Saipem India Projects Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 401/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 7974 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 09-11-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 22-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D N KAR IRS
• Assessee Lawyers: ANANTHAKRISHNAN C AS; SHARATH RAO PRANITH GOLECHA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction
• Section: 115JB

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI . . . , !' . #$#% , & '' ( [BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ] ./I.T.A. NO. 401/MDS/2016 / ASSESSMENT YEAR :2011-2012. M/S. SAIPEM INDIA PROJECTS LIMITED, YARLAGADDA TOWERS, 4, FOURTH LANE, OFF. NUNGAMBAKKAM HIGH ROAD, CHENNAI 600 034. VS. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE VI(1) CHENNAI. [PAN AAACI 7915F] ( )* / APPELLANT) ( +,)* /RESPONDENT) / APPELLANT BY : S/SHRI. SHARATH RAO, PRANITH GOLECHA & ANANTHAKRISHNAN. C.AS. /RESPONDENT BY : SHRI. D.N. KAR, IRS, CIT. /DATE OF HEARING : 09-11-2016 ! /DATE OF PRONOUNCEMENT : 25-11-2016 / O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST AN ORDER DATED 21.12.2015 OF THE ASSESSING OFFICER PASSED U/ S.143(3) OF THE INCOME TAX ACT, 1961 (HEREIN REFERRED TO THE ACT ) PURSUANT TO THE ITA NO.401/MDS/2016. :- 2 -: DIRECTION OF THE LD. DISPUTE RESOLUTION PANEL (HERE INAFTER REFERRED TO THE DRP) U/S.144C (13) OF THE ACT 2. GROUNDS TAKEN BY THE ASSESSEE ARE ON A TRANSFER PR ICING ADJUSTMENT OF C7,11,50,235/- FOR THE IMPUGNED ASSES SMENT YEAR. LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBMITTED T HAT, HE WAS NOT PRESSING GROUNDS 15 & 16 ASSAILING REJECTION OF IDL E CAPACITY ADJUSTMENT. ACCORDINGLY THESE TWO GROUNDS ARE DISM ISSED AS NOT PRESSED. 3. FACTS APROPOS ARE THAT ASSESSEE AN ENGINEERING SER VICES PROVIDER HAD FILED ITS RETURN FOR THE IMPUGNED ASSE SSMENT YEAR DISCLOSING INCOME OF C3,31,83,584/- UNDER NORMAL PR OVISION AND C6,37,96,564/- U/SEC. 115JB OF THE ACT. SINCE ASSE SSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES EXCEEDING A VALUE OF C15,00,00,000/- A REFERENCE WAS MADE TO THE LD. TRANSFER PRICING OFFICER (HEREINAFTER REFERRED TO THE TPO ) BY THE ASSESSING OFFICER. PROFILE OF THE ASSESSEE HAS BEEN SUMMARIZ ED BY THE LD. TPO AT PARA 3 & 5 OF THE ORDER DATED 22.01.2015 AND THIS IS REPRODUCED HEREUNDER:- SAIPEM INDIA IS ENGAGED IN PROVIDING ENGINEERING AND ALLIED SERVICES. DURING THE FINANCIAL YEAR 2010-11. SAIPE M INDIA EXPORTED ENGINEERING S ERVIC E AND PAID TECHNICAL SERVICE CHARGE ITA NO.401/MDS/2016. :- 3 -: TO ITS AES BELONGING TO THE SAIPEM GROUP. UNDER THE ENGINE RING SERVICES SEGMENT. THE MAIN ACTIVITIES OF SAIPEM INDIA C OULD BE CATE GORISED AS FOLLOWS: . PROJECT MANAGEMENT; . ENGINEERING ; . PROCUREMENT SERVICES AND; . SITE ACTIVITIES SAIPEM INDIA IS ENGAGED IN CARRYING OUT PROJECT MANAGEMENT, ENGINEERING PROCUREMENT ASSISTANCE SERIES, SITE SUP ERVISION, COMMISSIONING, MAINTENANCE FOR PROJECTS IN OIL & GA S, PETROCHEMICALS, REFINERIES, CHEMICAL AND MARITIME W ORKS IN INDIA AND HAS ITS PRESENT AND PLANNED OPERATIONS IN INDIA . BASED ON FAR ANALYSIS PRESENTED IN THE TP DOCUMENTATION, SAI PEM INDIA IS LEAST COMPLEXS ENTITY AND DOES NOT OWN ANY VALUABLE INTANGIBLES. SAIPEM INDIA BEARS NORMAL MARKET RISK, CONTRACT RIS K, FOREIGN EXCHANGE FLUCTUATION RISK AND IDLE CAPACITY RISK IN RELATION TO ITS ENGINEERING DESIGN SERIES. 4. INTERNATIONAL TRANSACTIONS ENTERED BY THE ASSESS EE WITH ITS ASSOCIATED ENTERPRISES DURING THE RELEVANT PREVIOUS YEAR WERE AS UNDER:- NAME OF THE ASSOCIATE DETAI LS OF TRANSACTION AMOUNT OF TRANSACTION (IN C) METHOD ADOPTED SAIPEM S.A. FRANCE, SAIPEM, SP. A. ITALY, GLOBAL PETRO PROJECTS SERVICES AG, SWITZERLAND, SAIPEM SINGAPORE PTE, LTD, SINGAPORE EXPORT OF ENGINEERING SERVICES 122,95,40,811 TNMM SAIPEM, SP. A. ITALY, SAIPEM S.A. FRANCE, SAIPEM SINGAPORE PTE, LTD, SINGAPORE, SAIPEM ASIA SDN BHD, MALAYSAIA REIMBURSEMENT OF EXPENSES 9,59,24,875 -- SAIPEM S.A. FRANCE, SAIPEM, RECOVERY OF 16,93,25,014/ - -- ITA NO.401/MDS/2016. :- 4 -: SP. A. ITALY, GLOBAL PETRO PROJECTS SERVICES AG, SWITZERLAND, SAIPEM SINGAPORE PTE, LTD, SINGAPORE AND OTHER EXPEN SES TOTAL 149,47,90,703 5. ASSESSEE HAD FOR ITS TRANSFER PRICING STUDY SEL ECTED TRANSACTIONAL NET MARGIN METHOD (HEREINAFTER REFERR ED TO AS TNMM) AS MOST APPROPRIATE ONE . IT HAD MADE AN ANALYSIS OF THE PROWESS AND CAPITAL LINE PLUS DATABASE AND SELECTED THREE COMP ANIES, WHICH ACCORDING TO IT WERE FUNCTIONALLY COMPARABLE TO IT. THE COMPARABLES SELECTED BY THE ASSESSEE AND THE ARITHMETIC MEAN OF THEIR PROFIT LEVEL INDICATOR WAS AS UNDER:- COMPANY NAME 2011 12 MONTHS M.N. DASTUR & COMPANY (P) LTD 3.13% STEWARTS AND LLOYDS INDIA LIMITED -19.87% TOYO ENGINEERING INDIA LTD 13.98% ARITHMETIC MEAN(%) -0.92% ASSESSEE HAS WORKED OUT ITS OWN PROFIT LEVEL INDICA TOR AS UNDER:- PARTICULARS ENGINEERING AND ALLIED SERVICES INCOME SERVICE INCOME OTHER INCOME 1,426,613,672 15,890,156 ITA NO.401/MDS/2016. :- 5 -: TOTAL OPERATING COST 1,442,503,828 EXPENDITURE: - PERSONAL EXPENSES OTHER OPERATING AND ADMINISTRATIVE EXPENSES. DEPRECIATION FINANCE CHARGES LESS: IDLE TIME COST (BEING IDLE CAPACITY IN RESPECT OF PERSONAL AND RENTAL COST) 829,043,265 504,751,396 35,855,723 1,152,404 95,505,056 TOTAL OPERATING COST 1,274,997,732 OPERATING/ NET PROFIT 167,506,096 OPERATING PROFIT/OPERATING COST 13.14% THE PROFIT LEVEL INDICATOR ADOPTED WAS THE RATIO O F OPERATING PROFIT TO OPERATING COST. AS PER ASSESSEE, ITS OWN PLI WAS M UCH MORE THAN THAT OF COMPARABLES AND THEREFORE THERE WAS NO REQUIREME NT FOR ANY ADJUSTMENT ON THE PRICING OF ITS INTERNATIONAL TRAN SACTIONS WITH THE ASSOCIATED ENTERPRISES. 6. THE LD. TPO AFTER CONSIDERING THE COMPARA BLES SELECTED BY THE ASSESSEE WAS OF THE OPINION THAT M/S.STEWARTS & LL OYDS LTD WAS NOT AN APPROPRIATE ONE. ACCORDING TO LD. TPO, M/S. STE WARTS & LLOYDS HAD ITA NO.401/MDS/2016. :- 6 -: INCURRED CONSIDERABLE MATERIAL COST AND WAS DOING FABRICATION WORK. THOUGH ASSESSEE SUBMITTED THAT MATERIAL CONSUMPTION OF M/S.STEWARTS & LLOYDS LTD AS A PERCENTAGE TO ITS OPERATING COST WAS ONLY 8.02%, THIS WAS NOT ACCEPTED BY THE LD. TPO. ACCORDING TO LD. TPO, M/S.STEWARTS & LLOYDS LTD WAS ENGAGED IN A DIFFEREN T TYPE OF ACTIVITY AND HAD SIGNIFICANT INVESTMENTS IN PLANT AND MACHIN ERY. THERE WERE NO SEGMENTAL RESULTS AND HENCE AS PER LD. TPO, M/S. STEWARTS & LLOYDS LTD COULD NOT BE CONSIDERED AS A PROPER COMPARABLE. LD. TPO THEREAFTER MADE HIS OWN STUDY PROWESS AND CAPITAL L INE PLUS DATABASE AND INDENTIFIED M/S. MAHINDRA CONSULTING ENGINEERS LTD., AND M/S. KIRLOSKAR CONSULTANTS LTD AS COMPARABLE TO THE AS SESSEE IN ADDITION TO M/S. MN DASTUR & COMPANY (P) LTD AND TOYO ENGINEERI NG INDIA LTD. APPEARING IN THE LIST OF THE ASSESSEE. ASSESSEE OB JECTED TO THE SELECTION OF M/S. MAHINDRA CONSULTING ENGINEERS LTD . AS A COMPARABLE CITING DIVERSIFIED PORTFOLIO OF ITS CONSULTANCY, WH ICH AS PER THE ASSESSEE WAS SIMILAR TO ADVISORY CONSULTANCY. FURTH ER, AS PER THE ASSESSEE THEY WERE CATERING TO A DIFFERENT MARKET. HOWEVER, THESE OBJECTIONS WERE REJECTED BY THE LD.TPO. AS PER LD . TPO ENGINEERING DESIGN SERVICES PERFORMED BY THE ASSESSEE INCLUDED ALLIED SERVICES ALSO AND THE SERVICES PERFORMED BY M/S. MAHINDRA CONSULT ING ENGINEERS LTD. FELL INTO THE LATTER CATEGORY. IT SEEMS ASSESS EE HAD NO OBJECTION TO ITA NO.401/MDS/2016. :- 7 -: THE INCLUSION OF M/S. KIRLOSKAR CONSULTANTS LTD IN THE LIST OF COMPARABLES. 7. ASSESSEE ALSO SUGGESTED TWO ADDITIONAL COMPARABL ES NAMELY M/S. DESEIN PRIVATE LIMITED AND M/S. BLUE STAR DESI GN & ENGINEERING LTD, BEFORE THE LD. TPO. AS PER THE ASSESSEE IF M/ S. MAHINDRA CONSULTING ENGINEERS LTD WAS CONSIDERED TO BE FUNCT IONALLY COMPARABLE, THEN M/S. DESEIN PRIVATE LIMITED WHICH WAS PROVIDING CONSULTANCY IN INDIAN POWER SECTOR AND M/S. BLUE ST AR DESIGN & ENGINEERING LTD WHICH WAS PROVIDING ENGINEERING SUP PORT SERVICES FOR BUILDINGS WERE ALSO FUNCTIONALLY COMPARABLE. HOWEV ER, LD. TPO WAS OF THE OPINION THAT M/S. DESIEN PRIVATE LTD AND M/S. B LUE STAR DESIGN & ENGINEERING LTD WERE NOT ALL COMPARABLE TO THE ASSE SSEE. 8. THE FINAL COMPARABLES THE SELECTED BY LD. TPO A ND AVERAGE PLI WORKED OUT BY HIM READ AS UNDER:- NAME OF THE COMPARABLE MARGIN IN % M/S. MAHINDRA CONSULTING ENGINEERS LTD 29.52 M.N. DASTUR & COMPANY (P) LTD 3.13 TOYO ENGINEERING INDIA LTD, 13.98 KIRLOSKAR CONSULTANTS LTD -1.35 AVERAGE 11.32 ITA NO.401/MDS/2016. :- 8 -: LD. TPO APPLIED AVERAGE PLI OF 11.32% OF THE COMPAR ABLES ON THE OPERATIVE COST OF THE ASSESSEE AND WORKED OUT AN UP WARD ADJUSTMENT OF C8,34,73,835/-. THE WORK OUT MADE BY THE LD. TP O IS REPRODUCED HEREUNDER:- ASSESSEES FINANCIALS:- OPERATING COST : 137,08,02,788 OPERATING PROFIT : 7,17,01,040 OPERATING REVENUE : 144,25,03,828 OPERATING PROFIT @11.32% OF COST : 15,51,74,875 OPERATING COST : 137,08,02,788 ARMS LENGTH REVENUE : 152,59,77,663 OPERATING REVENUE : 144,25,03,828 ADJUSTMENT PROPOSED : 8,34,73,835 9. WHEN A DRAFT ASSESSMENT ORDER IN THE LINES MENTI ONED ABOVE WAS PROPOSED BY THE LD. ASSESSING OFFICER TO THE ASSESSEE, IT CHOSE TO MOVE THE LD. DISPUTE RESOLUTION PANEL (HER EINAFTER REFERRED TO AS DRP). APART FROM OBJECTING TO IDLE TIME ADJ USTMENT ON PLI NOT BEING GRANTED TO IT, ASSESSEE ALSO ASSAILED REJECTI ON OF ITS COMPARABLE NAMED M/S. STEWARTS & LLOYDS LTD AND INCLUSION OF T HE NEW COMPARABLE CALLED M/S. MAHINDRA CONSULTING ENGINEER S LTD. IT ALSO ITA NO.401/MDS/2016. :- 9 -: ASSAILED NON CONSIDERATION OF TWO NEW COMPARABLES SUGGESTED BY IT NAMELY M/S. DESEIN PRIVATE LIMITED AND BLUE STAR DE SIGN & ENGINEERING LTD, SUGGESTED BY THE ASSESSEE. LD. DRP DISPOSED OFF THESE OBJECTIONS OBSERVING AS UNDER:- SINCE ASSESSEE'S OBJECTIONS 1.4 TO 1.13 ARE INTER RELATED, THE SAME ARE BEING TAKEN UP TOGETHER. THE SUBMISSIONS OF THE ASSESSEE ON THESE OBJECTIONS HAVE DULY BEEN CONSIDERED. AS REGARDS ASSESSEE'S OB JECTION OF TPO REJECTING ITS TP STUDY AND APPLYING FRESH FILTE RS, THE ISSUE HAS BEEN DEALT IN DETAIL BY THE TPO. REASON FOR REJ ECTION OF COMPARABLES ADOPTED OR SUGGESTED BY THE ASSESSEE, A RE GIVEN BY TPO IN HIS ORDER. HE HAS ALSO GIVEN HIS FINDINGS AS TO WHY ASSESSEE S OBJECTION REGARDING COMPARABLES PROPOSE D BY THE TPO CANNOT BE ACCEPTED. SO, AS SUCH, THERE IS NO INFIRMITY IN THE ORDER OF TPO IN RELATION TO REJECTION OF CERTAI N COMPARABLES PROPOSED BY THE ASSESSEE. DURING HEARI NGS ALSO THE ASSESSEE COULD NOT CONTROVERT THE FINDINGS OF T HE TPO. DURING HEARINGS THE ASSESSEE WAS ASKED TO SHOW THAT THE TWO ADDITIONAL COMPARABLES SELECTED BY IT SATISFIED THE FILTERS ADOPTED BY THE TPO E.G RELATED PARTY TRANSACTION FI LTER, 1CRORE TURNOVER FILTER ETC. AND THAT THE SAME ARE F UNCTIONALLY SIMILAR TO THE ASSESSEE. HOWEVER, ASSESSEE FAILED T O PRODUCE ANNUAL REPORTS OF THE TWO COMPARABLES FROM WHICH TH E PROFIT AND LOSS ACCOUNT OF THE TWO COMPARABLES PROPOSED BY IT COULD HAVE BEEN EXAMINED AND APPLICABILITY OF FILTERS AND FUNCTIONAL SIMILARITY COULD HAVE BEEN LOOKED INTO. SO OBJECTIO NS OF THE ASSESSEE ON THIS ISSUE ARE NOT ACCEPTED. THEREAFTER ASSESSMENT WAS COMPLETED IN ACCORDANCE W ITH LD. DRP DIRECTIONS. 10. BEFORE US, LD. AUTHORISED REPRESENTATIVE, STRON GLY ASSAILING THE ORDERS OF THE LOWER AUTHORITIES SUBMITTED THAT M/S. MAHINDRA CONSULTING ENGINEERS LTD WAS NOT COMPARABLE TO THE FUNCTIONAL PROFILE ITA NO.401/MDS/2016. :- 10 -: OF THE ASSESSEE. AS PER LD. AUTHORISED REPRESENTATI VE PROFILE OF THE ASSESSEE WAS CAPTURED IN ITS TRANSFER PRICING STUDY FOR THE RELEVANT ASSESSMENT YEAR. RELYING ON THE PAPER BOOK PAGE NO. 220 AND 221, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT ASSESSEE W AS ENGAGED IN ENGINEERING SERVICES RELATING TO OIL AND GAS INDUST RY FOR OFFSHORE AND ONSHORE PROJECTS. AS PER LD. AUTHORISED REPRESENTAT IVE ENGINEERING SERVICES DONE BY THE ASSESSEE WAS ONLY IN THE ONSHO RE PROCESS SYSTEMS AND OFFSITE SERVICES RELATED TO OIL AND GAS , CHEMICAL AND PETROCHEMICAL AND REFINERY. AS PER LD. AUTHORISED REPRESENTATIVE, OTHER ACTIVITIES OF THE ASSESSEE WHICH WAS CONSIDER ED BY THE LD. TPO TO BE COMPARABLE WITH THE ACTIVITIES OF M/S. MAHINDRA CONSULTING ENGINEERS LTD WAS RESIDUAL ACTIVITIES WHICH WERE I NCIDENTAL TO THE MAIN SERVICES. LD. AUTHORISED REPRESENTATIVE TOOK US THR OUGH THE ANNUAL REPORT OF M/S. MAHINDRA CONSULTING ENGINEERS LTD. AS PER LD. AUTHORISED REPRESENTATIVE DIRECTORS REPORT AVAILAB LE AT PAPER BOOK PAGE 184 CLEARLY PROVED THAT THE SAID COMPANY WAS D OING ENGINEERING CONSULTANCY IN INFRASTRUCTURE ESPECIALLY IN THE ARE A OF SPECIAL ECONOMIC ZONE, WATER SUPPLY AND SEWAGE, SOLID WASTE MANGEMEN T ETC. AS PER LD. AUTHORISED REPRESENTATIVE M/S. MAHINDRA CONSULT ING ENGINEERS LTD THOUGH IT HAD AN INTENTION TO DO INFRASTRUCTURE CON SULTING SERVICES IN PARTNERSHIP WITH AN M/S.SAFAGE, FRANCE, THIS HAD NO T HAPPENED DURING THE RELEVANT PREVIOUS YEARS. ACCORDING TO HI M, FUNCTIONAL PROFILE ITA NO.401/MDS/2016. :- 11 -: OF M/S. MAHINDRA CONSULTING ENGINEERS LTD CLEARLY S HOWED THAT THEY WERE NOT IN OIL AND REFINERY SECTOR. AS PER LD. AU THORISED REPRESENTATIVE THEY WERE DOING INFRASTRUCTURE CONSU LTANCY. THUS, ACCORDING TO HIM, M/S. MAHINDRA CONSULTING ENGINEER S LTD WAS WRONGLY CONSIDERED AS A GOOD COMPARABLE. 11. ADVERTING TO THE EXCLUSION OF M/S. STEWARTS & LLOYD S LTD, LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE SAID C OMPANY WAS CONSIDERED BY LD. TPO HIMSELF IN TP ORDERS FOR ASSE SSMENT YEARS 2008- 09, 2009-2010 AND 2010-2011 AS A GOOD COMPARABLE. ACCORDING TO HIM, THERE WAS NO CHANGE IN THE FUNCTIONAL PROFILE OF M/S. STEWARTS & LLOYDS LTD WHICH WARRANTED REJECTION OF THAT COMPARABLE FOR TH E IMPUGNED ASSESSMENT YEAR. AS PER LD. AUTHORISED RE PRESENTATIVE COST OF RAW MATERIAL INCURRED BY THE SAID COMPANY WAS IN SIGNIFICANTLY SMALL WHEN COMPARED TO ITS TOTAL OPERATING COST. THUS, AC CORDING TO HIM, WITHOUT ANY RHYME OR REASON, M/S. STEWARTS & LLOY DS LTD WAS REJECTED AS A PROPER COMPARABLE. 12. IN ANY CASE, ACCORDING TO HIM, IF M/S. MAHINDRA CON SULTING ENGINEERS LTD WAS CONSIDERED AS A PROPER COMPARABLE , THEN TWO NEW COMPARABLES SUGGESTED BY THE ASSESSEE DURING THE CO URSE OF PROCEEDING BEFORE LD. TPO, NAMELY M/S. DESEIN PRIVA TE LIMITED AND ITA NO.401/MDS/2016. :- 12 -: M/S. BLUE STAR DESIGN & ENGINEERING LTD. HAD ALSO TO BE CONSIDERED AS GOOD COMPARABLES. LD. AUTHORISED REPRESENTATIVE SU BMITTED THAT THESE TWO COMPANIES WERE ALSO PROVIDING ENGINEERIN G CONSULTANCY. SUMMARIZING HIS ARGUMENTS, LD. AUTHORISED REPRESENT ATIVE SUBMITTED THAT M/S. MAHINDRA CONSULTING ENGINEERS LTD HAD TO BE EXCLUDED AND M/S. STEWARTS & LLOYDS LTD HAD TO BE INCLUDED IN TH E LIST OF COMPARABLES. AS PER THE LD. AUTHORISED REPRESENTAT IVE IN THE EVENT M/S. MAHINDRA CONSULTING ENGINEERS LTD WAS CONSIDER ED AS A GOOD COMPARABLE, THEN M/S. DESEIN PRIVATE LTD AND M/S.B LUE STAR DESIGN & ENGINEERING LTD ALSO SHOULD COME IN THE LIST. 13. PER CONTRA, LD. DEPARTMENTAL REPRESENTATIVE STRONG LY ASSAILING ON THE ORDERS OF THE LOWER AUTHORITIES SU BMITTED THAT IN TNMM ANALYSIS PERFECT TALLYING OF FUNCTIONAL PROFI LE WAS NOT NECESSARY. ACCORDING TO HIM, FUNCTIONAL PROFILE OF BOTH ASSESS EE AS WELL AS M/S. MAHINDRA CONSULTING ENGINEERS LTD WERE SIMILAR, SIN CE BOTH WERE DOING ENGINEERING CONSULTANCY. TAKING US THOUGH THE PRO FILES OF BOTH THE COMPANIES LD. DEPARTMENTAL REPRESENTATIVE SUBMITTE D THAT THERE WAS LITTLE THAT COULD DIFFERENTIATE THESE TWO. VIZ-A-V IZ M/S. STEWARTS & LLOYDS LTD., LD. DEPARTMENTAL REPRESENTATIVE SUBMI TTED THAT EACH ASSESSMENT YEAR WAS DIFFERENT. JUST BECAUSE THE SAI D COMPANY WAS CONSIDERED TO BE GOOD COMPARABLE IN EARLIER YEARS W OULD NOT MAKE IT A ITA NO.401/MDS/2016. :- 13 -: GOOD COMPARABLE FOR THE SUBSEQUENT YEAR. ACCORDING TO HIM, ASSESSEE COULD NOT SHOW THAT IN THE EARLIER YEARS M/S. STEWA RTS & LLOYDS LTD HAD ANY MATERIAL COST SIMILAR TO WHAT WAS INCURRED BY IT DURING THE RELEVANT PREVIOUS YEAR. AS FOR THE PLEADING OF THE LD. AUTHORISED REPRESENTATIVE THAT TWO COMPANIES NAMELY M/S. DESEI N PRIVATE LTD & M/S. BLUE STAR DESIGN & ENGINEERING LTD, ALSO NEEDE D TO BE CONSIDERED, LD. DEPARTMENTAL REPRESENTATIVE SUBMIT TED THAT ASSESSEE COULD NOT SHOW SIMILARITY IN THE FUNCTIONAL PROFIL E OF THESE COMPANIES WITH THAT OF ASSESSEE. 14. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSE D THE ORDERS OF THE AUTHORITIES BELOW. FIRST QUESTION WH ETHER M/S. MAHINDRA CONSULTING ENGINEERS LTD WAS RIGHTLY CONSIDERED AS A GOOD COMPARABLE. IN THE TRANSFER PRICING STUDY UNDER TH E HEADING STATEMENT OF FACTS ASSESSEE HAD GIVEN THE FUNCTIO NAL PROFILE OF M/S. SAIPEM GROUP, OF WHICH ASSESSEE WAS A MEMBER AS UN DER:- SA I PEM GROUP IS A GLOBAL TURNKEY CONTRACTOR IN THE OIL AND GAS INDUSTRY., 43 PERCENT OF THE G R OUP IS OWNE D BY ENI, AN ITALIAN MULTINATIONAL OIL AND GAS COMPANY. ENI OPERATES IN THE OII AND GAS ELECTRICITY GENERATION ( AND SALE. PETROCHEMICALS, OILFIELD SERVICES, CONSTRUCTION AND ENGINEERING INDUSTRIES. ENI IS ACTIVE IN 79 COUNTRIES WITH A STAFF OF ABOUT 80,000 EMPLOYEES. . SAIPEM GROUP IS A GLOBAL LEADER IN THE PROVISION OF ITA NO.401/MDS/2016. :- 14 -: ENGINEERING, PROCUREMENT, PROJECT MANAGEMENT AND CONSTRUCTION SERVICES WITH DISTINCTIVE CAPABILITIES IN THE DESIGN AND THE EXECUTION OF LARGE - SCALE OFFSHORE AND ONSHORE PROJECTS. AND TECHNOLOGICAL COMPETENCES SUCH AS GAS MONETISATION AND HEAVY OIL EXPLOITATION. THE SAIPEM GROUP HAS A STRONG LOCAL PRESENCE IN STRATEGIC AND EMERGING AREAS SUCH AS WEST AFRICA, NORTH AFRICA, FORMER SOVIET UNION COUNTRIES (FSU), CENTRAL ASIA, MIDDLE EAST AND SOUTH EAST ASIA. THE VASTLY DIVERSIFIED GROUP IS ORGANISED IN THREE BUSINESS UNITS:, OFFSHORE, ONSHORE AND DRILLING WITH A STRONG BIAS TOWARDS OIL AND GAS RELATED ACTIVITIES IN REMOTE AREAS AND DEEP WATER. OFFSHORE SAIPEM OFF SHORE'S VAST SPECTRUM OF ACTIVITIES IS COMPREHENSIVE OR PLATFORMS. MARINE TERMINALS. PIPELINES, SUBSEA DEEP WATER DEVELOPMENTS. FPSOS .(FLOATING PRODUCTION STORAGE AND OFFLOADING). THE ENGINEERING AND PROJECT MANAGEMENT EXPERTISE TO CARRY OUT EPIC CONTRACTS. HAS BEEN FOSTERED WITH THE ACQUISITION O F BOUYGUES OFFSHORE IN 2002. AND SNAMPROGETTI IN 2006. ONSHORE WITH THE ACQUISITION OF SNAMPROGETTI, THE BUSINESS UNIT, SAIPEM ONSHORE, HAS BECOME ONE OF THE WORLD'S LARGEST ENGINEERING AND CONSTRUCTION COMPANIES, SERVING PRIMARILY THE OIL AND GAS, REFINING AND PETROCHEMICAL MARKETS AS WELL AS A NUMBER OF DIVERSIFIED INDUSTRIAL ONES, SUCH AS ENVIRONMENT, INFRASTRUCTURE, MARINE TERMINALS, ETC. SAIPEM OFFERS A COMPLETE RANGE OF PROJECT DEFINITION AND EXECUTION SERVICES, PARTICULARLY FOR THE 'RNEGA- PROJECTS' REQUIRED BY THE MARKET FROM FEASIBILITY AND FRONT END STUDIES TO DESIGN, ENGINEERING, PROCUREMENT AND FIELD CONSTRUCTION. SAIPEM MAINLY OPERATES FROM FOUR GLOBAL ENGINEERING CENTRES FOR ONSHORE PROJECTS LOCATED IN MILAN AND FANO IN ITALY, PARIS, FRANCE AND CHENNAI, INDIA. ITA NO.401/MDS/2016. :- 15 -: IT IS TO BE NOTED THAT THE ABOVE WAS THE PROFILE OF SAIPEM GROUP AND NOT THAT OF ASSESSEE COMPANY NAMELY SAIPEM INDIA PR OJECTS LTD, AS SUCH. FUNCTIONAL PROFILE OF ASSESSEE IS CAPTURED A T PARAGRAPH 3 & 4 OF LD. TPO WHICH ARE REPRODUCED HEREUNDER:- FUNCTIONS PERFORMED SAIPEM INDIA COVERS THE ENTIRE SPEC TRUM OF UPSTREAM I DOWNSTREAM AS WELL AS ONSHORE I OFFSHORE PROJECTS RIGHT FROM CONCEPTUAL STUDIES THROUGH DETAILED AND FIELD ENGINEERING . SAIPEM INDIA ALSO PROVIDES VALUE A SERVICES LIKE FEASIBILITY STUDIES. ESTIMATION AND PROPOSALS . PROCUREMENT ASSISTANCE SERVICES INCLUDING MARKET SCOUTING. COST ESTIMATE. REQUEST FOR QUOTATION, TECHN I CAL AND COMMERCIAL EVALUATIONS, POST-ORDER MANAGEMENT INCLUDING INSPECTION AND EXPEDITING . SHIPMENT AND CUSTOMS CLEARANCE IN OIL AND GAS (ONSHORE AND OFFSHORE), CRYOGENIC TANKS, REFINING. PETROCHEMICAL S AND POWER. SAIPEM INDIA UNDERTAKES TO PROVIDE EXECUTION OR THE PROCESS ACTIVITIES FOR BOTH THE PRIMARY ONSHOR E PROCESS SYSTEMS (REFINERY, CHEMICAL AND PETROCHEMICAL, OIL AND GAS) AND UT IL IT I ES AND OFFSITE SERVICES. BASICALLY SAIPEM INDIA'SOFFER1NGS CAN BE CATEGORIZED AS FOLLOWS: 1. ENGINEERING SERVICES THIS ENCOMPASSES PERFORMING FEASIBILITY STUDIES, BASIC AND DETAIL ENGINEERING AND TECHNICAL ASSISTANCE RELATED TO ONSHORE I OFFSHORE PLANT DESIGN WORKS; THIS INCLUDES SUPPORT ENGINEERING . COORDINATION OF DESIGN ACTIVITIES, ECONOMICAL, FEASIBILITY AND CONCEPTUAL STUDIES , PROCESS STUDIES, ANALYSIS AND DRAWINGS RELATED TO THE METHOD OF PERFORMING THE CONSTRUCTION ACTIVITIES , DESIGN AND ENGINEERING SERVICES FOR VARIOUS DISCIPLINES I.E. ITA NO.401/MDS/2016. :- 16 -: CIVIL, STRUCTURAL, MECHANICAL, ELECTRICAL, INSTRUMENTATION, PIPING ETC. 2. PROJECTS SERVICES THIS CONSIST OF UNDERTAKING TECHNICAL ASSISTANCE TO THE PROJECTS OF CLIENTS AND PERFORMING S E RVICES SUCH AS COORDINATION OF DESIGN ACTIVITIES. FIELD ENGINEERING, COMMISSIONING ASSISTANCE , C ONSTRUC TI ON SUPERVISION, MATERIAL CONTROL. PROJECT CONTROL . PLANNING. QUALITY CONTROL I ASSURANCE. AND S AFETY AT CONSTRUCTION SITES AND OTHER TECHNICAL ASSISTANCE ACTIVITIES 3. PROCESS ENGINEERING SERVCIES THIS CONSIST OF THE EXECUTION OF THE PROCESS ACTIVITIES FOR BOTH THE PRIMARY ONSHORE PROCESS SYSTEMS (REFINERY. CHEMICAL & PETROCHEMICAL. OIL & GAS) AND UTILITIES & OFFSITE. THAT MAY BE REQUIRED BY CUSTOMERS. THESE INCLUDE THE EXECUTION OF PROCESS ACTIVITIES FOR FEASIBILITY STUDIES, BASIC FRONT END DETAILED ENGINEERING AND PROCESS TECHNICAL ASSISTANCE RELATED TO ONSHORE PLANT DESIGN WORKS. BESIDES. IT ALSO INCLUDES PROCESS SUPPORT TO PLANT COMMISSIONING START-UP AND PERFORMANCE TEST RUN. THE PROCESS ENGINEERING SERVICES SHALL BE CARRIED OUT BY THE NEW DELHI PROCESS CENTRE 4. OTHER ACTIVITIES:- SAIPEM INDIA ENGAGES ITSELF IN ANY RESIDUARY ACTIVITIES, INCIDENTAL TO THE PROVISION OF MAIN SERVICE. ENGINEERING ACTIVITIES IN SAIPEM INDIA ARE SUPPORTED BY A COMPREHENSIVE PANEL OF SOFTWARE , FROM SPECIFIC STANDALONE SOFTWARE SUCH AS HYSIS, PROII, HTRI,SACS, ABAQUS TO INTEGRATED PLATFORMS SUCH AS SMART PLANT P&ID, PCS, PDMS, AUTOCAD OR MICRO STATION. SAIPEM INDIA USES 3D MODELLING THROUGH PDS OR PDMS. ADDITIONAL SOFTWARE AND TOOLS ARE ADDED ON PROJECT NEED BASIS TOGETHER WITH ADEQUATE TRAININGS FOR THEIR PERSONAL. ITA NO.401/MDS/2016. :- 17 -: SAIPEM INDIA RENDERS SERVICES TO BOTH THE GROUP COMPANIES, WHICH ARE ITS AES AS WELL AS NON- GROUP OR I THIRD PARTIES. THESE SERVICES ARE RENDERED FROM INDIA (OFF-SITE) AS WELL AS ON-SITE AND SAIPEM INDIA IS REMUNERATED ON AN HOURLY BASIS I FIXED PRICE FOR THE SAME . A READING OF THE ABOVE TWO PROFILES CLEARLY SHOW TH AT M/S. SAIPEM GROUP OF WHICH ASSESSEE WAS A PART, WAS NOT ONLY SERVING OIL AND GAS BUT WERE INTO DIVERSIFIED INDUSTRIES LIKE ENVIRONME NT, INFRASTRUCTURE AND MARINE TERMINALS. COMING TO THE SPECIFIC FUNCTIONS PERFORMED BY THE ASSESSEE CAPTURED ABOVE IT CLEARLY SHOW THAT ASSESS EE WAS PROVIDING ENGINEERING AND ALLIED SERVICES NOT TO OIL AND GAS INDUSTRIES ALONE. IT WAS GIVING SUPPORT SERVICES FOR PLANT COMMISSIONING START UP AND PERFORMING TEST RUN. IN SUCH CIRCUMSTANCES CONTENTI ON OF THE ASSESSEE THAT M/S. MAHINDRA CONSULTING ENGINEERS LTD WAS EN GAGED IN CONSULTANCY ENGINEERING OF A TOTALLY DIFFERENT VARI ETY, WHICH WERE NOT COMPARABLE TO IT CANNOT BE ACCEPTED. AS MENTIONED B Y LD. DEPARTMENTAL REPRESENTATIVE A STRICT PRODUCT OR SER VICE SIMILARITY IS NOT REQUIRED WHEN TNMM IS SELECTED AS MOST APPROPRI ATE METHOD, IN A TRANSFER PRICING STUDY. 15. APART FROM THE ABOVE, FUNCTIONAL PROFILE OF M/S . MAHINDRA CONSULTING ENGINEERS LTD IS CLEAR FROM THE DIRECTOR S REPORT FORMING A PART OF ITS ANNUAL REPORT. THIS IS REPRODUCED HERE UNDER:- ITA NO.401/MDS/2016. :- 18 -: DURING THE YEAR UNDER REVIEW, YOUR COMPANY CONSOLIDATED ITS PRESENCE IN INFRASTRUCTURE CONSULT ING SECTOR AND REGISTERED A HIGH GROWTH IN SEVERAL AREAS OF OPERATION . YOUR COMPANY'S INCOME FOR THE YEAR HAS INCREASED TO 1,1 01 . 56 TAKHS AS COMPARED TO 936.89 LAKHS IN THE PREVIOUS YEAR, REGISTERING A GROWTH OF 17 . 58%. PROM BEFORE TAXATION FOR THE YEAR WAS 253 . 54 LAKHS AS COMPARED TO RS . 175.65 LAKHS FOR THE . PREVIOUS YEAR, REPRESENTING AN I NCREASE OF 44 . 34% . DURING THE YEAR UNDER REVIEW , YOUR COMPANY HAS BAGGED SEVERAL PRESTIGIOUS AND FIRST OF ITS KIND ASSIGNMENTS. YOUR COMPANY HAS FURTHER STRENGTHENED ITS POSITION IN INFRASTRUCTURE SECTOR BY PROVIDING CONS ULTANCY SERVICES IN THE AREAS ZONES, WATER SUPPLY AND SOLID WASTE MANAGEMENT, URBAN INFRASTRUCTURE AGRI AND HO RTI INFRASTRUCTURE, SOCIAL I NFRASTRUCTURE, MARINE INFRASTRUCTURE, INDUSTRIAL INFRASTRUCTURE . RENWEAB LE ENERGY, SUSTAINABILITY STUDIES, , INSTITUTIONAL STR ATEGIES I PLANNING STUDIES, INDUSTRIAL PLATS AND SYSTEMS. ET C:--'' YOUR COMPANY HAS ALSO IMPLEMENTED SEVERAL INNOVATIV E AND S USTAINABILITY IDEAS IN ITS PROJECTS AND IS AUGMENTI NG ITS EFFORTS TO CONSOLIDATE ITS POSITION AS A FRON T RUNNER IN INNOVATE PROJECTS. YOUR COMPANY CONTINUES TO RECEI VE ORDERS FROM PRESTIGIOUS AND EXISTING CLIENTS IN DIF FERENT SECTORS INDICATING ITS VERSATILE CAPABILITY OF PROV IDING CONSULTANCY SERVICES FOR MULTI DISCIPLINARY PROJECT S WHICH AFFIRMS THE GOODWILL OF YOUR COMPANY. THIS WOULD AL SO SERVE AS A BASE FOR THE COMPANYS SUSTAINED GROWTH IN THE FUTURE. DURING THE YEAR UNDER REVEIW, YOUR COMPANY HAS GOT ITSELF EMPLANED WITH VARIOUS CENTRAL/STATE GOVERNME NT NODAL AGENCIES ENTRUSTED WITH RESPONSIBILITY OF DEVELOPING INFRASTRUCTURE IN THE COUNTRY. OBVIOUSLY, M/S. MAHINDRA CONSULTING ENGINEERS LTD W AS ALSO PROVIDING ENGINEERING CONSULTANCY AND SERVICES WHICH WERE FU NCTIONALLY SIMILAR TO WHAT THE ASSESSEE WAS DOING. IN SUCH CIRCUMSTAN CES, WE ARE OF THE ITA NO.401/MDS/2016. :- 19 -: OPINION THAT LOWER AUTHORITIES WERE JUSTIFIED IN CO NSIDERING M/S. MAHINDRA CONSULTING ENGINEERS LTD AS A GOOD COMPARA BLE. 16. COMING TO THE ARGUMENT OF THE LD. AUTHORISED RE PRESENTATIVE THAT IF M/S. MAHINDRA CONSULTING ENGINEERS LTD IS C ONSIDERED A GOOD COMPARABLE THEN TWO OTHER COMPARABLES SUGGESTED BY THE ASSESSEE DURING THE COURSE OF PROCEEDING BEFORE LD. TPO NAME LY M/S.DESEIN PRIVATE LIMITED AND M/S. BLUE STAR DESIGN AND ENGIN EERING LTD ALSO NEED TO BE CONSIDERED, LD. DRP HAD IN ITS ORDER CLEARLY MENTIONED THAT ASSESSEE HAD FAILED TO PRODUCE ANNUAL REPORTS OF THESE TWO COMPANIES WHICH ALONE COULD HAVE DEMONSTRATED THE F UNCTIONAL COMPARABILITY OF THESE COMPANIES WITH THAT OF THE A SSESSEE. EVEN BEFORE US, NO RECORDS WERE PRODUCED TO SHOW THAT M/ S.DESEIN PRIVATE LIMITED AND M/S. BLUE STAR DESIGN AND ENGINEERING L TD WERE FUNCTIONALLY COMPARABLE TO THE ASSESSEE. WE, ARE T HEREFORE OF THE OPINION THAT LOWER AUTHORITIES WERE JUSTIFIED IN NO T CONSIDERING THESE TWO COMPARABLES. 17. COMING TO THE LAST LIMB OF THE ARGUMENT OF THE LD. AUTHORISED REPRESENTATIVE THAT M/S. STEWARTS & LLOYDS LTD WAS UNJUSTIFIABLY REJECTED AS A GOOD COMPARABLE, WE FIND THAT LD. TPO HAD CONSIDERED THE SAID COMPANY AS A GOOD COMPARABLE IN THE TRANSF ER PRICING STUDY ITA NO.401/MDS/2016. :- 20 -: FOR ASSESSMENT YEARS 2008-09, 2009-2010 AND 2010-20 11. FOR THE IMPUGNED ASSESSMENT YEAR, LD. TPO REFUSED TO CONSID ER IT AS A GOOD COMPARABLE FOR A REASON THAT IT HAD MATERIAL COST O F 8.02% TO THE TOTAL OPERATING COST. ARGUMENT OF THE ASSESSEE IS THAT, COST OF MATERIAL WAS NOT SIGNIFICANT ENOUGH TO CONSIDER THE SAID COMPAN Y TO BE ENGAGED IN MANUFACTURING/PRODUCTION. IN OUR OPINION, THIS IS AN ACCEPTABLE ARGUMENT. THE COST OF MATERIALS AND TOTAL OPERATIN G COST OF M/S. STEWARTS & LLOYDS LTD FOR THE RELEVANT PREVIOUS YEA RS WAS AS UNDER:- PARTICULARS AMOUNT IN INR COST OF MATERIALS (A) 20,683,368 TOTAL OPERATING COSTS(B) 257,752,236 PERCENTAGE OF TOTAL COSTS (A/B) 8.02 PER CENT WE DO FIND THAT MATERIAL COST WAS NOT SIGNIFICANT E NOUGH TO COME TO A CONCLUSION THAT THE SAID COMPANY WAS HAVING AN INDE PENDENT MANUFACTURING /PRODUCTION SEGMENT, REQUIRING A SEG MENTAL ANALYSIS. THEREFORE, WE ARE OF THE OPINION THAT M/S. STEWARTS & LLOYDS LTD WAS A GOOD COMPARABLE. 18. AS A RESULT OF THE DISCUSSION IN PARA 14 TO 17 ABOVE, FINAL LIST OF COMPARABLES THAT ARE TO BE CONSIDERED ARE MAHIN DRA CONSULTING ENGINEERS LTD, M.N. DASTUR & COMPANY (P) LTD, TOYO ENGINEERING INDIA ITA NO.401/MDS/2016. :- 21 -: LTD, KIRLOSKAR CONSULTANTS LTD AND M/S. STEWARTS & LLOYDS LTD. LD. TPO IS DIRECTED TO REWORK THE PLI OF THE ABOVE COMPARAB LES AND RECOMPUTED THE ARMS LENGTH PRICE ADJUSTMENT IF ANY NECESSARY. ORDERED ACCORDINGLY. 19. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON FRIDAY, THE 25TH DAY OF NOVEM BER, 2016, AT CHENNAI. SD/- SD/- ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( !' . #$#% ) (ABRAHAM P. GEORGE) & / ACCOUNTANT MEMBER #$ / CHENNAI %& / DATED:25TH NOVEMBER, 2016 KV &' ()*) / COPY TO: 1 . / APPELLANT 3. +,' / CIT(A) 5. )-. / / DR 2. / RESPONDENT 4. + / CIT 6. .01 / GF