DCIT, New Delhi V. M/s. Comverse Network Systems India Pvt. Ltd., Gurgaon

ITA 1626/DEL/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7159 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 16-12-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 04-04-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G C SRIVASTAVA; ANUBHAV JAIN
• Keywords: Related party transaction; Transfer pricing; Principle of natural justice; International transaction
• Section: 92C; 92F

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-2 NEW DELHI BEFORE SMT DIVA SINGH, JUDICIAL MEMBER AND SH.L.P.SAHU, ACCOUNTANT MEMBER I.T.A .NO.-1626/ DEL/2011 (ASSESSMENT YEAR- 2002-03) DCIT, CIRCLE-3(1), NEW DELHI (APPELLANT) VS COMVERSE NETWORK SYSTEMS INDIA PVT. LTD., 2 ND FLOOR, DLF INFINITY TOWER A, DLF CYBER CITY, PHASE-II, GURGAON PAN-AABCC3425B (RESPONDENT) C.O.NO.-144/DEL/2011 (IN I.T.A .NO.-1626 /DEL/2011) (ASSESSMENT YEAR- 2002-03) COMVERSE NETWORK SYSTEMS INDIA PVT. LTD., 2 ND FLOOR, DLF INFINITY TOWER A, DLF CYBER CITY, PHASE-II, GURGAON PAN-AABCC3425B (APPELLANT) VS DCIT, CIRCLE-3(1), NEW DELHI (RESPONDENT) APPELLANT BY SH.G.C.SRIVASTAVA, ADV. & SH. ANUBHAV JAIN, ADV. RESPONDENT BY SH. SARABJEET SINGH, SR. DR ORDER PER DIVA SINGH, JM THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A SSAILING THE CORRECTNESS OF THE ORDER DATED 30.12.2010 OF CIT(A) -XX, NEW DELHI PERTAINING TO 2002-03 ASSESSMENT YEAR ON THE FOLLOW ING GROUNDS:- DATE OF HEARING 16.12.2015 DATE OF PRONOUNCEMENT 09.02 .2016 I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 2 OF 28 1. THE LD.CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING ADDITION OF RS.9689294/-MADE BY THE AO ON ACCOUNT O F ARM'S LENGTH PRICE U/S 90CA(3) IGNORING. A) THE DETAILED REASONS MENTIONED BY THE TPO FOR E ACH COMPARABLE, IN THAT EITHER THE COMPARABLE IS ENGAGE D IN MANUFACTURING WHILE THE ASSESSEE IS ENGAGED IN PROV IDING SERVICES OR THAT EITHER THE COMPARABLE IS ENGAGED I N MANUFACTURING WHILE THE ASSESSEE IS ENGAGED IN PROV IDING SERVICES OR THAT SOME COMPARABLE IS INVOLVED IN EXE CUTION OF TURNKEY PROJECTS WHICH IS NOT WHAT THE ASSESSEE IS DOING. B) THE LD.CIT(A) HAS ERRED IN RELYING UPON PARA 2.6 2 OF THE OECD GUIDELINES TO ALLOW SUCH COMPARABLES TO BE INT RODUCED INTO THE SET OF COMPARABLES. NOWHERE DO THE OECD GU IDELINES PERMIT THAT SIMPLY BECAUSE TNMM IS BEING USED AS A METHOD, A SERVICE PROVIDER CAN BE COMPARED TO A MANUFACTURER OR ONE WHO IS ENGAGED IN EXECUTION FOR TURNKEY PROJECTS. C) THE LD.CIT(A) HAS ERRED IN ALLOWING A MERCIFUL A PPROACH TO THE ASSESSEE BY STATING THAT SINCE THIS IS THE FIRS T YEAR OF TRANSFER PRICING A 'MORE LATERAL COMPARABILITY SEAR CH CAN BE ACCEPTED'. THE STANDARD OF COMPARABILITY WILL NOT C HANGE GIVEN THE STAGE OF THE TRANSFER PRICING REGIME IN A PARTI CULAR JURISDICTION. 2. THE APPELLANT CRAVES LEAVE FOR RESERVING THE RI GHT TO AMEND, MODIFY, AFTER, ADD OR FOREGO ANY GROUNDS OF APPEAL AT ANY TIME BEFORE OR DURING THE HEARING OF THIS APPEA L. 2. THE ASSESSEE HAS FILED A CROSS OBJECTION ON THE FO LLOWING GROUNDS:- 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX [AP PEALS]- XX, NEW DELHI ('CIT-A') ERRED IN NOT HOLDING THE OR DER PASSED BY THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, C IRCLE 3(1), NEW DELHI ('AO') AND THE. LEARNED JOINT COMMISSIONE R OF I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 3 OF 28 INCOME TAX, TRANSFER PRICING OFFICER - I, NEW DELHI ('TPO') AS BEING CONTRARY TO THE FACTS, LAW AND THE PRINCIPLES OF NATURAL JUSTICE. 2. THAT THE CIT -A ERRED IN LAW IN NOT HOLDING THAT THE AO DID NOT MEET THE PRECONDITIONS FOR MAKING REFERENCE TO THE TPO UNDER SECTION 92CA(1) OF THE ACT AND ERRED IN NOT P ROVIDING AN OPPORTUNITY OF 'BEING HEARD' TO THE RESPONDENT BEFO RE REFERRING THE TRANSFER PRICING ISSUES TO THE TPO. 3. THAT THE CIT -A ERRED IN LAW IN NOT HOLDING THAT THE ORDER OF THE TPO IS BAD IN LAW AND CONTRARY TO THE PRINCI PLES OF NATURAL JUSTICE SINCE 'NO SUFFICIENT OPPORTUNITY' W AS PROVIDED TO THE RESPONDENT WHILE CONCLUDING THE ASSESSMENT UNDE R SECTION 92CA(3) OF THE ACT IN RESPECT OF DETERMINATION OF A RM'S LENGTH PRICE. 4. THAT THE CIT-A DID NOT ADJUDICATE ON WHETHER THE TPO HAS ERRED IN NOT PROVIDING THE BENEFIT OF THE ARM'S LENGTH RANGE AS PROVIDED UNDER PROVISO TO SECTION 92C OF ACT FOR PURPOSES OF COMPUTING THE ARM'S LENGTH PRICE UNDER SECTION 92F OF THE ACT. 5. THAT THE CIT-A ERRED IN LAW AND ON FACTS IN NOT ACCOUNTING FOR DIFFERENCES IN RISKS ASSUMED BY THE RESPONDENT VIS-A-VIS COMPARABLE COMPANIES, WHILE DETERMINING T HE ARM'S LENGTH PRICE FOR THE IMPUGNED TRANSACTION. 6. THAT THE ABOVE CROSS OBJECTIONS ARE MUTUALLY EXC LUSIVE & WITHOUT PREJUDICE TO EACH OTHER. 7. THAT THE RESPONDENT CRAVES LEAVE TO ADD, ALTER, AMEND AND / OR MODIFY ANY OF THE CROSS OBJECTIONS EITHER BEFORE OR DURING THE COURSE OF THE APPELLATE PROCEEDINGS. 3. AT THE TIME OF HEARING, THE LD. AR STATED THAT HIS CLIENT HAS INSTRUCTED HIM NOT TO PRESS THE ABOVE GROUND RAISE D IN THE CROSS OBJECTION FILED AND INSTEAD HAS INSTRUCTED HIM TO S EEK PERMISSION I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 4 OF 28 FOR ADMITTING ADDITIONAL GROUND WHEREIN EXCLUSION O F TWO COMPARABLES IS SOUGHT. IT WAS HIS SUBMISSION THAT ALL NECESSARY FACTS FOR DECIDING THE ADDITIONAL GROUND IF ADMITTE D ARE ON RECORD AND NO FRESH EVIDENCE IS REQUIRED TO BE FILED. 3.1. THE ADDITIONAL GROUND SOUGHT TO BE ADMITTED READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1) (AO)/ COMMISSIONER OF INCOME TAX (APP EALS) XX, NEW DELHI (CIT(A)) HAVE ERRED IN INCLUDING CE RTAIN COMPANIES LISTED BELOW TO THE FINAL SET OF COMPARAB LES, EVEN THOUGH THESE COMPANIES ARE NON-COMPARABLE TO T HE APPELLANT ON VARIOUS GROUNDS, TO BENCHMARK THE IMPU GNED TRANSACTIONS PERTAINING TO PROVISION OF SUPPORT SER VICES, NAMELY:- SCAL SERVICES LIMITED; AND WARTSILA OPERATIONS & MAINTENANCE INDIA LIMITED. 4. FOR THE SAKE OF COMPLETENESS RELIANCE WAS PLACED O N THE FOLLOWING DECISIONS IN SUPPORT OF THE PRAYER FOR AD MITTING ADDITIONAL/SUPPLEMENTARY GROUNDS. IT WAS SUBMITTED THAT THE JUDICIAL PRECEDENT LAID PERMITTED THE ADMISSION OF THE ADDITIONAL GROUND:- I) CIT VS KRISHAK BHARTI CO-OPERATIVE LTD. 266 ITR 208 ; II) CIT VS SOUTH INDIA BANK LTD. 249 ITR 304; III) CIT VS KESHRI METAL PVT.LTD. 237 ITR 165. I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 5 OF 28 5. THE PRAYER FOR ADMISSION OF ADDITIONAL GROUND WAS NOT OBJECTED TO BY THE LD.SR.DR. ACCORDINGLY AFTER CONSIDERING THE MATERIAL ON RECORD AND THE STAND OF THE RESPECTIVE PARTIES BEFO RE THE BENCH ALONGWITH THE JUDICIAL PRECEDENT RELIED UPON THE AD DITIONAL GROUND RAISED BY THE ASSESSEE IN ITS CROSS OBJECTIONS IS A DMITTED. THE ORIGINAL GROUNDS RAISED IN THE CROSS-OBJECTION ARE DISMISSED AS NOT PRESSED. 6. THE RELEVANT FACTS OF THE CASE ARE THAT THE ASSESS EE IN THE YEAR UNDER CONSIDERATION RETURNED AN INCOME OF RS. 74,55 ,720/- BY WAY OF FILING ITS RETURN ON 30.10.2002. THE SAID RETUR N WAS SELECTED FOR SCRUTINY AFTER ISSUANCE OF NOTICE U/S 143(2) ETC. O F THE I.T. ACT. IT WAS REFERRED BY THE AO TO THE TRANSFER PRICING OFFI CER (HEREINAFTER REFERRED TO AS TPO) FOR DETERMINING THE ARMS LEN GTH PRICE (HEREINAFTER REFERRED TO AS ALP) WHEREIN THE TPO CONSIDERING THE INTERNATIONAL TRANSACTION AS PER FORM 3CEB AS ANNEX ED WITH THE RETURN PROPOSED ARMS LENGTH ADJUSTMENT (HEREINAFTE R REFERRED TO AS ALP) U/S 92CA(3) OF THE INCOME TAX ACT, 1961. TA KING THIS INTO CONSIDERATION THE ASSESSMENT ORDER WAS PASSED. 6.1. THE RECORD SHOWS THAT THE TPO CONSIDERING THE FACT THAT THE ALP OF THE MARKET SUPPORT SERVICES (HEREINAFTER REF ERRED TO AS MSS) PROVIDED BY THE ASSESSEE TO ITS PRINCIPLE WAS TO BE DETERMINED AT I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 6 OF 28 RS.15,57,30,294/- AS AGAINST RS.14,60,41,000/-, THE PRICE CHARGED BY THE ASSESSEE PROPOSED AN ADDITION BY WAY OF AN A DJUSTMENT OF RS.96,89.294/- RESULTING IN CONCLUDING THE ASSESSED INCOME AT RS.1,73,45,016/-. 7. AGGRIEVED BY THIS, THE ASSESSEE WENT IN APPEAL BEFO RE THE CIT(A). THE CIT(A) CONSIDERING THE EXPLANATION FIL ED DELETED THE ADDITION HOLDING AS UNDER:- 17.8. I HAVE CAREFULLY EXAMINED THE ABOVE ISSUE AN D ALSO CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT AND ALL OTHER RELEVANT MATERIAL PLACED ON RECORD. ON THE MATTER OF COMPARABILITY, I PLACE RELIANCE O N THE OECD GUIDELINES (PARA 2.62) WHICH PROVIDES AS UNDER:- ONE STRENGTH OF THE TRANSACTIONAL NET MARGIN METHOD IS THAT NET PROFIT INDICATOR (E.G RETURN ON ASSETS, OPERATING INCOME TO SALES, AND POSSIBLY OTH ER MEASURES OF NET PROFIT) ARE LESS AFFECTED BY TRANSACTIONAL DIFFERENCES THAN IN THE CASE WITH PRI CE, AS USED IN COMPARABLE UNCONTROLLED PRICE METHOD. NET PROFIT INDICATORS ALSO MAY BE MORE TOLERANT TO SOME FUNCTIONAL DIFFERENCES BETWEEN THE CONTROLLED AND UNCONTROLLED TRANSACTIONS.' GIVEN THAT THIS IS FIRST YEAR OF TRANSFER PRICING A ND THE DATABASES WERE NOT ROBUST ENOUGH FOR INDENTIFYING EXACT COMPARABLE COMPANIES, A MORE LATERAL COMPARABILITY SEARCH CAN BE ACCEPTED. HENCE , LIGHT OF THE ABOVE, I AM OF THE VIEW THAT ALL THE I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 7 OF 28 COMPANIES SELECTED BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTATION ARE PERFORMING SERVICES SIMILAR TO ONE ANOTHER AND BROADLY SIMILAR TO THE SERVICES PROVIDED BY THE APPELLANT. HENCE, THE TPO HAS ERRED IN REJECTING THE ABOVE MENTIONED 7 COMPANIES. 17.9. IT IS ALSO OBSERVED THAT OUT OF THE 15 COMPAN IES, TWO COMPANIES, NAMELY HINDUSTAN HOUSING CO. LTD. AND DODSAL PRIVATE LIMITED HAVE SIGNIFICANT RELATED PAR TY TRANSACTIONS. HENCE THESE COMPANIES ARE REMOVED FROM THE SET OF 15 COMPARABLE COMPANIES. 17.10.FURTHER, IT IS OBSERVED THAT ONE COMPANY I.E VULCAN ENGINEERS LTD. HAS PERSISTENT LOSSES AND HENCE IS REMOVED FROM THE SET OF COMPARABLE COMPANIES. 18. IN LIGHT OF THE ABOVE DISCUSSION, THE ARMS LEN GTH PRICE OF THE IMPUGNED INTERNATIONAL TRANSACTION IS DETERMINED ON THE FOLLOWING BASIS:- I) THE 7 COMPANIES REJECTED BY THE TPO ARE ACCEPTED. THUS, TOTAL 15 COMPANIES ARE ACCEPTED. HOWEVER, HINDUSTAN HOUSING CO. LTD., DODSAL PRIVATE LTD. AND VULCAN ENGINEERS LTD. ARE TO BE EXCLUDED FROM THE LIST OF COMPARABLES (FOR REASON MENTIONED ABOVE) TO BE USED AT THE ARMS LENGTH PRICE. 19. ON THE ABOVE CRITERIA THE AVERAGE NET MARGIN OF THE COMPARABLE COMPANIES IS ARRIVED AT AS UNDER:- S.NO. NAME OF COMPANY WORKING CAPITAL ADJUSTED OP/TC (MULTIPLE YEAR DATA) 1. ADOR TECHNOLOGIES LTD. (-) 8.73% 2. ARTSON ENGINEERS LTD. (-)1.82% 3. CHOKSI LABORATORIES LTD. 12.32% I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 8 OF 28 4. ENVIRO TECHNOLOGY LTD. 4.73% 5. ISGEC COVEMA LTD. (-) 14.68% 6. SCAL SERVICES LTD. 20.53% 7. THERMAX ENGINEERING CONSTRUCTION LTD. (-) 0.10% 8. UTILITY POWERTECH LTD. 5.97% 9. VIJAY TANKS & VESSELS LTD. 4.86% 10. VIMTA LABS LTD. 14.27% 11. WARTSILA OPERATIONS & MAINTENANCE INDIA LTD. 43.93% 12. YASHMUN ENGINEERS LTD. 5.49% MEAN 7.23% 20. THE (-) 5 PERCENT OF THE MEAN MARGIN OF THE COMPARABLE COMPANIES IS 1.86 PERCENT. ACCORDINGLY, SINCE, THE NET OPERATING MARGIN OF THE APPELLANT OF 5 PERCENT ON OPERATING COST FROM THE IMPUGNED TRANSACTION FALLS WITHIN THE (-) 5 PERCENT RANGE AS PERMITTED UNDER THE LAW, THE IMPUGNED TRANSACTION OF THE APPELLANT IS HELD TO BE AT ARM'S LENGTH. ALTHOUGH APPELLANT HAS NOT SPECIFICALLY RAISED THE GROUND OF ADJUSTMENT OF +/- 5%, BUT DURING THE COURSE OF APPELLATE PROCEEDINGS IN ITS SUBMISSION DATED 27TH FEB, 2006 THE APPELLANT HAD INCORPORATED IN THEIR SUBMISSION WITH RESPECT TO GROUND 2. THIS MATTER WAS ALSO REMANDED TO THE TPO WHERE IN THE TPO (VIDE REMAND REPORT DATED 28-12-2005) IN PRINCIPLE ACCEPTED THAT THE BENEFIT OF +/- 5% SHALL ONLY BE GRANTED IF THE APPELLANT FELL WITHIN THE +/ - 5% RANGE. HOWEVER, SINCE THE MARGIN OF THE APPELLANT WAS OUTSIDE THE -5% RANGE, THE BENEFIT OF THE +/- 5 % RANGE WAS NOT PROVIDED BY THE TPO. 21. ACCORDINGLY, THE ADDITION OF RS.96,89,294 MADE BY THE AO /TPO STANDS DELETED. I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 9 OF 28 8. AGGRIEVED BY THIS, THE REVENUE IS IN APPEAL BEFORE THE ITAT ON THE ABOVE-MENTIONED GROUNDS AND THE ASSESSEE IN ITS CROSS- OBJECTIONS RELYING UPON THE ADDITIONAL/SUPPLEMENTAR Y GROUNDS REQUESTS FOR DIRECTION TO EXCLUDE THE TWO SPECIFIC COMPARABLES REFERRED TO IN THE GROUND RAISED. 9. THE LD. SR.DR IN THE SAID BACKGROUND INVITING ATTE NTION TO THE FINDING RECORDING IN PARA 17.8 SUBMITTED THAT THE R EASONS TAKEN BY THE CIT(A) TO DELETE THE ADDITION NAMELY THAT THIS WAS THE FIRST YEAR OF THE TRANSFER PRICING AND DATA BASES WERE NOT ROBUST HAS CONCLUDED THAT ALL THE COMPARABLES SELECTED BY THE ASSESSEE H AVING BROAD SIMILAR SERVICES SHOULD BE INCLUDED. REFERRING TO THE SAID FINDING WHICH WAS STRONGLY OBJECTED TO BY THE REVENUE, IT W AS HIS PRAYER THAT THE ISSUE NEEDS TO BE RESTORED SETTING ASIDE T HE IMPUGNED ORDER AS THE FINDING IS GENERALISTIC AND CASUAL. INVITIN G ATTENTION TO PARA 17.7 OF THE IMPUGNED ORDER WHEREIN THE CIT(A) HAS B ROUGHT OUT THE REASONS OF THE TPO FOR REJECTING THE OBJECTIONS OF THE ASSESSEE QUA THE SEVEN COMPARABLES EXCLUDED BY THE TPO IT WAS SU BMITTED THE FINDING DOES NOT ADDRESS THE SPECIFIC OBJECTIONS OF THE ASSESSEE NOR DOES IT BRING OUT THE REASONS FOR ACCEPTING THE PRA YER EXCEPT GENERAL OBSERVATIONS. FOR READY-REFERENCE THE RELEVANT CHA RT ADDRESSING THE I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 10 OF 28 FACTUAL POSITION BROUGHT OUT IN THE IMPUGNED ORDER IS REPRODUCED HEREUNDER:- ARGUMENTS OF THE APPELLANT 17.7. THE APPELLANT ARGUED THAT THE TPO HAS ERRED IN REJECTING 7 OUT OF THE 15 COMPANIES CONSIDERED COMP ARABLE BY THE APPELLANT IN THE TRANSFER PRICING DOCUMENTAT ION. A SUMMARY OF THE ARGUMENTS OF THE APPELLANT AGAINST T HE CONTENTIONS OF THE TPO FOR ACCEPTING THE 7 COMPANIE S IS AS UNDER:- S.NO. NAME OF COMPARABLE COMPANY TPOS ARGUMENT FOR REJECTION COMPANY ON NON-COMPARABILITY APPELLANTS COUNTER- ARGUMENT 1. ADOR TECHNOLOGIES LTD. EXECUTION OF PROJECTS AND SUPPLY OF EQUIPMENT APPELLANT IS ALSO ENGAGED IN EXECUTION AND IMPLEMENTATION OF PROJECTS. ALSO SUPPLY OF EQUIPMENT IS LESS THAN 25 PERCENT OF THE TOTAL INCOME OF ADOR. 2. DODSAL PRIVATE LTD. ENGAGED IN ENGINEERING PROJECTS AND NOT TELECOM PROJECTS THE TPO HAS PROPOSED A VERY STRICT COMPARABILITY CRITERIA,. IF THAT BEING THE CASE, NONE OF THE COMPANIES SELECTED BY THE TPO ARE ENGAGED IN TELECOM PROJECTS. 3. THERMAX ENGINEERING CONSTRUCTION LTD. EXECUTION OF TURNKEY PROJECTS APPELLANT IS ALSO ENGAGED IN EXECUTION AND IMPLEMENTATION OF PROJECTS. 4. UTILITY POWERTECH LTD. ENGAGED IN RENOVATION OF POWER PROJECTS APPELLANT IS ENGAGED IN PROVIDING MAINTENANCE AND WARRANTY SUPPORT SERVICES. HENCE, RENOVATION SERVICES ARE SIMILAR TO THE SERVICES PROVIDED BY THE APPELLANT. 5. VIJAY TANKS & EXECUTION OF PROJECTS APPELLANT IS ALSO ENGAGED I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 11 OF 28 VESSELS LTD. IN EXECUTION AND IMPLEMENTATION OF PROJECTS 6. VULCAN ENGINEERING LTD. ENGAGED IN MANUFACTURING AND NOT SERVICES FOR PURPOSE OF COMPARABILITY ANALYSIS THE ENGINEERING SERVICES SEGMENT HAS BEEN CONSIDERED WHICH HAS EARNED ENTIRE INCOME FROM SERVICES. 7. YASHMUN ENGINEERS LTD. ERECTION OF TRANSMISSION TOWERS AND LINES APPELLANT IS ALSO ENGAGED IN INSTALLATION AND COMMISSIONING OF PROJECTS. FURTHER, THE APPELLANT SUBMITTED THAT SINCE THE APPELLANT IS NOT A PARTY TO THE AGREEMENT BETWEEN T HE ASSOCIATED ENTERPRISE AND THE CUSTOMERS OF THE ASSO CIATED ENTERPRISES IN INDIA, THE APPELLANT DOES NOT HAVE A CCESS TO SUCH AGREEMENTS. THE SAME HAS ALSO BEEN SUBMITTED BY THE APPELLANT VIDE SUBMISSION DATED 22 NOVEMBER 201 0. 9.1. IN THESE CIRCUMSTANCES IT WAS HIS SUBMISSION THAT IN ALL FAIRNESS THE CIT(A) SHOULD HAVE DISCUSSED AND COME TO A FINDING CONSIDERING EACH OF THE SPECIFIC COMPARABLES ON THE SPECIFIC FACTS ON RECORD AND JUSTIFIED HIS DECISION ON THE BASIS OF ACCEPTABLE PRINCIPLES TO BRING OUT WHY A SPECIFIC COMPARABLE SHOULD BE RETAINED OR EXCLUDED. THE CIT(A) INSTEAD IT WAS SUBMITTED H AS GIVEN VERY SWEEPING BROAD BASED GENERALISTIC ARGUMENTS TAKING CURIOUSLY EMOTIONAL REASONS FOR JUSTIFYING THE EXCLUSION OF A LL THE COMPARABLES. I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 12 OF 28 FOR THE SAID PURPOSE, ATTENTION WAS INVITED TO PARA 17.8 OF THE IMPUGNED ORDER AND THESE FINDINGS IT WAS SUBMITTED ARE STRONGLY OBJECTED TO BY THE REVENUE. IT WAS HIS ARGUMENT T HAT THE DECISION BEING VAGUE, GENERAL AND BIASED IS NO DECISION AND CANNOT STAND IN THE EYES OF LAW. 10. THE LD. AR, MR. G.C. SRIVASTAVA UNABLE TO DEFEND TH E SWEEPING OBSERVATION MADE IN PARA 17.8 IN SUPPORT OF THE IMP UGNED ORDER SUBMITTED THAT INFACT EIGHT COMPARABLES WERE EXCLUD ED BY THE TPO. THESE EIGHT COMPARABLES IN TOTO WERE NOT INCLUDED BY THE CIT(A). REFERRING TO PARA 7.9 IT WAS SUBMITTED THAT THE CIT (A) UPHOLDING THE ORDER OF THE TPO ONLY EXCLUDED DODSAL PVT.LTD. IT W AS HIS SUBMISSION THAT IF THE RECORD IS CONSIDERED THIS COMPARABLE WA S EXCLUDED BY THE TPO ALSO THUS TO THIS EXTENT REVENUE CANNOT BE SAID TO BE AGGRIEVED. 10.1. INVITING ATTENTION TO VULCAN ENGINEERS LTD., IT W AS SUBMITTED THAT ITS EXCLUSION WAS OBJECTED TO BY THE ASSESSEE . THE ASSESSEES OBJECTION IT WAS SUBMITTED WAS NOT ACCEPTED BY THE CIT(A). THUS THE EXCLUSION OF THIS COMPARABLE AS HELD BY THE TPO HA S BEEN RETAINED AS WOULD BE EVIDENT FROM PARA 17.10 OF THE IMPUGNED ORDER. 10.2. HOWEVER, THE CIT(A) IT WAS SUBMITTED HAS DIRECTED THE EXCLUSION OF HINDUSTAN HOUSING CO. LTD. WHICH COMPA RABLE WAS OFFERED BY THE ASSESSEE AND RETAINED BY THE TPO. T HIS COMPARABLE I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 13 OF 28 WAS DIRECTED TO BE EXCLUDED BY THE CIT(A). ACCORDI NGLY IT WAS HIS SUBMISSION THAT NOTWITHSTANDING THE REASONS GIVEN T HE GRIEVANCE OF THE REVENUE AT BEST COULD BE VERY LIMITED. 11. NOT AGREEING WITH THE MANNER IN WHICH THE LD.AR P RESENTED ITS CASE, THE LD. SR. DR INVITING ATTENTION TO PARA 18 OF THE IMPUGNED ORDER STATED THAT SUB-PARA 18.1 WOULD SHOW THAT THE CIT(A) HAS INFACT MADE A CONFUSING REFERENCE TO THE FACT THAT IN TOTAL FIFTEEN COMPANIES ARE ACCEPTED HOWEVER THREE COMPARABLES AR E EXCLUDED THUS IT IS AN EXERCISE IN CONFUSION AS TO WHAT EXAC TLY THE CIT(A) INTENDED. 11.1. THE LD. AR CONSIDERING THE CONTRARY FINDING WAS ALS O UNABLE TO CLARIFY EXACTLY WHAT THE CIT(A) INTENDED. FURTHER THOUGH RELIANCE WAS PLACED ON THE ORDER TO THE EXTENT OF THE GRIEVA NCE POSED BY THE REVENUE HOWEVER HE WAS UNABLE TO SUPPORT THE REASO NING ADOPTED. ACCORDINGLY ON CONSIDERING THE CONFLICTING AND THE CONFUSING FINDINGS AND ALSO CONSIDERING THE BROAD SWEEPING GENERAL REA SONS SET OUT JUSTIFYING THE RELIEF GRANTED WHICH IS CHALLENGED I N THE DEPARTMENTAL APPEAL, BOTH THE PARTIES AFTER DELIBERATING AT LEN GTH ON THE PROS AND CONS OF THE FINDING ON RECORD AND ALSO CONSIDERING THE PRAYER MADE BY WAY OF THE ADDITIONAL GROUNDS IN THE CROSS-OBJEC TIONS POSED BY THE ASSESSEE FINALLY AGREED THAT FOR THE SAKE OF CO RRECTNESS AND I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 14 OF 28 CLARITY ON THE ISSUES INVOLVED THE CASE MAY BE REST ORED TO THE TPO RESTRICTING HIM TO GIVE A FINDING ON THE ISSUES WHE REIN THE TWO COMPARABLES SOUGHT TO BE EXCLUDED BY THE ASSESSEE N AMELY WARTSILA OPERATIONS & MAINTENANCE INDIA LTD. AND SCALA SERVICES LTD. WHICH WERE AS PER RECORD INTRODUCED BY THE ASSESS EE AND ACCEPTED BY THE TPO WERE OPPOSED TO FOR THE FIRST T IME BEFORE THE CIT(A) WHICH REMAIN UNCONSIDERED BY THE CIT(A). TH E FACT THAT ITS RETENTION WAS OBJECTED TO BEFORE THE CIT(A) IT WAS SUBMITTED WOULD BE BORNE OUT FROM PAPER BOOK PAGE 550 WHEREIN THE A SSESSEE HAS BROUGHT TO THE NOTICE OF THE CIT(A) THAT WARTSILA OPERATIONS & MAINTENANCE INDIA LTD. AS PER INFORMATION AVAILABLE IN THE PUBLIC DOMAIN HAD AMALGAMATED AND ON THE DATA IT CEASED TO EXIST THUS IT COULD NOT BE TREATED AS A COMPARABLE. THE ISSUE IT WAS SUBMITTED WAS NOT EXAMINED BY THE CIT(A) AS SUCH MAY BE RESTO RED. 13. SIMILARLY IN REGARD TO THE OTHER COMPARABLE I.E. S CALA SERVICES LTD. SOUGHT TO BE EXCLUDED BY THE ASSESSEE IT WAS S UBMITTED BY THE LD.AR THAT THIS COMPARABLE THOUGH WAS INTRODUCED BY THE ASSESSEE, HOWEVER AS PER DATA IN PUBLIC DOMAIN IT WAS NOTICED THAT 50% OF ITS REVENUE WAS FROM AIR CONDITIONING AND 50% FROM SERV ICES AND THE SEGMENTAL DETAILS WERE NOT AVAILABLE. THUS THE TPO IT WAS SUBMITTED MAY BE DIRECTED TO EXAMINE THE FACT AND FOLLOWING T HE PRECEDENT THAT I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 15 OF 28 IN THE ABSENCE OF SEGMENTAL DETAILS THE COMPARABLE CEASES TO BE A COMPARABLE THE TPO MAY BE DIRECTED TO EXCLUDE THE C OMPARABLE FOLLOWING THE PRECEDENT. THE LD. SR.DR HAD NO OBJE CTION IF THE ISSUES ARE SET ASIDE TAKING NOTE OF THE DEPARTMENTA L OBJECTIONS. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. IT IS SEEN THAT AS PER THE PR OFILE CONSIDERED BY THE TPO COMVERSE NETWORK SYSTEMS INDIA PVT. LTD. ( CNSI) WAS INCORPORATED IN JULY 1999. IT IS SEEN THAT ITS SHA RE CAPITAL IS HELD BY TWO INDIVIDUALS AND THE COMPANY WAS IN THE PROCESS OF TRANSFERRING THE SAME TO CONVERSE US (CU). THE ASSESSEE IS A ME MBER OF THE COMVERSE GROUP HEADQUARTERED IN THE USA. THE ULTIM ATE PARENT COMPANY OF THE GROUP IS COMVERSE NETWORK SYSTEMS IN C. USA. COMVERSE GROUP IS ENGAGED IN DESIGNING, DEVELOPING, MANUFACTURING, MARKETING ETC. OF TELECOMMUNICATION EQUIPMENTS (WIT H EMBEDDED SOFTWARE) USED PRIMARILY BY CELLULAR OPERATORS IN 3 G MULTIMEDIA MESSAGING, MOBILE INTERNET, PREPAID GPRS SERVICE AN D SPEECH PORTAL. THE MAJORITY OF RESEARCH AND DEVELOPMENT ACTIVITIES AND MANUFACTURING OF PRODUCTS IS UNDERTAKEN BY COMVERSE LIMITED, ISRAEL. THE ASSESSEE, COMVERSE INDIA IS PRIMARILY ENGAGED IN PROVIDING SALES SUPPORT AND POST-SALES SUPPORT SERV ICES IN RESPECT OF COMVERSE PRODUCTS. ITS SERVICES COMPRISE OF MARKET ING OF COMVERSE I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 16 OF 28 PRODUCTS, THEIR INSTALLATION, COMMISSIONING AND ACC EPTANCE TEST PROCEDURES, THEIR DAY TO DAY MAINTENANCE (INCLUDING FAULT REPAIR. PROBLEM RESOLUTION, SPARE PART, SUPPORT ETC.) TRAIN ING IN THEIR RESPECT ETC. THE CONTRACT FOR SUPPLIES OF SERVICES IS ENTE RED BETWEEN THE CUSTOMERS AND COMVERSE GROUP COMPANIES, THE PERFORM ANCE OF SERVICES IS SUB CONTRACTED BY GROUP COMPANIES TO TH E ASSESSEE. THE ASSESSEE IS COMPENSATED ON COST PLUS 5% BASIS FOR S UCH SERVICES. SUCH REMUNERATION COMPRISED MAJORITY OF REVENUES OF THE ASSESSEE. THE ASSESSEE IS A SERVICE PROVIDER AND ASSUMES ALL THE RISKS OF A SERVICE PROVIDER. THE DETAILS OF THE RISK ASSUMED AND ASSETS EMPLOYED BY THE ASSESSEE HAVE BEEN GIVEN ON PAGE 25 -33 OF THE TRANSFER PRICING REPORT AND AT THIS STAGE NEED NOT BE ADVERTED TO IN DETAIL. 14.1. THE FOLLOWING INTERNATIONAL TRANSACTIONS WERE DISCL OSED BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION:- S.NO. INTERNATIONAL TRANSACTION METHOD VALUE (IN RS.) 1. PROVISION OF SUPPORT SERVICES TNMM 1,46,041,000 2. REIMBURSEMENTS TNMM 7,697,814 3. IMPORT OF CAPITAL EQUIPMENT TNMM 1,500,414 I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 17 OF 28 14.2. IT IS SEEN THAT THE ASSESSEE ADOPTED TNMM AS THE M OST APPROPRIATE METHOD. TAKING OPERATING MARGIN OVER T HE TOTAL COST AS THE PROFIT LEVEL INDICATOR, THE ASSESSEE MADE ITSEL F THE TESTED PARTY AND COMPARED ITS MARGINS WITH OTHER COMPARABLE COMP ANIES ENGAGED IN INDIA IN SIMILAR FUNCTIONS. THE TPO ACC EPTED TNMM WITH OP/TC AS PLI. THE FIFTEEN COMPARABLES COMPANIES TA KEN BY THE ASSESSEE AFTER CARRYING OUT ADJUSTMENT IN THE WORKI NG CAPITAL ADJUSTMENTS OF THE COMPARABLES SELECTED CONSIDERING THEIR AVERAGE OP/TC OF 4.55% AS AGAINST ITS OWN OP/TC RATIO OF 5. 00% CONSIDERED THE TRANSACTION WITHIN ARMS LENGTH. THE SAID POSI TION WAS NOT ACCEPTED BY THE TPO. 14.3. THE TPO CONSIDERED THE ASSESSEES SELECTION PROCE SS OF THE COMPARABLES AS DEFECTIVE. IT WAS FOUND THAT THE C OMPANIES WITH TURNOVER OF LESS THAN RS.1 CRORE HAVE BEEN ELIMINA TED ON THE GROUND OF HAVING HIGH RESEARCH DEVELOPMENT EXPENSES, HIGH FIXED ASSETS TO SALES RATIO AND ENGAGED IN SIGNIFICANTLY DIFFERENT BUSINESS ACTIVITY. CONSIDERING THE FINAL SET OF 15 COMPANIES IDENTIFIE D BY THE ASSESSEE AS COMPARABLES AND THEIR OPERATING PROFIT MARGIN OV ER TOTAL COST (OP/TC) HE FOUND THAT THE ASSESSEE CARRIED OUT WORK ING CAPITAL ADJUSTMENTS AS PER PARA 5.1 STATING THAT THE AMOUNT OF CAPITAL REQUIRED TO SUPPORT THE FUNCTIONS VARIED GREATLY, B ECAUSE THE LEVEL OF I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 18 OF 28 INVENTORIES, DEBTORS AND CREDITORS MEASURED AS A P ERCENT OF SALES VARIES. THE ASSESSEE IS FOUND TO HAVE JUSTIFIED IT S ACTION ON THE REASONING THAT THE EFFECT ON PROFITS FROM INVESTING IN DIFFERENT LEVELS OF NET WORKING CAPITAL MUST BE TAKEN INTO ACCOUNT. THEREFORE, IN THE ANALYSIS APPROPRIATE ADJUSTMENTS WERE STATED TO HAV E BEEN CARRIED OUT. THE TPO FOUND THAT AS A RESULT OF THIS EXERCI SE SALE OF EACH COMPARABLE COMPANY WAS REDUCED. IN THIS MANNER, T HE ASSESSEE IS FOUND TO HAVE JUSTIFIED CARRYING OUT ADJUSTMENTS FO R THE DIFFERENCES IN ITS OWN WORKING CAPITAL FUNDS AND THAT OF THE CO MPARABLES. THE SELECTION WAS HELD TO BE DEFECTIVE. 14.4. THE TPO NOTICED THAT THE FINAL SET OF COMPANIES ARR IVED AT BY THE ASSESSEE AFTER CARRYING OUT THE WORKING CAPITAL ADJUSTMENT HAD THE FOLLOWING OP/TC MARGINS:- AFTER CARRYING OUT THE WORKING CAPITAL ADJUSTMENT THE FINAL SET OF COMPARABLES ARRIVED AT BY THE ASSESSEE HAD T HE FOLLOWING OP/TC MARGINS:- NAME OF THE COMPANY ADJUSTED OP/TC (%) (AFTER WORKING CAPITAL ADJUSTMENT) HINDUSTAN HOUSING CO.LTD. 15.00 SCAL SERVICES LTD. 20.53 WARTSILA OPERATIONS & MAINTENANCE INDIA LTD. 43.93 VULCAN ENGINEERS LTD. (19.98) I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 19 OF 28 CHOKSI LABORATORIES LTD. 12.32 ADAR TECHNOLGOIES LTD. (8.73) ARSAN ENGINEERS LTD. (1.82) DODSAL PVT.LTD. (13.52) ISGEC CONVEMA LTD. (14.68) THERMAX ENGINEERS CONSTRUCTIONS CO. LTD. (0.10) YASHROAN ENGINEERS LTD. 5.49 VJAY TANKS & VESSELS LTD. 4.86 ENVIRO TECHNOLOGY LTD. 4.73 UTILITY POWERTECH LTD. 5.97 VIMTA LABS LTD. 14.27 AVERAGE OP/TC 4.55% 14.5. THE ASSESSEE HAVING CALCULATED ITS OP/TC RATIO AT 5% WHEN COMPARED WITH THE AVERAGE OP/TC OF 15 COMPARABLE C OMPANIES AT 4.55% CLAIMED THAT THE TRANSACTIONS WITH THE AE WER E AT ARMS LENGTH. THE TPO TAKING NOTE OF THE FACT THAT THE MAJOR INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WERE IN R ESPECT OF PROVISION OF SUPPORT SERVICES TO COMVERSE ISRAEL, O NE OF THE ASSOCIATED ENTERPRISES. THE TOTAL VALUE OF THE SER VICES PROVIDED TO THE AE WAS RS. 14.60 CRORES WHICH WAS ALMOST 91% OF THE TOTAL REVENUE FROM THE SAID ACTIVITY. THE ASSESSEE WAS FO UND TO HAVE BEEN COMPENSATED WITH THE SERVICES REFERRED BY IT AT A P REDETERMINED RATE. CONSIDERING THE FACT THAT THE ASSESSEE IS IN THE S ERVICE INDUSTRY. THE TPO HELD AS UNDER:- I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 20 OF 28 7.1. THE ASSESSEE IS IN THE SERVICE INDUSTRY AND T HE PROFITS IN SERVICE INDUSTRY ARE DIRECTLY PROPORTION ATE TO THE EFFORTS GONE INTO PROVISION OF SERVICES. THE ASSES SEE IS PRIMARILY RENDERING SERVICES TO ITS AE AND SINCE NO TWO SERVICES CAN BE CONSIDERED AS SIMILARLY SERVICES TO ANY OTHER ENTITY CAN BE CONSIDERED AS COMPARABLE. HENC E IT IS APT TO USE TRANSACTION NET MARGIN METHOD (TNMM) WIT H OPERATING PROFITS OVER THE TOTAL COST OF THE PROFIT LEVEL INDICATOR. SINCE THE ASSESSEE HAS ALSO USED OP/TC AS THE PLI, THE CHOICE OF METHOD THE ASSESSEE IS NOT DISPU TED. 14.6. THE TPO REQUIRED THE ASSESSEE TO EXPLAIN WHY THE FO LLOWING SEVEN COMPARABLES OUT OF THE FIFTEEN COMPARABLES IN TRODUCED BY IT SHOULD NOT BE EXCLUDED IN VIEW OF THE FOLLOWING FAC TS:- 8. ANALYSIS OF THE COMPARABLES OD THE ASSESSEE THE ASSESSEE IS ENGAGED IN PROVIDING HIGHLY TECHNI CAL SERVICE. THE PRODUCTS/EQUIPMENTS ARE DIRECTLY SENT BY THE OVERSEAS AE TO THE CLIENT/CONSIGNEE AND AS SUCH THE ASSESSEE IS NEITHER MANUFACTURING NOR DOES IT ACQUI RE OR HOLD ANY INVENTOR FOR TRADING. IN LIGHT OF THE SAM E ON AN ANALYSIS OF THE COMPARABLES USED BY THE ASSESSEE IT WAS OBSERVED THAT : VALCUN ENGINEERS LTD. IS PRIMARILY A MANUFACTURING CONCERN AND DOING WORK ON TUMKEY BASIS. THE BALANCE SHEET OF THE COMPANY CLEARLY SHOWS HEAVY CONSUMPTION OF RAW MATERIAL IN THE YEARS 2000 AND 2001 WHICH MEANS THAT COMPANY IS ENGAGED IN MANUFACTURING. I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 21 OF 28 ADOR TECHNOLOGIES LTD.- THE COMPANY IS PRIMARILY INTO EXECUTION OF PROJECTS FURTHER AN ANALYSIS OF T HE BALANCE SHEET OF THE COMPANY SUGGESTS THAT IT IS ACTUALLY PURCHASING CERTAIN RAW MATERIALS AND CONSUMING THE SAME IN EXECUTION OF PROJECTS. IT HA S PURCHASED WIELDING EQUIPMENTS AMOUNTING TO RS.1.24 CRORES WHICH IS APPROXIMATELY 29% OF THE TOTAL COST FOR THE YEAR ENDING 31 ST MARCH 2012. IT INDICATES THAT THIS COMPANY IS ENGAGED IN SUPPLY OF EQUIPMENT I.E IT DERIVES INCOME FROM OTHER THAN SERVICE ACTIVITY. DODSAL PVT.LTD.- THE COMPANY IS MAINLY ENGAGED IN ENGINEERING PROJECTS AND NOT IN TELECOM PROJECTS, A S IS THE CASE OF ASSESSEE. THERMAZ ENGINEERING & CONSTRUCTION CO.LTD.- THIS COMPANY IS ALSO ENGAGED IN EXECUTION OF TURNKEY CONSTRUCTION PROJECTS. VIJAY TANKS & VESSELS LTD.- THIS COMPANY IS ENGAGED IN EXECUTION OF TUMKEY DESIGN/ENGINEERING & CONSTRUCTION PROJECTS. UTILITY POWERTECH LTD.- THIS COMPANY IS ENGAGED IN RENOVATION OF POWER PROJECTS BELONGING MAINLY TO IT S GROUP COMPANIES I.E. NTPC AND BSES. YASHMUN ENGINEERS LTD:- THE PROFILE OF THIS COMPANY INCLUDES ERECTION OF TRANSMISSION TOWERS AND TRANSMISSION LINES AND ALSO SALE OF ENGINEERING PROJECTS MANUFACTURED BY IT. ACCORDINGLY, ON 10.01.2005, THE ASSESSEE WAS REQUESTED TO EXPLAIN AS TO WHY THE ABOVE STATED COMPANIES MAY NOT BE TAKEN OUT OF THE LIST OF THE COMPARABLES. (EMPHASIS PROVIDED) I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 22 OF 28 14.7. THE ASSESSEE IN SUPPORT OF RETAINING THE SAID COMP ARABLES AS PER RECORD IS FOUND TO HAVE MADE THE FOLLOWING SUBMISSIONS:- 8.1. THE ASSESSEE IN ITS REPLY VIDE LETTER DATED 18.01.2005 SUBMITTED AS UNDER:- VULCAN ENGINEERS LTD. IS ENGAGED IN DESIGN, ENGINEERING, MANUFACTURER, ERECTION AND COMMISSIONING OF CUSTOM BUILT INDUSTRIAL FURNACES AND KINS. ADOR TECHNOLOGIES- DESIGNING, PROCURING, ERECTING AND COMMISSIONING OF COMBUSTION SYSTEMS AND EQUIPMENTS. DODSAL PVT. LTD.-ENGINEERING PROCUREMENT AND IMPLEMENTING PIPELINES. THERMAX ENGINEERING-SUPPLY AND ERECTION OF SITE OF BOILER ACCESSORIES, SPARES AND UTILITY FACILITIES. VIJAY TANKS & VESSELS LIMITED-DESIGN, ENGINEERING, PROCUREMENT, CONSTRUCTION AND COMMISSIONING OF ATMOSPHERIC STORAGE TANKS, CRYOGENIC STORAGE TANKS, HIGH PRESSURE SPHERES ETC. UTILITY POWERTECH LIMITED-MAINTENANCE OF POWER PROJECTS INCLUDING RENOVATION AND MODERNIZATION. YASHMUN ENGINEERS-MAINTENANCE SERVICES TO POWER COMPANIES AND ERECTION OF TRANSMISSION TOWERS AND TRANSMISSION LINES. THE ASSESSEE ALSO STATED THAT ON 6 BROADER SPECTRUM , THE IDENTIFIED COMPANIES ARE ENGAGED IN DESIGNING, ENGINEERING, INSTALLATION, COMMISSIONING AND MAINTENANCE SERVICES AND PERFORM FUNCTIONS AND ASSUMES RISK TO THOSE OF ASSESSEE. I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 23 OF 28 14.8. THE TPO CONSIDERING THE ABSENCE OF RELEVANT FACTS W HERE NO CONTRACT OR AGREEMENT BETWEEN THE ASSESSEE AND THE CLIENT FOR THE ENTIRE RANGE OF THE SERVICES PROVIDED BY THE ASSESS EE TO THE CLIENTS ON BEHALF OF THE AE WAS PROVIDED AND CONSIDERING THE C LAIM MADE WAS THAT THE SERVICES WERE PERFORMED AT THE INSTANCE OF THE AE WHERE DESPITE QUERIES THE ASSESSEE FAILED TO PROVIDE INFO RMATION AS TO WHAT THE AE CHARGED FROM THE CLIENTS FOR THE SERVICES PR OVIDED IN THE CIRCUMSTANCES THE TPO WAS OF THE VIEW THAT THE VER ACITY OF THE CLAIM OF COST PLUS 5% MODEL IN THE ABSENCE OF ACTUAL QUAN TIFICATION LEFT THE ISSUE UNVERIFIABLE AND OPEN TO SPECULATION. THUS T HE CLAIM THAT REMUNERATION RECEIVED WAS ADEQUATE AND AT ARMS LENG TH WAS HELD TO BE NOT PROVED. THE TPO FURTHER FOUND THAT CONSIDER ING THE EMPLOYEE COSTS DETAILS PROVIDED BY THE ASSESSEE THE EMPLOYEE S WERE FOUND TO BE HIGHLY QUALIFIED, TECHNICALLY COMPETENT AND HAND SOMELY PAID WITH FREQUENT TRAINING PERIODS ABROAD FOR UPDATING THEIR EXPERTISE. THE COMPARABLES OFFERED WERE ON THE OTHER HAND FOUND TO BE MANUFACTURING COMPANIES HAVING VERY LOW LEVEL SKILL ED EMPLOYEES ENGAGED IN ROUTINE MECHANICAL ACTIVITIES. THUS THE SELECTION OF COMPARABLES WAS FAULTED WITH. FOR READY-REFERENCE, THE RELEVANT REASONING IS EXTRACTED HEREUNDER:- I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 24 OF 28 8.3. IT IS PERTINENT TO MENTION THAT FOR THE ENTIR E RANGE OF SERVICES PROVIDED BY THE ASSESSEE TO THE CLIENTS ON BEHALF OF THE AE, THERE EXISTS NO CONTRACT/AGREEMENT BETWE EN THE ASSESSEE AND THE CLIENT. THE ASSESSEE PERFORMS ITS FUNCTIONS AS THE INSTANCE OF THE AE AND ON BEHALF O F IT. IT HAS NOT QUANTIFIED THE ACTUAL AMOUNT CHARGED BY THE AE FROM THE CLIENTS FOR SUCH SERVICES DESPITE BEING SP ECIFICALLY ASKED. IT HAS MAINTAINED ITS STAND THAT THE COST P LUS 5% MODEL FOLLOWED BY THE ASSESSEE IS ADEQUATE AND COMPARABLE WITH OTHER SERVICE PROVIDERS. THE BASIS OF SUCH ADEQUACY AND COMPARABILITY HAS BEEN LEFT FOR THE DEPARTMENT TO SPECULATE UPON. 8.4. FURTHER, FROM THE DETAILS OF THE EMPLOYEE COST SUBMITTED BY THE ASSESSEE VIDE ITS SUBMISSION DATED 18.02.2005. IT WAS OBSERVED THAT THE EMPLOYEES OF ASSESSEE ARE HIGHLY QUALIFIED, TECHNICALLY COMPETEN T AND HANDSOMELY PAID. OUT OF A TOTAL HEADCOUNT OF 55, O NLY ONE EMPLOYEE IS A TECHNICIAN. THE REMAINING EMPLOYEES ARE EITHER HAVING BE (ELECTRONICS & COMMUNICATION) OR A HIGHER DEGREE. MOREOVER, THESE ENGINEERS HAVE BEEN REGULA RLY TRAINED ABROAD FOR UPDATING THEIR EXPERTISE. ON THE OTHER HAND, THE ABOVE STATED COMPARABLES ARE ENGAGED IN MANUFACTURING OR TRADING ACTIVITY WHICH REQUIRES A VERY LOW SKILLED SET OF EMPLOYEES, FOR UNDERTAKING ROUTI NE MECHANICAL JOB. SUCH DIFFERENCE IN THE SKILL SET O F EMPLOYEES ALSO SIGNIFIES THE DIFFERENCE IN THE NATU RE OF ACTIVITIES OF ASSESSEE AND ABOVE STATED COMPARABLES . IT WILL ALSO BE APT TO MENTION HERE THAT THE LOWER END CONSTRUCTION AND MANUFACTURING ACTIVITY WILL HAVE A LOWER OPERATING, MARGIN AS COMPARED TO A SERVICE REQUIRIN G HIGH DEGREE OF TECHNICAL COMPETENCE AND SKILL. I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 25 OF 28 14.9. THE TPO ACCORDINGLY ON THE FACTS AS MARSHALLED EXCL UDE THE FOLLOWING COMPARABLES SETTING OUT THE FOLLOWING REA SONS FOR JUSTIFYING THEIR EXCLUSION:- 8.2. THE SUBMISSIONS OF THE ASSESSEE WERE CAREFULL Y ANALYSED. IT COULD BE SEEN THAT FOR VULCAN ENGINEE RS LTD., ADOR TECHNOLOGIES, VIJAY TANKS & VESSELS LIMITED, D ODSAL PVT. LTD. & THERMAX ENGINEERING. THE ASSESSEE HAS ITSELF STATED THAT THESE COMPANIES ARE ENGAGED IN DESIGNIN G, MANUFACTURING OR PROCURING AND COMMISSIONING OF VAR IOUS ENGINEERING EQUIPMENTS. THE ASSESSEE.............. ..AND IN NO WAY PROCURES OR MANUFACTURES OR DISTRIBUTES ANY PRO DUCT INSTALLED OR SERVICED BY IT. THE FACT THAT THE ABO VE STATED COMPARABLES ARE IN SOME MANNER ENGAGED IN MANUFACTURING OR TRADING SUGGEST THAT FUNCTIONS OF THESE COMPANIES ARE SIGNIFICANTLY DIFFERENT FROM THAT OF ASSESSEE. HENCE, BASED ON THE DIFFERENCE IN FUNCTI ONS, THESE COMPARABLES ARE REJECTED. FOR UTILITY POWERTECH LTD. THE ASSESSEE HAS NOT REP LIED TO OUR CONTENTION OF SERVICES TO RELATED PARTIES I.E N TPC & BSES AND HAS MERELY STATED THAT IT IS ENGAGED IN MAINTENANCE OF POWER PROJECTS. THIS COMPANY HAS BE EN REJECTED ON THE BASIS OF NON COMPARABILITY OWING TO RELATED PARTY TRANSACTIONS. YASHMUN ENGINEERS ARE ALSO ENGAGED IN TRADING OF GO ODS. THIS FACT IS EVIDENT FROM PROFIT & LOSS ACCOUNT FOR THE YEARS 2000 & 2001, WHICH SHOWS PURCHASE OF FINISHED GOODS . FURTHER, FROM THE PROWESS DATABASE IT WAS ALSO FO UND THAT THE COMPANY IS NOT ONLY ENGAGED IN TRADING, BU T ALSO I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 26 OF 28 HAS PLANTS AT HADASPUR INDUSTRIAL ESTATE NEAR PUNE, WHICH IS ENGAGED IN MANUFACTURING ENGINEERING PRODU CTS. HENCE THIS COMPANY IS ALSO REJECTED. 14.10. AS A RESULT THEREOF HE FOUND THAT THE AVERAGE OP/TC WAS OF THE FOLLOWING EIGHT COMPARABLES RETAINED WAS 11. 78% WHICH WAS TO BE CONSIDERED FOR PROPOSING THE ARMS LENGTH ADJ USTMENTS:- 9. DETERMINATION OF ARMS LENGTH PRICE HENCE, AFTER ELIMINATING THE ABOVE STATED COMPANIES THE FINAL SET OF COMPARABLES AND THEIR OP/TC OFFER WORKING CAPITAL ADJUSTMENT IS AS UNDER:- NAME OF THE COMPANY ADJUSTED OP/TC (%) HINDUSTAN HOUSING CO.LTD. 15.00 SCAL SERVICES LTD. 20.53 WARTSILA OPERATIONS & MAINTENANCE INDIA LTD. 43.93 CHOKSI LABORATORIES LTD. 12.32 ARSAN ENGINEERS LTD. (1.82) ISGEC CONVEMA LTD. (14.68) ENVIRO TECHNOLOGY LTD. 4.73 VIMTA LABS LTD. 14.27 AVERAGE OP/TC 11.78% 14.11. CONSEQUENTLY, THE ARMS LENGTH PRICE WAS WORKED OU T IN THE FOLLOWING MANNER:- 9.3. THE ARMS LENGTH PRICE OF THE INTERNATIONAL T RANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE IS WORKED OUT AS UNDER:- TOTAL COST OF PROVISION OF SERVICES BY RS.150,8 79,653 I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 27 OF 28 THE ASSESSEE (AS PROVIDED BY THE ASSESSEE) MARGIN @ 11.78% OF THE ABOVE RS.17,773,623 OPERATING PROFIT OF THE ASSESSEE RS.8,084,329 DIFFERENCE RS.9,689,294 THIS DIFFERENCE IS TO BE ADDED TO THE AMOUNT RECEIV ED FROM THE AE FOR PROVISION OF SUPPORT SERVICES TO ARRIVE AT T HE ARMS LENGTH PRICE OF THIS TRANSACTION. AMOUNT RECEIVED FOR PROVISION OF SUPPORT SERVICES RS.146,041,000 ARMS LENGTH PRICE TO BE CHARGED FROM THE AE RS.155 ,730,294 14.12. AS EXTRACTED IN THE EARLIER PART OF THIS ORDER IT IS SEEN THAT THE CIT(A) CONSIDERING THE SUBMISSIONS ON BEHALF OF THE ASSESSEE PROCEEDED TO EXCLUDE HINDUSTAN HOUSING CO. LTD. ETC . ON GENERAL BROAD BASED SWEEPING REASONING THAT A CERTAIN LEVE L OF LEEWAY NEEDS TO BE GIVEN AS THE DATA IN THE FIRST FEW EARLIER YE ARS WAS NOT ROBUST. THE SAID CASUAL APPROACH OF THE CIT(A) IN THE FACE OF THE SPECIFIC DISCUSSION CARRIED OUT BY HIM ADDRESSING THE TPOS REASONING IN PARA 17.9 OF THE IMPUGNED ORDER MAKES THE GENERAL S WEEPING REASONING INCAPABLE OF STANDING JUDICIAL SCRUTINY. THE SAID CASUAL AND GENERALISTIC APPROACH TO DECIDE THE ISSUE AT H AND CANNOT BE ACCEPTED AND WARRANTS THAT THE IMPUGNED ORDER BE SE T ASIDE. ACCORDINGLY, IN VIEW OF THESE PATENT SHORTCOMINGS I N THE IMPUGNED ORDER, THE ISSUE IS RESTORED BACK TO THE TPO IN TER MS OF THE PRAYERS OF THE PARTIES BEFORE US IN THE LIGHT OF THE ABOVE MENTIONED FACTS WITH THE DIRECTION TO VERIFY THE CLAIMS MADE. THE ARGUM ENTS BASED ON INFORMATION AVAILABLE IN THE PUBLIC DOMAIN WHICH T HE ASSESSEE MAY I.T.A .NO.-1626/DEL/2011 & C.O.-144/DEL/2011 PAGE 28 OF 28 CHOSE TO PLACE BEFORE THE TPO FOR VERIFICATION IS D IRECTED TO BE CONSIDERED AND EXAMINED AS PER JUDICIAL PRECEDENT. THE TPO ACCORDINGLY IS DIRECTED TO PASS A SPEAKING ORDER IN ACCORDANCE WITH LAW IN TERMS OF THE ABOVE MENTIONED DIRECTION ON TH E ISSUES SET OUT HEREIN ABOVE. ACCORDINGLY ITA NO.1626/DEL/2011 IS ALLOWED FOR STATISTICAL PURPOSES. 15. IN VIEW OF THE ABOVE THE ISSUES RAISED IN THE CROS S OBJECTION BY WAY OF ADDITIONAL GROUND ARE ALSO RESTORED TO THE T PO FOR VERIFICATION ON FACTS. 16. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWE D FOR STATISTICAL PURPOSES AND THE C.O OF THE ASSESSEE IS ALSO ALLOWE D. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 09 OF FEBRUARY 2016. SD/- SD/- (L.P.SAHU) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 09/02/2016 *AMIT KUMAR* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI