Income Tax Appellate Tribunal – Delhi
Haldor Topsoe (I) Pvt Ltd, New … vs Dcit, New Delhi on 26 December, 2018 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH: ‘I-1’: NEW DELHI) BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER ITA No:- 654/Del/2015 (Assessment Year: 2010-11) Haldor Topsoe India Pvt. Ltd., Deputy Commissioner of Income
Elegance Tower, 2nd floor, Vs. Tax,
Jasola District Centre, Circle 10(1),
New Delhi-110025. New Delhi.
PAN No: AABCH7781F
APPELLANT RESPONDENT Assessee by : Sh. H.P. Aggarwal, FCA, and Ms. Prashuka Jain, CA Revenue by : Sh. Sanjay I. Bara, CIT (DR) ORDER
PER: ANADEE NATH MISSHRA, AM This appeal by the Assessee is filed directed against the Assessment Order dated 04-12-2014 passed by the Assessing Officer U/s 154/143(3) r.w.s. 144C of the Income Tax Act, 1961 (for short “the Act”). The grounds of appeal are as under:- “i. The learned DCIT(after incorporating Ld. DRP’s order) has erred on facts and in law in making addition of Rs. 3,20,93,274/- on account of adjustment in value of international transaction, on account of following:
a) Selecting 2 new comparable companies
b) Rejecting 4 comparable companies selected by the assessee
c) Rejecting adjustment in margin due to different risk profit of comparable companies Page 1 of 112 ITA No.-654/Del/2015.
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ii. The learned DCIT (after incorporating Ld. DRP’s order) has erred on facts and in law in initiating penalty proceedings u/s 271(1)(c) iii. The appellant craves leave to add to or modify the above grounds of appeal at or before the hearing of the appeal.”

(1.1) The Assessee has also filed an Additional Ground of the appeal, which is reproduced as under:

“The learned DCIT (after incorporating Ld. DRP’s order) has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confining the deduction at 90% only.”

(2) The Assessee filed return of income declaring total income of Rs. 43,58,900 on 30.09.2009. The case selected for scrutiny and a reference was made to Transfer Pricing Officer (“TPO” for short). The TPO, vide Order dated 17.01.2014 U/s 92CA(3) of I.T. Act, proposed adjustments of Rs. 3,26,30,317 to the returned income. (2.1) Brief facts of the Case, as noticed by TPO in aforesaid order dated 17.01.2014 of TPO are, the assessee is a fully owned subsidiary in the Topsoe Group (with 99.9% shares being held by HTIAS and 1 share being held by another group company- Subcontinent ammonia Investment Company Aps). The assessee provides Engineering service (including preparation of engineering packages, equipment designs, etc.) and Technical Assistance services (including providing engineers for supervision) to HTAS for their global projects (including projects in India). The key efforts of the Haldor Topsoe India Private Limited are in developing basic engineering design packages based on Topsoe technologies for ammonia, methanol, hydrogen, hydrogen + carbon- monoxide, SNG, DME, hydro-processing technologies including naphta treaters, Page 2 of 112 ITA No.-654/Del/2015.
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VGO/Diesel hydro-treaters, hydrocrackers, environmental technologies for abatement of NOx, Sox etc. for Topsoe’s global market. The international transactions entered into by the assessee are as under :

S. No. International Transaction Amount (In Rs.) 1 Engineering & Technical Assistance service 25,00,55,515 2 Purchase of fixed assets 11,87,625 3 Reimbursement of Expenses (Received) 81,000 4 Reimbursement of Expenses (Paid) 13,31,078 (2.2) TPO observed in his order that the assessee is engaged in activity which is largely defined as technical consultancy of engineering services. The assessee has also mentioned in its TP report that it can be classified as a technical and engineering service provider. As per assessee’s TP Report, the assessee selected eight comparables, and summary of the results as submitted by the assessee are as under:
Particulars Amount Operating Revenues 250,055,514.60 Operating Expenses 223,767,775.99 Operating Profit 26,287,738.61 OP/OC 11.75% Method used TNMM PLI OP/OC
No of Comparables 8 Mean Margin of Comparables 14.45% (2.3) The arm’s length price of the international transactions representing Provision of Technical Support services provided to the associated enterprises (AE) was determined by the assessee by applying Transactional Net Margin Method (TNMM), Page 3 of 112 ITA No.-654/Del/2015.
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which was stated by the assessee to be the most appropriate method in the facts and circumstances of the case. The operating profit to total cost (OP/TC) ratio was taken as the profit level indicator (PLI) in the TNMM analysis. The PLI of the company was arrived at 11.75% on cost whereas the average PLI of the eight ccomparables selected by the assessee was arrived at 14.45% in the analysis in the TP document, as per aforesaid summary of results. As the price charged in its international transactions was more than the said arithmetical mean price, the price charged in the international transactions was treated by the assessee to be at arm’s length. (2.4) For international transactions of the assessee related to provision of Technical Support services, the TPO commented as under in respect of the filters used by the assessee in selection of 08 comparables using the Prowess database; in show cause notice dated 17.12.2013 of TPO. The filters used by the assessee and remarks of the TPO are as under:

SI.
No. Particulars Remark of the TPO 1 Financial information This is an appropriate filter. not available for year 2009-10, rejected 2 Companies for which An appropriate filter, however, it should be data for 12 months March ending. were not available, Rejected 3 Companies having This is not an appropriate filter because there is Page 4 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. marketing expenses no correlation of marketing expenses and profit
greater than and equal earned in service industry. to 3% of total sales, Rejected 4 Companies having R&D This is not an appropriate filter. The taxpayer expenses greater than has not explained any rationale for putting the equal to 3% of total limit of 3%. The taxpayer adopted the cut of sales, rejected limit of 3% of R&D expenditure over sales in a very arbitrary manner. There are no studies to show that companies incurring R&D expenditure less than 3% of turnover are necessarily Software developer companies. A company engaged in providing services in the nature of Software development may not require incurring any expenditure on R&D. Hence this filter does not have logical application in the case of software companies.
5 Companies having This has to see case to case basis.
negative net worth, Rejected 6 Companies having more An appropriate fitler. than 25% of related party transactions, Rejected In the aforesaid show cause notice, the TPO proposed the following filters:

Companies whose Technical Support service income <Rs.l cr. are Page 5 of 112 ITA No.-654/Del/2015.
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excluded, on the ground that By taking companies whose income is less than Rs.l Crore, the analysis may not lead to a proper comparability.

Moreover their low cost/sales base makes their results unreliable. Companies whose revenue from Technical Support service is less than 75% of the total operating revenues are excluded.

The companies whose revenues from Technical Support service and related services are more than 75% of their operating revenues are selected as comparables. According to the TPO, this was an appropriate filter as this is the stage which will determine the correct comparability. As per TPO, In respect of enterprises whose main source of income is from service segment, the companies whose income from TECHNICAL SUPPORT SERVICES comes to more than 75% of the operating revenues have been considered for the study as the other segment may not materially affect the financial results of the company. Companies having different financial year ending (i.e. not March 31, 2009) or data of the company does not fall within 12 month period i.e. 01-04-2009 to 31-03-2010, are rejected. As per TPO, If a tested party ends its financial year in March, then taking companies whose financial year ends in March will be an appropriate filter and may lead to a proper comparability.

Companies that are functionally different from the taxpayer are Page 6 of 112 ITA No.-654/Del/2015.
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excluded.

Companies that are having peculiar economic circumstances are excluded. As per TPO, any other peculiar circumstances of a company which is divergent from the taxpayer and the environment in which the taxpayer and the comparables are working makes it incomparable. According to TPO, peculiar economic circumstances which are specific to the comparable enterprises are being looked into to check whether the enterprise is going along with the industry trend, if not whether suitable adjustments can be made to that effect, and if suitable adjustments cannot be made, the same is rejected as a comparable. As per TPO, among the peculiar economic circumstances that affect the suitability of a company as a comparable is its being a persistent loss maker or having declining revenues because these are factors that are not in keeping with the industry standard and disqualify the company from being used as a benchmark.

(2.4) The TPO proposed, in the aforesaid show cause notice, to use the current year data alone i.e. the data pertaining to the FY 2009-10. As per TPO, the use of earlier year data is not acceptable in the absence of any reasons as to how the earlier year data has an influence on transfer prices. In the absence of any cogent, relevant and reliable evidence to prove that the data for preceding two years revealed facts which Page 7 of 112 ITA No.-654/Del/2015.
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could have an influence on the determination of the ALP, in view of proviso to Rule 10B(4) use of the data pertaining to the two earlier years i.e. FY 2007-08 and FY 2008- 09 is not justified, according to TPO. Unless it is shown that conditions as mentioned in the aforesaid proviso are fulfilled, only the current year data was proposed to be used by TPO , and to exclude the earlier year data.

(2.5) Of the eight comparables selected by the Assessee, the TPO proposed to reject six, and accept two; in the aforesaid show cause notice, for the reasons as under: SI. Name of Remarks of this office Accept/
No. comparable Reject Central Mine
1 Planning & Design This company is failing service filter. Hence, not a Rejected Institute Limited suitable comparable.
2 Mukund Engineers This company is functionally different from the Rejected Limited taxpayer. Hence, not a suitable comparable.
3 Petron Engineering This company is engaged in ‘Construction Rejected Constructions contract/projects’ which are functionally different from Limited the taxpayer. Hence, not a suitable comparable.
4 Project and This company is having controlled by the government Development Hence, can’t be considered as a suitable comparable. Rejected India Limited
5 Simon India This company is engaged in ‘Construction contract’ Limited which are functionally different from the taxpayer and Accepted fails service filter also. Hence, not a suitable comparable.

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6 TCE Consulting The company passes all the filters proposed by the Accepted Engineers Limited TPO.
7 UB Engineering This company operates in two segments i.e. Mechanical Rejected Limited Erection and EPC Electrical which are not comparables to that of assessee. Hence, can’t be considered as a good comparable.
8 IOT Design and The company fails service income filter. Hence, can’t be Rejected Engineering taken as comparable. Limited (2.6) The comparables selected by the TPO from out of the comparables chosen by assessee are as under:

Sl. No Name of the comparable company 1 TCE Consulting Engineers Limited 2 Mukand Engineers Limited 3 Project and Development India Limited 4 UB Engineering Limited (2.7) In the aforesaid show cause notice, the TPO also proposed to include the two comparables, which were not chosen by the Assessee. The reasons stated by the TPO are as under:
1 Mahindra Consulting Engineers You have rejected this company on the ground Limited that ‘Funcional/product profile not similar’.
However, AR of the company perused and it is seen that this company is enmgaged in the field Page 9 of 112 ITA No.-654/Del/2015.
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of providing Technical Support Service. It passes all the filters also. Hence a suitable comparable.
2 Engineers India You have rejected this company on the ground that ‘Functionally different Annual Report of the company is perused and it is seen that company operates in two segments ‘Consulting and Engineering Project and Lumpsum Turnkey Project’. First segment i.e. Consulting and Engineering project is comparable to assessee and same is considered. This company is passes all filters also. Hence a suitable comparable.
(2.8) Thus, the TPO proposed the following list of comparables to determine the arm’s length price of the international transaction related to the provision of Market Support Services:

SI. No Name OP/OC 1 Mahindra Consulting Engineers Limited 23.50 2 TCE Consulting Engineers Limited 25.88 3 Engineers India 67.77 4 Mukand Engineers Limited 12.87 5 Project and Development India Limited 23.09 6 UB Engineering Limited 9.71 AVERAGE 26.33 Page 10 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. (2.9) Proposed Computation of ALP, and proposed Transfer pricing adjustments , as per aforesaid show cause notice of TPO are as under :

Operating Cost 223,767,776 Arm’s Length Price at a Margin of 26.33% 282,685,831 Price Received 250,055,515 105% of International Transaction 262,558,290 Proposed Adfustment u/s 92CA 32,630,317 (2.10) The assessee made a reply to the show cause notice. The reply was considered by the TPO and discussed with assessee’s Authorised Representative; after which he arrived at the following conclusions:
(2.10.1) Regarding the business of the assessee In the reply to the show cause notice assessee stated that assessee is rendering services to industries operating in Fertilizer, Petro-Chemical, Refinery and OIL & Gas sector. Accordingly, while selecting comparable companies, the assessee had selected those engineering companies which were also rendering services to the industries in Fertilizer, Petro-Chemical, Refiner and Oil & Gas Sector. As per TPO ; the assessee is also providing technical and engineering consultancy services. In any case, as per TPO, the ‘different sector’ or verticals of technical consultancy cannot be a criterion for acceptance or rejection of a comparable because the taxpayer and the TPO have selected TNMM as the most appropriate method. The TPO noted that taxpayer while selecting the method has clearly stated that under TNMM the standards of comparability are relatively relaxed and only broad similarity of functions is required Page 11 of 112 ITA No.-654/Del/2015.
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and that TNMM can be used with data for companies that are broadly comparable to the taxpayer, as functional differences are likely to be reflected in the level of operating expenses incurred by each company, as these expenses are deducted in the calculation of operating profit and are accordingly taken account of in the comparability analysis. The taxpayer having adopted net margin or operating profit as the most reliable or viable indicator of profit level; as per TPO, selective argument against some of the comparables was uncalled for. The TPO held that the Comparables selected by the TPO broadly perform functions similar to the taxpayer and are part of the Technical Consultancy & engineering services segment and hence such comparables cannot be rejected simply on the ground of high end activity. As per TPO, it is also to be kept in view that transfer pricing is not an exact science and that it is difficult to find exact comparables particularly under TNMM. As per TPO, this constraint has been accepted by the ITAT, Delhi in the case of ST Microelectronics Ltd (supra) wherein the ITAT held that ALP of an international transaction cannot be determined accurately in accordance with a scientific formula. It is quite difficult to arrive at any firm conclusion with mathematic precision. The TPO also referred to order of ITAT, Hyderabad Bench in the case of Deloitte Consulting India Pvt. Ltd in which it was held that no two comparable companies can be replicas of each other. The application of Rule 10B should be carried out and judged not with technical rigor, but on a broader prospective. Considering these facts and the fact that the taxpayer itself has not gone into the verticals or high end or low end distinction while selecting Page 12 of 112 ITA No.-654/Del/2015.
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the comparables and for this very reason selected TNMM as the most appropriate method, the TPO held that it cannot now argue against some of the comparables on this ground. The TPO mentioned that the taxpayer has selected companies operating in various verticals and that TPO has also selected comparables which are broadly engaged in the field of Technical Consultancy & engineering services. The TPO observed that out of 08 comparables selected in its TP report, 04 comparables were accepted by TPO and even the other 2 comparables further selected are from the search matrix of the assessee.

(2.10.2) Regarding filters selected by the assessee but rejected by the TPO Filters of marketing expenses >3% of total sales:

The taxpayer applied this filter whereby companies with the ratio of sum of advertising, marketing and distribution expenses to sales more than 3% were rejected. As per TPO, this is not an appropriate filter. As per TPO, independent enterprise has to incur marketing expenditure. As per TPO, in a service industry like Technical support, the taxpayer did not provide the basis on which such expenses resulted in any intangible unlike in manufacturing industry where substantial marketing expenditure creates an intangible; and thus, this filter is not relevant in service industry like Technical support. The taxpayer’s main argument was that marketing and advertising activities carried out by the comparable companies result in creation of marketing intangibles and thereby a return on such investment made in creation of such intangible. However, TPO noted that the taxpayer did not give the Page 13 of 112 ITA No.-654/Del/2015.
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basis on which it could be concluded that such companies have created marketing intangible. As per TPO, in the case of manufacturing or distribution companies, marketing expenses over a period of time may create marketing intangible but the same may not be true for service industry like technical support services. Further, as per TPO, the marketing effort is always linked with expenditure and these efforts may not necessarily result in the increased profits/margins. The TPO noted that ITAT, Hyderabad Bench in M/s Deloitte Consulting India Pvt. Ltd ITA No. 1082 and 1084 of 2010 in order dated 22.07.2011 had affirmed the above principle. (2.10.3) Filter of R&D expenses > 3% of total sales:

Assessee objected to the rejection of this filter mentioning that it hasn’t spent any expenses on R&D activities thus application of this filter is appropriate in its case. As per TPO, there are no uniform standards regarding disclosure of R&D expenditure in the accounts and the nature of R&D is not available from the published accounts. As per TPO, for creating Intellectual Property Rights, research and development is required but the converse is not true i.e. each company spending on research and development automatically is towards creating an IPR. As per TPO, the research and development activity, if any in a Service Industry is to improve the processes in delivering the technical services and not in creating an intangible. The TPO observed that the taxpayer had also not demonstrated that companies having expenditure greater than 3% on R&D were necessarily creating IP products. The TPO was of the Page 14 of 112 ITA No.-654/Del/2015.
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view that there were other quantitative filters which would more appropriately segregate companies which were rendering comparable services as that of the assessee. In the absence of any supporting data, R&D expenditure @ 3% of the turnover cannot be considered as creating any significant economic intangibles; the TPO held and observed that rejection of this filter does not have material impact in the case of the assessee.

(2.10.4) Regarding Comparables selected by the assessee but rejected by the TPO.

The TPO started with a general discussion, stating that it is seen that taxpayers argue against or for a company based on the certain keywords rather than seeing the main activity of the company; that every company tries to put its best face both in its website as well as in annual report; that any person can pickup certain keywords from the website and annual report and may argue that it is providing a sophisticated service, has certain patents, has specialized in certain areas, has obtained excellence in certain area; that, however, what needs to be seen is whether that is the substantial activity of that company or it is just an area which company wants to develop and do better work ; that the effort of the office of TPO has been to see the company’s activity in its entirety and find out what it is doing substantially. Further, the TPO stated that it is not possible to find companies providing exactly similar services as that of taxpayer because there will not be an independent company in the market which is providing only some technical support; that in order to exist as a Page 15 of 112 ITA No.-654/Del/2015.
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separate company, it has to provide a range of technical services; that it is possible for the taxpayer to argue that a comparable company taken by this office does not provide the type of technical service, taxpayer is rendering but then the taxpayer itself has not been able to suggest comparables providing exactly similar services as that of taxpayer. The TPO stated that the effort of his office has therefore been to find companies which are providing technical services with similar employee profile engineers and technical people as that of taxpayer irrespective of their size and range of services instead of finding companies which have exactly similar services as that of taxpayer as this will be a very difficult and in fact an Impossible exercise; and that most of the small independent companies will be providing only services in a niche area and then the taxpayer’s argument would be that these companies are providing services in a niche area while it is providing general technical support services. Hence, according to the TPO, size, range of services etc. will have to be disregarded while making comparisons as long as the employee profile is similar that is of providing technical services.

(2.10.5) Central Mine Planning and Design Institute Limited The Assessee submitted that this company is failing service income filter whereas Form 23ACA shows that this company is having 100% service income. As per TPO, contention of the assessee was verified from the information available in the public domain and a few snap shots taken by him were reproduced as under: Page 16 of 112
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As per TPO, it was evident from the above that the exploration can’t be considered as a service. Moreover, as per TPO, the company was having 100% related party transactions as evident from the followin followingg extracts of the annual report as per p P-6/AR “Your Company continued to operate with seven Regional Institutes (RI) located at Asansol/Dhanbad, Ranchi, Nagpur, Bilaspur, Singrauli & Bhubaneswar and its headquarters at Ranchi. Seven Regional Institutes designated as RI-I RI to RI-VII rendered consultancy services to seven corresp corresponding onding subsidiaries of CIL viz. ECL (RI-
(RI I), BCCL (RI-II), CCL (RI-III), III), WCL (RI (RI-IV), SECL (RI-V), NCL (RI-VI), VI), & MCL (RI-
(RI VII).”

As per AR, the company is a subsidiary of Coal India Limited and is also providing services to seven other subsidiaries of Coal India Ltd; the TPO noted. Hence, the TPO held that all the transactions are related party transactions. (2.10.6) Petron Engineering Construction Limited Assessee objected to the rejection of this comparable and submitted that this company is functionally similar to assessee as it is providing similar services as that of Page 17 of 112 ITA No.-654/Del/2015.
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assessee. In this regard, as snap shot of P&L Account was taken which is produced below:-

As per TPO, the above data shows that the sources of revenue of this comparable company for the relevant year makes it evident that none of the work performed by this company like construction contracts is similar to assessee. Hence, this company can’t be considered as suitable comparable, the TPO held. (2.10.7) Simon India Limited The TPO rejected this comparable, stating : “”It It is submitted that this company is failing service income filter whereas Form 23ACA shows that this company is having 96.70% service income. However, contention of the assessee is verified form the data produced in its claim. It is seen that assessee has made significant revenue from Sale or supply of services which is the major part of its revenue during the year. However, it has made purchases for re re-sale sale for almost equivalent amount also Page 18 of 112 ITA No.-654/Del/2015.
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and in the note to the accounts, against the purchase of services it is mentioned that ‘Purchases made for re-sale is to be given as per following calculation – Opening stock of goods traded + purchases of goods traded-closing stock of goods traded’ Hence, it is evident from the above that assessee is not providing services and is engaged in sales primarily as such. Hence, this company can’t be considered as a suitable comparable.”

(2.10.8) IOT Design & Engineering The TPO rejected this comparable, stating : “It is submitted that this company is failing service income filter whereas Form 23ACA shows that this company is having 100% service income. However it is seen that AR of the company is not available on the public domain. Only data is available on the data bases, which shows that this company is failing service filter. Hence, in absence of cogent financial data this company can’t be considered as suitable comparable.” (2.10.9) Regarding new companies selected by the TPO & Added to the list of comparables.

(2.10.9.1) Engineers India Limited The assessee objected to this comparable stating that it provides a complete range of project services ranging from conceptualization, planning, design, engineering and construction activities to meet the specific requirements of its clients in the several fields- Petroleum Refining; Petrochemicals; Pipeline; Offshore Oil & Gas; Onshore Oil Page 19 of 112 ITA No.-654/Del/2015.
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& Gas; Terminals & Storages; Mining & Metallurgy; and Infrastructure. And further that EIL is engaged into providing services from concept to commissioning in all the sectors listed above and it provides services beyond the commissioning of clients plants through monitoring the operation of each plant and accumulating feedback on its performance; and furthermore, that this company has a much higher turnover than that of taxpayer. Relying on his earlier general discussion; the TPO further r noted that M/s. Project and Development India Limited, a comparable selected by the assessee, is also a government company. As per TPO, Related Party Transactions (RPT) of the company is checked and it is within threshold limit. The TPO contended that all government contracts are being bid both by government and private companies on competitive basis and therefore there is no advantage to EIL on this account and that news items regarding the contracts of NTPC being bid competitively by BHEL, L&T, BGR Energy make this point abundantly clear. On the issue of High turnover the TPO observed that the taxpayer’s hypothesis that there is a direct co- relation between turnover and profit margins of the company is not acceptable; that the Transfer pricing rules or the OECD guidelines do not prescribe any specific range of turnover for comparability corresponding to size and scale of operations; that once functional similarity is accepted, companies can be compared irrespective of the turnover, size or scope of operation particularly in the service industry where not much of infrastructure is needed to set up business; that the fixed costs in the service industry are insignificant compared to the manufacturing industry ; that the major Page 20 of 112 ITA No.-654/Del/2015.
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costs in the service industry which includes the taxpayer are variable costs such as salary, traveling expenses, communication expenses etc. ; that margins in any industry vary with change in turnover only when the fixed costs involved are significant; that in the absence of any significant fixed costs, the margins in the service industry are not linked to the turnover of the company; that many small companies have much higher margins than the big companies; that in Service industry turnover does not play any significant role as far as the margins are concerned; and that there is no linkage whatsoever between the sales and the margins. The TPO referred to the case of M/s SYMANTEC SOFTWARE SOLUTIONS PVT LTD (2011-TII- 60-ITAT-MUM-TP) , which was related to market support service, in which the ITAT has observed “a) It is not shown that high or low turnover influences the margins of the comparable. b) Assessee’s objection was general in nature and no specific fact was brought on record to show that due to difference in turnover comparables became non-comparables; it could not be demonstrated as to how the difference in turnover influenced the results of comparables. c) The accepted economic principles and commercial practice in a highly competitive market one can survive only by keeping low margin but high turnover. d) Similarly, low turnover does not necessarily mean high margin. Therefore, unless and until it is shown that turnover makes undue difference on the margins, it is not a general rule to exclude such comparables.” Page 21 of 112
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(2.10.9.1.1.) The TPO also referred to the following decisions in which it was held that the turnover is not a relevant factor for choice of comparables i) Willis processing, Mumbai, ITAT
ITA No. 4429/Mumbai and 457/ Mumbai /2012
Dated 01.03.2013 – A.Y. 2007-08 dated 01.03.2013 ii) Capgemini, Mumbai, ITAT
ITA No. 786/ Mumbai / 2011
Dated 28.01.2013 A.Y. 2007-08 (2.10.9.1.2.) As regards Abnormal Margins Issue it was argued by the assessee that comparables having ‘abnormally’ high margins should not be selected. In support of this the taxpayer has referred to certain judicial decision. The above objection of the taxpayer was not accepted by the TPO, stating : ” In several decisions the ITATs have accepted so called high margin comparables. For instance, the ITAT, Bangalore in the case of Sap Labs(2010-TII- 44-ITAT-Bang-TP), ITAT, Hyderabad in the case of Deloitte Consulting Pvt. Ltd. confirmed selection of high margin comparables for service industry. These decisions pertain to the service sector viz. Software development and ITES. In the case of Exxon mobil the ITAT upheld Alpha Geo India Ltd having margin of 47.79% and Vimta Lab having margin of 57.68%. In any case, as per TPO in comparability analysis loss or so called higher margin is not a determining factor unless there are any peculiar economic circumstances in such a Page 22 of 112 ITA No.-654/Del/2015.
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case. As per TPO, in favour of loss making companies it is generally argued that such companies should not be rejected simply because they have incurred losses in a single year as loss making companies are as much part of industry as are profit making companies. As per TPO, the same logic is required to be applied to the cases having ‘supernormal profit’. Just like loss making companies, ‘super* normal profit making companies are also part of the industry and hence cannot be rejected merely because they have earned such profits, unless peculiar economic circumstances of such companies are pointed out. The TPO mentioned that This view has been completely endorsed by the OECD in their revised 2010 guidelines; and referred to the relevant Para “3.63 Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed “comparable” merely appear to be very different from the results observed in other proposed “comparables”. Page 23 of 112
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The TPO also referred to order of Mumbai ITAT in case of BP India services (2011-TII- 118) in which it was held: “we are not convinced with the submission advanced on behalf of the assessee that simply because two loss making cases have been excluded from the list of comparable cases for determining the mean margin rate of profit, the other two cases of extreme profit should also be excluded. Rule 10B(l)(e)(ii) clearly refers to ‘a comparable uncontrolled transaction or a number of such transactions’. It not only talks of one transaction which is comparable and uncontrolled, but also contemplates a number of such transactions. By using such comparable transactions in plural, it has been made clear that if there are a number of such transactions under consideration, then their average should be adopted as a benchmark. It is obvious that the very rationale of having average in case of more than one transactions is to iron out the effect of extreme cases and finding the profit margin as a representative of the whole lot….. the cases of FI and ME have been held by us to be rightly excluded by the TPO because of their having different product profile and also not satisfying the requirement of Rule 10B read with Rule 10A as uncontrolled transactions. These are the reasons in support of their exclusion from the list of comparable cases and not because there was high loss in such cases. This elimination by itself would not support the omission of HT and DT, being the cases with extreme profit rate. The exclusion by the CIT(A) of these cases on the sole reason of high profits, is not sustainable. Before eliminating such cases from the count, it was incumbent upon him to show that such cases were incomparable on the basis Of relevant considerations and not the higher or Page 24 of 112 ITA No.-654/Del/2015.
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lower profit rates. It is imperative to note that the list of 12 comparable cases was provided by the assessee and not something created by the TPO as per his own whims and fancies. When the list of comparable cases was furnished by the assessee, it was the turn of the TPO to find out whether such cases were, in fact, comparable or not and if not, then to exclude them after showing how these were not comparable; the decisive factors for determining inclusion or exclusion of any case in/from the list of comparables are the specific characteristics of services provided, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. Nowhere, the higher or lower profit rate, as presumed by the CIT(A), has been prescribed as the determinative factor to make a case incomparable. Rightly so, because profit is not a factor in itself, but consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B(2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables… Hence, EIL will be retained as a suitable comparable in assessee’s case, the
TPO held.

(2.10.9.2) Mahindra Consulting Engineers Limited The assessee argued that website www.mahindramace.com suggests that it is primarily engaged in providing consultancy services such as opportunity analysis, expediting services, market demand assessment etc. in the areas of SEZ, Industrial Page 25 of 112 ITA No.-654/Del/2015.
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Parks and Township, Privatisation, Environment and other areas. Further, the assessee argued that as per P-114 of annual report, the company is engaged in rendering consultancy services in the areas of special economic zones, water supply and sewerage, solid waste management, urban infrastructure, Agricultural and Horticultural infrastructure, industrial Infrastructure, renewable energy, etc. for the year under review. According to the TPO, however, this company is engaged in various engineering and project consultancy services which are in the nature of technical services and therefore comparable to taxpayer in view of his General Discussion.

(2.10.10.) Regarding Working Capital Adjustment: Assessee sought working capital adjustment to the margins of the comparables as well as in its own case. However, as per TPO, assessee has not demonstrated that there is a difference in the levels of working capital employed by it vis-a-vis the comparables. As per TPO, claim of working capital adjustment is not a matter of right; and as in the case of risk adjustment, it must be based on some data. The TPO referred to OECD guidelines which mention that no adjustment can be allowed in the absence of reliable data. The TPO referred to Paragraph 1.33 of the OECD guidelines, 2010 , in which it is stated : “[…..] To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate [emphasis added] adjustments can be made to eliminate the Page 26 of 112 ITA No.-654/Del/2015.
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effect of any such differences. [….].” For Transactional Net margin method, the TPO also referred to paragraph 3.2 of the Guidelines which state: “[….] the reliability of a method should be assessed taking into account the principles discussed in this Report, including the extent and the reliability [emphasis added] of adjustments to the data used.” The TPO also referred to article of Shri. Jamal Hefazi, a transfer pricing expert of Canada in his article (at pages 356 to 358 of International transfer pricing journal November/December 2008 issue) to highlight that Growth in transfer pricing informant will form analysis to rely more heavily on Asian Financial statement; that in Asia working capital adjustments are difficult to apply due quality considerations in data; es that accurate financial information in needed to perform working capital adjustments and failure to have sound financial data makes the application of working capital adjustment difficult and results in potentially more biased results are obtained; and that concern over the lack of transparent accounting standard and weakness of financial data in Asia are well documented amongst practitioners. The TPO also mentioned that OECD in its above referred to public draft on comparability has explained process of working capital adjustment and has also raised some important reservation on working capital adjustment in these words : “The process of calculating working capital adjustments: 1. Identify differences in the levels of working capital. Generally trade receivables, inventory and trade payables are the three accounts considered. TNMM is applied relative to an appropriate base, for example costs, sales or assets (see paragraph 3.26 of the Page 27 of 112 ITA No.-654/Del/2015.
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Guidelines). If the appropriate base is sales, for example, then any differences in working capital levels should be measured relative to sales. 2. Calculate a value for differences in levels of working capital between the tested party and the comparable relative to the appropriate base und reflecting the time value of money by use of an appropriate interest rate. 3. Adjust the result to reflect differences in levels of working capital. The following example adjusts the comparable’s result to reflect the tested party’s levels of working capital. Alternative calculations are to adjust the tested party’s results to reflect the comparables levels of working capital or to adjust both the tested party and the comparables results to reflect “zero” working capital.” The TPO also referred to these observations ; Extracted from pages 57-58 of CTPA/CFA(2006)31: ” • An issue in making Working Capital Adjustments is what point in time are the Receivables, Inventory and Payables compared between the tested party and the comparables. The example compares their levels on the last day of the financial year. This may not, however, be appropriate if this timing does not give a representative level of working capital over the year. • In the long run Receivables + Inventory – Payables should approach zero for a comparable. If proposed Working Capital Adjustments are significant, consideration may need to be given to whether the proposed comparable is an appropriate one. • A major issue in making Working Capital Adjustments is the question of which interest rate to use. The rate to be used is determined by the tested party. In most cases a borrowing rate will be appropriate. In cases where the tested party’s working capital balance is Page 28 of 112 ITA No.-654/Del/2015.
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negative (that Is Payables > Receivables * Inventory) a lending rate may be considered in some cases. The example uses an interest rate based on what TestCo is able to borrow at in the local market. This example also assumes that the same interest rate is applied to payables, receivables and inventory. • The purpose of Working Capital Adjustments is to improve the reliability of the comparables. There is a question whether Working Capital Adjustments should be made when the results of some comparables can be reliably adjusted while the results of some others cannot”. The TPO expressed the opinion that the underlying assumption is that all companies are efficient profit maximizers but poor manager may be the simple reality. Rather than embarking on adjustments, the question should really be asked at this stage as to why the assessee or suggested comparables have material deviation in the working Capital source or level, he observed. Stating that the assessee had been unable to satisfactorily answer this question; he held that there was no case for allowing a working capital adjustment. He also referred to an article published in Economic Times (New Delhi edition) under the title, “When Every Penny Counts”, and quoted these portions from the article : “Companies either borrow short-term loans or use internals cash accruals to procure raw materials and to meet day-to-day requirements. These loans are paid once the cash is received from customers. This process is termed as the working capital cycle of a firm. The lesser the number of days in which the company earns back the cash invested in operating activities, better is its working capital management Companies, Page 29 of 112 ITA No.-654/Del/2015.
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which have smaller working capital cycles, tend to deliver better profitability since their short-term borrowing requirement is lower compared with firms that have longer working capital cycle.

Working capital efficiency assumes greater significance. During a low-growth phase, demand for goods and services erodes thereby increasing the amount of average inventory at hand. For companies that undertake execution of turnkey projects, investments made to procure materials are blocked until the execution of the projects. When the implementation of such projects is delayed, the short-term borrowing requirement of such payers shoots up.

When working capital remains tied up in receivables or inventory for longer than the average period, the company will have to borrow additional capital to meet daily expenses. Given the current scenario of rising interest rates, higher borrowings will increase interest outgo thereby putting pressure on net margins. As has been brought out, the issue of working capital will be relevant when there is a situation of inventory remaining tied up or receivables being held up. Frankly speaking these situations may not be so relevant to the service industry. The assessee, as also the comparables used, shall launch into a project only when they have been awarded a contract. It is not as if these parties have manufactured goods that await buyers. This being the case, there is a serious question on the very need for a working capital adjustment in the service industry. A working capital adjustment will be required only when the varying levels of the working capital deployed is Page 30 of 112 ITA No.-654/Del/2015.
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actually making a difference to the margins earned by the assessee and the comparables. This is actually at the heart of every comparability adjustment. The assessee has not been able to demonstrate that the difference in the working capital deployed is making a difference in the margin earned by the assessee and the comparables.”

The TPO held that there was no case for working capital adjustment.
(2.10.11) Regarding Risk Adjustment The TPO declined to make Risk adjustment. According to TPO, risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins.

The TPO quoted To quote him, revised OECD guidelines of 2010 “Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed, the reasons for the adjustments being considered appropriate, how they were calculated, how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V. ” From the above guidelines it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable and how the same would improve the comparability and unless adequate reasons are given for such adjustment, no adjustment can be allowed to the taxpayer. In the present case, Page 31 of 112 ITA No.-654/Del/2015.
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except giving proportion of various risks borne, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability. Mechanical adjustment cannot be made to the margins of the comparables without knowing which risk was taken by the entity concerned and how its profitability was affected. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustment. In my view assessee cannot be compared to a risk free security. Even other methodology, whether ad hoc adjustment as in case of Sony India, CAPM or Sharpe Ratio (which is a measure of the excess return on risk undertaken by an entity investing in a particular asset), as applied by Hyderabad ITAT in the case of ADP Private Ltd, are based on return of capital which is not the PLI adopted by the assessee and the TPO. All this requires robust and reliable data, both for the assessee and the comparables in the absence of which risk adjustment cannot be considered for enhancing comparability. Thus claim of the assessee is not acceptable.” According to TPO, Assessee may object on the computation margin of this comparable company. In this regard TPO mentioned that margin has been computed in accordance with the principles governing the treatment of an item as operating and non-operating has been followed which was issued in CBDT notification SO 2810(E) dt. 19.9.2013, extract of the same is produced below: – (QUOTE)
(j) “operating expense” means the costs incurred in the previous year by the assessee Page 32 of 112 ITA No.-654/Del/2015.
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in relation to the international transaction during the course of its normal operations including depreciation and amortization expenses relating to the assets used by the assessee, but not including the following, namely.

(i) interest expense; (ii) provision for unascertained liabilities; (iii) pre-operating expenses; (iv) loss arising on account of foreign currency fluctuations; (v) extraordinary expenses; (vi) loss on transfer of assets or investments; (vii) expense on account of income tax; and
(viii) other expenses not relating to normal operations of the assessee;

(k) “operating revenue” means the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations hut not including the following, namely:

(i) interest income; (ii) income arising on account of foreign currency fluctuations; (iii) income on transfer of assets or investments; (iv) refunds relating to income-tax; (v) provisions written back; (vi) extraordinary incomes; and (vii) other incomes not relating to normal operations of the assessee” (2.10.12) Regarding Provision for doubtful debts As per TPO, provision for doubtful debts was considered part of operating expenses only when the same expenses are incurred every year for the last three years upto and including the FY 2009-10 and these expenses are incurred at almost consistent level in terms of its ratio with the turnover; and otherwise, the same is excluded from operating expenses treating the same expense as extra ordinary or restricted to the extent of reasonableness based on the three year figures. According to TPO, thus provision for doubtful debts are allowed provided a company follows a consistent approach to make provision every year’; and otherwise, such expense becomes extra ordinary and thus is excluded from operating expenses.
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(2.11) The final set of comparables selected by TPO; and computation of Arm’s Length Price in his aforesaid order dated 17.01.2014 U/s 92CA(3) of I. T. Act are as under:

SI. No Name OP/OC 1 Mahindra Consulting Engineers Limited 23.50 2 TCE Consulting Engineers Limited 25.88 3 Engineers India 67.77 4 Mukand Engineers Limited 12.87 5 Project and Development India Limited 23.09 6 UB Engineering Limited 9.71 AVERAGE 26.33 Computation of Arm’s Length Price: Operating Cost 223,767,776 Arm’s Length Price at a Margin of 26.33% 282,685,831 Price Received 250,055,515 105% of International Transaction 262,558,290 Proposed Adjustment u/s 92CA 32,630,317 (2.12) Thus the above different of Rs.3,26,30,317/- was proposed by TPO as transfer pricing adjustment for the FY 2009-10.

(3) The Assessing Officer (“AO” for short) formulated draft Assessment Order U/s 144C of I.T. Act on 31.01.2014 on the basis of the aforesaid Order dated 17.01.2014 of TPO. The Assessee filed objections against the draft Assessment Order before Dispute Resolution Panel (“DRP” for short) against this draft Assessment Order. The Page 34 of 112 ITA No.-654/Del/2015.
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DRP issued directions vide Order dated 25.09.2014 U/s 144C(5) of I.T. Act. Relevant portion of the Order of the DRP is as under:

“2. Business activity of the taxpayer company:

The taxpayer, Haldor Topsoe India Pvt. Ltd. is an engineering and consultancy service provider to its AE, Haldor Topsoe International A/S, Denmark. The taxpayer claims to provide engineering and technical assistance services to its parent company for their global projects (including projects in India) and thereby serves to augment the total strength of the Topsoe Group.

The international transactions entered into are tabulated below:-
Nature of transaction Arm’s length price as Sr. No. per taxpayer (i) Engineering and Technical Assitance Service Rs.25,00,55,515 rendered (“) Purchase.pf fixed assets Rs. 11,87,625 (iii) Reimbursement of expenses (Received Rs. 81,0000 (iv) Reimbursement expenses (paid) Rs. 13,31,078 3. The taxpayer furnished the TP Study and selected TNMM as the most appropriate method to benchmark its international transaction namely engineering and technical assistance service rendered. The taxpayer selected a set of 8 companies whose average margin was 14.45% as compared to Page 35 of 112 ITA No.-654/Del/2015.
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that of the taxpayer at 11.75%. Since, the taxpayer’s margin was within the range of ±5%, hence taxpayer contended that their international transaction was at arm’s length.

The TPO however did not agree with the TP study and instead used certain filters and rejected 4 of taxpayer’s comparables and in addition introduced 2 new comparables. Thus TPO used a set of 6 comparables in all (4 from taxpayer’s set and 2 new comparable) whose average margin was 26.33% and thus he proposed an addition of Rs.3,26,30,317. 4. Aggrieved by the action of the AO the following grounds of objection has been raised before the DRP in form no. 35A:-

1. a) The action of learned Transfer Pricing Officer of adding new companies to the list of Comparables and rejecting companies fairly selected by the taxpayer is not scientific / methodical and is on arbitrary basis.

b) The order passed by the AO / TPO is bad in law being against the principle of natural justice as no opportunity of hearing was granted by the AO to taxpayer before referring the matter to TPO. 2. The learned Transfer Pricing Officer has erred on facts and in law in selecting 2 new companies and adding the same to the list of Page 36 of 112 ITA No.-654/Del/2015.
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comparable companies.

3. The learned Transfer Pricing Officer has erred on facts and in law in rejecting 4 comparable companies selected by taxpayer. 4. The learned Transfer Pricing Officer has erred on facts and in law in rejecting the Company’s request for adjustment to the margins due to different risk profiles of comparable companies. 5. The learned Transfer Pricing Officer has erred on facts and in law in rejecting the Company’s request for working capital adjustment to the margins of comparable companies.

6. The learned Assessing Officer has erred on facts in making addition of Rs. 71 provision for expenses made by the Company.

7. The learned Assessing Officer has erred on facts in making addition of Rs. 29,74,264 on account of income from other sources. 8. The learned Assessing Officer has erred on facts in making addition of Rs. 24,01,433 on account of disallowance u/s 40A(2)(b). 9. The learned Assessing Officer erred on facts and in law initiating penalty proceedings u/s 271(1)(c) on account of certain additions. Page 37 of 112
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10. The learned Assessing Officer has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confirming the deduction at 90%, which was so claimed by the Company inadvertently. 5. From the above grounds of objections relating to transfer pricing following issues emerge which requires consideration of the DRP for issue of direction under section 144C of the Act.

Issue I Whether AO/TPO’s action by applying various filters, is right in rejecting few of taxpayer’s comparables and including new comparables without going into the functionally aspect. Issue II Whether AO/TPO is right in denying any adjustment on account of working capital, risk etc. while working out the average margins of the comparables.

Issue III Whether AO/TPO is right in denying any adjustment on account of risk while working out the average margins of the comparables.

Each of the issue is discussed hereinafter.

6. Issue I Whether AO/TPO’s action by applying various filters, is right in rejecting few of taxpayer’s comparables and including new comparables.

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6.1 With regard to the above issue the taxpayer’s has made the detailed submission contended that TPO was wrong in using following filters to reject the comparables selected by them and introducing new comparables. • Rejecting companies whose turnover was less than Rs.5.00 crore • Rejecting companies having RPT of 25% and more • Rejecting companies with different financial year ending. • Not rejecting the companies having high turnover filter/super profit • Rejecting companies where export revenues is less than 75% of total income. • Rejecting the filter used by the taxpayer of R & D to sales more than 3% filter Rejecting the filter used by the taxpayer of AMP expenses to sales more than 3% filter.

6.2 Having gone through the taxpayer’s submissions and AO/TPO’s order and judicial pronouncements on the issue of use of various filter, the Panel’s view on various objections raised by the taxpayer are as under:- Turnover filter of Rs.5.00 crore applied by TPO With regard to the use of turnover filter, this Panel is of the view that there is no arbitrary selection of limit of Rs.5.00 crores, the limit has been chosen after keeping in mind the Companies (Auditor’s Report) Page 39 of 112 ITA No.-654/Del/2015.
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Order, 2003 as per which the auditor has to make specific comments in respect of 33 items. The order is applicable to companies above turnover of Rs. 5 crores. Hence, audit compliance requirements are definitely better in these companies resulting in better reliability of their results. Ergo, the turnover filter has rightly been selected by the TPO.

Further, this Panel is also of the view that the reliability of the financial data for companies with low levels of sales/operating income can be significantly reduced because the same persons are often both major shareholders and also the key employees, thereby obliterating the economic distinction between profits and salaries. Also the companies having very small turnover are to be excluded because the margins earned by these companies fluctuate to extremes because of the narrow base. Such companies lack competitive strength, lack operational efficiencies and also lack human resources and so give skewed results. Further, because of smaller size, these companies tend to escape the eyes of the regulators and also managed personally by promoters instead of being professionally managed, therefore they are also not true representative of industry and their results do not have economic significance.

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In view of the above discussion this DRP has no hesitation in upholding this turnover filter used by the TPO instead of filter of Rs.1 crore used by the taxpayer.

Rejecting companies having RPT of 25% and more For the purpose of comparability analysis, the international transaction should be compared with uncontrolled transaction. Therefore, the comparables companies having more than 25% related party transactions could not be treated as operating in uncontrolled environment and RPT could have substantial impact on margins of such companies. The taxpayer has argued that there is no rational basis for applying the threshold limit of 25% of sales. The AR has referred to the number of ITAT decision in this regard. This panel has carefully considered the above objections of the taxpayer, but are not inclined to interfere in the TPO’s action in this regard. Cases having some RPT can be taken as comparable as they do not materially affect the price/margins. This view has been upheld by various ITAT’s including ITAT, Delhi.

In the case of Sony India Ltd. ITAT, Delhi did not lay down any threshold limit for applying RPT filter. This was clarified by ITAT, Delhi Page 41 of 112 ITA No.-654/Del/2015.
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in their subsequent decision in the case of Global Logic India P. Ltd. (2011 TII-35- ITAT-Del-TP).

Reference may also be made to ITAT, Hyderabad’s decision in the case of ADPP Ltd. (2011-TII-44-ITAT-Hyd-TP) and Deloitte Consulting India P. Ltd ITA No. 1082/Hyd/2010 dated 22.07.2011.

In the aforesaid decisions also threshold limit of 25% was accepted by the ITAT. In the case of ST Microelectronics (2011-TII-63-ITAT-Del- TP) also this limit has been impliedly upheld.

The rationale of 25% threshold limit is based on section 92A(2)(a) and (b) wherein a limit of less than 26% is fixed. Therefore, this Panel declines to interfere with the stand taken by the TPO in this regard. Rejecting comparables having different accounting year On the Comparables maintaining accounts in terms of period other than the financial year has been considered and DRP is of following view.

So far as the issue of requirement of data pertaining to the Financial Year as provided in rule 10B(4) is concerned, though there is no impediment in law to use data even if the comparables do not maintain their accounts in terms of financial year, the same is correct. However, Rule 10B(4) is not to be read in isolation. This rule has been Page 42 of 112 ITA No.-654/Del/2015.
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provided for the purpose of determination, analysis and benchmarking of international transaction with an appropriate comparable in uncontrolled transactions for the purpose of determination of Arm’s Length Price (ALP). So, the determining factors in the view of the DRP are:-

(i) Whether the taxpayer/ the Department will be able to identify an Uncontrolled comparable to benchmark an international transaction of the taxpayer who is maintaining data and accounts in terms of financial year.

(ii) Whether the taxpayer/ the Department will be able to carry out such adjustments so as to make the uncontrolled transactions materially identical with that of the taxpayer if such comparable is not maintaining its accounts financial year wise. (iii) Whether the taxpayer/ the Department will be able to apply such filters to be applied to publicly available data so as to bring out only those companies which are broadly functionally similar to that of the taxpayer if the comparable is not maintaining its account financial year wise.

In cases of companies, the data in respect of which are available publicly and which maintain accounts other than in terms of the Page 43 of 112 ITA No.-654/Del/2015.
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financial year, following adjustments are required to be carried out in order to bring the data at par with that of the taxpayer: (i) Apportion the data from preceding or subsequent period so as to make data equivalent to the financial year available for comparison with the international transaction.

(ii) While apportioning such data, adequate care needs to be taken so that the Profit Level Indicators are computed comparably. Further, for the determination of profit level indicators, certain entries having bearing on the cost and income are- interest, provisions, losses/ gains on account of foreign exchange, etc, which normally as per the business practice are accounted for at the end of the accounting year. Under both the situations, whether the data pertaining to the period prior to the accounting year or subsequent to the accounting year are integrated with the relevant portion of the accounting year of the comparable, the same gives a lopsided picture of the accounts so far as the financial year data is concerned. Since, there is no requirement as per company law or as per accounting standards that the da’ta pertaining to a particular quarter needs to be closely compartmentalized by providing for various provisions etc. for each quarter, the validity of such data for the purpose of comparability will be a matter of question mark. Also, some of the companies Page 44 of 112 ITA No.-654/Del/2015.
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provide for depreciation at the end of the accounting period. Apportionment of such depreciation on prorata basis to a particular quarter or month will be a difficult proposition.

Most important many of the companies maintaining accounts other than on financial year basis do not keep such data in public domain. Such inaccessibility of vital information in public domain may not render the comparison the warranted judicious effect creates a hurdle wherein the effort required to search for such comparables data for the financial year is not commensurate with the result. In addition, in order to reach at such uncontrolled comparables, the taxpayer as well as the TPO apply certain filters in accordance with the provisions of Rule 10B e.g. the filter of export income/ realization is applied for comparison of an international transaction involving export of goods and services; filter of related party transaction is applied for the purpose of identifying only those comparables which are functioning in a relatively uncontrolled environment. It is difficult to apportion information required for applying such filters if the accounting period is not congruent to the accounting period of the taxpayer. In order to carry out FAR analysis, taxpayers and the TPOs apply the filter of networth. Generally, networth of a company is determined on the last day of the accounting year. Therefore, Page 45 of 112 ITA No.-654/Del/2015.
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apportionment of data will again lead to lopsided indicator for comparability analysis.

Rule 10C (2)(c) provides for the requirement of “the availability, coverage and reliability of data necessary for application of the method ° In the light of the discussions made in the above paragraphs, the reliability of such data is a question mark and as such the requirement of the rule will not be fulfilled if the comparable does not maintain its accounts in terms of financial year.

It will also be very difficult to carry out adjustments, assumptions, classifications, etc, of such comparables to bring the transactions at par with the international transactions in such situations. Hence, in view of the above, the DRP is of the considered view that TPO is right in rejecting those comparable companies who are maintaining accounts in terms of period other than the financial year, for the purpose of determination of ALP.

Not rejecting the companies having high turnover filter/super profit The taxpayer has objected to inclusion of high turnover/high margin companies in the set of comparables. We have carefully considered the arguments of the taxpayer. For the purpose of transfer pricing analysis, the comparables are selected which has similar functional Page 46 of 112 ITA No.-654/Del/2015.
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profile. The profit margin of any company is not an indicator of its functional profile. Unless, the taxpayer is able to point out any functional differences, there is no reason to exclude a high profit margin company from the set of comparables.

Further, high turnover is no criteria to determine the functional comparability. Bigger size may result into higher revenue and not necessarily higher margins. In this highly competitive environment, customer is very demanding and refuses to pay higher rates if he can obtain similar services from other smaller vendors having no brand and small turnover. What matters most in the service sector is the functional similarity, nature of services rendered, and not the brand or size of the company.

In the case of Symantec Software Solutions P. Ltd. (2011-TII-60-ITAT- MUM-TP) which was related to market support sen/ice the ITAT has observed as under:-

(i) It is not shown that high or low turnover influences the margins of the comparables.

(ii) Taxpayer’s objection was general in nature and no specific fact was brought on record to show that due to difference in turnover comparables became non comparables; it-could not be Page 47 of 112 ITA No.-654/Del/2015.
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demonstrated as to who the difference in turnover influenced the results of comparables.

(iii) The accepted economic principles and commercial practice in a highly competitive market one can survive only be keeping low margin but high turnover.

(iv) Similarly, low turnover does not necessarily mean high margin. (v) Therefore, unless and until it is shown that turnover makes undue difference on the margins, it is not a general rule to exclude such comparables.

Under the Income Tax Act, if there are more than one comparable then the arithmetic mean of the margins of the comparables is taken to calculate the ALP under TNMM. In a set of functionally comparable companies, there could be companies with low margin as well as high margins. What is material is the functional comparability. Moreover, while taking arithmetic mean, such differences will ultimately average out. Comparables cannot be rejected simply because they are loss or high profit making comparables. Such cases can be excluded only if there are peculiar economic circumstances. This view is now also supported by the OECD in its revised 2010 guidelines. For the sake of ready reference, the relevant Para is extracted below. Page 48 of 112
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“3.63 Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect other items, e.g. exceptional items which are below the line but nonetheless may reflect exceptional circumstances. Where one or more of the potential comparables have extreme results, further examination would be needed to understand the reasons for such extreme results. The reason might be a defect in comparability, or exceptional conditions met by an otherwise comparable third party. An extreme result may be excluded on the basis that a previously overlooked significant comparability defect has been brought to light, not on the sole basis that the results arising from the proposed “comparable” merely appear to be very different from the results observed in other proposed “comparables”. 3.64 An independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.70 to 1.72. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that loss- making transactions can never be comparable. In Page 49 of 112 ITA No.-654/Del/2015.
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general, all *relevant information should be used and there should not be any overriding rule on the inclusion or exclusion of loss-making comparables. Indeed, it is the facts and circumstances surrounding the company in question that should determine its status as a comparable, not its financial result.

3.65 Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable Circumstances in which loss-making transactions/enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses incurred by third parties reflect a level of risks that is not comparable to the one assumed by the taxpayer in its controlled transactions. Loss-making comparables that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses.

3.66 A similar investigation should be undertaken for potential comparables returning abnormally large profits relative to other potential comparables.”

Even ITAT. Mumbai in the case of EXXON MOBIL COMPANY INDIA PVT LTD (2011-TII-68-ITAT-MUM-TP) has held as under:

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“Now, coming to the alternative arguments of the taxpayer that abnormal profit making unit is also to be eliminated on the same analogy on which loss making units are excluded, we, in principle, do not dispute this proposition. The various case laws relied upon by the taxpayer lay down that a comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average The reason for rejecting the two loss making units is not just because they were loss making units but for the reasons which are already stated in the preceding paragraphs. If similar reasons existed in the higher profit making unit, then, it is for the taxpayer to bring out those reasons and seek exclusion of the same. A general argument that, you have to exclude units which have high profit range, in case you exclude units which have made loss is a general submission which cannot be accepted. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Thus, this ground is dismissed.”

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Thus, In order to exclude the extreme result cases there should *be either a defect in comparability or exceptional conditions faced by the comparables. In the present case, the taxpayer had sought exclusion of certain comparables without disputing the functional comparability or showing any exceptional circumstances. Moreover, if high profit making case is to be excluded then logically loss/low profit margin cases are also required to be excluded. This would mean introducing the concept of inter-quartile range which is not provided under the Indian law. Without prejudice to above, in the case of SAPLabs India Ltd [2010-TII- 44- ITAT-BANG-TP], the Hon’ble ITAT has held that if cases of abnormal margin on the high side are to be removed then those on the lower side (having margin lower than the taxpayer) also should be removed. The taxpayer has relied on the decision of Hon’ble Delhi High Court in the case of Agnity India Technologies Pvt. Ltd. to derive support on its claim that since their turnover is Rs.25 crores, therefore, the comparables which are having high turnover viz. EIL, should not be considered as comparable.

The decision of Hon’ble Delhi High Court in the case of Agnity India Technologies P, Ltd. has been based on the decision of Delhi Bench of the ITAT in the same case in ITA No. 3856/Del/2010 wherein on page 5, Page 52 of 112 ITA No.-654/Del/2015.
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para 3.3 of the order, the AR of the taxpayer had submitted a table differentiating the risk profile, nature of services, ownership of branded/ proprietary product, situs of services rendered, expenditure on advertising/ sales promotion and brand building and expenditure on research and development. Based on that table, the ITAT on page 10 para 5.2 had observed:

“It is argued that the case of the taxpayer is not comparable with Infosys Technologies Ltd, the reasons being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. On the other hand, the taxpayer is a captive unit of its parent company in the USA and it assumes only limited currency risk. Having considered these points, we are of the view that the case of aforesaid Infosys and the taxpayer are not comparable at all as seen from the financial data etc of the two companies mentioned earlier in this order. Therefore, we are of the view t hat this case is required to be excluded. ”

This factual finding of the ITAT has been confirmed by Hon’ble High Court with the observation that the revenue did not controvert such finding. However, it is seen that decisions have been given on the facts where no analysis was made by the department that in case of service companies, margins do not depend on turnover and scale of the Page 53 of 112 ITA No.-654/Del/2015.
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company. Where in such an analysis has been given and has been shown that turnover is not a comparability criterion in IT industry. Where such an analysis has been made, the Tribunals have ruled that turnover is not a comparability criterion. The list of such decisions is as under:- -Order dt. 01.03.13 of ITAT, Mumbai in Willis Processing Services (India) Ltd. (ITA No.8772/Mum/2010) -Order dt. 28.02.13 of IJAJ Mumbai in Capgemini India Private Limited vs. ACIT (ITA No.7861/Mum/2011)- In this case, all the decisions quoted by taxpayer have been discussed and yet Tribunal arrived at a different decision- Para 5.3,5 and 5.3.6 of the order -Order dt. 26.04 2013 of ITAT, Mumbai in Vodafone India Services Pvt. Ltd. (ITA No. 7140/Mum/2012 and ITA No. 7097/Mum/2012) – Para 24.3.3 of the order It is pertinent to mention here that when one examines the profitability trend of Infosys Ltd. over the years from the time when it was a small company, it can be seen that the margin has almost remained constant over the years even when the turnover has increased substantially:- Page 54 of 112
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It can be seen from the above figures that the turnover does not have effect on margins of companies in service industry. Apart from above, this DRP also took a random sample of comparables which were taken by various taxpayers and TPOs while carrying out comparability analysis of service industry sector. The following table will also make it clear that there is no correlation between turnover and profitability:-

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As regards the taxpayer’s argument that some of the comparables included by TPO have high turnover and some others have high profitability, it is stated that as per proviso to section 92C(2) when more than one price is determined then tthe he arithmetical mean of such prices shall be the arm’s length price. Therefore, when there is a robust set of several comparables, such set: obviously contains comparables having low margin, normal margin and also high margin cases. The arithmetical mean o off such prices takes care of all kinds of cases including loss or high profit making, low turnover, high turnover, Page 56 of 112 ITA No.-654/Del/2015.
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low end-high or end activity, etc. Thus, removing a comparable from such a set simply on the ground of high profit making would neither be as per the Act and nor would it result in a representative set. Without prejudice to the above, if high profit making comparables are to be removed then consequently loss or low profit making companies are also required to be excluded. This view has been upheld by the ITAT, Bangalore in the case of Sap Labs (supra). This would, however, mean the implied application of inter-quartile range concept which is not permissible under the Act, The Act mandates use of arithmetical mean. In this connection reference may. be made to ITAT, Mumbai’s decision in the case of Dieageo India Private Limited (2011-TII-94- ITAT-MUM-TP). Similarly, in this case, following Quark Systems decision it was argued that comparables showing loss of 9.98% and profit of 37.48% should be excluded. Rejecting the taxpayer’s argument, the ITAT held as under:

“As evident from the above discussions, comparables showing exceptionally high profits and losses have been held to be excludable from the list of comparables not only because of the high profits or losses, but on account of factors like high intra AE transactions and lack of functional comparability. In this view of the matter, merely because an taxpayer has made high profit or high loss, that cannot be Page 57 of 112 ITA No.-654/Del/2015.
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a ground enough for its exclusion from comparables. Undoubtedly, there is some merit in excluding comparables at the top end of the range and at the bottom end of the range, but, in the absence of any provisions to this effect in the transfer pricing regulations, as is the practice under US transfer pricing regulation 1.482 by providing for inter-quartile range excluding cases in first and fourth quartile, this cannot be adopted as a practice. Nothing more than the fact of higher profits or losses has been pointed out by the taxpayer. We are, therefore, not persuaded to uphold this objection either.” In addition to above the taxpayer has also referred to certain ITAT decisions in’ support of its contention. These decisions have been perused. Firstly, all these decisions were given on their own fact pattern. In fact, in some of the cases the TPO had excluded loss making comparables simply because they were incurring losses in a single year. On the same analogy, the ITAT removed supernormal profit making companies. In other decisions ITATs did not reject them only on the ground of margins. Secondly, the ITATs in several decisions have held that a loss making comparable cannot be rejected simply on the ground that it had incurred losses. As discussed above, the same logic has to be extended to the high profit making cases also. Thirdly, the benefit of revised OECD guidelines was not available Page 58 of 112 ITA No.-654/Del/2015.
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in these decisions. Lastly, ITAT, Mumbai in the case of Exxon Mobile Company India Pvt Ltd, Diageo India P Ltd and BP India Services Private Limited (Supra) have held that loss or profit cannot be a criterion for acceptance/ rejection of a comparable. These decisions have been given after duly considering Quark’s decision. It may also be mentioned that the taxpayer’s margin is not being compared with the margins of these “high-margin” comparables alone These comparables are only which contains even low margin cases. The margin of the taxpayer is being finally compared with the average margin of the comparables finally selected in this order. Hence, from the above discussions, it is more the amply clear that high turnover and profitability in a service industry has no correlation at all, therefore the taxpayer’s reliance on Agnity Technologies (supra) and thereby arguing that the high turnover comparables should be removed does not cut much ice, Ergo, no comparable can be rejected merely on the basis of margins and turnover for the purpose of comparability analysis and Panel declines to interfere with the stand taken by the TPO in this regard.

Rejecting companies where export revenues is less than 75% of total income Page 59 of 112 ITA No.-654/Del/2015.
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The taxpayer is providing engineering and technical services, therefore in order to select similar comparable which are in the engineering and technical services, TPO has selected this filter. As per Rule 10B(2), it is important to judge any international transaction keeping in mind the “conditions prevailing in the markets” while deciding the compara’ble cases. The DRP is of the considered view that by using this filter, TPO has narrowed down the search for comparables.

Therefore, the above filter is logical and as per Rules and it ensures further refinement of functional proximity in FAR analysis. DRP thus does not find any infirmity in the order of the TPO using the filter of rejecting the companies with less than 75% earning from engineering and technical services of their total operating revenue, is correct. Rejecting the filter used by the taxpayer of R & D to sales more than 3% filter Regarding application of filter of R&D expenses in excess of 3% which is used by the taxpayer but not accepted by the TPO during the comparability analysis, we have given careful consideration to the contentions of both.

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Regarding application of R&D/Sales>3% filter, it is seen that spending on R&D does not necessarily result in creation of IPR. The R&D activity may be with respect to improving processes with respect to delivery of services rather than creation of intangible.

Further on the application of R&D/Sales>3% filter, companies with IP products did not necessarily get rejected. Similarly, certain companies which were otherwise purely providing engineering and related services gets rejected. The taxpayer had also not demonstrated that companies having expenditure greater than 3% on R&D were necessarily creating IP products.

In this respect, DRP is in agreement with the argument of the TPO that there are other quantitative filters which would more appropriately segregate companies which were rendering comparable services as that of the taxpayer.

Rejecting the filter used by the taxpayer of AMP expenses to sales more than 3% filter As discussed above, similarly DRP feels that this filter of AMP is not be appropriate filter for a service industry as compared to manufacturing industry wherein substantial marketing expenditure lead to creation of intangibles. Further taxpayer has also not demonstrated that how Page 61 of 112 ITA No.-654/Del/2015.
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service companies having expenditure more than 3% of AMP creates marketing intangibles. Therefore, this DRP is in agreement with the TPO that this filter in the present case does not substantially help in comparability analysis.

6.3 Further, apart from the above discussion it is seen that among others, taxpayer is aggrieved from the exclusion of Petron Engineering Construction Ltd. It is seen that this company is engaged in installation, construction and commissioning of projects as against the taxpayer’s business of providing engineering and consulting services, therefore this company is functionally different from that of the taxpayer. Hence, Panel feels that the said company has rightly been excluded for the purpose of comparability analysis. 6.4 As regards taxpayer’s objection to the inclusion of 2 companies namely EIL and Mahindra Consultancy Engineers Ltd. is concerned, it is seen that every company tries to put its best face both in its website as well as in annual report. Any person can pickup certain keywords from the website and annual report and may argue that it is providing a sophisticated service, has certain patents, has specialized in certain areas, has obtained excellence in certain areas. However, what needs to be seen whether that is the substantial activity of that company or it is just an area which company wants to develop and do better work. Page 62 of 112
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Further, under TNMM1 it is not possible to find companies providing exactly similar services as that of taxpayer because there will not be an independent company in the market which is providing only same technical support.

From the above discussion considering the fact that both the above^ mentioned companies are engaged in the field of engineering design and consultancy which broadly falls in the same category as that of the taxpayer and further considering the fact that in TNMM net profit margin are compared to appropriate base and it accepts vide range of functional similarities and application of Rule 10B is to be carried out and, but on a broader prospective, therefore this DRP overrules the objection raised by the taxpayer in this behalf and both these companies mentioned above are held to be the suitable comparable in the taxpayer’s case for the purpose of comparability analysis. 6.5 In view of the above discussions, the DRP holds that on account of above filters the following comparables have rightly been rejected/accepted.

Simon India Ltd.

With regard to this comparable the taxpayer submitted that TPO has wrongly considered “purchases made for resale” and has wrongly Page 63 of 112 ITA No.-654/Del/2015.
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concluded that this comparable is not providing any services. The taxpayer produced the financials wherein Rs.2,04,84,73,624 is considered as purchase expenses and thus taxpayer pleaded that it is a valid comparable.

On going through the financials so produced (schedule 14 of annual report), it is found that the purchases made for the re sales are to the tune of Rs.72,31,46,052 (which is 28% of the total operating income) and thus, since the service income is less than 75%, hence, as discussed above it does not qualify the filter.

Thus from the above discussion this company is not a valid comparable.

IOT Design and Engineering The TPO has rejected this company on the ground that the annual data is not available. The taxpayer during the course of this proceedings stated that the data is available in public domain therefore, TPO has wrongly not included this as a comparable. This Panel on going through the information finds that the data from the website of Ministry of Corporate Affairs has been made available by the taxpayer and is not accompanied by the annual report, directors report etc., therefore, about the functionality no comments can be Page 64 of 112 ITA No.-654/Del/2015.
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offered, hence, in the view of this Panel, this company cannot be taken as a valid comparable. However, taxpayer is directed to provide the complete annual report, director’s report and financials and TPO then is directed to take a call accordingly about the inclusion/exclusion of this company as a comparable.

Engineers India The taxpayer primarily wants this comparable to be excluded on account of • RPT more than 25% • Functionally different • Predominantly rendering service to government companies This Panel has gone through the TPO’s comments on the above grounds and also during the proceedings the taxpayer was requested to bring the data relating to RPT but inspite of the opportunity the data relating to RPT was not made available showing that it is more than 25%. As regards the arguments relating to catering to government sector/PSU, this Panel is of the view that in today’s economic world the government companies/PSU s work as per the market forces and EIL has no advantage on this score and further as mentioned above that in a service industry there is no direct co Page 65 of 112 ITA No.-654/Del/2015.
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relation between profitability and high turnover, accordingly, this Panel holds that EIL is a valid comparable.

Mahindra Consulting Engineers Ltd.

With regard to the inclusion of this company as a comparable, the taxpayer has made similar objections as were made in the earlier year, since there has been no change in the operation in the current year vis-a-vis last year, accordingly, as held in the last year this DRP holds that it is a valid comparable for the current year also. 7. Issue II Whether AO/TPO is right in denying any adjustment on account of working capital, while working out the average margins of the comparables.

7.1 With regard to the above, the taxpayer made both oral as well as written submissions, the gist of which is as under:- • No adjustment have been undertaken by the Ld. AO to the margins of the comparables selected by the TPO to account for differences in the working capital and risk profile of the companies and the taxpayer.

• In this regard, it is submitted that the Indian transfer pricing regulations Rule 10B(3) read with Rule 1QB(1)(e) recognize that Page 66 of 112 ITA No.-654/Del/2015.
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appropriate adjustments should be made to eliminate material effect of differences between the international transactions and the comparables transactions to establish comparability. 7.2 This DRP has considered the taxpayer’s contention with regard to the adjustments on account of working capital and also the arguments of the TPO.

Working capital is measured by trade receivables/debtors, trade payables/creditors and inventories. Interest cost will be high if the trade receivable/debtors time cycle is large. Interest cost will be low if the company can pay its liabilities after a larger period of gap then pay it in a shorter period. Holding of inventory has also interest costs. If inventory turnover is for a shorter period, interest cost will be lower. Thus all parameters namely trade debtors, trade creditors and inventories do affect the overall results of the company. In order to cover the interest cost, the margin may seem to be high in absolute term, but when interest cost is accounted for, the margin changes its luster. Therefore, working capital requirements do affect the margins or prices, costs or profits because this is a implicit cost which is recovered/recoverable from the customers. Therefore, this DRP is of the opinion that in view of the Rule 10B(3) and in order, to improve the comparability, in the-facts of the present case, while Page 67 of 112 ITA No.-654/Del/2015.
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comparing the margins of tested party with that of the comparables, adjustment be made for working capital for which the reliable data is to be provided by the taxpayer.

7.2.2 The TPO has stated that the taxpayer has not demonstrated that there is a difference in the levels of working capital employed by it vis-3-vis the comparables which affect prices and consequently profits. With regard to this objection, as discussed above that holding of inventories, trade debtor/ creditors, trade receivable/payable has always an interest cost. Therefore there is definitely a connection in the level of working capital and the price at which one is willing to offer its services/goods. Hence, this ground of rejecting taxpayer’s claim of working capital adjustment by the TPO is not tenable.

7.2.3 TPO has also referred to OECD guidelines which state that only reasonably accurate adjustments can be made. In. this respect, TPO has raised the issue of unreliable data and has pointed out that monthly data of comparables as well as segmental data is not available for making reasonably accurate working capital adjustment. Monthly data in respect of comparables would not be available. Page 68 of 112
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This DRP is of the view, that the average of opening and closing balance of the inventories and of trade receivable/payable, trade debtors/creditors, for the relevant year may be adopted which may broadly give the representative level of working capital over the year. Even if there is some difference with respect to the representative level, it will not affect the comparability as the same method will be applied to all cases. Same is the case with segmental data. 7.2.4 Hence, from the above discussion the TPO is directed to give working capital adjustment using the OECD methodology given at it in Annex to Chapter III and apply SBI Prime Lending Rate (as on 30th June of the relevant financial year) as the interest rate. It has been a general matter of observation by this Panel that in many of the cases the taxpayers do not strictly follow the guidelines provided by OECD for the computation of working capital adjustment. For example in some of the cases it has been observed that instead of taking into account only trade creditors the taxpayers also take into account credits received from various group concerns or loans etc. Similarly, creditors on account of capital items are also observed to be included iri many cases. Since, this practice is not in accordance with Page 69 of 112 ITA No.-654/Del/2015.
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the Guidelines, the TPO and the taxpayer are directed to take following into consideration while working out the working capital adjustment:- a) compute the average of opening and closing balances of inventories, trade debtors/receivables, trade creditors/payables of both the tested party and the comparables, on revenue account only b) work out the net working capital ratio (in percentage) after dividing the net working capital by operating cost/sales or such denominator (as is used in the PLI) both for the tested party and the comparables, c) determine the difference between the tested party’s ratio with that of each comparables.

d) thereafter multiply the above difference by interest rate i.e. SBI Prime Lending Rate as on 30th June of the relevant financial year. e) lastly, these adjustments are to be added to the profit margin of comparable companies as finally determined in accordance with the directions of this Panel.

7.2.5 In allowing the working, capital adjustment, this DRP carries strength from the following judicial decisions.

• Mentor Graphics (109 ITD 101) • Sony India (288 ITR 52 (Delhi- ITAT) Page 70 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. • Philips Software (26 SOT 226) (Bangalore- ITAT) 8. Issue III Whether AO/TPO is right in denying any adjustment on account of risk, while working out the average margins of the comparables.

8.2 Having gone through the taxpayer’s submission in this regard and having considered the facts and evidences on records and case laws relied upon both by the TPO and taxpayer in this regard, this DRP agrees that for the purpose of meaningful comparison, Transfer Pricing provisions do prescribe that the “reasonable and accurate adjustments” be made only if they enhance comparability. But at the same time such data must be reliable and robust and there should be no scope for mechanical adjustments.

As regards adjustment sought, it is seen that no claim for working capital has been made before the TPO and therefore no such claim can be entertained now. With regard to the risk adjustment, TPO has discussed in detail in his order as to why this adjustment cannot be carried out.

The Panel has carefully considered the facts of the case and the submissions of the taxpayer. As per Rule 10B (2) and 10B (3) of Income Tax Rules, 1962, Indian transfer pricing provisions prescribe Page 71 of 112 ITA No.-654/Del/2015.
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only for “reasonable accurate adjustment” and further adjustment to the margins of comparables can be made only if they enhance comparability. But at the same time the data for the same must be relevant reliable and robust. Risk adjustment as a general rule cannot be allowed unless it is clearly shown that the comparables had actually undertaken such risk and how the same materially affected their margins The revised OECD guidelines of 2010 has also stated in para 3.54 as under:-

“Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed the reasons for the adjustments being considered appropriate, how they were calculated how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V.”

Even the various judicial decisions on the issue of adjustments and even OECD guidelines, impresses upon time and again that the adjustment should be “reasonable accurate adjustment”. From the above guidelines, it can be seen that unless it is shown that how the risk adjustment would change the result of each comparable Page 72 of 112 ITA No.-654/Del/2015.
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and how the same would improve the comparability and unless adequate reasons are given for such adjustments, no adjustment can be allowed to the taxpayer. In the present case, except pointing out various risks, the taxpayer has not shown with evidence as to whether each of the risk was actually undertaken or not by the comparables and if so, how these risks affected each of them and whether such adjustment would improve the comparability.

Mechanical adjustment cannot be made to the margins of the comparables without knowing which risks were taken by the entity concerned and how its profitability was affected. Probability of risk and certainty of risk are two different aspects and cannot be equated for the purpose of adjustments. The significant of risk depends on its economic significance, likelihood of its realization and predictability. All these requires robust and reliable data, both for the taxpayer and the comparables in the absence of which risk adjustments cannot be considered for enhancing comparability. Thus the objection is rejected. In the various judicial pronouncements the risk adjustment has not been allowed by the ITATs. Some of these decisions are discussed below:

(a) Vedaris Technology 2010-TII-10-ITAT-Del-TP: No risk Page 73 of 112 ITA No.-654/Del/2015.
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adjustment to be allowed even on ad hoc basis particularly when the same has not been quantified;

(b) Marubeni India Private Ltd (2011-TII-36-ITAT-Del-TP) in which it was held that as the taxpayer failed to bring any evidence on record to show that there was any difference in risk profiles of comparable companies and since the taxpayer failed to file the details exhibiting risk borne by comparables, no risk adjustment can be given, even on ad hoc basis.

(c) ADP Private Limited (2011-TII-44-ITAT-Hyd-TP) wherein the ITAT held that there is no thumb rule for allowance of risk adjustment (d) Symantec Software Solutions Pvt. Ltd. (2011-TII-60-ITAT- Mum-TP): The ITAT held that;

(i) Until and unless it is shown that the difference in function and risk results in deflation or inflation of financial results of the comparables, it is not a general rule to grant it as a standard adjustment.

(ii) The taxpayer could not show how such difference in risk and functions affected the results of the comparables. (e) ST Micro Electronics (2011-TII-63-ITAT-Del-TP): The taxpayers claim that it was a risk free captive sen/ice provider and hence cannot be compared with comparables who were full entrepreneurs was not Page 74 of 112 ITA No.-654/Del/2015.
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accepted by the ITAT.

(f) Exxon Mobil Company India Pvt. Ltd. (2011-TII-68-ITAT-Mum- TP): The ITAT held that since working capital adjustment has been given and the taxpayer has not worked out the risk adjustment, no adjustment can be granted on this account.

Therefore, for the reasons mentioned above, this Panel declines to interfere with the action of TPO in this regard.

9. The taxpayer has also submitted before the Panel that, there were certain calculation mistakes while calculating the margins. In this regard the taxpayer is directed to provide all the backup details with working to the TPO so that it may ascertain as to where TPO faulted in the calculation and further TPO is directed to considered the same while working out the margins of the tested party as well as of the comparables, Corporate Matter Objection No. 6 10.1 This ground of objection is regarding proposed disallowance of Rs.75,000/- on account of provisions for expenses. 10.2 The draft assessment order shows that during the course of assessment proceedings the AO noticed that the taxpayer has claimed Page 75 of 112 ITA No.-654/Del/2015.
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printing & stationary expenses at Rs.5,60,854/-. The details of these expenses were called for and the AO noted that the taxpayer has claimed expenses of Rs.75,000/- as on 31.3.2010 as provision for expenses. The taxpayer was required to explain as to how the provisions are allowable as deduction. In compliance thereto the AR of the taxpayer stated that in the assessment year this provision has been reversed and the amount has been offered for taxation. The taxpayer also filed copy of account and perusal thereof revealed that this amount was reversed on 9.4,2010. After considering all the facts of the case the AO held that the expenses have been claimed on provision basis and the taxpayer thereby reduced income to the extent of Rs,75,000/- in AY 2010-11, hence AO proposed to disallow Rs.75,000/- and added it to the total income.

10.3 The Ld. AR of the taxpayer has submitted that the provision was made in the month of March 2010. The AO misunderstood the accounting entry for booking of expenses on accrual basis. Attention is drawn to the reply dated 31.1.2014 addressed to the assessing officer where it has been explained that the provision was made in respect of the following invoices relating to the month of March 2010: (i) Canon India P. Limited Rs.46,757/- (ii) SS Stationers Rs.32,005/- Page 76 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. Referring to the account of printing and stationary for April 2010 (i.e. the subsequent period) it is brought out that the provision was reversed on 9.4.2010 and only net amount remained to be claimed in the financial year 2010-11. It is therefore, requested to delete the proposed addition.

10.4 The Panel has examined the matter. From the submissions of the taxpayer it is evident that provision of Rs.75,000/- made on 31.03.2010 is with reference to the bills of SS Stationers and Canon India P. Limited. As against the total of such bills at Rs.78,762/-, the taxpayer made a provision of Rs.75,000/- on estimate basis. Thus, it cannot be said the provision so made of Rs.75,000/- during FY 2009- 10 was excessive or unsupported by the corresponding claims. The AO has disallowed the claim only for the reason that it was reversed on 9.4.2010 without realizing that by debiting total sum of Rs.78,762/- corresponding to these invoices and simultaneously crediting Rs.75,000/- on account of reversal of the said provision, the taxpayer has claimed the expenditure on this account as under: (i) During FY 2009-10 Rs.75,000/-

(ii) During FY 2010-11 Rs. 3,762/-

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Under these facts, it is evident that there is no flaw in the claim made by the taxpayer. The AO is directed to delete the addition proposed by him on this account.

10.5 This ground of objection is disposed-off accordingly. Objection No. 7 11.1 This ground of objection is about disallowance/addition of income from other sources.

11.2 The draft assessment order shows that the AO found that the taxpayer earned income from FDR interest at Rs. 29,74,264/-. As per provisions of law while calculating deduction u/s 10A of the Act, this amount of FDR interest should separately be added in the income as “income from other sources”. In the instant case the taxpayer has claimed deduction u/s 10A of the Act for Rs. 2,65,60,262/- and while doing so this amount of interest was not added as income from other sources. The taxpayer was required to show cause as to why this income be not separately added as income from other sources. After- considering the reply of the taxpayer, the AO held that the income from interest cannot be treated as income derived from the undertaking so as to qualify for deduction u/s 10A of the Act. The taxpayer has also admitted that while calculating total income, the Page 78 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

income from interest has to be disclosed separately as income from other sources as held by the Hon’ble Supreme Court in the case of Liberty India. Thus the AO held that the taxpayer has availed benefit u/s 10A on enhanced amount by Rs. 29,74,264/-. This income is separately added in the total income as income from other sources. 11.3 The Ld. AR of the taxpayer has submitted that the taxpayer has shown interest income of Rs.29,74,264/- separately in the Profit & Loss account and the same has not been considered as eligible profit for the purpose of computing deduction u/s 10A amounting to Rs. 2,65,60,262/-. This fact is clear from Annexure -1 filed alongwith letter dated 31.01.2010 (PB 149). The AO: has, by mistake, included the income of Rs.29,74,264 twice while computing the total income (firstly, the taxpayer has itself offered the same as taxable in its return of income and secondly, the AO has made the addition again). The taxpayer never claimed benefit of exemption u/s 10A in respect of the said interest income. It is therefore, submitted that the disallowance made by the AO may be deleted.

11.4 The Panel has examined the matter. The allegation of the AO has been that the taxpayer has claimed deduction u/s 10A of Rs.2,65,60,262/- but while doing so interest of Rs.29,74,264/- was added thereby claiming excess deduction. The Panel has perused the Page 79 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

taxpayer’s letter dated 31.1:.2014 submitted to the AO where reconciliation of taxable income between STPI and others has been made (PB 148-149). A perusal of the reconciliation shows that interest on bank deposits of Rs.29,74,264/- has been credited under the column for ‘others’ and the no income from bank deposit is taken to the STPI unit. Accordingly, the Panel observes that the taxpayer itself has excluded the said interest from bank deposits for computing admissible deduction u/s 10A of the Act. In this scenario, the Panel is of the view that there was no valid reason with the AO to hold otherwise. It appears that the AO has not duly appreciated to the contention of the taxpayer and passed his verdict unilaterally. The Panel therefore, directs the AO to make computation of total income separately for STPI unit and ‘others’ wherein interest from bank deposits should be taken under the column ‘others’. In this process, the addition on this account separately proposed by the AO will be duly taken care of and no separate addition could be made. 11.5 The ground of objection is disposed off accordingly. Objection No. 8 12.1 This ground of objection is about proposed addition of Rs.24,01,433/- on account of disallowance of u/s 40A(2)(b) of the Act. Page 80 of 112
ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

12.2 The draft assessment shows that the AO has observed as under:

“during the year under reference taxpayer company has charged Rs.1,60,09,554/- on account of rental expenses from HTIPL holding company. The AO taxpayer company is charging markup on all the services @ 12.5% but in this transaction the taxpayer company did not charged any markup; therefore the taxpayer was required to show cause as to why the markup amount on office space be not added in the income as income from other sources , In compliance thereto the taxpayer filed its written reply detailed below:

The said amount of Rs. 1,60,09,554/- is the amount charged without any mark-up toward office space not being currently used by HTIPL from M/s Haldor Topsoe A/s (which is a related party-being the holding company of HTIPLs parent company), The said space had been acquired by HTIPLS for future expansion. Accordingly, the same cannot be treated as income from other sources as the same is part and parcel of business operations of HTIPL.

I have considered all the facts of the case, plea of the taxpayer and of the view that the taxpayer company is incurring expenditure at Rs.5,81.07,010/- on account of rent expense but charging from the Page 81 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

parent company at Rs.1,60,09,554/- no basis for charging of rental expenses has been given. Even the taxpayer company is charging mark-up on other services @ 12.5%. since, there is no basis for charging rental expenses and the expenses incurred on account of rent are clearly covered by the provision of section 40A(2)(b) of the Act. After considering all the facts of the case, no basis for charging rental expenses, and also mark-up charged by the taxpayer company. The expenses on account of rent expenses claimed by the taxpayer to the extent of 15% of Rs. 24,01,433/- is hereby disallowed u/s 40A(2)(b) of the Act.”

12.3 The Ld. AR of the taxpayer has submitted that the provisions of section of 40A(2)(b) under which addition has been made by AO are not applicable in the present case, as no payment in respect of rent has been made by the taxpayer to any related person as specified u/s 40A(2)(b). Moreover, the observation of the AO that no margin has been charged on the said payment from the parent company is also irrelevant. This issue relates to calculation of margin which has already been dealt with in Transfer Pricing order by the TPO.

12.4 The Panel has examined the matter. On perusal of the details of office rent expenses (PB 150) it is seen that the taxpayer has taken Page 82 of 112 ITA No.-654/Del/2015.
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office premises of STPI from M/s BHL Forex and Finlease Limited whereas other area has been taken from Ms Naseema Lone, Wasim Ahmed Bhatt, Vinay Nagrath and Neera Vinay Nagrath. None of the premises have been taken on rent from the related party specified u/s 40A(2)(b). It is further seen that total rent paid for STPI unit is Rs.4,20,97,547/- whereas for the other area it is Rs. 1,60,09,554/-. Thus, the AO has apparently considered the rent for ‘other area’ and computed the disallowance u/s 40A(2)(b) @15% of the said sum of Rs. 1,60,09,554/-. Prima-facie when rent has not been paid to a related party, the Panel fails to understand as to how such disallowance can be proposed by the AO u/s 40A(2)(b) of the Act. No such mention has been made about payment to any related party in the annual accounts as well. Rather no transaction on account of rent has been disclosed in the related party transactions. Considering the facts in totality, the Panel holds that the AO has proposed the said disallowance without due reasoning and therefore, he is directed to delete the proposed addition. So far as the issue, of charging of margin from the parent company is concerned, the AO has not brought out any sound logic to make it sustainable. Moreover, this issue was within the domain of the TPO who has done the needful into the matter of adjustments.

Page 83 of 112
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12.5 The ground of objection is disposed off accordingly. Objection No. 9 13.1 The taxpayer has raised objections holding that AO has erred in proposing to initiate penalty proceedings u/s 271 (1 )(c) of the Act. 13.2 Objection regarding levying of penalty under section 271(1)(c) of the Act, for concealment of income, is consequential in nature. The penalty has not been levied yet and therefore, there is no cause of any grievance.

13.3 The ground of objection is disposed off accordingly. Objection No. 10 14.1 This ground relates to the claim of deduction u/s 10A @100% instead of 90% claimed by the taxpayer.

14.2 The draft assessment order shows that the AO has not made any change to the amount of deduction claimed u/s 10A. In the computation of total income, the taxpayer had claimed deduction u/s 10A on STPI unit as under:

Net income of STPI Unit 2
90% of proportionate income 2
Deduction u/s 10A 2 Page 84 of 112
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Thus, AO has indirectly proposed to allow deduction u/s 10A at Rs.2,65,60,262/-.

14.3 The Ld. AR of the taxpayer has submitted that the taxpayer has in its Return of income inadvertently claimed 90% of the profits relating to STPI unit as deduction u/s 10A instead of 100% allowable to it. The AO accordingly allowed the same at 90%. Before the DRP, the taxpayer by way of this objection has claimed the deduction at higher amount being @ 100%. It is submitted that the taxpayer has made a legal mistake in claiming deduction @90% instead of 100%. For this legal claim, the taxpayer relied on the following cases: • CIT v. Pruthvi Brokers and Shareholders P. Ltd [2012] 349 ITR 336 (Bombay) • CIT v. Jai Parabolic Springs Ltd. [2008] 306 ITR 42 (Delhi) 14.4.1 The Panel has considered the matter. From the facts mentioned above it is clear that the taxpayer has claimed deduction to the extent of 90% of admissible deduction u/s 10A in the computation of total income. No action has been taken by the taxpayer to make any amendment to the total income by filing a revised computation of income within the time permitted u/s 139(4) of the Act. Even no claim was made before the AO during the course of assessment proceedings. The taxpayer has made the claim that it is entitled for Page 85 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

100% of deduction u/s 10A for the first time before this Panel. Needless to reiterate that the said claim has been filed beyond the time to file revised return of income u/s 139(4), therefore, is to be considered as the belated claim Supreme Court of India in the case of Goetze (India) Ltd, 157 Taxmann 1 was seized of a similar issue. In that case after the return was filed, the taxpayer sought to claim a deduction by way of a letter before the AO. The said claim was beyond the time permitted u/s 139(4) of the Act. The deduction was disallowed by the AO on the ground that there was no provision under the Act to make an amendment in the return of income by making application at the assessment stage. The CIT(A) allowed the taxpayer appeals but tribunal allowed the department’s appeal. In Supreme Court, the taxpayer relied upon the judgment in National Thermal Power Company Ltd. 229 ITR 183 Hon’ble Supreme Court held as under: “4. The decision in question is that the power of the Tribunal under section 254 of the Income-tax Act, 1961, is to entertain for the first time a point of law provided the fact on the basis of which the issue of law can be raised before the Tribunal. The decision does not in any way relate to the power of the Assessing Officer to entertain a claim for deduction otherwise than by filing a revised return. In the Page 86 of 112 ITA No.-654/Del/2015.
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circumstances of the case, we dismiss the civil appeal. However, we make it dear that the issue in this case is limited to the power of the assessing authority and does not impinge on the power of the Income- tax Appellate Tribunal under section 254 of the Income tax Act, 1961. There shall be no order as to costs.”

Thus, the Supreme Court in the above case held that an AO could entertain a claim only if made in the return/revised return of income and not otherwise. As in the case of the taxpayer also, the facts are identical to the reported decision, the AO cannot be faulted. Moreover, the proceedings before the Panel are covered in the Chapter-XIV of the Act titled ‘Procedure for assessment’ and therefore, a new plea of the taxpayer cannot be considered by the Panel.

14.4.2 So far as the submission of the taxpayer with reference to the decisions in 349 ITR 336 and 306 ITR 42 are concerned, the Panel is of the view*that these decisions do not render any assistance to it. The Bombay High Court in the case of Pruthvi Brokers and Share P. Limited held that the jurisdiction of appellate authority to entertain a fresh claim has not been negated by the Supreme Court in the case Goetze India. Further, the Supreme Court held that the issue in the case was limited to the power of the AO and that the judgment does not nor impinge upon the power of the ITAT u/s 254 of the Act. Page 87 of 112
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Liikewise, the Delhi High Court in the case of Jai Parabolic (supra) has commented upon the powers of the appellate authorities as against the assessing officer. As mentioned above, the present proceedings before the Panel are under Chapter XIV of the Act and therefore, the decision of Hon’ble Supreme Court in the case of Goetze (India) (supra) would be squarely applicable.

14.4.3 Considering the facts and circumstances of the case in totality, the claim of the taxpayer cannot be accepted by the Panel. 14.5 The ground of objection is disposed off accordingly. 15. The taxpayer has cited in its submission various judicial pronouncements which have been considered by this Panel. These are distinguishable from the factual matrix in the case of the taxpayer. Accordingly, a detailed description of such analysis is not being mentioned in this order.

(4) The AO passed aforesaid Assessment Order dated 04.12.2014 making addition of Rs. 3,20,93,274 on account of Transfer Pricing Adjustments. Relevant portion of the Assessment Order is as under:

” Assessee filed return of income declaring a income of Rs. 43,58,900/- on 30.09.2009. The case was selected for scrutiny and notice under section 143(2) was issued on 30.08.2010. Again notice u/s 143(2) along with questionnaire under section 142(1) was issued on 07.08.2012. In response to notices, Sh. Yogesh Jain, C.A./Authorized Representative appeared from time to time and filed the requisite details which were placed on record and the case was discussed.
Page 88 of 112
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Haldor Topsoe India Pvt. Ltd., New Delhi.
Assessee is engaged in the business in providing IT enabled engineering consulting
services. During the course of hearing AR has produced books of account which have
been test checked.

1. Addition account of Transfer Pricing Adjustment
A reference was made to TPO -1(2), to determine the ‘arm’s Length Price; in respect of ‘international transactions) undertaken by the assessee by the assessee during the F.Y.
2009-10. In response to notice u/s. 92CA, Mr. Ahish Gupta and Mr. Prashuka jain the ,
the authorized representative of assessee company appeared. The transfer pricing
documentation containing functional economic analysis prescribed under Rule 10D of
the Income Tax Rules was submitted and placed on the record.
The TPO vide its order dated 17.01.2014 proposed adjustment of Rs. 3,26,30,317/- by
holding as under:-

6.1 Adjustment to Risks After carefully considering the facts of the case and the submissions of the taxpayer, I
am not inclined to accept the assessee’s claim of risk adjustment. Risk adjustment as a
general rule cannot be allowed unless it is clearly shown that the comparables had
actually undertaken such risk and how the same materially affected their margins. The
revised OECD guidelines of 2010 has also stated in Para 3.52 as under:- ” Ensuring the need level of transparency of comparability of adjustments may depend
upon the availability of an explanation of any adjustments performed, the reasons for
the adjustments being considered appropriate, how they were calculated, how they
changed the results for each comparables and how the adjustment improves
comparability, issue regarding documentation of comparability adjustments are
discussed in Chaper V. ”

From the above guidelines it can be seen that unless it is shown that how the risk
adjustment would change the result of each comparable and how the same would
improve the comparability and unless adequate reasons are given for such adjustment,
no adjustment can be allowed to the taxpayer. In the present case, except giving
proportion of various risks borne, the taxpayer has not shown with evidence as to
whether each of the risk was actually undertaken or not by the comparables and if so,
how these risks affected each of them and whether such adjustment would improve the
comparability.
Mechanical adjustment cannot be made to the margins of the comparables without
knowing which risk was taken by the entity concerned and hot its profitability was
affected. Profitability of risk and certainty of risk are two different aspects and cannot
be equated for the purpose of adjustment. In my view assessee cannot be compared to
a risk free security. Even other methodology, whether adhoc adjustment as in case of
Sony India, CAPM or Sharpe Ratio ( which is a measure of excess return on risk
undertaken by an entity investing in a particular asset), as applied y Hyderabad ITAT in
the case of ADP Private Ltd. are based on return of capital which is not the PLI adopted
by the assessee and the TPO. All this requires robust and reliable data, both for the
assessee and the comparable in the absence of which risk adjustment cannot be
considered for enhancing comparability. Thus claim of the assessee is not acceptable. Page 89 of 112
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7. Assessee may object on the computation margin of this comparable company.
In this regard it is to mention here that margin has been computed in accordance with
the principles governing the treatment of an item as operating and non-operating has
been followed which was issued in CBDT notification SO 2810(E) dated. 19.09.2013,
extract of the same is produced below:-

(QUOTE) (j) “operating expense” means the costs incurred in the previous year by the
assessee in relation to the international transaction during the course of its normal
operations including depreciation and amortization expenses relating to the assets used
by the assessee, but not including the following, namely; (i) Interest expenses;
(ii) Provisions for unascertained liabilities;
(iii) Pre-operating expenses;
(iv) Loss arising on account of foreign currency fluctuations;
(v) Extraordinary expenses;
(vi) Loss on transfer of assets or investments;
(vii) Expenses on account of income tax; and
(viii) Other expenses not relating to normal operations of the assessee;
(k) “Operating revenue” means the revenue earned by the assessee in the
previous year in relation to the international transaction during the course of its normal
operations but not including the following, namely: (i) Interest income;
(ii) Income arising on account of foreign currency fluctuations;
(iii) Income on transfer of assets or investments:
(iv) Refunds related to income- tax;
(v) Provisions written back;
(vi) Extraordinary incomes; and
(vii) Other incomes not relating normal operating of the assessee; (UNQUOTE) Provisions for doubtful debts Provisions for doubtful debts was considered part of operating expenses only when the
same expenses are incurred every year for the last three years upto and including the
FY 2009-10 and these expenses are incurred at almost consistent level in terms of its
ratio with the turnover. Otherwise, the same is excluded from operating expenses
treating the same expense as extraordinary or restricted to the extent of reasonable
based on the three year figures. Thus provision for doubtful debts are allowed provided
a company follows a consistent approach to make provisions every year. Otherwise,
such expenses becomes extra ordinary and thus is excluded from operating expenses. 8. Following the discussions in the preceding paras the final set of comparables
going to be used in the case of assessee are listed below:- SI. No. Name OP/OC Page 90 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. 1. Mahindra Consulting Engineers Limited 23.50 2. TCE Consulting Engineers Limited 25.88 3. Engineers India 67.77 4. Mukand Engineers Limited 12.87 5. Project and Development India Limited 23 09 6. UB Engineering Limited 9.71 AVERAGE 26.33 9. Computation of Arm’s Length Price: Operating Cost 223,767,776 Arm’s length price at a Margin of26.33% 282,685,831 Price Received 250,055,515 105% of International Transaction 262,558,290 Proposed Adjustment u/s92CA 32,630,317 Thus the above different of Rs. 3,26,30,317/- is treated as transfer pricing
adjustment for the FY 2009-10.

No adverse inference is drawn in respect of the other international transactions
undertaken by the assessee during the FY 2009-10. The assessee was afforded
reasonable opportunity of being heard.

Therefore, an addition of Rs. 3,26,30,317/- was made to the income of the assessee
being difference between the Arm’s Length Price. Draft Order u/s. 143(3) rws 144(C) of
the I.T. Act, 1%1 was passed on 31.01.2014. Penalty proceedings u/s 271(l)(c) of the IT
Act, were also initiated on this point for furnishing inaccurate particulars of income.
In response, to the Draft Order the assessee filed an appeal before the DRP-I, New Delhi
against the draft assessment order passed by the AO. In response to which the Ld. DRP-
I issued directions on 25.09.2014 u/s 144C (5) for AY 2010-11 with some specific
directions. However, till date no order has been passed by the TPO. Since, the final
assessment order in the case is getting barred by limitation on 30.11.2014, therefore,
final order is hereby passed and an addition of Rs. 3,26,30,317/- is hereby made on
account of difference of Arm’s length price subject to rectification order in accordance
with the outcome of the order of Transfer pricing officer. Since, I am satisfied that the
assessee has furnished inaccurate particulars of income, therefore, penalty proceedings
u/s 271(l)(c) is initiated separately.
(Addition Rs. 3,26,30,317/-) Page 91 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

In view of the above discussion, the total income/loss of the assessee company is computed as under:
Income as declared by the assessee Rs. 43,58,900/-

Additions 1. Addition made by TPO as discussed above Rs. 3,26,30,317/- Total Income Rs. 3,69,89,217/- Rounded off Rs. 3,69,89,220/- Assessed as above at total income of Rs. 3,69,89,220/-. Issue necessary forms. Charge interest u/s 234B and 234D as applicable under Income tax Act, 1961. Penalty proceedings u/s 271(l)(c) have been initiated separately.” (5) Aggrieved, the Assessee is now in appeal before us against the aforesaid Assessment Order dated 04.12.2014. During the appellate proceedings the Assessee filed application for admission of additional ground vide letter dated 14.06.2018. The additional ground is as under:

“The learned DCIT (after incorporating Ld. DRP’s order) has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confining the deduction at 90% only.”

(5.1) During the appellate proceedings the Assessee also filed Paper Book containing the following particulars:

S.No. Particulars 1 Copy of Order u/s 92CA dated 17.01.2014 passed by TPO for AY 2010-11 2 Copy of Draft assessment order dated 31.01.2014 passed by AO for AY 2010-11 3 Copy of objections filed before DRP (in Form 35A) for AY 2010-11 4 Copy of submissions dated 22.09.2014 filed before DRP for AY 2010-11 5 Copy of Directions given by Hon’ble DRP-I u/s 144C(5) dated 25.09.2014
Copy of letter no. L/72 dated 14.11.2014 filed with TPO for giving appeal effect to
6 DRP’s order Copy of Order dated 26.11.2014 passed by TPO giving appeal effect to DRP order for
7 AY 2010-11 Page 92 of 112 ITA No.-654/Del/2015.
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Copy of Order u/s 143(3) dated 27.11.2014 read with rectification order u/s 154
8 dated 04.12.2014 passed by AO for AY 2010-11
9 Copy of letter no. L/40 dated 31.12.2013 filed with TPO
10 Copy of audited accounts for the year ended 31.03.2010
11 Copy of report u/s 10A in Form 56F dated 25.09.2010
12 Copy of Computation of income for FY 2009-10 (AY 2010-11) Copy of Order dated 02.05.2017 passed by Hon’ble ITAT, New Delhi for AY 2009-10
13 in the case of assessee Copy of Relevant extract of letter L/161 dated 28.08.2017 filed with TPO for giving
14 appeal effect to ITAT order for AY 2009-10 in the case of assessee Copy of Appeal effect order u/s”254 dated 30.01.2018 passed by TPO for AY 2009-10
15 in the case of assessee Copy of Relevant extract of Annual report of Mahindra Consulting Engineers Ltd. for
16 FY 2009-10 and profile of the Company downloaded from the website
17 Copy of Relevant extract of Annual report of Engineers India Ltd. for FY 2009-10 Copy of Printout of the profile from the website of Petron Engineering Construction
18 Ltd.
19 Copy of Rectification application dated 17.07.2018 filed with TPO Copy of Rampgreen Solutions Pvt. Ltd. v C1T [2015] 60 taxmann.com 355 (Delhi High
20 Court) Copy of Thyssenkrupp Industries India (P.) Ltd. V. Addl. CIT. [2013] 33 taxmann.com
21 107 (Mumbai – Trib.)
22 Copy of Bechtel India (P.) Ltd. v. DCIT [2016] 66 taxmann.com 6 (Delhi – Trib.) Copy of AT & T Communication Services India (P.) Ltd. v. ACIT [2018] 91
23 taxmann.com 58 (Delhi – Trib.) Copy of CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289 (Delhi
24 High court) Copy ofPr. CIT v. New River Software Services (P.) Ltd. [2017] 85 taxmann.com 302
25 (Delhi High court) Copy of Blackrock Services India (P.) Ltd. v. ACIT [2018] 93 taxmann.com 251 (Delhi
26
– Trib.) Copy of KOB Medical Textiles (P.) Ltd. v. DCIT [2017] 81 taxmann.com 223 (Chennai
27
– Trib.)
28 Copy of Nokia India (P.) Ltd. v. DCIT [2018] 91 taxmann.com 288 (Delhi – Trib.) Copy of Finastra Software Solutions (India) (P.) Ltd. v. ACIT [2018] 93 taxmann.com
29 460 (Bangalore – Trib.) Copy of Relevant extract of Sony India (P.) Ltd. v. DCIT [2008] 114 ITD 448 (Delhi
30 Trib.) Copy of Sony Mobile Communications International AB v. DDIT [2016] 69
31 taxmann.com 404 (Delhi – Trib.)
32 Copy of Eli Lily & Co. (India) Ltd. v. ACIT [2018] 98 taxmann.com 380 (Delhi – Trib.) Page 93 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

(5.2) During the appellate proceedings the Assessee also filed a synopsis in seven pages, relevant portion of which is reproduced as under:

“Brief Background Haldor Topsoe India Pvt. Ltd. (Assessee) is a wholly owned subsidiary of Haldor Topsoe International A/S, (HTIAS), which is a Denmark based company. The parent company i.e., HTIAS is a subsidiary of Haldor Topsoe A/S, Denmark (HTAS). Accordingly, HTAS is the ultimate active holding company of Assessee. The services of the assessee are being captively consumed by HTAS. The assessee is rendering services to industries operating in (1) Fertilizer, (2) Petro-chemical, and (3) Refinery and Oil & Gas sector. Hence, the assessee had selected those engineering companies which were also rendering services to the industries in Fertilizer, Petro-chemical, Refinery and Oil & Gas sector.

During the FY 2009-10 the assessee got transfer pricing study done according to which the margin of comparable companies was 14.45% (refer page 2 of PB). The actual margin of the assessee for FY 2009- 10 was 11.75%.

The Ld. TPO has initially calculated the margin of the comparable companies @ 26.33%. The Ld. DCIT (after incorporating the Hon’ble DRP’s order) after giving relief for working capital adjustment has computed the margin of comparable companies @ 26.09% (refer page 87 of PB).

It may be noted that this is 2nd year of transfer pricing assessment, In the preceding year i.e., AY 2009-10. an addition to income was made by ld. TPO / AO. However, after the Hon’ble ITAT order , the same got reduced to NIL. Ground 1(a) The learned DCIT (after incorporating Ld. DRP’s order! has erred on facts and in law in making addition of Rs. 3.20.93.274 on account of adjustment in value of international transaction, on account of following:
(a) Selecting 2 new comparable companies Brief facts The Ld. TPO has selected following 2 and added the same to the list of final comparable companies :
• M/s Engineers India Ltd. (Margin – 67.77%) • M/s Mahindra Consulting Engineers Ltd. (Margin – 23.50%) The detailed factual arguments were submitted to the Hon’ble DRP (refer page 49 to 55 of PB). Our submissions regarding the comparable companies are as follows:

Regarding Engineers India Ltd. [“EIL”]:

Observations of Ld. TPO / Hon’ble DRP Page 94 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.
The Ld. TPO has included this company in the final list of comparables and discussed about it at para 5 (7internal page 11 to 13 of the order) (refer page 11 to 13 of the PB). The Ld. DRP has discussed this issue at page 16 of its order (refer page 71 of the PB).

Appellant’s submission First Ground – Govt Entity & Related Party Transactions > 25% : The first ground for exclusion is that EIL is rendering services to other government companies and had executed most of the projects in the Consulting & Engg. Division with govt. entities and therefore, its related party transactions are more than 25%.

• The assessee is rendering engineering services to industries operating in (1)
Fertilizer, (2) Petrochemical, and (3) Refinery and Oil & Gas sector. • EIL is a large govt. company primarily rendering engineering services to public
sector companies. Directors Report of EIL for F.Y. 2009-10 (refer page 180 to 193 of
the PB) give details of major jobs done by EIL during the year. The said report (at internal
pages 15 to 16) gives details of major activities in the fields of ‘Engineering’ and ‘Process
Design & Development’. Detail of such projects was also submitted to Ld. DRP (refer
page 54 to 55 of the PB). A perusal of the said detail will show that EIL is rendering
services predominantly to Government Companies and, therefore, related party
transactions are obviously much more than 25%.

• Hon’ble Mumbai ITAT in the case of Thyssenkrupp Industries India (P.) Ltd. V.
Addl. CIT. [2013] 33 taxmann.com 107 (Mumbai – Trib.) affirmed by Hon’ble Bombay High
court in [2016] 68 taxmann.com 248 (Bombay), has held as under on the basis of annual
report of EIL (refer para 12.8.2 at page 33 of the Compilation of Cases): “The second reason is that Engineers India Limited earned income from turnkey project by
successfully completing the project of IOCL and other Public Sector Undertakings. In that
sense of the matter, the related party transactions are much more than the filter of 25%.
We, therefore, order for the exclusion of this case from the list of comparables.” • It may be mentioned that in the above case although no financial details of
transactions with other government companies were available, the Hon’ble ITAT on the
basis of Directors Report etc. concluded that transaction with government companies was
more than 25% and, hence, EIL was not a comparable company. • This decision of Hon’ble Mumbai ITAT has been followed by Hon’ble ITAT Delhi in
the case of
❖ Bechtel India (P.) Ltd. v. DCIT [2016] 66 taxmann.com 6 (Delhi – Trib.) (para
12.4 at page 43 & 44 of the compilation of cases)
❖ AT & T Communication Services India (P.) Ltd. v. ACIT [2018] 91 taxmann.com 58
(Delhi – Trib.) (para 30 at page 56 & 57 of the compilation of cases)
❖ Honda Trading Corp. (India) (P.) Ltd. V. DCIT [2014] 44 taxmann.com 333 (Delhi –
Trib.) • Further, Hon’ble ITAT Delhi in the case of Eli Lily & Co. (India) Ltd. v. ACIT [2018]
98 taxmann.com 380 (Delhi – Trib.) (para 16 at page 128 of the compilation of Page 95 of 112 ITA No.-654/Del/2015.
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cases) following Thyssenkrupp (supra) has discussed the comparable – Engineers India
Ltd. and has given the various reasons for rejection of EIL as a comparable company. Second Ground – Scale & Size of the company : The total turnover of EIL was
1984.10 crores, as against the appellant turnover of 25 crores . Thus EIL’s turnover is 80
times the turnover of appellant company. Even if turnover of Consulting and Engineering
segment is considered, the same is 1055.33 crores, i.e. appx 42 times the turnover of
appellant company (refer page 202 of the PB). The appellant did not own any
intangibles, has not incurred any expenditure ofn R& D etc. • In support of the proposition that company with very high turnover should not be
considered as comparable, we place reliance on the following cases:
❖ CIT v. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289 (Delhi HC)
(para 5 & 6 at page 59 & 60 of the Compilation of cases)
❖ Pr. CIT v. New River Software Services (P.) Ltd. [2017] 85 taxmann.com 302
(Delhi HC) (para 12 at page 63 of the Compilation of cases)
❖ Sony Mobile Communications International AB v. DDIT [2016] 69 taxmann.com
404 (Delhi – Trib.) (para 6.3 at page 120 of the Compilation of cases)
❖ United Health Group Information Services (P.) Ltd. v. DCIT [2018] 90
taxmann.com 423 (Delhi – Trib.)
❖ Keystroke Pro India (P.) Ltd. v. ITO [2018] 93 taxmann.com 189 (Delhi – Trib.)
❖ St-Ericsson India (P.) Ltd. v. Addl. CIT [2017] 79 taxmann.com 207 (Delhi – Trib.) • In all these cases, it has been held that a giant company in terms of risk
profile, nature of services, number of employees, ownership of branded products and brand related profits, etc., could not be compared with assessee which was simply
a captive unit rendering services to its AE alone without acquiring any intellectual property.
In light of the above, it is submitted that EIL cannot be selected as a comparable company. • The Ld. TPO has relied on the following Mumbai ITAT decisions in support
of the proposition that high turnover is not the sole ground for exclusion :
❖ Capgemini India (P.) Ltd. v. ACIT
❖ Syantec Software Solutions Pvt. Ltd. (2011-TII-60ITAT-MUM-TP)
❖ Wills Processing (ITA No. 429 & 457/ Mumbai/ 2012) • We would like to submit that all the 3 judgements were delivered in 2013. There
are scores of decisions delivered in later years holding that high turnover is a very relevant
consideration. Further, as against the Mumbai Tribunal, we are placing our reliance on
jurisdictional Delhi High Court and Delhi Tribunal. Third Ground – Abnormal margin: The average margin of the consulting and
engineering industry for FY 2009-10 is 9.79% (taken from the Prowess software), The Consulting and Engineering division of EIL has a margin of 67.77% which is
clearly an extremely high margin compared to average industry margin. In light of the
above, it is submitted that EIL cannot be selected as a comparable company. Fourth Ground — Segmental accounts not available: We would like to
submit that only segmental turnover and profit of the EIL is available in the audited
accounts. However, no segmental break up of expenses are available in the audited
accounts and further there is some unallocable expenditure for which no justification was
provided by Ld. TPO while calculating the margins (refer page 216 of the PB). Page 96 of 112
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It is also submitted that the audited accounts do not contain the segmental profit & loss
account and balance sheet. Therefore, it is not possible to compute the Working capital
adjustment in case of EIL. It may also be noted that the Ld. TPO, while giving effect to the
Hon’ble DRP’s order has made the wrong calculation of WCA. He has computed the WCA
adjustment using the segmental profits but the figures of debtors, creditors and inventory
were taken from the consolidated balance sheet (refer page 89 and 194 of the PB). Since
segmental accounts are not available, therefore, EIL cannot be taken as a suitable
comparable company. In support of this proposition, reliance is placed on the following
cases:

❖ Blackrock Services India (P.) Ltd. v. ACIT [2018] 93 taxmann.com 251 (Delhi –
Trib.) (refer para 28 at page 74 of compilation of cases)
❖ Messe Dusseldorf India (P.) Ltd. v. DCIT [2018] 90 taxmann.com 159 (Delhi –
Trib.) In view of the above, it is humbly prayed that EIL cannot be taken as a comparable
company and, therefore, should be excluded from the list of comparable companies. Regarding Mahindra Consulting Engineers Ltd. [“Mahindra”! ; Observations of Ld. TPO /Hon’bleDRP
The Ld. TPO has included this company in the final list of comparables (refer page 18 of
PB). The
Hon’ble DRP has discussed this comparable at page 17 of its order dated 29.09.2014
(refer page 72 of PB). The Hon’ble DRP has added this comparable on the basis of the
addition made by the TPO in the current year as well as the immediate preceding year. Appellant’s submission • This issue is covered in the assessee’s own case by Hon’ble IT AT order
for immediately preceding year for AY 2009-10 (refer page 147 of the PB). The
Hon’ble ITAT has held that although Mahindra’s functions are similar to that of
the appellant, however due to outsourcing the work by Mahindra’s has
remanded back this comparable to Ld. TPO /AO to check the outsourcing
expenses and exclude the same from the final list of comparable companies, if
substantiated (refer page 148 ofPB) • However, the Ld. TPO while giving effect to ITAT order for AY 2009-10 has not
examined this issue of outsourcing of expenses and instead has given its observations
again only on functional similarity of Mahindra, thereby included the same in the final list of
comparables (refer page 163 to 164 of the PB). The appellant has not preferred appeal
against the said appeal effect order due to the fact that the margin of the assessee comes
within the range of 5% in AY 2009-10.

• During AY 2010-11 also, the expenses incurred by the appellant and Mahindra on
personnel and sub-consultancy costs during FY 2009-10 are given below (refer page 115
and 174 of the PB):
_________________________________________________________________________(in lakhs) Page 97 of 112 ITA No.-654/Del/2015.
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Particulars ________________________ HTIND (appellant) _____ Mahindra
Total employee & sub-consultancy costs 1000.44 452.02
Sub consultancy costs 0.00 68.90
% of sub-consultancy costs 0% 15.24% From the above, it will be seen that while assessee is rendering services by employing its
own employees whereas roughly 16% of the activity carried out by Mahindra has been
outsourced. Therefore, its business model is different from appellant and, hence, cannot be
selected as a comparable company. In support of the above proposition, reliance is placed
on Hon’ble Delhi High Court judgement in the case of Rampgreen Solutions Pvt. Ltd. v CIT.
[2015] 60 taxmann.com 355 (at para 38 – refer page 16 of Compilation of cases) on
account of different business model, namely, more of outsourcing than in-house services. • Without prejudice to above, it is submitted that Mahindra has been specifically
excluded by the Hon’ble Delhi tribunal as the comparable company in view of highly
technical capabilities of executing infrastructure development projects in the following
cases:
Rolls-Royce India (P.) Ltd. v. DCIT [2016] 69 taxmann.com 426 (Delhi – Trib.) Alcatel-Lucent India Ltd. v. DCIT [2017] 88 taxmann.com 157 (Delhi – Trib.)
Ground 1(b)
The learned DCIT (after incorporating Ld. DRP’s order) has erred on facts and in
law in making addition of Rs. 3,20,93,274 on account of adjustment in value of
international transaction on account of following: (b) Rejecting 4 comparable companies selected by the assessee
Brief facts
The Ld. TPO of rejecting following comparable companies selected by the appellant:
• Central Mine Planning & Design Institute Ltd. (Margin – 4.63%)
• IOT Design & Engg. Ltd.(Margin – 14.42%)
• Simon India Ltd. (Margin – 15.28%)
• Petron Engineering Construction Ltd. (Margin -11.41 %) The first three comparable companies are not pressed. Our submissions regarding
remaining 1 company is given below:

Regarding Petron Engineering Construction Ltd.:

• The Ld. TPO at para 4.3.2 (at internal page 10 of its order) (refer page 10 of
the PB). The Ld. TPO has rejected this comparable on the ground that source of revenue
is no similar to that of assessee and hence functionally dissimilar. The Hon’ble DRP has not
discussed this comparable in its order dated 25.09.2014. • This issue is covered in the assessee’s own case by Hon’ble ITAT order
for immediately preceding year for AY 2009-10 (refer page 151 of the PB). The
TPO, pursuant to Hon’ble Tribunal’s decision while giving appeal effect to the ITAT order
has included the Petron in the final list of comparables (refer page 166 of the PB).
• We would again like to submit that the company is not functionally dissimilar. As Page 98 of 112 ITA No.-654/Del/2015.
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can be seen from the profile of Petron downloaded from its website (refer page 219 of
the PB), it is working in the same sector as the appellant namely in the field of refinery,
petrochemical & fertilizer.

• In view of the above, it is humbly prayed that Petron Engineering Construction Ltd
should be selected as a suitable comparable and be added in the list of final comparables.
Ground 1(c)
The learned DCIT (after incorporating Ld. DRP’s order) has erred on facts and in
law in making addition of Rs. 3,20.93,274 on account of adjustment in value of
international transaction, on account of following:
(c) Rejecting adjustment in margin due to different risk profile of comparable
companies Brief facts
• Appellant vide letter No. L/40 dated 31.12.2013 submitted before Ld. TPO that it
is a captive service provider to it’s AE – Haldor Topsoe A/s. It operates in a risk-insulated
environment, since it operates on a cost-plus model and is compensated for all the costs
borne by it. The levels of risk borne by third- party comparables (which are entrepreneurs)
are much more than those of HT1PL. It was also submitted that difference in risk profile of
the appellant and comparable companies are on account of the various risk including
Market risk, Service liability risk, Research & development risk, Credit risk, Manpower risk,
Technological obsolescence risk, etc. • Accordingly, an adjustment for difference in risk profile (i.e. captive service
provider vs. entrepreneur) is called for (refer page 101 to 102 of the PB). • The Appellant claimed risk adjustment of 5.25%. The adjustment on account of a
difference in risk profile was computed by subtracting the risk-free bank rate from the
prime lending rate. During the previous year relevant to assessment year 2010-11, such
difference worked out to appx. 5.25% (i.e. 11.75% less 6.50%) [refer page 102 of the
PB], The appellant has submitted the brief note on the risk adjustment to the Ld. TPO
(refer page 106 to 108 of the PB).

TPO’s observation
The Ld. TPO has discussed this issue in para 6 (internal page 16 to 17) of its order dated
17.01.2014 (refer page 16 to 17 of the PB).

DRP’s Observation
The Ld. DRP has discussed this matter in para 8 (internal page 19 to 21) of its order dated
29.09.2014 (refer page 74 to 76 of the PB). The Hon’ble DRP has held that mechanical
adjustment cannot be made to the margins of the comparables without knowing which
risks were taken by the entity concerned and how its profitability was effected. The Hon’ble
DRP has held that it was the onus of the taxpayer to show with the evidence as to whether
each of the risk was actually undertaken or not by the comparables and if so how these
risks effected each of that and where such adjustment would improve the incomparability. Appellant’s submission • This issue is covered in the assessee’s own case by Hon’ble ITAT order Page 99 of 112 ITA No.-654/Del/2015.
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for immediately preceding year for AY 2009-10. The Hon’ble Delhi Tribunal has
restored the matter to the file of Ld. TPO / AO to compute the risk adjustment
(refer page 152 to 154 of the PB).

• The appellant has made its submissions in relation to risk adjustment to the Ld.
TPO pursuant to the ITAT’s order for AY 2009-10 (refer page 158 to 160 of the PB).
However, the Ld. TPO has not accepted the appellant’s submission in giving appeal effect
to the ITAT order (refer page 164 to 166 of the PB) The Ld. TPO has again produced
the same arguments which has been mentioned in the Ld. TPO’s original order dated
17.01.2014 (refer page 16 to 17 of the PB) and finally denied the risk adjustment
to the appellant despite of having the clear directions from the Hon’ble Tribunal. • We would further like to submit that this onus placed by Hon’ble DRP on the
appellant is an onus which places an impossibility on the shoulders of the appellant in as
much as the appellant has no means to ascertain like risks actually undertaken by the
various comparables. It is submitted that the DRP thus erred in law in placing the onus on
the appellant in view of the celebrated ‘maxim lex non legit impossibilia’. Therefore, it
is not practically possible to calculate the adjustment on account of each risk factor for
every comparable company.

• In this connection, we would like to submit that there are scores of judgements on
this issue. However, we place reliance on the following latest decisions wherein the risk
adjustment has been granted in case of captive service provider: ❖ Nokia India (P.) Ltd. v. DCIT [2018] 91 taxmann.com 288 (Delhi – Trib.) (refer
para 7.4 at page 91 of compilation of cases)
❖ DCIT v. Applied Micro Circuits India (P.) Ltd. [2017] 88 taxmann.com 276 (Pune
– Trib.)
❖ CAPCO IT Services India (P.) Ltd. v. ITO [2017] 79 taxmann.com 214 (Bangalore –
Trib.)
❖ Starent Networks (India) (P.) Ltd. v. ACIT [2018] 90 taxmann.com 367 (Pune –
Trib.)
❖ MSC Software Corporation India (P.) Ltd. v. ACIT [2017] 80 taxmann.com 55
(Pune – Trib.) • Further reliance is placed on the following latest judicial decisions of various
Tribunals where an adhoc risk adjustment has been granted: ❖ Sony India (P.) Ltd. v. DCIT [2008] 114 ITD 448 (Delhi-Trib) : 20% adhoc
adjustment of profit i.e., appx. 2% -3% (refer para 132 at page 113 of Compilation
of cases) KOB Medical Textiles (P.) Ltd. v. DCIT [2017] 81 taxmann.com 223 (Chennai –
Trib.) : 2% adhoc adjustment (refer para 6 at page 81 of Compilation of cases) ❖ Finastra Software Solutions (India) (P.) Ltd. v. ACIT [2018] 93 taxmann.com 460
(Bangalore – Trib.) – 1 % adoc (refer para 40 at page 104 of Compilation of cases) • The Ld. TPO has relied on the following cases in support of non-allowance of risk
adjustment:
❖ ADP Private Limited (200-TII-44-ITAT-HYD TP) Page 100 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. ❖ Symantec Software Solutions Pvt. Ltd. (201 l-TII-60-ITAT-MUM TP) ❖ ST Micro Electronics (201 l-TII-60-ITAT-DEL TP) ❖ Vedaris Technology (2010-TII-10-ITAT-DEL TP) • We would like to submit that all these judgements were delivered in year 2011.
There are lot of judgements as mentioned above which have been delivered after these decisions of the Tribunal wherein the risk adjustment has been granted in case of captive service providers. We submit that later decisions of the Tribunals should be followed as against the older decisions. In any case, this issue is directly covered by assessee’s own case in AY 2009-10. Therefore, following the well settled principle of consistency, the risk adjustment should be granted to the appellant.”

(6) At the time of hearing before us, Ld. Counsel for Assessee reiterated the submissions made in the aforesaid synopsis in support of the original grounds of appeal. In respect of the additional ground of appeal the Ld. Counsel for Assessee relied on aforesaid letter dated 14.06.2018, relevant portion of which is reproduced as under:

“1. The brief facts of the case are as follows :
• The appellant filed its return of income on 30.09.2010 declaring total income of Rs. 43,58,900. In the said return of income, the appellant has claimed deduction u/s 10A as follows:
– Net income of STPI unit :Rs. 2,95,11,402 – 90% of proportionate income on export turnover :Rs. 2,65,60,262 – Deduction u/s 10A :Rs. 2,65,60,262 • The report obtained u/s 10A in Form 56F dated 25.09.2010 and its detailed
calculation was filed with the Ld. AO at the time of assessment proceedings. The Ld. AO had passed the draft assessment order dated 31.01.2010 allowing the benefit of section 10A and allowed the claim of the appellant of Rs. 2,65,60,262 (being 90% of the amount of the income).

• The assessee while filing its objections with Hon’ble Dispute Resolution Panel [“DRP”] realized that while computing total income, the said deduction u/s 10A was inadvertently claimed at 90% of the eligible profit of the undertaking (i.e. 90% of Rs. 2,95,11,402) instead of 100% of the eligible profit as contemplated in Section 10A of the Income-tax Act.

• The relevant provision of section 10A is reproduced below for ready reference: “10A(1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or computer software during the previous year relevant to any Page 101 of 112 ITA No.-654/Del/2015.
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assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be —
(i) hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter;”

• The assessee raised an objection before the Hon’ble DRP-1 as follows “The learned Assessing Officer has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confirming the deduction at 90%, which was so claimed by the Company inadvertently.” The Hon’ble DRP-1 has discussed this objection at para 14.4. lto 14.4.2 of its order dated 25.09.2014. The Hon’ble DRP has rejected the claim of the appellant in light of the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd. 157 Taxmann 1 and stated that “… the tax payer has made the claim that is entitled for 100% deduction u/s 10A for the first time before this Panel..” and ” ….the proceedings before the Panel are covered in the Chapter X-IV of the Act titled ‘procedure for assessment’ and therefore, a new plea of the tax payer cannot be considered by the Panel…. ”

• Thereafter, the Ld. AO passed the final assessment order dated 24.12.2014 allowing deduction of the 90% of the eligible profits (on the basis of the draft assessment order).

• The appellant filed appeal before Hon’ble Delhi Tribunal against the said assessment order. However, the appellant inadvertently / erroneously has not challenged this legal ground while filing such appeal.

2. Under the circumstances, the assessee company raises the following additional ground:
“The learned DCIT (after incorporating Ld. DRP ‘s order) has erred in not granting 100% of the eligible profit as deduction u/s 10A(1A), and confining the deduction at 90% only”.

3. It is respectfully submitted that the aforesaid additional ground raises a question of law arising from the facts which are already on record of assessment proceedings. Therefore, the appellant may be allowed to raise the aforesaid additional ground of the appeal which may kindly be entertained in the interest of justice as held by the Hon’ble Supreme Court in the case of Jute Corporation of India Ltd. v. CIT, 187 ITR 688 (SC) and also in the case of National Thermal Power Corporation v. CIT, 229 ITR 383 (SC).”
(6.1) The Ld. CIT(DR) did not object to admission of the additional ground of appeal in view of the Assessee’s contention that relevant facts for adjudication of the Page 102 of 112 ITA No.-654/Del/2015.
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additional ground of appeal are already on record of assessment proceedings. Therefore, the additional ground of appeal is admitted. (7) In ground 1(a) of appeal, the Assessee has objected to selection of two new comparables, namely: Engineers India Ltd. (“EIL” for short) and Mahindra Consulting Engineers Ltd. (“Mahindra” for short). (7.1) As far as the comparable of EIL is concerned, the Ld. Counsel for Assessee contended that this was a Government entity and Related Party Transactions exceeded 25%. He submitted that Mumbai Bench of ITAT, in the case of Thyssenkrupp Industries India (p.) Ltd. vs. Addl. CIT. [2013] 33 taxmann.com 107 (Mumbai – Trib.) affirmed by Hon’ble Bombay High Court in [2016] 68 taxmann.com 248 (Bombay), has held: “The second reason is that Engineers India Limited earned income from turkey project by successfully completing the project of IOCL and other Public Sector Undertakings. In that sense of the matter, the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables.” The Ld. Counsel for Assessee further submitted that this decision of Mumbai Bench of ITAT has been followed by Co-ordinate Benches of ITAT, Delhi in the cases of Bechtel India (P.) Ltd vs. DCIT [2016] 66 taxmann.com 6 (Delhi-Trib.), AT & T Communication Sevices India (P.) Ltd. vs. ACIT [2018] 91 taxmann.com 58 (Delhi-Trib.) and Honda Trading Corp. (India) (P.) Ltd. vs. DCIT [2014] 44 taxmann.com 333 (Delhi-Trib.). The Ld. Page 103 of 112
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Counsel also relied on the decision of Co-ordinate Benches of ITAT, Delhi in the case of Eli Lily & Co. (India) Ltd. vs. ACIT [2018] 98 taxmann.com 380 (Delhi- Trib.) giving the various reasons for rejection of EIL as a comparable company. Moreover, the Ld. Counsel for Assessee submitted that the scale and size of EIL was not comparable with the scale and size of the Assessee. He submitted that the total turnover of EIL was 1984.10 crores, as against the appellant turnover of 25 crores (i.e. EIL’s turnover is 80 times the turnover of appellant company) and further that even, if turnover of Consulting and engineering segment is considered, the same is 1055.33 crores, i.e. appx 42 times the turnover of appellant company. The Ld. Counsel for Assessee submitted that the assessee did not own any intangibles, and has not incurred any expenditure on R&D etc. He relied on CIT vs. Agnity India Technologies (P.) Ltd. [2013] 36 taxmann.com 289 (Delhi HC), Pr. CIT vs. New River Software Services (P.) Ltd. [2017] 85 taxmann.com 302 (Delhi HC), Sony Mobile Communications International AB vs. DDIT [2016] 69 taxmann.com 404 (Delhi-Trib.), United Health Group Information Services (P.) Ltd. vs. DCIT [2018] 90 taxmann.com 423 (Delhi-Trib.), Keystroke Pro India (P.) Ltd. vs. ITO [2018] 93 taxmann.com 189 (Delhi-Trib.) and St- Ericsson India (P.) Ltd. vs. Addl. CIT [2017] 79 taxmann.com 207 (Delhi- Trib.) for the proposition that company with very high turnover should not be considered as a comparable. He further submitted that a giant company in terms of risk profile, nature of services, number of employees, ownership of branded products Page 104 of 112 ITA No.-654/Del/2015.
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and brand related profits, etc., could not be compared with Assessee which was simply a captive unit rendering services to its AE alone without acquiring any intellectual property. The Ld. Counsel for Assessee further submitted that EIL had an abnormally high margin at 67.77% which was extremely high compared to average margin of Consulting & Engineering Industry, which was 9.79% and he contended that EIL cannot be selected as a comparable in view of the abnormally high profit margins. The Ld. Counsel for Assessee also submitted that the audited accounts of EIL do not contain segmental profit and loss account and balance sheet due to which it was not possible to compute the working capital adjustment in the case of EIL. Relying on Blackrock Services India (P.) Ltd. vs. ACIT [2018] 93 taxmann.com 251 (Delhi-Trib.) and Messe Dusseldorf India (P.) ltd. vs. DCIT [2018] 90 taxmann.com 159 (Delhi-Trib.), the Ld. Counsel for Assessee contended that EIL cannot be taken as a suitable comparable company in the absence of its segmental accounts.

(7.2) The Ld. CIT(DR), in response, submitted that although EIL, a Public Sector Undertaking, had rendered services to other Government companies and to Government entities; and in that sense had a substantially high ratio of Related Party Transactions, yet EIL had to compete with other private sector companies and entities to remain in business. Therefore, he contended that the fact that EIL had substantially high Related Party Transactions, was not relevant. Further, he submitted that merely Page 105 of 112 ITA No.-654/Del/2015.
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because EIL had high profitability or because its scale and size was large; EIL cannot be rejected as a comparable.

(7.2.1) However, the Ld. CIT(DR) failed to bring any distinguishable facts to our notice in respect of the Assessee in appeal before us, to make us consider any departure from view already taken by Co-ordinate Benches of ITAT, Delhi in respect of EIL as a comparable, in the aforesaid precedents, namely Bechtel India (P.) Ltd vs. DCIT (supra), AT & T Communication Sevices India (P.) Ltd. vs. ACIT (supra), Honda Trading Corp. (India) (P.) Ltd. vs. DCIT (supra), Eli Lily & Co. (India) Ltd. vs. ACIT (supra),Blackrock Services India (P.) Ltd. vs. ACIT (supra), and Messe Dusseldorf India (P.) ltd. vs. DCIT (supra). As no material differences on facts have been brought for our consideration by the Ld. CIT(DR), therefore, respectfully following the precedents in the cases of Bechtel India (P.) Ltd vs. DCIT (supra), AT & T Communication Sevices India (P.) Ltd. vs. ACIT (supra), Honda Trading Corp. (India) (P.) Ltd. vs. DCIT (supra), Eli Lily & Co. (India) Ltd. vs. ACIT (supra), Blackrock Services India (P.) Ltd. vs. ACIT (supra) and Messe Dusseldorf India (P.) ltd. vs. DCIT (supra); we also hereby hold that EIL is not to be included as a comparable in the case of the Assessee in appeal before us.

(7.3) As regards, comparable of Mahindra, the Ld. Counsel for Assessee submitted that the issue is squarely covered by order of Co-ordinate Bench of ITAT, Delhi in Assessee’s own case vide order dated 02/05/2017 in ITA No. 2133/Del/2014 for AY Page 106 of 112 ITA No.-654/Del/2015.
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2009-10; wherein ITAT has remanded back this comparable to Ld. TPO/AO to check the outsourcing expenses with the directions to exclude this comparable if the assessee is able to substantiate its claim that most of the work carried out by Mahindra was outsourced whereas the assessee had not or minimal outsourcing. The Ld. Counsel for the Assessee submitted that in this year also the facts are similar. He drew our attention to the fact that while Assessee is rendering services by employing its own employees whereas roughly 16% of the activity carried out by Mahindra has been outsourced. Therefore, its business model is different from appellant and, hence, cannot be selected as a comparable company. He further submitted that Mahindra has been specifically excluded by the Hon’ble Delhi Tribunal as the comparable company in view of highly technical capabilities of executing infrastructure development projects in the cases of Rolls-Royce India(P.) Ltd. vs. DCIT [2016] 69 taxmann.com 426 (Delhi-Trib.) and Alcatel-Lucent India (P.) Ltd. vs. DCIT [2017] 788 taxmann.com 157 (Delhi-Trib.). On the other side, the Ld. CIT(DR) submitted that this issue may be remanded back to TPO/AO for this year also, as was done by Co-ordinate Bench of ITAT, Delhi in Assessee’s own case for AY 2009-10. As neither side [neither the Ld. Counsel for Assessee, nor the Ld. CIT(DR)] has brought any material facts to our attention to distinguish facts and circumstances of this year from AY 2009-10; we respectfully follow the order of Co- ordinate Bench of ITAT, Delhi in Assessee’s own case for AY 2009-10 and set aside this issue regarding comparable of Mahindra to the file of TPO/AO for fresh order, Page 107 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

with the direction to exclude Mahindra as a comparable if the assessee is also to substantiate its claim that most of the work carried out by Mahindra was outsourced whereas the assessee had not or minimal outsourcing. (8) In ground 1(b) of appeal the Assessee objected to rejection of four comparables selected by the Assessee, namely Central Mine Planning & Design Institute Ltd., IOT Design & Engg. Ltd., Simon India Ltd. and Petron Engineering Construction Ltd.

(8.1) At the time of hearing before us Ld. Counsel for the Assessee submitted that in respect of the first three of these four comparables, the appeal was not pressed. He informed that the appeal was being pressed only in respect of Petron Engineering Construction Ltd. He submitted that the disputed issue regarding selection of Petron Engineering Construction Ltd. as a comparable is covered in favour of the Assessee by order of Co-ordinate Bench of ITAT, Delhi in Assessee’s own case for AY 2009-10. He referred to the following relevant portion of order dated 02.05.2017 of Co-ordinate Bench of ITAT, Delhi in Assessee’s own case for AY 2009-10 in ITA No. 2133/Del/2014 regarding Petron Engineering Construction Ltd.: “…. We are of the considered opinion that there is no functional dissimilarity between the tested party and the comparable as both of them are providing similar services although the sectors might be a little different and the Ld. TPO was wrong in excluding it. We direct the inclusion of this comparable in the final set of Page 108 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

comparables.” On the other side the Ld. CIT(DR) relied on the order of the lower authorities.

(8.1.1) However, the Ld. CIT(DR) failed to bring any material facts to our attention to distinguish the facts and circumstances of this year with AY 2009-10. (8.2) In the absence of any material facts brought to our notice by either side to distinguish the facts and circumstances of this year with AY 2009-10, we respectfully follow the order of Co-ordinate Bench of ITAT, Delhi in Assessee’s own case for AY 2009-10 and direct the inclusion of Petron Engineering Construction Ltd. as a comparable.

(9) The second ground of appeal is against initiation of penalty proceedings U/s 271(1)(c) of I.T. Act. However, on perusal of Section 253 of I.T. Act it is found that initiation of penalty proceedings U/s 271(1)(c) of I.T. Act is not appealable. Therefore, this ground of appeal is not maintainable. Accordingly, second ground of appeal is dismissed, being not maintainable.

(10) Coming to the additional ground of appeal, the Ld. Counsel for Assessee submitted that the additional ground of appeal raises a question of law arising from the facts which are already on record of assessment proceedings. He relied on the Page 109 of 112 ITA No.-654/Del/2015.
Haldor Topsoe India Pvt. Ltd., New Delhi.

cases of Jute Corporation of India Ltd. vs. CIT 187 ITR 688 (SC) and National Thermal Power Corporation vs. CIT 229 ITR 383 (SC) in support of prayer for admission of the additional ground of appeal. The Ld. CIT(DR) did not oppose the admission of the additional ground of appeal. However, he submitted that the issue may be restored to the file of the AO for verification with records. In National Thermal Power Co. Ltd. vs. CIT 229 ITR 383 (SC), the Hon’ble Supreme Court held:”… where the Tribunal is only required to consider the question of law arising from facts which are on record in the assessment proceedings, there is no reason why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.” Respectfully following National Thermal Power Co. Ltd. vs. CIT (supra), we admit the additional ground of appeal and restore this issue to the file of the AO for fresh order in accordance with law after verification of facts from assessment records.

In the result, the appeal is partly allowed.

Order pronounced in the open court on 26/12/2018 Sd/- Sd/- (BHAVNESH SAINI) (ANADEE NATH MISSHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 26/12/2018
Pooja/- Copy forwarded to: 1. Appellant Page 110 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. 2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI Page 111 of 112 ITA No.-654/Del/2015. Haldor Topsoe India Pvt. Ltd., New Delhi. Date of dictation On computer in chamber of member, completed in 21.12.2018
Date on which the typed draft is placed before the
dictating Member
Date on which the typed draft is placed before the
Other Member Date on which the approved draft comes to the Sr.
PS/PS Date on which the fair order is placed before the
Dictating Member for pronouncement Date on which the fair order comes back to the Sr.
PS/PS
Date on which the final order is uploaded on the
website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant
Registrar for signature on the order Date of dispatch of the Order Page 112 of 112

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