FIELDCORE SERVICE SOLUTIONS INTERNATIONAL INDIA PVT. LTD.,GURGAON vs. ACIT, CIRCLE- 10(2), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘I-1’, NEW DELHI

BEFORE SHRI O.P. KANT, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER

ITA No.7692/Del./2017 Assessment Year: 2013-14

M/s. FieldCore Service Vs. ACIT, Solutions International Circle-10(2), India Pvt. Ltd. (Erstwhile New Delhi known as Granite Pvt. Ltd.), Building No. 7A, 5th Floor, DLF Cyber City, Phase-III, Sector-25A, Gurgaon PAN : (Appellant) (Respondent)

Appellant by Shri K.M Gupta, Adv. & Ms. Shruti Khimta, AR Respondent by Shri Surender Pal, CIT(DR) Date of hearing 01.12.2020 Date of pronouncement 04.12.2020

ORDER PER O.P. KANT, AM:

This appeal by the assessee is directed against final assessment order dated 20/10/2017 passed by the Ld. Assistant Commissioner of Income-Tax, Circle-10(2), New Delhi, pursuant to the direction dated 27/09/2017 of the Ld. Dispute Resolution Panel (DRP). The grounds raised by the assessee are reproduced as under:

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the arm’s length price u/s 920(3) by making addition of notional interest. 6. That on the facts and circumstances of the case and in law, the Hon’ble DRP/Ld. TPO/Ld. AO erred in not appreciating the fact that the continuing debit balance with an associated enterprise does not constitute an international transaction as defined u/s 92B of the Act. 7. Without prejudice to the grounds 5 and 6, the Hon’ble DRP/Ld. TPO/Ld. AO erred in: 7.1. granting a credit period of only one month as against the normal business practice of allowing a credit limit of upto 6 months and 7.2. Benchmarking the notional interest basis PLR of SBI plus 300 bps. The receivables being USD transactions, the basis for benchmarking the notional loan transaction should be the LIBOR rate which is recommended approach in case of foreign currency loans.

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9.2. That the Ld. AO and Hon’ble DRP erred in holding that such payments warrant disallowance under section 4o(a)(i) of the Act. 9.3. Without prejudice, that on the facts and circumstances of the case and in law, the Ld. AO and the Hon’ble DRP erred in not appreciating that the services provided by the employees seconded to Appellant company do not ‘make available’ any technical know-how, skills, etc., as provided under the DTAA between India and USA. 10. That on the facts and circumstances of the case, the Ld. AO and the Hon’ble DRP erred in not allowing the claim of INR 875,000 of professional fees which had been inadvertently missed to claim by assessee in return of income filed for the AY 2013-14. 11. That in the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under section 234B of the Act. 12. That in the facts and circumstances of the case and in law, the Ld. AO erred in proposing to initiate the penalty proceedings under section 27i(i)(c) of the Act. The above grounds are independent and without prejudice to each other. That the Appellant prays that it kindly may be allowed to add, amend, alter and delete the above grounds of appeal before or during the course of hearing.

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transactions reported by the assessee, the matter of determination of Arm’s Length Price of those international transaction was referred to the Ld. Transfer Pricing Officer (TPO). The LD. TPO proposed adjustment of ₹ 1,59,03,863/- to the international transaction of technical services, which was further rectified to ₹ 1,38,64,533/-. In the draft assessment order dated 29/12/2016, the Assessing Officer proposed transfer pricing adjustment as well as other corporate additions/disallowances. Aggrieved, the assessee filed objection before the Ld. DRP. The Ld. DRP, issued certain directions in the order dated 27/09/2017 in relation to the additions proposed by the Assessing Officer in the draft assessment order. Pursuant to the direction of the Ld. DRP, the Assessing Officer passed the impugned final assessment order after making following additions: Serial No. Addition Amount 1. Transfer pricing adjustment Rs. 1,28,44,201/- to technical service segment 2. Transfer pricing adjustment Rs.19,49,156/- for interest on receivable 3. Disallowance of expenditure Rs.6,75,99,621/- under section 40(a)(ia)

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S. No. Nature of Transactions Amount in INR 1 Provision of technical services 14,53,14,963 2 Provision of payroll administration services 8,55,85,187 3 Purchase of payroll administration services 5,78,32,102 4 Reimbursement of expenses 1,65, 57,521 5 Payment of payroll processing fees 56,82,284 Total 31,09,72,057

5.1 For determining arm’s-length price of the transaction of the provision of the technical services, the assessee applied Transactional Net Margin Method (TNMM) using Profit Level Indicator (PLI) as operating profit/total cost (OP/TC). The assessee worked out its PLI or margin as 16.44%. The assessee selected 13 comparables and worked out their mean margin as 11.60%. In view of margin of the assessee being higher than mean margin of the comparables, the assessee considered the transaction of the provision of technical services at arm’s-length. The Learned TPO rejected the economic analysis submitted by the assessee and undertook a fresh search of comparables. The Learned TPO initially proposed an adjustment of ₹ 1,59,03,863/- in respect of the international transaction of provision of technical support services, which was further rectified to ₹ 1,38,64,533/-. The Learned DRP granted working capital adjustment, however no relief was granted with respect to exclusion/inclusion of the

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comparables. The final set of the comparables post DRP direction, is reproduced as under: WC adjusted Comparable Margins % (Post selected by DRP Directions) Assessee or TPO S. No Comparable

1 Cades Digitech 6.24 2 Neilsoft Ltd 15.62 3 Holtec Consulting 67 .73 TPO 4 IOT Design and Engineering -0.07 5 Korus Engineering Solutions -365 Certification Engineering Solutions TPO 6 34.77 Ltd 7 Acropetal Technologies 29.46 BGR Energy Systems 12.27 8 9 Engineers India Ltd 35.29 Assessee 10 Petron Engineering Construction 9.57 11 Projects and Development India 1.91 Assessee 12 Punj Lloyd 7.34 13 Raunuq International 6.2 14 Techno Electric and Engineering 17.55 15 Wapcos 66.28 Assessee 16 TCE Consulting Engineers Ltd 12.32 Average 1993

5.2 Before us, the Learned Counsel of the assessee submitted that if comparables namely, ‘Certification Engineering Solutions Ltd.’, ‘Engineers India Ltd.’, ‘Projects and Development India’ and ‘Wapcos’, are excluded from the set of comparables, the margin of the assessee would be in the safe harbour range and no adjustment would be required in the case of the assessee in respect of technical support services. The Learned Counsel referred to page 298 and 300 of the paper-book and submitted

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that Certification Engineering Solutions Ltd (CEIL), is a Government of India enterprises. He submitted that support and backing of the government makes the company not comparable with the assessee. He submitted that the major projects have been awarded to the CEIL by Government companies. He submitted that in the case of the assessee in assessment year 2010-11, the Tribunal has rejected government companies as comparable to the assessee. Similarly, to support that Engineers India Ltd, Projects and Development India and Wapcos are Government companies, he referred to pages 304, 324, 329 respectively of the paper-book . 5.3 The Learned DR, on the other hand, submitted that objection for inclusion of above for comparables on the ground of being government companies, was not raised before the Assessing Officer and therefore this objection should not be entertained at this stage. The Learned Counsel of the assessee in his rejoinder submitted that objections in relation to selecting government companies were duly raised before the Learned DRP. 5.4 We have heard the rival submission of the parties on the issue in dispute and perused the relevant material on record. In the case of the assessee for assessment year 2010-11 in ITA No. 1486/Del/2015, the Tribunal directed to exclude ‘Engineers India Ltd.’ being a public sector undertaking and notcomparable with the assessee. The relevant finding of the Tribunal is reproduced as under: “Having heard both the sides and perused the relevant material on record, we find it as undisputed fact that Engineers India Limited is a Government company. It has several segments which also include 'Turnkey project’. Page 1 onwards of the paper book is a copy of the

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Annual report of Engineers India Limited. In our considered opinion, this company cannot be included in the list of final comparables. The reason is that Engineers India Limited earned income from turnkey projects by successfully completing the project of other Public Sector Undertakings. In that sense of the matter, the related party transactions are much more than the filter applied by the TPO. We, therefore, order for the exclusion of this company from the list of comparables. Similar view has been taken by the Mumbai Bench of the Tribunal in Thyssen Kmpp Industries India (P) Ltd. vs. Addl. CIT (2013) 154 TTJ 689 Hum). Such Tribunal order has been approved by the Hon'ble Bombay High Court, a copy of which has been placed on record. The Delhi Bench of the Tribunal in Bechtel India (P) Ltd. vs. DCIT (2016) 66 taxmann.com 6 (Del.) (Trib.) has also reiterated similar view. In the light of the foregoing precedents, we are of the considered opinion that this company was wrongly included by the TPO in the list of comparables. The same is, therefore, directed to be excluded.”

5.5 As far as CEIL is concerned, we find from page 298 of the paper-book that it is a wholly-owned subsidiary of ‘Engineers India Ltd.’, which is a government of India undertaking. The ‘Engineer India Ltd.’ has already been held by the Tribunal as a government of India undertaking. On perusal of the page 329 of the paper-book, we find that ‘Wapcos’ has been mentioned as government of India undertaking-Ministry of water resources. Similarly, Projects and Development India Ltd. is also one of the Government of India undertakings as evident from the Annual Report of the Company. The Projects and Development India Ltd. is Mini Ratna Company under the Department of Fertilizers, Government of India. In view of the above factual position, respectfully following the finding of the Tribunal (supra) these four companies being Government of India undertakings, are directed to be excluded from the set of the comparables. The Learned AO/TPO is accordingly directed to re-compute the transfer pricing adjustment after excluding above for companies.

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The grounds No. 3 & 4 of the appeal are accordingly allowed partly. 6. The grounds No. 5, 6 and 7 relates to adjustment for interest on receivables. The Learned TPO observed that assessee has received payment against invoices raised on Associated Enterprises after delay of substantial period, which in case of some invoices has been allowed for more than 200 days. According to the Assessing Officer, no independent enterprises would have allowed the third parties to make delay payments or else would have charged higher prices for delayed payments. In view of the Assessing Officer delay in receipt of payment for the receivable need to be benchmarked separately being international transaction in terms of explanation (1)(c) to section 92B and section 92F(v) of the Act. The Learned TPO worked out the delay period in each invoice and after applying mean SBI prime lending rate (i.e. 9.86%) computed the adjustment at ₹ 19,49,156/-. The Learned DRP upheld the finding of the Learned TPO. 6.1 Before us, the Learned Counsel of the assessee submitted that issue of outstanding receivable is squarely covered by the decision of the Hon’ble Delhi High Court in the case of ‘Kusum Healthcare Private Limited (ITA No. 756/2016)’ wherein it is held that no separate adjustment is required for notional interest on receivables wherever working capital adjustment has already been factored for benchmarking the main international transaction of the sales or services provided to AEs. He submitted that in the case of the assessee Ld. DRP has already granted working capital adjustment and therefore no separate adjustment is warranted in the case of the assessee. Alternatively, he also

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submitted that in view of the decision of the Hon’ble Delhi High Court in the case of Cotton Naturals (India) Private Limited versus CIT (ITA No. 233/2014) the arm’s-length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to the currency in which loan has to be repaid. He submitted that accordingly in the case of the assessee LIBOR rate should be applied instead of SBI prime lending rate. 6.2 The Learned DR, on the other hand, supported the finding of the lower authorities and submitted that in view of the delay period in case of some invoices being more than 200 days, the Learned TPO is justified in making adjustment on account of interest on receivables. 6.3 We have heard rival submission of the parties and perused the relevant material on record. In the case of Kusum Healthcare Private Limited (supra), Hon’ble Delhi High Court has held as under: “10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression „receivables‟ does not mean that de hors the context every item of „receivables‟ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way. 11. The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly

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reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-à-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re-characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi). 12. Consequently, the Court is unable to find any error in the impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.”

6.4 We find that Hon’ble High Court has held that wherever working capital adjusted margin of comparables has been taken into consideration while benchmarking the main international transaction of sales to AEs, no separate adjustment on account of interest on receivable is required as same get subsumed in working capital adjustment. In the instant case, pursuant to the direction of the Learned DRP, the Learned TPO has computed mean margin of the comparables at 19.93 % , which is available on page 44 of the appeal set. This average margin has been computed using working capital adjusted OP/OC for comparable companies. Thus it is evident that in the instant case working capital adjusted margin of the comparable companies has been considered for determination of arm’s-length price of the international transaction and therefore, following the decision of the Hon’ble jurisdictional High Court (supra), no separate adjustment for interest on receivable is required. Accordingly, the ground Nos. 5 & 6 of the appeal of the assessee are allowed. As we have already deleted the adjustment for interest on the receivables, the alternative ground No. 7 of the appeal seeking

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application of the LIBOR rate is rendered academic only and therefore same is dismissed as infructuous. 6.5 Grounds No. 8 & 9 relates to disallowance under section 40(a)(ia) of the Act. The facts in brief qua the issue in dispute are that the assessee company requested foreign Associated Enterprise to second their employees to India to work for a limited period, under supervision and control of the assessee. According to the assessee, under an agreement the employees seconded by the foreign AE were acting as employee of the assessee and the assessee is responsible to pay salary of such employees as well as their travelling and conveyance cost for the employment period. During the year under consideration, the assessee reimbursed travelling and conveyance cost and salary cost of such employees to Associated Enterprise. The assessee did not deduct tax on travelling and conveyance cost on the ground that same are ‘pure reimbursement’ of the expenses paid by the foreign Associated Enterprise in respect of such employees, however with respect to the salary cost, the tax was deducted under section 192 of the Act. The Learned Assessing Officer in draft assessment order, however was of the view that seconded employees continued to remain employees of the Associated Enterprise and were not employees of the assessee during the period of the secondment. According to him, amount shown as reimbursement to Associated Enterprises are actually in the nature of Fee for Technical Services and since there was no employer-employee relationship between the assessee and the secondees, in view of non- deduction of the tax on such payment, same were liable for disallowance. The Learned Assessing Officer also relied on the

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decision of the Hon’ble Delhi High Court in the case of Centica India Offshore P Ltd. Vs CIT reported in 364 ITR 336, where in the SLP filed by the assessee has also been dismissed by the Hon’ble Supreme Court as reported in 227 Taxman 368. The Learned DRP following its earlier orders upheld the disallowance, observing as under: “..This pertain to disallowance made by the AO u/s 40(a)(i) amounting to Rs. 6,75,99,621/-. AO has discussed in details in Para 4 of his order. The assessee’s submission is also available on record. Most of this disallowances are the same as in the earlier years and have been upheld by the DRP in earlier years against which the appeal is the applicant appeal pending. DRP Directions In view of the above DRP fully upholds the disallowance made by the AO.”

6.6 In the impugned assessment order, also the Learned Assessing Officer has observed as under: “.. It may be pertinent to note that that the Hon’ble DRP in the assessee’s own case for AY 2011-12 & 2012-13 has held payments of the above nature under identical facts to be in the nature of FTS. Respectfully following the directions of the DRP in earlier years, the disallowance is proposed to be made in current year also....”

6.7 Before us, the Learned Counsel of the assessee submitted that Tribunal in assessment year 2011-12 had restored this issue to the file of the Assessing Officer to analyse the evidences filed by the assessee and adjudicate on the taxability of those payments. He submitted that in remand proceeding the Learned Assessing Officer has accepted the contention of the assessee and held that no disallowance under section 40(a)(ia) of the Act is warranted and thereby he deleted the disallowance made in the original assessment order for said assessment year. The learned Counsel

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of the assessee submitted that in view of the principle of the consistency and identity of facts, the disallowance should be deleted in the year under consideration also. In support of the rule of consistency, the Learned Counsel relied on the decision of the Hon’ble Supreme Court in the case of Radhasoami Satsang Vs CIT (1992) 60 Taxman 248 (SC). 6.8 On the contrary, the learned DR relied on the order of the Assessing Officer and direction of the DRP in the year under consideration. 6.9 We have heard rival submission of the parties and perused the relevant material on record. The issue in dispute before us is whether the travelling and conveyance cost and salaries paid to the seconded employees constitute fee for technical services or not. The Learned Counsel of the assessee has submitted before us that on the direction of the Tribunal, in assessment year 2010-11, the Assessing Officer has re-examined the taxability of travelling and conveyance on salary cost to the seconded employee in the hands of the assessee and found that no addition is warranted under section 40(a)(ia) of the Act. The relevant part of the order of the Assessing Officer is reproduced as under: 4. Disallowance u/s 40(a)(i) of the Income Tax Act, 1961 4.1 As the matter related to the issue of disallowance u/s 40(a)(i) was restored back to the file of AO by the Honhle ITAT, New Delhi, hence fresh notice u/s 143(2) of the Act dated 13/02/2018 was issued to the assessee. Thereafter, notices u/s 142(1) of the Act were issued to the assessee company from time to time wherein the following details were sought:-

“Annexure-A for furnishing information in respect of AY 2011-12 1. Please furnish the details of payment made in respect of travel and conveyance expenses in the following format:-

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S. No. Amount Nature of Person to Whether Whether Payment whom payment TDS deducted TDS was made deducted or deposited or not not

Substantiate your clear necessary evidences such as TDS Certificate and other documents in support of your claim. 2. Please furnish the details of payment made in respect of salaries and allowance to secondees expenses in the following format:- S.No. Amount Nature of Payment Person to whom Whether Whether payment was TDS deducted TDS made deducted deposited or not or not

Substantiate your clear necessary evidences such as TDS Certificate and other documents in support of your claim. Furnish copies of agreement executed between the assessee and persons referred to at point Nos. (1) and (2) above.”

4.2 In response to these notices, the assessee company submitted its replies dated 31/10/2018 and 07/10/2019. The replies furnished by the assessee have been examined and after verification it is found that no addition/disallowance is warranted u/s 40(a)(i) of the Income Tax Act, 1961. Hence, the disallowance of Rs. 11,01,72,196/- made in the Original Assessment Order dated 31/12/2015 is reduced to Rs. NIL.”

6.10 Thus, it is evident that in earlier year identical expenses incurred on travel and conveyance and salary on seconded employees has not been found is liable for disallowance u/s 40(a)(ia) of the Act. This action of the Assessing Officer has not been found erroneous or fraud by the higher authorities of the Income Tax Department and, therefore, once the Assessing Officer has accepted that the payments are not liable for disallowance, we do not find any reason for agitating those very payments by the Assessing Officer in the year under consideration.

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Accordingly, we direct the Assessing Officer to delete the disallowance made under section 40(a)(ia) of the Act on payments reimbursed to foreign AEs towards travel and conveyance cost on salary cost of the seconded employees. The grounds No. 8 & 9 of the appeal are accordingly allowed. 7. The ground No. 10 was not pressed before us by the Learned Counsel of the assessee and accordingly same is dismissed as infructuous. In the result, the appeal of the assessee is allowed partly. 8. Order pronounced in the open court on 4th December, 2020.

Sd/- Sd/- (SUCHITRA KAMBLE) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 4th December, 2020. RK/-(D.T.D.S.) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi