Terex India Pvt. Ltd., Tamil Nadu V. DCIT, New Delhi

ITA 4791/DEL/2015

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4701 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 22-07-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; International transaction; Cost of acquisition; Set aside
• Section: 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.4791/DEL/2015 (ASSESSMENT YEAR : 2010-11) M/S. TEREX INDIA PRIVATE LTD., VS. DCIT, CIRCLE 25 (1), PLOT NO.E 18, PHASE II, NEW DELHI. EXPANSION II, SIPCOT INDL. PARK, HOSUR, TAMIL NADU 635 109. (PAN : AACCT6500D) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VED JAIN, ADVOCATE SHRI ASHISH GOEL, CA SHRI RISHABH JAIN, CA REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 09.05.2019 DATE OF ORDER : 30.05.2019 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. TEREX INDIA PRIVATE LTD. (HEREINAFT ER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 27.01.2015 PASSED BY THE A O IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER SECTION 143 (3) READ WITH SECTION 144C OF THE INCOM E-TAX ACT, 1961 ITA NO.4791/DEL/2015 2 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010- 11 ON THE GROUNDS INTER ALIA THAT :- THE GROUNDS OF APPEAL LISTED BELOW ARE WITHOUT PRE JUDICE TO EACH OTHER: 1. THE ORDER OF THE LEARNED DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 25(1), NEW DELHI ('ASSESSING OFFICER' OR 'AO') PASSED PURSUANT TO THE ORDER OF THE LEARNED ADDITIO NAL DIRECTOR OF INCOME TAX (TRANSFER PRICING OFFICER) - II (4), NEW DELHI (TRANSFER PRICING OFFICER' OR TPO') AND THE DIRECTI ONS ISSUED BY THE HON'BLE DISPUTE RESOLUTION PANEL (THE 'DRP'), T O THE EXTENT PREJUDICE TO THE APPELLANT, IS ERRONEOUS, BAD IN LA W AND CONTRARY TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE AO, TPO AND DRP ERRED IN MAKING AN ADJUSTMENT OF IN R 9,87,50,638/- IN THE ARM'S LENGTH PRICE (,ALP') OF THE APPELLANT'S INTERNATIONAL TRANSACTIONS WITH ASSOCIA TED ENTERPRISES ('AES'). GROUNDS IN RELATION TO ENGINEERING DESIGN SERVICES COEDS') SEGMENT 3. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FA CTS, BY NOT ACCEPTING THE ECONOMIC ANALYSIS IN RESPECT OF E DS SEGMENT UNDERTAKEN BY THE ASSESSEE IN ACCORDANCE WITH THE P ROVISIONS OF THE ACT READ WITH THE RULES, AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ALP IN CONNEC TION WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THAT THE ASSESSEE'S INTERNATIONAL TRANSACTION IS NOT AT ARM' S LENGTH. 4. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FA CTS, BY NOT PROVIDING THE DETAILS OF THE SEARCH PROCESS IN RESPECT OF THE EDS SEGMENT. 5. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FA CTS, BY APPLYING CERTAIN QUANTITATIVE AND QUALITATIVE FILTE RS WHICH ARE ARBITRARY IN NATURE FOR COMPUTING THE ALP IN RESPEC T OF EDS SEGMENT. 6. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FA CTS, BY SELECTING CERTAIN ADDITIONAL COMPANIES AS COMPARABL ES WHICH DO NOT SATISFY VARIOUS COMPARABILITY CRITERIA AND ALSO ERRED IN REJECTING PERTAIN COMPANIES IDENTIFIED BY THE ASSES SEE BASED ON INCORRECT REASONS IN RESPECT OF EDS SEGMENT. ITA NO.4791/DEL/2015 3 7. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN FA CTS, BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR VARI OUS DIFFERENCES IN THE RISK PROFILE OF THE ASSESSEE VIS --VIS THE COMPARABLES. GROUNDS RELATING TO MANUFACTURING SEGMENT 8. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND FACTS , BY NOT APPRECIATING THAT THE LOSSES INCURRED BY THE AP PELLANT WAS ON ACCOUNT OF ECONOMIC AND COMMERCIAL REASONS DUE TO T HE FIRST YEAR OF OPERATION OF THE APPELLANT. 9. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND FACTS , BY NOT APPRECIATING THE FACT THAT THE AES HAVE NOT MAD E EXCESSIVE MARGINS ON THE EXPORTS MADE TO THE APPELLANT AND AC CORDINGLY, THE LOSS WAS NOT ATTRIBUTABLE TO THE INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE APPELLANT WITH THE AES. 10. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND FACT S, BY NOT PROVIDING FOR SUITABLE ADJUSTMENTS FOR DIFFEREN CES LIKE UNDER- UTILIZATION OF CAPACITY, EXCESSIVE CUSTOMS DUTY TO ACCOUNT FOR DIFFERENCES IN THE CAPACITY UTILISATION AND OTHER A DJUSTMENTS FOR ECONOMIC AND COMMERCIAL REASONS BY THE ASSESSEE VIS -A-VIS THE COM PARABLES. BY NOT DOING SO, NEGLECTING THE INDIA N TRANSFER PRICING REGULATIONS AND THE OECD GUIDELINES ON TRAN SFER PRICING AND JUDICIAL PRECEDENCE. 11. THE LEARNED TPO AND THE LEARNED AO HAVE ERRED, IN LAW AND IN FACTS, BY NOT RESTRICTING THE TRANSFER PRICI NG ADJUSTMENT IN RESPECT OF THE IMPORT OF RAW MATERIALS TRANSACTION TO THE VALUE OF CONSUMPTION OF MATERIALS OF THE ASSESSEE. GROUNDS COMMON TO BOTH EDS AND MANUFACTURING SEGMEN TS 12. THE TPO, AO AND DRP HAVE ERRED, IN LAW AND IN F ACTS, BY DETERMINING THE ARM'S LENGTH MARGIN / PRICE USING O NLY FY 2009- 10 DATA WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TRANSFER PRICING DOCUMENTATION R EQUIREMENTS. 13. THE TPO, AO AND DRP HAVE ERRED, IN NOT ALLOWING THE BENEFIT UNDER THE PROVISO TO SECTION 92C(2) OF THE INCOME-TAX ACT ('THE ACT'). 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TAXPAYER, M/S. TEREX INDIA PRIVATE LIMITED, BEING AN INDIAN COMPANY ENGAGED IN THE MAN UFACTURING OF ITA NO.4791/DEL/2015 4 MATERIAL PROCESSING EQUIPMENTS LIKE CRUSHERS, SCREE NERS ETC AND IS ALSO INTO PROVIDING SALES AND POST-SALES BUSINESS S UPPORT AND ENGINEERING DESIGN SERVICES TO ITS ASSOCIATED ENTER PRISES (AE). DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTE RED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE AS UNDER :- NATURE OF INTERNATIONAL TRANSACTION METHOD AMOUNT ( IN INR) PURCHASE OF RAW MATERIAL TNMM 160,782,287 PURCHASE OF SPARE TNMM 3,502,093 PURCHASE OF SERVICES TNMM 69,705,032 RECEIPT OF SERVICES TNMM 34,491,124 INTEREST OF ECB CUP 8,155,970 CORPORATE CHARGERS NA 16,313,777 RECEIPT OF INTEREST ON OVERDUE TNMM 989,789 PAYMENT OF INTEREST ON OVERDUE TNMM 43,565 REIMBURSEMENTS NA 9,992,070 RECEIPT OF SHARE APPLICATION MONEY NA 63,093,299 3. THE TAXPAYER IN ORDER TO BENCHMARK ITS INTERNATI ONAL TRANSACTIONS QUA BUSINESS SUPPORT SERVICES SEGMENT PROVIDED TO ITS AE UNDERTAKEN TP ANALYSIS BY APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) WITH OPERATING PROFIT TO TOTAL COST (OP/TC) AS PROFIT LE VEL INDICATOR (PLI) AND COMPUTED OP/OC OF COMPARABLES AT 13.90% A S AGAINST THE AVERAGE OP/OC OF TAXPAYER AT 16.00% AND FOUND I TS INTERNATIONAL TRANSACTIONS AT ARMS LENGTH. ITA NO.4791/DEL/2015 5 4. TPO, AFTER ACCEPTING TNMM AS THE MAM WITH OP/OC AS PLI, HOWEVER, QUESTIONED THE TP ANALYSIS UNDERTAKEN BY THE TAXPAYER APPLIED FILTERS AS UNDER :- (I) USE OF CORRECT KEYWORDS; (II) COMPANIES WITH POSITIVE NETWORTH; (III) USE OF CURRENT YEAR DATA; (IV) REJECT COMPARABLES HAVING DIFFERENT FINANCIAL YEAR; (V) REJECT COMPANIES WHERE TURNOVER IS LESS THAN RS .1 CRORES; (VI) SELECT COMPANIES WHERE THE RATIO OF SERVICE IN COME TO TOTAL INCOME IS AT LEAST 75%; (VII) REJECT COMPANIES WHERE RELATED PARTY TRANSACT IONS EXCEED 25% OF SALES; (VIII) REJECT COMPANIES THAT HAVE EMPLOYEE COST LES S THAN 25% OF TOTAL COST; (IX) REJECT COMPANIES THAT ARE AFFECTED BY SOME PEC ULIAR ECONOMIC CIRCUMSTANCES; (X) SELECT COMPANIES PROVIDING BUSINESS SERVICES, F ACILITY MANAGEMENT SERVICES, TECHNICAL SERVICES, ADVISORY S ERVICES. 5. BY APPLYING THE AFORESAID CRITERIA, LD. TPO REJE CTED ALL THE COMPARABLES SELECTED BY THE TAXPAYER AND ON THE BAS IS OF FRESH SEARCH CHOSEN, 10 NEW COMPARABLES WITH AVERAGE PLI AT 28.20% AND THEREBY MADE AN ADJUSTMENT OF RS.62,57,762/-. 6. LD. TPO HAS NOT GIVEN ADJUSTMENT CLAIMED BY THE TAXPAYER ON ACCOUNT OF CAPACITY UTILIZATION AND CUSTOMS DUTY AND ORDER OF THE LD. TPO IN THIS REGARD HAS BEEN CONFIRMED BY TH E LD. DRP. LD. TPO AS WELL AS AO HAS ALSO NOT ALLOWED RESTRICTING THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF IMPORT OF RAW MATE RIAL TRANSACTION ITA NO.4791/DEL/2015 6 TO THE VALUE OF CONSUMPTION OF MATERIALS BY THE TAX PAYER, WHICH HAS BEEN CONFIRMED BY THE LD. DRP. 7. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY WAY OF FILING OBJECTIONS WHO HAS RETAINED THE FINAL SET OF COMPARABLES CHOSEN BY THE TPO BY DISMISSING THE OBJECTIONS RAIS ED BY THE TAXPAYER. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1 & 2 9. GROUNDS NO.1 & 2 ARE GENERAL IN NATURE AND DO NO T REQUIRE ANY ADJUDICATION. GROUNDS NO.3 TO 5 10. GROUNDS NO.3 TO 5 ARE ALSO GENERAL IN NATURE RE LATING TO ENGINEERING DESIGN SEGMENT AND DO NOT REQUIRE ANY A DJUDICATION . ENGINEERING DESIGN SEGMENT GROUND NO.6 11. THE LD. TPO IN ORDER TO BENCHMARK THE INTERNATI ONAL TRANSACTIONS QUA ENGINEERING DESIGN SEGMENT SERVICE S PROVIDED BY ITA NO.4791/DEL/2015 7 THE TAXPAYER TO ITS AE REJECTED ALL THE 8 COMPARABL ES CHOSEN BY THE TAXPAYER AND SELECTED 10 NEW COMPARABLES WITH AVERA GE OP/OC AT 28.20% WHICH ARE AS UNDER :- S.NO. COMPANY NAME OP/OC (%) 1. CADES DIGITECH PVT. LTD. 9.02 2. DALKIA ENERGY SERVICES LTD. 20.81 3. ENGINEERS INDIA 62.94 4. IBI CHEMATUR 52.66 5. I-DESIGN ENGG. 11.88 6. KIRLOSKAR CONSULTANTS LTD. 15.64 7. KITCO LTD. 14.01 8. MAHINDRA CONSULTING ENGINEERS LTD. 23.50 9. RITES LTD. 45.71 10. T C E CONSULTING ENGINEERS LTD. 25.88 AVERAGE 28.20 12. CONSEQUENTLY, THE LD. TPO PROPOSED THE ALP FOR ENGINEERING DESIGN SERVICES SEGMENT AS UNDER :- OPERATING COST 5,12,95,776 ARMS LENGTH MARGIN OP/OC % 28.20% ARMS LENGTH PRICE (ALP) 6,57,61,185 PRICE SHOWN IN THE INTERNATIONAL TRANSACTIONS 5,95, 03,423 SHORTFALL BEING ADJUSTMENT U/S 92CA 62,57,762 13. THE LD. DRP ACCEPTED THE FINAL SET OF COMPARABL ES SELECTED BY THE TPO BY REJECTING THE OBJECTIONS RAISED BY TH E TAXPAYER. 14. THE TAXPAYER CHALLENGED THE ORDER PASSED BY THE TPO/DRP/AO BY SEEKING EXCLUSION OF 8 COMPARABLES VI Z. (I) ENGINEERS INDIA LTD.; (II) IBI CHEMATUR; (III) MAHI NDRA CONSULTING ENGINEERS LTD. ; (IV) RITES LTD. ; (V) KITCO LTD. ; ITA NO.4791/DEL/2015 8 (VI) TCE CONSULTING ENGINEERS LTD.; (VIII) KIRLOSK AR CONSULTANTS LTD.; AND (VII) DALKIA ENERGY SERVICES LTD.. 15. THE TAXPAYER ALSO SOUGHT INCLUSION OF TWO OF IT S COMPARABLES VIZ. (I) NEILSOFT LTD. AND (II) VAMA INDUSTRIES LTD. TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS QUA ENGINEERING DESI GN SERVICES SEGMENT. 16. WE WOULD DISCUSS THE SUITABILITY OF EACH OF THE COMPARABLE COMPANIES VIS--VIS TAXPAYER CHALLENGED BY IT TO BE NCHMARK THE INTERNATIONAL TRANSACTIONS ONE BY ONE. ENGINEERS INDIA LTD. (EIL) 17. THE TAXPAYER SOUGHT TO EXCLUDE EIL ON GROUNDS I NTER ALIA THAT IT IS A GOVERNMENT COMPANY SURVIVING ON THE BA SIS OF CONTRACTS PROVIDED BY THE GOVERNMENT OF INDIA; THAT IT IS FUN CTIONALLY DIFFERENT; THAT IT HAS INCURRED SUBSTANTIAL EXPENDI TURE OF RS.11.40 CRORES ON ITS R&D ACTIVITIES; AND RELIED UPON THE D ECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL IN CASE OF BOEING INTERNATIONAL CORPORATION INDIA PVT. LTD. VS. DCIT IN ITA NO.1127/DEL/2015 DATED 30.10.2018 AND DECISION RENDERED BY HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. THYSEEN KRUPP INDUSTRIES PVT. LTD. (2016) 385 ITR 612 . ON THE OTHER HAND, LD. DR FOR THE REVENUE SUPPORTED THE RETENTION OF EIL B Y THE LD. TPO ITA NO.4791/DEL/2015 9 AND CONTENDED THAT THERE IS NO BAR TO SELECT GOVERN MENT COMPANY AS COMPARABLE UNLESS ITS ENTIRE REVENUE IS FROM THE GOVERNMENT. 18. PERUSAL OF THE ANNUAL REPORT OF EIL SHOWS THAT IT IS PROVIDING COMPLETE RANGE OF SERVICES RANGING FROM CONCEPTUALI ZATION, PLANNING, DESIGN, ENGINEERING AND CONSTRUCTION ACTI VITIES TO MEET WITH THE SPECIFIC REQUIREMENT OF ITS CLIENTS IN THE SEVERAL FIELDS PETROLEUM REFINING, PETRO-CHEMICALS, PIPELINES, OFF SHORE OIL & GAS, ONSHORE OIL & GAS, TERMINALS & STORAGES, MINING & M ETALLURGY; AND INFRASTRUCTURE. EIL IS ALSO EXECUTING TURNKEY PROJ ECTS OF LUMP SUM TURN KEY (LSTK) MODE OR ON THE RECENTLY INTRODU CED CONCEPT OF OPEN BOOK ESTIMATE. EIL IS ALSO HAVING GOVERNME NT CONTRACTS IN ITS HAND PERTAINING TO HIGH-DENSITY POLYETHYLENE (HDPE)/ LINEAR LOW-DENSITY POLYETHYLENE (LLDPE) SWING UNIT OF IOCL AT THEIR PANIPAT NAPHTHA COMPLEX ON LSTK BASIS. 18.1 ON THE OTHER HAND, THE TAXPAYER BEING A CAPTIV E ENTITY IS ENGAGED IN PROVIDING ENGINEERING DESIGN SERVICES TO ITS AE AS AGAINST HIGH END AND FULL-FLEDGED ENGINEERING AND T ECHNICAL SERVICES BEING PROVIDED BY EIL FOR PETROLEUM REFINE RIES AND OTHER INDUSTRIAL PROJECTS. EIL HAS INCURRED HUGE R&D EXP ENDITURE TO THE TUNE OF RS.11.40 CRORES WHICH IS 0.53% OF THE TURNO VER WHICH MAKES IT NOT A SUITABLE COMPARABLE. ITA NO.4791/DEL/2015 10 19. HONBLE DELHI HIGH COURT IN CASE OF PR.CIT VS. INTERNATIONAL SOS SERVICES INDIA P. LTD. 2017 (5) TMI 1588 WHILE EXAMINING THE COMPARABILITY OF GOVERNMENT COM PANY VIS-- VIS PRIVATE COMPANY HELD THAT EIL COULD NOT BE CONS IDERED TO BE A COMPARABLE FOR THE REASON THAT THE CONTRACTS BETWEE N PUBLIC SECTOR UNDERTAKING ARE NOT DRIVEN BY PROFIT MOTIVE ALONE B UT OTHER CONSIDERATION ALSO WEIGH IN SUCH AS DISCHARGE OF SO CIAL OBLIGATION ETC. BY RETURNING FOLLOWING FINDINGS :- 10 THE COURT ON PERUSING THE AFOREMENTIONED JUDGME NT OF THE BOMBAY HIGH COURT FINDS THAT IN PARA 4(A) AND 4 (B) OF THE SAID ORDER THE BOMBAY HIGH COURT HAS HELD THAT THE VIEW TAKEN BY THE MUMBAI BENCH OF THE ITAT IS A REASONABLE AN D PLAUSIBLE VIEW. IT NOTED THAT THE ITAT, MUMBAI BENCH HAD HEL D THAT THE ENGINEERS INDIA LTD. COULD NOT BE CONSIDERED TO BE COMPARABLE FOR THE REASON THAT CONTRACTS BETWEEN PUBLIC SECTO R UNDERTAKINGS ARE NOT DRIVEN BY PROFIT MOTIVE ALONE BUT OTHER CONSIDERATION ALSO WEIGH IN SUCH AS DISCHARGE OF SO CIAL OBLIGATIONS ETC. THUS, IT IS NOT COMPARABLE. INTER ESTINGLY IN THE PRESENT CASE THE ASSESSEE ITSELF PICKED UP TWO OF T HE 100% GOVERNMENT OWNED COMPANIES NAMELY ECIL AND ITDCL AS ITS COMPARABLES BUT THAT WAS NOT ACCEPTED BY THE TPO OR THE DRP. THE REASON FOR THE ITAT EXCLUDING APITCO AS A COMPA RABLE IS ALSO FOR THE SAME REASON THAT IT WAS A 100% GOVERNM ENT OWNED COMPANY. 20. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT EIL CANNOT BE RETAINED AS A SU ITABLE COMPARABLE, HENCE ORDERED TO BE EXCLUDED FROM THE F INAL SET OF COMPARABLES. ITA NO.4791/DEL/2015 11 IBI CHEMATUR (ENGINEERING & CONSULTANCY) LTD. (IBI CHEMATUR) 21. THE TAXPAYER SOUGHT EXCLUSION OF IBI CHEMATUR F ROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTER NATIONAL TRANSACTION ON GROUNDS INTER ALIA THAT IT IS FUNCTI ONALLY DISSIMILAR TO THE TAXPAYER THAT IT HAS SIGNIFICANT R&D EXPENDITUR E AND RELIED UPON THE DECISIONS OF THE COORDINATE BENCH OF THE T RIBUNAL IN (I) TAXPAYERS OWN CASE IN ITA NO.6783/DEL/2015 FOR AY 2011-12 DATED 26.03.2019; (II) BG EXPLORATION AND PRODUCTIO N INDIA LTD. VS. JCIT IN ITA NO.1170/DEL/2015 DATED 24.04.2017; (III) BECHTEL INDIA P. LTD. VS. DCIT IN ITA NO.1478/DEL/2015 DATE D 21.12.2015; AND (IV) ITO VS. COLT TECHNOLOGY SERVIC ES INDIA (P.) LTD. (2014) 146 ITD 46 . 22. HOWEVER, ON THE OTHER HAND, LD. DR FOR THE REVE NUE CONTENDED THAT IN ENGINEERING DESIGN SERVICES, R&D EXPENDITURE ARE INBUILT IN EVERY COMPANY AND AS SUCH, IT CANNOT BE EXCLUDED ON THE BASIS OF THE FACT THAT IT HAS INCURRED SIGNIFIC ANT R&D EXPENDITURE. LD. DR ALSO EMPHASIZED THAT THERE IS NO NEED FOR SEPARATE SEGMENTATION KEEPING IN VIEW THE FACT THAT THE ENTIRE INCOME IS FROM ENGINEERING SERVICE CHARGES TO PROFI T & LOSS ACCOUNT, AVAILABLE AT PAGE 371 OF THE PAPER BOOK. ITA NO.4791/DEL/2015 12 23. WHEN WE EXAMINE ANNUAL REPORT UNDER THE HEAD R EVIEW OF PERFORMANCE AT PAGE 361 OF THE PAPER BOOK, IT SHOW S THAT IBI CHEMATUR HAS PROGRESSED ON USE OF SUMMARY PLANT SUI TE OF SOFTWARE. ALL ENGINEERS ARE TRAINED ABOUT NEW SOFT WARE AND THE COMPANY HAS UNDERTAKEN CONTINUOUSLY UPGRADING TECHN OLOGIES AND ALSO IMPROVING COMPETENCE OF STAFF WHICH HAS EMPLOY ED HIGHLY TRAINED TECHNICAL STAFF. THE COMPANY IS PLANNING T O BRING TECHNOLOGIES OF BIOSTIL, 2000 PROCESS. THESE TECHN OLOGIES FIND SYNERGY WITH BIOSTIL, 2000. THE ACTIVITY IN BIOSTI L 2000 TAKES US TO SUGAR INDUSTRY, WHICH REMAINS AS THE BIGGEST BIOMASS PROCESSORS IN THE COUNTRY. THE COMPANY CONTINUES T O CARRY OUT DOMESTIC BUSINESS ACTIVITIES IN IBIC ENGINEERING ( DIV. OF IBI CHEMATUR (ENG.. & CONS.) LTD.) DIVISION OF THE COMP ANY AS STATED IN THE YEAR. 24. FURTHERMORE, IBI CHEMATUR HAS STARTED ITS NEW D IVISION IN THE NAME AND STYLE AS IBIC RESEARCH AND TECHNOLOGY CENTRE WHEREIN ALL IN HOUSE ENGINEERING RESEARCH AND DEVEL OPMENT ACTIVITIES UNDERTAKEN RELATING TO THE BUSINESS ACTI VITIES OF YOUR COMPANY. SUCH IN-HOUSE R&D CENTRE WILL BE PROVIDIN G ITS SERVICES IN THE AREAS OF MODERNIZATION, TECHNOLOGICAL UP GRA DATION AND ADDITIONS, MODIFICATION AND TROUBLESHOOTING OF PLAN TS FOR OUR OWN AS WELL AS CLIENTS PLANTS, NEW DIVISION HAS STARTED RESEARCH & ITA NO.4791/DEL/2015 13 DEVELOPMENT ACTIVITIES DURING THE YEAR. THE RESEAR CH AND DEVELOPMENT ACTIVITIES CARRIED OUT IN DIVISION, HAS RESULTED IN IMPROVEMENT IN PROCESS AND PRODUCTIVE CAPACITY, BET TER QUALITY AND MARKETABILITY OF TECHNOLOGY. 25. PROFIT AND LOSS ACCOUNT, AVAILABLE AT PAGE 371 OF THE PAPER BOOK, SHOWS THAT IT HAS INCURRED HUGE R&D EXPENDITU RE DURING THE YEAR UNDER ASSESSMENT TO THE TUNE OF RS.1,16,99,720 /- WHICH IS 5% OF THE TOTAL TURNOVER. 26. NO DOUBT, EVERY ENGINEERING DESIGN SERVICES PRO VIDER NEEDS TO HAVE AN INBUILT R&D CENTRE BUT IBI CHEMATUR IS H AVING A SPECIALIZED R&D CENTRE ON WHICH IT HAS HUGE EXPENDI TURE OF 5% LEADING TO THE CREATION OF INTANGIBLES AND AS SUCH CANNOT BE COMPARED TO THE TAXPAYER WHO HAS NOT INCURRED A SIN GLE PENNY UNDER THE SPECIFIED HEAD. MOREOVER, IBI CHEMATUR I S INTO PROVIDING HIGH END SERVICES WHEREAS THE TAXPAYER, A CAPTIVE SERVICE PROVIDER, IS PROVIDING ROUTINE ENGINEERING DESIGN S ERVICES TO ITS AE ONLY. 27. COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2011-12 (SUPRA) DIRECTED TO EXCLUDE IBI CHEMATUR FROM THE FINAL SET OF COMPARABLES BY RETURNING FOLLOWING FIN DINGS :- WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE CO MPANY PLACED AT PAPER BOOK PAGES 461 490. ON GOING THRO UGH THE SAME, WE NOTE THAT THIS COMPANY FAILS THE 75% SERVI CE REVENUE ITA NO.4791/DEL/2015 14 FILTER WHICH HAS BEEN ADOPTED BY THE TPO. THIS FACT IS CORROBORATED FROM THE PROFIT & LOSS ACCOUNT OF THE COMPANY, WHEREIN THE ENGINEERING SERVICE CHARGES OF THE COMP ANY ARE SHOWN AT RS.18,88,21,452/-, OUT OF THE TOTAL REVENU E OF THE COMPANY OF RS.29,74,92,912/-. THEREFORE, THE SERVIC E/REVENUE RATIO OF THE COMPANY COMES OUT TO 63.47%, WHICH IS LESS THAN 75%, WHICH IS ONE OF THE FILTERS ADOPTED BY THE TPO HIMSELF. MOREOVER, NO SEGMENTAL INFORMATION WITH REGARD TO T HE DIFFERENT SEGMENTS OF THE COMPANY IS AVAILABLE IN THE FINANCI AL STATEMENTS. THIS COMPANY HAS BEEN CONSIDERED BY THE ITAT DELHI BENCH IN THE CASE OF BECHTEL INDIA (P.) LTD. V. DCIT IN ITA NO.1478/DEL/2015 DATED 21.12.2015 AND IN THE CASE O F BG EXPLORATION & PRODUCTION INDIA LTD. V. JCIT IN ITA NOS. 1170 & 1581/DEL/2015 DATED 24.04.2017 WHEREIN IT HAS BEEN HELD TO BE NOT A GOOD COMPARABLE. TAKING INTO CONSIDERATION AL L THE ABOVE FACTS, WE ARE OF THE VIEW THAT THIS COMPANY IS NOT A GOOD COMPARABLE WITH THAT OF THE ASSESSEE COMPANY AND, A CCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPARABLE. 28. COORDINATE BENCH OF THE TRIBUNAL IN CASE CITED AS BG EXPLORATION AND PRODUCTION INDIA LTD. VS. JCIT, INT ERNATIONAL TAXATION, DEHRADUN FOR AY 2010-11 (SUPRA) ALSO ORDERED TO EXCLUDE IBI CHEMATUR IN IDENTICAL SET OF FACTS BY R ETURNING FOLLOWING FINDINGS :- THIS COMPARABLE HAS BEEN SELECTED BY THE LD. TRANS FER PRICING OFFICER WHICH IS A JOINT VENTURE COMPANY PROMOTED I N ASSOCIATION WITH SWEDISH COMPANY TO RENDER BASIC ENGINEERING, D ETAILED ENGINEERING AND CONSULTANCY SERVICES IN THE FIELD O F PETROCHEMICALS, FINE CHEMICALS AND CHEMICALS, COSME TICS, PHARMACEUTICALS, INDUSTRIAL EXPLOSIVE AND WEST ACID RECOVERY. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT TH E COMPANY GENERATES INCOME FROM PROVISION OF ENGINEERING SERV ICES LIKE DESIGNING AND DRAWING, 3D MODELING, PIPING AND INSTRUMENTATION DIAGRAM, SMART PLANT INSTRUMENTATIO N, PROCESS SIMULATION, INSPECTION SERVICES AND ERECTION SUPERV ISION SERVICES, WHICH ARE NOT SIMILAR TO SERVICES PROVIDED BY THE A SSESSEE. THE COMPANY GENERATES INCOME FROM PROVISION OF ENGINEER ING SERVICES AND SOFTWARE SERVICES. IT IS FURTHER SUBMI TTED THAT COMPANY HAS EARNED A HIGH PROFIT MARGIN OF 52.66% D URING THE FY 2009-10. IT WAS FURTHER STATED THAT THERE IS AN EXISTENCE OF SIGNIFICANT RESEARCH AND DEVELOPMENT COST TO SALES RATIO FOR THE FY 2009-10 IS 5.41%. HE FURTHER PLACED RELIANCE ON THE DECISION ITA NO.4791/DEL/2015 15 OF DELHI ITAT IN CASE OF IQOR INDIA SERVICES PRIVAT E LTD. VS ITO WHERE IN THE HONBLE ITAT HELD THAT THE HIGH END SE RVICES INVOLVING SPECIAL KNOWLEDGE CANNOT BE COMPARED WITH THE LOW END ITES SERVICES PROVIDED BY THE ASSESSEE. WE HAVE CAREFULLY PERUSED THE ANNUAL ACCOUNTS OF THE COMPANY, WHICH A RE PLACED AT PAGE NO. 93 -117 OF THE PAPER BOOK. AT PAGE NO. 94 OF THE PAPER BOOK WHERE REVIEW OF PERFORMANCE OF COMPANY IS NOTE D, IT SHOWS THAT COMPANY HAS EMPLOYED HIGHLY TRAINED TECHNICAL STAFF AND IS ALSO MARKETING THESE CAPABILITIES IN THE DOMESTIC A S WELL AS THE OVERSEAS MARKET. IT FURTHER USES SMART PLANT FOUNDA TION, WHICH IS SOFTWARE FOR BRINGING THE TECHNOLOGIES SPECIFIC TO SEVERAL INDUSTRIES. IT ALSO HAS THE NEW DIVISION IN THE FOR M OF RESEARCH AND TECHNOLOGY CENTRE, WHICH STARTED FUNCTIONING DU RING THE YEAR. LOOKING TO THE ASSETS EMPLOYED BY THE COMPANY , IT USES THE COMPUTER SOFTWARE IN THE NAME OF SMART PLANT SUITE. FURTHER DURING THE YEAR. IT HAS INCURRED RESEARCH AND DEVEL OPMENT EXPENDITURE OF RS. 11699720/ WHICH WAS NOT THERE I N THE EARLIER YEAR. FURTHER, THE COMPANY IS ALSO PLANNING TO USE SMART PLANT FOUNDATION FOR INTEGRATION OF OTHER SMART PLANT TOO LS. IN VIEW OF THIS WE AGREE WITH THE ARGUMENT OF THE LD. AUTHORIS ED REPRESENTATIVE THAT THIS COMPANY IS ENGAGED IN THE BUSINESS OF HIGH-END ENGINEERING SERVICES WHICH IS BASED AND SU PPORTED BY THE USE OF A SPECIFIC TECHNOLOGIES AND HUGE RESEARC H AND DEVELOPMENT EXPENDITURE ALONG WITH AN R&D CENTRE. I N VIEW OF THIS, THE FUNCTIONS PERFORMED BY THIS COMPARABLE CO MPANY ARE NOT COMPARABLE WITH THE ASSESSEES FUNCTIONS. FOR T HIS REASON ONLY, WE DIRECT THE LD. TRANSFER PRICING OFFICER/AO , REJECTING THIS COMPARABLE, TO EXCLUDE THE SAME FOR THE COMPARABILI TY ANALYSIS. 29. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT IBI CHEMATUR IS NOT A SUITABLE COMPARABLE VIS--VIS THE TAXPAYER, HENCE ORDERED TO BE EXCLUDE D. MAHINDRA CONSULTING & ENGG. SERVICES LIMITED (MAHINDRA) 30. THE TAXPAYER SOUGHT EXCLUSION OF MAHINDRA ON GR OUNDS INTER ALIA THAT IN THE ABSENCE OF SEGMENTAL INFORMATION, IT CANNOT BE CONSIDERED AS A VALID COMPARABLE; THAT MAHINDRA REC OGNIZES ITS REVENUE ON PERCENTAGE COMPLETION METHOD WHICH IS NO T IN THE CASE ITA NO.4791/DEL/2015 16 OF TAXPAYER; AND RELIED UPON THE DECISIONS RENDERED BY THE COORDINATE BENCHES OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2011-12 (SUPRA), ALCATEL LUCENT INDIA LTD. VS. ITO IN ITA NOS.2154 7 2209/DEL/2014 DATED 06.04.2018 AND ROLLS ROYCE INDIA (P.) LTD. VS. DCIT IN ITA NO.6636/DEL/2015 DA TED 22.04.2016 . 31. TO COUNTER THE ARGUMENTS ADDRESSED BY THE LD. A R FOR THE TAXPAYER, LD. DR FOR THE REVENUE CONTENDED THAT A C OMPANY CANNOT BE EXCLUDED ON THE BASIS OF USE OF PERCENTAGE COMPL ETION METHOD AS IT IS ONE OF THE RECOGNISED METHOD. 32. PERUSAL OF FUNCTIONS OF MAHINDRA, AVAILABLE AT PAGE 444 OF THE PAPER BOOK, SHOWS THAT IT IS ENGAGED IN PROVIDI NG CONSULTING SERVICES IN INFRASTRUCTURE SECTOR IN THE AREA OF SP ECIAL ECONOMIC ZONES, WATER SUPPLY & SEWERAGE, SOLID WASTE MANAGEM ENT, URBAN INFRASTRUCTURE, AGRI & HORTI INFRASTRUCTURE, SOCIAL INFRASTRUCTURE, MARINE INFRASTRUCTURE, INDUSTRIAL INFRASTRUCTURE, R ENEWABLE ENERGY, SUSTAINABILITY STUDIES, INSTITUTIONAL STRATEGIES / PLANNING STUDIES, INDUSTRIAL PLANTS AND SYSTEMS ETC.. 33. COORDINATE BENCH OF THE TRIBUNAL EXAMINED THE COMPARABILITY OF MAHINDRA VIS--VIS THE TAXPAYER IN TAXPAYERS OWN CASE FOR AY 2011-12 (SUPRA) (THOUGH A DIFFERENT YEAR BUT BUSINESS MODEL HAS NOT UNDERGONE ANY CHANGE), FOUND THE SAME TO ITA NO.4791/DEL/2015 17 BE NOT A SUITABLE COMPARABLE ON GROUND OF NON-AVAIL ABILITY OF SEGMENTAL INFORMATION ABOUT ENGINEERING DESIGN SERV ICES AND ON THE GROUND THAT THE COMPANY HAS RECOGNISED ITS REVE NUE ON PERCENTAGE COMPLETION METHOD. NO DOUBT, A COMPARAB LE CANNOT BE EXCLUDED MERELY ON THE BASIS OF DIFFERENT REVENUE A CCOUNTING METHOD WHICH IS RECOGNISED ONE BUT NON-AVAILABLE OF SEGMENTAL INFORMATION IN THE FACE OF THE FACT THAT IT IS INTO DIVERSIFIED SERVICES AS DISCUSSED ABOVE, WE FIND IT NOT A SUITABLE COMPA RABLE VIS--VIS TAXPAYER WHICH IS INTO PROVIDING ROUTINE LOW END EN GINEERING DESIGN SERVICES. HENCE, WE ORDER TO EXCLUDE MAHIND RA AS A VALID COMPARABLE. RITES LTD. & KITCO LTD. 34. THE TAXPAYER SOUGHT TO EXCLUDE BOTH THE AFORESA ID COMPANIES I.E. RITES LTD. & KITCO LTD. ON THE GROUNDS INTER A LIA THAT BOTH ARE GOVERNMENT OF INDIA UNDERTAKING AND MOSTLY GETS ITS CONTRACTS FROM GOVERNMENT OF INDIA; THAT BOTH ARE FUNCTIONALL Y DISSIMILAR VIS--VIS TAXPAYER. 35. ANNUAL REPORT OF RITES LTD., AVAILABLE AT PAGE 464 OF THE PAPER BOOK, SHOWS THAT THIS COMPANY IS HAVING A BRA ND IMAGE OF 'THE INFRASTRUCTURE PEOPLE' AND THE GLOBAL AND DOME STIC EXPERIENCE IN TRANSPORTATION & PROJECT MANAGEMENT SERVICES IS LIKELY TO EMERGE AS A MAJOR BENEFICIARY OF ENHANCED INFRASTRU CTURE SPENDING. ITA NO.4791/DEL/2015 18 COMPANY CONTINUED TO PROVIDE SPECIALIZED, INTEGRATE D, SINGLE ROOF SERVICES IN TRANSPORTATION INFRASTRUCTURE SECTOR AN D EXPORT PACKAGES FOR SUPPLY OF LOCOMOTIVES, COACHES, SPARE PARTS AND MODERNIZATION OF WORKSHOPS. COMPANY IS ALSO INTENDING TO EXPAND T HE ROLLING STOCK LEASING BUSINESS ACTIVITIES IN DOMESTIC MARKE T. THE COMPANY IS EXPLORING BUSINESS OPPORTUNITIES IN CAPTIVE RAIL WAY SYSTEMS IN INDIA THROUGH EQUITY PARTICIPATION WITH OTHER STAKE HOLDERS, WITH A MAIN FOCUS TO PROVE TOTAL TRANSPORTATION SOLUTION A S AGAINST PURE CONSULTANCY ASSIGNMENT). THE COMPANY HAS SECURED N EW ORDERS WORTH OF RS. 972.59 CRORES DURING THE YEAR 2009-10. SO, FUNCTIONAL PROFILE OF RITES LTD. GOES TO PROVE THAT IT IS DISS IMILAR TO TAXPAYER BEING DIVERSIFIED SERVICES LIKE PROVIDING SINGLE RO OF SERVICES IN TRANSPORTATION INFRASTRUCTURE SECTOR AND EXPORT PAC KAGES FOR SUPPLY OF LOCOMOTIVES, COACHES, SPARE PARTS AND MODERNIZAT ION OF WORKSHOP. IT IS ALSO GETTING INTO BUSINESS OF CAPT IVE RAILWAY SYSTEMS IN INDIA HAVING A PREFERENTIAL TREATMENT IN BUSINESS AVENUE BEING A GOVERNMENT COMPANY. 36. SIMILARLY, KITCO LTD. IS ALSO A 100% GOVERNMENT OWNED COMPANY. PROFILE OF KITCO LTD., AVAILABLE AT THE W EBSITE OF THIS COMPANY, SHOWS THAT ITS TECHNICAL SERVICES INCLUDE SERVICES LIKE ASSET VALUATION, ENERGY AUDITS, REVIVAL STUDY, ETC. KITCO LTD. IS ALSO A PERMANENT PLAYER IN ENERGY STUDIES, SKILL CERTIFI CATION AND ITA NO.4791/DEL/2015 19 PLACEMENT SERVICES. IT IS HAVING MULTI-FUNCTIONAL, MULTI- DISCIPLINARY ORGANIZATION AND INFRASTRUCTURE SECTOR HAVING WIDE RANGE OF CLIENTELE. 37. HONBLE DELHI HIGH COURT IN CASE OF PR.CIT VS. INTERNATIONAL SOS SERVICES INDIA P. LTD. 2017 (5) TMI 1588 WHILE EXAMINING THE COMPARABILITY OF GOVERNMENT COM PANY VIS-- VIS PRIVATE COMPANY HELD THAT EIL COULD NOT BE CONS IDERED TO BE A COMPARABLE FOR THE REASON THAT THE CONTRACTS BETWEE N PUBLIC SECTOR UNDERTAKING ARE NOT DRIVEN BY PROFIT MOTIVE ALONE B UT OTHER CONSIDERATION ALSO WEIGH IN SUCH AS DISCHARGE OF SO CIAL OBLIGATION ETC. BY RETURNING FOLLOWING FINDINGS :- 10 THE COURT ON PERUSING THE AFOREMENTIONED JUDGME NT OF THE BOMBAY HIGH COURT FINDS THAT IN PARA 4(A) AND 4 (B) OF THE SAID ORDER THE BOMBAY HIGH COURT HAS HELD THAT THE VIEW TAKEN BY THE MUMBAI BENCH OF THE ITAT IS A REASONABLE AN D PLAUSIBLE VIEW. IT NOTED THAT THE ITAT, MUMBAI BENCH HAD HEL D THAT THE ENGINEERS INDIA LTD. COULD NOT BE CONSIDERED TO BE COMPARABLE FOR THE REASON THAT CONTRACTS BETWEEN PUBLIC SECTO R UNDERTAKINGS ARE NOT DRIVEN BY PROFIT MOTIVE ALONE BUT OTHER CONSIDERATION ALSO WEIGH IN SUCH AS DISCHARGE OF SO CIAL OBLIGATIONS ETC. THUS, IT IS NOT COMPARABLE. INTER ESTINGLY IN THE PRESENT CASE THE ASSESSEE ITSELF PICKED UP TWO OF T HE 100% GOVERNMENT OWNED COMPANIES NAMELY ECIL AND ITDCL AS ITS COMPARABLES BUT THAT WAS NOT ACCEPTED BY THE TPO OR THE DRP. THE REASON FOR THE ITAT EXCLUDING APITCO AS A COMPA RABLE IS ALSO FOR THE SAME REASON THAT IT WAS A 100% GOVERNM ENT OWNED COMPANY. 38. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT BOTH RITES LTD. AND KITCO LTD. BEING 100% GOVERNMENT OWNED COMPANY AND INTO DISSIMILAR BUSINE SS ARE NOT ITA NO.4791/DEL/2015 20 SUITABLE COMPARABLES VIS--VIS TAXPAYER, HENCE ORDE RED TO BE EXCLUDED. TCE CONSULTING ENGINEERS LTD. (TCE CONSULTING) 39. THE TAXPAYER SOUGHT TO EXCLUDE TCE CONSULTING A S COMPARABLE ON THE GROUNDS INTER ALIA THAT IT IS FUN CTIONALLY DISSIMILAR; THAT ITS SEGMENTAL FINANCIALS ARE NOT A VAILABLE; THAT TCE CONSULTING IS INTO PROVIDING HIGH END CONSULTING SE RVICES AND RELIED UPON TAXPAYERS OWN DECISION IN AY 2011-12 (SUPRA). 40. PERUSAL OF THE ANNUAL REPORT OF TCE CONSULTING , AVAILABLE AT PAGES 538 TO 559 OF THE PAPER BOOK, SHOWS THAT IT I S INTO VARIOUS OTHER SERVICES APART FROM ENGINEERING SERVICES LIKE PROVIDING SERVICES OF DESIGNING, DEVELOPMENT OF NEW PRODUCT A ND COMPUTER AIDED DESIGNING (CAD), BUT ITS SEGMENTAL FINANCIALS ARE NOT AVAILABLE. 41. COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2011-12 (SUPRA) ORDERED TO EXCLUDE TCE CONSULTING FROM FIN AL SET OF COMPARABLES ON TWO GROUNDS, VIZ., (I) IT DOE S NOT SATISFY THE UPPER TURNOVER FILTER OF RS.200 CRORES; AND (II) TH AT BRAND NAME OF THE COMPANY HAS ENABLED THIS COMPANY TO CAPTURE MAJ OR GOVERNMENT CONTRACTS AND OTHER HIGH END CUSTOMERS. 42. SO FAR AS QUESTION OF EXCLUDING THIS COMPANY ON GROUND OF UPPER TURNOVER FILTER IS CONCERNED, THIS FILTER HAS NOT BEEN APPLIED ITA NO.4791/DEL/2015 21 BY THE TAXPAYER AS WELL AS TPO DURING THE YEAR UNDE R ASSESSMENT. HOWEVER, WE ARE OF THE CONSIDERED VIEW THAT IT IS N OT A VALID COMPARABLE ON ACCOUNT OF FUNCTIONAL DISSIMILARITY A ND NON- AVAILABILITY OF ITS SEGMENTAL FINANCIALS. MOREOVER , IN 2009-10, TPO HIMSELF EXCLUDED TCE CONSULTING FROM FINAL SET OF COMPARABLES ON RAISING OBJECTIONS BY THE TAXPAYER A ND SINCE THEN, TAXPAYERS BUSINESS PROFILE HAS NOT UNDERGONE ANY C HANGE. 43. COORDINATE BENCH OF THE TRIBUNAL IN CASE OF BECHTEL INDIA PVT. LTD. VS. DCIT 2015 (12) TMI 1560 ITAT DELH I FOR AY 2010-11 HAS ORDERED TO EXCLUDE TCE CONSULTING AS A COMPARA BLE VIS--VIS ROUTINE ENGINEERING DESIGN SERVICE PROVID ER BY RETURNING FOLLOWING FINDINGS :- 12.6 THE COMPARABLE COMPANY IS INVOLVED IN ACTIVIT IES BEYOND ENGINEERING DESIGN. IT IS ENGAGED IN ACTIVITIES THA T EXTEND FROM CONCEPT TO COMMISSIONING. WHEREAS THE ASSESSEE PROV IDES SERVICES AS A CAPTIVE UNIT TO ITS OVERSEAS AES. THE DIVERSIFIED FUNCTIONS OF THIS COMPARABLE COMPANY INCLUDE PRE-PR OJECT ACTIVITIES, PROCUREMENT ASSISTANCE, PROJECT MANAGEM ENT, COMMISSIONING AND COORDINATION, INSPECTION, CONSTRU CTION AND SUPERVISION. FURTHER, THERE IS NO SEGMENTAL ACCOUNT ING IN THE ANNUAL REPORT OF THE COMPANY WHICH PROVIDES PROFITA BILITY, FOR THE ENGINEERING DESIGN SEGMENT. HENCE THE SAME CANN OT BE ACCEPTED AS A COMPARABLE. 44. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT TCE CONSULTING HAVING A BIG BR AND VALUE AND BEING INTO HIGH END ENGINEERING CONSULTING SERVICES WITH NO ITA NO.4791/DEL/2015 22 FINANCIAL SEGMENTAL AVAILABLE IS NOT A SUITABLE COM PARABLE VIS--VIS TAXPAYER, HENCE ORDERED TO BE EXCLUDED. KIRLOSKAR CONSULTANTS LTD. (KIRLOSKAR) 45. THE TAXPAYER SOUGHT EXCLUSION OF KIRLOSKAR ON T HE GROUND THAT SUFFICIENT INFORMATION IS NOT AVAILABLE IN ANN UAL REPORT TO KNOW THE NATURE AND VOLUME OF SERVICES OF CONSULTANCY BE ING PROVIDED BY IT. ITS FINANCIAL SEGMENTAL ARE ALSO NOT AVAILA BLE AND RELIED UPON BG EXPLORATION AND PRODUCTION INDIA LTD. VS. JCIT 2017 (4) TMI 1145- ITAT DELHI . 46. LD. DR FOR THE REVENUE, ON THE OTHER HAND, CONT ENDED THAT FROM THE PROFIT & LOSS ACCOUNT, AVAILABLE AT PAGE 4 03 OF THE PAPER BOOK, SHOWS THAT SUBSTANTIAL INCOME IS FROM CONSULT ANCY FEES AND IN SUCH CIRCUMSTANCES, NO SEGMENTAL INFORMATION IS REQUIRED. 47. PERUSAL OF THE ANNUAL REPORT FAILS TO DISCLOSE THE REQUISITE INFORMATION TO LOOK INTO THE NATURE AND VOLUME OF S ERVICES OF CONSULTANCY BEING PROVIDED BY THE COMPANY. EVEN IN THE ANNUAL REPORT, INCOME IS SHOWN UNDER VAGUE HEAD I.E. INCOM E OF RS.59,685,941/- & RS.5,861,557/- ON ACCOUNT OF CONS ULTANCY FEES & OTHER INCOME. SO, IT FAILS TO DISCLOSE REQUIRED SEGMENTAL INFORMATION. MERELY ON THE BASIS OF THE FACT THAT SUBSTANTIAL INCOME IS FROM CONSULTANCY FEES, IT IS DIFFICULT TO ACCEPT THE ITA NO.4791/DEL/2015 23 ARGUMENT MADE BY THE LD. DR FOR THE REVENUE THAT NO SEGMENTAL INFORMATION IS REQUIRED. 48. COMPARABILITY OF KIRLOSKAR HAS BEEN EXAMINED BY THE COORDINATE BENCH OF THE TRIBUNAL VIS--VIS ROUTINE ENGINEERING DESIGN SERVICE PROVIDER AND FOUND TO BE NOT A SUITA BLE COMPARABLES IN CASE CITED AS BG EXPLORATION AND PRODUCTION INDIA LTD. FOR AY 2010-11 (SUPRA) BY RETURNING FOLLOWING FINDINGS :- THIS COMPARABLE IS SELECTED BY THE LD. TRANSFER PR ICING OFFICER WHICH IS ENGAGED IN THE AREA OF ENGINEERING CONSULT ANCY, PROJECT MANAGEMENT SERVICES AND ARCHITECTURAL CONSULTANCY. THE COMPARABLE COMPANY SPECIALIZES IN CONCEPTUALIZING, DESIGNING AND EXECUTING ARCHITECTURAL, CIVIL, STRUCTURAL, ELE CTRICAL, MECHANICAL FIRE AND LIFE SAFETY, WATER SUPPLY, DRAI NAGE, STORM WATER MANAGEMENT, NETWORKING, SURVEILLANCE, TELEPHO NE AND BUILDING MANAGEMENT SYSTEMS REQUIRED FOR ANY LARGE INTEGRATED PROJECT. ACCORDING TO THE LD. AUTHORISED REPRESENTA TIVE, THIS COMPANY IS ENGAGED IN THE HIGH-END SERVICE PROVIDER SEGMENT AND IT WAS ALSO STATED THAT HE DOES NOT HAVE THE SE GMENTAL INFORMATION PERTAINING TO THE SEGMENT IN WHICH THE ASSESSEE OPERATES, AND THEREFORE, THIS CANNOT BE ACCEPTED AS A COMPARABLE. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION A ND ALSO PERUSED THE ANNUAL REPORT OF THE COMPANY AVAILABLE IN PAPER BOOK AT PAGE NO. 246 304. NO INFORMATION IS AVAIL ABLE WITH RESPECT TO THE PROVISION OF THE SERVICES OF CONSULT ANCY, ITS NATURE, AND ITS VOLUME. IT IS SIMPLY MENTIONED THAT THIS CO MPANY IS ENGAGED IN THE BUSINESS OF CONSULTANCY SERVICES AT THE CONSULTANCY REVENUE SHOWN IN THE PROFIT AND LOSS AC COUNT AS A SINGLE ITEM. THERE ARE NO SPECIFIC BIFURCATIONS GIV EN OF VARIOUS SERVICES PROVIDED BY THE ASSESSEE AS WELL AS THE NA TURE OF SUCH SERVICES OR THE SEGMENTAL INFORMATION. FURTHER, IT IS ALSO NOTED THAT DURING THE YEAR THE ASSESSEE HAS ENTERED INTO TRANSACTIONS FOR RECEIPT OF THE CONSULTANCY FEE FROM THE RELATED PARTIES TO THE TUNE OF RS. 89.59 LAKHS OUT OF THE TOTAL CONSULTANC Y FEE RECEIPT OF RS. 586 LACS. THOUGH THE RELATED PARTY FILTER HAS P ASSED BUT DURING THE YEAR ITSELF THE ASSESSEE HAS ENTERED INT O ALL THESE TRANSACTIONS, WHICH WERE NOT THERE IN THE PAST YEAR . HOWEVER, IN VIEW OF THE ABSENCE OF COMPLETE INFORMATION ABOUT T HE BUSINESS PROFILE OF THE COMPANY AS WELL AS THE NATURE OF THE SERVICES RENDERED BY THE COMPANY, THIS COMPARABLE CANNOT BE ACCEPTED. HENCE, WE REJECT THIS COMPARABLE DUE TO INADEQUATE INFORMATION AVAILABLE BEFORE US. ITA NO.4791/DEL/2015 24 49. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, WE AR E OF THE CONSIDERED VIEW THAT KIRLOSKAR IS NOT A VALID COMPA RABLE FOR FINAL SET OF COMPARABLES, HENCE ORDERED TO BE EXCLUDED. DALKIA ENERGY SERVICES LTD. (DALKIA) 50. THE TAXPAYER SOUGHT TO EXCLUDE DALKIA ON THE GR OUNDS INTER ALIA THAT AS PER ITS ANNUAL REPORT, SUFFICIENT INFO RMATION REGARDING THE NATURE OF ITS BUSINESS IS NOT AVAILABLE; THAT I T IS FUNCTIONALLY DISSIMILAR AND RELIED UPON THE DECISION OF BG EXPLORATION AND PRODUCTION INDIA LTD. FOR AY 2010-11 (SUPRA). 51. PERUSAL OF THE ANNUAL REPORT, AVAILABLE AT PAGE S 148 TO 196 OF THE PAPER BOOK, DOES NOT PROVIDE COMPLETE INFORMATI ON AS TO THE NATURE OF ITS BUSINESS. HOWEVER, INFORMATION AVAIL ABLE AT THE WEBSITE SHOWS ITS BUSINESS PROFILE AS UNDER :- DALKIA ENERGY SERVICES COMPANY LTD. OFFERS ALTERNA TE ENERGY SOURCES. THE COMPANY DEVELOPS RENEWABLE ENERGY POW ER PROJECTS FOR THE BIOMASS AND HYDRO SECTOR. DALKIA ENERGY SERVICES ALSO PROVIDES ENERGY COST REDUCTION CONSUL TING SERVICES FOR INDUSTRIAL, COMMERCIAL, FERTILIZER, CHEMICALS, PLASTICS, CEMENT, SUGAR, POWER GENERATION AND MUNICIPAL SECTORS. 52. COMPARABILITY OF DALKIA HAS BEEN EXAMINED BY TH E COORDINATE BENCH OF THE TRIBUNAL IN BG EXPLORATION AND PRODUCTION INDIA LTD. FOR AY 2010-11 (SUPRA) VIS--VIS ROUTINE ENGINEERING DESIGNS SERVICE PROVIDER AND HAS FOUND TO BE NOT A SUITABLE COMPARABLE BY RETURNING FOLLOWING FINDINGS :- ITA NO.4791/DEL/2015 25 THIS COMPARABLE SELECTED BY THE LD. TRANSFER PRICI NG OFFICER IS ENGAGED IN THE BUSINESS OF SERVICE IN THE AREA OF E NERGY MANNER AND DEVELOPING ENERGY EFFICIENCY AND ENERGY PROJECT S WITH FOCUS ON REDUCING THE ENERGY COST AND DERIVING OF CONSEQU ENT ENVIRONMENT BENEFITING THE VARIOUS SECTORS OF ECONO MY IN INDIA AND ABROAD. THE COMPARABLE COMPANY ADOPTS A MULTIPR OJECT APPROACH WHEN THE INDIVIDUAL CUSTOMER DEFINES THE S COPE AND STRUCTURE OF THE SERVICES BEGINNING WITH RELATIVELY SIMPLE PROJECTS, DEPENDING ON THE COMFORT LEVEL OF THE CLIENT, THE S COPE AND COMPLEXITY OF THE SERVICE IS EXPANDED TO MULTITIER PRODUCT PACKAGE. THE LD. AUTHORISED REPRESENTATIVE OBJECTED TO THE INCLUSION OF THE ABOVE COMPANY AS COMPARABLE FOR TH E SIMPLE REASON THAT IT DID NOT HAVE THE FINANCIAL AVAILABLE IN THE PUBLIC DOMAIN. NEITHER THE LD. TRANSFER PRICING OFFICER NO R THE LD. DRP HAS CONSIDERED THIS ASPECT THAT WHEN THE FINANC IAL OF THE COMPARABLE IS NOT AVAILABLE HOW THE ASSETS EMPLOYED BY THAT COMPANY VIS-A-VISS RISK ASSUMED AND FUNCTIONS PERF ORMED CAN BE COMPARED. THEREFORE, IN ABSENCE OF ANY FINANCIAL INFORMATION AVAILABLE OF THIS COMPANY, EITHER IN THE ORDER OF T HE LD. TRANSFER PRICING OFFICER OR AVAILABLE WITH THE ASSESSEE, WE REJECT THIS COMPARABLE AT THE THRESHOLD ITSELF. 53. SO, FOLLOWING THE ORDER PASSED BY THE COORDINAT E BENCH OF THE TRIBUNAL IN BG EXPLORATION AND PRODUCTION INDIA LTD. FOR AY 2010-11 (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT DALKIA BEING INTO MORE PROJECTS APPROACHED WITH COMPLEXITY OF SE RVICE OF WHICH COMPLETE INFORMATION IS NOT AVAILABLE IN THE PUBLIC DOMAIN, IT CANNOT BE A VALID COMPARABLE VIS--VIS TAXPAYER, HE NCE ORDERED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 54. THE TAXPAYER SOUGHT INCLUSION OF TWO COMPARABLE S, VIZ., NEILSOFT LIMITED AND VAMA INDUSTRIES LTD. INCLUSION SOUGHT FOR BY THE TAXPAYER NEILSOFT LIMITED ITA NO.4791/DEL/2015 26 55. THE TAXPAYER SOUGHT INCLUSION OF NEILSOFT LTD. IN THE FINAL SET OF COMPARABLES ON THE GROUNDS INTER ALIA THAT THE N ATURE OF BUSINESS OF NEILSOFT LTD. IS SIMILAR TO THE TAXPAYER AND THI S COMPARABLE HAS ALREADY BEEN ORDERED TO BE INCLUDED BY THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 DATED 14.12.2018 IN THE FINAL SET OF COMPARABLES. THE TPO REJECTED NEILSOFT LTD. AS COM PARABLE ON THE GROUND THAT IT IS FUNCTIONALLY DISSIMILAR BEING ENG AGED INTO THE BUSINESS OF SOFTWARE ENGINEERING SERVICES AND SALE OF SOFTWARE PROJECTS. HOWEVER, LD. AR FOR THE TAXPAYER BY REFE RRING TO ANNUAL REPORT OF NEILSOFT LTD., AVAILABLE AT PAGES 560 TO 615 OF THE PAPER BOOK, CONTENDED THAT NEILSOFT LTD. IS INTO PROVIDIN G SOFTWARE ENGINEERING SERVICES WHICH ARE SIMILAR TO TAXPAYER S ENGINEERING DESIGN SEGMENT SERVICES. 56. HOWEVER, WHEN WE EXAMINE COMPANYS OVERVIEW OF NEILSOFT LTD. AT PAGE 572 OF THE PAPER BOOK, IT SHO WS THAT APART FROM PROVIDING SOFTWARE ENGINEERING SERVICES TO ITS CLIENTS, NEILSOFT LTD. IS ALSO ENGAGED IN THE BUSINESS OF SELLING SOF TWARE PRODUCTS. WHEN WE EXAMINE THE PROFIT & LOSS ACCOUNT OF NEILSO FT LTD. FOR THE YEAR UNDER ASSESSMENT, AVAILABLE AT PAGE 565 OF THE PAPER BOOK, IT HAS SHOWN ITS SUBSTANTIAL INCOME FROM SERVICES AND PRODUCTS WITH NO SEGMENTAL INFORMATION AVAILABLE. ITA NO.4791/DEL/2015 27 56.1 NO DOUBT, NEILSOFT LTD. WAS ORDERED TO BE INCL UDED IN THE FINAL SET OF COMPARABLES IN TAXPAYERS OWN CASE FOR AY 2009-10, BUT THE YEAR UNDER ASSESSMENT BEING DIFFERENT, THE SAME ORDER CANNOT BE RELIED UPON AND A COMPANY HAVING INCOME F ROM PRODUCTS THOUGH RENDERING SOFTWARE ENGINEERING SERVICES, IN THE ABSENCE OF SEGMENTAL INFORMATION CANNOT BE A SUITABLE COMPARAB LE. SO, THE CONTENTION OF THE TAXPAYER TO INCLUDE NEILSOFT LTD. IN THE FINAL SET OF COMPARABLES IS NOT SUSTAINABLE, HENCE WE CONFIRM TH E ORDER PASSED BY THE TPO AS WELL AS DRP. VAMA INDUSTRIES LTD. (VAMA) 57. THE TAXPAYER SOUGHT TO INCLUDE VAMA IN THE FINA L SET OF COMPARABLES BEING FUNCTIONALLY SIMILAR ON THE GROUN D THAT THE TAXPAYER HAS CONSIDERED SOFTWARE DEVELOPMENT AND SE RVICES SEGMENT FOR THE PURPOSE OF COMPARABILITY. HOWEVER, TPO HAS REJECTED THIS COMPARABLE ON THE GROUND THAT IT IS E NGAGED IN PROVIDING INFORMATION TECHNOLOGY AND COMPUTER SERVI CE ACTIVITIES. 57.1 PERUSAL OF THE ANNUAL REPORT OF VAMA PARTICULA RLY ITS FINANCIAL HIGHLIGHTS AT PAGE 8 SHOWS THAT OUT OF TH E TOTAL TURNOVER OF RS.903.17 LAKHS, VAMA HAS EARNED INCOME FROM SOFTWA RE DEVELOPMENT AND ITES TO THE TUNE OF RS.561.86 LAKHS . THE LD. AR FOR THE ASSESSEE CONTENDED THAT IN ITS TP ANALYSIS THE TAXPAYER HAS ITA NO.4791/DEL/2015 28 CONSIDERED SOFTWARE DEVELOPMENT AND SERVICE SEGMENT FOR THE PURPOSE OF COMPARABILITY. HOWEVER, WHEN WE EXAMINE PROFIT & LOSS ACCOUNT OF VAMA, AVAILABLE AT PAGE 33 OF THE P APER BOOK, IT HAS SHOWN INCOME UNDER THE HEAD DOMESTIC RS.50,387,389/ -, EXPORT RS.39,929,771/- AND OTHER INCOME RS.329,272/-, BUT NO SEGMENTAL INFORMATION IS AVAILABLE SO AS TO COMPUTE ACTUAL PR OFITABILITY OF VAMA. MOREOVER, IN THE FINANCIAL HIGHLIGHTS, AVAIL ABLE AT PAGE 8, IT IS CATEGORICALLY MENTIONED THAT IT HAS EARNED INCOM E FROM PRODUCT/HARDWARE SALES AND SERVICES, BUT AGAIN SEGM ENTAL FINANCIALS ARE NOT AVAILABLE IN THE PROFIT & LOSS ACCOUNT. 57.2 NO DOUBT, COMPARABILITY OF VAMA WAS EXAMINED B Y THE COORDINATE BENCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR AY 2009-10 AND DIRECTED THE AO/TPO TO CONSIDER THE SOF TWARE DEVELOPMENT AND SERVICE FOR THE PURPOSE OF COMPARAB ILITY BUT THE SAME CANNOT BE FOLLOWED BEING OF DIFFERENT ASSESSME NT YEAR AND THAT TIME COMPLETE FINANCIALS OF VAMA MIGHT NOT BE BROUGHT BEFORE THE BENCH. SO, WHEN SEGMENTAL FINANCIALS ARE NOT A VAILABLE ON RECORD VAMA CANNOT BE A VALID COMPARABLE, HENCE RIG HTLY BEEN NOT INCLUDED BY THE TPO. GROUND NO.7 58. THE TAXPAYER CHALLENGED THE ORDER PASSED BY THE TPO AS WELL AS DRP FOR NOT PROVIDING WORKING CAPITAL ADJUSTMENT AND RISK ITA NO.4791/DEL/2015 29 ADJUSTMENT. WHILE CARRYING OUT THE COMPARABILITY A NALYSIS UNDER RULES 10B(1)(E) AND 10B(3), THE DIFFERENCE BETWEEN CONTROLLED AND UNCONTROLLED TRANSACTION IS REQUIRED TO BE TAKEN IN TO ACCOUNT BY PROVIDING NECESSARY ADJUSTMENT. SO, IN ORDER TO BR ING TWO COMPARABLE COMPANIES AT PAR, NECESSARY WORKING CAPI TAL ADJUSTMENT AND RISK ADJUSTMENT IS REQUIRED TO BE MA DE. 59. COORDINATE BENCH OF THE TRIBUNAL IN MENTOR GRAPHICS (NOIDA) P. LTD. VS. DCIT (2007) 109 ITR 101 (DELH I) HAS DECIDED THE IDENTICAL ISSUE FOR PROVIDING WORKING C APITAL ADJUSTMENT AND RISK ADJUSTMENT FOR THE PURPOSE OF C OMPARABILITY BY RETURNING FOLLOWING FINDINGS :- 27. AFTER THE SELECTION OF THE COMPARABLES, BEST M ETHOD OF DETERMINING ARMS LENGTH PRICE IS SELECTED. THEREAF TER, FUNCTIONAL ANALYSIS IS CARRIED TO IDENTIFY FUNCTION S, RISK AND ASSETS OF UNCONTROLLED TRANSACTIONS AND COMPARISON IS CARRIED WITH CHARACTERISTICS OF THE CONTROLLED TRANSACTION. THIS IS NECESSARY TO FIND WHETHER COMPARABLE SELECTED ARE R EALLY COMPARABLE AND RELIABLE. COMPARISON BASED ON FUNCTI ONAL ANALYSIS INCLUDE ECONOMICALLY SIGNIFICANT ACTIVITIE S AND RESPONSIBILITIES UNDERTAKEN OR TO BE UNDERTAKEN BY THE INDEPENDENT AND ASSOCIATED ENTERPRISES. THE STRUCTU RE AND ORGANIZATION OF THE GROUP AND MORE PARTICULARLY THE JUDICIAL RELATIONSHIP BETWEEN DIFFERENT ENTITIES OF SAME GRO UP ARE TO BE SEEN. THE FUNCTION THAT NEED TO BE IDENTIFIED WHILE CARRYING COMPARISON AS PER OECD GUIDELINES INCLUDE DESIGN, MANUFACTURING, ASSEMBLING, RESEARCH AND DEVELOPMENT , SERVICING, PURCHASING, DISTRIBUTION, MARKETING, ADV ERTISING, TRANSPORTATION, FINANCIAL AND MANAGEMENT ACTIVITIES . IT IS ALSO NECESSARY TO EXAMINE AS TO WHAT IS THE PRINCIPAL FU NCTION OF THE ENTITIES. THE ANALYSIS OF COMPARISON SHOULD CONSIDE R TOTAL ASSETS EMPLOYED AND ASSETS USED TO EARN PROFIT. THE RISK A SSUMED BY RESPECTIVE PARTIES IS A VERY IMPORTANT CONSIDERATIO N. IT IS A SIMPLE PRINCIPLE OF ECONOMICS THAT THE GREATER THE RISK, T HE GREATER THE EXPECTED RETURN (COMPENSATION). IF THERE ARE MATERI AL AND SIGNIFICANT DIFFERENCES IN THE RISK INVOLVED, THEN THE COMPARABLE ITA NO.4791/DEL/2015 30 IDENTIFIED ARE NOT CORRECT AS APPROPRIATED ADJUSTME NTS FOR DIFFERENCES IN SUCH CASES ARE NOT POSSIBLE. THEREFO RE, WHILE PERFORMING SEARCHES FOR POTENTIAL COMPARABLE COMPAN IES, NOT ONLY TURNOVER AND OPERATING PROFIT BUT FUNCTIONS PE RFORMED AND RISK PROFILE ARE ALSO TO BE CONSIDERED. HOWEVER, IT CAN ALWAYS BE SHOWN ON THE GIVEN FACTS OF THE CASE THAT COMPARABL E FOUND ARE SIMILAR OR ALMOST SIMILAR TO THE CONTROLLED TRANSAC TION AND NO ADJUSTMENTS ARE NEEDED. IT IS USEFUL TO SEE THE LEV EL OF INTANGIBLE ASSETS IN COMPARABLE TO AN APPROPRIATE BASE. DEPEND ING ON FACTS OF THE CASE, FINAL SET OF COMPARABLES MAY NEED TO E LIMINATE DIFFERENCES BY MAKING ADJUSTMENTS FOR THE FOLLOWING : (A) WORKING CAPITAL (B) ADJUSTMENT FOR RISK AND GROWTH (C) ADJUSTMENT OF R&D EXPENSES. 27.1 THE RISK NOT ONLY DUE TO HUMAN RESOURCES, INFR ASTRUCTURE AND QUALITY WHICH ARE NORMALLY TAKEN INTO ACCOUNT Y ET MORE SIGNIFICANT RISKS LIKE MARKET RISK, CONTRACT RISK, CREDIT AND COLLECTION RISK AND RISK OF INFRINGEMENT OF INTELLE CTUAL PROPERTY ARE BEING IGNORED HERE. IN MOST OF THE COMPARABLE A NALYSIS CARRIED IN INDIA, THE LATTER TYPE OF RISK ARE NOT B EING TAKEN INTO CONSIDERATION ALTHOUGH THESE CAN LEAD TO MAJOR DIFF ERENCE IN MARKET VALUE OF TRANSACTIONS. 60. SO, WE ARE OF THE CONSIDERED VIEW THAT TPO/DRP ARE REQUIRED TO PROVIDE WORKING CAPITAL ADJUSTMENT AND RISK ADJUSTMENT TO THE TAXPAYER AS WELL AS COMPARABLE COMPANY TO BR ING THEM AT PAR WITH EACH OTHER. SO, GROUND NO.7 IS DETERMINED IN FAVOUR OF THE TAXPAYER. GROUNDS NO.8 & 9 61. GROUNDS NO.8 & 9 BEING GENERAL IN NATURE NEED N O ADJUSTMENT. GROUND NO.10 62. THE TAXPAYER HAS SOUGHT ADJUSTMENT ON ACCOUNT O F CAPACITY UTILIZATION AS WELL AS CUSTOMS DUTY WHICH THE TPO A S WELL AS DRP ITA NO.4791/DEL/2015 31 HAS DECLINED. THE LD. AR FOR THE TAXPAYER CONTENDE D THAT THE ISSUE AS TO THE PROVIDING ADJUSTMENT ON ACCOUNT OF CAPACI TY UTILIZATION AS WELL AS CUSTOMS DUTY HAS ALREADY BEEN DECIDED IN FA VOUR OF THE TAXPAYER IN ITS OWN ASSESSMENT FOR AY 2011-12 (SUPR A). 62.1 IT IS NOT IN DISPUTE THAT THE TAXPAYER HAS STA RTED ITS COMMERCIAL OPERATION IN OCTOBER 2009. IT IS ALSO N OT IN DISPUTE THAT DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER HAS PRODUCED ONLY 17 UNITS OF EQUIPMENTS AS AGAINST THE INSTALLED CAP ACITY OF 238 EQUIPMENTS, AS IS EVIDENT FORM FINANCIALS STATEMENT , AVAILABLE AT PAGE 16 OF THE PAPER BOOK. SO, THE CAPACITY UTILIZ ATION RATIO OF TAXPAYERS COMPANY IS ONLY 7.14%. 63. THE TAXPAYER HAS PROVIDED CAPACITY UTILIZATION TO LD. TPO AS WELL AS DRP IN TABULATED FORM WHICH IS AS UNDER :- A.Y. INSTALLED CAPACITY ACTUAL PRODUCTION 2010-11 238 17 2011-12 238 98 2012-13 238 128 2013-14 252 175 64. COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2011-12 (SUPRA) DEALT WITH THE ISSUE IN QUESTION BY RETURN ING FOLLOWING FINDINGS :- 3.5.14 NOW, COMING TO THE METHODOLOGY TO BE ADOPTED FOR ALLOWING THE CAPACITY ADJUSTMENT IN THI S CASE. THE LD. DRP HAS TAKEN COGNIZANCE OF THE SAME BUT INSTEAD OF ALLOWING THE ADJUSTMENT ON ACCOUNT O F ITA NO.4791/DEL/2015 32 CAPACITY UTILIZATION, IT HAS DIRECTED TO EXCLUDE DEPRECIATION AND REPAIRS OF MACHINERY FROM THE COMPARABLES AS WELL AS THE ASSESSEE. WE ARE OF THE VIEW THAT CAPACITY ADJUSTMENT IS NOT LIMITED TO DEPRECIA TION AND REPAIR OF MACHINERY. IN A BUSINESS ENTITY, THER E ARE CERTAIN FIXED OVERHEADS SUCH AS RENT, ADMINISTRATIV E EXPENSES ETC., WHICH HAVE TO BE INCURRED IRRESPECTI VE OF THE PERCENTAGE OF CAPACITY UTILIZATION. THERE ARE VARIABLE EXPENDITURES WHICH ARE IN DIRECT PROPORTIO N TO THE PRODUCTION I.E. THE CAPACITY UTILIZED. THE NET MARGIN OF AN ENTITY WILL VARY WITH THAT OF ANOTHER ENTITY IN CASE THERE IS A DIFFERENCE IN THE CAPACITY UTILIZATION. IF THERE IS HIGHER CAPACITY UTILIZATION, THEN THE FIXED OVER HEADS GET SPREAD OVER SUCH HIGHER CAPACITY UTILIZATION WI TH THE RESULT THAT THE NET MARGIN OF SUCH ENTITY WILL BE M UCH HIGHER AS COMPARED TO THE ANOTHER ENTITY WHERE THE CAPACITY UTILIZATION IS LOW AND AS SUCH THERE IS A HIGHER PROPORTION OF FIXED OVERHEADS WHICH GET ALLOCATED T O SUCH LOWER CAPACITY/PRODUCTION. THUS, THE RIGHT MET HOD IS TO IDENTIFY ALL THE FIXED EXPENSES INCLUDING DEPRECIATION AND TO ADJUST THE SAME IN THE RATIO OF THE CAPACITY UTILIZED. IN VIEW OF THE ABOVE ANALYSIS, W E DIRECT THE TPO TO EXERCISE HIS POWERS UNDER SECTION 133(6) OF THE ACT AND TO CALL FOR THE INFORMATION O N CAPACITY UTILIZATION OF COMPARABLE COMPANIES. AFTE R OBTAINING THE INFORMATION, HE WILL SHARE THE DETAIL S SO OBTAINED WITH THE ASSESSEE AND GIVE AN OPPORTUNITY TO THE ASSESSEE AND GRANT ADJUSTMENT FOR CAPACITY UNDE R- UTILIZED. 65. SO, THE ISSUE BEING COVERED IN FAVOUR OF THE TA XPAYER IN TAXPAYERS OWN CASE, TPO IS DIRECTED TO IDENTIFY AL L THE FIXED EXPENSES INCLUDING DEPRECIATION AND TO ADJUST THE S AME IN CAPACITY UTILIZED BY EXERCISING HIS POWERS AVAILABLE UNDER T HE ACT BY CALLING INFORMATION QUA THE CAPACITY UTILIZATION BY COMPARA BLE COMPANIES. SO, THIS ISSUE IS REMANDED BACK TO THE TPO TO DECID E AFRESH IN VIEW OF THE DIRECTION GIVEN IN TAXPAYERS OWN CASE FOR AY 2011-12 ITA NO.4791/DEL/2015 33 (SUPRA) BY THE TRIBUNAL. SO, GROUND NO.10 IS DETER MINED IN FAVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. 66. SO FAR AS CUSTOMS DUTY ADJUSTMENT AS SOUGHT FOR BY THE TAXPAYER IS CONCERNED, THIS ISSUE HAS ALSO BEEN DEC IDED IN FAVOUR OF THE TAXPAYER IN ITS OWN CASE FOR AY 2011-12 (SUPRA) BY RETURNING FOLLOWING FINDINGS :- 3.8.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AN D PERUSED THE ORDER PASSED BY THE AUTHORITIES BELOW. THE LD. DRP HAS REJECTED THIS CONTENTION OF THE ASSESSEE COMPANY ON THE GROU ND THAT CUSTOM DUTY DOES NOT HAVE ANY IMPACT ON THE NET PRO FIT LEVEL OF THE ASSESSEE. WHILE DECIDING THE ISSUE OF THE CAPAC ITY ADJUSTMENT, WE HAVE HELD THAT IN TERMS OF RULE 10B (3) ALL THE ADJUSTMENTS WHICH ARE MATERIALLY AFFECTING THE TRANSACTION BEIN G COMPARED NEED TO BE ELIMINATED. THUS, IN CASE NON-CENVAT-ABL E CUSTOM DUTY ON IMPORT MADE BY THE ASSESSEE COMPANY IS MATERIALL Y AFFECTING THE TRANSACTION VIS--VIS THE COMPARABLES BEING CON SIDERED BY THE TPO THEN THE SAME NEEDS TO BE ELIMINATED. SINCE, TH IS ISSUE HAS NOT BEEN CONSIDERED BY THE TPO AND CONSIDERING THE FACT THAT WE HAVE REMITTED THE MATTER BACK TO AO FOR ALLOWING AD JUSTMENT ON ACCOUNT OF CAPACITY UTILIZATION, WE DEEM IT FIT TO RESTORE THIS ISSUE ALSO TO THE TPO. THE TPO WILL EXAMINE WHETHER NON-C ENVAT-ABLE CUSTOM DUTY ON IMPORTS PAID BY THE ASSESSEE IS MATE RIALLY AFFECTING THE PLI OF THE ASSESSEE COMPANY AND IF HE FINDS THAT THIS PAYMENT OF NON-CENVAT-ABLE CUSTOM DUTY IS MATE RIALLY AFFECTING THE TRANSACTION WITH THAT OF THE COMPARAB LES THEN HE WILL SUITABLY MAKE ADJUSTMENT THEREOF. 67. THE TAXPAYER HAS BROUGHT ON RECORD THE IMPACT O F CUSTOMS DUTY ON PROFITABILITY OF THE TAXPAYER COMPANY IN TA BULATED FORM WHICH IS AS UNDER : (RS. IN LAKHS) A.Y. IMPORT SALES IMPORT/SALES IN RATIO 2010-11 1586.44 1302.01 121.85% 2011-12 5573.74 9882.41 56.40% 2012-13 8070 19954 40.44% 2013-14 10914 23257 46.93% 2014-15 7060.64 21916.36 32.22% ITA NO.4791/DEL/2015 34 68. FOLLOWING THE ORDER PASSED BY THE COORDINATE BE NCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2011-12 (SUPRA), WE DIRECT THE TPO TO EXAMINE IF NON-CENVAT-ABLE CUSTOMS DUTY OF IMPORT PAID BY THE TAXPAYER IS MATERIALLY AFFECTING THE PL I OF TAXPAYER COMPANY AS PER MANDATE OF RULE 10B(3) THEN SUITABLE ADJUSTMENT BE PROVIDED TO THE TAXPAYER. GROUND NO.11 69. TPO/DRP HAVE NOT RESTRICTED TRANSFER PRICING AD JUSTMENT IN RESPECT OF IMPORT OF RAW MATERIAL TRANSACTION TO TH E VALUE OF CONSUMPTION OF MATERIAL OF THE TAXPAYER, WHICH IS C HALLENGED BY THE TAXPAYER BEFORE THE TRIBUNAL. THE LD. AR FOR T HE TAXPAYER CONTENDED THAT THIS ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE TAXPAYER IN AY 2011-12 (SUPRA). 70. COORDINATE BENCH OF THE TRIBUNAL DECIDED THE IS SUE IN CONTROVERSY BY RETURNING FOLLOWING FINDINGS AS UNDE R :- 3.10.3 WE HAVE CONSIDERED THE RIVAL CONTENTIONS. I T IS UNDISPUTED FACT THAT THE ASSESSEE HAS MADE PURCHASE S OF RS.105,55,16,000/- DURING THE YEAR OUT OF WHICH MAT ERIAL WORTH RS.41,34,29,000/- WAS NOT CONSUMED DURING THE YEAR AND, THEREFORE, THE IMPACT ON THE MARGIN, IF ANY, IN RES PECT OF SUCH PURCHASES DURING THE YEAR IS ONLY OF THE MATERIAL C ONSUMED AND NOT OF THE MATERIAL PURCHASED AND WHICH IS LYING UN UTILIZED AT THE END OF THE YEAR AS CLOSING STOCK. THE PURCHASE COST DEBITED IN RESPECT OF SUCH RAW MATERIAL AND THE VALUATION OF S UCH MATERIAL AS CLOSING STOCK IS AT SAME COST. CONSIDERING THIS FACT, WE DIRECT ITA NO.4791/DEL/2015 35 THE TPO THAT IN CASE ANY ADJUSTMENT IS REQUIRED TO BE MADE AFTER GIVING EFFECT TO THE ADJUSTMENT ON ACCOUNT OF CAPAC ITY AND OTHER ISSUES DECIDED BY US IN THIS APPEAL THE SAME IS TO BE RESTRICTED TO THE MATERIAL PURCHASED FROM THE AE AND CONSUMED DUR ING THE YEAR. 71. SO, FOLLOWING THE AFORESAID ORDER PASSED BY THE COORDINATE BENCH OF THE TRIBUNAL, TPO IS DIRECTED TO RESTRICT THE ADJUSTMENT, IF ANY, AFTER PROVIDING ADJUSTMENT ON ACCOUNT OF CAPAC ITY UTILIZATION AND OTHER RISK ADJUSTMENTS, TO THE MATERIAL PURCHAS ED FROM AE AND CONSUMED DURING THE YEAR UNDER ASSESSMENT IN LINE W ITH THE DIRECTIONS ISSUED BY THE COORDINATE BENCH OF THE TR IBUNAL IN AY 2011-12. SO, THIS GROUND IS DETERMINED IN FAVOUR O F THE TAXPAYER. GROUND NO.12 72. GROUND NO.12 IS DISMISSED HAVING NOT BEEN PRESSED D URING THE COURSE OF ARGUMENTS. GROUND NO.13 73. GROUND NO.13 BEING CONSEQUENTIAL IN NATURE NEED S NO SPECIFIC FINDINGS. 74. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 30 TH DAY OF MAY, 2019. SD/- SD/- (N.K. BILLAIYA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 30 TH DAY OF MAY, 2019/TS ITA NO.4791/DEL/2015 36 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.