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Facts
The assessee, engaged in dredging and marine engineering services, faced transfer pricing adjustments and disallowances for AYs 2013-14 to 2015-16. Issues included disallowance of reimbursement of expenses, disallowance of provision for expected loss on contracts, and adjustments related to deputation of personnel and royalty payments for technical services.
Held
The Tribunal held that the disallowance of provision for expected loss on contracts was not justified and should be allowed as a deduction, following a previous ruling. The Tribunal also directed the AO to follow judicial consistency regarding benchmarking for deputation of personnel and accept the FTS payment at arm's length.
Key Issues
Whether the disallowance of provision for expected loss on contracts is valid and whether the transfer pricing adjustments for deputation of personnel and technical services are justified.
Sections Cited
143(3), 144C(13), 92CA, 10B, 40(a)(ia), 37
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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM
(िनधा)रणवष) / Assessment Year: 2013-14) & आयकर अपील सं./ IT (TP)A No.35/Chny/2018 (िनधा)रणवष) / Assessment Year: 2014-15) & आयकर अपील सं./ IT (TP)A No.87/Chny/2019 (िनधा)रणवष) / Assessment Year: 2015-16) M/s. International Seaport Dredging DCIT / JCIT(OSD) Private Limited, Corporate Circle-2(2) बनाम 5th floor, Challam Towers, Chennai. Old No.62, New No.113, / Vs. Dr.Radhakrishnan Salai Chennai-600 004. �थायीलेखासं./जीआइआरसं./PAN/TAN No. AABCI-2286-E (अपीलाथ�/Appellant) : (��थ� / Respondent) अपीलाथ�कीओरसे/ Appellant by : Shri Ashik Shah (C.A) – Ld.AR ��थ�कीओरसे/Respondent by : Shri A.Sasi Kumar (CIT) -Ld. DR सुनवाईकीतारीख/Date of Hearing : 05-02-2025 घोषणाकीतारीख /Date of Pronouncement : 02-05-2025 आदेश / O R D E R Per Manu Kumar Giri, JM: These appeals by assessee for Assessment Years (AY) 2013-14 & 2014-15 arise out of the separate orders of assessments framed by Ld. Assessing Officer [AO] u/s.143(3) r.w.s 144C(13) of the Act on 26/10/2017 and 28.06.2018 respectively, whereas appeal by assessee for Assessment Year (AY) 2015-16 arises out of the order of the Ld. CIT(A)-6 dated 20.09.2019. The grounds taken by the assessee for Assessment Years (AYs) 2013-14, 2014-15 and 2015-16 read as under: A.Y. 2013-14: The grounds stated here are without prejudice to one another. The Lower authorities have erred in finalizing an order of assessment, which is against the principles of natural justice, violative of provisions of the Act, devoid of merits, without appreciating the facts involved, without appreciating the documents submitted in proper light, without conducting adequate inquiries and as such is without jurisdiction.
2. Transfer Pricing 2.1. The Lower authorities have finalized their order with improper adjustments, as a result of misapplying the law pertaining to TP and by adopting faulty processes/ methodologies to finalize the adjustment, such as but not limited to, applying filters, functional analysis selection of comparable companies, computation of profit margin of Appellant and comparable companies and undertaking economic adjustment. 2.2. The lower authorities have erred in disregarding the FAR analysis submitted by the Appellant and erroneously characterized the Appellant's transaction as a high- end service. 2.3. Without prejudice to the above, the lower authorities have erred in selecting companies that are not comparable to the Appellant's business. 2.4. The Lower authorities have failed to take cognizance of the fact that the fees was paid at the rate of 5 percent on the basis of an agreement between the parties. 2.5. The lower authorities erred in disallowing the 2 percent of fees for technical services, without appreciating rationale and evidences provided to substantiate the additional services availed. 2.6. The lower authorities while disallowing 2 percent of the fees paid had not adhered to the principles of benchmarking in determining the Arm's Length Price and had arbitrarily disallowed 2 percent. The lower authorities have erred in not following the principle of consistency in relation to the transfer pricing approach adopted.
3. Corporate Tax 3.1 The lower authorities have erred in disallowing the cost to cost reimbursement of expenses incurred by the group companies on behalf of the Appellant on account of non-deduction of tax at source. 3.2. The Lower authorities have failed to consider that no service has been rendered by the group companies, hence the payments are not chargeable to tax in India and consequently no taxes are required to be withheld.
A.Y.: 2014-15:
1. The lower authorities have erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed.
2. The lower authorities have finalized their order with improper adjustments to the reported income of the Appellant, as a result of misapplying the provisions of the Act, by adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, rejection of transfer pricing study, application of filters, analysis of the functions carried out by the Appellant and those of the comparable companies, selection of comparable companies, computation of profit margins of the comparable companies, as well as usage of appropriate adjustments.
II. TP Adjustment in relation to the payment for availing technical services
3. The lower authorities have, in facts and circumstances of the case and in law, failed to appreciate that the rate of technical service fees paid to turnover was much lower than the arm's length rate determined from comparable agreements.
4. The lower authorities have, in facts and circumstances of the case and in law, failed to appreciate that the Appellant has made the payment to its AE in accordance with its agreement valid for the current period and erred in considering the prior agreement of the Appellant with its AEs for determining arm's length price without bringing on record any benchmarking exercise using third party comparable prices.
5. The lower authorities have, in facts and circumstances of the case and in law, erred in disallowing the 2 percent of fees for technical services arbitrarily, without appreciating rationale and evidences provided to substantiate the additional services availed, and has erred in concluding that no tangible/direct benefits accrued to the Appellant from such services.
6. The lower authorities erred in law and in facts by ignoring the provisions of rule 10B while determining the arm's length price for receipt of technical services.
III. TP Adjustment in relation to income received from deputation of personnel
7. The lower authorities have, in facts and circumstances of the case and in law, erred in disregarding the functional and risk analysis submitted by the Appellant and erroneously characterized the Appellant's transaction as a high-end service.
8. The lower authorities have, in facts and circumstances of the case and in law, erred in not following the principle of consistency in relation to the transfer pricing approach adopted.
9. The lower authorities have, in the facts and circumstances of the case and in law, erred in choosing certain comparable companies despite such companies failing the legally required parameters such as, but not limited to, functional dissimilarity and quantitative filters.
10. The lower authorities have, in facts and circumstances of the case and in law, erred in not following the direction of Ld. DRP to exclude three comparable companies with regard to transaction of deputation of personnel.
11. The lower authorities have, in facts and circumstances of the case and in law, erred in incorrectly computing the operating margin of the comparable companies selected for benchmarking purposes.
IV. Disallowance in relation to reimbursement of expenses
12. The lower authorities have, in facts and circumstances of the case and in law, erred in disallowing the cost to cost reimbursement of expenses incurred by the group companies on behalf of the Appellant on account of non-deduction of tax at source.
13. The lower authorities have, in facts and circumstances of the case and in law, failed to consider that no service has been rendered by the group companies, hence the payments are not chargeable to tax in India and consequently no taxes are required to be withheld.
Without prejudice to the above, the lower authorities have, in facts and circumstances of the case and in law, erred in not considering the respective treaties.
V. Disallowance in relation to provision for expected loss on contracts
15. The lower authorities have, in facts and circumstances of the case and in law, erred in disallowing provision for expected loss on contract amounting to INR 2,72,425.
The lower authorities have, in facts and circumstances of the case and in law, erred in disregarding the relevant Accounting Standard ('AS') issued by the Institute of Chartered Accountants of India (ICAI).
Vi Miscellaneous grounds
The lower authorities have, in facts and circumstances of the case and in law, erred in not providing relief for brought forward losses.
The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto.
ASSESSMENT YEAR: 2015-16:
The lower authorities have erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed.
The lower authorities have finalized their order with improper adjustments to the reported income of the Appellant, as a result of misapplying the provisions of the Act, by adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, rejection of transfer pricing study, analysis of the functions carried out by the Appellant and those of the comparable companies, selection of comparable companies, computation of profit margins of the comparable companies, as well as usage of appropriate adjustments.
11. TP Adjustment in relation to the payment for availing technical services
3. The lower authorities have, in facts and circumstances of the case and in law, failed to appreciate that the rate of technical service fees paid to turnover was lower than the arm's length rate determined from comparable agreements.
4. The lower authorities have, in facts and circumstances of the case and in law, failed to appreciate that the Appellant has made the payment to its AE in accordance with its agreement valid for the current period and erred in considering the prior agreement of the Appellant with its AEs for determining arm's length price without bringing on record any benchmarking exercise using third party comparable prices.
5. The lower authorities have, in facts and circumstances of the case and in law, erred in disallowing the 2 percent of fees for technical services arbitrarily, without appreciating rationale and evidences provided to substantiate the additional services availed, and has erred in concluding that no tangible/ direct benefits accrued to the Appellant from such services.
The lower authorities erred in law and in facts by ignoring the provisions of rule 10B while determining the arm's length price for receipt of technical services.
III. Disallowance in relation to reimbursement of expenses
7. The lower authorities have, in facts and circumstances of the case and in law, erred in disallowing the cost to cost reimbursement of expenses incurred by the group companies on behalf of the Appellant on account of non-deduction of tax at source.
The lower authorities have, in facts and circumstances of the case and in law, failed to consider that no service has been rendered by the group companies, hence the payments are not chargeable to tax in India and consequently no taxes are required to be withheld.
Without prejudice to the above, the lower authorities have, in facts and circumstances of the case and in law, erred in not considering the respective treaties.
10. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal mentioned supra and all consequential relief thereto.
Brief facts of the case are as under: The assessee is engaged in the business of dredging and marine engineering services involving designing, construction, developing, modernising, extending and maintaining ports and harbours. The Company also carried out the maintenance of dredging works for public as well as private ports in India. During the scrutiny assessment proceedings, the Transfer Pricing Officer (‘TPO’ in short) and the Assessing Officer ('AO' in short) made certain adjustments / disallowances to the assessee's income. Against draft assessment order of the AO, the Appellant filed its objections before the Dispute Resolution Panel ('DRP' in short) for AY 2013-14 and 2014-15. The DRP deleted the transfer pricing adjustment towards lease rental payments for AY 2013-14 and upheld the other adjustments and disallowances for AY 2013-14.
1. Further for the AY 2014-15, the DRP allowed the exclusion of certain comparable companies for computation of the upward adjustment made towards income received from deputation of personnel, while upholding the other adjustments made by the TPO and AO.
2. For the AY 2015-16, the Appellant filed an appeal against the final assessment order before the CIT(A), who upheld the order of the AO and TΡΟ. The adjustments made during the AYs 2013-14 to 2015-16 are as under:- (Amount in INR crores)
Nature of Adjustment AY 2013-14 AY 2014- AY 2015- 15 16
Downward adjustment for 2.80 6.39 3.89 payment of royalty to AEs for availing technical services Upward adjustment 0.30 0.28 -- towards income received from deputation of personnel Disallowance of 0.61 0.47 1.08 reimbursement of expenses under Section 40(a)(ia) of the Income Tax Act, 1961 ('the Act') Disallowance of provision -- 0.03 -- of expected loss on contract under Section 37 of the Act
The Appellant has deputed some of its employees to the AE's during the AYs 2013-14 to 2015-16. Nature of employees deputed is as under:- (a) The employees deputed are operational level employees involved in the execution of projects. These employees are not involved in any decision- making pertaining to AEs project; (b) Only those employees having idle time were deputed to the Group based on the AEs requirements; and (c) The Company does not oversee the operations of the deputed employees during the deputation period. The deputed employees undertake or execute operations based on instructions provided by the AEs to which they have been deputed. The Appellant is recharged by the AEs on a cost-plus mark-up of 12% for such deputation. The TPO has inferred that the services provided by the company to the AEs are high value-added services and TPO concluded that the mark-up charged by the Appellant was insignificant and proposed to undertake a fresh benchmarking. The TPO computed an arm's length margin of comparable companies at 27.44% for AY 2013-14 and 35.24% for AY 2014-15 and made an adjustment to the revenue amounting to INR 0.30 crores and INR 0.22 crores, respectively. Subsequent to the Directions of the DRP, the TPO revised the arm's length margin of comparable companies to 40.25% for AY 2014-15 and accordingly, revised the upward adjustment to INR 0.28 crores for AY 2014-15.
The ld. counsel for the assessee submitted that the Appellant provides only support services and not specialized services. The employees deputed have a basic graduation degree in engineering and cannot be treated as highly qualified and specialised employees. The employees deputed are operational level employees involved in the execution of projects and providing operational assistance including support functions such as finance. These employees are not involved in any decision-making processes. Accordingly, the Appellant had benchmarked the mark-up charged to AEs based on the arm's length margin of comparable companies involved in providing administrative support services. Referred Pg 144 of Paper Book dated 07.06.2018 filed for AY 2013-14 and Pg 125 of Paper Book for AY 2014-15 dated 29.01.2019.
With regard to deputation to AEs aids recovery of idle time employee cost, the Appellant also highlighted the fact that employees deputed to AEs perform only operational activity and moreover, since only idle item of the employees are utilized, the amount recovered from AEs results in recovery of employee cost which otherwise would have been incurred by the Company resulting in lower profits. TPO's stand in the light of similar facts in earlier and subsequent assessment years, the Appellant refers to the transfer pricing assessment concluded during the earlier AYs 2011-12 and 2012-13 in the Appellant's own case and subsequent AY 2015-16. It may also be noted that for the AY 2009-10, the TPO had rejected the Appellant's benchmarking under TNMM and proceeded to do an entity-level TNMM, wherein this Hon'ble Tribunal had upheld the transaction wise benchmarking adopted by the Appellant, thereby deleting the adjustment proposed by the TPO. Further, it would also be relevant to note that a show-cause notice dated September 26, 2018 (Referred Pg 371 of Paper Book dated 29.01.2019), wherein the TPO averred that the services are being provided by highly qualified people and thus, the mark up appears to be insignificant. On this basis, the TPO proposed to benchmark the transaction based on an independent search conducted by the TPO. The ld. Counsel further pointed out that the TPO during the AYs 2013-14 and 2014-15 had conducted a fresh search process on a similar basis as provided in the SCN for AY 2015-16. In response to the SCN, the Appellant vide letter dated October 17, 2018 (Referred Pg 376 of Paper Book dated 29.01.2019) challenged the TPO's characterisation of the transaction as technical services of specialized nature by elucidating the low- end nature of services provided by the Appellant. The TPO after duly considering the Appellant's submissions in this regard did not make any adjustment with respect to the above referred transaction in AY 2015-16 vide his order dated October 31, 2018 (Referred Pg 379 of Paper Book dated 29.01.2019). Therefore, the assessee based on the principle of consistency pleaded that benchmarking in respect of the said transaction may be upheld. With regard to the comparable companies selected by TPO not in the business of providing manpower services, the assessee submitted that the TPO's benchmarking based on margins of companies engaged in engineering
and design services is not tenable considering that the nature of service provided by the Appellant is mere provision of manpower services and there are no engineering or design services provided by the Appellant to its AEs. For instance, certain comparable companies selected by the TPO are engaged in wind power generation activity (Mitcon Consulting and Engineering Services Ltd.), deployment of optical fiber infrastructure (RK Infratel Limited), designing, engineering and testing of electrical substations (Siddhartha Engineering Ltd.), etc, which is not functionally similar to the service of provision of manpower services rendered by the Appellant in connection with the deputation of personnel. Further for the AY 2014-15, it is also submitted that there are material discrepancies in the computation of operating margins of the comparable companies selected by the TPO. The workings for the computation of operating margins of the comparable companies were not provided by the TPO. The Appellant submits that the operating margins of the comparable companies must be computed as per the audited financials of the companies. Therefore, it is prayed by the assessee that the transfer pricing adjustment towards income received from deputation of personnel may be deleted.
The submissions of the appellant on Adjustment of royalty payment to AEs for availing technical services for AY 2013-14 ( Grounds 2.4 to 2.7), AY 2014-15 (Grounds 3 to 6) and AY 2015-16 (Grounds 3 to 6): 6. Facts of the issue are that the Appellant had entered into an agreement with Tideway BV ("TBV") for receipt of technical services. As per the agreement, the Appellant was required to pay a fee (hereinafter referred to as FTS) amounting to 3% of its turnover. From FY 2012-13, the appellant received additional services from its TBV in the nature of contractual assistance for project tendering, maintenance of quality and health safety measures, etc., this warranted the additional payment of FTS. Accordingly, vide addendum to the FTS Agreement, the rate of FTS was increased from 3% to 5% with effect from July 2012. The above payment was established to be at arm's length as it is lower than the arm's length rate of 5.63% as per the comparable agreements identified in the benchmarking analysis of the TP documentation. The TPO rejected the incremental FTS, as compared to previous years and made an adjustment to the extent of 2% of turnover. With regard to receipt of additional services the assessee submitted that the additional services received by the Appellant from FY 2012-13 were in the nature of assistance provided for obtaining ISO accreditation, maintenance of quality, health safety and environment security measures and contractual assistance in project tendering. The TPO failed to note that the services were specific and specialised and erroneously concluded that services are generic in nature. The assessee further submitted that rate adopted by TPO is not Comparable Uncontrolled Price ('CUP'). As per rule 10B(1)(a)(i) of the Rules, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is to be identified. Thus, for the purpose of applying CUP method, the services rendered by the appellant have to be compared with price paid for similar services received by parties in an uncontrolled transaction. However, in the present case the TPO has compared the rate of FTS paid by the Appellant with assessee’s own agreed price during a prior year, which is not an uncontrolled transaction and cannot be used as a CUP. The Appellant relies on the following judicial precedents in this regard: (a) The Hon'ble Mumbai Bench of the Tribunal had held in the case of Cabot India Ltd. (12 taxmann.com 70 that "where no data was available in respect of uncontrolled transactions which were similar to transactions of assessee with its foreign associated enterprise, CUP method could not be considered as most appropriate method to determine arm's length price (ALP) of royalty paid by assesse to its AE for technology collaboration"
(b) The Hon'ble Chennai Bench of the Tribunal has held in the case of Flakt (India) Ltd. 70 taxmann.com 342 that "Without identifying comparable uncontrolled transactions, TPO could not simply come to conclusion that quality and volume of services received by assesse were not commensurate with payment made by assessee" The assessee further submitted that the TPO in his order held that there is no increase in operational efficiency and the same is evidenced from the losses being incurred by the Appellant over the years. In this regard, it is pertinent to note that the loss incurred by the Appellant amounting to INR 19.5 crores during the financial year 2012-13 which considerably constitutes of the impairment loss on Kaveri dredger owned by the Appellant. Without prejudice to the above, the Appellant also wishes to submit that the ALP of a transaction does not depend on whether a transaction results in profit or loss to the Appellant. The Hon'ble Punjab & Haryana High Court had in the case of Knorr-Bremse India (P) Ltd. (63 taxmann.com 186):(2016) 380 ITR 307 (P&H) has held that "whether a transaction is at an ALP or not is not dependent on whether transaction results in an increase in assessee's profit. Mere failure to establish that transactions resulted in a profit does not indicate they were not at an ALP and even if profit is established, it does not necessarily follow that transaction was at an ALP." Further, the TPO cannot question the commercial expediency of a business decision as that falls beyond his scope of determining the ALP. In this regard, the appellant relied on the following judicial precedents: (a) Decision of Delhi High Court in the case of EKL Appliances (TS-206-HC- 2012(Del)-TP) (b) Decision of the Hon'ble 'D' Bench of Chennai ITAT in the case of Siemens Gamesa Renewable Power (P.) Ltd.
In the light of the above, the Appellant humbly prays before this Hon'ble Tribunal to adopt the transfer pricing methodology adopted in its TP documentation and accept the FTS payment to AE at arm's length.
7. Disallowance in relation to provision for expected loss on contracts; AY 2014-15: Grounds 15 and 16. Facts of the case During the AY 2014-15, the Company has provided for expected loss on contract in its profit and loss account amounting to Rs. 2,72,425/- and the same has been claimed as deduction in computing the total income of the Company. The AO has disallowed the provision for expected loss on contract under section 37 of the Act while computing the total income of the Appellant without providing any basis or the reason for such disallowance in the final assessment order. The assessee submitted that the Appellant, had in line with the Accounting Standard ('AS') 7 notified by the Ministry of Corporate Affairs ('MCA') after consultation with the Institute of Chartered Accountants of India ('ICAI), provided for the loss on expected contracts, while computing its income from business. It is submitted that the Appellant had been consistently following the accounting principles and method of accounting prescribed under AS-7, wherein the anticipated loss on contracts should be provided for in the books on the basis of principles of prudence. The said provision for loss contract claimed as a deduction by the Appellant in computing the taxable income was disallowed by the lower authorities. In this regard, the Appellant submits that the said provision was reviewed and reversed during the subsequent assessment year 2015-16, in line with the AS 7, and was consequently offered to tax in the said year. Provision for loss on contracts charged in Profit and Loss Account in AY 2014-15 is Rs.2,72,425/-, Reversal of provision for loss on contracts reduced from expenses in the Profit and Loss Account in AY 2015-16
is loss of Rs.2,72,425/-. Assessee pointed out that the profit before tax in item VII as per the Profit and Loss account for AY 2015-16 is the same appearing in Annexure 1 to Computation of Total Income. Thus, it may be noted that the reversal of provision for losses has been duly offered to tax in the immediate subsequent AY. In light of the above, the Appellant submits that the said disallowance during the Impugned AY would result in double-taxation of the same amount that has already been duly offered to tax in the subsequent AY, at the same rates of tax. The said disallowance would therefore unfairly prejudice the Appellant. Hence, the assessee pleaded that the only dispute is regarding the year of allowability of expenditure and given that the rate of tax applicable for the said years is uniform, the entire exercise of seeking to disturb year of allowability of expenditure would, in any case, be revenue neutral. The Appellant relies on the following decisions in this regard: Bilahari Investment Private Limited (299 ITR 1-Supreme Court) Excel Industries Limited (358 ITR 295-Supreme Court) Triveni Engg & Industries Ltd4 (336 ITR 374-Delhi High Court) Amec Foster Wheeler India Pvt. Ltd. (ITA 680/CHNY/2020-Chennai ITAT) The Appellant also submits that the aforesaid issue has been covered in Appellant's own case for AY 2016-17 in where after considering and appreciating that the provision is an ascertained liability that has been created based on the estimated cost and revenue has been recognized on Percentage of Completion method. Further, this Hon'ble Tribunal had also considered the fact that the provision created has been reversed and offered to tax in the future years. It is therefore, assessee prayed that the said disallowance for the Impugned AY be deleted, in view of principles of natural justice and given the position of revenue neutrality. Without prejudice to the above, if the said disallowance is confirmed for the impugned AY, the Appellant requests for a direction to be issued to the Ld. AO, to allow deduction of the reversal of the said amounts in the subsequent years, to ensure that the same amount is not doubly taxed in the hands of the Appellant.
8. Relief for brought forward losses; AY 2014-15: Ground 17 The Appellant had brought forward losses and unabsorbed depreciation based on the assessed loss/income of prior financial years for set off against the assessed income of the AY 2014-15 While determining the tax payable for AY 2014-15, the AO failed to set off the brought forward unabsorbed depreciation against the income of the Appellant. Since, the Appellant has losses available for set off against income for AY 2014-15, the Appellant prays for direction to the lower authorities to consider the same while computing the taxable income of the Appellant.
9. Per contra, the ld.DR, Mr. A. Sasi Kumar, CIT relied upon the orders of the DRP/CIT(A) and Assessment orders. However, he has not disputed the order of the co-ordinate bench order in assessee’s own case for AY 2016-17 on the issue of disallowance of provision of expected loss on contract under Section 37 of the Act. The ld.DR read out the findings of AO and DRP and pleaded for dismissal of appeals.
We have heard the rival submissions/arguments of both the parties and perused the voluminous paper books filed by the assessee.
A. Our adjudication on the issue ‘Deputation of Personnel’: We find from the Pg 144 of Paper Book dated 07.06.2018 filed for AY 2013-14 and Pg 125 of Paper Book for AY 2014-15 dated 29.01.2019, the Appellant provides only support services which cannot be termed as specialized services. We also endorse the arguments of the assessee that the employees deputed have a basic graduation degree in engineering and cannot be treated as highly qualified and specialised employees. In this case, the employees deputed are operational level employees. These employees are involved in the execution of projects and providing operational assistance including support functions such as finance. These employees are not supposed to do the action or process of making important decisions. We also note that there is/was no adjustment made during the previous and subsequent Assessment Years [see TPO’s order u/s 92CA, paper book page 358, 364, 379 for AY 2014-15 dated 29.01.2019]. Therefore, in the light of above factual matrix, we direct the AO to follow the judicial consistency and accept the detailed benchmarking based on the comparable set of companies engaged in providing administrative support services as submitted by the assessee in appeals for AYs 2013-14 & 2014-15 [refer paper book page 144 for AY 2013-14 dated 07.06.2018 and paper book page 125 for AY 2014-15 dated 29.01.2019]. Hence, this ground of appeal is allowed for statistical purposes.
B. Our adjudication on the ‘Downward adjustment for payment of royalty to AEs for availing technical services:
The agreement between Appellant and Tideway BV ("TBV" in short) for receipt of technical services, the Appellant was required to pay a fee (hereinafter referred to as FTS) amounting to 3% of its turnover. From FY 2012-13, the appellant received additional services from TBV which are in the nature of contractual assistance and for obtaining ISO accreditation, maintenance of quality, health safety and environment security measures and contractual assistance in project tendering. Consequently, the additional payments of FTS arise. For the reason that vide addendum to the FTS Agreement [refer page 309 of Paper book filed for AY 2013-14 dated 07.06.2018], the rate of FTS was increased from 3% to 5% with effect from July 2012. The aforesaid payment was established to be at arm's length as it is lower than the arm's length rate of 5.63% [refer page 96 of paper book filed for AY 2013-14 dated 07.06.2018; page 78 of paper book filed for AY 2014-15 dated 29.01.2019; page 59 of paper book filed for AY 2015-16 dated 21.04.2021] as per the comparable agreements identified in the benchmarking analysis of the TP documentation [refer pages 150-154 of paper book filed for AY 2013-14 dated 07.06.2018; pages 133-137 of paper book filed for AY 2014-15 dated 29.01.2019; pages 116-119 of paper book filed for AY 2015-16 dated 21.04.2021]. The TPO rejected the incremental FTS, as compared to previous years and made an adjustment to the extent of 2% of turnover. We find that the TPO failed to note that the services were specific and specialised. The TPO dehors the TP documentation referred supra cannot arbitrarily and erroneously concluded that services are generic in nature. In fact, the additional services received by the assessee from FY 2012-13 were in the nature of assistance provided for obtaining ISO accreditation, maintenance of quality, health safety and environment security measures and contractual assistance in project tendering. [Refer page 1799-206 of paper book filed for AY 2013-14 dated 07.06.2018 and page 219 of paper book filed for AY 2013-14 dated 07.06.2018]. Further, while applying CUP method, TPO has to follow the rule 10B(1)(a)(i) which speaks of ‘price paid for similar services received by parties in an uncontrolled transaction. However, in the present case the TPO has compared the rate of FTS paid by the Appellant with assessee’s own agreed price during a prior year, which is not an uncontrolled transaction and cannot be used as a CUP. In this respect, the Mumbai Bench of the Tribunal had held in the case of Cabot India Ltd. (12 taxmann.com 70 that "where no data was available in respect of uncontrolled transactions which were similar to transactions of assessee with its foreign associated enterprise, CUP method could not be considered as most appropriate method to determine arm's length price (ALP) of royalty paid by assesse to its AE for technology collaboration". Similarly, the Chennai Bench of the Tribunal has held in the case of Flakt (India) Ltd. 70 taxmann.com 342 that "Without identifying comparable uncontrolled transactions, TPO could not simply come to conclusion that quality and volume of services received by assesse were not commensurate with payment made by assessee". Hence, in the light of above discussion and orders of the Tribunal, we are of the considered view that the reasoning given by the TPO is not sound. Commercial expediency of the assessee cannot be questioned by the TPO. Further, we also note that the Hon'ble Punjab & Haryana High Court had in the case of Knorr-Bremse India (P) Ltd. (63 taxmann.com 186):(2016) 380 ITR 307 (P&H) has held that "whether a transaction is at an ALP or not is not dependent on whether transaction results in an increase in assessee's profit. Hence in the light of the above factual and legal matrix, we direct the AO to adopt the transfer methodology adopted in its TP documentation and accept the FTS payment at arm’s length. Hence , this ground of appeal is allowed for statistical purposes.
C. Our adjudication on the issue of ‘Disallowance in relation to provision for expected loss on contracts (AY 2014-15): The lower authorities disallowed provision for expected loss on contract amounting to Rs.2,72,425/- for AY 2014-15. The AO has disallowed the provision for expected loss on contract under section 37 of the Act while computing the total income of the assessee. The assessee submitted that this is squarely covered by the order of the co-ordinate Bench in assessee’s own case for AY 2016-17 in ITA No.1284/Chny/2023. The order of co-ordinate Bench in assessee’s own case for AY 2016-17 held as under:
Our findings and Adjudication 5. In the written submissions, Ld. AR has submitted that the assessee has secured a dredging contract from M/s Kamarajar Port Limited at Kamarajar Port. The estimated duration of the contract was around 2 to 3 years. This contract concluded in FY 2017-18. The total revenue earned form the project was Rs.312.75 Crores and total cost was Rs.398.03 Crores. Accordingly, the assessee ultimately suffered loss of Rs.85.28 Crores in the project. It has further been submitted that the assessee was contractually obligated to complete the said contract. The assessee recorded revenue and contract cost based on Percentage of Completion Method ("POCM") as mandated by AS-7 issued by ICAI. The standard mandates that the in a scenario where it is probable that the total contract costs are expected to exceed the total contract revenue, the expected contract loss is to be immediately recorded as an expense. Following the same, the assessee has estimated the total contract cost to be Rs.238.72 Crores as against contract revenue of Rs.218.74 crores which leads to an expected loss of Rs.19.98 crores. During this year, the assessee has incurred actual contract cost of Rs.102.86 crores and has also recorded contract revenue of Rs.94.25 crores (based on POCM) thereby booking an actual loss of Rs.8.61 crores. The Ld. AR submitted that though actual revenue billed during the year was Rs.47.26 Crores, considering the fact that the project was completed to the extent of 43.09% during this year, the assessee booked additional revenue of Rs.46.99 Crores during this year. Further, out of total expected loss of Rs.19.98 Crores, the assessee has already recorded actual loss Rs.8.61 Crores and made provision for the balance expected loss of Rs.11.37 Crores. Hence, the provision has been created as per mandate of AS- 7 and the same could not be held to be unascertained / contingent liability for the assessee. It is the submission that both revenue and expenditure as recorded by the assessee has been recognized as per percentage of completion method. The Ld. AR further submitted that the income computation and disclosure standards (ICDS) as notified by the Central Government vide Section 145(2) are applicable only from AY 2017-18 onwards and accordingly, the same would not have an impact on AY 2016- 17. Reliance has been placed on the decision of Hon'ble Delhi High Court in the case of Triveni Engg & Industries Ltd [336 ITR 374] and the ruling of Pune Bench of the Hon'ble Tribunal in the case of Ashoka Buildcon Ltd. [170 TT J 19] for the submissions that the provision for contract losses would be an allowable deduction. Lastly, it has been submitted that out of impugned provision of Rs.11.37 Crores, the assessee has reversed provision to the extent of Rs.10.56 Crores in the subsequent year and offered the same to tax. Disallowing the provision in this year would amount to double taxation which is impermissible. The Ld. AR referred to the decision of Hon’ble Apex Court in the case of Excel Industries Ltd [358 ITR 295] to support these submissions. The Ld. CIT-DR, in its written submissions, supported the findings of Ld. CIT(A) and submitted that the provision made by the assessee was not an ascertained liability. The Ld. CIT-DR has referred to the ruling of the Hon'ble High Court of Madras in the case of FLSmidth v DCIT (456 ITR 300).
6. Upon careful consideration of material fact, it is quite clear that the assessee has undertaken a project which has lasted for more than 3 years. To recognize the revenue under the project, the assessee has followed percentage of completion method which is clear from following tabulation as furnished by Ld. AR in its written submissions: - ............................... ................................... It could be seen that though the actual billed revenue is less, the assessee, following POCM, has offered additional revenue of Rs.46.99 Crores. The assessee has followed same methodology to recognize the costs. As mandated by AS-7, any probable losses arising out of such contracts are to be recognized immediately. The assessee has done exactly like that. The losses from the contract were estimated at Rs.19.98 Crores, out of which an amount of actual loss of Rs.8.61 Crores was already recognized. The balance loss of Rs.11.37 Crores was recognized as provision for losses. In subsequent year, the assessee has already reversed the provision to the extent of Rs.10.56 Crores as per estimate made in subsequent year. On these facts, the provision of this year would be nothing but an ascertained liability / probable loss for the assessee. It could not be said that the provision was not made on a scientific basis. In our considered opinion, both the lower authorities have erred in appreciating the fact that revenue from the contract has also been recognized on percentage of completion basis only. The case laws as cited by Ld. AR duly support our view. The case law of Hon’ble High Court of Madras in FLSmidth v DCIT (456 ITR 300) is distinguishable on facts. Upon perusal of Para-28, it is clear that in that case the assessee could not explain as to how the total contract costs would exceed total contract revenue despite being specifically asked to explain. The assessee merely relied on AS-7. However, in the present case, the assessee has recognized the revenue as well as expenses on same methodology. The claim is supported by computations / workings. The provision has been reversed in subsequent years as per estimation made in subsequent year. Therefore, this case law would not render any assistance to the case of the revenue. The case law of Hon'ble Delhi High Court in Triveni Engg & Industries Ltd [336 ITR 374] is on similar facts. The assessee recognized the income from the projects and also made provision for expenses to be incurred up-to the stage of completion. The Ld. AO termed the provision as contingent liability and accordingly, disallowed the same. However, Hon’ble Court confirmed the order of Tribunal allowing such deduction. Therefore, on the facts and circumstances of the case, we would hold that the impugned provision would be an allowable deduction. The question of adding the same to Book-Profit do not arise.
The appeal stand allowed. Order pronounced on 3rd September, 2024”
The co-ordinate bench of Tribunal in order referred supra (assessee’s own case) held that the provision is an ascertained liability that has been created based on the estimated cost and revenue has been recognised on percentage of Completion method. Further, the co-ordinate bench of Tribunal also noted that the provision created has been reversed in subsequent years and ordered to tax in the future years.
On query from bench, the ld.AR submitted that the provision created has been reversed during the AY 2015-16 and offered to tax in subsequent year.
Therefore, respectively following the order of the co-ordinate Bench in assessee’s own case for AY 2016-17 in dated 03.09.2024 and in the light of the submissions of the assessee, we delete this addition. Hence, this ground of appeal is allowed.
14. On the issue of ‘Disallowance u/s 40(a)(i) of the Act for not withholding taxes on reimbursement of expenses’, the ld. AR for the assessee during the course of hearing has not pressed this issue. Hence, this issue is dismissed as not pressed.
In result, the appeals of the assessee are partly allowed in terms above.
Order pronounced on 2nd May, 2025.