KAZSTORY ENGINEERING INDIA PVT. LTD,NEW DELHI vs. DCIT, NEW DELHI

The appeal by the assessee is preferred against the order dated 29.12.2015 of the Ld. Assistant Commissioner of Income Tax, Circle-14(1), New Delhi (“ACIT/ AO”) pertaining to assessment year (“AY”) 2011-12.

2.1 During AY 2011-12, the assessee had entered into international transaction with its Associated Enterprises (“AEs”) in respect of provision of Engineering services to AEs. The Ld. Assessing Officer (“AO”), therefore referred the case to Transfer Pricing Officer (“TPO”) who vide his order dated 29.01.2015 proposed a total adjustment of Rs. 4,27,32,829/- in respect of provision Engineering services to AEs tabulated below : Computation of Arm’s length price:-

Operational cost Rs. 13,45,03,729/-

Arm’s Length Price at a Margin of Rs. 16,71,74,685/- 24.29% Price received Rs. 12,44,41,856/-

105% of Price Received Rs. 13,06,63,949/-

Adjustment under section 92CA Rs. 4,27,32,829/- Accordingly, the Ld. TPO enhanced the income of the assesee by Rs. 4,27,32,829/-.

2.2 Aggrieved, the assessee appealed before Hon’ble DRP who vide its order dated 19.11.2015 directed the Ld. TPO to re-compute the Arm’s Length Price (“ALP”) incorporating the following observations :-

1. 1. Exclusion of IBI Chematur Engineering & Consultancy Ltd. from final list of comparables.

2. Inclusion of M.N. Dastur & Company Pvt. Ltd. and Cades Digitech Pvt. Ltd. in final list of comparables.

2.3 The Ld. TPO passed the appeal effect order dated 18.12.2015 wherein he reduced the earlier adjustment of Rs. 4,27,32,829/- to Rs. 3,72,58,527/-. Accordingly, the Ld. AO disallowed the said amount of Rs. 3,72,58,527/- and added the same to the total income of the assessee in the assessment order 2 dated 29.12.2015 passed under section 143(3) read with section 92CA(3) of the Act.

1. This ground is general in nature 1.1. That, the Learned Deputy Commissioner of Income Tax, Transfer Pricing Officer -2(3) (1) (hereinafter referred as ‘Ld. TPO’)/ Hon’ble DRP has grossly erred in making/upholding an adjustment of Rs. 3,72,58,527 in respect of provision of engineering services to associated enterprises (“AEs”) and in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case.

2. Rejection of the economic analysis of the Appellant 2.1. That on the facts and circumstances of the case and in law, Ld. TPO/Hon’ble DRP have erred in not accepting the economic analysis of the Appellant, for determination of the arm’s length price (ALP’) in. connection with the impugned international transactions. 2.2. That the Ld. TPO/ Hon’ble DRP has grossly erred in facts and circumstances by rejecting the Comparable Uncontrolled Price (“CUP”) Method as the most appropriate method (“MAM”) followed by the assessee in the Transfer Pricing documentation for the transaction of provision of engineering services to AEs citing the following reasons: A. Price which is quoted cannot be compared with the price which is charged B. Difference in geographical location of receipt of services

3. Adoption of the most appropriate method (“MAM”) 3.1 That the Ld. TPO/ Hon’ble DRP erred in facts and in law in summarily rejecting the submission/s of Appellant without conducting the analysis of selecting the MAM as prescribed under Section 92(C ) read with Rule 10C of the Rules.

3.2. The Ld. TPO/ Hon’ble DRP erred in law by upholding the determination of the ALP of the international transaction using TNMM without following the manner of applying the TNMM prescribed under Rule 10B(1)(e) of the Rules. 3.3. Without prejudice to the above grounds, the Ld. TPO/ Hon’ble DRP for the purpose of benchmarking the transaction of provision of engineering services has erred in A. selecting inappropriate filters B. incorrect exclusion/inclusion of comparable companies 3.4. The Ld. TPO hasn’t considered the correct margins as furnished by the Assessee as directed by the DRP in its order. 3.5. The Ld. TPO/ Hon’ble DRP grossly erred on facts and in law in not appreciating that ‘Engineering Expenses’ of Rs. 3,54,36,435/- relates to actual operating expenditure pertaining to non-AE’s and could not be the subject matter of allocation on an ad hoc basis to expenditure relatable to international transaction with AEs. 3.6. Without prejudice to the above ground, the Ld. AO/TPO has erred on facts and in law in not considering the segmental profitability of the Assessee and Hon’ble DRP erred in not adjudicating this ground. 3.7. The Learned TPO/ Hon’ble DRP has erred by not providing the capacity utilization adjustment as claimed by the Assessee. 3.8. The TPO/ Hon’ble DRP has erred, in law and facts, by not making suitable adjustment to account for the differences in the risk profile of the Assessee vis-a-vis the comparable companies 4. Transfer pricing adjustment based on incorrect assumptions 4.1. The Ld. TPO/ Hon’ble DRP erred in passing an order that is perverse in law ignoring the relevant submissions, information and documents provided by the Appellant to substantiate the application of CUP methodology to benchmark the captioned international transaction of provision of engineering services, and based on a preoccupied mind 4 reached at an inappropriate conclusion that use of TNMM for benchmarking the impugned international transaction is more sound.

5. Levying interest under section 234A, 234B, 234C and 234D 5.1. That on the facts and in the circumstances of the case, the Ld. AO has erred in charging interest under 234A, 234B, 234C and 234D of the Act, as consequences of the additions made in the assessment order passed under section 143(3) read with section 144C of the Act.. 5.2. The Appellant denies its liability to such interest and prays that the AO be directed to delete the levy of aforesaid interest as it is entirely a result of additions/disallowance and consequential in nature.

6. Penalty proceedings initiated u/s 271(1)(c) of the Act 6.1. The Ld. AO has erred in initiating penalty proceedings under Section 271(1 )(c) read with Section 274 of the Act against the Appellant.”

3.1 The assessee requested for admission of additional ground No. 7 vide letter dated 06.11.2017 which reads as under :-

Ground No. 7 – Without prejudice to our other grounds of appeal the benefit of +/-5 per cent variation from the mean, which is permitted under the provisions of Section 92C(2) of the Income Tax Act, 1961 should be allowed, as applicable.”

3.2 Since the assessee has raised legal issue, we admitted the additional ground No. 7 for adjudication.