MWH INDIA P .LTD, MUMBAI V. DCIT CIR 9(2), MUMBAI

ITA 792/MUM/2013

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8903 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Next Hearing Date: 28-07-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 30-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAYANT KUMAR
• Assessee Lawyers: J D MISTRI
• Keywords: Related party transaction; Depreciation; Transfer pricing; Rectification of order; Opportunity of being heard; International transaction
• Section: 143(3); 133(6); 32; 6; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 792/MUM/2013 ASSESSMENT YEAR: 2008 - 09 MWH INDIA PVT. LTD. 168, UDYOG BHAVAN SONAWALA ROAD, GOREGAON (E), MUMBAI - 400063. VS. DCIT - 9(2) AAYAKAR BHAVAN, MAHARSHI KARVE ROAD MUMBAI400020. PAN NO. AAACA4613L APPELLANT RESPONDENT ASSESSEE BY : MR. J.D. MISTRI & MR. NIRAJ SHETH , AR REVENUEBY : MR. JAYANT KUMAR , DR DATE OF HEARING : 01 /08/2017 DATE OF PRONOUNCEMENT : 27/10/2017 ORDER PER N.K. PRADHAN, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2008 - 09 . THE APPEAL IS DIRECTED AGAINST THE ORDER U/S 143(3) R.W.S. 144C (13) OF THE INCOME TAX ACT 1961, (THE ACT) DATED 29.11.2012 PASSED BY THE ASSESSING OFFICER (AO) . MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 2 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE READ AS UNDER: 1:0 RE.: ADJUSTMENT OF RS.4,48,60,208/ - U/S 92CA OF THE INCOME - TAX ACT, 1961 ('THE ACT') ON ACCOUNT OF THE PROVISION OF CONSULTANCY & DESIGN SERVICES : 1:1 THE ASSESSING OFFICER ('AO') HAS ERRED IN MAKING AN UPWARD ADJUSTMENT OF RS.4,48,60,208/ - TO THE TOTAL INCOME OF THE APPELLANT BY HOLDING THAT THE INTERNATIONAL TRANSACTION RELATING TO PROVISION OF CONSULTANCY & DESIGN SERVICES ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISES ('AES') WAS NOT ENTERED AT ARM'S LENGTH PRICE ('ALP'). 1:2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT, THE INTERNATIONAL TRANSACTION RELATING TO PROVISION OF CONSULTANCY & DESIGN SERVICES ENTERED INTO BY THE APPELLANT WITH ITS AES WAS ENTERED A T ALP AND HENCE NO ADJUSTMENT IN RESPECT THEREOF WAS CALLED FOR AND THE STAND TAKEN BY THE AO IN THIS REGARD IS MISCONCEIVED, ERRONEOUS AND INCORRECT. 1:3 THE APPELLANT SUBMITS THAT THE AO BE DIRECTED TO DELETE THE UPWARD ADJUSTMENT OF RS. 4,48,60,208/ - MAD E BY HIM TO THE APPELLANT'S TOTAL INCOME AND TO RE - COMPUTE ITS TOTAL INCOME AND TAX LIABILITY ACCORDINGLY. 1:4 WITHOUT PREJUDICE TO THE ABOVE, THE AO ERRED IN NOT GIVING EFFECT TO THE RECTIFICATION ORDER DATED 25 JULY 2012 PASSED U/S 154 OF THE ACT BY THE TPO R EDUCING THE ADJUSTMENT FROM RS.4,48,60,208/ - TO RS. 3,02,91,629/ - 2:0 RE.: ADJUSTMENT OF RS.1,10,25,109/ - U/S 92CA OF THE ACT ON ACCOUNT OF THE PAYMENT OF MANAGEMENT CHARGES : 2:1 THE TPO ERRED IN CONSIDERING THE CORPORATE CHARGES PAID BY THE APPELLANT TO ITS AES AS SHAREHOLDER SERVICES AND CONSEQUENTLY, ERRED IN DETERMINING THE ALP AS NIL. 3:0 PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT 3 :1 THE AO ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT FOR FURNISHING OF INACCURATE PARTICULARS AND CONCEALMENT OF INCOME. 4:0 RE.: NON GRANTING OF DEDUCTION OF DEPRECIATION U/S. 32 OF THE INCOME - TAX ACT,1961 : MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 3 4: 1 THE ASSESSING OFFICER HAS ERRED IN NOT GRANTING THE APPELLANT DEDUCTION IN RESPECT OF DEPRECIATION IN ACCORDANCE WITH SECTION 32 OF THE INCOME - TAX ACT, 1961. 4:2 THE APPELLANT SUBMITS THAT CONSIDERING THE FACTS AND CIRCUMSTANCES OF ITS CASE AND THE LAW PREVAILING ON THE SUBJECT IT IS ENTITLED TO THE DEDUCTION IN ACCORDANCE WITH SECTION 32 OF THE INCOME - TAX ACT, 1961. 4:3 THE APPELLANT SUBM ITS THAT THE ASSESSING OFFICER BE DIRECTED TO GRANT THE APPELLANT DEDUCTION U/S. 32 OF THE INCOME - TAX ACT, 1961 AND TO RE - COMPUTE ITS TAX LIABILITY FOR THE YEAR ACCORDINGLY. 3. WE DEAL WITH THE 1 ST AND 2 ND GROUND OF APPEAL TOGETHER AS THEY ADDRESS A COMMON ISSUE . THE AO MADE A REFERENCE U/S 92CA(1) TO THE TRANSFER PRICING OFFICER (TPO) FOR COMPUTATION OF THE ARMS LENGTH PRICE OF THE ASSESSEE. THE TPO VIDE ORDER U/S 92CA(3) DATED 30.10.2011 MADE AN ADJUSTMENT OF RS. 4,48,60 ,208 / - . THE AO , ACCORDINGLY, IN HIS DRAFT ASSESSMENT ORDER U/S 143(3) R.W.S. 144C DATED 12.12.2011 MADE A TP ADJUSTMENT BY ADDING THE ABOVE SUM OF RS. 4,48,60,208 / - TO THE INCOME SHOWN BY THE ASSESSEE. AFTER RECEIPT OF THE DRAFT ASSESSMENT ORDER, THE ASSES SEE FILED ITS OBJECTION BEFORE THE DISPUTE RESOLUTION PANEL (DRP) - 1 MUMBAI. THE DRP VIDE ITS ORDER DATED 26.09.2012 ENDORSED THE ORDER OF THE TPO AND DIRECTED THE AO TO FOLLOW IT. THEN THE AO MADE THE FINAL ASSESSMENT ORDER ON 29.11.2012 BY MAKING AN ADDIT ION BY WAY OF TP ADJUSTMENT OF RS.4,48,60,208/ - . 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE HAS FILED THIS APPEAL BEFORE THE TRIBUNAL. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT T HE ASSESSEE - COMPANY IS A 99.99% SUBSIDIARY OF MWH EUROPE LTD., UK AND IS ENGAGED IN MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 4 ENVIRONMENTAL ENGINEERING AND CONSULTANCY . BALANCE SHARES IN THE ASSESSEE - COMPANY ARE HELD BY MR. SHARAD S. BHAGWAT, ONE OF THE DIRECTOR OF THE GROUP. MWH US, MWH UK AND MWH AU ARE THE MARKETING AND FRONT ENDING ARM OF THE ASSESSEE - COMPA NY . MWH US, MWH UK AND MWH AU PROVIDE VARIOUS SOFTWARE DEVELOPMENT AND CONSULTANCY SERVICES TO ITS CUSTOMERS. SOME OF THE OFF - SHORE DEVELOPMENT IS OUTSOURCED TO THE ASSESSEE - COMPANY . ALSO THE ASSESSEE - COMPANY RENDERS VARIOUS BACK - OFFICE SUPPORT SERVICES, I N ADDITION TO THE SOFTWARE DEVELOPMENT SERVICES AS NOTED ABOVE. BASED ON THE ABOVE , THE ASSESSEE - COMPANY , MWH UK, MWH EUROPE AND MWH AU ARE ASSOCIATED ENTERPRISES AND THESE ENTITIES ENTERED INTO VARIOUS INTER - COMPANY TRANSACTIONS, TO WHICH THE INDIAN TRANS FER PRICING REGULATI ONS ARE CLEARLY APPLICABLE. 4.1 DURING THE YEAR UNDER CONSIDERATION , THE ASSESSEE - COMPANY HAD PROVIDED SOFTWARE CONSULTANCY AND DESIGN SERVICES OF RS.19,11,81,023/ - TO ITS AES. IT SELECTED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS T HE MOST APPROPRIATE METHOD IN ITS TP STUDY. THE OPERATING PROFIT TO TOTAL COST RATIO WAS TAKEN AS THE PROFIT LEVEL INDICATOR (PLI) IN THE TNMM ANALYSIS. THE PLI OF THE ASSESSEE - COMPANY WAS 27.42% WHEREAS THE AVERAGE PLI OF THE CO MPARABLES WAS ARRIVED AT 14 .33%. ACCORDINGLY, THE TRANSACTION WAS CONSIDERED TO BE AT ARMS LENGTH. DURING THE A UDIT PROCESS THE TPO FOUND THAT THE PLI OF THE COMPARABLES HA D BEEN ARRIVED AT BY CONSIDERING WEIGHTED AVERAGE MARGIN OF THREE YEARS DATA FOR THE FY 2005 - 06, FY 2006 - 07 AND FY 2007 - 08 . MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 5 THE TPO HAS DISCUSSED THE COMPARABLES SELECTED BY THE ASSESSEE - COMPANY AS UNDER: SL NO. NAME OF THE COMPARABLE REMARKS 1. ACE SOFTWARE EXPORTS LTD. THE COMPANY HAS DECLINING REVENUES FOR THE LAST THREE YEARS UPTO AND INCLUDING THE FY 2 007 - 08. REASONABLY ACCURATE ADJUSTMENTS CANNOT BE MADE TO ACCOUNT FOR UNDER UTILIZATION OF ASSETS/RESOURCES BASED ON THE INFORMATION AVAILABLE IN THE PUBLIC DOMAIN. THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLES. 2. WTI ADVANCED TECHNOLOGIES LTD. THE COMPANY FAILS 75% EXPORT EARNINGS FILTER AS IT HA S ANY EXPORTS TO THE TUNE OF 25.50% FOR THE FY 2007 - 08. THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE. 3. NEILSOFT LTD. THE COMPANY HAS NIL EXPORT REVENUES FOR THE FY 2007 - 08. THUS IT FAILS 75% E XPORT EARNINGS FILTER APPLIED BY THE TPO AND IS NOT CONSIDERED AS A COMPARABLE. 4. SHREEJAL INFO HUBS LTD. THE COMPANY FAILS 75% EXPORT EARNINGS FILTER AS IT DOES NOT HAVE ANY EXPORTS FOR THE FY 2007 - 08. THUS THE COMPANY IS NOT CONSIDERED AS A COMPARABLE . 4.2 THEREAFTER, THE TPO HAVING CONSIDERED (I) THE NATURE OF BUSINESS AS COMPUTER SOFTWARE, (II) COMPAN Y FOR WHICH THE DATA IS AVAILABLE FOR THE FY 2007 - 08, (III) COMPANY WHOSE TURNOVER IS MORE THAN RS.1 CRORE, (IV) COMPANY WHOSE SERVICE INCOME IS MORE THAN 75% OF THE REVENUES, (V) COMPANY WHOSE EXPORT REVENUE IS MORE THAN 75% OF THE REVENUES, (VI) COMPANY WHOSE EMPLOYEE COST IS MORE THAN 25% OF THE REVENUES AND (VII) COMPANY WHOSE RELATED PARTY TRANSACTION IS MORE THAN 25% OF THE REVENUES RESORTED TO SEGMENT SEARCH AND ARRIVED AT THE FOLLOWING 9 COMPARABLES: MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 6 SL NO. NAME OF THE COMPARABLE COMPANY 1. ACCEL TRANSMATIC LTD. (SOFTWARE SERVICES SEGMENT) 2. ACROPETAL TECHNOLOGIES LTD. (IT SEGMENT) 3. BODHTREE CONSULTING LTD. 4. CELESTIAL BIOLABS LTD. 5. E - INFOCHIPS LTD. 6. E - ZEST SOLUTION LTD. 7. QUINTEGRA SOLUTIONS LTD. 8. SOFTSOL INDIA LTD. 9. THIRDWARE SOLUTIONS LTD. (SOFTWARE DEVELOPMENT SERVICES SEGMENT) THE TPO HAS COMPUTED THE ARITHMETICAL MEAN MARGIN OF THESE COMPARABLES AT 32.14%. ACCORDINGLY, HE COMPUTED THE ARMS LENGTH PRICE OF RECEIPT FOR THE PROVISION OF CONSULTANCY AND DESIGN SERVICE S FROM AES AT RS.23,60,41,231/ - AS AGAINST RS.19,11,81,023/ - SHOWN BY THE ASSESSEE - COMPANY , THUS MAKING AN ADJUSTMENT OF RS.4,48,60,208/ - U/S 92CA OF THE ACT. 5. BEFORE US, THE LD. COUNSEL S OF THE ASSESSEE SUBMIT THAT THE ASSESSEE - COMPANY HAD CARRIED OUT A VALID, SCIENTIFIC AND DOCUMENTED SEARCH PROCESS, WHEREIN IT ENDEAVOURED TO INDENTIFY THE COMPANIES THAT ARE MOST CO MPARABLES TO ITS OPERATIONS. FOLLOWING THIS SCIENTIFIC SEARCH CRITERIA, ALL THE FINAL SELECTED COMPANIES CAN BE SAID TO BE FUNCTIONALLY COMPARABLE TO THE ASSESSEE - COMPANY . THE LD. COUNSEL S FURTHER SUBMIT THAT THE ASSESSEE - COMPANY WAS OPERATING ITS BUSINE SS OUT OF TWO BUSINESS UNITS VIZ. MUMBAI UNIT AND PUNE UNIT. THE PUNE UNIT WAS 100% EXPORT ORIENTED UNIT (EOU). THE MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 7 TOTAL VALUE OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE - COMPANY WITH ITS AES RELATING TO PROVISION OF CONSULTANCY AND DESIGN SERVICES AMOUNTED TO RS.19,11,81,023/ - . OUT OF THIS AMOUNT , THE MAJORITY OF THE TRANSACTIONS WERE ENTERED FROM PUNE UNIT I.E. RS.18,67,28,245/ - AND REMAINING TRANSACTIONS WERE ENTERED FROM THE MUMBAI UNIT AMOUNTING TO RS.44,52,778/ - ONLY. THEREFORE, AROUND 98% OF T HE INTERNATIONAL TRANSACTION WAS FROM THE PUNE UNIT. IN THE TP REPORT, THIS TRANSACTION WAS BENCHMARKED USING PLI OF THE PUNE UNIT. THE SEGMENTAL UNIT WISE PROFIT AND LOSS ACCOUNT WAS MAINTAINED BY THE ASSESSEE - COMPANY ON AN ACTUAL BASIS. THE TPO HAS COMPU TED THE TRANSFER PRICING ADJUSTMENT ON A WHOLE ENTITY BASIS WITHOUT CONSIDERING THE FACT THAT MAJORITY OF INTERNATIONAL TRANSACTION WAS ENTERED FROM THE PUNE UNIT. THE LD. COUNSEL S THUS SUBMIT THAT TRANSFER PRICING ADJUSTMENT, IF ANY SHOULD BE COMPUTED CON SIDERING THE PLI OF THE PUNE UNIT INSTEAD OF ON WHOLE ENTITY BASIS. ALTERNATIVELY, IT IS SUBMITTED THAT EVEN IF TRANSFER PRICING ADJUSTMENT IS CARRIED OUT TAKING PLI ON WHOLE ENTITY BASIS, THE ADJUSTMENT AMOUNT SHOULD BE PROPORTIONATELY RESTRICTED TO THE T RANSACTIONS WITH THE AES. ALSO IT IS STATED THAT ADDITIONALLY BENEFIT OF +/ - 5% SHOULD ALSO BE GIVEN TO THE ASSESSEE - COMPANY . 5.1 THE LD. COUNSEL S SUBMIT THAT THE FOLLOWING COMPANIES SELECTED BY THE TPO ARE TO BE REJECTED AS COMPARABLES BECAUSE OF THE REA SONS AS UNDER: SR. NO. COMPANYS NAME REASONS COST PLUS MARGIN 1. ACROPETAL TECHNOLOGIES LTD. - ENGAGED IN ITES SERVICES AND SOFTWARE DEVELOPMENT SERVICE REVENUE IS < 75% OF TURNOVER - EMPLOYEE COST IS < 25% OF TURNOVER - PREDOMINANTLY IN ONSIT E DEVELOPMENT ACTIVITY 32.45% MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 8 2. BODHTREE CONSULTING LTD. - ENGAGED IN PROVIDING SOFTWARE SOLUTIONS 19.14% 3. CELESTIAL BIOLABS LTD. - HAS ABNORMALLY HIGH MARGIN - EMPLOYEE COST IS <25% OF TURNOVER - HAS BEEN CATEGORIZED UNDER RESEARCH AND DEVELOPMENT IN PROWESS DATABASE - HIGH PROFIT MARGIN 87.94% 87.94% 4. E - INFOCHIPS LTD. - ENGAGED IN SALE OF SOFTWARE SERVICES AND SALE OF SOFTWARE AND HARDWARE - RELATED PARTY TRANSACTIONS OF 15.62% 30.32% 5. E - ZEST SOLUTIONS LTD. - ENGAGED IN KNOWLEDGE PROCESS OUTSOURCING AND ITES SERVICES 28.58% 6. QUINTEGRA SOLUTIONS LTD. - ENGAGED IN PROPRIETARY SOFTWARE PRODUCTS - HOLDS SIGNIFICANT INTANGIBLES SUCH AS COPYRIGHTS AND TRADEMARKS - HAS EXPERIENCED PECULIAR ECONOMIC CIRCUMSTANCES DURING THE YEAR UNDER CONSIDERATION 9.57% 7. SOFTSOL INDIA LTD. - QUALITY UPGRADATION OF PRODUCT DEVELOPMENT - RELATED PARTY TRANSACTIONS ARE 19% - DOES NOT SATISFY THE CRITERIA OF ABNORMAL BUSINESS ACTIVIT Y 42.33% 8. THIRDWARE SOLUTIONS LTD. - ENGAGED IN SALE OF SOFTWARE PRODUCTS - ACQUIRED INTANGIBLES AND DERIVED SALES BASED ON SALE OF LICENSES - RELATED PARTY TRANSACTIONS ARE 15.24% - DATA FOR FY 2007 - 08 WAS CONSIDERED FROM FY 2008 - 09 WHICH IS AGAINST THE CONTEMPORANEOUS DATA AS REQUIRED UNDER THE PROVISIONS OF TRANSFER PRICING 23.05% 5.2 THE LD. COUNSEL S ALSO SUBMIT THAT PLI OF M/S SOFTSOL INDIA LTD. HAS NOT BEEN COMPUTED PROPERLY. AS PER THEM THE CORRECT PLI SHOULD BE 15%. AS UNDER : PARTICULARS AMO UNT (IN RS.) TP ORDER CORRECT COMPUTATION TOTAL INCOME 236,499,498 236,499,498 LESS: NON - OPERATING INCOME INTEREST EARNED 400,974 400,974 RENTS RECEIVED 44,840,042 DIVIDENDS FROM MUTUAL FUNDS 1,026,868 1,026,868 EXCESS PROVISION WRITTEN BACK 289,093 MISCELLANEOUS RECEIPTS 1,775 TOTAL NON - OPERATING INCOME 1,427,842 46,558,752 TOTAL OPERATING INCOME 235,071,656 189,940,746 TOTAL EXPENSES 165,500,114 165,500,114 LESS NON - OPERATING EXPENSES INTEREST ON FIXED LOANS 331,660 331,660 MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 9 5.3 THE LD. COUNSEL S FURTHER SUBMIT THAT WORKING CAPITAL ADJUSTMENT AND MARKET RISK ADJUSTMENT SHOULD BE ALLOWED TO THE ASSESSEE - COMPANY . 6. PER CONTRA THE LD. DR SUPPORTS THE ORDER PASSED BY THE TPO, DRP AND THE AO. HE SUBMITS THAT THE TPO HAS RIGHTLY REJECTED THE COMPARABLES SELECTED BY THE THE ASSESSEE - COMPANY AS THE PLI OF THE COMPARABLES WAS ARRIVED AT CONSIDERING THE WEIGHTED AVERAGE MARGIN OF THREE YEARS DATA FOR THE FY 2005 - 06, FY 2006 - 07 AND FY 2007 - 08. HE SUBMITS THAT THE TPO HAS RIGHTLY CONSIDERED (I) THE NATURE OF BUSINESS COMPUTER SOFTWARE, (II) THE COMPAN Y FOR WHICH DATA IS AVAILABLE FOR THE FY 2007 - 08, (III) THE COMPAN Y HAVING TURNOVER OF MORE THAN RS.1 CRORE, (IV) COMPAN Y WHOSE SERVICE INCOME IS MORE THAN 75% OF THE REVENUE, (V) COMPAN Y WHOSE EXPORT REVENUES IS MORE THAN 75% OF THE REVENUES, (VI) COMPAN Y WHOSE EMPLOYEE COST IS GREATER THAN 25% OF THE REVENUES, (VII) COMPANY WHOSE RELATED PARTY TRANSACTION IS MORE THAN 25% OF THE REVENUES, (VIII) SEGMENT THE LD. DR SUBMITS THAT THE TPO HAVING CONSIDERED THE ABOVE ASPECTS HAS RIGHTLY SELECTED THE NINE COMPARABLES. THUS THE LD. DR SUPPORTS THE ORDER PASSED BY THE AO . SHORT TERM CAPITAL LOSS 3,388 3,388 SUNDRY DEBIT BALANCES WRITTEN OFF 268 TOTAL NON - OPERATING EXPENSES 335,048 335,316 TOTAL OPERATING EXPENSES 165,165,066 165,164,798 TOTAL OPERATING PROFIT 69,906,590 24,775,948 OPERATING PROFIT AS A % OF OPERATING EXPENSES 42.33% 15.00% MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 10 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. THE OBTAINING FACTUAL MATRIX HAS TO BE TESTED ON THE ANVIL OF THE FOLLOWING ENUNCIATION OF LAW WHICH WOULD RESOLVE THE CONTENTIOUS ISSUES IN THE INSTANT CASE . (I) COMPARABI LITY IN RAMPGREEN SOLUTIONS PVT. LTD. VS. CIT (2015) 377 ITR 0533 (DEL.), THE HONBLE DELHI HIGH COURT HAS HELD THAT COMPARABILITY ANALYSIS BY TNMM METHOD MAY BE LESS SENSITIVE TO CERTAIN DISSIMILARITIES BETWEEN THE TESTED PARTY AND THE COMPARABLES. HOWEV ER, THAT CANNOT BE THE CONSIDERATION FOR DILUTING THE STANDARDS OF SELECTING COMPARABLE TRANSACTIONS/ENTITIES. A HIGHER PRODUCT AND FUNCTIONAL SIMILARITY WOULD STRENGTHEN THE EFFICACY OF THE METHOD IN ASCERTAINING A RELIABLE ALP. THEREFORE, AS FAR AS POSSI BLE, THE COMPARABLES MUST BE SELECTED KEEPING IN VIEW THE COMPARABILITY FACTORS AS SPECIFIED. WIDE DEVIATIONS IN PLI MUST TRIGGER FURTHER INVESTIGATIONS/ANALYSIS. (II) OPERATING PROFIT THE OPERATING PROFIT, FOR THE PURPOSES OF TNMM, IS THE NET PROFIT OF THE TESTED PARTY FROM THE CONTROLLED TRANSACTION; AND THE NET PROFIT OF UNCONTROLLED COMPARABLE ENTERPRISES FROM COMPARABLE UNCONTROLLED TRANSACTIONS. THE INCOME AND EXPENSES OF ONLY OPERATING NATURE ARE TAKEN INTO ACCOUNT FOR WORKING OUT THE OPERATING PR OFIT OF THE TESTED PARTY FROM THE CONTROLLED TRANSACTION. AND THE OPERATING PROFIT OF THE UNCONTROLLED COMPARABLE ENTERPRISES FROM COMPARABLE UNCONTROLLED TRANSACTIONS IS ALSO WORKED OUT ON SIMILAR BASIS. MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 11 (III) COMPANIES WITH EXTREME PROFIT MARGIN IN CHRYS CAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. VS. DCIT (2015) 376 ITR 0183 (DELHI), THE HONBLE DELHI HIGH COURT HAS HELD THAT T HE MERE FACT THAT AN ENTITY MAKES HIGH/EXTREMELY HIGH PROFITS/LOSSES DOES NOT, IPSO FACTO , LEAD TO ITS EXCLUSION FROM THE LIST OF COMPARABLES FOR THE PURPOSES OF DETERMINATION OF ALP. IN SUCH CIRCUMSTANCES, AN ENQUIRY UNDER RULE 10B(3) OUGHT TO BE CARRIED OUT, TO DETERMINE AS TO WHETHER THE MATERIAL DIFFERENCES BETWEEN THE ASSESSEE AND THE SAID ENTITY CAN BE ELIMINATED. UNLESS SU CH DIFFERENCES CANNOT BE ELIMINATED, THE ENTITY SHOULD BE INCLUDED AS A COMPARABLE. (IV) CURRENT YEAR VS. MULTIPLE YEAR DATA DATA OF ONLY THE RELEVANT YEAR SHOULD BE CONSIDERED FOR COMPARISON. THIS IS WHAT RULE 10B(4) PRESCRIBES. IN ORDER TO ANALYZE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION, DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION OR SPECIFIED DOMESTIC TRANSACTION HAS BEEN ENTERED INTO SHOULD BE USED. PROVISO TO RULE 10B(4) CARVES OUT THE EXCEPTION I.E. DATA RELATING TO TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON DETERMINATION OF TRANSFER PRICES. IN CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. VS. DCIT ( 2015) 376 ITR 0183 (DELHI), THE HONBLE DELHI HIGH COURT HAS HELD THAT WHILE DETERMINING THE COMPARABILITY OF TRANSACTIONS, MULTIPLE YEAR DATA CAN ONLY BE INCLUDED IN THE MANNER PROVIDED IN RULE 10B(4) AND THUS, IT MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 12 IS NOT OPEN TO ASSESSEE TO RELY UPON PREV IOUS YEARS DATA AS A GENERAL RULE. (V) RELATED PARTY TRANSACTIONS IN CIT V.THYSSEN KRUPP INDUSTRIES INDIA (P) LTD . (2016) 385 ITR 0612 (BOM), THE HONBLE BOMBAY HIGH COURT HAS HELD APPLYING CONSISTENT FILTER OF 25% OR LESS OF RELATED PARTY TRANSACTION ALONE SHALL BE CONSIDERED COMPARABLE. (VI) SEGMENTATION VS. AGGREGATION IN AZTEC SOFTWARE & TECHNOLOGY V. ACIT (294 ITR 32 - BANG ITAT), IT IS HELD THAT ALP TO BE DETERMINED ON TRANSACTION BY TRANSACTION BASIS AND NOT ON AGGREGATE BASIS. IT HAS BEEN HELD IN LG SOFT INDIA (P.) LTD. DCIT (2014) 48 TAXMANN.COM 237 (BANGALORE - TRIB.) THAT IN ABSENCE OF SEGMENTAL DETAILS, A COMPANY CANNOT BE TAKEN INTO ACCOUNT FOR COMPARABILITY ANALYSIS. IN M/S PANASONIC INDIA PVT. LTD. V. ITO (2010) TII - 47 - ITAT - DEL - TP, AGGREGATION OF TRANSACTIONS ARE UPHELD WHERE FUNCTIONS, ASSETS AND RISKS UNDERLYING THOSE TRANSACTIONS ARE SIMILAR. (VII) ECONOMIC ADJUSTMENTS IN MENTOR GRAPHICS (P) LTD. V. DCIT 109 ITD 101 (DEL ITAT), ADJUSTMENT IS PERMITTED IN (A) WORKING CAP ITAL, (B) RISK AND GROWTH, (C) R & D EXPENSES. HOWEVER, IT HAS BEEN HELD THAT, IF DIFFERENCES ARE SO MATERIAL THAT ADJUSTMENT CANNOT BE MADE THEN THE COMPANY SHOULD BE MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 13 REJECTED. TNMM IS MORE TOLERANT TO MINOR FUNCTIONAL AND RISK LEVEL DIFFERENCES. CERTAIN SIGNIFICANT RISKS LIKE MARKET RISKS, CONTRACT RISKS, CREDIT AND COLLECTION RISKS, INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHT ETC. ARE MATERIAL AND CAN LEAD TO MAJOR DIFFERENCE IN THE VALUE OF TRANSACTION. (VIII) +/5% VARIATION IN DCIT V. MISYS SOFTWARE (I)(P.) LTD . (2015) 56 TAXMANN.COM 332(BANGALORE - TRIB.), IT HAS BEEN HELD THAT +/5% VARIATION IS ALLOWED TO JUSTIFY PRICE CHARGED IN INTERNATIONAL TRANSACTIONS AND NOT FOR ADJUSTMENT/ STANDARD DEDUCTION PURPOSES. WE ALSO REFER HERE TO SECTION 92C(2A). (I X) I NFORMATION OBTAINED UNDER SECTION 133(6) IT HAS BEEN HELD IN LG SOFT INDIA (P.) LTD. DCIT (2014) 48 TAXMANN.COM 237 (BANGALORE - TRIB.) THAT NO COMPANY CAN BE SELECTED AS COMPARABLES ONLY ON BASIS OF INFORMATION OBTAINED UNDER SECTION 133(6), WITHOUT FU RNISHING SUCH INFORMATION TO ASSESSEE. IN VIEW OF THE ABOVE, WE SET ASIDE THE ORDER OF THE AO AND DIRECT HIM TO MAKE AN ASSESSMENT DE NOVO AFTER EXAMINING THE SAID COMPARABLES IN THE LIGHT OF OUR OBSERVATIONS HEREINBEFORE AT PARA 7 AND AFTER GIVING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE ALSO DIRECT THE ASSESSEE TO FILE THE RELEVANT DOCUMENTS/ EVIDENCE BEFORE THE AO. THUS THE 1 ST AND 2 ND GROUND OF APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. MWH INDIA PVT. LTD. ITA NO. 792/MUM/2013 14 AS WE HAVE RESTORED T HE MATTER TO THE FILE OF THE AO TO MAKE AN ASSESSMENT DE NOVO , WE ARE NOT ADVERTING TO THE CASE - LAWS RELIED ON BY THE LD. COUNSELS. 8. AS THE PENALTY HAS BEEN INITIATED ONLY, IT IS PREMATURE TO CONSIDER THE 3 RD GROUND OF APPEAL. 9. WE DIRECT THE AO TO ALL OW DEPRECIATION U/S 32 TO THE ASSESSEE AFTER DUE VERIFICATION OF THE RECORD AND AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 10. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27/10/2017 SD/ - SD/ - ( MAHAVIR SINGH ) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 27/10/2017 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI