SAIPEM INDIA PROJECTS PRIVATE LIMITED,CHENNAI vs. ACIT COMPANY CIRCLE VI(1), CHENNAI

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ITTPA 8/CHNY/2018Status: DisposedITAT Chennai07 July 2026AY 2013-1410 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal decided both issues in favor of the assessee. Regarding the transfer pricing issue, the Tribunal excluded two comparable companies: I Design Engineering Solutions Ltd. because it failed the related party transaction (RPT) filter (35.94% RPT income against the TPO's filter of <25%), and Tata Consulting Engineers Ltd. due to a lack of segmental information and its diversified activities beyond engineering design, citing the Delhi High Court's decision in PCIT vs. Bechtel India Pvt. Ltd. The Tribunal directed the TPO to re-compute the ALP. Concerning the disallowance under Section 40(a)(i), the Tribunal noted that a coordinate bench in the assessee's own case had held that the impugned payments did not fall under the definition of 'Royalty' as per the DTAA and therefore did not warrant withholding tax deduction under Section 195. Consequently, the disallowance made under Section 40(a)(i) for failure to deduct tax at source was deleted. The appeal was allowed.

What were the facts?

The assessee, Saipem India Projects Private Limited, filed an appeal against the assessment order for AY 2013-14, passed by the Dy. Commissioner of Income Tax under Section 143(3) r.w.s 144C(13) of the Income Tax Act, 1961. The assessment order was pursuant to directions from the Dispute Resolution Panel (DRP) and the Transfer Pricing Officer (TPO). The assessee is engaged in engineering design services. The core disputes involve the determination of Arm's Length Price (ALP) for international transactions with associated enterprises and the disallowance of payments made for software to its parent company, Saipem SPA, Italy, as royalty. The total adjustment for transfer pricing was INR 10,22,12,375, and the disallowance for royalty was INR 15,00,72,242.

What were the issues?

1. Whether the international transactions undertaken by the Appellant with its associated enterprise were not at Arm's Length Price (ALP) as defined under section 92F(ii) of the Act, leading to an adjustment of INR 10,22,12,375. - Assessee's contention: The AO, DRP, and TPO erred in holding the transactions as not at ALP. The TPO erred in undertaking a fresh search for comparables without cogent reasons and without satisfying the conditions under Section 92C(3). The TPO also erred in not sharing the search process and in selecting new comparables and rejecting others. The assessee also argued that economic adjustments for idle time cost were wrongly rejected and that the Internal Transactional Net Margin Method (TNMM) should have been accepted. Furthermore, adjustments were made to the entire revenue, not just the international transactions. - Revenue's contention: Not recorded. 2. Whether the amount paid towards the purchase of software to Saipem Italy is royalty as per the Act and the treaty, leading to a disallowance of INR 15,00,72,242 under section 40(a)(i) of the Act. - Assessee's contention: The payment was for a 'copyrighted article' (software), not a 'copyright', and thus not royalty under Section 9(1)(vi) or the India-Italy DTAA. The assessee relied on the jurisdictional Madras High Court decision in CIT vs. Vinzas Solutions Private Limited and a coordinate bench decision in its own case for AY 2013-14 regarding software support charges. - Revenue's contention: Not recorded.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 92CA,Section 92F(ii),Section 92C(3),Section 40(a)(i),Section 9(1)(vi),Section 195,Section 201(1)/(1A),Section 234B

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI ABY T. VARKEY & MS. PADMAVATHY.S

For Respondent: Mr. K.Jayaganesh, CIT

आदेश / O R D E R

PER PADMAVATHY.S, A.M:

This appeal by the assessee is against the final order of the assessment passed by Dy. Commissioner of Income Tax, Corporate Circle-6(1), Chennai (in short "AO") passed u/s. 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short "the Act") dated 28.12.2017 for Assessment Year (AY) 2013- 14. The grounds of appeal raised by the assessee are as under: “1. The Assessment order dated December 28, 2017 passed by the learned Assessing Officer ("AO") under section 143(3) of the the Income tax Act, 1961 ("the Act") pursuant to the directions of the Dispute Resolution Panel ("DRP") under section 144C of the Act and the order of the Transfer Pricing Officer ("TPO") made under section 92CA of the Act are

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not in accordance with the law, made in violation of the principles of equity and natural justice and are contrary to the facts and circumstances of the present case.

2 The learned AO, the DRP and the TPO has erred, in law and on facts, in holding that the international transactions undertaken by the Appellant with its associated enterprise ("AE") were not at Arm's Length Price ("ALP") as defined under section 92F(ii) of the Act and thereby making adjustment amounting to INR 10,22,12,375.

3 The learned AO and the DRP has erred, in law and on facts, in holding that the amount paid towards purchase of software to Saipem SPA, Italy ("Saipem Italy"), being the parent company, is royalty as per the Act and the treaty, consequently making a disallowance of INR 15,00,72,242 under section 40(a)(i) of the Act to the total income of the appellant.

Grounds on Transfer Pricing 4 The learned AO, the DRP and the TPO have erred undertaking a fresh search of comparable companies for benchmarking the international transaction of the Appellant without cogent reasons. The learned AO, the DRP, and the learned TPO did not consider that the AO/TPO can proceed to determine the arm's length price, for the international transactions of the Appellant, on its own only upon satisfaction of the conditions mentioned in 92C(3) of the Act which were not satisfied in the impugned case.

5 The learned AO, the DRP and the TPO have erred in not sharing the basis or search process adopted in the fresh search undertaken and the manner in which four new comparables were selected by the TPO in addition to one comparable company originally selected by the Appellant, which was acceptable to the TPΟ.

6.

The learned AO, the DRP and the TPO has erred in applying the filter of rejecting companies that have persistent losses.

7.

The learned AO/TPO has erred in determining the ALP for the appellant's international transactions by selecting the following companies which are not comparable to the Appellant due to various factors such as functional differences, difference in size, very low turnover, absence of segmental information, inadequate financial information which fails the filters applied by the Appellant and accepted by the TPO etc.: • Tata Consulting Engineers Limited; • I Design Engineering Solutions Limited; and • Neilsoft Limited.

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8.

The learned AO/TPO has erred in law and on facts in rejecting the following comparable companies, for the purpose of determining the ALP for the international transaction of the Appellant by stating various factors such as persistent losses, functionally dissimiliar which are inappropriate and contrary to the facts of the case. • IBI Chematur (Engineering & Consultancy) Limited; • Kicons Limited; • Toyo Engineering India Limited; and • Desein Private Limited.

Economic Adjustments claimed by the Appellant 9. The learned AO, the DRP and the TPO have erred in law and on facts, by rejecting the adjustment towards idle time cost on the sole premise that the capacity information of comparable companies were not available in the public domain even after accepting the fact that the Appellant has idle capacity due to business reasons, which were beyond the control of the Appellant.

Use of Internal Transactional Net margin Method 10 Without prejudice to the above grounds, the learned AD, the DRP and the TPO have erred, in law and on facts, in not accepting the international transactions at arm's length under the Internal Transactional Net Margin Method ("TNMM") (supported by audited segment financial information), considering that the Appellant has also rendered engineering services to third parties and based on the audited segmental information, the margin earned by the Appellant from its Associated enterprises is comparable to the margin earned by the Appellant from third parties.

Other grounds relating to Transfer Pricing 11 The learned AO, the DRP and the TPO have erred, in law, by making adjustments in respect of the entire revenue of the Appellant and not restricting the transfer pricing adjustments to the value of the international transactions. 12 The Appellant prays that the benefit of variance of 3 percent from the value of the international transaction as per proviso to Section 92C(2) of the Act be provided on granting relief under any of the above mentioned grounds of appeal

Grounds on Disallowance under section 40(a)(i) of the Act 13. The learned AO and the DRP have erred in law and on facts in disallowing the payments made towards purchase of software to Saipem Italy amounting to INR 15,00,72,242 under section 40(a)(i) of the Act.

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14 The learned AO and the DRP have erred in law and on facts in not appreciating the fact that the payment made towards obtaining a non- exclusive, non-transferable, non-assignable, revocable license to use the software which is a "copyrighted article" cannot be considered as payment towards acquiring a "copyright" in the software. 15 The learned AO and the DRP have erred in law and on facts in not appreciating the fact that the payment made towards software which is a "copyrighted article" would neither be covered under the definition of royalty provided under section 9(1)(vi) of the Act even after the amendment made by Finance Act, 2012 as per the decision of Hon'ble jurisdictional Madras High Court in the case of CIT vs Vinzas Solutions Private Limited (TCA No.861/2016) and nor be covered under the definition of royalty provided under as per the Double Tax Avoidance Agreement between India and Italy ("DTAA") as per the decision of the Hon'ble ITAT in the Appellant's own case. 16 The final assessment order passed by the learned AO pursuant to the DRP directions is no longer sustainable in view of the decision of Hon'ble ITAT dated October 23, 2017 in the Appellant's own case wherein the very same payments made for the very same year towards software support charges were held as not in the nature of royalty as per the DTAA, not chargeable to tax in India and not liable to provisions of withholding taxes under Section 195 of the Act. 17 The learned AO, the DRP, and the TPO erred in law, and on facts by levying consequential Interest under Section 2348 of the Act. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Honorable Income Tax Appellate Tribunal to decide this appeal according to law.”

2.

The assessee is a company engaged in the business of providing engineering design services to its group companies and to third party customers in India and overseas. The assessee filed a return of income for AY 2013-14 on 28.11.2023 declaring loss of Rs. 6,82,37,705/-. The case was selected for scrutiny and the statutory notices were duly served on the assessee. Since the assessee had international transactions, the A.O made a

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reference to the Transfer Pricing Officer (TPO) to compute the Arm's Length Price (ALP) of the international transactions. The TPO proposed a TP adjustment of Rs. 15,05,37,031/- . The A.O passed the draft assessment order incorporating the TP adjustment. The A.O also made a disallowance u/s. 40(a)(i) towards payments made to its AE on which the assessee has not deducted tax at source. Aggrieved, the assessee filed its further objections before Disputes Resolution Panel (DRP). The DRP gave partial relief to the assessee towards TP Adjustment but sustained the entire disallowance made u/s. 40(a)(i) of the Act. The assessee is in appeal before the Tribunal against the final order of assessment passed by the A.O pursuant to the directions of the DRP.

Transfer Pricing adjustment: 3. The assessee in the transfer pricing report has adopted Transaction Net Margin Method (TNMM) as the most appropriate method (MAM) for the purpose of determining the Arm's Length Price (ALP) and operating profit by operating cost is taken as the PLI. The assessee has computed a PLI of 0.38% for the year under consideration and the average margin of three comparables as listed below chosen by the assessee worked out to 1.70%,

Comparable companies selected by Assessee Margin % 1 Desein Private Limited 3.34% 2 IBI Chematur (Engineering and Consultancy) Ltd -2.55% 3 Neilsoft Ltd 4.30% Weighted average / mean of comparables 1.70%

The assessee accordingly concluded that its transactions are at Arm's length. The TPO rejected two of the comparables selected by the assessee and based on fresh search conducted by the TPO three more comparables. The assessee

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during the course of TP proceeding submitted two more comparables which is accepted by the TPO. Accordingly, the final list of comparables is as under:

S.No. Comparable Margin 1 Cades Digitech Private Limited 5.96% 2 Neilsoft Limited 12.97% 3 I-Design Engineering Solutions Ltd 12.12% 4 Tata Consulting Engineers Ltd 12.86% Shrishti Urban Infrastructure 5 Development Ltd 16.03% 6 MN Dastur and Company Pvt Ltd -15.50% Mean / Average margin 7.41%

4.

The TPO accordingly arrived at the TP adjustment as per below workings:

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5.

The DRP directed the TPO to exclude one of the above list of comparables viz., M/s.Sristi Urban Infrastructure Development Ltd. whereby the TP adjustment was reduced to Rs. 10,22,12,375/-.

6.

The Ld. Authorized Representative (AR) of the assessee submitted that out of the final list of comparables if M/s.I-Design Engineering Solutions Ltd. and M/s.Tata Consulting Engineering Ltd. are excluded then the assessee is margin would be within arm's length. Accordingly we will first consider the exclusion of these two comparables –

I-Design Engineering Solutions Ltd.: 7. The Ld. AR submitted that the comparable fails the related party transactions filter adopted by the TPO as well as the assessee. In this regard, the Ld. AR drew our attention to the overall income from services earned by the company (page 814 of paper book) and the service income from the related party (page 819 of paper book). The Ld. AR submitted that the RPT filter applied is less than 25% whereas in the comparable's case the percentage of related party transaction works out 35.94%. Accordingly, the Ld. AR argued that the comparables fails the RPT filter test. Without prejudice the Ld. AR submitted that the comparables is functionally different and also fails the turnover filter of 1/10th.

8.

We have heard the parties, and perused the material available on record. We notice from the financial statements of the comparables, the income from services is at Rs.7,69,63,463/- and that the services income from related party is at Rs.2,76,59,973/-. Accordingly, the claim that the percentage of RPT income of the comparables is at 35.94% has merits. We further notice that the TPO himself has applied the RPT filter of < 25% (page 5 of TPO

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order) while doing the fresh search comparables. In view of this discussion, we are convinced of the fact that the comparable fails the RPT filter and therefore cannot be part of the final list of comparables.

Tata Consulting Engineering Ltd.: 9. We have heard the parties, and perused the material available on record. The primary argument of the Ld. AR with regard to the exclusion of the comparables is that the company is engaged in diversified activities beyond engineering services and therefore compared with the assessee which is rendering engineering design services. In this regard, we notice that the company is engaged in providing services towards engineering consultancy, project management consultancy, construction management consultancy (page 840 of paper book). We further notice that there is no segmental information available in the annual report (page 894 of paper book) with regard to the various services rendered by the company. Accordingly, we see merit in the argument that in the absence of segmental information the company cannot be included as part of the final list of comparables. We further notice that the Hon'ble Delhi High Court in the case of PCIT vs. Bechtel India Pvt. Ltd. [ITA No.655/2019 dated 19.07.2019] has upheld the exclusion of the comparable on the same ground that no segmental information is available and the relevant findings are extracted herein below – “2) TCE Consulting Engineers Ltd. 12.6 The Comparable Company is involved in activities beyond engineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the annual report of the Company which provides profitability, for the engineering design segment. Hence the same cannot be accepted as a comparable.” (Emphasis supplied)

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In view of the above discussion, we hold that the company should be excluded from the final list of comparables. We direct the TPO to re- compute the ALP as per the directions given herein above.

Disallowance u/s. 40(a)(i) of the Act: 10. The Ld. AR in this regard submitted that the impugned payments made by the assessee to its AE is considered by the coordinate bench with regard to the taxability of the same in the hands of the AE in India in the context of liability u/s. 201(1)/(1A) of the Act in assessee's case. (ITA No.1862 to 1868/Mds/2017 dated 23.10.2017]. The Ld. AR drew our attention to the findings of the Coordinate Bench where it has been held that the impugned payments did not warrant deduction of tax at source u/s. 195 of the Act since the same do not fall under the meaning of the term 'Royalty' as per the DTAA. The Ld. AR accordingly submitted that the same payments cannot be disallowed u/s. 40(a)(i) of the Act in the hands of the assessee for the reason that tax has not been deducted at source.

11.

We have heard the parties, and perused the material available on record. We notice that the coordinate bench in assessee's case while considering the issue of liability u/s. 201 towards the impugned payments has held that the payments are not taxable in India in the hands of the recipient AE and therefore no liability to deduct tax at source u/s. 195 would arise. In the present case, the A.O has made the disallowance u/s. 40(a)(i) of the Act for the reason that the assessee failed to deduct tax at source u/s. 195 on the impugned payments to the AE. Therefore, we see merit in the submission that the decision of the coordinate bench in assessee's own case in the context

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of liability u/s. 201(1)((1A) of the Act would cover the disallowance made in the present appeal u/s. 40(a)(i) of the Act. Accordingly, we direct the A.O to delete the disallowance made in this regard.

12.

In the result, the appeal of the assessee is allowed.

Order pronounced on 07th day of July, 2026 at Chennai.

Sd/- Sd/- (एबी टी. वक�) (पदमावती यस) (ABY. T. Varkey) (Padmavathy.S) लेखा सद�य सद�य /Accountant Member लेखा लेखा लेखा सद�य सद�य �याियक �याियक सद�य �याियक �याियक सद�य सद�य / Judicial Member सद�य चे�नई/Chennai, �दनांक/Dated: 07th July, 2026. EDN, Sr. P.S आदेश क� �ितिल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकर आयु�/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय �ितिनिध/DR 5. गाड� फाईल/GF Digitally signed by EJTADA DURGA EJTADA DURGA NARESH NARESH Date: 2026.07.10 09:57:52 +05'30'

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