TECHNIMONT ICB P.LTD ( SUCCESSORS TO ENGINEERING DESIGN TECHNIMONT ICB P.LTD), MUMBAI V. DCIT RG 9(3), MUMBAI

ITA 7576/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79203 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2014
• Appeal Filed By: Assessee
• Bench Allotted: K
• Next Hearing Date: 16-06-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 24-12-2012
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 133A; 132; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BEN CH, MUMBAI JH JH JH JH VKJ VKJVKJ VKJ- -- - LH LHLH LH- -- - 'KEKZ 'KEKZ 'KEKZ 'KEKZ] ] ] ] YS[KK LNL; YS[KK LNL; YS[KK LNL; YS[KK LNL; ,OA JH ,OA JH ,OA JH ,OA JH FOT; IKY JKO] U;KF;D LNL; FOT; IKY JKO] U;KF;D LNL; FOT; IKY JKO] U;KF;D LNL; FOT; IKY JKO] U;KF;D LNL; DS LE{K DS LE{K DS LE{K DS LE{K BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER VK;DJ VIHY LA[;K / ITA NO.7576/MUM/2012 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2008-09 TECNIMONT ICB PVT. LTD. (SUCCESSORS TO ENGINEERING DESIGN TECNIMONT ICB PVT. LTD.) TECNIMONT ICB HOUSE, CHINCHOLI BUNDER, 504 LINK ROAD, MALAD (W) MUMBAI 400 064. VS. ADDITIONAL CIT-9(3) 2 ND FLOOR, ROOM NO. 229, AAYKAR BHAVAN, M.K. ROAD, NEW MARINE LINES, MUMBAI 400 020. PAN AAACI2628B APPELLANT RESPONDENT ASSESSEE BY / FU/KKZFJRH DH VKSJ LS FU/KKZFJRH DH VKSJ LS FU/KKZFJRH DH VKSJ LS FU/KKZFJRH DH VKSJ LS SHRI M.P. LOHIA REVENUE BY/ JKTLO DH VKSJ LS JKTLO DH VKSJ LS JKTLO DH VKSJ LS JKTLO DH VKSJ LS SHRI S.D. SRIVASTAVA. ORDER PER VIJAY PAL RAO, JM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ASSESSMENT ORDER DATED 15.11.2012 PASSED U/S 143(3) R.W.S 144C(13) OF THE INCOME TAX ACT IN PARSUANCE TO DIRECTIONS OF DISPUTE RESOLUTION PANEL (HEREIN AFTER REFERRED AS DATE OF HEARING 16.06.2014 DATE OF PRONOUNCEMENT 27.06.2014 TECNIMONT ICB PVT. LTD. 2 | P A G E DRP) DATED 28.09.2012 U/S 144C(5) OF THE INCOME TAX ACT FOR THE A.Y. 2008- 09. THE ASSESSEE HAS FILED THE CONCISE GROUNDS AS U NDER:- BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TECNIMONT 1GB PRIVATE LIMITED (SUCCESSORS TO ENGINEERING DESIGN TECNIMONT 1GB PRI VATE LIMITED) (HEREINAFTER REFERRED TO AS THE APPELLANT) RESPECTFULLY CRAVES LEAVE TO PREF ER AN APPEAL AGAINST THE FINAL ORDER PASSED BY THE LEARNED ADDITIONAL COMMISSIONER OF IN COME-TAX - 9(1) ('AO'), IN PURSUANCE OF THE DIRECTIONS ISSUED BY DISPUTE RESOLUTION PANEL- I (,DRP'), MUMBAI UNDER SECTION 143(3) R.W.S.144C(13) OF THE INCOME-TAX ACT, 1961 (HEREINA FTER REFERRED TO AS THE ACT) ON THE FOLLOWING GROUNDS WHICH ARE INDEPENDENT AND WITHOUT PREJUDICE TO EACH OTHER. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE AO/ TRANSFER PRICING OFFICER (TPO') BASED ON DIRECTIONS OF DRP: GENERAL 1 ERRED IN MAKING A TRANSFER PRICING ADJUSTMENT OF RS 29,08,51,336/-; 2 ERRED IN ADOPTING AN APPROACH BASED ON UNSUBSTAN TIATED PRESUMPTIONS, SURMISES, CONJECTURES AND ALLEGATIONS FOR THE PURPO SE OF MAKING AN ADJUSTMENT TO THE INTERNATIONAL TRANSACTIONS, THERE BY VIOLATING THE PROVISIONS OF SECTION 92 C(3) READ WIT H 92GA( 3) O F THE ACT; 3 ERRED IN IGNORING THE FACT THAT SINCE THE APPELL ANT IS AVAILING TAX HOLIDAY U/S 10A OF THE ACT, THERE IS NO MOTIVE OR REASON TO SHIFT PROFITS OUT OF INDIA, CURBING WHICH IS THE BASIC INTENTION OF INTR ODUCING THE TRANSFER PRICING PROVISIONS; REJECTION OF ECONOMIC AND COMPARABILITY ANALYSIS 4 ERRED IN NOT ACCEPTING THE ECONOMIC ANALYSIS UND ERTAKEN BY THE 4 APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, CONDUCTING A FRESH SEARCH FOR THE DETERMINATION OF THE ALP IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANSACTION AND HOLDING THAT THE APPELLANT'S INTERNATIONAL TRANSACTION IS NOT AT ARM'S LENGTH; ORDER BASED ON INCORRECT PRESUMPTIONS 5 ERRED IN MAKING INCORRECT PRESUMPTIONS LIKE; A) THE APPELLANT OPERATES ON A COST PLUS 15% BASIS; B) APPELLANT'S GLOBAL ANALYTICAL CENTER RENDERS CRE DIT ANALYTICAL AND RESEARCH SERVICES, WHICH ARE ALSO IN THE NATURE OF KPO SERVICES; TECNIMONT ICB PVT. LTD. 3 | P A G E C) THE APPELLANT IS PROVIDING SERVICES EXCLUSIVELY TO ITS AE, THOMSON US; D) THE APPELLANT IS ENGAGED IN EQUITY AND CREDIT RE SEARCH SERVICES. REJECTION OF BUSINESS ACTIVITY PROFILE 6 ERRED IN HOLDING THAT THE APPELLANT'S BUSINESS AC TIVITY IS SIMILAR TO KPO WITHOUT ASSIGNING ANY VALID REASONS AND WITHOUT ANA LYZING BUSINESS ACTIVITY OF THE APPELLANT IN THE RIGHT PERSPECTIVE; COMPARABLES SELECTED BY ASSESSING OFFICER/TPO 7 ERRED IN SELECTING FOLLOWING COM PARABLES THOUGH THEY ARE FUNCTIONALLY DIFFERENT COMPARED TO THE BUSINESS ACTIVITIES OF TH E APPELLANT : ACROPETAL TECHNOLOGIES CROSSDOMAIN SOLUTIONS LIMITED EXCLERX SERVICES LIMITED MOLD-TEK TECHNOLOGIES LIMITED TRITON CORP LIMITED 8 ERRED IN SELECTING MOLD-TEK TECHNOLOGIES THOUGH N OT COMPARABLE IN VIEW OF THE FACT THAT THERE WAS A DEMERGER AS WELL AS ACQUISITION DU RING THE YEAR AND WITHOUT APPRECIATING THAT TPO ITSELF R EJECTED ALLSEC TECHNOLOGIES AS A COMPARABLE ON SIMILAR GROUNDS DUR ING HIS SEARCH PROCESS; 9 WITHOUT PREJUDICE TO THE ABOVE, IF MOLD TEK TECHNOLOGIES IS ACCEPTED AS A COMPARABLE, THEN ALLSEC TECHNOLOGIES SHOULD ALSO BE CONSIDERED AS A COMPARABLE; 10 WITHOUT PREJUDICE TO THE ABOVE , ERRED IN APPLYING INCORRECT MARGIN OF 96.66% FOR MOLD TEK TECHNOLOGIES AS AGAINST THE CORRECT MARGIN OF 15.05% AS WORKED OUT BY THE APPELLANT; 11 ERRED IN CONTINUING 'M/S CORAL HUBS LTD.' AS A P ART OF COMPARABLE SET, EVEN THOUGH THE DRP SPECIFICALLY DIRECTED TO EXCLUDE IT FROM THE COMPARABLE SET; 12 WITHOUT PREJUDICE TO THE ABOVE , WHILE TREATING THE APPELLANT'S BUSINESS ACTIVITY SIMILAR TO KPO, ERRED IN REJECTING FOLLOWING 5 COMP ANIES OUT OF 11 COMPARABLES MENTIONED IN THE SHOW CAUSE NOTICE WITHOUT ASSIGNIN G ANY VALID REASONS EVEN THOUGH THEY FULFILLED ALL THE QUANTITATIVE FILTERS ADOPTED BY THE TPO: TECNIMONT ICB PVT. LTD. 4 | P A G E ADITYA BIRLA MINACS WORLDWIDE LTD. R SYSTEMS INTERNATIONAL LTD. SPANCO LTD. ACCENTIA TECHNOLOGIES LTD. 13 W ITHOUT PREJUDICE TO THE ABOVE , WHILE TREATING THE A PPELLANT ' S BUSINESS ACTIVITY SIMILAR TO KPO, ERRED IN NOT SELECTING THE FOLLOWING 7 COMPARABLES IN THE COMPARABILITY STUDY UNDERTAKEN BY THE TPO EVEN THOUGH THEY FULFILLED ALL THE QUANTITATIVE FILTERS ADOPTED BY THE TPO: INFOSYS BPO LIMITED ASIT C MEHTA FINANCIAL SERVICES LTD E4E HEALTHCARE BUSINESS SERVICES PVT LTD ADJUSTMENT ON ACCOUNT OF COST OF NEW HIRES/ TRAINEE S 14 WHILE COMPUTING MARGIN FOR THE APPELLANT'S COMPA RABLES, ERRED IN NOT GRANTING ADJUSTMENT ON ACCOUNT OF COST OF NEW HIRES/ TRAINEE S WHO REMAINED UNPRODUCTIVE DURING THE YEAR BEING UNDER TRAINING; RISK ADJUSTMENT 15 ERRED BY NOT MAKING SUITABLE ADJUSTMENTS TO ACCO UNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS-A-VIS THE CO PARABLES. 2. AT THE TIME OF HEARING THE LD. AUTHORIZED REPRES ENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT SUBSEQUENT TO THE DIREC TIONS OF DRP DATED 28.09.2012, THE ASSESSEE HAS FILED A RECTIFICATION PETITION UNDER RULE 13 OF THE INCOME TAX (DISPUTE RESOLUTION PANEL RULES 2009 ) ON 27.12.2012. THE DRP DISPOSED OF THE RECTIFICATION PETITION VIDE ORD ER DATED 10.03.2014, THEREBY DIRECTED THE ASSESSING OFFICER/TPO TO RECOM PUTE THE MARGIN OF MOLD- TEK TECHNOLOGIES LTD AFTER CONSIDERING THE LOSS ON DERIVATIVES AS AN OPERATING ITEM. HE HAS FILED A COPY OF THE DRP ORDE R DATED 10.03.2014 WHEREBY THE DIRECTIONS ARE MODIFIED. THE LD. AUTHOR IZED REPRESENTATIVE HAS THEN SUBMITTED THAT IN VIEW OF THE RECTIFIED DIRECT IONS OF DRP, THE GROUND NO. 8, 10 AND 11 OF THE CONCISE GROUNDS BECAME INFRUCTU OUS. THE LD. DR HAS NOT TECNIMONT ICB PVT. LTD. 5 | P A G E DISPUTED THIS FACT THAT IN VIEW OF THE MODIFIED/REC TIFIED DIRECTIONS OF DRP, GROUND NOS. 8,10 AND 11 OF THE ASSESSEES APPEAL BE CAME INFRUCTUOUS. 3. IN VIEW OF THE ABOVE SUBMISSIONS AND THE ORDER O F DRP DATED 10.03.2014, THE GROUND NOS. 8,10 AND 11 ARE DISMISS ED BEING INFRUCTUOUS. 4. GROUN NO. 1 TO 3 ARE GENERAL IN NATURE AND DO NO T REQUIRE ANY SPECIFIC FINDING OR ADJUDICATION. 5. GROUND NOS. 4 TO 7, 12 AND 13 ARE IN RELATION TO THE REJECTION OF COMPARABLES SELECTED BY THE ASSESSEE AND INCLUSION OF FRESH COMPARABLES BY TPO AND THEREBY MAKING THE ADDITION/ADJUSTMENT. 5.1 THE ASSESSEE HAS ELECTRONICALLY FILED ITS RETUR N OF INCOME ON 29.09.2008 DECLARING TOTAL INCOME OF RS. 12,24,93,560/-. THE A SSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF EXPORT AND INFORMATIN TE CHNOLOGY ENABLED SERVICES UNDER THE STPI SCHEME OF GOVT. OF INDIA AS 100% EXPORT UNIT. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY H AS PROVIDED ENGINEERING DESIGN SERVICES USING CAD/CAM SOFTWARE TO ITS AES (ASSOCIATE ENTERPRISES). THE ASSESSEE FILED REPORT IN THE FORM NO. 3CEB ALONG WITH THE RETURN OF INCOME DECLARING INTERNATIONAL TRANSACTIO NS. THE ASSESSING OFFICER MADE A REFERENCE U/S 92CA(1) TO THE TRANSFER PRICIN G OFFICER (TPO) FOR COMPUTATION OF ARMS LENGTH PRICE (ALP) IN RELATION TO THE INTERNATIONAL TECNIMONT ICB PVT. LTD. 6 | P A G E TRANSACTIONS. THE TPO NOTED THE INTERNATIONAL TRANS ACTIONS OF THE ASSESSEE IN PARA 4 OF THE ORDER AS UNDER :- SL. NO. NAME OF THE AE NAME OF INTERNATIONAL TRANSACTIONS AMOUNT (IN INR) MOST APPROPRI ATE METHOD 1. TECNIMONT SPA SUPPLY OF ENGINEERING DESIGN AND TECHNICAL SERVICES RS. 1,092,846,852 TNMM ADMINISTRATIVE SERVICES RS.7,590,924/- 2. SOFREGAZ S.A. SUPPLY OF ENGINEERING DESIGN AND TECHNICAL SERVICES RS.5,198,550/- TNMM ADMINISTRATIVE SERVICES RS. 167,025 3. TWS SA SUPPLY OF ENGINEERING DESIGN AND TECHNICAL SERVICES RS. 35,823,201/- TNMM ADMINISTRATIVE SERVICES RS. 774, 099/- 4. TECHNIMONT INDIA PROJECT OFFICE SUPPLY OF ENGINEERING DESIGN AND TECHNICAL SERVICES RS. 240,606,763/- TNMM 5. TECNIMONT SPA REIMBURSEMENT OF COST ALLOCATION RS. 15,275,686/- AT COST 6 TECNIMONT SPA RECOVER OF EXPENSES RS.124,539,636/ - AT COST 5.2 THE ASSESSEE FILED ITS TP STUDY REPORT AND SHO WN THE MARGIN AT 19.46% ON OPERATING INCOME WHICH HAS BEEN BENCH MAR KED BY THE AVERAGE PLI OF COMPARABLES AT 16.61% BY APPLYING TNMM AS MO ST APPROPRIATE MEHOD. THUS THE ASSESSEE CLAIMED THAT THE PRICE CHA RGED FOR ITS INTERNATIONAL TRANSACTION IS HIGHER THAN THE ARITHEMATICAL MEAN P RICE AND, THEREFORE, THE PRICE CHARGED BY THE ASSESSEE ON ITS INTERNATIONAL TRANSACTIONS IS AT ARMS LENGTH. THE ASSESSEE HAS SELECTED SIX COMPARABLES O N THE BASIS OF SEARCH TECNIMONT ICB PVT. LTD. 7 | P A G E CONDUCTED IN THE PUBLIC DATA BASES, PROWESS AND CAP ITAL LINE PLUS. THE TPO NOTED THAT THE ASSESSEE HAS DERIVED THE NET PROFIT MARGIN AT 19.46% DURING THE YEAR UNDER CONSIDERATION AND BENCH MARKED ITS INTERNATIONAL TRANSACTION BY TAKING A SET OF SIX COMPARABLE COMPANIES IN ITES AND BPO SECTOR. HE HAS FURTHER NOTED THAT THE ASSESSEE HAS USED THREE YEAR S DATA OF THESE SIX COMPARABLES FOR THE PURPOSE OF BENCH MARKING AND TH E ARITHEMATIC MEAN OF THE NET PROFIT MARGIN OF THE COMPARABLE COMPANIES W HICH COMES TO 16.61%/. THE FIRST OBJECTION OF THE TPO AGAINST THE COMPARAB LE SELECTED BY THE ASSESSEE WAS THAT THE FUNCTIONS PERFORMED BY THE AS SESSEE BY PROVIDING SERVICES TO ITS AES IS SIMILAR TO THAT PROVIDED BY KPO. THEREFORE, THE COMPANIES SELECTED BY THE ASSESSEE IN THE ITES AND BPO SECTOR FOR BENCH MARKING ITS INTERNATIONAL TRANSACTION WAS FOUND BY THE TPO NOT COMPARABLE WITH THE FUNCTIONS PERFORMED BY THE ASSESSEE IN PRO VIDING THE SERVICES WHICH ARE IN THE NATURE OF KPO. FURTHER THE TPO HAS ALSO QUESTIONED THE USE OF THREE/MULTI YEAR DATA INSTEAD OF CURRENT YEAR DATA OF THE COMPARABLE COMPANIES. ACCORDINGLY THE TPO REJECTED ALL SIX COM PARABLES SELECTED BY THE ASSESSEE AND UNDERTOOK A FRESH SEARCH FOR SELECTING THE COMPARABLES IN THE KPO FIELD. THE TPO HAS APPLIED VARIOUS FILTERS IN S EARCHING FOR COMPARABLES INCLUDING THE COMPANIES WHOSE DATA IS NOT AVAILABLE FOR THE F.Y. 2007-08 AND THE COMPANIES THAT ARE NOT MAINLY ENGAGED IN KPO S ERVICES WERE EXCLUDED. SINCE THE OTHER FILTERS APPLIED BY THE TPO ARE NOT IN DISPUTE BEFORE US, THEREFORE, WE ARE REFERRING MAINLY TWO CRITERIA AGA INST WHICH THE ASSESSEE HAS RAISED SERIOUS OBJECTIONS. THE ASSESSEE TOOK OP ERATING PROFIT TO TOTAL INCOME AS PROFIT LEVEL INDICATOR (PLI) WHEREAS THE TPO HAS CONSIDERED THE OPERATING PROFIT TO OPERATING EXPENSES/COST AS APPR OPRIATE PLI. BY APPLYING THE FILTER/CRITERIA FOR SEARCH OF THE COMPANIES, TH E TPO FINALLY SHORTED OUT 13 COMPANIES FOR FURTHER EXAMINATION AND INCLUSION OF COMPARABLES. OUT OF THESE TECNIMONT ICB PVT. LTD. 8 | P A G E 13 COMPANIES, THE TPO SLECTED FINAL SET OF SIX COMP ARABLES WHICH WERE ENGAGED IN THE KPO SERVICES. DURING THE COURSE OF P ROCEEDINGS THE ASSESSEE SUBMITTED BEFORE TPO THAT THE ENTIRE SET OF KPO COM PANIES ARE NOT COMPARABLES AS ITS ACTIVITIES ARE MORE AKIN TO BPO AND RAISED THE OBJECTION AGAINST THE COMPARABILITY OF EACH OF THE COMPANIES SELECTED BY THE TPO. THE TPO REJECTED THE OBJECTIONS RAISED BY THE ASSESSEE AND FINALLY ARRIVED AT ARITHEMATIC MEAN MARGIN AT 49.88% BY CONSIDERING TH E OPERATING PROFIT TO TOTAL COST AS PLI. THE TPO HAS ALSO REJECTED THE CLAIM OF THE ASSESSEE FOR RISK ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE RISK PR OFILE VIS--VIS COMPARABLE SELECTED BY TPO. ACCORDINGLY THE TPO MADE AN ADJUST MENT OF RS. 29,08,51,336/- ON THE BASIS OF ARMS LENGTH PRICE D ETERMINED AT RS. 1,69,56,75,115/- BY TAKING THE MEAN MARGIN AT 49.88 % OF THE SIX COMPARABLES FINALLY SELECTED BY THE TPO. THE ASSESSING OFFICER FRAMED THE DRAFT ASSESSMENT ORDER AGAINST WHICH THE ASSESSEE FILED O BJECTIONS BEFORE THE DRP. THE DRP VIDE ITS DIRECTION DATED 28.09.2012 DI RECTED THE ASSESSING OFFICER/TPO TO EXCLUDE ONE COMPANY NAMELY M/S CORAL HUBS LTD FROM THE SET OF COMPARABLES SELECTED BY THE TPO. FURTHER THE DR P VIDE ORDER DATED 10.03.2014 HAVE PASSED THE MODIFIED DIRECTIONS ON T HE RECTIFICATION PETITION OF THE ASSESSEE IN RESPECT OF MISTAKE IN THE CALCULAT ION OF MARGIN OF M/S MOLDTEK TECHNOLOGIES LTD. THE DRP HAS DIRECTED THE ASSESSING OFFICER/TPO TO RECOMPUTE THE MARGIN OF MOLD TECH TECHNOLOGIES IN A MANNER SIMILAR TO THAT OF ASSESSEES IN RESPECT OF FOREX EXCHANGE GA INS AND LOSSES INLCUDING THAT OF DERIVATIVES. 6. BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE TPO HAS REJECTED THE COMPARABLES SELECTED BY THE TECNIMONT ICB PVT. LTD. 9 | P A G E ASSESSEE ON THE BASIS OF WRONG FACTS AND ASSUMPTION AND SOLELY ON THE GROUND OF KPO AND BPO AS A CRITERIA OF FUNCTIONAL C OMPARABILITY. THE LD. AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT THIS I SSUE OF COMPARABILITY OF BPO AND KPO AND DETERMINATION OF ARMS LENGTH PRICE HAS BEEN CONSIDERED AND DECIDED BY THE SPECIAL BENCH OF THIS TRIBUNAL V IDE ITS DECISION DATED 7.03.2014 IN THE CASE OF M/S MAERSK GLOBAL CENTRES VS. ACIT IN ITA NO. 7446/MUM/2012. THE SPECIAL BENCH HAS HELD THAT THE POTENTIAL COMPARABLES OF ITES SECTOR LEVEL CAN BE SELECTED BY APPLYING B ROAD FUNCTIONAL TEST AT FIRST STAGE AND CLASSIFICATION OF ITES INTO LOW END BPO S ERVICES AND HIGH END KPO SERVICES FOR COMPARABILITY ANALYSIS WOULD NOT B E FAIR AND PROPER. THUS THE FUNCTIONAL COMPARABILITY OF THE ASSESSEE WITH T HE POTENTIAL COMPARABLES SHOULD BE BASED ON ACTUAL NATURE OF BUSINESS ACTIVI TIES AND NOT ON THE NOMENCLATURE OF KPO AND BPO. THE LD. AUTHORIZED REP RESENTATIVE THEN TOOK US TO THE BUSINESS PROFILE OF THE ASSESSEE AND SUBM ITTED THAT THE ASSESSEE IS PRIMARILY ENGAGED IN PROVIDING ENGINEERING DESIGN S UPPORT SERVICES TO ITS AES. THE CORE EPC TEAM OF THE AE CLOSELY WORK WITH THE CUSTOMER AND THE TECHNOLOGY PROVIDER TO CONVERT THE BASIC DESIGN IN TO WORKABLE DETAILED DESIGN. IN ORDER TO SAVE ON LABOUR COST, PORTION OF THE LOW END DESIGN AND DRAWING WORK IS OUTSOURCED BY THE AE TO THE ASSESSE E. HE HAS FURTHER SUBMITTED THAT THE BUSINESS PROFILE OF THE SIX COMP ANIES SELECTED BY THE ASSESSEE AS COMPARABLE IS SIMILAR TO THE BUSINESS O F THE ASSESSEE. THE LD. AUTHORIZED REPRESENTATIVE HAS THEN REFERRED THE BUS INESS DESCRIPTION OF INFOTECH FROM THE ANNUAL REPORT PLACED AT PAGE 737 OF THE PAPER BOOK AND SUBMITTED THAT THE COMPANY IS SPECIALIZED IN GEOSPA TIAL, ENGINEERING DESIGN AND IT SOLUTIONS. ITS RANGE OF SERVICES INCLUDE DIG ITIZATION OF DRAWINGS AND MAPS, PHOTOGRAMMETARY, COMPUTER AIDED DESIGN/ENGINE ERING (CAD/CAE), DESIGN AND MODELLING REPAIR DEVELOPMENT ENGINEERING ETC. THUS THE BUSINESS TECNIMONT ICB PVT. LTD. 10 | P A G E PROFILE OF THE COMPARABLE IS SIMILAR TO THE ASSESSE ES BUSINESS. HE HAS THEN REFERRED THE BUSINESS PROFILE OF ROLTA INDIA AT PAG E 698 AND 701 AND SUBMITTED THAT THE SAID COMPANY IS ALSO IN THE ENGI NEERING AND DESIGN BUSINESS AS ONE OF ITS SEGMENT AND, THEREFORE, THE SAID SEGMENT IS COMPARABLE WITH THE ASSESSEE. THE NEXT COMPARABLE S ELECTED BY THE ASSESSEE IS ONWARD TECHNOLOGY AND THE BUSINESS PROF ILE OF THE ONWARD TECHNOLOGY LTD. HAS BEEN REFERRED IN THE DIRECTORS REPORT AT PAGE 791 OF THE PAPER BOOK. THE LD. AUTHORIZED REPRESENTATIVE HAS S UBMITTED THAT THE ONWARD TECHNOLOGY IS IN THE MECHANICAL ENGINEERING DESIGN SERVICES. ITS CLIENTS INCLUDE GLOBAL FORTUNE 1000 MANUFACTURING C OMPANIES IN THE AUTOMOTIVE, AGRICULTURAL, HEAVY ENGINEERING, ELECTR ICAL EQUIPMENTS AND AEROSPACE INDUSTRY. THUS THE SEGMENT DATA USED BY THE ASSESSEE HAVING RELATION TO THE COMPARABLE BUSINESS OF THE ASSESSEE . THE LD. AUTHORIZED REPRESENTATIVE THEN REFERRED THE BUSINESS PROFILE O F TATA ELXSI LIMITED AT PAGE NO. 755 OF PAPER BOOK AND SUBMITTED THAT THE S AID COMPANY IS IN THE PRODCUT DESIGN SERVICES, INNOVATION DESIGN ENGINEER ING AND VISUAL COMPUTING LABS. THE ASSESSEE HAS USED SEGMENTAL DAT A OF DESIGN ENGINEERING SEGMENT, THEREFORE, THE BUSINESS OF THE DESIGN ENGINEERING SEGMENT PROVIDING INTEGRATED STYLING AND MECHANICAL DESIGN SOLUTION IS SIMILAR TO THE ASSESSEES BUSINESS ACTIVITY AND, THEREFORE IT IS A GOOD COMPARABLE. THE LD. AUTHORIZED REPRESENTATIVE THEN REFERRED THE BUSINESS PROFIEL OF THE NEIL SOFT LTD. AND SUBMITTED THAT THE SAID COMPANY IS ALSO IN THE SIMILAR LINE OF BUSINESS PROVIDING ENGINEERING PRODUCT/PRODUCT LIFE CYCLE, CAD/CAM/CAE DESIGN AUTOMATION APPLICATION DEVELOPMENT ETC. THE LAST COMPARABLE OF THE ASSESSEE IS GEOMETRIC LTD AND THE LD. AUTHORIZED RE PRESENTATIVE HAS REFERRED THE BUSINESS PROFILE OF THE SAID COMPANY A T PAGE 839 OF THE PAPER BOOK AND SUBMITTED THAT THE RESULTS OF COMPUTER AID ED DESIGN/COMPUTER AIDED TECNIMONT ICB PVT. LTD. 11 | P A G E MANUFACTURING AND COMPUTER AIDED MANUFACTURING PROD UCT, THEREFORE, THIS COMPANY IS ALSO A GOOD COMAPRABLE. 7. THE LD. AUTHORIZED REPRESENTATIVE THEN REFERREF THE COMPARABLES SELECTED BY THE TPO AND SUBMITTED THAT NON OF THE C OMPANIES IS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE AND SOME OF THE COMPA NIES SELECTED BY THE TPO HAS DIFFERENT NATURE OF BUSINESS. HOWEVER WIT HOUT PREJUDICE THE RIGHT AND CONTENTION OF THE ASSESSEE, THE LD. AUTHORIZED REPRESENTATIVE HAS SUBMITTED THAT EVEN IF THE TPOS COMPARABLE AFTER T HE ORDER OF DRP ARE TAKEN INTO CONSIDERATION ALONG WITH THE ASSESSEES COMPAR ABLE THEN THE MEAN MARGIN OF THE ELEVEN COMPARABLES COMES TO 23.53% WH ICH IS LESS THAN THE ASSESSEES OPERATING PROFIT MARGIN OF 24.17% AND, T HEREFORE, THE ASSESSEES PRICE IS AT ARMS LENGTH AND NO ADJUSTMENT IS REQUI RED TO BE MADE. HE HAS FURTHER CONTENDED THAT EVEN IF ALL 13 COMPANIES ARE FILTERED BY THE TPO BY APPLYING THE COMMON FILTER ARE TAKENN INTO ACCOUNT, THE ARITHEMATIC MEAN OF THE OPERATING PROFIT OF ALL THESE COMPANIES COMES T O 19.87% WHICH IS MUCH BELOW THE OPERATING PROFIT OF THE ASSESSEE AT 24.17 %. THE LD. AUTHORIZED REPRESENTATIVE HAS FURTHER POINTED OUT THAT THE TPO THOUGH RAISED AN OBJECTION OF USING MULTI YEAR DATA INSTEAD OF CURRE NT YEAR, HOWEVER, DURING THE PROCEEDINGS BEFORE THE TPO, THE ASSESSEE FURNISHED THE CURRENT YEAR DATA AND REVISED UPDATED MARGINS OF THE COMPARABLES SELE CTED BY THE ASSESSEE WHICH COMES TO 15.31%. THE TPO HAS DULY NOTED THIS FACT IN PARA 8.3 BUT REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE. 8. ON THE OTHER HAND, THE LD. DR HAS STRONGLY RELI ED UPON THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE TPO HAS SE LECTED A SET OF TECNIMONT ICB PVT. LTD. 12 | P A G E COMPANIES WHICH ARE SIMILAR AND COMPARABLE TO THE B USINESS OF THE ASSESSEE AND FURTHER THE DECISION OF SPECIAL BENCH IN THE CA SE OF M/S MAERSK GLOBAL CENTRES VS. ACIT (SUPRA) WAS NOT AVAILABLE BEFORE T HE AUTHORITIES BELOW. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CA REFULLY PERUSED THE RELEVANT MATERIALS ON RECORD. WE HAVE GIVEN OUR DEE P THOUGHT ON THE ISSUE OF COMPARABILITY OF HE COMPANIES SELECTED BY THE ASSES SEE AS WELL AS BY THE TPO. THE BUSINESS PROFILE OF THE ASSESSEE HAS BEEN RECORDED BY THE TPO AT PAGE 22 OF ITS ORDER AS UNDER:- IT WAS SUBMITTED THAT ASSESSEE IS PRIMARILY ENGAGE D IN PROVIDING ENGINEERING DESIGN SUPPORT SERVICES TO ITS AE'S. THE AE'S OF TH E ASSESSEE ARE IN THE BUSINESS OF EXECUTING TURNKEY ENGINEERING, PROCUREM ENT AND CONSTRUCTION CONTRACTS (EPC) FOR CUSTOMERS. SINCE THE AE'S DO NO T POSSESS THEIR OWN TECHNOLOGY FOR BUILDING PLANTS; THEY APPROACH GLOBA L PLAYERS LIKE MITSHIBUSHI. KBR ETC FOR LICENSING THE BASIC DESIGN AND TECHNOLO GY. THE CORE EPC TEAM OF THE AE CLOSELY WORK WITH THE C USTOMER AND THE TECHNOLOGY PROVIDER TO CONVERT THE BASIC DESIGN INT O WORKABLE DETAILED DESIGN. IN ORDER TO SAVE ON LABOUR COST; PORTION OF THE LOW END DESIGN AND DRAWING WORK IS OUTSOURCED BY THE AE TO THE ASSESSE E. THE EMPLOYEES OF THE ASSESSEE ARE LARGELY DRAFTSMEN AND CAD/CAM OPERATOR S WHO CONVERT THE INSTRUCTIONS PROVIDED BY THE CORE TEAM INTO DRAWING S. THESE DRAWINGS ARE CHECKED AND VERIFIED BY THE CORE TEAM OF THE AE; IN CLUDING THE CUSTOMER AND THE PROJECT MANAGERS APPOINTED BY THE CUSTOMER. THE CORRECTIONS SUGGESTED BY THE CORE TEAM ARE EXECUTED BY EDTCIB AND RESUBMI TTED TO THE CORE TEAM. 10. THE ASSESSEE IS A WHOLLY OWNED SUBSDIARY OF TEC NIMONT ICB PVT. LTD. AND ENGAGED IN THE EXECUTION OF COMPUTER SOFTWARE A ND INFORMATION TECHNOLOGY ENABLES SERVICES, ENGINEERING DESIGN UND ER THE SOFTWARE DEVELOPMENT PARK SCHEME OF GOVT. OF INDIA. AT THE O UTSET WE NOTE THAT THE TPO HAS REJECTED THE SIX COMPARABLES SELECTED BY TH E ASSESSEE ON THE TECNIMONT ICB PVT. LTD. 13 | P A G E GROUND THAT THE SET OF COMPANIES SELECTED BY THE AS SESSEE AS COMPARABLES ARE IN THE BPO SERVICES AND, THEREFORE, NOT COMPARA BLE WITH THE SERVICES OF THE ASSESSEE WHICH IS IN THE NATURE OF KPO. IT IS P ERTINENT TO NOTE THAT THE TPO HAS NOT UNDERTAKEN THE EXERCISE OF COMPARING TH E ACTUAL FUNCTIONS AND BUSINESS PROFILE OF THE ASSESSEE WITH THE COMPARABL ES SELECTED BY THE ASSESSEE BUT THE REJECTION OF THE COMPARABLES SELE CTED BY THE ASSESSEE IS BASED ONLY ON THE GROUND OF BPO AND KPO SERVICES. I N THE RECENT DECISION OF SB OF THIS TRIBUNAL IN THE CASE OF M/S MAERSK GLOBA L CENTRES VS. ACIT (SUPRA), THE SPECIAL BENCH HAS CONSIDERED AND DECID ED THIS ISSUE IN PARA 78 AS UNDER:- TO SUM UP, WE HOLD THAT THE POTENTIAL COMPARABLES OF ITES SECTOR LEVEL CAN BE SELECTED BY APPLYING BROAD FUNCTIONAL TEST AT FI RST STAGE AND ALTHOUGH THE COMPARABLES SO SELECTED CAN BE PUT TO FURTHER TEST, DEPENDING ON FACTS OF EACH CASE, BY COMPARING THE SPECIFIC FUNCTIONS PERF ORMED IN THE INTERNATIONAL TRANSACTIONS WITH THAT OF UNCONTROLLED TRANSACTIONS TO ATTAIN THE RELATIVELY EQUAL DEGREE OF COMPARABILITY AS DISCUSSED ABOVE, T HE CLASSIFICATION OF ITES INTO LOW-END BPO SERVICES AND HIGH-END KPO SERVICES FOR COMPARABILITY ANALYSIS WOULD NOT BE FAIR AND PROPER. THE FIRST QU ESTION REFERRED TO THIS SPECIAL BENCH IS WHETHER FOR THE PURPOSE OF DETERMI NING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY PROVIDING BACK OFFICE SUPPORT SERVICES TO THEIR OVERSEAS ASSOCIATE D ENTERPRISES, COMPANIES PERFORMING KPO FUNCTIONS SHOULD BE CONSIDERED AS CO MPARABLE ?. IN OUR OPINION, THE ANSWER TO THIS QUESTION WILL DEPEND ON THE FACTS AND CIRCUMSTANCES OF EACH CASE INASMUCH AS IF THE ASSES SEE COMPANY, ON THE BASIS OF ITS OWN FUNCTIONAL PROFILE, IS FOUND TO HA VE PROVIDED TO ITS AE THE LOW- END BACK OFFICE SUPPORT SERVICES LIKE VOICE OR DATA PROCESSING SERVICES AS A WHOLE OR SUBSTANTIALLY THE WHOLE, THE COMPANIES PRO VIDING MAINLY HIGH-END SERVICES BY USING THEIR SPECIALIZED KNOWLEDGE AND D OMAIN EXPERTISE CANNOT BE CONSIDERED AS COMPARABLES. 11. THUS IT IS CLEAR THAT THE CLASSIFICATION OF INFORMA TION TECHNOLOGY ENABLES SERVICES (ITES) INTO LOW END BPO SERVICES AND HIGH END KPO SERVICES FOR COMPARABILITY ANALYSIS IS NOT JUST AND PROPER, AND, THEREFORE, THE ACTION OF THE TPO IN REJECTING THE COMPARABLES BY APPLYING THE CR ITERIA OF BPO AND KPO IS TECNIMONT ICB PVT. LTD. 14 | P A G E NOT SUSTAINABLE IN VIEW OF THE DECISION OF SPECIAL BENCH. WE FURTHER NOTE THAT THE ASSESSEE HAS USED THE SEGMENTAL DATA FOR DETERM INING THE ARMS LENGTH PRICE AND TAKEN THE MEAN PROFIT OF EACH COMPARABLE ONLY FROM THE SEGMENTAL DATA/RESULTS. THOUGH THE TPO INITIALLY RAISED AN OB JECTION OF USING MULTIPLE YEAR DATA, HOWEVER, WE NOTE THAT DURING THE COUSE O F PROCEEDINGS BEFORE THE TPO, THE ASSESSEE FURNISHED THE UPDATED CURRENT YEA R DATA, MEAN MARGIN OF THE COMPARABLES BASED ON THE CURRENT YEAR DATA. THI S FACT HAS BEEN RECORDED BY THE TPO AT PAGE 23 OF THE ORDER. THE RELEVANT PA RT OF THE TPO ORDER IS AS UNDER:- AS REGARDS YEARS FOR WHICH THE DATA HAS BEEN USED IN THE DOCUMENTATION, THE ASSESSEE SUBMITTED THAT THE COMPARABLE DATA FOR FY 2007-08 WAS NOT AVAILABLE IN ALL CASES, AT THE TIME OF COMPLYING WI TH THE DOCUMENTATION REQUIREMENTS UNDER THE ACT BY THE SPECIFIED DATE. F URTHER, REJECTION OF THE DOCUMENTATION PREPARED BY THE ASSESSEE ON THE ABOVE GROUND WOULD BE CONTRARY TO WHAT IS PRESCRIBED UNDER THE ACT AND TH E RELEVANT RULES A REFERENCE WAS MADE TO THE DEFINITION OF THE TERM 'A RM'S LENGTH PRICE' UNDER SECTION 92F(II), RULE 10C. RULE 100(3) AND RULE 100 (4). FURTHER REFERENCE WAS ALSO MADE TO THE ITAT RULING, BANGALORE BENCH I N PHILIPS SOFTWARE CENTRE PVT. LID VS ACIT (11 9 TT J 721). ASSESSEE ALSO SUBMITTED UPDATED MARGINS OF COMPARABLE PERTAINING TO FY 2007 -08 WHICH WORKS OUT TO 15.31%. 12. IT IS CLEAR THAT AFTER SUBMITTING THE UPDATED M ARGINS OF THE COMPARABLES, THE OBJECTION OF USING MULTIPLE YEAR DATA CEASED TO EXIST. ONCE THE CRITERIA ADOPTED BY THE TPO FOR REJECTING THE COMPARABLE OF THE SET OF COMPANIES SELECTED BY THE ASSESSEE IS NOT FOUND PROPER THEN T HE COMPARABILITY HAS TO BE ANALYSED ON THE BASIS OF REAL NATURE OF THE BUSINES S ACTIVITIES OF THE ASSESSEE AS WELL AS THE COMPARABLES AND FURTHER WHERE THE SE GMENTAL DATA ARE USED THEN THE ONLY BUSINESS ACTIVITY OF THE PARTICULAR S EGMENT OF COMPARABLE HAS TO BE COMPARED WITH THE BUSINESS ACTIVITY OF THE AS SESSEE. WE FIND THAT THE BUSINESS PROFILE OF THE SIX COMPARABLES SELECTED BY THE ASSESSEE AND TECNIMONT ICB PVT. LTD. 15 | P A G E PARTICULARLLY THE SEGMENT OF ENGINEERING DESIGN SER VICES ARE SIMILAR TO THAT OF THE ASSESSEES SERVICES PROVIDED TO THE AES, THEREF ORE, WHEN THE INTERNATIONAL TRANSACTION OF THE ASSESSEE COMPANY I N RESPECT OF OF THE SERVICES PROVIDED TO THE AES ARE SIMILAR TO THE BUS INESS PROFILE OF THE COMPARABLES AND A PARTICULAR SEGMENT OF THE COMPARA BLE THEN THE REJECTION OF THE COMPARABLES SELECTED BY THE ASSESSEE IS NOT PRO PER AND JUSTIFIED. WITHOUT GOING INTO THE COMPARBILITY OF THE COMPANIES SELECT ED BY THE TPO, IF WE CONSIDER THE ALTERNATIVE SUBMISSION OF THE ASSESSEE THAT THE COMPARABLES SELECTED IF AS WELL AS THE FIVE COMPARABLES OF THE TPO AFTER THE DRP ORDER REJECTING ONE OUT OF SIX COMPARABLES, THE MEAN MARG IN OF ELEVEN COMPANIES COMPRISING SIX SELECTED BY THE ASSESSEE AND FIVE OF THE TPO COMES TO 23.53%. THE ASSESSEE HAS GIVEN THE DETAILS OF THE O PERATING PROFIT OF ALL THE ELEVEN COMPANISE COMPRISING THE SIX COMPARABLES SEL ECTED BY THE ASSESSEE AND FIVE OF THE TPO AS UNDER:- MARGIN OF COMPARABLE COMPANIES AS DOCUMENTED IN THE TRANSFER PRICING STUDY OF EDTICB PLUS THE COMPANIES ADOPTED BY THE LEARNED TP O: SRNO NAME OF THE COMPANY OPERATING PROFIT/ OPERATING COST 1 ROLTA INDIA LIMITED (S EG) 49.06% 2 INFOTECH ENTERPRISE LIMITED (SEG) 15.38% 3 TATA ELXSI LIMITED (SEQ) 18.18% 4 ONWARD TECHNOLOQIES LIMITED (SEQ) - 1.63% 5 NEILSOFT LTD 5.55% 6 GEOMETRIC LIMITED (SEQ) 5.30% 7 ACROPETAL TECHNOLOGIES (SEG) 35.30% 8 CROSSDOMAIN SOLUTIONS LTD 26.96% 9 ECLERX SERVICES LTD 65.88% 10 MOLD - TEK TECHNOLOGIES LTD 15.05% 11 TRITON CORP LTD 23.81% ARITHMETIC MEAN 23.53% 13. THE ASSESSEE ALSO FILED THE COMPUTATION WHICH S HOWS THAT THE ASSESSEES OPERATING PROFIT BY USING PLI AS OP/OC FROM THE INT ERNATIONAL TRANSACTION IS 24.17% TECNIMONT ICB PVT. LTD. 16 | P A G E WHICH IS MORE THAN THE ARITHEMATIC MEAN/ALP BASED O N THE SET OF ELEVEN COMPARABLES INCLUDING THE ASSESSEES AS WELL AS THE TPOS SELECTED COMPANIES. IT IS PERTINENT TO NOTE THAT EVEN AFTER ACCEPTING THE COMPARABLE COMPANIES SELECTED BY THE ASSESSEE, THE TPO HAS POWER U/S 92 CA(3) TO GAT HER AND CONSIDER ALL RELEVANT MATERIALS AND INFORMATION APART FROM THE EVIDENCE, INFORMATION AND DOCUMENTS PROVIDED BY ASSESSEE AS REQUIRED UNDER SECTION 92 D (3) OF INCOME TAX ACT TO DETERMINE THE ALP IN RELATION TO THE INTERNATIONAL TRANSACTION. FURTHER THE TPO IS ALSO EMPOWERED UNDER SECTION 92 CA(7) TO EXERCISE A NY OF THE POWERS SPECIFIED IN CLAUSES (A) TO (D) OF SUB-SECTION (1) OF SECTION 13 2 OR SUB-SECTION 6 OF SECTION 133 OR 133A FOR THE PURPOSE OF DETERMINING THE ALP. THEREF ORE, UNDER THE PROVISIONS OF TRANSFER PRICING THE TPO IS NOT PRECLUDED FROM CARR YING OUT FRESH SEARCH FOR GATHERING MORE RELEVANT INFORMATION FOR THE PURPOSE OF DETERMINING THE ALP. THUS LARGE SIZE OF COMPARABLE WOULD GIVE BETTER AND ADEQ UATE REPRESENTATION OF UNCONTROLLED PRICE IN TURN A PROPER AND MORE REALIS TIC PRICE CAN BE DETERMINED TO COMPARE WITH THE PRICE OF INTERNATIONAL TRANSACTION . THUS, BY CONSIDERING THE TOTAL NO OF COMPARABLES COMPRISING ASSESSEES AS WELL AS TPO S AND MEAN MARGIN THEREOF, WE FIND THAT ASSESSEES INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH AND, THEREFORE, NO ADJUSTMENT IS CALLED FOR. 14. AS REGARDS GROUND NOS.9, 14 AND 15, IN VIEW OF OUR FINDING ON THE ISSUE OF COMPARABLE AND DETERMINATION OF ALP AND CONSEQUENTI AL ADJUSTMENT, GROUND NOS. 9, 14 AND 15 OF THE REVISED GROUNDS BECOME INFRUCTU OUS AND NEED NO ADJUDICATION. 13. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED.. ORDER PRONOUNCED IN THE OPEN COURT TODAY I.E 27-6-2014 SD/- SD/- ( R.C. SHARMA ) (VIJAY PAL RAO) (ACCOUNTANT MEMBER/ YS[KK LNL; YS[KK LNL; YS[KK LNL; YS[KK LNL; ) (JUDICIAL MEMBER/ U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; U;KF;D LNL; ) MUMBAI DATED 27-6 -2014 SKS SR. P.S, TECNIMONT ICB PVT. LTD. 17 | P A G E COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, J BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI