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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGH & SHRI G. MANJUNATHA
आदेश /O R D E R
Per G Manjunatha, AM:
This appeal filed by the assessee is directed against final assessment order passed by the Assessing Officer u/s.143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter the ‘Act’) dated 04.05.2017, in pursuant to directions of the Dispute Resolution Panel issued u/s.114C(5) of the Act dated 17.04.2017 and pertains to assessment year 2013-14.
2. The assessee has raised the following grounds of appeal:-
1. The Ld. DRP, Ld. AO and Ld. TPO 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 fact involved, without appreciating the documents submitted in proper light, without conducting adequate inquiries and as such is without jurisdiction.
The Ld. DRP, Ld. AO and Ld. TPO 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 margins of appellant and comparable companies and undertaking economic adjustments.
3. The Ld. DRP and Ld. TPO have erred in passing non-speaking orders, without adjudicating the contentions raised by the Appellant.
4. The Ld. DRP, Ld. AO and Ld. TPO erred in considering Acropetal Technologies Limited as a comparable company:
a) When the Appellant has demonstrated that the company is not functionally comparable to the Appellant; b) When the Appellant has demonstrated that the year under assessment is an extra-ordinary year of operations for the company; c) The Ld. DRP failed to provide adequate opportunity to the Appellant to verify and object the information gathered under section 133(6) of the Income-tax Act, 1961.
5. The Ld. DRP, Ld. AO and Ld. TPO erred in introducing additional quantitative filters without rejecting the TP documentation of the Appellant as required under section 92C(3) of the Income-tax Act, 1961.
6. The Ld. DRP, Ld. AO and Ld. TPO have erroneously applied employee cost filter, despite the Appellant highlighting various practical difficulties in adoption of this filter. The Ld. DRP, Ld. AO and Ld. TPO erred in not following judicial precedents relied upon by the Appellant in relation to application of employee cost filter.
7. The Ld. DRP, Ld. AO and Ld. TPO erred in introducing asset turnover filter to the economic analysis, without appreciating that the Appellant is in (which is not capital intensive). The inclusion of the asset turnover filter is arbitrary as the Ld. DRP, Ld. AO and Ld. TPO have not provided any threshold for application of the said filter.
8. The Ld. DRP, Ld. AO and Ld. TPO erred in law and facts by rejecting the additional companies selected by the Appellant, by stating incorrect parameters such as functional dissimilarity, non-availability of data and such other factors.
9. The Ld. DRP, Ld. AO and Ld. TPO erred in computing the operating margin of the final comparable companies selected.
10. The Ld. DRP, Ld. AO and Ld. TPO erred in disregarding the usage of multiple-year data for comparability analysis.
The Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.”
The brief facts of the case are that the assessee company is part of the Petrofac Group established in 2007, is a 100% subsidiary of Petrofac International Limited, UK. The company is engaged in the business of providing engineering design services to its group as captive service provider. The assessee was paid on a cost plus mark-up basis. During the year under consideration, the assessee has entered into an international transaction for providing engineering design services to Petrofac International Ltd., UAE and received an amount of Rs.227,82,71,984/-. The assessee has conducted transfer pricing study as required u/s.92D of the Act and has adopted Transactional Net Margin Method (TNMM) as the most appropriate method and claimed to be a tested party. The assessee
20.7% (operating profit / operating cost) and has selected 5 comparables with the 3 year weighted average margin of 13.44% and claimed that international transactions with its AE’s is at arm’s length price.
The case was taken up for scrutiny and during the course of assessment proceedings, a reference was made to the Joint Commissioner of IncomeTax, Transfer Pricing Officer – 2 to determine arm’s length price of international transactions of the assessee with its AE’s. During TP proceedings, the TPO has re-characterized TP documentation maintained by the assessee and has applied certain filters including employee cost filter and turnover filter and has excluded 3 comparables from the list of comparables and thus, retained only 2 comparables with arithmetic mean of 33.77%. The assessee has objected for application of employee cost and turn-over filter and has also filed its objections for retaining Acropetal Technologies Ltd., as a comparable, on the ground that it cannot be compared owing to extraordinary year of operation. The TPO, however, was not convinced with explanation furnished by the assessee and according to him, no concrete evidence has been filed to prove financial abnormalities to exclude Acropetal Technologies Ltd., from the list of comparables. As TPO noted that the assessee, being in the service sector and employee being the prime asset, 50% filter on employee cost is considered to be reasonable. The ld.TPO has also rejected additional comparables selected by the assessee on the ground that all 3 comparable companies suggested by the assessee are functionally different from the assessee company and hence, cannot be included in the list of comparables. Thus, the TPO has recomputed operating margin of the assessee by retaining 2 comparables with arithmetic mean of 28.6% and thus, compared with operating margin of the assessee which is at 20.7% and made upward adjustment of Rs.15,02,08,973/-.
In pursuant to TP adjustment, as suggested by the ld.TPO, the AO has passed draft assessment order u/s.143(3) r.w.s 144C(1) of the Act on 15.12.2016 and proposed TP adjustment as suggested by the ld.TPO. The assessee has filed its objections against draft assessment order before the learned Dispute Resolution Panel-2, Bangalore and challenged TP adjustment suggested by the AO. The assessee had also challenged inclusion of Acropetal Technologies Ltd., from the list of comparables on the ground owing to abnormal financial position and certain extraordinary events leading to window dressing of books of accounts. The assessee had also Onward Technologies Ltd., on the ground that the functions performed by the comparable companies are similar to functions carried out by the assessee and thus the ld.TPO was incorrect in rejecting additional comparables without assigning any reason. The assessee had also challenged application of employee cost filter and turn-over filter and further selection of multiple year data.
The ld.DRP for the reasons stated in its direction dated 17.04.2017 rejected objections filed by the assessee and upheld the findings of the ld.TPO for inclusion of Acropetal Technologies Ltd., as a comparable by holding that when comparables are performing the similar function, then merely on the ground of their being earning super profits, they cannot be excluded. The ld.DRP has also taken support from number of judicial precedents and has also considered principles laid down under Rule 10B and OECD Guidelines, 2010 to reject arguments of the assessee. The ld.DRP has also rejected the arguments of the assessee in light of regulatory action initiated by SEBI on the company, by holding that when the show-cause notice was issued, which relates to financial year 2016-17, it cannot be inferred that allegations have any relevance for the assessment year
2012-13. As regards, application of additional quantitative filters including employee cost filer and multiple year data, the ld.DRP has rejected arguments of the assessee in light of certain judicial precedents and held that as per Rule 10B(4), data which pertains to financial year in which international transactions were undertaken by the tested parties needs to be considered. The use of the word “shall” in the main provision of the Rule makes it clear that in no uncertain terms that the use of current financial year data is a mandatory requirement of law in the comparability analysis under the Indian Transfer Pricing regulations. The proviso to said Rule makes it an exception in allowing the use of data for preceding two years, if and only if, it is proved that such data reveals facts, which could have an influence on the determination of transfer price. Since, the assessee has failed to demonstrate on the basis of contemporaneous documentation at the time of fixing and determining transfer price that multiple year data have an influence, the ld.TPO was right in rejecting multiple year data. The ld.DRP has also rejected objections filed by the assessee regarding application of employee cost filter by holding that in the case of an Engineering Design Service Company, employees are the main asset of the company and directly reflect the nature of business undertaken by the company. Very low expenditure on employee cost is an indication that the company is either into further outsourcing of the work or is a software trading company. Therefore, opined that since the employee cost of the assessee is 67% of the total revenue, the decision of the TPO to apply filter at 50% is considered justified. The ld.DRP has also rejected additional comparable companies suggested by the assessee on the ground that all the companies are having diversified activities which was different from the FAR analysis of the assessee company and thus cannot be comparable. The DRP had also rejected objection regarding use of multiple year data by holding that proviso to Rule 10B(4) allows for use of earlier year data only if it reveals certain facts, which have influence on the determination of transfer prices on the international transactions being compared. Since, the assessee failed to demonstrate how and why earlier year data is influencing on the transfer pricing computability, the question of considering multiple year data contrary to Rule 10B(4) cannot be accepted. Thus, the DRP has rejected objections filed by the assessee and confirmed TP adjustment made by the ld.TPO. Aggrieved by the DRP order, the assessee is in appeal before us.
The ld.AR for the assessee, at the time of hearing submitted that although assessee has taken various grounds challenging
erroneous application of employee cost filter and disregarding the use of multiple year data, but he has restricted his arguments on Ground No.4 regarding exclusion of Acropetal Technologies Ltd., as a comparable company. The ld.AR referring to certain judicial precedents submitted that when the assessee has demonstrated that the company is not financially comparable to the assessee and further for the year under assessment, it has an extraordinary year of operations, then the same cannot be included in the list of comparables even though, assessee itself has included said company in the TP documentation. The ld.AR further referring to the decision of ITAT, Chennai in the case of Bloom Energy India Pvt. Ltd., TS-626-ITAT-2016, submitted that Acropetal Technologies Ltd., cannot be a good comparable owing to the fact that it has abnormal financial reasons and further the SEBI has initiated certain regulatory actions, which may have certain impact on financial results of the company. Therefore, the same cannot be considered to be a good comparable. The ld.AR further submitted that as regards inclusion of Onward Technologies Ltd., as an additional comparable, the assessee has demonstrated with various evidences before the TPO that Onward Technologies Ltd., is functionally similar to the assessee, but the ld.TPO as well as DRP has rejected the arguments of the assessee without any cogent reasons. Therefore,
TPO to include Onward Technologies Ltd., as a comparable company.
The ld.DR on the other hand strongly supporting order of the DRP / TPO, submitted that when the assessee itself had selected Acropetal Technologies Ltd., as a comparable company by considering the financials for the relevant assessment year and also FAR analysis, there is no reason for the assessee to seek exclusion of said company only on the basis of certain newspaper reports, which suggest initiation of regulatory proceedings by SEBI, without bringing on record any evidences to prove that such proceedings initiated by regulatory bodies is having bearing on the financials of the company for the relevant period. The ld.DR further submitted that as regards inclusion of Onward Technologies Ltd., as a comparable company, the ld.DRP has very categorically held that as per its Director’s report, the company is involved in major lines of operations which is different from engineering design services provided by the assessee and hence, it is not a good comparable to the assessee company. Therefore, there is no reason for the assessee to seek inclusion of Onward Technologies Ltd., as a good comparable.
We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We have also carefully considered various case laws cited by both the sides. As regards exclusion of Acropetal Technologies Ltd., it was the contention of the assessee that although it has included said company in the list of comparables, but subsequent developments were noticed at the time of TP proceedings and on that basis, it has sought to exclude said company from the list of comparables and demonstrated with evidences before the TPO that its financials are not reliable owing to regulatory proceedings initiated by SEBI. The ld.TPO as well as ld.DRP has rejected objections filed by the assessee on the ground that higher margin is not a good ground for exclusion of company, when functions performed by said company is similar to the functions carried out by the assessee. As regards, extraordinary events of SEBI regulatory proceedings, the ld.DRP rejected the arguments of the assessee on the ground that the notice was issued which pertains to financial year 2016-17, whereas transfer pricing exercise carried out pertains to assessment year 2012-13 and thus, it cannot be inferred that the allegation have any relevance for the current assessment year.
We have given our thoughtful consideration to the reasons given by the ld.TPO/DRP in light of the arguments advanced by the ld.AR for the assessee and we ourselves do not in agreement with the arguments of ld.AR for the assessee for the simple reason that when the assessee claims that subsequent development have a bearing on the financial results of comparable company, it is the duty of the assessee to provide adequate evidence to the AO to verify and object the information gathered by exercising its power u/s.133(6) of the Act. We, further noted that the ITAT, Chennai in the case of Bloom Energy India Pvt. Ltd., has excluded Acropetal Technologies Ltd., on the ground of abnormal profit margin. In this case, the assessee is seeking exclusion of Acropetal Technologies Ltd., on two grounds; one is on account of abnormal financial results and second is on account of subsequent development of disciplinary proceedings initiated by SEBI. As regards abnormal financial results, it is a well settled principle of law by various decisions of Tribunal that higher profit is not a good ground for exclusion of comparable, when all other functions are similar to the functions performed by an assessee. Therefore on that ground, the arguments of the assessee for exclusion of Acropetal Technologies Ltd., is rejected. As regards allegation of fraud against the company in light of notice issued by SEBI, we find that the notice
2016-17, whereas the assessment year in question pertains to 2012-13. The assessee has not filed any evidences to demonstrate the disciplinary proceedings initiated by SEBI is having any bearing on financial results of assessment year 2012-13, but the assessee is supporting its arguments only on the basis of certain newspaper reports. Although, the assessee has referred the investigation report of SEBI, but on perusal of report issued by SEBI, we could not find any adverse comments on financial results for the relevant assessment year except violation of certain regulatory guidelines in respect of trading of shares in stock market. Therefore, we are of the considered view that unless the assessee demonstrate with evidences that disciplinary proceedings initiated by certain agencies are having bearing on financial results of the company for relevant assessment year, the company cannot be excluded from the list of comparables, more particularly when the assessee itself had included said company in the list of final comparables in its TP documentation. Therefore, on this count also, exclusion of Acropetal Technologies Ltd., is rejected.
As regards, plethora of case laws relied upon by the assessee including Bloom Energy India Pvt. Ltd., supra, we find that in the case before the Tribunal, the assessee never included the company
right from beginning and argued that it is not comparable because of abnormal financial results. Under those facts, the Tribunal has accepted the arguments of the assessee and excluded Acropetal Technologies Ltd., in the list of comparable. In this case, the assessee has included Acropetal Technologies Ltd., in the list of comparables after analysis of FAR and thus, on the basis of subsequent development it cannot seek to exclude said company unless prove that the allegations of wrong doing is having impact on financial results. Insofar as, the decision of Bombay High Court in the case of CIT vs. Tata Power Solar Systems Ltd., (2017) 77 taxmann.com 326, we find that the Hon’ble High Court held that where the assessee engaged in generation of solar, had mistakenly included two companies engaged in area of wind energy in its list of comparables, assessee would not bar in law in withdrawing these two comparables from its list on ground of functional difference. In this case, facts are entirely different, because the assessee is not seeking exclusion of the company on the ground of functional difference, but such exclusion was sought on the basis of extraordinary events of allegation of wrong doing, that too without any evidence to support its case. In our view, the decision of Hon’ble Bombay High Court has no application to the facts of the present case. Therefore, we are of the considered view that there is Acropetal Technologies Ltd., from the list of comparables and hence, we are inclined to uphold the findings of ld.DRP and reject ground taken by the assessee.
As regards inclusion of additional comparables including Onward Technologies Ltd., it was the contention of the assessee that Onward Technologies Ltd., is similar to functions performed by the assessee and it was engaged in product engineering services, which is almost similar to functions performed by the assessee and hence, there is no reason for the AO to reject inclusion of additional comparables. We have gone through the arguments of the ld.AR for the assessee in light of reasons given by the ld.DRP to exclude Onward Technologies Ltd., from the list of comparables and find that one side, the ld.DRP is accepting the fact that the company is engaged in engineering design services and IT consulting, but on the other side, rejected objection filed by the assessee only for the reason that segmental data is not available in the financial years. Therefore, once the DRP having accepted fact that functions performed by Onward Technologies Ltd., is similar to functions performed by the assessee, it ought not to have rejected inclusion of said company, merely for non-availability of segmental data.
Therefore, we are of the considered view that the ld.TPO needs to re-examine the claim of the assessee for inclusion of Onward Technologies Ltd., in the list of comparables by analyzing FAR studies of both companies. Hence, we set aside the issue to the file of the ld.TPO and direct him to reconsider the claim of the assessee in light of various averments made and in accordance with law.
As regards other grounds taken challenging application of employee cost filter and disregarding use of multiple year data, the ld.AR for the assessee has not made any arguments. Therefore, we reject the ground taken by the assessee challenging employee cost filter and use of multiple year data as not-pressed.
In the result, appeal filed by the assessee is partly allowed for statistical purpose.
Order pronounced in the court on 27th August, 2021 at Chennai.