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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against order of DCIT, Circle-1(1), Pune, dated 27.01.2016 relating to assessment year 2011-12 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:- 1. On the facts and in circumstances of the case and in law, the Ld. Assessing Officer ('AO') / Transfer Pricing Officer ('TPO') erred in proposing a transfer pricing adjustment of Rs.1,36,48,827/- in relation to 'Professional fees' payable to Aquatech Guangzhou Water Treatment Company Limited Guangzhou, China, and the Hon. DRP, erred in
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restricting the relief only to Rs.4,00,000/- resulting in a disallowance of Rs.1,32,48,827/- under the provisions of Chapter X of the Act; The Appellant prays that the said adjustment is erroneous, unwarranted and ought to be deleted. 2. On the facts and in circumstances of the case and in law, the Ld. AO/ TPO, under the directions of the Hon. DRP, erred in not stating any reasons to show that either of the conditions mentioned in clause (a) to (d) of section 92C(3) of the Act were satisfied before disregarding the arm's length price computed by the Appellant. The Appellant prays that the said adjustment is erroneous, unwarranted and ought to be deleted. 3. On the facts and in circumstances of the case and in law, the Ld. AO/ TPO, under the directions of the Hon. DRP, erred in not appreciating the economic analysis conducted by the Appellant as well as not appreciating the evidences furnished by the Appellant to demonstrate that the services were actually rendered and holding that no service was rendered by the AE as well as no tangible benefit was derived by the Appellant from receipt of the Professional consultancy services. The Appellant prays that the said adjustment is erroneous, unwarranted and ought to be deleted. 4. On the facts and in circumstances of the case and in law, the Ld. AO/ TPO, under the directions of the Hon. DRP, erred in not following any method to benchmark 'Professional Fees' and not appreciating that the Transactional Net Margin Method prescribed under section 92C(1) of the Act read with Rule 10B(1)(e) of the Rules is the most appropriate method for computation of arm's length price of Professional Fees'. The Appellant prays that the said adjustment is erroneous, unwarranted and ought to be deleted. 5. On the facts and in the circumstances of the case, the Ld. AO erred in initiating penalty proceeding under section 274 read with Section 271(1)(c) of the Act and levying interest under section 234A, 234B and 234C of the Act.
The issue raised in the present appeal is against transfer pricing adjustment in respect of international transactions undertaken by the assessee.
Briefly, in the facts of the case, the assessee was engaged in the business of providing engineering, software and technical design services with use of Computer Aided Design (CAD), Computer Aided Manufacturing (CAM), advanced pressure vessel design and product data system design techniques. The assessee procured, assembled and supervised waste water treatment
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plants and projects. The assessee was also supplying surface water and industrial wastewater treatment systems and services. For the year under consideration, the assessee had furnished return of income declaring total income of ₹ 3,31,37,349/-. The case of assessee was picked up for scrutiny. The Assessing Officer noted that the assessee had entered into international transactions with its associated enterprises aggregating to ₹ 38.07 crores. The Assessing Officer thus, made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for determining the arm's length price of international transactions. During TP proceedings, the TPO noted various activities undertaken by the assessee and various international transactions entered into by the assessee, which are tabulated at pages 2 and 3 of order of TPO. The assessee was engaged in five different business segments. The TPO considered FAR analysis of following segments:- a) Engineering Designing Services; b) Contract R&D Trading Segment; c) ITES Segment; d) EPC purchases; and e) Trading Segment
The TPO after analyzing search criteria and acceptance / rejection matrix applied by the assessee also applied certain new filters and show cause notice was issued to the assessee. The TPO rejected multiple year data applied by assessee and was of the view that only data for contemporaneous period has to be applied. The TPO also rejected the companies with less than 75% earnings from exports and the concerns which have related party transactions exceeding 25%. The assessee selected four concerns as comparables, whereas the TPO selected six companies as comparables. The TPO also rejected the contention of assessee that KPO/LPO were high end
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providing services and were not comparable. In the final analysis, the TPO selected five concerns as comparables. The TPO show caused the assessee in this regard and after discussing the submissions made by assessee in respect of each of the concerns, finally selected the following concerns as comparable:- Sr.No. Name of the Company PLI Margin 1 Cosmic Global Ltd. 9.81 2 Informed Technologies India Ltd. 12.06 3 Infosys BPO Ltd. 18.80 4 Jindal Intellicom Pvt. Ltd. 13.51 5 Accentia Technology Ltd. 54.51 6 E Clerx Services Ltd. 56.85 Average 27.59
The mean margins of comparables worked out to 27.59% as against margins of 8.62% shown by the assessee. Consequently, the TPO proposed an upward adjustment of ₹ 7,87,911/- in IT Enabled Services Segment.
The next issue taken up by the TPO was the payment of professional fees. In 3CEB report, the assessee had stated to have paid charges of ₹ 1,36,48,827/- towards professional service charges to its associated enterprise concern in China. The assessee had not benchmarked the said transaction separately and the TPO further observed that the assessee had not submitted any document evidencing the receipt of services and tangible benefits received therefrom. The assessee in this regard was show caused by the TPO. In reply dated 27.01.2015, the assessee furnished copies of certain e-mails. The TPO observed that e-mails were routine communications between the assessee and associated enterprise and it was difficult to correlate e-mails with reference to professional and consultancy fees. As per the assessee, services were identification of supplier / vendor in getting comparative quotes and other related services. Since the assessee had failed
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to demonstrate any benefits received in identifying the supplier or having impact on reduction of cost or any other benefits received in this regard and where the assessee had not submitted complete details, thus, an upward adjustment of ₹ 1,36,48,827/- was proposed. In total, the TPO proposed an adjustment of ₹ 1,44,36,738/-. The Assessing Officer issued draft assessment order in this regard and proposed an upward adjustment of ₹ 1,44,36,738/-. The assessee filed objections before the Dispute Resolution Panel (DRP), who gave certain directions. The TPO following the said directions deleted adjustment in ITES Segment, but upheld adjustment of ₹ 1.36 crores made to international transactions of professional consultancy services received. The DRP vide para 7.3.3 at page 20 of its order observed that as per para 7.6 of the OECD Transfer Pricing Guidelines on Intra Group Services dealing with the topic „determining whether intra-group services have been rendered’; para 7.18 of the OECD Guidelines further stated that ‘the fact that a payment was made to an associated enterprise for purported services can be useful in determining whether services in fact were provided.’ It was further observed that mere description of payment as Management Fees should not be expected to be treated as prima facie evidence that such services had been rendered. The DRP further noted that benefit test was implicit in the concept of determination of arm's length price of intra-group services, under transfer pricing. So, a person has to establish that the payment was made for providing benefits to it. Then, referring to adequacy of supporting evidences furnished by the assessee, the DRP also considered the remand report of Assessing Officer in this regard and noted that the assessee claimed that quotes were received from Chinese vendors through associated enterprise and the same were evaluated by the TPO. The DRP however, pointed out that the same was incorrect since the TPO in remand report had informed that since the quotes
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were in Chinese language, no comments were offered by the TPO. The DRP further notes that the assessee had submitted corresponding quotes from third party vendors other than Chinese vendors only in respect of 2-3 bids but had not submitted corresponding quotes of third party vendors in respect of balance 97-98 bids. The DRP observed that information was called from the assessee in order to examine purchases of only ₹ 40 lakhs as against professional service charges of ₹ 136.48 lakhs. Since the assessee had failed to discharge the onus cast upon it and in the absence of any supporting evidences and documents furnished by the assessee and assuming that 10% charges were being paid by the assessee on the purchases from China through its associated enterprise. The arm's length price of said transaction of payment of professional services was worked out to ₹ 4 lakhs. The DRP held that associated enterprise of assessee had rendered only nominal services and arm's length price of professional service charges paid were computed at ₹ 4 lakhs as against nil computed by the TPO and ₹ 136.48 lakhs claimed by the assessee. Following the aforesaid directions of DRP, the TPO re-worked the adjustment to be made in the hands of assessee at ₹ 1,32,48,827/-, which was applied by the Assessing Officer and assessment order was issued under section 143(3) r.w.s. 144C(13) of the Act.
The assessee is in appeal against the aforesaid upward adjustment of ₹ 1.32 crores (approx.).
The learned Authorized Representative for the assessee pointed out that the assessee had prepared segmental accounts for different activities it had undertaken and benchmarked the international transactions embedded in the segment. Inviting our attention to EPC segment, the learned Authorized
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Representative for the assessee referred to page 178 of Paper Book, wherein the nature of services is provided. At page 204 of Paper Book, the list of expenses claimed i.e. including professional service charges to EPC is provided. The learned Authorized Representative for the assessee pointed out that once EPC segment has been held to be at arm's length price, then the TPO was precluded from doing separate benchmarking for the professional service charges paid by the assessee to Aquatech, China. The learned Authorized Representative for the assessee pointed out that the said services were utilized for identification of supplier in getting quotes, confirming the vendor schedules, expediting the work, documentation, visiting vendors, ensuring quality, etc. The TPO had called for evidences to substantiate the factum of receipt of services. The learned Authorized Representative for the assessee referred to pages 237 and 250 of Paper Book i.e. e-mails correspondence filed before the TPO. Then she stated that first of all, TPO accepted TNMM analysis of the segment i.e. EPC segment, then no authority with the TPO to tinker with other sub-segments of that segment. She further pointed out that argument of TPO was that no evidence of services availed was filed by the assessee. It was stressed by her that the TPO has jurisdiction to determine the arm's length price on the basis of methods provided under the Act and the TPO has no jurisdiction to exclude services separately and thereafter, benchmark the same. In this regard, reliance was placed on the decision of Pune Bench of Tribunal in M/s. Eaton Fluid Power Ltd. Vs. ACIT in ITA No.45/PUN/2013, relating to assessment year 2008-09, order dated 12.03.2018 and various decisions of the Hon’ble Bombay High Court including in the case of CIT Vs. Merck Ltd. (2016) 389 ITR 70 (Bom).
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The learned Departmental Representative for the Revenue referring to page 500 of Paper Book pointed out that the document was in Chinese language and it difficult to know head or tail of the same. The learned Departmental Representative for the Revenue referred to page 7 of the order of DRP and pointed out that professional service charges were being paid for identification of supplier. He then referred to the arguments of the learned Authorized Representative for the assessee in this regard that the said payment of professional service charges were part of EPC centre. He then, referred to pages 17 to 19 of the order of DRP and stressed that against goods bought for ₹ 40 lakhs, the assessee had paid professional service fees at ₹ 1.36 crores, which was very high. He further pointed out that where it is an international transaction to be benchmarked, then the TPO has the power to determine the nature and quantum of expenditure and its admissibility.
The learned Authorized Representative for the assessee in rejoinder pointed out that the TPO should look into the arm's length price of transactions and not its commercial viability. The question which arises is whether the services were received by the assessee. Again, attention was drawn to the documents placed at pages 250, 254 and thereafter, upto 286 of Paper Book, wherein all the details were filed before the TPO. The learned Authorized Representative for the assessee fairly commented that receipt of services have to be established by the assessee, but whether the services were needed or what was the benefit of said services is not required to be proved. Our attention was drawn to the Inter Company Agreement placed at page 239 of Paper Book when the question was with the terms of agreement. The learned Authorized Representative for the assessee in reply submitted that where there is an agreement between the parties and if not all the services were rendered
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to the employees but some of the services are availed, then the payment is to be allowed as expenditure. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. Merck Ltd. (supra) in this regard. It was further pointed out by her that the DRP has asked for additional information. However, the DRP picked up only one service of procurement of ₹ 40 lakhs but ignored the availability of team for various services. Our attention was drawn to the contents of each of the agreement separately at pages 289, 290 and 291 of Paper Book. She then placed reliance on the following decisions of the Hon’ble Bombay High Court:- i) CIT Vs. Lever India Exports Ltd. (2017) 292 CTR 393 (Bom) ii) CIT Vs. Johnson & Johnson Ltd. (2017) 80 taxmann.com 337(Bom) iii) CIT Vs. Kodak India (P.) Ltd. (2016) 288 CTR 46 (Bom) iv) M/s. Eaton Fluid Power Ltd. Vs. ACIT in ITA No.45/PUN/2013, relating to assessment year 2008-09, order dated 12.03.2018
We have heard the rival contentions and perused the record. The assessee has filed the present appeal against the orders of Assessing Officer/DRP/TPO in making an upward adjustment of ₹ 1,32,48,827/- in relation to professional fees payable to associated enterprise in China. The assessee is wholly owned subsidiary of Aquatech US (AE-US). The assessee supplies surface water and industrial wastewater treatment systems and services. The AE-US provides design, engineering, procuring, manufacturing, erection and commissioning services for industrial water and wastewater treatment systems. The AE-US also offers services in projects related to zero liquid discharge, Electro De-ionization Concentration, Thermal Desalination etc. The assessee during the year had entered into various international transactions with its associated enterprise. The assessee had bifurcated the international transactions segment-wise applying TNMM method. The segment which is the matter of dispute before us is EPC segment i.e. under EPC segment, the
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assessee supplied and installed waste water treatment equipment as per specifications received from the associated enterprise. The assessee was engaged in providing engineering, procurement and construction services for its clients enabling the commissioning and supplementing waste water treatment projects. In order to meet the requirements of its clients, the assessee imported waste water treatment components from its associated enterprise. The assessee was also utilizing the spare parts and components for specific base water treatment products. The technology for providing EPC services was provided by Aquatech, USA, for which the assessee was paying royalty, which transaction has been accepted. During the year under consideration for benchmarking the transactions pertaining to EPC projects, the assessee had aggregated the transactions having similar business functions. The transactions analyzed together under EPC segment were as under:- i) Procurement of spare parts and components; ii) Technical and field implementation services iii) Payment of royalty fees; amortization; iv) Availing professional consulting services from Aquatech China for identification of suppliers and vendors.
The assessee selected TNMM method as most appropriate method for benchmarking international transactions pertaining to EPC segment based on Operating Profit / Total Cost (OP/TC) as the Profit Level Indicator (PLI). The assessee had selected set of five companies for benchmarking the transactions with its associated enterprise, which again is not disputed.
The assessee had provided segmental details based on audited annual accounts, wherein it had shown operating revenue under each segment and also the operating expenses. In the EPC segment, the total receipts were shown as ₹ 104.61 crores, against which the cost of sales was shown at ₹ 62.23 crores, wherein the cost of goods procured from associated enterprise
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were to the tune of ₹ 8.77 crores. The assessee had debited various expenses against the same including professional charges paid of ₹ 1.36 crores. The TPO in the TP proceedings asked the assessee to justify the said expenditure. In reply, the assessee explained the nature of services provided by associated enterprise in China and the explanation reads as under:- “Aquatech India has received professional and consultancy services from Aquatech Guangzhou Water Treatment Company Limited (“Aquatech China”), amounting to Rs.1,36,48,827/-. The services received from Aquatech China are primarily for the business of third party EPC (Engineering, Procurement and Construction) projects. These services are primarily for the purpose of identification of supplier / vendor, getting competitive quotes, confirming vendor schedules, expediting the work as may be required, documentation, visiting vendors, performing quality checks as may be required. The assessee contends that in addition to these services, other business support services were also availed from Aquatech China.”
The assessee also claimed that it had deducted TDS out of such professional and consulting service charges paid. The TPO asked the assessee to provide copies of invoices raised by Aquatech China on the assessee. The copies of same are placed at pages 231 to 236 of Paper Book. The service charge invoices are raised month-wise for USD 25,000 initially and thereafter, for USD 27,778. The narration in the said invoices is identical and the same reads as under:- “Per Service Agreement signed by Dilip B.Purohit and R.C. Jaitly for identification of supplier/vendor, getting competitive quotes, confirming vendor schedules, expediting the work as may be required, documentation, visiting vendor, ensuring quality.”
The assessee has also filed copy of agreement between Aquatech China and itself, which is placed at pages 239 to 249 of Paper Book. As per recital of the said agreement, the purpose of service is mentioned and the same reads as under:- “WHEREAS, ASA desires to engage Consultant to provide certain consulting services hat pertain to the establishment of a ASA procurement network in China for the purpose of services including identification of supplier / vendor, getting competitive quotes, confirming vendor schedules, expediting the work as may be required, documentation, visiting vendor(s), ensuring quality check as may be required by ASA, etc. (hereinafter, “Professional Services”); and
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WHEREAS, ASA agrees to provide the necessary resources to complete such Professional Services in accordance with the terms and conditions of this Agreement.”
The term of agreement was from 01.11.2009 to 31.10.2010. The compensation which was agreed upon was @ USD 25,000 per month. The various other terms have also been entered into regarding obligations and confidentiality, arbitration, etc., which are not relevant to decide the issue. At page 249 of Paper Book is placed a letter dated 29.10.2010, under which agreement was extended for 12 months i.e. upto 31.10.2011 on the same terms and conditions as earlier agreed. The assessee claims that in line with understanding between Aquatech China and itself, it had made the payments on account of service charges totaling ₹ 1.36 crores during the year. The assessee was asked to file evidence of providing the said services by associated enterprise to assessee. In this regard, our attention was drawn to the evidences filed before the TPO along with letter dated 27.01.2015, which are placed at pages 250 to 286 of Paper Book. Our attention was drawn to various e-mails exchanged between the employees of Aquatech China and the assessee in this regard. We have gone through the said evidences filed by assessee. The first and foremost which needs to be highlighted is that e-mails which were received from Aquatech China are in Chinese language. The employees of assessee no doubt have replied in English, but what is the outcome of queries raised. In other words, what are the services which were rendered by the said Aquatech China is not clear. It may be pointed out herein itself that the TPO had rejected the claim of assessee on this surmise beside other points; but the assessee has not filed English translation of the said document before the DRP or even before us. Further, the assessee has filed certain additional evidences before the DRP vide application dated 17.11.2015,
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which are placed at pages 287 to 292 of Paper Book. The perusal of e-mails at pages 306 to 308 of Paper Book reflects the mails received from Aquatech China in Chinese language. The learned Authorized Representative for the assessee has not referred to any English translation in this regard. We refer to the first document placed at pages 307 to 309 of Paper Book. The assessee has also placed other e-mails which are from the employees of assessee to Aquatech China but the replies are majorly from the counterpart of assessee were in Chinese language. This is the position when the TPO had already brought to the notice of assessee that copies of e-mails received from Aquatech China were in Chinese language. On sample basis, he also referred to other documents filed by the assessee in remand proceedings before the TPO which are part of quotations received from China vendors with support from Aquatech China. The documents placed at pages 513 to 527 of Paper Book are all in Chinese language. So they are definitely received from China, but whether in connection to providing services to the assessee or not, is not clear from the said documents. The onus is upon the assessee to provide English transaction of the said documents, which the assessee has failed to supply even before us. In the written submissions under para B.3, the assessee has referred to Paper Book pages and also pointed out the summary of e-mails exchanged between the parties but the said stand of assessee is not verifiable as the assessee has failed to furnish English translation of the documents relied upon.
The case of assessee before us is two-fold; that where the transactions of EPC segment were accepted by the TPO to be at arm's length price, then the assessee having paid charges for professional services to Aquatech China, for which no separate benchmarking was done and where the payments were
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in relation to EPC segment, then the same could not be segregated and benchmarked separately. The second line of objection is against benchmarking of the said transaction by the TPO at nil on the ground that the assessee had failed to demonstrate the benefits received and consequently, determined arm's length price at nil. Even the DRP had failed to consider various additional evidences filed to substantiate the claim of services received from Aquatech China and had in turn, evaluated whether the assessee had received any benefit from the services. The assessee has challenged the findings of DRP that associated enterprise had rendered only nominal services and had assumed the arm's length price of international transactions of receiving professional services to the tune of ₹ 4 lakhs and made an adhoc addition of ₹ 1.32 crores.
The issue which arises is whether the onus is upon assessee to establish its case of availment of services from its associated enterprise. The learned Authorized Representative for the assessee has also accepted the same that receipt of services have to be established by the assessee. Undoubtedly, whether the services were needed or what was the benefit of said services is not required to be proved by the assessee. We have held so in M/s. Eaton Fluid Power Ltd. Vs. ACIT (supra) that the TPO cannot sit in the judgment of business module of assessee and its intention to avail or not to avail any services from its associated enterprise.
Further, the Hon’ble Bombay High Court in CIT Vs. Lever India Exports Ltd. (supra) had laid down the proposition that the jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an international transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules.
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Further, in another decision, the Hon’ble Bombay High Court in the case of CIT Vs. Johnson & Johnson Ltd. (supra) had held that the TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. In view of the settled position of law, we hold that jurisdiction of TPO is limited to determine the arm's length price of international transactions undertaken by the assessee. The aforesaid transaction of payment of professional fees is to be benchmarked in the hands of assessee subject to the assessee fulfilling its stand of availing services from its associated enterprise in China. The assessee is thus, directed to furnish complete information in this regard especially the documents in Chinese language to be translated into English language and the TPO is thus, directed to verify the evidences so available with the assessee and decide the issue of availment of services by the assessee from its associated enterprise in China. Once the same has been established, then the next step is to determine the arm's length price of said segment in the hands of assessee by applying most appropriate method of benchmarking the international transactions, for which the Assessing Officer / TPO shall afford reasonable opportunity of hearing to the assessee and decide the issue in line thereof.
Before parting, we may also refer to the contention of assessee that the transaction of payment of professional service charges to associated enterprise in China is to be aggregated with the transaction of EPC segment. In the absence of assessee having established the nature of services availed, we find no merit in the aforesaid plea of the learned Authorized Representative for the assessee. The assessee has first to establish its case of availment of services from its associated enterprise, for which we have already given necessary
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directions as above. Accordingly, the grounds of appeal raised by assessee are partly allowed.
In the result, the appeal of assessee is partly allowed.
Order pronounced on this 28th day of February, 2019.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 28th February, 2019. GCVSR आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : The Appellant; 1. The Respondent; 2. The DRP-3, WZ, Mumbai; 3. The PCIT-I, Pune; 4. The DR ‘B’, ITAT, Pune; 5. Guard file. 6. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune