WORLEY SERVICES INDIA PVT LTD(PREDECESSOR COMPANY WORLEY INDIA PVT LTD),MUMBAI vs. DCIT, CIRCLE 3(3)(1), MUMBAI

PER PAWAN SINGH JUDICIAL MEMBER: 1. This appeal by assessee is directed against the additions in assessment order dated 26.10.2024 passed under section 143(3) r.w.s. 144C(13) r.w.s. 144B for A.Y. 23021-22, passed in pursuance of direction of Dispute Resolution Panel (DRP)-2 dated 21.09.2024. The assessee in its appeal has raised following grounds of appeal: “General Ground 1. erred in assessing total income of Appellant at INR 60,01,12,064 as against the returned income of INR 0 as computed by the Appellant. Time Barred assessment liable to be quashed 2. erred in not passing the final assessment order within the time limit prescribed under section 153 of the Act and passing the draft assessment order in the time limit prescribed under section 153 of the Act, accordingly the assessment proceedings are invalid and ought to be quashed;

A)Transfer Pricing grounds

Transfer Pricing adjustment amounting to INR 60,01,12,064 on provision of design and engineering services (D&E)

Rejection of economic analysis

Undertaking an entity level benchmarking approach

5.erred in rejecting segmental profitability without considering that the same was accepted by the Learned TPO in the prior year i.e. AY 2020-21 wherein costs were allocated using similar approach as in the year under consideration for provision of D&E services;

Rejection of comparables adopted by the Appellant

Rejection of additional companies identified by the Ld. TPO

 Wapcos Ltd  Consulting Engineers Group Ltd  Satyam Venture Engineering Pvt Ltd: Risk Adjustment 12. erred in not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables;

B)Corporate Tax Grounds

Granting of unabsorbed claim of deduction under section 80G of the Act against assessed income

Non-Grant of advance tax credit of INR 6,10,00,000

Incorrect levy of consequential interest payable and incorrect computation of interest receivable due to eligible refund

Initiation of penalty proceedings

The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.” 2. Rival submissions of both the parties have been heard and record perused. At the outset of hearing, the learned Authorised Representative (ld. AR) of the assessee submits that ground no. 1 is general. Further, he is not pressing ground no. 6 and 12. Considering the submission of assessee, we find that ground no. 1 is general and need no specific adjudication. Further, as per the statement of ld. AR, ground no. 6 and 12 are dismissed as not pressed. 3. Ground no. 3 to 5 relates to transfer pricing adjustment on account of provision of design and engineering services (D & E). Ground no. 3 relates to rejection of economic analysis, ground no. 4 relates to undertaking an entity level benchmarking project and ground no. 5 relates to rejecting segmental profitability. 4. Facts in brief qua these grounds of appeal are that is in the business of providing integrated consulting engineering, design, architecture and project management services for hydrocarbons, architectural, civil, marine, industrial and structural works including associated mechanical, electrical, piping and instrumentation services in various fields. Consequent upon reporting international transaction with its AE for rendering and availing of design and engineering (D & E) services in its Transfer Pricing Report (TPSR) a reference was made by assessing officer (AO) to transfer pricing officer (TPO) for computation of arm’s lengths price. Before TPO the assessee furnished its TPSR. The assessee adopted Transaction Net Margin Method (TNMM) as most appropriate method. The assessee selected six comparable companies having 35th percentile at 13% and 65th percentile at 14.64 % thus, having mean margin of 13.64%. The assessee AEs segmental mean margin was at 45.38% (para 6.2 of TPO). The assessee claimed that operation profit / operating cost (OP/OC) of AE segment is 22.84%. Thus, the assessee claimed its transaction at ALP. The TPO rejected segmental accounts by taking view that the same are not accurate and reliable by taking view that assessee failed to justify huge profit at 22.8% at AE segment and huge loss of (-17.50%) in non AE segment.The assessee failed to justify huge difference in the AE and non AE segment level for engineering design services. The TPO rejected certain comparable and included certain new comparable. Ultimately, the TPO selected four final set of comparable and worked out mean margin of such comparable at 22.15%(para-9.0 of TPO order).The TPO after considering the submission of assessee and on making his own exercise suggested adjustment of Rs. 59.09 crore, as per working in para 9.1 of his order. On receipt of report of TPO, the assessing officer passed draft assessment order. The assessee exercised its option to file objection before Dispute resolution Penal (DRP) wherein the rejection of segmental profitability and adjustment suggested by TPO was upheld in its direction dated 21.09.2024. Consequently, on receipt of direction of DRP, final assessment order under section 144C(13) r.w.s. 143(3) dated 26.10.2024 was passed. 5. The learned Authorised Representative (ld. AR) of the assessee submits that assessee provided design and engineering services (D&E) to its global affiliates (associated enterprises) and third-party client that is non-AEs. The engineering services mainly are divided in two segments, firstly, AE segment and secondly non-AE segment.For AEs segment, the ld AR of the assessee submits that the assessee engaged in low-end work on a low-risk sub-contract basis for its AEs. This work primarily includes engineering and drafting of designs and drawings based on conceptual and basic engineering data. As the primary contractor, AEs handle strategic functions, marketing, and pre-sales support, while assuming overall service liability and credit risks for their customers. The detailed functional analysis forming part of the transfer pricing study of the assessee has been filed on record at page no. 875 to 879 of supplementary paper book. 6. For non-AE segment, the ld AR of the assessee submits that assessee undertakes full-fledged engineering work directly for end customers including Public Sector Undertakings ('PSUs) in India. In addition to delivering technical services for the project, this work includes identifying and pursuing the project opportunity, formulating the execution and, resourcing strategy, developing the commercial proposition, project management etc. As the primary contractor, assessee performs all strategic functions, marketing, and pre-sales support, and assumes overall service liability and credit risks for its third party client projects. The assessee undertakes entrepreneurial functions while rendering design engineering services to clients in the non-AE segment. Accordingly, the assessee assumes contractual liabilities such as rectifying defects in case of faulty work at its own cost and payment of liquidated damages in case of delay in performance. On the basis above facts, the ld. AR of the assessee submits due to the differences in the functions, risks and assets ('FAR') profile, it is essential for using segmental margins instead of entity level margins for benchmarking the transaction of rendering of engineering services to its AEs.Audited segmental P&L account includes data of throughput hours for AE and non-AE segment. The assessee maintains a robust system for maintaining time spent by personnel for projects with AEs as well as non-AEs. This is recorded by way of time sheets for each project.These time sheets enable precise time mapping for each employee, indicating how much time is spent on each project and for each client. This system allows the assessee to reasonably allocate the number of hours required for various projects.Accordingly, the throughput hours considered by the assessee, in its segmental account are derived from this robust and systematic process. To substantiate such facts the assessee furnished the evidences in the form of extract of the details of throughput hours AE and Non-AE wise (cost allocation base for segmental profitability) as per page 880 to 882 of supplementary paper-book).Sample snapshot of the timesheet filed by a certain employee as per page 883 to 884of supplementary paper-book. Audited segmental P&L account for FY 2020- 21 as per page 885 to 887 of supplementary paper-book. 7. The ld. AR of the assessee submits that during FY 2020-21, assessee incurred losses in its non-AE segment, which were attributable, inter-alia, to the various factors like; (i) The COVID-19 pandemic adversely affected project timelines, resulting in incurrence of increased hours which were not previously budgeted for and the cost for which could not be recovered. (ii) The complexity of certain projects necessitated post facto allocation of senior personnel to such projects which was not initially envisaged and the cost for which could not be recovered. (iii) The assessee had to undertake re-work in case of some projects, the cost for which could not be recovered. (iv) The assessee was liable to pay liquidated damages on account of delay in completion of projects. The assessee provided a breakdown of non AE segment between project with the Government / PSU entities and other entities in the following manner: Particulars Key AE Segment Non-AE Segment Total Engineering Design Government Other Total Services Entities Entities Count of 7 47 54 customers Total Hours A 30,62,853 5,04,140 5,30,844 10,34,983 40,97,836 (Hours) P@L Total operating B 6,86,39,33,662 61,22,51,762 99,48,83,156 1,60,71,34,918 8,47,10,68,580 income (INR) Less: Direct C 3,05,69,52,422 52,34,98,117 53,09,09,903 1,05,44,08,020 4,11,13,60,442 Cost (INR) Gross Margin D=B-C 3,80,69,81,240 8,87,53,644 46,39,73,254 55,27,26,898 4,35,97,08,138 (INR) Less: G&A E 2,53,08,79,940 43,53,24,050 45,83,82,695 89,37,06,745 3,42,45,86,685 (INR) Net operating F=D-E 1,27,61,01,300 (34,65,70,405) 55,90,558 (34,09,79,847) 93,51,21,453 Margin (INR) Net Margin (%( F/(C+E) 22.84% -36.15% 0.57% -17.50% 12.41% Per hour D/A 1,243 176 874 534 recoverable rate (INR) 8. The ld. AR of the assessee further submits that analysis of aforesaid details indicates that hourly recoverable rate (calculated as gross profit divided by total hours) is significantly lower in the Non-AE segment with an ever greater decline observed in government projects. Thus, trend highlights that the non-AE segment is operating at suboptimal profitability levels. Thereby substantiating the losses incurred in this segment. In the non-AE segment, the revenue generated by the assessee comprises 38% from government entities and 62% from other public and private entities. While the costs incurred for both segments were consistent at 50%. The disproportionate loss of 36.15% in Government projects heavily influenced the overall non-AE segment’s negative margin. 9. The assessee has made profit in non-AE segment; losses was incurred only in F.Y. 2020-21 and in FY 2021-22 representing and aberration from the overall trend. The details from F.Y. 2017-18 to F.Y. 2021-22 were furnished before the lower authorities. On the basis of aforesaid submissions, the ld. AR of the assessee submits that (a) the assessee has a robust system in place and the audited segmental data is prepared accordingly. (b) A reasonable explanation has been provided for the 22.84% profit in the AE segment and the 17.50% loss in the Non-AE segment. (c) The losses in the Non-AE segment for AY 2021-22 was primarily due to COVID-19, with government entity projects being most affected. (d) In subsequent years, profit margins have improved, indicating recovery. 10. The ld AR of the assessee submits that no consistent approach is followed by the TPO. The segmental profitability was accepted by the TPO in the prior year i.e. AY 2020-21 and subsequent year le. AY 2022-23, wherein the costs were allocated using similar approach as that of AY 2021-22 and no upward adjustment was made towards rendering D&E services. As there have been no change in the facts and circumstances in AY 2021-22 vis-à-vis the prior AY i.e. AY 2020-21 and no additional facts have emerged in the proceedings in AY 2021-22 which would have a bearing on the outcome of AY 2020-21, by applying the principle of consistency, the TPO cannot adopt a different view/ position for determination of the ALP of rendering of D&E services.The TPO order and audited segmental accounts of AY 2020-21 is placed on record at Page 890 to 894 of the supplementary paper-book.As there have been no change in the facts and circumstances in AY 2021-22 vis-à-vis the subsequent AY i.e. AY 2022-23 and no additional facts have emerged in the proceedings in AY 2021-22 which would have a bearing on the outcome of AY 2022-23, by applying the principle of consistency, the learned TPO cannot adopt a different view/ position for determination of the ALP of rendering of D&E services. The TPO order and audited segmental accounts of AY 2022-23 is filed at Page 895 to 904 of the supplementary paper-book. While concluding submissions on the segmental issue, the ld AR of the assessee submits that AO/ TPO has erred in not accepting the segmental TNMM analysis adopted by the assessee and in using an aggregated approach at an entity level, to determine the arm's length nature of international transactions undertaken by the assessee due to the reasons; (a) disregarding the functional and economic analysis undertaken by the Appellant as documented in the transfer pricing report; (b) not accepting the segmental margin analysis submitted by the assessee; (c) disregarding the submissions filed by the assessee before the ld. TPO; (d) erred in applying the principle of consistency by adopting a different view/position in determining the ALP of rendering of D&E services as determined in the AY 2020-21 and AY 2022-23 and (e) adopting an erroneous basis to state that entity level approach should be adopted since rational criteria had been followed to allocate the cost. The ld AR of the assessee prayed that segmental analysis may be accepted, and the margin earned by the AE segment is to be considered for determining ALP of international transaction. The ld. AR of the assessee submits that in case segmental margin of assessee is accepted, there would be no need to go for exclusion or inclusion various comparables from the final set of comparable and all other TP issue will become academic. 11. On the other hand, learned Commissioner of Income Tax – Departmental Representative (ld. CIT-DR) for the Revenue supported the order of lower authorities. The ld. CIT-DR submits that no scientific basis for profit in AE segment and loss in non-AE segment was provided by assessee. There was huge difference between margin earned from AE segment and Non-AE segment. The assessee relied merely on the CA certificates which is not reliable. The principle of res judicata is not applicable in the Income tax proceedings. Each and every year has to be considered on the basis of its segmental profit and on the basis of transaction. 12. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that the TPO rejected segmental accounts by taking view that the same are not accurate and reliable by taking view that assessee failed to justify huge profit at 22.8% at AE segment and huge loss of (-17.50%) in non AE segment. No specific defect if pointed out by the TPO in his order. We find that in response to the show cause notice by TPO, the assessee filed its detailed reply explaining the difference in AE and non-AEs segmental profit as has been argued before us. The TPO has not considered such detailed explanation before rejection of segmental profit differences. We find that before TPO as well as before DRP the assessee specifically stated that similar segmental profitability has been accepted by TPO in previous and subsequent assessment years. To substantiate such submissions, the assessee has also filed orders of TPO in earlier and subsequent years. No doubt that principal of res-judicata is not applicable in the income tax proceedings, however, the tax authorities are bound to follow the principal of consistency, if there is no variation in facts. No variation in facts in brought on record by TPO. 13. We find that Mumbai Tribunal in Tata Communication Transformation Services Ltd Vs DCIT (2015) 54 taxmann.com 24 (Mum-Trib) it was held that Segmental results determined by assessee could not be rejected merely on ground that accounts segmental results were unaudited or segmental break up was done after accounts were closed. Further, Mumbai Tribunal in Spectrum Technologies (P) Ltd Vs DCIT (2024) 160 taxmann.com 763 (Delhi-Trib) held where assessee had provided segmental account and had also allocated expenses and had given basis of allocation, merely because segmental accounts were not audited, segmental accounts could not be rejected without pointing out any specific defect/error/fallacy in them. Delhi Tribunal in SMA Nutrition India (P)

Limited Vs Ad CIT (2022) 142 taxmann.com 201 (Delhi-Trib) also held that segmental profitability cannot be discarded merely on basis that same are not certified segmental accounting cannot be rejected without pointing out defects in allocation done by assessee. 14. We are conscious of the facts that reports of auditors are not absolutely binding on tax authorities, as the Income Tax Department performs a quasi-judicial function and possesses the statutory right to verify claims independently of an audit report, however, it bears high evidentiary value. Thus, it cannot be summarily ignored or discarded without recording valid, legal and factual reasons. Now again adverting to the facts of the case in hand, we find that segmental data furnished by assessee are duly supported with the reports of independent audit reports. The TPO has not given specific finding as to why such reports are not reliable. Thus, we do not find any justification in rejecting segmental profitability in the year under consideration, when the same has been accepted by TPO in previous and subsequent years. 15. In the result, ground no. 3 to 5 are allowed. Considering the fact that we have accepted the submission of ld. AR of the assessee on segmental margins in AE and Non-AE segment, therefore, as per the submissions of ld. AR of the assessee the adjudication on all other issue on transfer pricing adjustment i.e. on the validity of exclusion or inclusion of various comparables as raised in ground no. 7 to 11 have become academic. Hence, AO / TPO is directed to recompute the adjustment having regards to the segmental data of AE and non-AEs segmental profitability on the basis of four final set of comparable. 16. Ground no. 13 relates to granting of unabsorbed claim of deduction under section 80G against the assessed income. Ground no. 14 relates to non- allowance of advance tax credit. The ld. AR of the assessee submits that application for rectification is pending on both the issues before AO, therefore, necessary direction may be given. 17. On the other hand, the ld. CIT-DR submits that necessary direction may be given to pass order on both the issues. Considering the submission of both the parties, the AO is directed to consider both the issues and pass the order in accordance with law. Ground no. 15 & 16 are consequential or pre mature, which needs no specific adjudication. 18. In the result, appeal of assessee is partly allowed. Order was pronounced in the open Court on 24/06/2026. Sd/- Sd/- GIRISH AGRAWAL PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, Dated: 24/06/2026 Biswajit Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order

Assistant Registrar ITAT, Mumbai