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

ITA 1477/DEL/2015

• Counselvise Citation: 147720114 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: 2005-2006
• Appeal Filed On: 13-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANUPAMA ANAND
• Assessee Lawyers: RAHUL K MITRA
• Keywords: Business income; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 244A; 6; 92

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.1477 /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 PRIVATE LIMITED, BY FILING THE PRESENT APPEAL U/S 253(1) OF I. T. ACT, 1961 (HEREINAFTER R EFERRED AS THE ACT) SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 30.01.2015 U/ S 254/143(3) READ WITH SECTION 144C PASSED IN CONSONANCE WITH THE DIRECTIO NS OF DRP I, MAKING ADDITION TO THE TUNE OF RS.8,63,90,740/- ON ACCOUN T OF RAISING INCOME AS A CONSEQUENCE OF TPO/DISPUTE RESOLUTION PANEL-I (DRP) U/S 92C(3) OF THE ACT, WHICH IS SECOND ROUND OF LITIGATION QUA THE AS SESSMENT YEAR 2005-06. 2. INITIALLY, IN CONSONANCE WITH THE ORDER DATED 15 .09.2008 PASSED BY TPO MAKING AN ADDITION OF RS.9.36 CRORES WAS MADE B Y MAKING TRANSFER ITA NO1477/DEL/2015 2 PRICING ASSESSMENT, WHICH WAS CHALLENGED BEFORE LD. CIT(A) WHO HAS PARTLY ALLOWED APPEAL. FEELING AGGRIEVED, THE REVENUE FIL ED APPEAL BEFORE HONBLE ITAT, WHICH HAS RESTORED THE CASE BACK TO THE TPO F OR DETERMINING THE ALP AFRESH BY TREATING THE COMPANY TO BE INVOLVED IN TH E BUSINESS OF ENGINEERING DESIGN AND DRAWING. IN COMPLIANCE TO THE ORDER DAT ED 22.12.2012 PASSED BY THE TRIBUNAL AND IN CONSONANCE WITH THE DIRECTIONS MADE BY TPO/DRP, A.O. MADE AN ADDITION OF RS.8,63,90,740/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 2. FEELING AGGRIEVED, THE ASSESSEE HAS AGAIN COME U P BEFORE THE TRIBUNAL AND SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 31 .01.2015 PASSED BY THE A.O. U/S 254/143(3) READ WITH SECTION 144C OF THE ACT ON THE GROUNDS INTER ALIA THAT: 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO 1 LD. TRANSFER PRICING OFFICER ('TPO') / LD. DIS PUTE RESOLUTION PANEL ('DRP') ERRED IN MAKING AN ADDITION OF INR 9, 22,55,795/- TO THE RETURNED INCOME OF THE APPELLANT BY RE-COMPUTIN G THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS UNDER SECTI ON 92 OF THE ACT. THUS, IN PASSING THE ORDER, THE LD. AO / LD. TPO / LD. DRP ERRED IN: 1.1 REJECTING THE COMPARABLE COMPANIES ADOPTED BY THE APPELLANT IN ITS TRANSFER PRICING DOCUMENTATION ON THE BASIS OF ADDITIONAL/MODIFIED QUANTITATIVE FILTERS WHICH LACK ED VALID AND SUFFICIENT REASONING. 1.2 ACCEPTING COMPANIES WHICH WERE FUNCTIONALLY NO T COMPARABLE TO THE APPELLANT. 1.3 INCLUDING COMPANIES WITH HIGH/SUPERNORMAL MARGI NS AS COMPARABLES. 1.4 INCLUDING GOVERNMENT HELD ENTERPRISES AS COMPAR ABLES. ITA NO1477/DEL/2015 3 1.5 NOT CONSIDERING THE CORRECT COMPUTATION OF OPER ATING MARGINS OF CERTAIN COMPARABLES. 1.6 DENYING THE BENEFIT OF ECONOMIC ADJUSTMENTS ON ACCOUNT OF IDLE CAPACITY AND DIFFERENCE IN RISK PROFILE IN ARRIVING AT THE ARM'S LENGTH MARGIN. 1.7 IN SELECTING THE CURRENT YEAR (I.E. FINANCIAL Y EAR 2004-05) DATA FOR COMPARABILITY DESPITE THE FACT THAT AT THE TIME OF PREPARATION OF TRANSFER PRICING DOCUMENTATION BY, THE APPELLANT, T HE COMPLETE DATA FOR FINANCIAL YEAR 2004-05 WAS NOT AVAILABLE WITHIN THE PUBLIC DOMAIN. 2. THAT WITHOUT PREJUDICE TO THE ABOVE, IF COMPARAB LES SELECTED THE LD. AO/TPOIDRP THAT DO NOT MEET THE PARAMETERS OF F UNCTIONAL COMPARABILITY ARE ACCEPTED, THEN THE COMPARABLES SE LECTED BY THE APPELLANT THAT WERE REJECTED BY LD. AO/TPO/DRP ON A CCOUNT OF FUNCTIONAL COMPARABILITY MUST ALSO BE ACCEPTED. 3. THAT FURTHER WITHOUT PREJUDICE TO THE ABOVE, BAS ED ON THE FACTS OF THE CASE AND IN LAW, THE APPELLANT'S INCOME CANN OT BE ENHANCED BY MORE THAN THE INCOME DETERMINED BY THE LD. AO IN TH E ORIGINAL ASSESSMENT ORDER U/S 143(3) OF THE ACT AS A CONSEQU ENCE OF THE DIRECTIONS GIVEN BY HON'BLE ITAT. 4. THAT THE LD. AO HAS ERRED IN CHARGING INTEREST U NDER SECTION 234B, 234D AND 244A OF THE ACT AMOUNTING TO INR 1,5 7,74,232. 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PRO CEEDINGS UNDER SECTION 271 (1)( C) OF THE ACT. 3. BRIEFLY STATED, THE FACTS OF THIS CASE ARE: THE ASSESSEE COMPANYS BUSINESS SET UP IN APRIL 1994 TO RENDER ENGINEERING SUPPORT SERVICES IN RESPECT OF ENGINEERING DESIGN AND DRAWINGS FOR VARI OUS OVERSEAS AES TO SUPPORT THE OVERSEAS OFFICES ON TURNKEY PROJECT EXE CUTION BASIS. DURING THE YEAR UNDER ASSESSMENT, THE ASSESSEE IN ORDER TO BEN CHMARK THE INTERNATIONAL ITA NO1477/DEL/2015 4 TRANSACTION, HAS ADOPTED TNMM PLI: OP/OR METHOD AS MOST APPROPRIATE METHOD IN ORDER TO BENCHMARK THE INTERNATIONAL TRAN SACTION SHOWING HIS PLI @ 3.71% AND MAKING THE COMPARABLES IN TP STUDY @ -5 .17% IN ENGINEERING DESIGN AND RELATED SERVICES (EDS). THE TPO AND THE A.O. BOTH HAVE ACCEPTED THE TNMM WITH PLI PERCENTAGE OF OP/OR AS A PLI AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATION AL TRANSACTION. HOWEVER, THE APPELLANT HAS OPTED MULTIPLIER DATA IN ACCORDANCE WITH RULE 10B(IV) OF RULE OF OECD GUIDELINES WHILE BENCHMARKI NG THE INTERNATIONAL TRANSACTION. HOWEVER LD. TPO AND A.O. DIFFERED WIT H THE ASSESSEE IN ADOPTING COMPARABLES FOR TRANSFER PRICING (TP). TH E TPO EXCLUDED COMPARABLES ADOPTED BY THE ASSESSEE FOR SELECTING P ROPER COMPARABLES FUNCTIONALLY SIMILAR TO THAT OF THE ASSESSEE COMPAN Y BY FOLLOWING FILTERS WITH CRITERIA INTER ALIA THAT COMPANIES WHOSE DATA IS NO T AVAILABLE FOR THE FINANCIAL YEAR 2004-05; THAT COMPANIES WHOSE ENGINEERING DESI GN AND DRAWING CONSULTANCY SERVICE IS LESS THAN RS.5 CRORES; THAT COMPANIES WHOSE REVENUE AND ENGINEERING DESIGN AND DRAWING IS LESS THAN 75% OF TOTAL OPERATING REVENUE; THAT COMPANIES HAVING MORE THAN 25% RELATE D PARTIES TRANSACTION OF INCOME, HAVE BEEN EXCLUDED AND COMPANIES HAVING DIF FERENT FINANCIAL YEAR ENDING (I.E. MARCH 31 ST , 2004) AND DATA OF THE COMPANY DOES NOT FALL 12 MONTHS PERIOD I.E. 01.04.2003 TO 31.03.2004, THAT T HE COMPANIES WHICH ARE FUNCTIONALLY DIFFERENT FROM THE TAXPAYER AND THAT T HE COMPANIES WHICH ARE HAVING PECULIAR ECONOMIC CIRCUMSTANCES, HAVE ALSO B EEN EXCLUDED. 4. THE TPO OFFERED ON THE BASIS OF AFORESAID FILTER S/CRITERIA, SELECTED 5 COMPANIES AS FINAL COMPARABLES, WHICH ARE TABULATED BELOW: ITA NO1477/DEL/2015 5 COMPANY NAME OP/OC HSCC (INDIA) LTD 50.64 HOLTEC CONSULTING PVT. LTD. 36.01 NTPC ELECTRIC SUPPLY CO. LTD. 3.5 RITES LTD. 34.19 TCE CONSULTING ENGINEERS LTD. 22.95 AVERAGE 29.46 YOUR CLAIM FAR ADJUSTMENT ON ACCOUNT OF IDLE CAPAC ITY IS NOT ACCEPTABLE AS IT IS NOT IN COMPLIANCE WITH RULE L0B (3). FOREIGN EXCHANGE FLUCTUATION HAS BEEN CONSIDERED T O BE NON- OPERATING EXPENSES IN VIEW OF RECENTLY ISSUE SAFE HARBOR GUIDELINES. AS PER DETAILS FILED THE FOREIGN EXCHAN GE FLUCTUATION LOSS AMOUNTS TO RS.29,00,000/- WHICH IS CONSIDERED TO BE NON OPERATING IN NATURE. THE OPERATING COST AS SUBMITTED IS RS.46051 4088 WHICH IS REDUCED BY FOREIGN EXCHANGE LOSS OF RS.29,00,000/-. THIS AMOUNTS TO RS.457614088. OPERATING COST 457614088 ARMS LENGTH MARGIN (%) 29.46 ARMS LENGTH PRICE (ALP) 592427198 PRICE RECEIVED 457933623 SHORTFALL BEING ADJUSTMENT U/S 92CA 134,493,575 THE ABOVE SHORTFALL OF RS. 134,493,575 IS BEING PRO POSED AS AN ADJUSTMENT TO THE PRICE SHOWN BY THE TAXPAYER IN IT S BOOKS OF ACCOUNT. 5. SO, THE TPO AFTER REJECTING THE APPROACH FOLLOWE D BY ASSESSEE IN TP STUDY DURING THE COURSE OF TP ASSESSMENT PROCEEDING S PASSED ON BENEFIT OF WORKING CAPITAL ADJUSTMENT, ECONOMIC ADJUSTMENT IN ARRIVING AT THE ARMS LENGTH TRANSACTION. HOWEVER ON THE OTHER HAND, TPO HAS MADE THE ADJUSTMENT ON ACCOUNT OF OUTSTANDING RECEIVABLES FR OM THE AE AND ALSO MADE THE FINAL TP ADJUSTMENT AS UNDER:- ITA NO1477/DEL/2015 6 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 0.07% 29.46% 13.45 2 OVERDUE RECEIVABLES N.A. 8.64 TOTAL N.A. 22.08 TREATING FOREIGN EXCHANGE FLUCTUATION AS NON-OPERA TING. 6. THE ASSESSEE CARRIED THE MATTER BEFORE LD. DISPU TE RESOLUTION PANEL (DRP). LD. D.R. PROCEEDED TO INCLUDE IN THE FINAL COMPARABLE SET, THE COMPARABLES SELECTED BY THE TPO AND IN ADDITION REJ ECTED THE THREE COMPARABLES; HSCC (INDIA) LTD., NTPC ELECTRIC SUPP LY LTD. AND STEWARDS & LLOYDS OF INDIA LTD. ADOPTED BY THE APPELLANT. I N CONSONANCE WITH THE DIRECTIONS ISSUED BY DRP, A.O. PASSED THE REVISED A RMS LENGTH TRANSACTION DETERMINED AS 20.23% AND CONSEQUENTLY, MADE TRANSFE R PRICING BY ADDING AN AMOUNT OF RS.9,22,55,795/-. 7. WE HAVE HEARD LD. AUTHORIZED REPRESENTATIVES OF BOTH THE PARTIES AND HAVE GONE THROUGH THE MATERIAL PLACED ON RECORD IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. 8. AT THE VERY OUTSET, LD. A.R. CONTENDED THAT EXCE PT GROUND NO.1 READ WITH GOURDS 1.1, 1.2, 1.3 , 1.4 AND 2, REST OF THE GROUNDS ARE OF ACADEMIC NATURE AND AS SUCH NEED NO ADJUDICATION. 9. IN CONSONANCE WITH THE DIRECTIONS PASSED BY LD. TPO/DRP, A.O. HAS ADOPTED THE FOLLOWING FINAL COMPARABLES: ITA NO1477/DEL/2015 7 S.NO. COMPANY NAME WORKING CAPITAL ADJUSTED (OP/TOTAL COST) 1 HOLTEC CONSULTING PVT. LTD. 37.71% 2 RITES LTD. 32,63% 3 TCE CONSULTING ENGINEERS LTD. 21,96% 4 UB ENGINEERING LTD 1.95% 5 TATA PROJECTS LTD 6.88% MEAN 20.23% 10. LD. A.R. FOR THE ASSESSEE CONTENDED THAT TPO/DR P HAVE ARBITRARILY SELECTED THE COMPARABLES WHICH ARE FUNCTIONALLY DIF FERENT FOR TRANSFER PRICING AND AT THE SAME TIME, THEY HAVE ARBITRARILY REJECTE D THE COMPARABLES ADOPTED BY THE ASSESSEE WITHOUT PASSING ANY SPEAKING ORDER AND AS SUCH, THE ORDER UNDER APPEAL IS LIABLE TO BE SET ASIDE. 11. THE TPO IN HIS ORDER DATED 27.01.2008, SELECTED M/S. HOLTEK CONSULTING PVT. LTD. AS COMPARABLE AND ITS P & L AC COUNT STATEMENT FOR THE YEAR ENDED 31.03.2005 IS LYING AT PAGE 141 OF THE A PPEAL SET. 12. THE ASSESSEE FILED COMPREHENSIVE OBJECTION FOR THE EXCLUSION OF M/S. HOLTEK CONSULTING PVT. LTD. LYING AT PAGE 54 OF THE APPEAL SET, WHICH ARE REPRODUCED AS UNDER FOR READY REFERENCE:- 2.2 HOLTEC CONSULTING PRIVATE LIMITED ('HOLTEC') FACTS SUBMITTED BEFORE THE LD. TPO THE REASONS FOR EXCLUSION OF HOLTEC ARE AS FOLLOWS: HOLTEC OFFERS COMPREHENSIVE SERVICES FROM CONCEPT TO COMMISSIONING FOR GREEN-FIELD, MODERNIZATION/ CONVE RSION/ EXPANSION OF CEMENT AS WELL AS CAPTIVE POWER PLANT/ WASTE HEA T RECOVERY BASED POWER PLANT PROJECTS. IT EVEN OPERATES CEMENT PLANT S FOR ITS CLIENTS; HAS A DIFFERENT ASSET PROFILE CONSISTING OF PLANT AND MACHINERY AND TOOLS AND TESTING EQUIPMENT IN ITS FIXED ASSETS ; ITA NO1477/DEL/2015 8 THE EXPORT SALES OF TRADED GOODS ACCOUNT FOR 0.26 PER CENT OF THE TOTAL SALES OF THE COMPANY; AND HIGH SUB-CONTRACTING COSTS (20.18% OF ITS TOTAL COS TS) IN THE BOOKS OF HOLTEC FOR FY 2004-05. 13. A BARE PERUSAL OF THE PROFILE OF THE AFORESAID COMPANY GOES TO PROVE THAT THE SAME IS ENGAGED IN OFFERINGS COMPREHENSIVE SERVICES FROM CONCEPT TO COMMISSIONING FOR GREEN-FIELD, MODERNIZATION/ CO NVERSION/ EXPANSION OF CEMENT AS WELL AS CAPTIVE POWER PLANT/WASTE HEAT RE COVERY BASED POWER PLANT PROJECTS. HOLTEC ALSO ENGAGED IN PROVIDING E NGINEERING SUPPORT SERVICES FOR BULK MATERIAL HANDLING AND STRUCTURAL STEEL DETAILING ETC. HAVING PLANT AND MACHINERY AS PART OF ITS FIXED ASSETS AND INVENTORY IN ITS BOOKS, IT HAS ALSO LARGE PORTION OF COST AS SUB-CONTRACTING A ND PROFILE OF HOLTEC IS DIAMETRICALLY OPPOSED TO THE ASSESSEE COMPANY WHICH IS ENGAGED IN ENGINEERING DESIGN AND DRAWING FOR VARIOUS OVERSEAS AES TO SUPPORT OVERSEAS OFFICES TURNKEY PROJECT EXECUTION. THE AS SESSEE COMPANY HAS NEITHER ANY PLANT AND MACHINERY AS PART OF ITS FIXE D ASSETS AND INVENTORY IN ITS BOOKS NOR HAS LARGE PORTION OF ITS COST AS SUB- CONTRACTING COST. SO, IT CANNOT BE TAKEN AS A COMPARABLE IN ANY CASE. 14. 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. ITA NO1477/DEL/2015 9 MORE SO, ITS INCOME FROM NON CONSULTANCY SERVICES I S LESS THAN 75% AND THIS FILTER IS APPLIED BY THE TPO HIMSELF. 15. 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. 16. WEBCAM CONSULTANCY SERVICE INDI LTD:- TPO REJECTED THE AFORESAID COMPANY ON THE GROUND TH AT ITS SERVICE INCOME TO SALES INCOME IS LESS THAN 75%. THE ASSES SEE FILED COMPREHENSIVE OBJECTIONS AGAINST REJECTION OF AFORESAID COMPANIES LYING AT PAGE 47 OF APPEAL SET:- 1.5 WATER & POWER CONSULTANCY SUPPLY (INDIA) LIMITE D TPO'S COMMENTS IN THE ORDER THE LD. TPO REJECTED THIS COMPANY STATING THAT THIS COMPANY FAILS SERVICE FILTER AND HAS SERVICE INCOME TO SALES INCO ME RATIO OF LESS THAN 75%. ASSESSEE'S COMMENTS: ITA NO1477/DEL/2015 10 THE ASSESSEE CONTINUES TO ARGUE THAT THE COMPANY HA S SERVICE INCOME MORE THAN 75% AND IS FUNCTIONALLY SIMILAR TO THE AC TIVITIES UNDERTAKEN BY THE ASSESSEE AND SHOULD BE CONSIDERED AS A COMPA RABLE. THE FOLLOWING EXTRACT OF ANNUAL REPORT ALONG WITH T HE CALCULATION CLEARLY STATES THAT THE COMPANY HAS SERVICE INCOME MORE THAN 75% WATER & POWER CONSULTANCY SERVICES (INDIA) LIMITED (A GOVT. OF INDIA UNDERTAKING) PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST MAR CH, 2005 SCHEDULE 31103/2005 31/03/2004 RS. RS.______ A. INCOME: FEE FROM SERVICES RENDERED K 86,57,59.004 61 ,76,05,713 OTHER MISC. INCOME L 54,07,546 32,32,930 TOTAL: (A) 87,11,66,550 62,08,38, 643 COMPANY NAME OPERATING INCOME (INR CRORES) SALES INR CRORES) INCOME/SALES WAPCOS 86.58 87.12 99.38% FUNCTIONALLY COMPARABLE THE ASSESSEE WOULD LIKE TO MENTION THAT THE COMPANY IS ENGAGED FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND HENCE I T SHOULD BE CONSIDERED AS A COMPARABLE 17. THE A.O. HAS MERELY REJECTED M/S. WEBCHAM SERVI CES (INDIA) LTD. ON THE SOLE GROUND THAT ITS SERVICES INCOME TO SALES I NCOME IS LESS THAN 75%. HOWEVER, FROM THE BARE PERUSAL OF THE P & L ACCOUNT STATEMENT FOR THE YEAR ENDED 31.03.2005, WHICH HAS OTHERWISE NOT BEEN REPR ODUCED ABOVE, WHICH HAS OTHERWISE NOT BEEN DISPUTED BY THE TPO, WHICH S HOWS THAT INCOME TO THE SALES INCOME IS MORE THAN 75% I.E. 99.38%. SO, APP ARENTLY TPO HA ARBITRARILY REJECTED THIS COMPARABLE IN TRANSFER PR ICING. SO, WE ARE OF THE CONSIDERED VIEW THAT THE MATTER IS REQUIRED TO BE R ESTORED TO THE TPO REGARDING THIS ISSUE. ITA NO1477/DEL/2015 11 18. 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. 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. 19. 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 ITA NO1477/DEL/2015 12 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. 20. GROUND NO.I READ WITH GROUND NO.1.6: REGARDING DENIAL OF BENEFIT OF ECONOMIC ADJUSTMENT. LD. A.R. FOR THE ASSESSEE CONTENDED THAT DRP MERELY PASSED THE DIREC TION DENYING BENEFIT OF CAPITAL UTILIZATION ADJUSTMENT ON THE BASIS OF ITS DIRECTIONS ISSUED IN THE IMMEDIATELY PRECEDING YEAR (ASSESSMENT YEAR 2004-05 ) AND AS SUCH LIABLE TO BE SET ASIDE AND FURTHER CONTENDED INTER ALIA TH AT THE ASSESSEE COMPANY GOT COMPENSATED ON YEARLY BASIS FOR THE SERVICES RENDER ED TO ITS AES AND GOT REIMBURSABLE AT ACTUAL FOR DIRECT AND INDIRECT PROJ ECT COST INCURRED BY IT. THUS IT IS OPERATED AS INDEPENDENT ENTITY SUCH AS C OMPLETE CONTROL OF MANAGEMENT AND CAPITAL AND ITS COST IN RELATION TO THE NON UTILIZATION OF CAPITAL BOTH BY THE APPELLANT. 21. TO COMPUTE THE IDLE CAPACITY COST, THE ASSESSEE COMPANY REDUCED THE DIFFERENCE BETWEEN THE POTENTIAL BILLABLE HOURS AND THE ACTUAL BILLED HOURS. IT MADE AN APPROPRIATE ADJUSTMENT TO SALARY AND ALLOWA NCES ETC. AND RECOMPUTED ITS MARGIN @ 3.85% ON COSTS AND PLACED R ELIANCE ON THE ORDERS PASSED BY ITAT WHERE CAPACITY UTILIZATION ADJUSTMEN T HAS BEEN PROVIDED. HCL TECHNOLOGIES BPO SERVICES LTD., VS. ACIT, CC-2 (I.T.A. NO. 5071/DE1L2010) DCIT VS CLAAS INDIA PVT. LTD. (ITA NO. I 783/DELL20 II) GLOBAL TURBINE SERVICES INC. (ITA NO. 3484/DE1/2011 ) DCIT VS. INNODATA ISOGEN INDIA PVT LTD (ITA N05390/ DEL/201 0) GOOGLE INDIA PRIVATE LIMITED (ITA NO. 1170/BANG/201 1) DCIT VS PETRO ARALDITE PRIVATE LIMITED [TS-201-1TAT -2013(MUM)-TP] MIS FIAT INDIA PRIVATE LIMITED [ITA NO. 1 8481MUM/2 009] GLOBA[ VANTEDGE (P) LTD. VS DC IT [20[0 37 SOT I] ITA NO1477/DEL/2015 13 22. HOWEVER, LD. DRP HAS SUMMARILY DECIDED THE ISSU E BY MERELY RELYING ITS DIRECTION ISSUED IN THE IMMEDIATELY PRECEDING Y EAR (ASSESSMENT YEAR 2004-05) WITHOUT GOING INTO THE MERITS OF THE FACTS OF THE CASE AND SUBMISSIONS MADE BY THE A.O. THE RATIO OF AFORESAI D RULINGS RELIED UPON BY THE ASSESSEE IS THAT CAPITAL UTILIZATION ADJUSTMENT IN TP IS TO BE PROVIDED TO THE ASSESSEE. 23. SIMILARLY, TPO/ DRP ALSO DENIED THE BENEFIT OF RISK ADJUSTMENT CLAIMED BY THE APPELLANT SUMMARILY BY RELYING UPON THE DIRECTION ISSUED IN THE IMMEDIATELY PRECEDING YEAR (ASSESSMENT YEAR 200 4-05). 24. CONSEQUENTLY, WE DETERMINE GROUND NO.1 READ WI TH 1.1, 1.4 AND 2 ARE REQUIRED TO BE DETERMINED IN FAVOUR OF THE ASSE SSEE AND FILE IS ORDERED TO BE RESTORED TO TPO TO PASS AFRESH ORDER BY PROVIDIN G OPPORTUNITY OF BEING HEARD TO THE PARTIES. 25. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE P RESENT APPEAL IS ALLOWED FOR STATISTICAL PURPOSE AND FILE IS ORDERED TO BE RESTORED TO THE TPO TO PASS AFRESH ORDER AFTER PROVIDING OPPORTUNITY OF BEING HEARD TO THE PARTIES. 26. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH NOV., 2015 SD./- SD./- ( J. S. REDDY) (KULDIP SIN GH) 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 NO1477/DEL/2015 14 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 19,20,20,23 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