HITACHI ENERGY TECHNOLOGY SERVICES PRIVATE LIMITED,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BENGALURU

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ITTPA 1529/BANG/2024Status: DisposedITAT Bangalore30 December 2024AY 2020-2110 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal noted that only one ground of appeal, concerning the computation of the margin in the case of Mahindra Consulting Engineers Ltd., was argued. The assessee contended that bad debts written off, disclosed in Note 23 of the profit and loss account, were not considered as operating expenses by the TPO. The Tribunal perused the profit and loss account and confirmed that bad debts written off of Rs. 32,309,057 were debited under 'other expenses'. The DRP had also directed the TPO to compute margins as per annual accounts. The Tribunal found the TPO's failure to compute the margin as per the annual accounts, specifically for Mahindra Consulting Engineers Ltd., to be in violation of Section 144C(10) of the Act, which makes DRP directions binding. Therefore, the TPO was directed to compute bad debt expenses as an operating expenditure and then recalculate the Profit Level Indicator (PLI) for Mahindra Consulting Engineers Ltd. The adjustment to the ALP should only be retained to the extent necessitated by this recalculation. Grounds 7 and 8 were allowed. All other grounds (1-6 and 9-15) were dismissed as not argued.

What were the facts?

The assessee, Hitachi Energy Technology Services Private Limited (formerly ABB Power Technology Services Private Limited), filed an appeal for Assessment Year 2020-21 against an assessment order passed under Section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961. The original return income was Rs.358,786,510, which was assessed at Rs.486,116,510 after a transfer pricing adjustment of Rs.127,330,000. This adjustment was made pursuant to directions from the Dispute Resolution Panel (DRP) dated 31.5.2024, which restricted an earlier proposed adjustment of Rs.151,910,000 by the Transfer Pricing Officer (TPO). The assessee is engaged in providing IT, support, software development, configuration, and testing services to ABB Hitachi affiliates.

What were the issues?

1. Whether the assessment order dated June 18, 2024, passed by the Ld. Assessing Officer under section 143(3) r.w.s. 144C(13) and 144B of the Income Tax Act, 1961, is bad in law (Ground 1)? 2. Whether the Ld. AO/TPO/DRP erred in not accepting the economic analysis undertaken by the assessee in accordance with the Act and Rules, and in modifying it for determining the arm's length price (ALP) of engineering design services, holding the transaction not to be at arm's length (Ground 2)? 3. Whether the Ld. AO/TPO/DRP erred in making a transfer pricing adjustment of INR 12,73,30,000 towards provision of engineering design services (Ground 3)? Assessee's Contentions: - The Ld. AO/TPO/DRP erred in their selection of comparable companies and rejection of companies considered by the assessee (Grounds 4, 5, 6, 10, 11, 12). - The Ld. AO/TPO/DRP erred in not considering bad debts written off as operating in nature while computing the operating mark-up of Mahindra Consulting Engineers Ltd. (Ground 7). - The Ld. AO/TPO/DRP erred in treating bad debts written off as an unascertained liability and a non-operating item (Ground 8). - The Ld. AO/TPO/DRP erred in modifying the persistent loss filter without cogent reasons (Ground 9). - The Ld. AO/TPO/DRP erred in not making adjustments for differences in working capital and risk profile (Grounds 14, 15). Revenue's Contentions: - The learned CIT(DR) vehemently supported the orders of the lower authorities and submitted that the directions of the DRP bind the assessing officer/TPO.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 144B,Section 92C(3),Section 144C(1),Section 144C(10),Section 92CA(3)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, “A” BENCH: BANGALORE

Before: SHRI PRASHANT MAHARISHI & SHRI SOUNDARARAJAN K.

For Appellant: Shri Ketan Ved, CA
For Respondent: Ms. Nandini Das, CIT(DR)(ITAT), Bengaluru
Hearing: 11.12.2024Pronounced: 30.12.2024

Per Prashant Maharishi, Vice President 1. This appeal is filed by Hitachi Energy Technology Services Private Limited (formerly known as ABB Power Technology Services Private Limited) [the assessee/appellant] for assessment year 2020– 21 against the assessment order passed by the Assessment Unit Income Tax Department (the ld. assessing officer) u/s. 143(3)

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r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (the Act) wherein the return income of the assessee of Rs.358,786,510/– is assessed at Rs.486,116,510/– incorporating adjustment as per the order of the Assistant Commissioner of Income Tax, Transfer Pricing–1(3)(1), Bangalore (the ld. TPO) making the adjustment of Rs. 127,330,000/–. The learned transfer pricing officer passed an order u/s. 92C(3) of the Act dated 26/5/2023 proposing the transfer pricing adjustment of Rs.151,910,000/– incorporated in the draft assessment order u/s. 144C (1) of the Act dated 26/9/2023 which was objected before the learned Dispute Resolution Panel–1, Bangalore (the ld. DRP) who passed the directions on 31.5.2024 and pursuant to that, the adjustment was restricted to 12,73,30,000/–.

2.

The assessee has raised 15 grounds of appeal as under: –

“1. That on the facts and circumstances of the case, the Assessment order dated June 18, 2024 passed by the Additional / Joint / Deputy / Assistant Commissioner of Income Tax / Income-tax Officer, National Faceless Assessment Centre, Delhi (hereinafter referred to as "Ld. Assessing Officer" or "Ld. AO") under section 143(3) r.w.s. 144C(13) and 144B of the Income Tax Act, 1961 the Act") is bad in law. 2. That on the facts and circumstances of the case, the learned AO / Transfer Pricing Officer ("TPO") Dispute Resolution Panel ("DRP") have erred in not accepting the economic analysis undertaken by the Company in accordance with the provisions of the Act read with the Income Tax Rules, 1962 he Rules"), and modifying the same for determination of arm's length price ("ALP") of the provision of engineering design services and holding that the said transaction is not at arm's length.

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3.

That on the facts and circumstance of the case, the Ld. AO / TPO / DRP erred in making a transfer ping adjustment of INR 12,73,30,000 towards provision of engineering design services. 4. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in conducting search using limited keywords as against the robust search criteria performed in the Transfer P-1c.ing ("TP") documentation and thereby non- inclusion of various functional comparable companies in the search matrix resulting in narrow comparable set. 5. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in selecting following comparable companies as comparable, despite them failing the test of comparability: Sikraft Infotech Limited • • Genesys International Corporation Ltd 6. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in rejecting following companies considered in TP documentation of the Company despite them passing the test of comparability: Axiscades Engineering Technologies Limited • May Softech Private Limited • XS Cad India Private Limited • 7. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not considering bad debts written off as operating in nature while computing the operating mark-up of Mahindra Consulting Engineers Ltd. 8. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in stating that bad debts written off is an unascertained liability in order to erroneously treat such costs as non-operating item in the operating mark-up computation of comparable companies and thereby failed to differentiate the actual bad debts written off from the provision for bad and doubtful debts as recognised in the statutory books of accounts. 9. That on the facts and circumstances of the case, the learned AO / TPO / DRP have erred in modifying application of

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persistent loss filter as adopted by the Assessee without providing any cogent reasons. 10. That on the facts and circumstances of the case, the Ld. AO I TPO / DRP erred in not excluding the Genesys International Corporation Ltd. and Mahindra Consulting Engineers Ltd. despite the fact that these companies failed the TPO's own export filter for 2 out of 3 years which resulted in not satisfying the multiple year data criteria to be adopted for comparability analysis. 11. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not excluding the Sikraft Infotech Private Limited despite the fact that it failed the RPT filter for 2 out of 3 years which resulted in not satisfying the multiple year data criteria to be adopted for comparability analysis. 12. That on the facts and circumstances of the case, the Ld, AO / TPO / DRP erred in applying an export earning filter of 75% of the total sales, leading to a narrower comparable set. 13. That on the facts and circumstances of the case. the Ld. AO / TPO / DRP erred in wrongly computing the operating mark- up of the companies identified as comparable and not rectifying the mistake apparent from record as highlighted by the Assessee in such operating mark-up computation of the comparable companies. 14. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not making suitable adjustments to account for differences in the working capital of the Assessee vis- a-vis the comparable companies. 15. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not making suitable adjustments to account for differences in the risk profile of the Assessee vis-a- vis the comparable companies.” 3. The brief facts of the case show that the assessee is a company engaged in the business of providing information technology, support activity and caters to the internal need of power grids

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business of ABB Hitachi affiliates, including developing software, configuration, testing activity and also deputy engineers on need basis for providing the IT support. The assessee filed its return of income at a total income of Rs.35,87,86,510/– which is selected for the scrutiny under CAAS where one of the reason is large value of international transaction in services in comparison to revenue from sale of services for ITeS and low profitability. Consequently the international transactions of the assessee were referred to the learned transfer pricing officer on 30/1/2022.

4.

The assessee as per the documents filed has international transaction of revenue from operation and other income of Rs. 23,611,771,90/- wherein the assessee has three different segment of information technology, information technology enabled services, engineering services and has earned operating profit percentage of 20.95%, 20.22% and 11.64% respectively. The assessee adopted the transactional net margin method as the most appropriate method and selected the profit level indicator of operating profit/operating cost. In the transfer pricing study report, it has considered the benchmarking analysis and the result of its ITeS fellow subsidiary ABB Global Industries and Services Private Limited which has a similar functional profile, wherein seven comparable companies were selected in respect of the engineering services segment. As the margin of the assessee was within the range of the margin of the comparable companies it was stated to be at arm’s-length.

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5.

The learned transfer pricing officer examined the TP study report and held that assessee has not applied the filter with respect to the significant related party transaction as well as where the insufficient financial information is available. Therefore the learned TPO adopted the filters of use of current year data, similar financial year, companies having turnover less than rupees one crore, companies having 75% of its operating revenues from the business segment, 25% related party transactions of the revenue, export services less than 75%, companies having persistent losses and companies having negative worth. On the basis of these filters, he examined the comparable selected by the assessee and rejected all the seven comparables of the assessee. He carried out fresh search wherein six comparable companies were selected, out of which four companies were selected from AceTP database and three companies were selected from Prowess database. One company was common in both the database and therefore ultimately the financial of six companies were verified wherein the median percentage of the margin of PLI was 23.19%. Accordingly the assessee was issued a show cause notice which was replied to on 17/1/2023 the assessee objected to the filters and also the comparable companies. After considering the objection of the assessee, the learned TPO retained five comparables and computed the average margin of 24.45%. While taking the three years financial data of these five comparables, the financial data for financial year 17–18 and 18–19 were not included, as it either fails

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export filter or RPT filter adopted by the TPO. The assessee’s margin was considered at 15.49% compared with average margin of the comparable set at 24.45% and accordingly an adjustment was made at Rs. 151,910,000 by order u/s. 92CA(3) of the Act dated 26/5/2023.

6.

The learned dispute resolution panel passed the direction, according to which, the order giving effect was passed by the learned TPO and the adjustment of Rs. 127,330,000 was retained.

7.

The learned authorized representative submitted that one comparable company is Mahindra Consulting Engineers Ltd. While computing the margin of the same, the learned AO/TPO and the DRP has not taken into consideration the bad debt written off as operating in nature. He submitted that bad debt written off cannot be an unascertained liability but is an ascertained liability which is written off in the books of the accounts and is different from the provision for bad and doubtful debts. If that adjustment is made, there is no other grievance of the assessee. It was submitted that ground of objection number 10 is with respect to the error in margin computation of the comparable companies. The learned authorized representative referred to the annual accounts of Mahindra Consulting Engineers Ltd and submitted that in note number 23 at (o), bad debts written off is mentioned at 3,23,09,057/–, if the same is adjusted and considered as an operating loss, the margin of that comparable company will

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change. He further referred to paragraph number 2.10.1 of direction of the learned dispute resolution panel wherein the learned TPO was directed to adopt the figures as per the annual report and accordingly the PLI of the margins, but despite this fact he has not done so in case of Mahindra Consulting Engineers Ltd.

8.

The learned CIT DR vehemently supported the order of the learned lower authorities and with respect to direction of the learned dispute resolution panel, it was submitted that it binds the assessing officer/transfer pricing officer.

9.

We have carefully considered the rival contention and perused the orders of the learned lower authorities. The only ground of appeal that has been argued before us is with respect to the computation of the margin in case of Mahindra Consulting Engineers Ltd which has been taken by the learned TPO as a comparable company on fresh search. The argument of the learned authorized representative is that in the computation of PLI of that margin, the learned TPO has not included the bad debts written off which have been disclosed in note number 23 of the profit and loss account. We have carefully perused the profit and loss account of the comparable company and find that at note number 23 – other expenses – (o) bad debts written off of Rs. 32,309,057 are debited. The learned dispute resolution panel also has categorically directed the learned transfer pricing officer to compute the margins of the comparable as per the annual accounts. The learned TPO, despite

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the same, has not computed it. According to the provisions of section 144C(10), every direction issued by the dispute resolution panel shall be binding on the assessing officer. Despite the same, as the learned transfer pricing officer has not computed the PLI of the margins as per the annual accounts and specifically in case of Mahindra Consulting Engineers Ltd. is in violation of the provisions of the Act. The learned assessing officer/transfer pricing officer is directed to compute the bad debt expenses as an operating expenditure and then compute the PLI of comparable company i.e. Mahindra Consulting Engineers Ltd. After that, if there is any adjustment on account of arm’s-length price of international transaction, only to that extent it should be retained. Accordingly ground no 7 & 8 of the appeal are allowed.

10.

No other Grounds were pressed, hence Ground no. 1 to 6 and 9 to 15 are dismissed as not argued.

11.

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

Pronounced in the open court on this 30th day of December, 2024.

Sd/- Sd/- (SOUNDARARAJAN K.) (PRASHANT MAHARISHI) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 30th December 2024. /Desai S Murthy /

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Copy to:

1.

Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order

Assistant Registrar ITAT, Bangalore.

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