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Income Tax Appellate Tribunal, “K”, BENCH MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI G. MANJUNATHA
आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
The assessee has filed appeal against order of the Ld. Commissioner of Income tax (Appeals)-56, Mumbai, dated 28/03/2016 for Asst.Year 2010-11, which in turn filed against final assessment order passed by the Ld. AO u/s 143(3) r.w.s. 144C of the I.T.Act, 1961, dated 07/03/2014. The assessee has also filed appeal against direction of the Dispute Resolution Panel (DRP)-1, Mumbai, dated 15/09/2015, which in turn arising out of draft assessment order passed by the Ld. AO u/s 144C(1) of the I.T.Act, 1961, dated 31/03/2015 for Asst.Year 2011-12. The revenue has filed appeal against directions of the DRP-1, Mumbai under Rule 13 of Income tax (DRP) Rules, 2009, dated 28/03/2016 for Asst.Year 2011-12. The revenue has also, filed cross objection against order of the DRP-1, Mumbai, dated 15/09/2015 for Asst.Year 2011-12. Since, the facts are identical and issues are common, for the sake of convenience, the appeals filed by the assessee, as well as the
3 IOT Design & Engineering Limited
revenue and cross objection filed by the revenue were heard together and are disposed-off by this consolidated order.
ITA No.4722/Mum/2016 for Asst.Year 2010-11:-
The assessee has raised the following grounds of appeal:
Transfer Pricing 1.1 The learned Commissioner of Income Tax (Appeals) has erred in confirming the transfer pricing adjustment of Rs. 2,16,04,328 made by the learned Assessing Officer ('AO) to the value of International Transaction entered into by the Appellant Company with its Associated Enterprise ('AE') as the same is based on an incorrect understanding of the facts of the case and thereby incorrect application of the law. 1.2 The learned Commissioner of Income Tax (Appeals) has legally and factually erred in confirming the action of learned AO/TPO by rejecting 3 companies adopted by the Appellant Company as comparables in its Transfer Pricing Study Report (TPSR'), on the basis of observation made by the learned TPO and on verification of financials of these comparable companies, namely:
Sr.No. Name of the Company 1 Cades Digitceh Private Limited
2 Easun Engineering Co. Ltd.
3 Molind Engineering Ltd.
1.3. The learned Commissioner of Income Tax (Appeals) has legally and factually erred in confirming the action of learned AO/TPO by including 2 companies, on the basis of the observation made by the learned TPO, in the final set of 6 comparables, rejected by the Appellant Company as being functionally different in its TPSR, namely:
Sr.No. Name of the Company 1 Mahindra Consulting Engineers Lid.
2 WAPCOS Ltd.
4 IOT Design & Engineering Limited
1.4.1 The learned Commissioner of Income Tax (Appeals) has legally and factually erred in confirming the action of learned AO/TPO by including 2 companies, on the basis of the observation made by the learned TPO, in the final set of 6 comparables, not appearing in the search process adopted by the Appellant Company as being functionally different in its TPSR, namely:
Sr.No. Name of the Company 1 Engineers India Ltd. (Consultancy segment) 2 Rites Ltd (Consultancy segment)
1.5. Without prejudice to the above grounds, the learned Commissioner of Income Tax (Appeals) has legally and factually erred in not giving any finding on the Appellant's ground against the action of learned AO/TPO in not considering multiple year data for calculation of Profit Level Indicator ('PLI') of comparable companies, failing to appreciate the provisions of Proviso to Rule 10B(4) of the Income Tax Rules, 1962. 1.6. Without prejudice to the above grounds, the learned Commissioner of Income Tax (Appeals) has legally and factually erred in not giving any finding on the Appellant's ground against action of learned AO/TPO in making erroneous calculation of PLI of certain companies included in the final set of comparables and also by considering the foreign exchange gain/loss as non-operating expenditure.
1.7. Without prejudice to the above grounds, the learned Commissioner of Income Tax (Appeals) has legally and factually erred in not giving any finding on the Appellant's ground against action of learned AO/TPO in not allowing the Appellant Company to make functional and risk adjustments, including working capital adjustments, to the PLI of comparable companies, and also not making such adjustments themselves, thereby, failing to appreciate the provisions of Rule 10B(l)(e) of the Income Tax Rules, 1962. 1.8 Without prejudice to the above grounds, the learned Commissioner of Income Tax (Appeals) has legally and factually erred in not giving any finding on the Appellant's ground against action of learned AO/TPO in making transfer pricing adjustments to the total revenue of the Appellant Company instead of restricting it to the value of the international transaction. 2. Addition of Undisclosed receipts of Rs 40,16,243
The learned Commissioner of Income Tax (Appeals) has erred in confirming addition of Rs. 40,16,244 as receipt from IOT Mabagas Limited (erstwhile known as IOT Cuddalore Construction & Terminalling Limited) as undisclosed receipts to the total income of the Appellant Company without appreciating the fact that the said receipt has already
5 IOT Design & Engineering Limited been considered in the total income of the Appellant Company in AY 2009-10 on accrual basis and offered to tax and said addition amounts to double taxation of same income. 3. Disallowance of professional fees of Rs 31,48,179 The learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of Rs 30,13,959 as professional fees for failure to deduct tax at source in accordance with the provisions of chapter XVII B of the Income Tax Act, 1961 without appreciating the fact that the said amount is in nature of bad debts but was erroneously disclosed in the professional fees ledger instead of separate item in the Profit & Loss account. The learned Commissioner of Income Tax (Appeals) has further failed to appreciate the fact that the said write off is in nature of irrecoverable revenue which recognized as revenue and offered to tax in AY 2009-10. 4. Penalty under section 271(1)(c) of the Act. The learned Commissioner of Income Tax (Appeals) has legally and factually erred in not giving! finding against action of learned AO in initiating penalty proceedings under section 271(l)(c) of Act.
The brief facts of the case are that the assessee company is engaged in the business of Design & Engineering Services in the field of refineries, petrochemicals, cements, fertilizers & power plants. The assessee company is also, engaged in the business of detailed engineering of EPC projects mainly with respect to terminals. The assessee has entered into international transactions of Rs.17,71,95,912/-, where it has provided engineering services to its Associated Enterprises(AE), Indian Oil tanking Engineering and Construction Services LLC, Oman. The assessee has benchmarked international transactions with its AE and selected TNMM as most appropriate method. The assessee has selected five comparable companies based on the selection criteria and filters with a Arithmetic Mean of (1.64%). The assessee has computed operating margin and used OP/OC as PLI and selected three years data. The assessee has computed PLI at 13.74% and stated that its margin with AE’s is at Arm’s Length Price (ALP). The final comparables
6 IOT Design & Engineering Limited selected by the assessee and the determination of ALP is tabulated below:- Sr Name of Company PLI (OP/OC) A Comparable Companies
1 Autoline Design Software Limited (8.24%) 2 Cades Digitech Pvt Ltd (1.49%) 3 Chemtex Global Engineers Ltd 1.32% 4 Easun Engineering Co Ltd 1.55% 5 Molind Engineering Ltd (1.33%) (1.64%) Arithmetic Mean B Appellant Company 13.74% IOT Design & Engineering Limited
The assesee has filed its return of income for Asst.Year 2010- 11 on 14/10/2010, declaring total income at Rs.47,23,023/-. The case was selected for scrutiny and during the course of assessment proceedings, a reference u/s 92CA(1) of the I.T.Act, 1961 was made to the Transfer Pricing Officer (TPO) to determine ALP of international transactions with the AE’s. During the course of Transfer Pricing proceedings, the TPO has rejected three companies selected by the assessee from the set of comparables and added four new companies and determined arithmetic mean of 23.90% and has made Transfer Pricing Adjustment (TPA) of Rs.2,16,04,328/-. The final set of comparables selected by the TPO and TPA made on international transactions is tabulated below:-
Name of the Company PLI (OP/OC) Sr. No A Appellant Company
7 IOT Design & Engineering Limited IOT Design & Engineering Limited 14.43% B Comparables 1 Autoline Design Software Limited (Accepted) 13.58% 2 Chemtex Global Engineers Pvt Ltd (Accepted) 15.66% 3 Mahindra Consulting Engineers Ltd (Added) 23.84% 4 WAPCOS Ltd (Added) 15.92% 5 Engineers India Ltd (Added) 43.85% 6 Rites Ltd (Added) 30.52% Arithmetic Mean 23.90% 22,81,82,836 Operating Cost (Refer TPO Order) (A) Arm's Length Profit ( 23.90% *A) = (B) 5,45,24,289
Actual Profit (Refer TPO Order) = (C) 3,29,19,961
TP Adjustment (B - C) Rs, 2,16,04,328
The Ld. AO has passed draft assessment order u/s 143(3) r.w.s. 144C of the I.T.Act, 1961 on 07/03/2014 and made TPA of Rs.2,16,04,328/-, as suggested by the TPO in his order u/s 92CA(3) of the I.T.Act, 1961, dated 24/01/2014 to the international transactions of the assessee with its AE’s. The Ld. AO has also, made additions towards disallowances on account of non reconciliation of TDS, as per Form-26AS amounting to Rs.40,26,903/-. The Ld. AO has made further additions of Rs.31,48,179/- towards disallowances on account of non deduction of TDS, in respect of professional fees paid to certain parties. Being aggrieved by the draft assessment order, the assessee has filed an appeal before the Ld.CIT(A). The Ld.CIT(A) vide its order dated 28/03/2016 found substance in the observations as adopted by the TPO, while determining the TPA, in respect of international
8 IOT Design & Engineering Limited transactions of the assessee with its AE and accordingly, confirmed TPA as suggested by the TPO. The Ld.CIT(A) has also, confirmed additions made by the Ld. AO towards undisclosed receipt of Rs.40,16,243/-, on the basis of Form-26AS and has also, confirmed additions made by the Ld. AO towards disallowances of professional fees of Rs.31,47,179/- for failure to deduct tax at source. Aggrieved by the Ld.CIT (A) order, the assessee is in appeal before us.
The first issue that came up for our consideration from ground No.1.3 and 1.4 of assessee appeal is inclusion of certain companies as comparables by the TPO and upheld by the Ld.CIT(A). Therefore, we deem it necessary to consider each comparables included by the TPO and upheld by the Ld.CIT(A).
i) Mahindra Consulting Engineers Ltd.:-
The Ld. AR for the assessee submitted that the Ld.CIT(A) has erred in confirming inclusion of Mahindra Consulting Engineers Ltd.(MCEL) as comparable without appreciating the fact that MCEL is functionally dissimilar, when compared to functions carried out by the assessee. The Ld. AR further submitted that MCEL is engaged in diversified services, which is altogether different from functions performed by the assessee. Further, MCEL provides services in different segemnts, however no segmental data is provided in the financials for the year. It has also fails export filter, because the assesee has generated revenue in foreign exchange, which is at 67.86% of total revenue, whereas MCEL has merely 0.93% revenue in foreign exchange. Further, MCEL owns intangibles of Rs.40,69,438/-, whereas the assesse does not possess any technical know-how. The Ld. AR, further submitted that the DRP in
9 IOT Design & Engineering Limited assessee own case in Asst.Year 2008-09 has rejected MCEL, on the basis of export filter. Therefore, the Ld.TPO, as well as the Ld.CIT(A) were erred in inclusion of Mahindra Consulting Engineers Ltd for the year under consideration.
The Ld. DR, on the other hand supporting order of the Ld.CIT(A) submitted that the Ld.CIT(A) has brought out clear facts to the effect that Mahindra Consulting Engineers Ltd. is functionally comparable to the functions carried out by the assesee and accordingly, included in the final set of comparables and hence, there is no reason to deviate from the findings recorded by the Ld.CIT(A).
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that although, the Ld.TPO and Ld.CIT(A) has recorded finding that MCEL is functionally comparable, but on perusal of details filed by the assessee, we find that MCEL is engaged in diversified services, such as project management, portfolio management and consultancy services. Further, the company manages various portfolio companies which include various industries, sectors like cleantech, Steel, Logistics etc. It is also engaged in the business of Provisions of consultancy services in Special Economic Zones, water supply and sewerage and solid waste management, urban infrastructure, Agri and Horti infrastructure, Social infrastructure, Marine infrastructure, industrial infrastructure and Renewable energy. Although, the company provides sector development to various types of industries, but no segmental data has been provided in financials. We further noted that it also fails export filter, because, the assessee has generated revenue in foreign exchange,
10 IOT Design & Engineering Limited which is at 67.86% of total revenue, while MCEL has merely 0.93% revenue in foreign exchange. Further, MCEL carries intangibles worth of Rs.40,69,438/-, whereas the assessee does not possess any intangibles. We further noted that the DRP for Asst.Year 2008- 09 has rejected MCEL, on the basis of export filter and said findings has been accepted by the revenue. Further, the ITAT, Delhi in the case of DCIT vs Terex India Pvt. Ltd. (supra) rejected MCEL as a comparable, on the ground that it is engaged in providing a variety of services, only one of which is engineering services and also, segmental information of engineering services is not available. Therefore, we are of the considered view that the Ld.TPO, as well as the Ld.CIT(A) were erred in inclusion of Mahindra Consulting Engineers Ltd. in the final set of comparables and hence, we direct the Ld.TPO to exclude Mahindra Consulting Engineers Ltd. from the final set of comparables.
ii) WAPCOS Ltd.:-
The Ld. AR for the assesee submitted that the Ld.TPO, as well as the Ld.CIT(A) has erred in inclusion of WAPCOS Ltd. in the final set of comparables, without appreciating the fact that the said company is functionally dissimilar and also, it has high turnover, which is evident from the fact that the company has recorded Rs.302 crores turnover, which is more than ‘11’ times of the turnover of the assessee company. The Ld. AR, further, submitted that WAPCOS Ltd. is a Government of India undertaking and the functions and risk profile of the government company cannot be compared with that of the assessee company. In this regard, he relied upon the decision of Hon’ble Bombay High Court, in the case of CIT vs Pentair Water
11 IOT Design & Engineering Limited India Pvt.Ltd. and also, the decision of CIT vs Thyssenkrupp Industries India Pvt.Ltd. (2016) 68 taxmann.com 248 (Bom.)
The Ld. DR, on the other hand, supporting order of the Ld.CIT(A) submitted that the functions performed by the assesee are similar to functions carried out by M/s WAPCOS Ltd. and merely, because it is a Government of India undertaking, it cannot be excluded from comparables.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that WAPCOS Ltd. is a Government of India undertaking and the functions and risk profile of the government company are entirely different from that of the assessee, because in Government of India undertakings, the profit motive is not the main objects of the company and they are mainly in furtherance of social obligations of the Government. We further noted that WAPCOS Ltd. is functionally dissimilar, which is evident from the fact that the company is engaged in pre-investments surveys and investigations, topographic surveys, operation and maintenance of all kinds of works involved in the development and utilization of water resources, generation and utilization of electronic power etc., whereas the assesse company is primarily engaged in Engineering services to EPC projects mainly with respect to terminals. Further, the Hon’ble Bombay High Court, in the case of CIT vs Thyssenkrupp Industries India Pvt.Ltd.(supra) has held that profit motive is not a relevant consideration in the case of Government undertaking and that many government companies, even operate on losses in furtherance of the social and obligations of the government and hence, cannot be compared with that of private company. The Hon’ble Bombay High Court, in the case of CIT vs
12 IOT Design & Engineering Limited Pentair Water India Pvt.Ltd. held that turnover is a relevant factor to consider comparability. In this case, on perusal of details available on record, we find that WAPCOS Ltd. turnover is at Rs.302 crores, which is more than ‘11’ times of the turnover of the assessee company. Therefore, we are of the considered view that WAPCOS Ltd. cannot be compared with that of Assessee Company and accordingly, we direct the Ld.TPO to exclude WAPCOS Ltd. from the final set of comparables.
iii. Engineers India Limited:-
The Ld. AR for the assessee submitted that the functions performed by Engineers India Limited are altogether different from the functions carried out by the assessee to its AE and hence, cannot be comparable. He, further submitted that Engineers India Limited turnover from consultancy segment is at Rs.1,055 crores, which is more than ‘40’ times turnover of the assessee company, which is at Rs.26.11 crores. Further, Engineers India Limited is a Government of India undertaking and functions and risks profile of the Government companies cannot be compared with that of the assessee company.
The Ld. DR, on the other hand supported order of the Ld.CIT(A).
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. Basically, Engineers India Limited is a Government of India undertaking and the functions and risks profile of the government of India companies are altogether different from that of the assessee
13 IOT Design & Engineering Limited company, because government companies are working in line with objective of Government of India, in furtherance of the social obligations of the government of India. Therefore, the same cannot be considered with that of Assessee Company. We further noted that the turnover of Engineers India Limited from consultancy segment is at Rs.1,055 crores, which is more than ‘40’ times of the turnover of the assessee company, which is at Rs.26.11 crores. We further noted that the company is engaged in the business of providing diversified engineering services, which includes constructions, mining, chemicals, and fertilizers etc. The Hon’ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. (supra) held that turnover is a relevant factor to consider comparability. Further, the Hon’ble Bombay High Court, in the case of CIT vs Tyssenkrupp Industries India (P) Ltd. held that profit motive is not a relevant consideration in case of Government undertaking and that many government companies even operate on losses in furtherance of the social obligations of the government. Therefore, we are of the considered view that Engineers India Limited is not a good comparable to the assessee, which is mainly providing services to its AE in the field of EPC projects and mainly with respect to terminals. Hence, we direct the TPO to exclude Engineers India Limited from the final set of comparables.
iv) Rites Ltd.:-
The Ld. AR for the assessee submitted that Rites Limited is a Government of India undertaking, which is engaged in consultancy and project management services for transportation and infrastructure sector. He further submitted that the functions and risk profile of the Government Company cannot be compared with that of
14 IOT Design & Engineering Limited Assessee Company. He, further, submitted that turnover of Rites Limited from consultancy segment is at Rs.474.92 crores, which is ‘18’ times more than the turnover of the assessee company, which is at Rs.26.11 crores. Therefore, Rites Limited cannot be a good comparable and needs to be excluded.
The Ld. DR, on the other hand strongly supporting order of the Ld.CIT(A) submitted that the Ld.TPO, as well as the Ld.CIT(A) has brought out clear facts to the effect that the functions performed by the assessee are similar to the functions carried out by Rites Limited and hence, merely because it is a government of India undertaking, it cannot be excluded from the list of comparables.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. Basically, RITES Limited is a Government of India undertaking and the functions and risks profile of the government of India companies are altogether different from that of the assessee company, because government companies are working in line with objective of Government of India, in furtherance of the social obligations of the government of India. Therefore, the same cannot be considered with that of Assessee Company. We further noted that turnover of Rites Limited from consultancy segment is at Rs.474.92 crores, which is more than ‘18’ times of the turnover of the assessee company, which is at Rs.26.11 crores. We further noted that the company is engaged in the business of providing diversified engineering services, which includes constructions, mining, chemicals, and fertilizers etc. The Hon’ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. (supra) held that turnover is a relevant factor to consider comparability. Further, the Hon’ble Bombay High Court, in
15 IOT Design & Engineering Limited the case of CIT vs Tyssenkrupp Industries India (P) Ltd. held that profit motive is not a relevant consideration in case of Government undertaking and that many government companies; even operate on losses in furtherance of the social obligations of the government. Therefore, we are of the considered view that RITES Limited is not a good comparable to the assessee, which is mainly providing services to its AE in the field of EPC projects and mainly with respect to terminals. Hence, we direct the TPO to exclude RITES Limited from the final set of comparables.
The next issue that came up for our consideration from ground No. 2 of assessee appeal is addition of undisclosed receipt of Rs.40,16,243/- . During the course of assessment proceedings, the Ld. AO called upon the assesse to submit reconciliation of TDS and income offered to tax, on the basis of TDS claim made as per Form- 26AS. Since, the assessee was not able to reconcile the difference between income reported in books of accounts and TDS claim as per Form-26AS, the Ld. AO has made addition of Rs.40,16,243/-.
The Ld. AR for the assessee submitted that after the assessment proceedings, the assessee noticed that name of IOT Cuddalore Construction & Terminalling Limited has changed to IOT Mabagas Limited and that income received from IOT Mabagas Limited, on account of additional design and engineering services provided was already offered to tax in the Asst.Year 2009-10, but the same income was reflected in Form-26AS for the year under consideration. Therefore, the issue may be set aside to the file of the Ld. AO to verify the facts with reference to claim of the assessee.
16 IOT Design & Engineering Limited 21. The Ld. DR, on the other hand submitted that the assessee has failed to file reconciliation between income offered in books of accounts and TDS appeared in Form-26AS and hence, the ld. AO has made additions of Rs.40,16,243/- and the claim of the assessee that the same income has been offered to tax for Asst.Year 2009-10 was not supported by necessary evidences and hence, no reason to give one more opportunity to the assessee.
We have heard both the parties, perused the material available on record, and gone through orders of the authorities below. In light of averments made by the assessee that income from TDS deducted on account of additional design & engineering service provided by IOT Mabagas Limited, was already offered tax in the Asst.Year 2009-10, we set aside the issue to the file of the Ld. AO and direct him to cause necessary verification and in case income was already offered to tax for Asst.Year 2009-10, then the Ld. AO is directed to delete additions for the year under consideration.
The next issue that came up for our consideration from ground No.3 of assessee appeal is disallowances of professional fees of Rs.31,48,179/- for non deduction of TDS. The Ld. AR for the assessee submitted that the disallowances made by the Ld. AO is not professional fees on which tax is required to be deducted, but pertains to write off of bad debts. Therefore, the issue may be set aside to the file of the Ld. AO for verification.
Having considered arguments of both the sides, we deem it appropriate to set aside the issue to the file of the Ld. AO and direct him to cause necessary enquiries, in light of claim of the assessee that said amount pertains to bad debts written off. In case, the Ld.
17 IOT Design & Engineering Limited AO found that the amount of disallowances is not pertains to professional fees on which tax is required to be deducted, and then the same may be considered in accordance with law, as applicable to write off of bad debts.
The other ground taken by the assessee in its memorandum of appeal or either, withdrawn or not pressed and therefore, all other grounds are dismissed as not pressed.
In the result, appeal filed by the assessee is partly allowed.
ITA No.536/Mum/2016 for Asst.Year 2011-12 & ITA.No.63/Mum/2016 for Asst. Year 2011-12
The facts and issues involved in this appeal, insofar as the issue of Transfer Pricing adjustment (TPA) on international transactions of the assessee with its AE’s revolves around inclusion and exclusion of certain comparables by the Ld.TPO/DRP. The assessee has challenged inclusion of Mahindra Consulting Engineers Ltd. and exclusion of Chemtex Global Engineers Ltd,. The revenue has challenged exclusion of WAPCOS Ltd., Engineers India Limited and Rites India Ltd. Therefore, we deem it proper to adjudicate the ground raised by the assessee, as well as the revenue with reference to each comparable included and excluded by the Ld.TPO and the Ld.DRP.
The assessee has challenged inclusion of Mahindra Consulting Engineers Ltd., on the ground that the company is dissimilar to functions performed by the assessee and also, there is no segmental data in financials of MECL. Although, it has provides
18 IOT Design & Engineering Limited various services to different segments of industries. The Ld. AR, further submitted that there is an abnormal event, inasmuch, as it has entered into a strategic partnership with safege and Safege and exercise significant influence over the company. Further, it has intangibles worth of Rs.40,69,438/-, whereas the assessee does not possess any technical know-how. Therefore, the same needs to be excluded from the final set of comparables.
The Ld. DR, on the other hand, strongly supported order of the Ld. DRP.
We have heard both the parties, perused the material available on record and gone through order of the authorities below. We find that M/s. Mahindra Consulting Engineers Ltd. has been considered by us in assessee own case for Asst.Year 2010-11, where the Tribunal held that Mahindra Consulting Engineers Ltd. is not a good comparable to that of the assessee company which is providing engineering consultancy to EPC projects mainly with respect to terminals. The relevant findings of the Tribunal are as under:-
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that although, the Ld.TPO and Ld.CIT(A) has recorded finding that MCEL is functionally comparable, but on perusal of details filed by the assessee, we find that MCEL is engaged in diversified services, such as project management, portfolio management and consultancy services. Further, the company manages various portfolio companies which include various industries, sectors like cleantech, Steel, Logistics etc. It is also engaged in the business of Provisions of consultancy services in Special Economic Zones, water supply and sewerage and solid waste management, urban infrastructure, Agri and Horti
19 IOT Design & Engineering Limited
infrastructure, Social infrastructure, Marine infrastructure, industrial infrastructure and Renewable energy. Although, the company provides sector development to various types of industries, but no segmental data has been provided in financials. We further noted that it also fails export filter, because, the assessee has generated revenue in foreign exchange, which is at 67.86% of total revenue, while MCEL has merely 0.93% revenue in foreign exchange. Further, MCEL carries intangibles worth of Rs.40,69,438/-, whereas the assessee does not possess any intangibles. We further noted that the DRP for Asst.Year 2008-09 has rejected MCEL, on the basis of export filter and said findings has been accepted by the revenue. Further, the ITAT, Delhi in the case of DCIT vs Terex India Pvt. Ltd. (supra) rejected MCEL as a comparable, on the ground that it is engaged in providing a variety of services, only one of which is engineering services and also, segmental information of engineering services is not available. Therefore, we are of the considered view that the Ld.TPO, as well as the Ld.CIT(A) were erred in inclusion of Mahindra Consulting Engineers Ltd. in the final set of comparables and hence, we direct the Ld.TPO to exclude Mahindra Consulting Engineers Ltd. from the final set of comparables.
In this view of the matter and consistent with view taken by the co-ordinate bench in assessee own case, we direct the Ld. TPO to exclude Mahindra Consulting Engineers Ltd, from the final set of comparables.
The assesee has challenged exclusion of Chemtex Global Engineers Pvt.Ltd. from final set of comparables. The Ld. AR for the assessee submitted that the company is functionally comparable, because the functions performed by the company are similar to functions performed by the assessee. Further, the TPO in Asst.Year 2010-11 has selected this company as comparable, but has
20 IOT Design & Engineering Limited erroneously rejected for the year under consideration, on the ground that annual report is not available in public domain and the industrial sales of the company have decreased by 69%. But, fact remains that the annual report of the company is available in public domain and its turnover has marginally dip from Rs.44.99 crores to 43.91 crores. Therefore, the Ld.TPO, as well as the DRP was incorrect in rejection of Chemtex Global Engineers Pvt.Ltd.
The Ld. DR on the other hand, supporting order of the Ld.DRP submitted that the Ld.DRP has brought out facts, including abnormal financial results to reject the company and hence, there is no reason to take a different view taken by the Ld. DRP.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the DRP has brought out clear facts, in light of various evidences filed by the assessee, including annual report and noticed that there is an abnormal change in financial results and the industrial sales of the company has decreased by 69%, when compared to previous financial year. The Ld. DRP further noted that the annual report of the company is not available in public domain. The Ld. DRP, further, noted that even, if Chemtex Global Engineers Ltd. is regarded as comparable, since it was selected in proceeding year, but the assets and liability i.e FAR cannot be said to be comparable during the year. Fact remains unchanged. Although, the ld. AR for the assesee explained that the functions performed by the company are similar to functions carried out by the assessee, but on perusal of details filed by the assessee, we find that there is an abnormal change in financials of the company for the year under consideration. Further, the Ld.TPO has brought out another peculiar
21 IOT Design & Engineering Limited facts of the case, as per which, the sales of the company has drastically reduced. Therefore, we are of the considered view that there is no error in findings recorded by the Ld.TPO/DRP for exclusion of Chemtex Global Engineers Pvt.Ltd. and hence, we are inclined to uphold the findings and reject ground taken by the assessee.
The other grounds taken by the assesee, including ground No. 4, 6, 7 and 8 are not pressed and hence, the same are dismissed as not pressed.
The revenue has challenged the findings of the Ld. DRP in exclusion of WAPCOS Ltd, Engineers India Limited & Rites Limited. Therefore, it is necessary to discuss each comparable challenged by the revenue, in light of facts brought out by the assessee and the findings of the Ld. DRP.
ii. WAPCOS Ltd:
We find that WAPCOS Ltd has been considered by us in assesee own case for Asst.Year 2010-11 and held that the company is not a good comparable. The relevant findings of the Tribunal are as under:-
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that WAPCOS Ltd. is a Government of India undertaking and the functions and risk profile of the government company are entirely different from that of the assessee, because in Government of India undertakings, the profit motive is not the main objects of the company and they are mainly in furtherance of social obligations of the Government. We further noted
22 IOT Design & Engineering Limited
that WAPCOS Ltd. is functionally dissimilar, which is evident from the fact that the company is engaged in pre-investments surveys and investigations, topographic surveys, operation and maintenance of all kinds of works involved in the development and utilization of water resources, generation and utilization of electronic power etc., whereas the assesse company is primarily engaged in Engineering services to EPC projects mainly with respect to terminals. Further, the Hon’ble Bombay High Court, in the case of CIT vs Thyssenkrupp Industries India Pvt.Ltd.(supra) has held that profit motive is not a relevant consideration in the case of Government undertaking and that many government companies, even operate on losses in furtherance of the social and obligations of the government and hence, cannot be compared with that of private company. The Hon’ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. held that turnover is a relevant factor to consider comparability. In this case, on perusal of details available on record, we find that WAPCOS Ltd. turnover is at Rs.302 crores, which is more than ‘11’ times of the turnover of the assessee company. Therefore, we are of the considered view that WAPCOS Ltd. cannot be compared with that of Assessee Company and accordingly, we direct the Ld.TPO to exclude WAPCOS Ltd. from the final set of comparables.
In this view of the matter and consistent with view taken by the co-ordinate bench, we direct the TPO to excluded WAPCOS Ltd and reject ground taken by the revenue.
iii) Engineers India Limited:-
We find that Engineers India Limited has been considered by us in assesee own case for Asst.Year 2010-11 and held that this company is not a good comparable. The relevant findings of the Tribunal are as under:-
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. Basically, Engineers India Limited is a Government of India undertaking and the
23 IOT Design & Engineering Limited
functions and risks profile of the government of India companies are altogether different from that of the assessee company, because government companies are working in line with objective of Government of India, in furtherance of the social obligations of the government of India. Therefore, the same cannot be considered with that of Assessee Company. We further noted that the turnover of Engineers India Limited from consultancy segment is at Rs.1,055 crores, which is more than ‘40’ times of the turnover of the assessee company, which is at Rs.26.11 crores. We further noted that the company is engaged in the business of providing diversified engineering services, which includes constructions, mining, chemicals, and fertilizers etc. The Hon’ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. (supra) held that turnover is a relevant factor to consider comparability. Further, the Hon’ble Bombay High Court, in the case of CIT vs Tyssenkrupp Industries India (P) Ltd. held that profit motive is not a relevant consideration in case of Government undertaking and that many government companies even operate on losses in furtherance of the social obligations of the government. Therefore, we are of the considered view that Engineers India Limited is not a good comparable to the assessee, which is mainly providing services to its AE in the field of EPC projects and mainly with respect to terminals. Hence, we direct the TPO to exclude Engineers India Limited from the final set of comparables.
In this view of the matter and consistent with view taken by the co-ordinate bench, we direct the Ld.TPO to exclude Engineers India Limited and accordingly, reject the ground taken by the revenue.
iv. Rites Limited:-
We find that the Tribunal has considered Rites Limited in assessee own case for Asst.Year 2010-11 and direct the TPO to exclude the company from the final the set of comparables. The relevant findings of the Tribunal are as under:-
24 IOT Design & Engineering Limited
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. Basically, RITES Limited is a Government of India undertaking and the functions and risks profile of the government of India companies are altogether different from that of the assessee company, because government companies are working in line with objective of Government of India, in furtherance of the social obligations of the government of India. Therefore, the same cannot be considered with that of Assessee Company. We further noted that turnover of Rites Limited from consultancy segment is at Rs.474.92 crores, which is more than ‘18’ times of the turnover of the assessee company, which is at Rs.26.11 crores. We further noted that the company is engaged in the business of providing diversified engineering services, which includes constructions, mining, chemicals, and fertilizers etc. The Hon’ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. (supra) held that turnover is a relevant factor to consider comparability. Further, the Hon’ble Bombay High Court, in the case of CIT vs Tyssenkrupp Industries India (P) Ltd. held that profit motive is not a relevant consideration in case of Government undertaking and that many government companies; even operate on losses in furtherance of the social obligations of the government. Therefore, we are of the considered view that RITES Limited is not a good comparable to the assessee, which is mainly providing services to its AE in the field of EPC projects and mainly with respect to terminals. Hence, we direct the TPO to exclude RITES Limited from the final set of comparables.
In this view of the mater and consistent with view taken by the co-ordinate bench, we are inclined to uphold the findings of the Ld.DRP and reject ground taken by the revenue.
In the result, appeal filed by the assessee is partly allowed and appeal filed by the revenue is dismissed.
25 IOT Design & Engineering Limited ITA No.4921/Mum/2016:- 44. The only issue challenged by the revenue from its ground of appeal is Transfer Pricing adjustment made by the TPO at transaction level and deleted by the DRP. The Ld. DR submitted that there is no quarrel to the proposition that the TP Adjustment, if any is to be made to the value of international transactions, as has been laid down by the various discussions of the High Court and ITAT, however, the dispute is regarding the manner of working out said adjustment to the value of the international transaction i.e, as to whether, it should be done on a proportional basis, as claimed by the assesee. The Ld. DR, further referring to the provisions of section 92D of the I.T.Act, 1961 and Rule 10D of the I.T.Rules, 1962 has submitted that the proportionate adjustment, as sought by the assesee is purely misleading and not warranted. He, further, submitted that though, the adjustment is computed at the entity level, but the same is only with respect to international transactions and not in relation to the non AE transactions. The Ld. DRP, without appreciating the facts has directed the TPO to make adjustment only to transactions with AE. In this regard, he has filed a detailed written submission, which has been reproduced as under;-
At the outset, it is stated that there is no quarrel to the proposition that the TP adjustment if any is to be made to the value of International transaction, as has been laid down by the various decisions of the High Court and ITAT relied upon by the assessee. However, the dispute is regarding the manner of working out the said adjustment to the value of International transaction, i.e as to whether it should be done on a proportionate basis as claimed by the assessee?. 5. Before analyzing the above claim of the assessee to compute the adjustment on a proportionate basis, let us first examine the statutory provisions regarding obligation of the assessee with regard to the maintenance of documents and production of the same during transfer pricing proceedings with regard to ALP determination of international transactions.
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The object of prescribing the documentation requirement is to enable the assessee to show that the choice of the most appropriate method and the comparability analysis undertaken by it is correct by producing the supporting documentary evidences. Similarly, the documents also help the TPO/AO to determine whether the choice made by the assessee is correct and whether the ALP is correctly determined. The material also affords the basis to the AO/TPO to determine the ALP on the basis of information available on record where it is found that the determination made by the assessee is not in accordance with law.
Since, the crux of the matter revolves around the ALP determination of the international transactions for which the law mandates a corresponding documentation ft is necessary to refer to the provisions of section 92D and Rule 10D The requirement under Rule 10D is to be examined in the light of the comparability factors in Ride 10B(2) and criterion for judging appropriateness contained in Rule 10C. The same are extracted below for ready reference. Section 92D of the Income Tax Act. 1961 provides as follows
*Sec92D Maintenance, keeping of information and document by persons entering into an international transaction.—
(1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed.
Thus, Subsection (1) of section 92D mandates and puts an onus on the assessee to maintain and keep such information and documents as may be prescribed in respect of 'International Transactions'. 9. Rule 10D of the Income Tax Rules, 1962 prescribes the information and documents required to be maintained by every person who has entered into an international transaction. The same reads as follows: "Information and documents to be kept and maintained under section 92D . 10D. (1) Every person who has entered into an international transaction —c'[or a specified domestic transaction] shall keep and maintain the following information and documents, namely:—
(g) a record of uncontrolled transactions taken into account for analyzing with the international transactions [ or the specified domestic transactions] including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions —[or specified du»*ij»6c transactions, as the case may be] ; (h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction - —[or specified domestic transaction];
27 IOT Design & Engineering Limited
(i) a description of the methods considered for determining the arm's length price in relation to each international transaction [or specified domestic transaction] or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case; (j) a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments if any. which were made to account for differences between the international transaction ~[or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions; 10. Thus, the assessee has to maintain documents giving various details about the international transaction like nature and terms, FAR analysis, record of forecasts budgets etc ; documents explaining and justifying the selection of the most appropriate method considering the factors specified in Rule 10C. and also the documents related to uncontrolled transactions to establish comparability and ALP of the international transaction by applying such most appropriate method and a record of actual working carried out for determining the ALP of the International Transaction.
Rule 10B(2) prescribes the Comparability factors to be taken into account. An evaluation of Rule 10B(2) shows that the comparability between international transaction and uncontrolled transaction has to be judged with reference to the specific characteristics of the property and the functions performed, assets employed and risks assumed by the parties to the transaction and the contractual terms of the transactions that shows how risks and rewards are divided between the parties Thus for the purpose of establishing comparability, complete details of the relevant international transaction are mandatory as also the details of the comparable uncontrolled transaction being considered.
Rule 10C discusses the 'Most appropriate method'. Rule 10C {1} provides for selection of the method which provides the most reliable measure of ALP of international transaction. Sub rule (2) provides for various factors to be taken into account for determination of the most appropriate method This inter-alia includes 'the degree of comparability existing between the international transaction and uncontrolled transaction' and 'the nature and extent and reliability of assumptions required to be made in application of a method1. Thus, the mandate of the Rule for selection of most appropriate method is that it will provide the most reliable measure of ALP and the assumptions made in application of the method are also reliable. An evaluation of Rule 10C(2) further shows that even for the purpose of selecting the most appropriate method, maximum importance is being given to the nature and class of international transaction and the functions performed, assets employed and risks assumed therein. Choice of
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appropriate method also depends on the comparability between the international transaction and the uncontrolled transaction, A choice of the method is governed by the availability of reliable data necessary for application of method. Thus, even for the purposes of selecting the most appropriate method, it is necessary to have complete information about the international transaction, the uncontrolled transaction and the comparability between the same. 13. At this juncture, it is relevant to note the provisions of Rule 10B(1)(e) which provides for the manner of determination of ALP of an international transaction while applying TNMM. which reads as under:
[10B. Determination of arm’s length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in to in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a)…….. ….. (e) transactional net margin method, by which —
(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard of any other relevant base; 14. Clause (i) of Rule 10B(1)(e) specifically provides that net profit margin realized by an enterprise from an international transaction is to be computed the law mandates that whenever TNMM is applied or sought to be applied, as a 1st step the profit margin realized from the International transaction is to be computed.
On a combined reading of section 92D. rule 10D(1). Rule 10B(2). Rule 10C and 10B(1)(e), it is clear that the law mandates the assessee to choose any of the method described in section 92C(1) as the most appropriate method by considering the factors specified in rule 10C, which will provide the most reliable measure of ALP of international transaction and maintain records as to why such method was selected as most appropriate method and how it was applied in each case [refer clause(i) of Rule 100(1}]. Further, having selected the most appropriate method, the assessee would also maintain a record of the uncontrolled transaction (including a record of uncontrolled transaction entered into by the assessee with the 3rd parties) which were taken into account for analyzing their comparability with international transaction [refer clause(g) of Rule 10D(1)], in line with the method selected as the most appropriate method. Thereafter, the assessee is also mandated to keep a record of the analysis performed to evaluate comparability of uncontrolled transaction with international transaction [refer clause(h) of Rule 10D(1)] in line with the method selected as the most appropriate method Further, the assessee is mandated to maintain a record of the actual working
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carried out for determination of ALP including details of financial information used in applying the most appropriate method [refer clause(i) of Rule 10D(1)]. Thus if TNMM is applied, the to keep a record of the actual working carried out for ALP by applying TNMM as per the method of determination Rule 10B(1)(e).
Thus it can be seen that the documentation requirements prescribed in Rule 10D are of such a nature that both the assessee as well as the AO is enabled to select the most appropriate method based on the documentation maintained and is also able to establish comparability between the international transaction and uncontrolled transaction. 17. It is submitted that it is the responsibility of the assessee / taxpayer to provide data of profitability of AE segment and also of Non-AE segment. This is due to the reason that special facts are in the knowledge of the assessee and it is the taxpayer who has responsibility to discharge the onus. In this case, the assessee has not discharged its onus to provide data of AE and Non-AE segment. There is no dispute with regard to this fact
In view of the documentation requirement as per the Act discussed above it may be noted that the purpose is to determine the profitability of the AE segment as well as the non AE segment. Having not complied with the documentation requirement as prescribed by law, the assessee now cannot take the benefit of its own failure. By claiming proportionate adjustment, the assessee is making an inherent assumption that 'in the entity level profitability, the profits earned on the AE segment as well as the Non-AE segment is same,. which may be less than the arm's length profits for both the segments' The same could be accepted provided the assessee furnished the relevant data for the AE and non-AE segment, as provided by law. Even at the cost of repetition, it may be stated that as a first step for determination of profitability under TNMM. the assessee has to compute the profits from the international transaction under Rule 10B(1)(e)(i). Once separate profitability of the AE transactions is not furnished, and the assessee uses entity level profits for comparability, the assumption of the assessee that both the AE segment as well as the non AE segment have earned the same profits, does not stand demonstrated by any evidence. In such a situation. the assumption of the Revenue that ' the profits earned by the assessee on the Non-AE segment (embedded in the entity level profits taken for comparability) is at arm's length in absence of any relationship to impact the profits of this segment, which would be the rate of profits earned by the comparable companies' would be more justified as has also been upheld by the Hon'ble Bombay High Court in the case of Alstrom Projects India Limited in ITA 362 of 2014 at para 12 wherein it has been held that 'The transaction with Non- AE are presumed to be at arm's length as there is no relationship which is likely to influence the price.
As per facts on record, the Assessee had disclosed International transactions, for which External Transactional Net Margin method (TNMM) was considered as the most appropriate method and it was applied to determine the ALP of the said international transaction. For
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working out the ALP of the said International Transaction, the PI I was taken as OP/OC, with the assessee as the tested party Thus this was the admitted position of the assessee considering the various provisions of the Act discussed above. It may be noted that the assessee has not worked out separate profit from the International Transaction as per the Mandate of Rule 10D and Rule 10B(1)(e). 20 The assessee has applied External TNMM, wherein the PLI of the assessee was computed and comparison was done with the PLI of the comparable companies The PLI was worked out by the assessee for the entire company (which consists of both AE sales as well as non AE sales) and was not worked out separately for the International Transactions with AEs in contravention to the mandate of rule 10B(1)(e) discussed above. It may be stated that when the assessee itself has computed the PLI at entity level (consisting both of AE sales as well as non AE sales) and has itself applied External TNMM, it means that the assessee has not considered Internal TNMM as an appropriate method for comparison. In other words, even as per the assessee, the profit of non AE segment was not comparable to the AE segment International transactions. This also means that even as per the assessee out of the entity level cost, the cost attributable to the AE segment and the non AE segment cannot be allocated on a proportionate basis of sales. Had it been so. the assessee would have prepared the accounts of AE and Non AE segment separately and would have done Internal TNMM analysis and would have justified the ALP of the International Transaction on this basis itself.
By claiming proportionate adjustment on the basis of AE sales to total sales, the assessee is by inference now claiming that entity level data can be segregated into AE and non-AE segment.. This assumption is erroneous, fallacious and not tenable as accepting this claim means that internal TNMM is available which has not been considered appropriate by the assessee itself and for which no data has been provided by the assessee and there could be no need to apply external TNMM at all It has been held in a number of cases that internal comparison is better than external, if other conditions are satisfied provided reliable data is provided. Having failed to provide the reliable data of two segments - AE transactions and non-AE transactions, the assessee is trying to take benefit out of his failure.
The difference between the Revenue and assessee is in the methodology of working out TP adjustment to International transaction The Department is working out cost of non-AE transaction by applying average PLI of external comparable, in the absence of data for AE/non- AE segments. It may be noted that even the Hon'ble Bombay High Court in the case of Alstrom Projects India Limited in ITA 362 of 2014 at para 12 held that 'The transaction with Non-AE are presumed to be at arm's length as there is no relationship which is likely to influence the price.
Accordingly, Since, the average PLI of comparables was higher than the PLI of the assessee's total transaction (AE + non-AE transactions),
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the natural presumption (as confirmed by the Hon'ble Bombay High Court supra) is that the transaction relating to the Non-AE part in the total transaction is at ALP. In other words, the profits earned by the assessee on Non-AE transaction is at arm's length. It automatically means that out of the total profits shown, the profit on the non AE part embedded in this total profits is at ALP i.e at the average PLI of the comparables Once it is so, the shortfall in the profits as computed at entity level is only in respect of International Transactions, for which no proportionate adjustment can be allowed. It may be noted that although in the method of computation, the entity level data comprising both of AE as well as non AE transactions has been used, the adjustment is only with respect to the international transaction, as the non AE part is already at ALP.
24 Regarding the contention raised by the assessee that the adjustment was required to be restricted only to the AE transaction and cannot be resorted to at entity level it is submitted that working of proportionate adjustment submitted by the assessee is based on an erroneous presumption that AE and non-AE transaction have actually earned same percentage of profit. As discussed, even the Bombay High Court has held that the Non-AE transactions would be at arm's length in absence of any relationship which is likely to influence the price. This assumption of the assessee. therefore, is erroneous. In case this assumption of the assessee is held acceptable, it would amount to existence of internal TNMM which has not been considered as the most appropriate method by the assessee and for which it has not furnished any details, which are in special knowledge of the assessee
Example to explain the contention of Revenue: (Column) AE NON-AE TOTAL
SALES ENTITY A 100.00 100.00 200.00
suppose actual OP/OC At entity level (%) B 10.00 operating cost at entity level C=Total 181. 82 sales/110% total op. profits at entity level D=A-C 18.18 suppose ALP margin (OP/OC)of comparables ( %) E 15.00 As for Non-AE transactions there is no relationship to F 15.00 influence the price, the margin on these transactions are at ALP i.e the OC is such that it produces ALP OP/OC margin of 15% OC of non AE Transaction G= Non-AE 86.96 86.96 Sales/115% OC of AE Transaction H=C-G 94.86 94.86 OP PROFITS EARNED AS PER BOOKS (Rs) l=A-[H-AE,G-Non 5.14 13.04 18 18 AE]
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OP/OC AS PER BOOKS (%) J=l/[H-AE,G-Non 5.42 15. 00 . AE]*100 Profit to be earned at entity level to get overall OP/OC of K=C*15% 27.27 15% Difference of profitability at entity level/ adjustment L=K-D 9.09 9.09 proposed
Total op profit of AE segment post adjustment (Rs) M=L+I 14.23 AE OP/OC post adjustment (%) N=M/H*100 15.00
The above is explained as under: > Suppose, AE sales and Non AE sales are Rs. 100 each aggregating to Rs. 200.(Column A) > Suppose, Actual entity level OP/OC is 10%. (Column B) ^ Hence, Entity level OC will be 181. 82. (Column C) ^ And, Entity level OP will be 18. 18. (Column D) > Suppose, ALP Margin of comparables is worked out at 15%. (Column E) > Since the transaction with Non-AE are presumed to be at arm's length as there is no relationship which is likely to influence the price, the ALP margin of Non-AE be also 15% in this example. (Column F) Applying the rate of 15% to non AE sales, OC of Non-AE sales works out to Rs 86 96 (Column G) • Accordingly, since out of entity level OC of Rs 181.82. Rs 86.96 is Non-AE, the AE cost is the difference amount of Rs 94.86 (Column H) ^ Thus, when we deduct the segment OC from the segment sales segment wise OP works out to Rs.5.14for AE segment and Rs. 13.04 for Non-AE segment {Column I) ^ This OP segment wise in terms of % works out to 5.42% for AE, 15% for Non-AE and 10% at entity level (Column J). It may be noted that Non-AE segment profitability is same as 15% which is the ALP margin. *- The entity level profit on OC of Rs. 181.82 with OP/OC as PLI @15% works out to Rs. 27.27 (Column K) > Hence there is difference in overall entity level profitability of Rs 909 which is proposed as adjustment to the AE segment (Column L). * If this adjustment proposed of Rs. 9.09 is added to the operating profit earned for the AE segment of Rs.5.14, the total works out to Rs. 14.23 (Column M) • This total profit of Rs. 14.23 works out to 15% of the OC of AE segment of Rs 94 86 (Column N), which is the ALP which should have been earned on the AE transaction
Thus, it may be seen that the proportionate adjustment as sought by the assessee is purely misleading and not warranted. It is again emphasized that though the adjustment is computed at entity level, but, the same is only with respect to the international transaction and not in relation to the Non-AE transaction. 28. Further, if the proportionate adjustment as sought by the assessee is allowed, the position in the above example would be as under: Column AE Non-AE Total
A B 10000 100.00 20000 sales 94.86 86.96 OC as per books 181.82
33 IOT Design & Engineering Limited 18.18 OP. PROFITS EARNED AS PER BOOKS (Rs} C=A-B 5.14 13.04 D 4.55 9.09 4. 55 Adjustment proposed to profits on prorata basis of sales E=C+D 17.59 Total segment wise profit earned 968 27.27 Profit as % of cost F=E/B*100 10.21 15.00 20.23
From the above chart, it may be seen that if proportionate adjustment as claimed by the assessee is allowed, in effect, it means that only Rs 4.55 would be added to the existing AE segment profit of 5.14 This would translate into total AE segment profit of Rs. 9 68. which works out to only 1021% of the OC of the AE segment of Rs 94 86 Thus when the AE segment is expected to earn ALP profit of 15%, the adjustment made on proportionate basis would only lead to OP/OC for the AE segment at 10.21%. Hence, the proportionate adjustment as claimed by the assessee is not called for Accordingly, although the adjustment has been computed on entity level, the adjustment is only with respect to International Transactions of the assessee. 30. To sum up, the Revenue does not have any grievance against the proposition that TP provisions do not apply to non-AE transactions. However, the issue is whether for the purpose of determining the ALP on AE transactions, if only entity level margins are given by the assessee, adopting the proportionate basis to derive the profits on AE transactions, is in accordance with law or not The underlying assumption in adopting the proportionate basis to derive the AE profits is that the assessee earns the same margin on AE transaction as it has earned on non-AE transaction However, this presumption is contrary to the TP provisions where the underlying presumption is always that the non-AE transactions at whatever price they are entered into are at arm's length.. In fact, the object of TP provisions is to determine whether the profit on AE transactions (where TNMM method is adopted) is better than the profits on non-AE transactions. Under such circumstances, the assumption that all assessee's transactions, whether with AE or non-AE, result in same rate of profit is to assume the correctness of the conclusion which should have actually been independently established, and which the assessee has failed to demonstrate. .
The Ld. AR for the assessee, on the other hand submitted that this issue is covered in favour of the assessee by the decision of Hon’ble Bombay High Court, in the case of CIT vs Tara Jewels Exports Pvt.Ltd. (2017) 80 taxmann.com 117, where it was held that the value of the TP adjustment needs to be made to the value of the
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international transactions instead of making the adjustments at entity level. In this regard, he has relied upon the following judicial precedents. Case Law Name Citation
Bombay High Court
CIT v. Tara Jewels Export (P.) Ltd. [2017] 80taxmann.com 117 (Bombay)
Ratilal Becharlal & Sons v. CIT [2016] 65 taxmann.com 155 (Bombay)
CPT v. Thyssen Krupp Industries India [2016] 70 taxmann.com 329 (Bombay)
CITv. Firestone International (P.) Ltd. [2015] 60 taxmann.com 235 (Bombay) - Bombay High Court
Mumbai ITAT
[2018] 96 taxmann.com 429 (Mumbai - DOT vs Tara Jewels Export (P) Ltd. Trib.)
Smt. Dina Sudhir Shah vs ACIT [2015] 53 taxmann.com 496 (Mumbai - Trib
Aramex India (P.) Ltd vs DCIT 2014] 51 taxmann.com 573 (Mumbai - Trib.)
Phoenix Mecano (India) (P.) Ltd vs (TO 2014] 42 taxmann.com 469 (Mumbai - Trib.)
Sandoz(P.)Ltd vs DCIT [2013] 34 taxmann.com 28 (Mumbai - Trib.)
Syscom Corporation Ltd vs ACIT [2013] 35 taxmann.com 600 (Mumbai - Trib.)
TCL Holdings (P.) Ltd vs ACIT [2013] 35 taxmann.com 147 (Mumbai - Trib.)
Penfort (Israel) Limited vs DCIT [2013] 36 taxmann.com 499 {Mumbai Trib.)
35 IOT Design & Engineering Limited
Alstom Projects India Ltd vs ACIT [2013] 36 taxmann.com 130 (Mumbai Trib.)
Star Diamond Group vs DCIT 2011] 44 SOT 532 (Mumbai)
DCIT vs Starlite [2010] 40 SOT 421 (MUM.) – ITAT
Huntsman Advanced Materials (India) Pvt. Ltd I.T.A. No. 8237/Mum/2010. – ITAT vs DCIT ITAT-Other Kirloskar Toyoda Textile Machinery Private [2015] 53 taxmann.com 389 Limited vs ACIT (Bangalore - Trib.)
Mindteck (India) Limited vs ITO [2015] 55 taxmann.com 261 (Bangalore - Trib.)
Gillete India Ltd vs ACIT [2014] 44 taxmann.com 133 (Jaipur - Trib.)
DCIT vs Alcatel India Limited 2014] 51 taxmann.com 518 (Delhi - Trib.)
Igarashi Motors India Ltd vs ACIT 2013] 36 taxmann.com 389 (Chennai - Trib.)
DCIT vs Invensys India Pvt. Ltd ITA Nos. 1858, 1859 & 2214/Del/ 2011
Invensys India Pvt. Ltd vs DCIT ITANos. 1858, 1859/Del/2011 [2010]
IL Jin Electronics (I) (P.) Ltd v. ACIT [2010] 36 SOT 227 (DELHI) - ITAT
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that the Ld.DRP has directed the TPO to limit the adjustment only to the AE transactions by following the decision of Hon’ble Bombay High court, in the case of Ratilal Becharlal & Sons vs CIT(2016) (65 taxmann.com 155) (Bom.), where it was categorically held that TP
36 IOT Design & Engineering Limited Adjustment needs to be made at transactions level and not at entity level. A similar view has been expressed by the Hon’ble Bombay High court, in the case of CIT vs Tara Jewels Exports Pvt.Ltd.(supra) Therefore, we are of the considered view that there is no error in the findings recorded by the Ld.DRP, while directing the Ld.TPO to limit the adjustments only to the transactions with AE’s. Hence, we are inclined to uphold the findings of the Ld. DRP and reject ground taken by the revenue.
In the result, appeal filed the revenue is dismissed.
As a result, appeal filed by the assesee for Asst. Years 2010- 11 & 2011-12 are partly allowed and appeal filed by the revenue for Asst.Year 2011-12 is dismissed and cross objection filed by the revenue for Asst.Year 2011-12 is also dismissed.
Before parting, we shall deal with procedural aspect of prouncement of order as prescribed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963. As per rule 34(4), no order shall be pronounced after expiry of 90 days from the date of hearing. This appeal was heard on 29/01/2020 and ordinarily, the order shall be pronounced on or before 27/04/2020. But, this order could not be pronounced on or before 27/04/2020, due to the fact that the Govt. of India has imposed nationwide lockdown from 25/03/2020 and the same has been extended timt to time up to 31/05/2020 and because of this the office was closed up to 21/05/2020. Further, if the above lockdown period is exclued for the purpose of limitation, then the order can be pronounced on or before 23/06/2020. Further, whether lockdown period can be excluded or not has been exhastively dealt by the co-ordinate bench of ITAT, Mumbai, in the case of DCIT vs
37 IOT Design & Engineering Limited JSW Limited, in ITA No. 6264/Mum/2018, dated 14/05/2020, where it was held that due to corona virus pandamic, the period of limitation automatically gets extends till such period the lockdown is in force. We, therefore, are of the opinion that considering the prevailing situation and also, by respectfully following the decision of co- ordinate bench in the case of DCIT vs. JSW Limited (Supra), the order is pronounced well within the time allowed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963.
Order pronounced as per Rule 34(4) of Income Tax Rules
1963, though notice to parties, on this: 17 /06/2020
Sd/- Sd/- (SAKTIJIT DEY) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai; Dated 17/06/2020 Thirumalesh Sr.PS
Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. BY ORDER, 6. Guard file. स�यािपत �ित //True Copy// (Asstt. Registrar) ITAT, Mumbai