DOOSAN POWER SYSTEMS INDIA P.LTD,HARYANA vs. JCIT CORPORATE CIRCLE-1(1), CHENNAI

These appeals by the assessee are arising out of the assessment order framed by the DCIT, Corporate Circle 1(1), Chennai u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide order dated 30.05.2017 and rectification order u/s.154 of the Act dated 17.01.2020 passed by the JCIT, Corporate Circle 1(1), Chennai as per the direction of the Dispute Resolution Panel, Bengaluru dated 04.04.2017 for the assessment year 2013-14.

The first issue raised by assessee is as regards to the assessment order framed u/s.143(3) r.w.s. 144C of the Act following the directions of TPO & DRP directing the AO to make transfer pricing adjustment by taking the comparable of Acropetal Technologies Limited (‘Acropetal’). For this, assessee has raised the following Ground No.3:-

Brief facts are that the assessee company is engaged in the business of designing, building, installation and maintaining engineering plants with specialization in thermal and coal power plants. The assessee company renders engineering services to its associated enterprises Doosan Heavy Industries & Construction Co. Ltd. The TPO scrutinized the international transactions entered into by the assessee and analyzed the transactions and the margins for the manufacturing and engineering segments by computing the OP & OI of manufacturing segment at 10.48% and engineering segment at 3.75% of OP & OC. The assessee has taken the data of comparables with respect to financial years 2010-11, 2011-12 & 2012-13 and arrived at the arithmetic mean for the manufacturing segment at 10.48% and for engineering services segment at 3.75%. The TPO carried out independent search for comparables on the basis of single year data/margin after applying the following filters in EDS and consultancy segments:-

Now, the ld.counsel for the assessee before us only requested that the assessee wants exclusion of this comparable only i.e., Acropetal Technologies Ltd. The ld.counsel for the assessee very fairly admitted that assessee in its TP report has already included Acropetal Technologies Ltd., but he stated that the data for financial years 2010-11 & 2011-12 was available but for financial year 2012-13, no data was available and he drew our attention to page No.128 of assessee’s paper- book. The ld.counsel stated that the assessee has taken weighted average method and by that, in the case of Acropetal Technologies Ltd., it was 11.49% before the financials of financial year 2012-13 was taken into consideration and by taking Acropetal Technologies Ltd., the assessee has computed and since the margin earned by assessee is higher than the weighted average margin earned by comparable companies, it was reasonably concluded that the international transaction of rendering engineering services appears to be consistent with arm’s length standard from the perspective of Indian transfer pricing. But now the ld.counsel stated that since the margin of this year in the case of Acropetal Technologies Ltd., is 61.11%, so the assessee wants exclusion of the same for two reasons. First, the reason is that the OP / OC in the case of Acropetal Technologies Ltd., is 61.11% as against the PLI of manufacturing segment of the assessee is 10.48%. The ld.counsel stated that this higher margin was although considered by the DRP and he took us through the DRP’s order and argued that firstly the DRP has not considered that such a higher margin company cannot be considered as comparable because high profit and high loss making companies cannot be considered as comparable as per various judicial decisions as well as OECD guidelines. Second reason given by ld.counsel is that the Acropetal Technologies Ltd., has earned significantly abnormal margin on year to year in its engineering design segment and apart from that, it enjoys significant benefit on account of intangibles developed and owned by it through its R&D centers whereas the assessee has not incurred any expenditure on R&D and hence, Acropetal Technologies Ltd., should not have been taken as comparable. The ld.counsel stated that the DRP has wrongly relied on Clause 8 of the agreement that all documents, data, engineering drawings and material will be submitted by the assessee to the AE and same will be the property of the AE. He also contested the finding of the DRP that intangibles created as a result of engineering design service by the assessee are passed on to the AE without any additional compensation. Apart from this, the ld.counsel also drew our attention to the Co-ordinate Bench decision in the case of J Ray DcDermott Engineering Services Pvt. Ltd., vs. DCIT in wherein the Tribunal has also considered the alleged irregularities committed by Acropetal Technologies Ltd., and consequent investigation / enquiry by SEBI in regard to irregularities committed in the financials of the company and finding that the SEBI has clearly stated that the company has committed a fraud in utilization of funds raised by IPO and has diverted majority of funds to non- business purposes, which has a significant bearing on operating margin. The ld.counsel also filed copy of report of Adjudicating Officer of SEBI in the case of Acropetal Technologies Ltd., dated 05.07.2018 vide No.SEBI/EAD-9/SM/JR/19001/11/2018, wherein SEBI has considered the fraud in utilization of funds raised in IPO and diversion of majority of funds for non- business purposes. The ld.counsel for the assessee also drew our attention to para 9 of the order of the Tribunal in the case of J Ray McDermott Engineering Services Pvt. Ltd., supra, and stated that Acropetal Technologies Ltd., is not a good comparable and hence, it should be directed to be excluded.

On the other hand, the ld.CIT-DR argued that the higher margins of Acropetal Technologies Ltd., cannot be a reason for exclusion of this comparable because this company is engaged in engineering design segment, the assessee company is also in the same business. But, he could not controvert the argument of ld.counsel that the Acropetal Technologies Ltd., had committed financial fraud by utilizing the funds raised in IPO for some other purposes other than business purpose.

We have heard rival contentions on the issue of exclusion of Acropetal Technologies Ltd. We agree with the arguments of the ld.counsel that if we compare the financial data of Acropetal Technologies Ltd., which is giving OP / OL at 61.11% with the present assessee which gives the OP / OC in manufacturing segment at 10.48%, the profit margin of Acropetal Technologies Ltd., is very high but that alone cannot be a reason for exclusion but we have to see that the financials of Acropetal Technologies Ltd., are on the basis of a fraud committed as per clear cut finding of SEBI adjudicator, copy of which was filed before us, which is dated 05.11.2018. From the SEBI report, it is clear there are irregularities committed in the financials of the company by way of committing a fraud in utilization of funds raised in IPO and diverted majority of funds to non-business purposes which has a significant bearing on the operating margins. This is a very good reason for not accepting the Acropetal Technologies Ltd., as comparable and hence, we direct the TPO to exclude the same while computing operating margins of the assessee. In term of the above, we direct the TPO / AO accordingly.

The next issue in this appeal of assessee is as regards to exclusion of following three comparables:- i. Accuspeed Engineering Ltd. ii. Harita Techserv Ltd. iii. Kirloskar Consultants Ltd. The ld.counsel restricted his arguments to exclusion of these three comparables. For the exclusion of these three comparables, the assessee has raised following Ground Nos.4,5 & 6:-

The ld.counsel for the assessee drew our attention to the chart prepared by TPO at page 5 and rejected the above stated three companies by giving the following reasons:- Assessee’s companies Rejected Reason Accuspeed Engineering Services Rejected No sale India Ltd. Harita Techserv Ltd. Rejected (-) PLI Kirloskar Consultants Ltd. Rejected No sale The ld.counsel for the assessee before us stated that the TPO has rejected Accuspeed Engineering Services India Ltd., and Kirloskar Consultants Ltd., on account of ‘no sales’ but the assessee before TPO has made this plea that the Accuspeed Engineering Services has total turnover of Rs.12.27 crores and Kirloskar Consultants has turnover of Rs.10.39 crores. The ld.counsel for the assessee then took us through the findings given by DRP wherein the DRP has noted that these companies i.e., Accuspeed and Kirloskar cannot be considered as comparable for the reason that these two companies for which the financial for the relevant year is not available during the TP study could not have been considered by the TPO as comparable. According to DRP since assessee did not produce the financials for the relevant year before the TPO and it is not the case of the assessee that financials of this company for financial year 2012-13 was available in the public domain at the time of TP proceedings conducted by the TPO, the claim of the assessee cannot be verified and hence, the argument of assessee was rejected. The ld.counsel stated that the DRP has simply rejected the claim of assessee in the absence of financial results of these two comparables whereas the TPO himself has recorded that the Accuspeed has a total turnover of Rs.12.27 crores and Kirloskar has total turnover of Rs.10.39 crores. Hence, the ld.counsel for the assessee drew our attention to the financials filed before us in regard to Accuspeed Engineering Services Ltd., at pages 56 to 57 of assessee’s paper-book and in the case of Kirloskar Consultants Ltd., at pages 227 to 247. The ld.counsel stated that once these details are available now before Tribunal either Tribunal can decide the issue or matter can be referred back to the file of the TPO for reconsideration whether these two companies have sales or not.

On the other hand, the ld.CIT-DR has not objected for remitting the matter back to the file of the TPO but he stated that once there are no sales there is no purpose in sending back the matter to the file of the AO and he strongly supported the order of TPO and that of the DRP.

We have heard rival contentions and gone through facts and circumstances of the case. We noted that since the assessee now before us has filed financials of Accuspeed Engineering Ltd., and Kirloskar Consultants Ltd., and this is the finding of the DRP that these financials are not available either before the TPO or DRP, we feel that in the interest of natural justice, we remit back the issue of these two comparables to the file of the AO for carrying out necessary enquiry and verification and then TPO will decide whether to consider the same as comparables or not. In term of the above, these two comparables are remitted back to the file of the TPO.

The next comparable i.e., Harita Techserv Ltd., the TPO has rejected this comparable selected by assessee because there is negative PLI. The TPO also noted that this company is not in line with the business of tested party and nothing is earned from engineering design services and the TPO has noted the details of revenue earned by Harita Techserv Ltd., and tabulated the same in his order.

The ld.counsel for the assessee before us argued that Harita Techserv Ltd., is engaged in providing solutions in project design engineering, highly skilled technical engineering resources and training services for diverse industry domains. He stated that the assessee company is engaged in providing engineering design 3D modeling & detailing, legacy conversion, engineering analysis, simulation, multi-body dynamics, virtual prototyping & testing, digital manufacturing, PLM & PDM and engineering illustration and publication (EIP), etc. He argued that engineering and designing services include tool & die designing, jigs and fixtures, NC programming, machine tool modeling, digital manufacturing apart from other digital services. The ld.counsel also drew our attention to services as described in its annual return which reads as under:-  Specialized engineering staffing services for multi-industry  Strong engineering & design background – our core competency  End-to-end solutions capability  Proven expertise in dedicated development centers  Finishing school and industry-first competency development programs in association with ARAI  Capability to meet requirements of large Indian and Global customers  Process rigor with speed, flexibility and engineering design center of excellence.

On the other hand, the ld.CIT-DR supported the order of the TPO and that of the DRP.

After hearing rival contentions and going through the facts of the case, we noted that there is a contradiction in the order of TPO and that of the DRP. The TPO has simply rejected the comparable on the reason that it has a negative PLI whereas DRP has only considered that it is not financially similar whereas assessee now before us filed complete details that Harita Techserv Ltd., is also engaged in engineering design services and financially similar. This needs to be considered. We feel that let the matter be restored back to the file of the TPO in regard to this comparable and TPO will consider whether assessee is financially similar to Harita Techserv Ltd., or not.

Apart from the above one inclusion and three exclusion, the ld.counsel for the assessee has not argued any other grounds and hence, the same are dismissed as ‘not pressed’. Accordingly, the appeal of the assessee is partly-allowed for statistical purposes.

The only issue in this appeal of assessee is as against the order of AO following the directions of DRP in disallowing the Ocean Freight charges paid by assessee to M/s. Doosan Corporation Korea for non-deduction of TDS by invoking the provisions of section 40(a)(i) of the Act. For this, the ld.counsel for the assessee drew our attention to additional grounds filed vide letter dated 07.09.2022. The ld.counsel stated that the original grounds raised are withdrawn and this revised ground can be considered, but the issue is only one. For this, assessee has raised six grounds vide revised grounds which are argumentative and citation of case laws decided and hence, need not be reproduced.

Brief facts are that the assessee is also carrying out business of execution of turnkey projects of steam generating equipments, supply of spares and providing related services. In turn, assessee paid ocean freight charges to its AE M/s.Doosan Corporation Korea amounting to Rs.5,13,63,114/- but no TDS was deducted on this u/s.195 of the Act. Therefore, the DRP directed the AO to disallow this ocean freight charges paid by assessee to M/s. Doosan Corporation Korea by invoking the provisions of section 40(a)(i) of the Act. For this, the AO issued notice u/s.154 of the Act. The DRP gave direction to the AO vide order dated 17.04.2017 as under:- During the year the assessee has availed ocean freight services from its AE Doosan Corporation, Korea for which Rs. 5,13,63,114/- has been paid without deduction of tax. The assessee filed detailed submission arguing that the payment is not liable for TDS in India. The basic premises of the submission is that 'Ocean freight charges would not fall within the scope of fees for technical services under section 9(1)(vi) of the Act and under article 13 of the India-Korea DTAA. Since the same would be in the nature of business of profits under article 7 'of the DTAA. Since, Doosan Corporation does not have business activity in India, the same would not be taxable in India.'

Before us, the ld.counsel for the assessee argued that ocean freight charges would not fall within the scope of fee for technical services or royalty u/s.9(1)(vii) of the Act or under Article 13 of the India Korea DTAA. The ld.counsel for the assessee also stated that this ocean freight services would be in the nature of business provided under Article 7 of the DTAA and since M/s. Doosan Corporation Korea does not have any business activity in India, the same would not be taxable in India. The DRP finally considered the payment of ocean freight charges as royalty as defined in Explanation 2 to section 9(1)(vi) of the Act. The DRP also considered the amendment carried out by the Finance Act, 2001 w.e.f. 01.04.2002 by inserting clause 4(a) to section 9(1)(vi) of the Act i.e., royalty means consideration for the use of or right to use any industrial, commercial or scientific equipment, but not included the amount referred to in section 44BB of the Act. The DRP considered Article 12 of the DTAA and noted that the royalty means payment made as a consideration for the use of or right to use any industrial, commercial or scientific equipment and considering the judgment of Hon’ble Madras High Court in the case of Poompuhar Shipping Corporation Ltd.,vs. ITO, 360 ITR 257 held the shipping as an equipment. The DRP considered the decision of Hon’ble Supreme Court in the case of Transmission Corporation of AP Ltd., 105 taxman 742. Finally the DRP held that the payment to non-resident under contract entered into is under obligation to TDS u/s.195 of the Act but the obligation is limited only to appropriate proportion of income chargeable under the Act.

On the other hand, the ld.CIT-DR relied on the order of the DRP.

We have heard rival contentions and gone through facts and circumstances of the case. We noted that as per the facts of the case, the assessee has paid ocean freight charges to its Korean counterpart M/s. Doosan Corporation Korea for hiring of ships. Admittedly, Doosan India has engaged M/s. Doosan Corporation Korea, a company registered in Korea and a tax resident of Korea for availing services such as shipmen of goods to various ports to Chennai in India. From the invoices clearly produced before us and for example page 63 of assessee’s paper-book, the invoice clearly says that the M/s. Doosan Corporation Korea has been paid freight by Doosan Power Systems Pvt. Ltd., the assessee company for hiring of ship. Now the question arises whether these ocean freight charges will fall within the scope of fee for technical services or royalty u/s.9(1)(vi) or Article 12.3 of the DTAA. The relevant consideration paid by assessee is for hiring of ships i.e., rental or ocean freight paid for ships. The assessee’s case is covered by Article 8 of DTAA of India-Korea and therefore the rentals of ship are in the nature of profit from the operation of ship or aircraft in international traffic carried on by an enterprise of a contracting state. The amount can be taxable only in contracting state and not taxable in India. Hence, the assessee is not liable to deduct TDS and therefore, no disallowance by invoking the provisions of section 40(a)(i) of the Act. In term of the above, we reverse the order of DRP and that of the AO and allow the appeal of the assessee.

In the result, the appeals filed by the assessee in is partly-allowed for statistical purposes.