. 9.31 TOTAL N.A. 22.99 15. WHEN THE MATTER CAME UP BEFORE LD. DRP FOR ADJU DICATION, IT HAS SELECTED THE COMPARABLES ADOPTED BY THE TPO EXCEPT TWO COMPARABLES; HSCC INDIA LTD. (SELECTED BY TPO) AND STEWARDS ALCA TEL INDIA LTD. (SELECTED BY APPELLANT). 16. IN COMPLIANCE TO THE DECISION MADE BY LD. DRP, THE A.O. ISSUED THE FINAL ORDER. IN ACCORDANCE WITH THE DIRECTIONS TO REVISE ARMS LENGTH TRANSACTION DETERMINED BY A.O. AT 15.34% AND ACCORD INGLY MADE TP ADDITION AMOUNTING TO RS.6,22,45,957/- ON THE BASIS OF FINAL SET OFF OF COMPARABLES ADOPTED BY HIM WHICH ARE REPRODUCED AS UNDER: S.N. COMPANY NAME WORKING CAPITAL ADJUSTMENT (OP/TOTAL COST) % 1 HOLTEC CONSULTING PVT. LTD. 15.26 2 1L & FS EDUCATION & TECHNOLOGY SERVICES LTD. 12.6 9 3 I L & FS TRANSPORTATION NETWORKS LTD 50.86 4 RITES LTD. 31.88 5 STUP CONSULTANTS PVT. LTD. 18.77 6 TCE CONSULTING ENGINEERS LTD. 12.28 7 WAPCOS LTD 17.95 8 UB ENGINEERING LTD 1.07 9 L&T SARGENT & LUNDY LTD. -11.75 10 TATA PROJECTS LTD. 4.40 MEAN 15.34 ITA NO.1476/DEL/2015 8 17. LD. A.R. CHALLENGING THE IMPUGNED ORDER CONTEND ED THAT DRP HAS ADOPTED THE COMPARABLES WHICH WERE FUNCTIONALLY ALT OGETHER DIFFERENT AS COMPARED TO THE TAXPAYER EDS SEGMENT, WHICH ARE DIS CUSSED AS UNDER: COMPANIES SELECTED IN THE FINAL ORDER APPELLANTS CONTENTIONS REMARKS IL & FS TRANSPORTATION NETWORKS LTD. THE COMPANY IS INVOLVED IN SURFACE TRANSPORT BUSINESS. IT ACTS AS DEVELOPER, OPERATOR AND FACILITATOR OF SURFACE TRANSPORT INFRASTRUCTURE PROJECT FROM CONCEPTUALIZATION TO OPERATION. IT IS ALSO INVOLVED IN OPERATION AND MAINTENANCE OF TOLLS AND COLLECTION OF TOLLS THE APPELLANT IS INVOLVED IN ENGINEERING DESIGNS AND DRAWINGS FOR VARIOUS OVERSEAS AES TO SUPPORT THE OVERSEAS OFFICES TURNKEY PROJECTS EXECUTION. THE BUSINESS OF THE COMPARABLE IS SIGNIFICANTLY DIFFERENT FROM THE BUSINESS OF THE APPELLANT. 18. THE TAXPAYER FILED DETAILED OBJECTIONS TO THE D IFFERENT ORDERS AGAINST INCLUSION OF AFORESAID COMPANY AS COMPARABLE, THE C RUX OF THE SAME IS LYING AT PAGES 67-72 OF THE APPEAL SET. IL & FS TRANSPOR TATION NETWORKS LTD. IS ENGAGED IN THE SURFACE TRANSPORT BUSINESS, WORKING AS DEVELOPER, OPERATOR AND FACILITATOR OF SURFACE TRANSPORT INFRASTRUCTURE PROJECT FROM CONCEPTUALIZATION TO OPERATION. IT IS ALSO INVOLVE D IN OPERATION AND MAINTENANCE OF TOLLS AND COLLECTION OF TOLLS, WHERE AS APPELLANT COMPANY IS UNDISPUTEDLY INVOLVED IN ENGINEERING DESIGN AND DRA WINGS FOR VARIOUS OVERSEAS AES TO SUPPORT OVERSEAS OFFICES TURNKEY PR OJECT EXECUTION. SO THE BUSINESS OF COMPARABLES IS INHERENTLY DIFFERENT FRO M THE BUSINESS OF THE APPELLANT AND AS SUCH, CANNOT BE ADOPTED FOR TP. I L & FS TRANSPORTATION NETWORKS LTD. TAKEN AS COMPARABLE BY THE TPO/DRP HA S TO BE EXCLUDED HAVING BEEN ENGAGED IN DIFFERENT BUSINESS. ITA NO.1476/DEL/2015 9 19. RITES LTD., TAKEN AS COMPARABLE BY DRP/TPO: THE TAXPAYER FILED DETAILED OBJECTIONS TO THE DIFFERENT ORDERS AGAINST INCLUSION OF AFORESAID COMPANY AS COMPARABLE. THE CRUX OF THE SAME IS LYI NG AT PAGES 73-75 OF THE APPEAL SET. MAJOR OBJECTION RAISED BY THE TAXPAYER IS THAT THE COMPARABLE COMPANY IS ENGAGED IN PROVIDING SERVICES IN THE ARE AS OF ENGINEERING CONSULTANCY, TRAFFIC STUDIES, EXPORTS OF LOCOMOTIVE S AND MAINTENANCE OF THE LOCOMOTIVES, CONSTRUCTION AND PROJECT MANAGEMENT FO R RAILWAY TRACK, ELECTRIFICATION TOGETHER WITH TRAFFIC AND SOFTWARE CONSULTANCY ASSIGNMENTS. MORE SO, ITS INCOME FROM NON CONSULTANCY SERVICES I S LESS THAN 75% AND THIS FILTER IS APPLIED BY THE TPO HIMSELF. 20. ON OTHER HAND, THE APPELLANT COMPANY IS ENGAGED IN ENGINEERING DESIGN AND DRAWING FOR VARIOUS OVERSEAS AES TO SUPP ORT OVERSEAS OFFICES ON TURNKEY PROJECT EXECUTION BASIS. SIMILARLY, THE CO ST OF EXPORT SALES AND SUPPLY SERVICES CONSTITUTES MERELY 35.86% OF THE TO TAL COST. SO KEEPING IN VIEW THE FACT THAT COMPARABLE COMPANY I.E. RITES LT D. TAKEN BY TPO IS FUNCTIONALLY DISTINCTIVE HAVING BEEN ENGAGED IN THE AREA OF ENGINEERING CONSULTANCY, TRAFFIC STUDIES, EXPORT OF LOCOMOTIVES AND MAINTENANCE OF THE LOCOMOTIVES, CONSTRUCTION AND PROJECT MANAGEMENT FO R RAILWAY TRACK, ELECTRIFICATION TOGETHER WITH TRAFFIC AND SOFTWARE CONSULTANCY ASSIGNMENTS AS AGAINST, THE APPELLANT COMPANY WHICH IS ENGAGED IN ENGINEERING DESIGN AND DRAWING FOR VARIOUS OVERSEAS AES TO SUPPORT OVERSEA S OFFICES ON TURNKEY PROJECT EXECUTION BASIS. 21. THE APPELLANT ALSO SOUGHT EXCLUSION OF ENGINEER S INDIA LTD., A GOVERNMENT COMPANY FORM THE LIST OF COMPARABLES ON THE GROUND THAT PROFIT MOTIVE IS NOT RELEVANT CONSIDERATION IN CASE OF GOV ERNMENT UNDERTAKINGS BY RELYING ON THE JUDGEMENTS CITED AS M/S. THYSSEN KRU P INDUSTRIES INDIA PVT. ITA NO.1476/DEL/2015 10 LTD. IN I.T.A. NO. 6460/MUM/2012 NEW DELHI M/S. AVA YA INDIA PRIVATE LTD. IN I.T.A. NO. 5150/DEL/2010 (SUPRA) AND CONTENDED T HAT THE GOVERNMENT COMPANIES CANNOT BE TAKEN AS COMPARABLES FOR TP BY FOLLOWING THE LAW LAID DOWN BY HON'BLE JURISDICTIONAL HIGH COURT IN M/S. A VAYA INDIA PVT. LTD. AND M/S. THYUSSEN KRUPP INDUSTRIES INDIA PVT. LTD. (SUPRA). THE GOVERNMENT UNDERTAKINGS CAN EVEN OPERATE ON LOSSES IN FURTHERANCE OF SOCIAL OBJECTIVES OF THE GOVERNMENT. BY RELYING ON THE JU DGEMENT SUPRA AS WELL AS ON FUNCTIONAL DISPARITY BETWEEN AFORESAID COMPARABL E COMPANY AND THE APPELLANT COMPANY, THIS COMPANY IS ORDERED TO BE EX CLUDED FROM THE LIST OF COMPARABLES. 22. REGARDING GROUND NO.1 READ WITH GROUND NOS. 1.1 , 1.2, 1.3, 1.4, 1.5 AND GROUND NO.2, LD. A.R. CONTENDED THAT THE TPO/ D RP HAS ARBITRARILY REJECTED THE FUNCTIONALLY COMPARABLE COMPANIES NAME LY STEEWARDS LLOYED INDIA LTD. FOR TP. TPOS COMMENTS FOR REJECTION OF AFORESAID COMPANIES ARE LYING AT PAGES 47-48 OF THE APPEAL SET. TPO HAS RE JECTED THE COMPANIES ON THE SOLE GROUND THAT THESE COMPANIES FALL IN SERVIC E FILTER AND HAS SERVICE INCOME TO SALES INCOME RATIO OF LESS THAN 75% WHERE AS A BARE PERUSAL OF THE AUDITED FINANCIAL STATEMENT OF THE COMPANY FOR THE YEAR ENDING 31.03.2004 LYING AT PAGE 48 OF APPEAL SET GOES TO PROVE THAT T HIS COMPANY HAS SERVICE INCOME TO SALE IS MORE THAN 75% I.E. 93.82%; HENCE ARBITRARILY REJECTED BY THE TPO/ DRP. SO, M/S. STEEWARDS LLOYED INDIA LTD. QUALIFIES FOR ADOPTION AS COMPARABLE FOR TRANSFER PRICING. ACCORDINGLY, G ROUNDS NO.1 READ WITH GROUNDS 1.1, 1.2, 1.3 , 1.4 AND GROUND NO.2 ARE DET ERMINED IN FAVOUR OF THE APPELLANT FOR STATISTICAL PURPOSES. SO, THE FILE I S ORDERED TO BE RESTORED TO THE TPO TO PASS AFRESH SPEAKING ORDER AFTER PROVIDING O PPORTUNITY OF BEING HEARD TO THE PARTIES. ITA NO.1476/DEL/2015 11 23. REGARDING GROUND NO.2 READ WITH GROUND NO.1.6, LD. A.R. HAS CONTENDED THAT TPO/DRP HAS ERRED IN DENYING THE ADJ USTMENT OF COMPLETE UTILIZATION AS WELL AS RISK ADJUSTMENT WHILE WORKIN G ON AVERAGE MATCHING OF COMPARABLES. RULE 10B(3) READ WITH RULE 10B(1)(E) CLARIFIES THAT APPROPRIATE ADJUSTMENT SHOULD BE MADE TO ELIMINATE MATERIAL EFFECT OF DIFFERENCE BETWEEN THE INTERNATIONAL TRANSACTION AN D THE COMPARABLE TRANSACTION TO ESTABLISH COMPARABILITY. DRP IN PAR A 8.2.6 OF THE IMPUGNED ORDER WRITTEN ITS FINDINGS FOR DENYING THE CAPITAL UTILIZATION ADJUSTMENT AS WELL AS RISK ADJUSTMENT, WHICH ARE AS UNDER: 8.2.6 WITH REGARD TO THE ISSUE OF ADJUSTMENT SOUGH T ON ACCOUNT OF RISK AND IDLE CAPACITY UTILIZATION, HAVING GONE THR OUGH THE TAXPAYER'S SUBMISSION AND CONSIDERING THE FACTS AND EVIDENCES ON RECORDS AND CASE LAWS RELIED UPON BOTH BY THE TPO AND TAXPAYER IN THIS REGARD, THIS DRP AGREES THAT FOR THE PURPOSE OF MEANINGFUL COMPARISON, TRANSFER PRICING PROVISIONS DO PRESCRIBE THAT THE. 'REASONABLE AND ACCURATE ADJUSTMENTS' BE MADE ONLY FOR THE ENHANCE COMPARABILITY. BUT AT THE SAME TIME SUCH DATA MUST BE RELIABLE AND ROBUST AND THERE SHOULD BE NO SCOPE FOR MECHANICAL ADJUSTMENTS. THE PANEL HAS CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE SUBMISSIONS OF THE TAXPAYER. AS PER RULE 10B(2) AND 10B(3) OF INCOME TAX RULES, 1962, INDIAN TRANSFER PRICING PROVISIONS PRESCRIBE ONLY FOR 'REASONABLE ACCURATE ADJUSTMENT' AND FURTHER ADJUST MENT TO THE MARGINS OF COMPARABLES CAN BE MADE ONLY IF THEY ENH ANCE COMPARABILITY. BUT AT THE SAME TIME THE DATA FOR TH E SAME MUST BE RELEVANT RELIABLE AND. ROBUST. RISK ADJUSTMENT AS A GENERAL RULE CANNOT BE ALLOWED UNLESS IT IS CLEARLY SHOWN THAT T HE COMPARABLES HAD ACTUALLY UNDERTAKEN SUCH RISK AND HOW THE SAME MATE RIALLY AFFECTED THEIR MARGINS. THE REVISED OECD GUIDELINES OF.2010 HAS ALSO STATED. IN PARA 3.54 AS UNDER:- 'ENSURING THE NEEDED LEVEL OF TRANSPARENCY OF COMPA RABILITY ADJUSTMENTS MAY DEPEND UPON THE AVAILABILITY OF AN EXPLANATION OF ANY ADJUSTMENTS PERFORMED THE REASONS FOR THE ADJUS TMENTS BEING CONSIDERED APPROPRIATE HOW THEY WERE CALCULATED HOW THEY CHANGED THE RESULTS FOR EACH COMPARABLE AND HOW THE ADJUSTM ENT IMPROVES ITA NO.1476/DEL/2015 12 COMPARABILITY. ISSUES REGARDING DOCUMENTATION OF CO MPARABILITY ADJUSTMENTS ARE DISCUSSED IN CHAPTER V.' EVEN THE VARIOUS JUDICIAL DECISIONS ON THE ISSUE OF ADJUSTMENTS AND EVEN OECD GUIDELINES, IMPRESSES UPON TIME AND AGAIN THAT THE ADJUSTMENT SHOULD BE 'REASONABLE ACCURATE ADJUSTMEN T'. FROM THE ABOVE GUIDELINES, IT CAN BE SEEN THAT UNLE SS IT IS SHOWN THAT HOW THE RISK ADJUSTMENT WOULD CHANGE THE RESULT OF EACH COMPARABLE AND HOW THE SAME WOULD IMPROVE THE COMPARABILITY AN D UNLESS ADEQUATE REASONS ARE GIVEN FOR SUCH ADJUSTMENTS, NO ADJUSTMENT CAN BE ALLOWED TO THE TAXPAYER. IN THE PRESENT CASE, EX CEPT POINTING OUT VARIOUS RISKS, THE TAXPAYER HAS NOT SHOWN WITH EVID ENCE AS TO WHETHER EACH OF THE RISK WAS ACTUALLY UNDERTAKEN OR NOT BY THE COMPARABLES AND IF SO HOW THESE RISKS AFFECTED EACH OF THEM AND WHETHER SUCH ADJUSTMENT WOULD IMPROVE THE COMPARABILITY. FURTHER IN RESPECT OF COMPARABLES NO DATA IS 'MADE AVAILABLE TO SHOW AT W HAT CAPACITY THEY ARE OPERATING AT AND WHAT IS THE AVERAGE STRENGTH O F THE EMPLOYEES ON ACCOUNT OF WHICH CAPACITY ADJUSTMENT SHOULD BE CARR IED OUT TO IMPROVE THE COMPARABILITY ANALYSIS. MECHANICAL ADJU STMENT CANNOT BE MADE TO THE MARGINS OF THE COMPARABLES WITHOUT KNOW ING WHICH RISKS WERE TAKEN BY THE ENTITY CONCERNED AND HOW ITS PROF ITABILITY WAS AFFECTED. PROBABILITY OF RISK AND CERTAINTY OF RISK ARE TWO DIFFERENT ASPECTS AND CANNOT BE EQUATED FOR THE PURPOSE OF AD JUSTMENTS. THE SIGNIFICANT OF RISK DEPENDS ON ITS ECONOMIC SIGNIFI CANCE, LIKELIHOOD OF ITS REALIZATION AND 'PREDICTABILITY. ALL' THESE REQ UIRES ROBUST AND RELIABLE DATA, BOTH FOR THE TAXPAYER' AND THE COMPA RABLES IN THE ABSENCE OF WHICH RISK AND CAPACITY ADJUSTMENTS CANN OT BE CONSIDERED FOR ENHANCING COMPARABILITY. 24. BARE PERUSAL OF THE FINDINGS RETURNED BY TPO/DR P REPRODUCED ABOVE DENYING THE BENEFIT OF CAPITAL UTILIZATION ADJUSTME NT AND RISK ADJUSTMENT GOES TO PROVE THAT THE OBJECTION RAISED BY THE TAX PAYER HAVING BEEN MECHANICALLY DISPOSED OFF WITHOUT RETURNING THE SPECIFIC FINDING S AS TO HOW AND UNDER WHAT CIRCUMSTANCES, THE DATA BROUGHT ON RECORD IS N OT RELIABLE OR ROBUST. TPO/DRP HAS NEITHER DECLARED THE DATA BROUGHT ON RE CORD BY THE TAXPAYER AS ITA NO.1476/DEL/2015 13 UNRELIABLE NOR THEY HAVE INJECTED FRESH DATA TO ASS ESS THE CAPITAL UTILIZATION ADJUSTMENT AND RISK ADJUSTMENT AS CLAIMED BY THE TA XPAYER. A PERUSAL OF THE DISCUSSION MADE BY DRP REGARDING DISALLOWANCE OF UT ILIZATION ADJUSTMENT AND RISK ADJUSTMENT IN PARA 8.2.6 FURTHER GOES TO P ROVE THAT MERELY ACADEMIC REASONS HAVE BEEN GIVEN TO DISALLOW THE SAME. CASE LAW RELIED UPON BY THE DRP IS NOT APPLICABLE TO THE FACTS AND CIRCUMSTANCE S OF THE CASE WHEN EXAMINED IN THE LIGHT OF DATA BROUGHT ON RECORD BY THE TAXPAYER TO DECIDE THE ISSUE IN CONTROVERSY. SO, FINDINGS OF DRP/TPO ON T HIS ISSUE ARE LIABLE TO BE REVERSED. CONSEQUENTLY, GROUND NO.2 READ WITH GROU ND NO.1.6 ARE DETERMINED IN FAVOUR OF THE APPELLANT FOR STATISTIC AL PURPOSES AND THE FILE IS ORDERED TO BE RESTORED TO THE TPO TO DECIDE THE MAT TER AFRESH BY PASSING SPEAKING ORDER AFTER PROVIDING OPPORTUNITY OF BEING HEARD TO THE PARTIES. 25. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, APPEA L FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 26. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH 2015. SD./- SD./- ( J. S. REDDY) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 20.11. 2015 SP COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DEL HI. TRUE COPY. BY ORDER (ITAT, NEW DELHI). ITA NO.1476/DEL/2015 14 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 2/11 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 2,20,20/11 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 20/11/15 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 20/11 SR. PS/PS 7 FILE SENT TO BENCH CLERK 26/11 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER ITA NO.1476/DEL/2015 15 BARE PERUSAL OF THE FINDINGS RETUNED BY TPO/DRP DEN YING THE BENEFIT OF CAPITAL UTILIZATION ADJUSTMENT AND RISK ADJUSTMENT GOES TO PROVE THAT THE OBJECTIONS RAISED BY THE TAXPAYER HAVE BEEN MECHANI CALLY DISPOSED OFF WITHOUT RETURNING THE SPECIFIC FINDINGS AS TO HOW T HE DATA BROUGHT ON RECORD IS NOT RELIABLE AND ROBUST (BOTH FROM THE TAXPAYER AND COMPARABLE IN THE ABSENCE OF WHICH RISK AND CORPORATE ADJUSTMENT CANN OT BE CONSIDERED FOR ENHANCING THE COMPARABILITY. NEITHER THE DATA BROU GHT ON RECORD BY THE TAXPAYER HAS BEEN DECLARED RELIABLE NOR THE DATA HA S BEEN INJECTED BY THE TPO/DRP TO ASSESS THE CORPORATE UTILIZATION ADJUSTM ENT AND RISK ADJUSTMENT AS CLAIMED BY THE TAXPAYER. SO, GROUND NO.1 READ W ITH GROUND NO.1.6 ARE DETERMINED IN FAVOUR OF THE APPELLANT FOR STATISTIC AL PURPOSE AND THE FILE IS ORDERED TO BE RESTORED TO THE TPO TO DECIDE THE MAT TER AFRESH BY PASSING S PEAKING ORDER B PROVIDING OPPORTUNITY OF BEING HEAR D TO THE PARTIES.