EVERSENDAI CONSTRUCTION PRIVATE LIMITED,CHENNAI vs. DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 2 (1), CHENNAI, CHENNAI

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ITTPA 14/CHNY/2025Status: DisposedITAT Chennai09 January 202610 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal allowed the idle capacity adjustment. It noted that under TNMM, comparability must account for differences in functions, assets, and risks, and idle capacity, especially in ramp-up years, can distort net margins. The assessee provided evidence of capacity/operational ramp-up and subsequent improvement in cost absorption, with a transparent methodology. The Revenue failed to demonstrate the methodology's unreasonableness or identify superior comparables. The Tribunal directed the AO/TPO to grant this adjustment in the EPC segment as per the assessee's validated methodology. Regarding working capital adjustment, the Tribunal held that it must reflect the tested party's actual operating cycle, including all relevant operating current assets and liabilities not connected with core business, consistent with accepted practice. Items like unbilled revenue and prepaid expenses impact liquidity and should be included. The Tribunal directed a recomputation of the working capital adjustment, including all relevant operating current assets and liabilities as claimed by the assessee, subject to verification by the AO/TPO.

What were the facts?

The assessee, Eversendai Construction Private Limited, is a wholly owned subsidiary of a Singaporean company, engaged in engineering, design, steel fabrication, and construction. For the assessment year 2011-12, the assessee reported international transactions with its Associated Enterprises, including purchase of steel, erection, testing and commissioning, engineering design services, and reimbursements. The Transfer Pricing Officer (TPO) accepted the Transactional Net Margin Method (TNMM) as the most appropriate method but rejected the assessee's transfer pricing documentation, conducted a fresh comparability search, and denied economic adjustments for idle capacity and working capital, leading to an upward adjustment of Rs. 3,24,00,000/- in the EPC segment. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld TNMM, allowed working capital adjustment, but rejected idle capacity adjustment and upheld certain comparables, resulting in a reduced adjustment of Rs. 1,85,00,000/-. The assessee appealed to the Tribunal.

What were the issues?

1. Whether the denial of the idle capacity adjustment is sustainable, considering the assessee's first full year of operations and subsequent revenue growth. - Assessee's contention: Idle capacity is inherent in industries and relates to underutilization of resources, not just manufacturing capabilities. Fixed costs are absorbed with increased revenue. The assessee invested in building expertise for future projects, and employee costs as a percentage of revenue declined significantly in the subsequent year, indicating full absorption. Reliance was placed on multiple ITAT judgments including GS Engineering & Construction Pvt. Ltd. and Colwell & Salmon Communications. - Revenue's contention: Relied on the orders of the TPO and CIT(A), rejecting the adjustment as non-comparable or inapplicable. 2. Whether the working capital adjustment should include all relevant operating current assets and liabilities. - Assessee's contention: The TPO incorrectly excluded certain operating current assets and liabilities such as unbilled revenue, prepaid expenses, advances from customers, advance recoverables, and inventories. The assessee provided revised computations aligning with accepted practice and relied on judgments like HCL EAI Services Limited and GL&V India Private Limited. - Revenue's contention: Not recorded in the judgment.

Which sections of the Income-tax Act were involved?

Section 68

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: HON’BLE SHRI MANU KUMAR GIRI & SHRI S.R. RAGHUNATHA

Hearing: 13.10.2025Pronounced: 09.01.2026

आयकर अपीलीय अधिकरण ‘‘डी’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI माननीय श्री मनु कुमार धिरर ,न्याययक सदस्य एवं एस. आर. रघुनाथा, लेखा सदस्य के समक्ष BEFORE HON’BLE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND SHRI S.R. RAGHUNATHA, ACCOUNTANT MEMBER आयकर अपील सं/. IT(TP)A No.14/Chny/2025 यनिाारण वर्ा /Assessment Year: 2011-12 Eversendai Construction Private The Deputy Commissioner of Limited, Vs Income Tax, Plot No.1&2, The Lords, Block 1, Corporate Circle-2(1), 5th Floor Jawaharlal Nehru Road, Chennai. Ekkaduthangal, Guindy Industrial Estate S.O. Guindy, Chennai-600032 Tamil Nadu [PAN: AACCE2174N] (अपीलाथी/Appellant) (प्रत्यथी/Respondent) अपीलाथी की ओर से/ Appellant by : Ms. Hema Muralikrishnan, Advocate प्रत्यथी की ओर से /Respondent by : Mr. Madan Kumar, JCIT सुनवाई की तारीख/Date of Hearing : 13.10.2025 घोर्णा की तारीख /Date of Pronouncement : 09.01.2026 आदेश / O R D E R PER MANU KUMAR GIRI (Judicial Member): This appeal is directed against the order passed by the Commissioner of Income Tax (Appeals) [“CIT(A)”], dated 05.02.2025 for the assessment year 2011–12.

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2.

Background and Facts: The assessee is a company incorporated on 14.08.2009 in the State of Tamil Nadu and is a wholly owned subsidiary of Eversendai Constructions (S) Pte Ltd, Singapore, ultimately held by Eversendai Corporation Berhad, Malaysia. The assessment year under consideration represents the assessee’s first full-fledged year of operations. The assessee is engaged in the business of engineering, design, detailing, steel fabrication, and development of residential and commercial buildings. During the relevant year, the assessee entered into the following international transactions with its Associated Enterprises (“AEs”):

Nature of transaction Amount (Rs.) Purchase of steel 4,71,02,873

Erection, testing and commissioning 5,77,86,046

Engineering design services 4,70,91,483

Reimbursement of expenses paid 26,11,100

Reimbursement of expenses received 68,815

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3.

The assessee benchmarked the Engineering, Procurement and Construction (‘EPC’) and Engineering Design Services (“EDS”) segments using the Transactional Net Margin Method (TNMM) as the most appropriate method (“MAM”), excluding pure reimbursements (Page 25 of the factual paper book). The Transfer Pricing Officer (“TPO”) accepted TNMM as the MAM but rejected the transfer pricing documentation maintained by the assessee, conducted a fresh comparability search, rejected certain comparables selected by the assessee, introduced new comparables, and denied economic adjustments claimed by the assessee, namely idle capacity adjustment and working capital adjustment. This resulted in an upward adjustment of Rs.3,24,00,000/- in the EPC segment.

4.

On appeal, the ld.CIT(A) upheld TNMM as the MAM and allowed the working capital adjustment. However, the ld.CIT(A) rejected the claim for idle capacity adjustment and upheld inclusion of certain comparables, namely: M/s. SPML Infra Limited 

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M/s. Afcons Infrastructure Limited  The order giving effect to the ld.CIT(A)’s decision resulted in a reduced transfer pricing adjustment of Rs.1,85,00,000/- in the EPC segment. Aggrieved, the assessee is in appeal before the Tribunal, limited to the said adjustment. 5. The appeal raises two core issues: Issue 1: Whether the denial of the idle capacity adjustment is sustainable. Issue 2: Whether the working capital adjustment should include all relevant operating current assets and liabilities.

6.

We will take up Issue 1- Idle Capacity Adjustment: The ld.AR for the assessee submitted that underutilization of capacity is with respect to resources of a company and not specific to "manufacturing capabilities". Idle capacity is bound to exist in all industries. Depreciation, rent and salary paid are fixed costs which are bound to be better absorbed as the revenues of the company increases. She further submitted that the Assessee is in its first full- fledged year of operations and that it has taken dedicated efforts to

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invest in building employees with strong expertise in the industry in anticipation of projects to be undertaken in subsequent years. The Assessee has considered the wages as well for the calculation of the adjustment. For some companies the amount of salaries includes wages as per the notes to accounts. The Assessee explained in detail the methodology of performing the adjustment. She furthermore pointed out that the assessee's revenue increased significantly by 377% in the subsequent financial year, i.e., FY 2011-12. Correspondingly, the employee cost as a percentage of revenue declined from 35% to 16%. This clearly indicates that the higher employee costs incurred during FY 2010-11 (the Assessee's first full year of operations) were fully absorbed and recovered in FY 2011-12. The copy of the financial statements of the assessee for FY.2011-12 is attached herewith as Appendix 1. The data as per the financials is reproduced hereunder for easy reference Particulars FY 2010-11 FY 2011-12 % of increase / (decrease) Employee cost 133,403,026 298,255,110 124% Revenue 380,376,046 1,815,018,475 377% % of employee 35% cost to revenue

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Reliance is placed on the following judgments by the assessee in support of its claim of idle capacity adjustment” a. GS Engineering & Construction Pvt. Ltd Vs. DCIT (ITA No.5221/Del./2012) (Para 5 of Page Nos 5 & 6 of the Caselaw paper book); b. Colwell & Salmon Communications [I] Ltd vs JCIT (ITA No. 3054/DEL/2011 [A.Y 2004-05] & ITA No. 1117/DEL/2012 [A.Y 2005-06)) (Paras 39 to 43 of Page Nos 30 to 32 of the Caselaw paper book); c. Mando Limited (L.T.A. No. Private India Steering Systems 2092/Mds/2012)(Para 10 of Page Nos 44 & 45 of the Caselaw paper book); d. Kyocera CTC Precision Tools Pvt. Ltd. Vs. DCIT (ITA No.233/Kol/2022) (Paras 8, 8.1 & 8.2 of Page Nos 64 to 66 of the Caselaw paper book) and e. Amdocs Business Services P Ltd vs DCIT (ITA NO.1412/PN/11) (Paras 8 & 9 of Page Nos 77 to 79 of the Caselaw paper book). Per contra, the ld.DR for the revenue relied upon the orders of the TPO and CIT(A). rejected the adjustment, treating it as non- comparable or inapplicable.

Our Adjudication on Issue 1- Idle Capacity Adjustment:

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It is now well-settled that under TNMM, comparability must account for differences in functions, assets, and risks. Idle capacity, particularly in early years of ramp-up can distort net margins if not adjusted. We note that several Tribunals as referred supra have upheld idle capacity adjustments where a tested party incurs disproportionate fixed costs in start-up years or experiences underutilization affecting profitability. The assessee’s evidence shows a clear capacity/operational ramp-up phase in FY 2010-11 and a dramatic improvement in cost absorption in FY 2011-12 and also a transparent and documented methodology. The Revenue has not demonstrated that the methodology is unreasonable, nor does it identify specific comparables demonstrating superior capacity utilization justifying denial of adjustment. Hence, we allow the idle capacity adjustment. The AO/TPO shall grant this adjustment in the EPC segment in accordance with the methodology furnished and validated by the assessee.

8.

Issue 2 - Working Capital Adjustment: The assessee submits that the TPO incorrectly excluded certain operating current assets and liabilities when giving effect to the

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ld.CIT(A) order, specifically Unbilled revenue, Prepaid expenses, Advances from customers, Advance recoverables and Inventories. The assessee has furnished revised working capital computations, aligning with accepted practice. The Assessee has furnished the working capital adjusted margins after factoring in relevant line items such as unbilled revenue, prepaid expenses, and other components that materially impact profitability of the Assessee vis-à-vis the comparables. The detailed computation has been enclosed as Appendix 2 to this submission. She also placed reliance on the following judgments by the assessee in support of its claim of inclusion of the above items for working capital adjustment: a. HCL EAI Services Limited Vs. DCIT (IT(TP)A No. 1348/Bang/2011) (Paras 29 to 31 of Page No 130 of the Caselaw paper book)’ b. GL&V India Private Limited (ITΑ Νο.2252/PUN/2017) (Paras 5.6 & 5.7 of Page Nos 139 to 141 of the Caselaw paper book); c. Mercedes-Benz Research and Development India (P.) Ltd. Vs. DCIT (IT(TP) Appeal No. 329 (bang) of 2014) (Para 7 of Page Nos 153 & 154 of the Caselaw paper book) The TPO excluded some items, resulting in a narrower base for working capital.

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Our adjudication: Working capital adjustment under TNMM must reflect the tested party’s actual operating cycle. Key principles include: Inclusion of all relevant operating current assets and liabilities;  Exclusion only of non-operating or financial elements not  connected with core business; Consistency with accepted accounting and transfer pricing  practice.

An item such as unbilled revenue reflects earned but not billed receivables and is correctly included in operating current assets. Similarly, prepaid expenses and advances impact liquidity and should not be excluded when material to the working capital cycle. The assessee’s revised working capital adjustment is supported by detailed computation and accepted accounting treatment and case laws referred supra. Hence, we direct recomputation of working capital adjustment by including relevant current assets and liabilities as claimed by the assessee, subject to verification by the AO/TPO. The AO/TPO is directed to:

(a) Allow the idle capacity adjustment for the EPC segment; and

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(b) Recompute working capital adjustment including all relevant operating current assets and current liabilities, in accordance with law and judicial precedents. The resultant transfer pricing adjustment shall be reworked and assessed accordingly. 9. Other issues not pressed by the assessee during the course of hearing.

10.

In the result, the appeal of the assessee is allowed for statistical purposes.

Order pronounced on 09th day of January, 2026 at Chennai.

Sd/- Sd/- (एस. आर. रघुनाथा) (मनु कुमार गिरर) (S.R. Raghunatha) (Manu Kumar Giri) लेखा सदस्य /Accountant Member न्यागिक सदस्य / Judicial Member चेन्नई/Chennai, ददन ांक/Dated: 09th January, 2026. EDN, Sr.PS आदेश की प्रतिलिपि अग्रेपिि/Copy to: 1. अिीि र्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्ि/CIT, Chennai /Madurai/Coimbatore/Salem 4. पिभ गीय प्रतितनधि/DR 5. ग डड फ ईि/GF

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