J RAY MCDERMOTT ENGINEERING SERVICES PRIVATE LIMITED,CHENNAI vs. DCIT CORPORATE CIRCLE 2(2), CHENNAI

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, in turn

which has arisen out of the directions of DRP-2, Bengaluru

dated 23.08.2017 and pertains to assessment year 2013-14.

appeal:-

“1. The Assessing Officer (“AO”), Dispute Resolution Panel (“DRP”) and Transfer Pricing Officer (“TPO”) have erred in finalizing an order of assessment, which is against the

ITA No.3239/Chny/2017

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.

2.1 The TPO and DRP erred in rejecting the transfer pricing documentation/ benchmarking conducted by the Appellant without providing any cogent reasons for the same.

2.2 The DRP, AO and TPO erred in considering Acropetal Technologies Limited (“Acropetal”) as a comparable company when the Appellant had demonstrated that the Company is not comparable and that in the year under assessment, Acropetal earned exorbitant margins.

2.3 The DRP, AO and TPO erred in considering Vama Industries Limited (“Vama”) as a comparable company despite demonstrating that Vama is functionally different from the Appellant.

2.4 The DRP, AO and TPO erred in disregarding the usage of multiple year data for comparability analysis.

2.5 The DRP, AO and TPO erroneously applied the export turnover filter, despite, the Appellant demonstrating various practical difficulties in applying the filter. The DRP, AO and TPO erred in introducing the filter without providing any threshold for application of the said filter.

2.6 The DRP and TPO erred in excluding comparable companies which were otherwise comparable to the Appellant by applying incorrect filters.

3 Corporate Tax.:

3.1 On facts and circumstances of the case, the DRP and AO have erred in disallowing the club membership fee to the tune of INR 1,68,540 without appreciating that the expenditure

3 ITA No.3239/Chny/2017

towards club membership fee is for business purposes and without providing adequate opportunity of being heard.

3.2 On the facts and circumstances of the case, the DRP and AO have erred in disallowing interest on delayed remittance of statutory dues without appreciating that the same is compensatory in nature and without providing adequate opportunity of being heard.”

wholly owned subsidiary of McDermott Asia Pacific Pte Ltd.,

Singapore. The assessee is a captive service provider of

engineering design and related services to McDermott group.

The company provides engineering design and related

services to J.Ray McDermott Middle East Inc.,Dubai and is

compensated on a cost plus basis. The assessee filed its

return of income for assessment year 2013-14 on 28.11.2013

declaring taxable income at Rs.11,37,53,110/-. The assessee

has entered into various international transactions with its AEs

and such transactions have been reported in Form 3CEB filed

in accordance with provisions of Indian Transfer Pricing

regulations contained in section 92, 92A to 92F of the Income

Tax Act, 1961. The assessee has aggregated all transactions

with its AEs and substantiated international transactions by

using TNMM as most appropriate method. Further,

4 ITA No.3239/Chny/2017

international transactions in the nature of reimbursement of

expenses received were justified for arm’s length price by

using CUP method. The assessee had operating margin at

18.57% and same was compared with comparable companies

margin at 12.03%.

of assessment proceedings, a reference was made to TPO to

determine arm’s length price of international transactions of the

assessee with its AEs. During the course of transfer pricing

proceedings, the TPO has re-characterised TP study

conducted by the assessee and has excluded certain

companies selected by the assessee and has also included

certain new comparables and arrived at average arithmetical

mean margin of 27.98%. The TPO has also recomputed

margin of the assessee by including forex income as operating

income and computed margin of 19.66% as against margin

computed by the assessee at 18.57%. Thus, the TPO has

recomputed arm’s length price of international transactions by

taking comparable margin of 27.98% and made TP addition of

Rs.4,94,25,547/-.

5 ITA No.3239/Chny/2017

TPO. The Assessing Officer had also made two corporate tax adjustment of disallowance of membership fees paid to clubs for employees of the assessee for Rs.1,68,540/- and has also

made disallowance of interest paid for delayed remittance of service tax for Rs.1,40,951/-. The assessee has filed objections against draft assessment order passed by the

Assessing Officer before the Dispute Resolution Panel-2, Bangalore and challenged re-characterization of TP study and inclusion of certain comparables. The assessee has also

challenged additions made by the Assessing Officer towards disallowance of club membership fees and disallowance of interest paid for delayed remittance of statutory payments.

6 ITA No.3239/Chny/2017

Technologies Ltd. as comparable by holding that mere

allegations of fraud against company and its margins are not

sufficient ground to exclude the company from the list of

comparables when functions performed by comparables are

similar to functions carried out by the assessee. The DRP has

also rejected the objections filed by the assessee towards club

membership fees paid to Madras club on the ground that the

same is in the nature of personal expenditure and not

allowable as deduction under the Act. Similarly, the DRP has rejected objections filed by the assessee regarding

disallowance of interest on delayed payment of remittance of

income tax and service tax. Aggrieved by the DRP directions,

the assessee is in appeal before us.

ground no.2 of the assessee appeal is inclusion of M/s.

Acropetal Technologies Ltd. as comparable company. The

learned AR for the assessee submitted that M/s. Acropetal

Technologies Ltd. is not a good comparable, because it has high margins and also SEBI has passed an order on alleged

7 ITA No.3239/Chny/2017

fraud committed by the company and hence, financials of the

company which cannot be relied upon. Therefore, the TPO as

well as DRP were erred in inclusion of M/s. Acropetal

Technologies Ltd. as good comparable. The learned A.R for

the assessee referring to paper books filed for this purpose

submitted that the ITAT., Chennai in the case of M/s. Bloom

Energy India Pvt.Ltd., in ITA No.2857/Chny/2017 dated

20.06.2018 has clearly held that there were several allegations

of window dressing its statement of accounts for the relevant

assessment year and further, it has abnormal variations in

operating margins, therefore, same cannot be considered as

good comparable. The AR further referring to report of SEBI

submitted that SEBI has conducted a thorough inquiry on the

affairs of M/s. Acropetal Technologies Ltd. and held that the

company has diverted its IPO funds to non-business purpose

and same has been treated as fraud within the meaning of

PFUTP regulations. Therefore, when the companies financials

are not to be considered as genuine, the same cannot be

considered as good comparable for a company, which is

providing captive service to its AEs.

8 ITA No.3239/Chny/2017

the order of TPO as well as DRP directions, submitted that

mere allegations of fraud and high margins is not a ground to

exclude a company from the list of comparables, when FAR

analysis of the company are similar to the assessee.

available on record and gone through orders of the authorities

below. The TPO has included M/s. Acropetal Technologies

Ltd. as comparable to determine operating margin of the

assessee company. The Assessing Officer has included M/s.

Acropetal Technologies Ltd. as comparable by rejecting

objections filed by the assessee on the ground that mere

allegation of fraud and high margins is not a reason for

exclusion of company, when FAR analysis are similar to

functions carried out by the assessee. We have given our

thoughtful consideration to reasons given by the Assessing

Officer to include M/s. Acropetal Technologies Ltd. as

comparable and arguments advanced by the learned A.R for

the assessee in light of SEBI report on alleged irregularities in

9 ITA No.3239/Chny/2017

the financials of the company and find that SEBI has clearly

stated that the company has committed a fraud in utilization of

funds raised in IPO and has diverted majority of funds to non-

business purposes and which has a significant effect on

operating margins. We further noted that co-ordinate Bench of

this Tribunal in M/s. Bloom Energy India Pvt.Ltd (supra) has

also considered comparability of M/s. Acropetal Technologies

Ltd. and after considering financials held that financials of M/s.

Acropetal Technologies Ltd. cannot be relied upon for the

assessment year 2013-14, because there is a finding from

SEBI regarding diversion of funds to non-business purposes

and which is a fraud within the meaning of PFUTP regulations.

The Tribunal further noted that even if it is considered, but the

profit of the companies are abnormally high during the relevant

assessment year and hence, it cannot be considered as good

comparable to a company, which is providing captive service to

its AEs. The ITAT., Chennai in the case of M/s.Cameron

Manufacturing India Pvt.Ltd., vide its order dated 16.10.2018

has once again reiterated its finding and held that M/s.

Acropetal Technologies Ltd. is having abnormal operating

10 ITA No.3239/Chny/2017

margin, which cannot be compared with the margin of a

company which is providing captive service to its AEs. We

further noted that SEBI has conducted inquiry about the

activities of M/s. Acropetal Technologies Ltd. and observed

that it has diverted its IPO proceeds to various group

companies for non-business purposes and concluded that

diversion of IPO funds is a fraud within the meaning of PFUTP

regulations . Therefore, we are of the considered view that a

company which has committed a fraud, as per findings of SEBI

regulations cannot be considered as good comparable for a

company, which is providing captive service to its AEs in the

area of engineering design service. Therefore, considering facts

and circumstances of the case and also by following decision of

the co-ordinate Bench in the case of M/s.Bloom Engineering

India Ltd.(supra), we are of the considered view that M/s.

Acropetal Technologies Ltd. is not a good comparable and

hence, we direct the TPO to exclude M/s. Acropetal

Technologies Ltd. from the list of comparables and recompute

margin after exclusion of the company.

11 ITA No.3239/Chny/2017

ground no.3 of the assessee appeal is disallowance of

expenditure incurred on membership fees paid to Madras Club.

The Assessing Officer has disallowed membership fees paid to

Madras Club on the ground that it is in the nature of personal

expenditure cannot be allowed as deduction. It was claim of

the assessee before lower authorities that expenditure towards

club membership fees was for business purpose and without

providing adequate opportunity of being heard to the assessee,

the Assessing Officer has treated same as personal in nature.

available on record, we do not find any merit in the arguments

of the learned AR for the assessee that membership fees paid

to Madras club is having bearing on business of the assessee.

Further, club membership fees paid is definitely in the nature of

personal expenditure, unless the assessee demonstrates with

evidence that it has been incurred for the purpose of promoting

business of the assessee. In this case, the assessee has not

produced any details to prove that club membership fees paid

to Madras club is having been incurred for the purpose of

12 ITA No.3239/Chny/2017

promoting business of the assessee. Therefore, we are of the

considered view that there is no error in the findings recorded

by the Assessing Officer to disallow club membership fees

paid to Madras club and hence, we are inclined to uphold the

findings of the DRP and reject the ground taken by the

assessee.

ground no.3.2 of the assessee appeal is disallowance of

interest on delayed statutory payments. The assessee has

claimed deduction towards interest on delayed / deferred

payment of income-tax, delayed payment of provident fund and

delayed payment of service tax. The Assessing Officer has

disallowed all three payments on the ground that they are not

allowable as deduction. It was claim of the assessee that

interest on delayed / deferred payment of income-tax of

Rs.32,107/- has been added back in the statement of total

income and hence, same cannot be once again disallowed. As

regards interest on delayed payment of PF and service tax, the

assessee claimed that it is in the nature revenue expenditure

and needs to be allowed.

13 ITA No.3239/Chny/2017

available on record and gone through orders of the authorities

below. As regards interest on delayed payment of income-tax,

there is no dispute with regard to the fact that the learned DRP

has recorded categorical finding that assessee itself has added

back said interest in the statement of total income and hence,

same cannot once again be disallowed. If the assessee has

already disallowed interest paid on delayed payments of

income tax, then the Assessing Officer is not required to

disallow once again said payment, because it amounts to

double disallowance. Hence, we direct the Assessing Officer to

verify claim of the assessee and take appropriate decision.

that it is a penal in nature for delayed remittance of statutory

dues payable under respective Acts and cannot be allowed as

deduction. Therefore, there is no merit in the arguments of the

assessee that interest paid on delayed remittances of Provident

Fund is an allowable deduction.

14 ITA No.3239/Chny/2017

the considered view that since service tax is an indirect expenditure, which is allowable under the Act, any interest paid on delayed remittances of such indirect taxes is also in the

nature of revenue expenditure, because it is compensatory in nature. Hence, we direct the Assessing Officer to allow deduction towards interest on delayed payment of service tax

at Rs.23,719/-.

Sd/- Sd/- (महावीर �संह) (जी. मंजुनाथ) (Mahavir Singh) (G. Manjunatha ) उपा�य�/ Vice-President लेखा सद%य / Accountant Member चे'नई/Chennai, (दनांक/Dated 7th July, 2021 DS आदेश क� ��त*ल+प अ,े+षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु-त (अपील)/CIT(A) 4. आयकर आयु-त/CIT 5. +वभागीय ��त�न1ध/DR 6. गाड� फाईल/GF.