Haldor Topsoe India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 2133/DEL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3318 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 24-10-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 09-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: G N GUPTA ITP SHRI H P AGARWAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI J.S. REDDY, ACCOUNTANT M EMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEM BER ITA NO.2133/DEL/2014 ASSESSMENT YEAR: 2009-10 HALDOR TOPSOE INDIA PVT. LTD., VS DCI T, ELEGANCE TOWER, 2 ND FLOOR, CIRCLE 12(1), JASOLA DISTRICT CENTRE, NEW DELHI. NEW DELHI-110025 (PAN: AABCH7781F) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI G.N. GUPTA, ITP, SHRI H.P. AGARWAL, FCA RESPONDENT BY : SHRI T.M. SHIVAKUMAR, CIT, LD. DR SHRI B. RAMANJENEYUIY, SR. D R ORDER PER SUDHANSHU SRIVASTAVA, JM THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 31/01/2014 PASSED U/S 143(3) OF THE INCOME TA X ACT, 1961 (THE ACT) READ WITH SECTION 144C OF THE ACT PURSUANT TO THE ORDER OF THE HONBLE DISPUTE RESOLUTION PANEL-I , NEW DELHI VIDE ORDER DATED 20.12.2013 FOR ASSESSMENT YEAR 200 9-10. 2. THE FOLLOWING GROUNDS HAVE BEEN PREFERRED:- 1. THE LEARNED DC1T (AFTER INCORPORATING LD. DRPS ORD ER) HAS ERRED ON FACTS AND IN LAW IN MAKING ADDITION OF RS. 1,06,67,470 ON ACCOUNT OF ADJUSTMENT IN VALUE OF INTERNATIONAL TRANSACTION, ON ACCOUNT OF FOLLOWING: I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 2 A) SELECTING 3 NEW COMPARABLE COMPANIES B) REJECTING 4 COMPARABLE COMPANIES SELECTED BY THE A SSESSEE C) REJECTING ADJUSTMENT IN MARGIN DUE TO DIFFERENT RI SK PROFILE OF COMPARABLE COMPANIES 2. THE LEARNED DCIT (AFTER INCORPORATING LD. DRPS ORDER) HAS ERRED ON FACTS AND IN LAW IN INITIATING PENALTY PROCEEDINGS U/S 271(1 )(C). 3. THE APPELLANT CRAVES LEAVE TO ADD TO OR MODIFY THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE HEARING OF THE A PPEAL. 3. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE M/S HALDOR TOPSOE INDIA PVT. LTD., INCORPORATED IN INDIA ON 3 RD OCTOBER, 2006 IS A WHOLLY OWNED SUBSIDIARY OF HALDOR TOPSOE INTERNATIO NAL A/S, (HTIAS), WHICH IS A DENMARK BASED COMPANY. THE PARE NT COMPANY I.E. HTIAS IS A SUBSIDIARY OF HALDOR TOPSOE A/S, DENMARK (HTAS). ACCORDINGLY, HTAS IS THE ULTIMATE H OLDING COMPANY OF ASSESSEE. THE SERVICES OF THE ASSESSEE A RE BEING CAPTIVELY CONSUMED BY HTAS IN TERMS OF AN AGREEMENT EFFECTIVE FROM 01.04.2007. ACCORDING TO CLAUSE 6 OF THIS AGR EEMENT READ WITH APPENDIX- II, THE ASSESSEE IS ENTITLED FOR ITS SERVICES AT ACTUAL COST PLUS 12.5%. THE ASSESSEE IS RENDERING S ERVICES TO INDUSTRIES OPERATING IN (1) FERTILIZER, (2) PETRO-C HEMICAL, AND (3) REFINERY AND OIL & GAS SECTOR. 3.1 DURING THE F.Y. 2008-09, THE ASSESSEE GOT TRAN SFER PRICING STUDY DONE ACCORDING TO WHICH THE AVERAGE MARGIN OF COMPARABLE COMPANIES WAS 10.20%. THE ACTUAL MARGIN OF THE ASS ESSEE FOR I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 3 F.Y. 2008-09 WAS 12.99%. THE ASSESSEE SELECTED TNMM AS THE MOST APPROPRIATE METHOD TO BENCH MARK ITS INTERNATI ONAL TRANSACTION NAMELY ENGINEERING AND TECHNICAL ASSIST ANCE SERVICE. THE ASSESSEE HAD SELECTED A SET OF NINE COMPARABLES . 3.2 A REFERENCE WAS MADE TO THE TPO WHO DID NOT A GREE WITH THE ASSESSEES TP STUDY. THE LD. TPO USED CERTAIN FILTE RS AND REJECTED ASSESSEES FIVE COMPARABLES AND INTRODUCED THREE NEW COMPARABLES. THUS, THE LD. TPO USED A SET OF SEVEN COMPARABLES IN ALL (FOUR FROM THE ASSESSEES SET AND THREE NEW COMPARABLES) WHOSE AVERAGE MARGIN WAS 23.44% AND THE ADDITION PR OPOSED WAS RS. 1,88,94,265/-. AGGRIEVED, THE ASSESSEE APPR OACHED THE HONBLE DRP AND RAISED OBJECTIONS WHICH WERE REJECT ED AND NOW THE ASSESSEE IS CONTESTING THE ISSUES BEFORE THE IT AT AND CHALLENGING THE INCLUSION OF THE FOLLOWING THREE CO MPANIES TO THE LIST OF COMPARABLE COMPANIES- KIRLOSKAR CONSULTANT LTD (MARGIN 41.57%), MITCON CONSULTANCY SERVICES LTD (MARGIN 37.35%) AND MAHINDRA CONSULTANCY ENGINEERS LTD (MARGIN 22.24%). THE ASSESSEE IS ALSO CHALLENGING THE DELETION OF THE FO LLOWING THREE COMPANIES SELECTED BY THE ASSESSEE IN THE TP STUDY- CHEMTEX GOLD ENGINEERS PVT. LTD (MARGIN 1.32%), SIMON INDIA (MARGIN 6.52%) AND PETRON ENGINEERING CONSULTANTS LTD (MARG IN 6.89%). I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 4 THE ASSESSEE IS ALSO CHALLENGING THE ASSESSEE'S CLA IM REGARDING ADJUSTMENT IN MARGIN DUE TO DIFFERENT RISK PROFILE OF COMPARABLE COMPANIES. 4.0 THE LD. AR SUBMITTED THAT THREE COMPARABLES I NCLUDED BY THE LD. TPO WERE BEING CHALLENGED WHICH WERE AS UND ER 4.0.1 M/S. KIRLOSKAR CONSULTANTS LTD. (KIRLOSKAR) IT WAS SUBMITTED THAT THIS COMPARABLE WAS ADDED BY THE LD. TPO TO THE LIST OF COMPARABLE COMPANIES IN VIEW OF HIS REMARKS APPEARING AT INTERNAL PAGES 16 & 17 OF HIS ORDER, WHEREIN THE LD . TPO HAS SPECIFICALLY STATED THAT THIS COMPANY PASSED ALL TH E FILTERS PROPOSED BY THE TPO. THE TPO'S ACTION WAS CONFIRMED BY HONBLE DRP IN PARA 7.4 OF ITS ORDER (INTERNAL PAGE 12-13). IT WAS SUBMITTED THAT THE LD. TPO HAS APPLIED A FILTER (IN TERNAL PAGE 11) REJECTING COMPANIES WHOSE EMPLOYEE COST IS LESS THA N 25% OF ENGINEERING AND TECHNICAL SERVICES REVENUE. THIS HA S BEEN UPHELD BY DRP (INTERNAL PAGES 5-6). NOW, IN THE CAS E OF KIRLOSKAR, THE EMPLOYEE COST IS RS. 1,48,25,884/-WH EREAS CONSULTANCY FEES IS RS. 8,53,10,642/- . THUS THE EM PLOYEE COST IS ONLY 17.3% OF THE CONSULTANCY FEES AS AGAINST TH E FILTER OF 25% ADOPTED BY LD. TPO HIMSELF. IT WAS SUBMITTED THAT I T IS EVIDENT FROM THE FACTS THAT TPO GROSSLY ERRED IN INCLUDING THE CASE OF I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 5 KIRLOSKAR IN THE LIST OF COMPARABLE COMPANIES. IT W AS FURTHER SUBMITTED THAT THE PROFILE OF KIRLOSKAR SHOWS THAT IT IS FUNCTIONALLY DISSIMILAR FROM THE ASSESSEE COMPANY. KIRLOSKAR BUSINESS CONTINUES IN BUSINESS DEVELOPMENT IN PROJE CT MANAGEMENT, ENVIRONMENT ENGINEERING & IRRIGATION WH EREAS THE ASSESSEE OPERATES IN FERTILIZER, PETRO CHEMICAL & R EFINERY & OIL & GAS SECTORS. FURTHER, WITHOUT PREJUDICE TO THE AF OREMENTIONED SUBMISSIONS, IT WAS FURTHER SUBMITTED THAT THE INCO ME OF KIRLOSKAR IS HUGELY BOLSTERED BY OTHER INCOME OF RS . 1,87,04,039/- AND ITEMS NO. 1-5 THEREOF AGGREGATING TO RS. 1,86,09,786/- NEED TO BE IGNORED WHILE WORKING OUT CONSULTANCY PROFITS OF KIRLOSKAR. THE AFORESAID OTHER INCOME WO RKS OUT TO 18% OF THE TOTAL INCOME OF KIRLOSKAR WHEREAS THE CO RRESPONDING FIGURE IN THE CASE OF THE ASSESSEE IS ONLY 0.64%. I T WAS ALSO SUBMITTED THAT THE RENT EXPENSES IN THE CASE OF KIR LOSKAR ARE ONLY 2.1% OF THE RECEIPTS WHEREAS IN THE CASE OF TH E ASSESSEE THEY ARE 23.3% AND THIS WITHOUT DOUBT SHOWS FUNCTIO NAL DISSIMILARITY BETWEEN KIRLOSKAR AND THE ASSESSEE. I N THIS CONNECTION, RELIANCE IS PLACED ON THE DECISION OF H ON'BLE DELHI HIGH COURT IN RAMP GREEN SOLUTIONS PVT. LTD. V. CIT . I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 6 4.02 MITCON CONSULTANCY PVT. LTD. (MITCON) IT WAS SUBMITTED THAT THIS COMPARABLE HAS BEEN INCLUDED BY THE LD. T PO IN THE LIST OF COMPARABLE COMPANIES IN VIEW OF REASONS RECORDED BY HIM IN HIS ORDER (INTERNAL PAGE 17) AND THE HONBLE DRP HA S CONFIRMED THE ACTION OF LD. TPO VIDE PARA 7.4 OF ITS ORDER ( INTERNAL PAGE 12). IT WAS SUBMITTED THAT ON INTERNAL PAGE 3, THE LEARNED TPO HAS ADOPTED THE FILTER BY WHICH THE COMPANIES WHOSE REVENUE FROM ENGINEERING SUPPLIER SERVICES IS LESS THAN 75% OF THE TOTAL OPERATING REVENUE ARE EXCLUDED. THIS IS ALSO CLEAR FROM THEIR REMARKS OF THE TPO AGAINST THE HEADING MITCON IN PA RA 3 OF TPO'S ORDER (INTERNAL PAGE 4). IT WAS SUBMITTED TH AT A BARE PERUSAL OF THE PROFIT/LOSS ACCOUNT OF MITCON WILL S HOW THAT THE PERCENTAGE OF CONSULTANCY FEES OPERATING INCOME IN THE CASE OF MITCON IS ONLY 58.48% WHICH IS BELOW THE FILTER OF 75% APPLIED BY THE LD. TPO. IT IS SUBMITTED THAT IN VIEW OF THIS F ACTUAL POSITION, THE TPO GROSSLY ERRED IN INCLUDING THE CASE OF MITC ON IN THE LIST OF COMPARABLE COMPANIES.IT WAS FURTHER SUBMITTED TH AT, WITHOUT PREJUDICE,MITCON IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY. MITCON PROVIDES CORPORATE SOLUTIONS IN POW ER, ENERGY EFFICIENCY, RENEWABLE ENERGY, CLIMATE CHANGE & ENVI RONMENTAL MANAGEMENT SECTORS BESIDES TRAINING COURSES & SKILL BASED I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 7 TRAINING PROGRAMMES AND THUS THE SECTORS WHEREIN MI TCON OPERATES ARE TOTALLY DIFFERENT FROM THE SECTORS IN WHICH THE ASSESSEE OPERATES. IT WAS FURTHER SUBMITTED THAT TH E ANALYSIS TO P&L A/C WOULD SHOW THAT THE SEGMENTAL PROFITS IN TH E CONSULTANCY BUSINESS IS ONLY 8.3% AS AGAINST 37.35% TAKEN BY THE LD. TPO. 4.03 MAHINDRA CONSULTING ENGINEERS LTD. (MAHINDR A) IT WAS SUBMITTED THAT THIS COMPARABLE HAS BEEN INCLUDED BY THE LD. TPO IN THE LIST OF COMPARABLE COMPANIES IN VIEW OF THE REASONS RECORDED BY HIM IN HIS ORDER (INTERNAL PAGE 17) AND THE HONBLE DRP HAS CONFIRMED THE ACTION OF THE TPO VIDE PARA 7 .4 OF HIS ORDER (INTERNAL PAGE 12). IT WAS SUBMITTED THAT THE BUSINESS OF MAHINDRA IS FUNCTIONALLY DIFFERENT FROM THE ASSESSE E COMPANY AND, THEREFORE, TPO SHOULD NOT HAVE INCLUDED MAHIND RA IN THE LIST OF COMPARABLE COMPANIES. A REFERENCE TO PAPER BOOK PAGE 13 WOULD SHOW THAT MAHINDRA IS PROVIDING CONSULTANCY I N SEZ, INDUSTRIAL PARK AND TOWNSHIP, WATER AND WASTE WATER , PROJECT MANAGEMENTS, SPECIAL PROJECTS, PUBLIC PRIVATE PARTN ERSHIP AND ENVIRONMENT, TRANSPORTATION INFRASTRUCTURE, TOURISM INFRASTRUCTURE, SOCIAL INFRASTRUCTURE ETC. THE INDU STRIES IN WHICH CONSULTANCY IS BEING PROVIDED BY MAHINDRA ARE COMPL ETELY I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 8 DIFFERENT FROM THE INDUSTRIES IN WHICH THE ASSESSEE IS OPERATING AS THE ASSESSEE IS OPERATING IN FERTILIZER, PETRO-C HEMICAL, REFINERY AND OIL & GAS INDUSTRIES ONLY. IT WAS SUBMITTED THA T MAHINDRA CANNOT BE TAKEN AS A FUNCTIONALLY COMPARABLE COMPAN Y. FURTHER A COPY OF THE P&L A/C OF MAHINDRA FOR THE YEAR ENDE D 31.03.2009 AND ITS SCHEDULE J WILL SHOW THAT THERE IS SUBSTANT IAL OUTSOURCING IN THE CASE OF MAHINDRA AND, THEREFORE, THE BUSINESS MODEL OF MAHINDRA IS ALSO DIFFERENT. IN THIS CONNEC TION, RELIANCE IS PLACED ON THE DECISION OF HON'BLE ITAT BANGALORE BE NCH-A IN THE CASE OF 24/7 CUSTOMER.COM (P) LTD. V. DCIT 28 TAXMA NN.COM 258 (BANG.). IT WAS SUBMITTED THAT THE LD. TPO HAS ERRED IN INCLUDING THE CASE OF MAHINDRA IN THE LIST OF COMPA RABLE COMPANIES PARTICULARLY IN VIEW OF THE DECISION OF H ON'BLE DELHI HIGH COURT IN THE CASE OF RAMP GREEN SOLUTIONS PVT. LTD. V. CIT. 4.1.0 ON THE COMPARABLES EXCLUDED BY THE LD. TPO, THE LD. AR SUBMITTED THAT THE THREE COMPARABLES EXCLUDED BY TH E LD. TPO WERE BEING OBJECTED TO AS UNDER 4.1.1 CHEMTEX GOLD ENGINEERS (PVT) LTD. (CHEMTEX) THE LD. AR SUBMITTED THAT THE LEARNED TPO HAS HELD THAT HE WOU LD APPLY A FILTER ACCORDING TO WHICH COMPANY WHOSE ENGINEERING SUPPORT SERVICE INCOME IS LESS THAN RS. 5 CRORES NEED TO BE EXCLUDED. HE I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 9 HAS, THEREFORE, EXCLUDED THE CASE OF CHEMTEX GOLD E NGINEERS PVT. LTD (CHEMTEX) BY OBSERVING THAT 'IT IS FOUND THAT OUT OF THE TOTAL INCOME OF 41.75 CRORES, INCOME FROM SALES COMPRISES RS. 40.58 CRORES, WHEREAS INCOME FROM SERVICES CONSTITUTES ON LY 88 LAKHS. THEREFORE, THE COMPANY DOES NOT QUALIFY SERVICE INC OME 5 CRORES FILTER. HENCE REJECTED' AND REJECTING THE ASSESSEES SUBMISSIONS THAT THE ABOVE OBSERVATION WAS FACTUALLY INCORRECT IN VIEW OF SCHEDULE 8 OF THE ANNUAL ACCOUNTS OF CHEMTEX ACCORD ING TO WHICH THE SERVICE INCOME OF THE COMPANY WAS RS. 36. 73 CRORES IT WAS SUBMITTED THAT A BARE PERUSAL OF SCHEDULE 8 OF THE ANNUAL ACCOUNTS OF CHEMTEX WILL SHOW THAT THE CONTRACT REV ENUE OF RS.40.58 CRORES COMPRISES OF ENGINEERING SERVICE FE ES OF RS. 36.73 CRORES AND CONTRACT REVENUE OF RS. 3.85 CRORE S . IT WAS SUBMITTED THAT IT APPEARS THAT THE LEARNED TPO HAS TAKEN THE FIGURE FROM PROWESS WHERE DETAILED BREAK - UP OF TH E FIGURE OF 'SALES' AMOUNTING TO RS. 40.58 CRORES IS NOT AVAILA BLE. THE FIGURES ARE AVAILABLE IN THE SCHEDULE 8 OF THE AUDI TED ACCOUNT OF CHEMTEX. IT WAS, SUBMITTED THAT THE EXCLUSION OF TH E CASE OF CHEMTEX FROM THE LIST OF COMPARABLE COMPANIES BY TH E LD. TPO IS CLEARLY ERRONEOUS AND BELIES THE FACTS. I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 10 4.1.2 SIMON INDIA LTD. (SIMON) IT WAS SUBMITTED THAT THE LEARNED TPO EXCLUDED THE CASE OF SIMON INDIA LTD. ( SIMON) BY OBSERVING THAT 'THE ASSESSEE CONTENDED THAT THE TPO HAS INCORRECTLY REJECTED THE COMPANY ON THE GROUND THAT SERVICE INCOME IS LESS THAN 5 CRORES. THE ASSESSEE ARGUED THAT THE GROSS RECEIPTS OF THE COMPANY ARE RS. 142 CRORES TOWARDS SUPPLY AN D SERVICES. IT RELIED ON THE FACT THAT RENDERING OF ENGINEERING SE RVICES IS THE MAIN BUSINESS OF THE ASSESSEE THEREFORE THE INCOME APPOR TIONED TO THIS SEGMENT MUST BE HIGHER THAN 5 CRORES'. THE LD. AR SUBMITTED THAT IN COMING TO THIS CONCLUSION, LD. TPO REJECTED THE FOLLOWING SUBMISSIONS OF THE ASSESSEE THAT 'IT IS SUBMITTED THAT THIS OBSERVATION IS FACTUALLY INCORRECT. THE GROSS RECEI PTS OF THE COMPANY ARE RS. 142 CRORES WHICH INCLUDES SUBSTANTI AL INCOME TOWARDS SERVICES, WHICH IS EVIDENT FROM THE PROFIT AND LOSS ACCOUNT WHICH STATES THAT THE RECEIPT OF RS. 142 CRORE IS T OWARDS SUPPLIES AND SERVICES. IT IS SUBMITTED THAT IT IS NOT JUSTIF IABLE TO SAY THAT SINCE THE COMPANY HAS NOT PROVIDED THEIR SEGMENTAL REPORTING, THEIR SERVICE INCOME OUT OF TOTAL RECEIPTS OF RS. 1 42 CRORES IS LESS THAN RS. 5 CRORES, CONSIDERING THE FACT THAT THE MA IN BUSINESS OF THE COMPANY IS TO RENDER ENGINEERING SERVICES. AS M ENTIONED ON THE COMPANY WEBSITE (HTTP)://WWW.SIMONINDIA.COM/) S IL IS A I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 11 GLOBAL ENGINEERING AND-EPC COMPANY'. IT WAS SUBMITTED THAT A COPY OF FORM 23ACA IN THE CASE OF SIMON IS PLACED I N THE PAPER BOOK AT PAGES 18-22 AND A BARE PERUSAL OF PAGE19 WI LL SHOW THAT WHEREAS SALE OF GOODS TRADE IS 8.8 CRORES, THE SUPP LY OF SERVICES (DOMESTIC & EXPORT) AMOUNTS TO RS. 142 CRORES. AS S UCH THE FINDING OF THE LD. TPO THAT THE SERVICE INCOME IS L ESS THAN RS. 5 CRORES IS FACTUALLY INCORRECT. 4.1.3 PETRON ENGINEERING CONSULTANTS LTD. (PETRON ) IT WAS SUBMITTED THAT THIS COMPANY HAS BEEN EXCLUDED BY TH E LD. TPO BY HOLDING THAT 'THE ASSESSEE CONTENDED THAT THE COMPANY IS FUNCTIONALLY SIMILAR AS IT OPERATES ON THE FIELDS L IKE REFINERY, PETROCHEMICAL & FERTILIZER PLANTS, SIMILAR TO ASSES SEE. HOWEVER, ON PERUSAL OF THE DIRECTOR'S REPORT IT IS OBSERVED THA T THE COMPANY IS INTO INSTALLATION, CONSTRUCTION AND COMMISSIONING O F PROJECTS. HENCE FUNCTIONALLY DIFFERENT AND REJECTED'. IT WAS SUBMITTED THAT A PERUSAL OF THE PROFILE OF PETRON WOULD SHOW THAT PE TRON IS WORKING IN THE SAME SECTOR AS THE ASSESSEE I.E. IN THE FIELD OF REFINERY, PETROCHEMICAL & FERTILIZER AND, THEREFORE , THE LEARNED TPO WAS NOT JUSTIFIED IN EXCLUDING THE CASE OF PETR ON FROM THE LIST OF COMPARABLE COMPANIES. I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 12 4.1.4 THE LD. AR SUBMITTED THAT EVEN ASSUMING FO R THE SAKE OF ARGUMENT, THOUGH NOT CONCEDING IT, THAT THE LD. TPO WAS JUSTIFIED IN EXCLUDING THE CASE OF PETRON AND INCLU DING THE CASE OF MAHINDRA, THE UNCONTROVERTED POSITION WHICH EMERGES REGARDING THE COMPARABLE CASES IS AS FOLLOWS:- SI. COMPARABLE'S NAME OP/OC 1. MUKAND ENGINEERS LTD. 14.97 2. CH E MTEX GOLD ENGINEERS 1.32 3. SIMON INDIA 6.52 4. PROJECTS AND 18.26 5. MAHINDRA CONSULTING 22.24 6. TCE CONSULTING 22.45 7. UB ENGINEERS LTD. 7.25 TOTAL 93 .01 AVERAGE 13.29% 4.1.5 IT WAS SUBMITTED THAT SINCE THE ACTUAL MARG IN IN THE CASE OF THE ASSESSEE IS 12.99%, LD. TPO WAS NOT JUSTIFIE D IN MAKING ANY ADDITION. I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 13 4.2.1 ARGUING ON THE GROUND RELATING TO ADJUSTMENT FOR RI SK PROFILE, THE LD. AR SUBMITTED THAT IN THE SUBMISSIO NS DATED 04.01.2013 BEFORE THE LD. TPO (PB PAGE 49) AND IN S UBMISSIONS BEFORE THE HONBLE DRP (PB PAGES 82-84), THE ASSESS EE HAD SUBMITTED THAT IT OPERATES IN A RISK INSULATED ENVI RONMENT SINCE IT OPERATES ON A COST - PLUS MODEL AND IS COMPENSAT ED FOR ALL THE COSTS BORNE BY IT. IT WAS ALSO SUBMITTED THAT THE A SSESSEE BEING A 100% CAPTIVE UNIT OPERATES IN RISK FREE ENVIRONMENT WITHOUT INCURRING ANY MARKETING RISK OR ANY CREDIT RISK. IT WAS ALSO SUBMITTED THAT DIFFERENCE IN RISK PROFILE OF THE AS SESSEE AND THE COMPARABLE COMPANIES ARE ON ACCOUNT OF THE FOLLOWIN G FACTORS: - A) MARKET RISK B) SERVICE LIABILITY RISK C) RESEARCH & DEVELOPMENT RISK D) CREDIT RISK E) MANPOWER RISK F) TECHNOLOGICAL OBSOLESCENCE RISK 4.2.2 THE LD. AR SUBMITTED THAT IT WAS SUBMITTED BEFORE THE LD. TPO AND THE HONBLE DRP THAT ADJUSTMENT FOR DIFFERE NCE IN RISK PROFILE IS CALLED FOR AND IT WAS CONTENDED THAT 'ALTHOUGH THE ACTUAL RISK ADJUSTMENT MAY BE MUCH HIGHER, IT IS SUBMITTED THAT AN I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 14 ADJUSTMENT ON ACCOUNT OF A DIFFERENCE IN RISK PROFI LE MAY BE DERIVED BY SUBTRACTING THE RISK-FREE BANK RATE FROM THE PRIME LENDING RATE. DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2009-10, SUCH DIFFERENCE WORKS OUT TO APPX. 5.50% ( I.E. 12.25% LESS 6.75%)'. 4.2.3 THE LD. AR SUBMITTED THAT THE AFORESAID CLAIM OF THE ASSESSEE WAS DISALLOWED BY THE LD. TPO AND THE HON BLE DRP DID NOT ALLOW ANY RISK ADJUSTMENT VIDE PARA 8.3 (INTERN AL PAGES 15 & 16 OF THEIR ORDER) BY RELYING ON PARA 3.54 OF THE R EVISED OECD GUIDELINES OF 2010 AFTER OBSERVING THAT 'FROM THE ABOVE GUIDELINES, IT CAN BE SEEN THAT UNLESS IT IS SHOWN THAT HOW THE RISK ADJUSTMENT WOULD CHANGE THE RESULT OF EACH COMPARAB LE AND HOW THE SAME WOULD IMPROVE THE COMPARABILITY AND UNLESS ADEQUATE REASONS ARE GIVEN FOR SUCH ADJUSTMENTS, NO ADJUSTME NT CAN BE ALLOWED TO THE TAXPAYER. IN THE PRESENT CASE, EXCEP T 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 EAC H OF THEM AND WHETHER SUCH ADJUSTMENT WOULD IMPROVE THE COMPARABI LITY'. THE LD. AR SUBMITTED THAT THIS IS FACTUALLY INCORRECT I N VIEW OF THE FACT THAT THE ASSESSEE HAD FILED A STATEMENT OF BAD DEBT OF THE I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 15 COMPARABLE COMPANIES SELECTED BY THE LD. TPO PLACED IN PB AT PAGE 24 WHICH INDICATES THAT THE BAD DEBTS AMOUNTED TO 1.19% OF THEIR TURNOVER, A RISK WHICH WAS NOT FACED BY TH E ASSESSEE COMPANY. IT WAS FURTHER SUBMITTED THAT THE HONBLE DRP HAS HELD THAT IT WAS THE ONUS OF THE TAXPAYER TO SHOW W ITH THE EVIDENCE AS TO WHETHER EACH OF THE RISK WAS ACTUALL Y UNDERTAKEN OR NOT BY THE COMPARABLES AND IF SO HOW THESE RISKS EFFECTED EACH OF THAT AND WHERE SUCH ADJUSTMENT WOULD IMPROVE THE INCOMPARABILITY. IT WAS SUBMITTED THAT THIS ONUS PL ACED BY THE HONBLE DRP ON THE ASSESSEE IS AN ONUS WHICH PLACES IMPOSSIBILITY ON THE SHOULDERS OF THE ASSESSEE IN A S MUCH AS THE ASSESSEE HAS NO MEANS TO ASCERTAIN LIKE RISKS ACTUA LLY UNDERTAKEN BY THE VARIOUS COMPARABLES. IT WAS SUBMI TTED THAT THE HONBLE DRP, THUS, ERRED IN LAW IN PLACING THE ONUS ON THE ASSESSEE IN VIEW OF THE CELEBRATED MAXIM LEX NON LEGIT IMPOSSIBILIA. 4.2.4 THE LD. AR FURTHER SUBMITTED THAT THE RELIA NCE PLACED BY HONBLE DRP ON THE OECD GUIDELINES IS CLEARLY MISPL ACED IN VIEW OF THE OBSERVATIONS IN PARA 37 OF HON'BLE ITAT DELH I BENCH-H CONTAINED IN THEIR DECISION DATED 02.11.2007 IN MEN TOR GRAPHICS (NOIDA) PVT.LTD. V. DCIT AND THAT THIS ISSUE IS NO LONGER RES- I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 16 INTEGRA IN VIEW OF PARA 17 OF THE DECISION DATED 15.01.2013 OF HON'BLE ITAT BENCH-A HYDERABAD IN DCIT V. HELLOSOFT INDIA PVT. LTD. WHERE THE FACTS ARE ON ALL FOURS WITH THE FACT S OBTAINING IN THE CASE OF THE ASSESSEE. RELIANCE WAS ALSO PLACED ON THE FOLLOWING:- I) PARA 17.2 OF THE DECISION DATED 28.06.2013 OF HON' BLE ITAT BENCH-B HYDERABAD IN HSBC ELECTRONIC DATA PROCESSING INDIA LTD. V. ADDL. CIT . II) THE OBSERVATIONS OF ITAT BANGALORE BENCH-B IN PHILI PS SOFTWARE CENTRE (P) LTD. V. ACIT. III) RECENT DECISION OF HON'BLE ITAT DELHI BENCH-I-2 IN AVENUE ASIA ADVISORS (P) LTD. 5. IN RESPONSE, THE LD. CIT DR PLACED HEAVY RELIA NCE ON THE ORDER OF THE LD. IT TPO AND THE HONBLE DRP AND VEH EMENTLY ARGUED THAT AS FAR AS THE ISSUE OF APPLYING THE FIL TERS WAS CONCERNED, THE SAME MAY BE RESTORED TO THE FILE OF THE LD. IT TPO/AO FOR VERIFICATION AS THE FILTERS WERE APPLIED BY SOFTWARE AND NOT MANUALLY AND HENCE THE POSSIBILITY OF ERROR S HAVING CREPT IN CANNOT BE RULED OUT. IT WAS FURTHER SUBMITTED TH AT AS FAR AS THE COMPATIBLE MAHINDRA WAS CONCERNED, THE SAME WAS FUN CTIONALLY NOT DISSIMILAR AND THE SAME SHOULD BE INCLUDED IN T HE SET OF I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 17 COMPARABLES STOP ON OTHER COMPARABLES, THE RELIANCE WAS PLACED ON THE REASONING ADOPTED BY THE LD. IT TPO AND THE ADJUDICATION BY THE HONBLE DRP. ON THE ISSUE OF RISK ADJUSTMENT , IT WAS SUBMITTED THAT RISK ADJUSTMENT HAS TO BE PROVIDED T O THE COMPATIBLE COMPANIES AND NOT TO THE ASSESSEE. IT WA S ALSO SUBMITTED THAT THE ASSESSEE WAS CAPTIVE SERVICE PRO VIDER WHOSE RISK WAS GREATER THAN OTHER COMPARABLES AND THEREFO RE THE RISK ADJUSTMENT WAS NOT CALLED FOR. IT WAS SUBMITTED THA T THE CONCLUSIONS ARRIVED AT BY THE LD. IT TPO AND CONFIR MED BY THE HONBLE DRP SHOULD BE UPHELD BY THE ITAT. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE PER USED THE RELEVANT MATERIAL ON RECORD. FIRST, WE PROCEED TO A DJUDICATE ON THE ARGUMENTS OF THE LD. AUTHORISED REPRESENTATIVE WITH RESPECT TO THE COMPARABLES INCLUDED BY THE LD. TPO BUT OBJE CTED TO BY THE ASSESSEE. 6.1.1 KIRLOSKAR CONSULTANTS LTD IT IS THE SUBMISSION OF THE ASSESSEE THAT EMPLOYEE COST FILTER OF 25% OF THE EN GINEERING AND TECHNICAL SERVICES REVENUE WAS APPLIED BY THE LD. T PO WHEREAS IN THE CASE OF KIRLOSKAR, THE EMPLOYEE COST WAS ONLY 1 7.3%. IT IS ALSO THE ARGUMENT OF THE LD. AUTHORISED REPRESENTATIVE T HAT THIS COMPANY WAS FUNCTIONALLY DISSIMILAR FROM THE ASSESS EE COMPANY I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 18 AS KIRLOSKAR WAS INVOLVED IN PROJECT MANAGEMENT, EN VIRONMENTAL ENGINEERING AND IRRIGATION WHEREAS THE ASSESSEE OPE RATED IN FERTILISER, PETROCHEMICALS, REFINERY, AND OIL AND G AS SECTORS. IT IS ALSO CONTENDED BY THE ASSESSEE THAT KIRLOSKAR HAS A HUGE AMOUNT OF INCOME FROM OTHER SOURCES WHICH THE ASSESSEE DOE S NOT HAVE AND THAT THIS AMOUNT NEEDS TO BE IGNORED WHILE WORK ING OUT THE CONSULTANCY PROFITS OF KIRLOSKAR. WE HAVE PERUSED T HE ANNUAL REPORT OF THE KIRLOSKAR COMPANY PLACED AT PAGE 7 OF THE PAPER BOOK AND WE FIND THAT THE EMPLOYEE COST IN THE CASE OF THE COMPARABLE IS RS. 14,825,884/- AS AGAINST THE CONSU LTANCY FEE OF RS. 85,310,642/-. THUS THE EMPLOYEE COST WORKS OUT TO 17.378 % WHEREAS THE LD. TPO HAS APPLIED A FILTER OF 25% BUT HAS INCLUDED THE SAME IN THE LIST OF COMPARABLES. THE HONBLE DR P HAS UPHELD THE APPLICATION OF THE EMPLOYEE COST FILTER BUT THE ISSUE OF ERROR IN CALCULATION WAS NOT BEFORE THE HONBLE DRP. IN SUCH A CIRCUMSTANCE, WE DEEM IT APPROPRIATE TO RESTORE THI S COMPARABLE TO THE FILE OF THE LEARNER TPO/AO FOR RECONSIDERATI ON AND DIRECT THAT THIS COMPARABLE BE EXCLUDED IF THE EMPLOYEE C OST FALLS BELOW 25% AS DEMONSTRATED TO US BY THE LD. AUTHORISED REP RESENTATIVE. WE ALSO DIRECT THAT THE ASSESSEE BE AFFORDED A PROP ER OPPORTUNITY OF BEING HEARD ON THIS ISSUE. I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 19 6.1.2 MITCON CONSULTANCY PRIVATE LIMITED THE LD. AUTHORISED REPRESENTATIVE HAS ARGUED AT LENGTH AND HAS SUBMITT ED THAT AN ANALYSIS OF THE PROFIT AND LOSS ACCOUNT OF THIS COM PANY WILL SHOW THAT THE PERCENTAGE OF CONSULTANCY FEES IN THE CASE OF THIS COMPANY IS ONLY 58.48% WHICH WAS MUCH BELOW THE FIL TER OF 75% APPLIED BY THE LD. TPO. ON PERUSAL OF THE PROFIT AN D LOSS ACCOUNT, THIS CONTENTION OF THE ASSESSEE APPEARS CORRECT. HO WEVER, IT IS SEEN THAT THIS ISSUE WAS NOT RAISED BEFORE THE HON BLE DRP. IN SUCH A CIRCUMSTANCE, WE DEEM IT FIT TO RESTORE THIS COMPARABLE ALSO TO THE FILE OF THE LD. TPO/AO FOR RE-EXAMINING THE CONTENTION OF THE ASSESSEE REGARDING THE ERROR IN CALCULATION AND DIRECT HIM TO EXCLUDE THIS COMPARABLE IF THE CONTENTION OF THE ASSESSEE IS FOUND CORRECT. DUE OPPORTUNITY IS TO BE GIVEN TO TH E ASSESSEE TO SUBSTANTIATE ITS CLAIM. 6.1.3 MAHINDRA CONSULTING ENGINEERS LTD IN RESPECT OF THIS COMPARABLE, IT IS THE CONTENTION OF THE ASSESSEE TH AT THE BUSINESS OF MAHINDRA WAS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE COMPANY. A PERUSAL OF THE PROFILE OF MAHINDRA CONSU LTING ENGINEERS PLACED AT PAGE 12 OF THE PAPER BOOK SHOWS THAT MAHINDRA IS IN THE BUSINESS OF PROVIDING CONSULTANC Y IN SEZ, INDUSTRIAL PARK AND TOWNSHIP, WATER AND WASTEWATER, PROJECT I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 20 MANAGEMENT, SPECIAL PROJECTS, PUBLIC-PRIVATE PARTNE RSHIP AND ENVIRONMENT, TRANSPORT INFRASTRUCTURE, TOURISM INFR ASTRUCTURE, SOCIAL INFRASTRUCTURE ETC WHEREAS THE ASSESSEE IS O PERATING IN THE FIELD OF FERTILISER, PETROCHEMICALS, REFINERY AND O IL AND THE GAS INDUSTRIES ONLY. HOWEVER, IT IS OUR CONSIDERED OPIN ION THAT THE COMPARABLE AS WELL AS THE TESTED PARTY, BOTH, ARE P ROVIDING SERVICES WHICH ARE FUNCTIONALLY SIMILAR AND WE FIND NO REASON FOR THE EXCLUSION ON THIS GROUND. IT IS ALSO THE ASSESS EES CONTENTION THAT MAHINDRA HAS A SUBSTANTIAL OUTSOURCING WHICH I S NOT SO IN THE CASE OF THE ASSESSEE COMPANY. THE ITAT BANGALOR E BENCH IN THE CASE OF 24/7 CUSTOMER.COM PRIVATE LIMITED VERSU S DCIT IN ITA NO. 227/BANG/2010 VIDE ORDER DATED 09/11/2012 H AS HELD THAT WHERE THE ASSESSEE WAS CARRYING OUT ITS WORK B Y ITSELF WHEREAS IN CASE OF A COMPARABLE, IT WAS OUTSOURCING MOST OF ITS WORK, THE SAID COMPANY COULD NOT BE A COMPARABLE. W HILE WE FULLY AGREE WITH THE RATIO LAID DOWN BY THE ITAT BA NGALORE BENCH, WE DO FIND THAT THE ASSESSEE COULD NOT SUBSTANTIATE ITS CLAIM THROUGH EVIDENCES ON THIS GROUND. HOWEVER, WE DO FE EL THAT IF SUCH IS THE CASE, IT WOULD BE INAPPROPRIATE TO INCL UDE MAHINDRA IN THE LIST OF COMPARABLES. THEREFORE, WE DEEM IT F IT TO RESTORE THIS COMPARABLE ALSO TO THE FILE OF THE LD. TPO/AO WITH A DIRECTION I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 21 THAT IF THE ASSESSEE IS ABLE TO SUBSTANTIATE ITS CL AIM THAT MOST OF THE WORK CARRIED OUT BY MAHINDRA CONSULTING ENGINEE RS LTD WAS OUTSOURCED WHEREAS THE ASSESSEE HAD NO OR MINIMAL O UTSOURCING, THIS COMPARABLE BE EXCLUDED. NEEDLESS TO SAY, THE A SSESSEE WILL BE GIVEN DUE OPPORTUNITY TO PRESENT ITS CASE. 6.1.4 THUS, ALL THE THREE COMPARABLES INCLUDED BY THE LD. TPO AND UPHELD BY THE HONBLE DRP ARE RESTORED TO THE F ILE OF THE LD. TPO/AO FOR ADJUDICATION IN TERMS OF OUR DIRECTIONS CONTAINED IN THE PRECEDING PARAGRAPHS. THUS, GROUND NO. 1.1 (A) STANDS ALLOWED FOR STATISTICAL PURPOSES 6.2.0 AS FAR AS THE ASSESSEES OBJECTIONS TO EXCL USION OF THE THREE COMPARABLES ARE CONCERNED, THE SAME ARE BEING ADJUDICATED AS UNDER 6.2.1 CHEMTEX GOLD ENGINEERS (P) LTD. THE LD. AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE CONTRACT REVE NUE IN CASE OF THIS COMPARABLE WAS RS. 40.58 CRORES WHICH COMPRISE S OF ENGINEERING SERVICES FEE OF RS. 36.73 CRORES AND CO NTRACT REVENUE OF RS. 3.85 CRORES. IT IS THE SUBMISSION OF THE LD. AR THAT THE LD. TPO MIGHT HAVE TAKEN THE FIGURE FROM THE SOFTWARE PROWESS WHERE THE DETAILED BREAKUP OF THE SALES FIGURE OF R S. 40.58 CRORES WAS NOT AVAILABLE BUT THE SAME WAS AVAILABLE IN SCH EDULE 8 OF THE I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 22 AUDITED ACCOUNTS OF THE COMPARABLE. IT HAS BEEN SUB MITTED THAT THE SERVICE INCOME OF 5 CRORES FILTER WAS, THEREFOR E, WRONGLY APPLIED. A PERUSAL OF PAGE 65 OF THE PAPER BOOK SHO WS THAT THE ENGINEERING SERVICE FEES OF CHEMTEX AMOUNTED TO RS. 367,304,215 DURING THE YEAR UNDER CONSIDERATION AND THUS IT WAS ABOVE THE 5 CRORE FILTER APPLIED BY THE LD. TPO. TH US, THE OBSERVATION OF THE LD. TPO THAT THE INCOME FROM SER VICES CONSTITUTED ONLY RS. 88 LAKHS IS INCORRECT AND WE D EEM IT APPROPRIATE TO DIRECT THAT THIS COMPARABLE BE INCLU DED IN THE FINAL SET OF COMPARABLES. 6.2.2 SIMON INDIA LTD - THIS COMPARABLE WAS ALSO EXCLUDED ON THE GROUND THAT IT DID NOT PASS THE SERVICE INCOME OF 5 CRORES FILTER. A PERUSAL OF PAGES 18 TO 22 OF THE PAPER BO OK SHOWS THAT THE VALUE OF GOODS TRADED BY SIMON INDIA LTD IS 8.8 CRORES WHEREAS THE SUPPLY OF SERVICES AMOUNTS TO RS. 142 C RORES. THUS, THE FINDING OF THE LD. TPO THAT THE SERVICE INCOME IS LESS THAN 5 CRORES IS FACTUALLY INCORRECT AND WE HAVE NO HESITA TION IN HOLDING THAT THIS FILTER HAS BEEN INCORRECTLY APPLIED. WE, ACCORDINGLY, DIRECT THAT THIS COMPANY BE ALSO INCLUDED IN THE FI NAL LIST OF COMPARABLES. I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 23 6.2.3 PETRON ENGINEERING CONSULTANTS LTD - IT IS THE CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE THAT THIS COMP ANY WAS FUNCTIONALLY SIMILAR AS IT OPERATED IN FIELDS LIKE REFINERY, PETROCHEMICAL AND FERTILISER PLANTS SIMILAR TO THE ASSESSEE WHEREAS THE SAME HAS BEEN EXCLUDED BY THE LD. TPO O N THE GROUND THAT THE COMPANY WAS INTO INSTALLATION, CONS TRUCTION AND COMMISSIONING OF PROJECTS. A PERUSAL OF THE DIRECTO RS REPORT, RELIED UPON BY THE LD. TPO AND PLACED AT PAGE 16 OF THE PAPER BOOK, SHOWS THAT PETRON IS INTO FABRICATION, ENGINE ERING, ELECTION, INSTALLATION OF PLANT, MACHINERY AND EQUIPMENT FOR A NUMBER OF BUSINESS SECTORS IN OIL, GAS AND PETROCHEMICALS, PO WER, CEMENT, MINERALS AND METALS, CHEMICALS AND FERTILISERS ETC. WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO FUNCTIONAL DISS IMILARITY BETWEEN THE TESTED PARTY AND THE COMPARABLE AS BOTH OF THEM ARE PROVIDING SIMILAR SERVICES ALTHOUGH THE SECTORS MIG HT BE A LITTLE DIFFERENT AND THE LD. TPO WAS WRONG IN EXCLUDING IT . WE DIRECT THE INCLUSION OF THIS COMPARABLE IN THE FINAL SET O F COMPARABLES. 6.2.4 IN VIEW OF THE ABOVE GROUND NO. 1.1 (B) OF T HE ASSESSEES APPEAL STANDS ALLOWED IN TERMS OF OUR DIRECTIONS CO NTAINED IN THE PRECEDING PARAGRAPHS. I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 24 6.3 THE NEXT ISSUE BEFORE US PERTAINS TO ALLOWANCE OF RISK ADJUSTMENT. THE HONBLE DRP, WHILE REJECTING THE AS SESSEES CLAIM FOR RISK ADJUSTMENT, HAS RELIED ON THE REVISE D OECD GUIDELINES AND HAS OBSERVED THAT UNLESS IT IS SHOWN THAT HOW THE RISK ADJUSTMENT WOULD CHANGE THE RESULT OF EACH COM PARABLE AND HOW THE SAME WOULD IMPROVE THE COMPARABILITY AND UN LESS ADEQUATE REASONS ARE GIVEN FOR SUCH ADJUSTMENTS, NO RISK ADJUSTMENT CAN BE ALLOWED TO THE TAXPAYER. THE HON BLE DRP HAS FURTHER OBSERVED THAT THE ASSESSEE COULD NOT SHOW W ITH EVIDENCE AS TO WHETHER EACH OF THE RISK WAS ACTUALLY UNDERTA KEN BY THE COMPARABLES AND, IF SO, HOW THESE RISKS AFFECTED EA CH OF THEM AND WHETHER SUCH ADJUSTMENT WOULD IMPROVE THE COMPARABI LITY. IT HAS BEEN FURTHER OBSERVED BY THE HONBLE DRP THAT M ECHANICAL ADJUSTMENT COULD NOT BE MADE TO THE MARGINS OF THE COMPARABLES WITHOUT KNOWING WHICH RISKS WERE TAKEN BY THE ENTIT Y CONCERNED AND HOW THE PROFITABILITY WAS AFFECTED. 6.3.1 DIFFERENT BENCHES OF THE ITAT HAVE TAKEN A DIVERGENT VIEW ON THIS ISSUE. THE ITAT MUMBAI BENCH IN THE CASE OF SYMANTEC HAS HELD THAT NO SEPARATE ADJUSTMENT IS REQUIRED ON ACCOUNT OF RISK AND FUNCTIONAL DIFFERENCES WHEREAS ITAT DELHI BENCH IN THE CASE OF SONY INDIA PRIVATE LIMITED VERSUS DCIT REPO RTED IN 114 I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 25 ITD 448 HAS HELD THAT DEDUCTION ON ACCOUNT OF OWNER SHIP OF INTANGIBLES, RISK FACTORS CAN BE ALLOWED. IN VIEW O F THE MATTER, WE ARE INCLINED TO ACCEPT THE VIEW FAVOURABLE TO THE A SSESSEE. 6.3.2 ITAT DELHI BENCH IN THE CASE OF AVENUE ASIA ADVISORS PRIVATE LIMITED VERSUS DCIT IN ITA NO. 6638/DEL/201 3 HAS HELD THAT IN THE TRANSFER PRICING THE STUDY, THE ENDEAVO UR IS TO IMPROVE THE COMPARABILITY BETWEEN THE ASSESSEE AND THE COMP ARABLE. THE BENCH OPINED THAT THE RISK TAKEN BY AN INDEPENDENT ENTITY AND A CAPTIVE SERVICE PROVIDER WERE DIFFERENT AND SINCE T HE REMUNERATION OF THE CAPTIVE ADVISOR WAS NOT LINKED WITH THE PERFORMANCE, IT WAS NOT AT A SIGNIFICANT RISK AND T HEREFORE, SUITABLE ADJUSTMENTS SHOULD BE ALLOWED. 6.3.3 ITAT HYDERABAD BENCH IN THE CASE OF IT IS HS BC ELECTRONIC DATA PROCESSING INDIA LTD VERSUS ADDITIONAL CIT IN ITA NO. 1624/HYD/2010 HAS HELD THAT WHERE THE ASSESSEE OPER ATES IN A RISK MITIGATED ENVIRONMENT VIS-A-VIS THE COMPARABLE COMPANIES PERFORMING ENTREPRENEURIAL RISK-TAKING FUNCTIONS, A DJUSTMENT FOR RISK BEING TAKEN BY THE COMPARABLE SHOULD BE ALLOWE D. 6.3.4 ITAT BANGALORE BENCH IN PHILIPS SOFTWARE CE NTRE PRIVATE LTD VERSUS ACIT IN ITA NO. 218/BANG/2008 HAS ALSO H ELD THAT ADJUSTMENT NEEDS TO BE MADE TO THE MARGINS OF THE C OMPARABLES I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 26 TO ELIMINATE DIFFERENCES ON ACCOUNT OF DIFFERENT FU NCTIONS, ASSETS AND RISKS. MORE SPECIFICALLY, ADJUSTMENT NEEDS TO B E MADE FOR DIFFERENCES IN RISK PROFILE, DIFFERENCE IN WORKING CAPITAL POSITION AND DIFFERENCES IN ACCOUNTING POLICIES. 6.3.5 THEREFORE, IN VIEW OF THE CITED PRECEDENTS AND ON THE FACTS OF THE CASE, IT IS OUR CONSIDERED OPINION THAT THE RISK TAKEN BY AN INDEPENDENT ENTITY AND THE CAPTIVE SERVICE PROVIDER ARE DIFFERENT AND SINCE THE REMUNERATION OF THE CAPTIVE SERVICE P ROVIDER IS NOT LINKED WITH THE PERFORMANCE, IT IS NOT A SIGNIFICAN T RISK AND, THEREFORE, A SUITABLE ADJUSTMENT SHOULD BE ALLOWED. ACCORDINGLY, WE RESTORE THE MATTER TO THE FILE OF THE LD. TPO/AO FOR EXAMINATION OF THE ISSUE AND PROVIDE SUITABLE ADJUS TMENT TOWARDS RISK IN ACCORDANCE TO THE LAW. THE ASSESSEE IS DIRECTED TO EXTEND COOPERATION TO THE LD. TPO IN QUANTIFICATION OF RISK ADJUSTMENT. ACCORDINGLY, THIS GROUND STANDS ALLOWED FOR STATISTICAL PURPOSES. 6.4 GROUND NO. 2 CHALLENGING INITIATION OF PENALT Y PROCEEDINGS IS DISMISSED AS BEING PREMATURE. 7. IN THE FINAL RESULT, THE APPEAL OF THE ASSESSE E STANDS ALLOWED IN TERMS OF OUR SPECIFIC OBSERVATIONS/DIRECTIONS. I.T.A. NO. 2133/DEL/2014 ASSESSMENT YEAR 2009-10 27 ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND MAY, 2017. SD/- SD/- (J.S. REDDY) (SUDHANSHU SRIVASTA VA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 ND MAY, 2017 GS COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSTT. REGISTRAR ITAT NEW DELHI