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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’ : NEW DELHI
Before: SHRI R.K.PANDA & SHRI KULDIP SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘I-1’ : NEW DELHI) BEFORE SHRI R.K.PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.1289/Del./2017, A.Y. 2012-13 Haldor Topsoe India Pvt. Ltd. Vs. ACIT Elegance Tower, 2nd Floor, Special Range-4 Jasola District Centre New Delhi New Delhi PAN : AABCH7781F (APPELLANT) (RESPONDENT) ASSESSEE BY : Sh. H.P.Agarwal, FCA & Ms. Prashuka Jain, FCA REVENUE BY : Shri Sanjay I. Bara, CIT, DR Date of Hearing : 04.11.2019 Date of Order :19.11.2019
O R D E R
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, Haldor Topsoe India Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 26.12.2016 passed by the Assessing Officer (AO) in consonance with the orders passed by the ld. DRP/TPO under section 254/143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2012-13 on the grounds inter alia that :-
“ 1. The learned Addl. CIT (after incorporating Hon’ble DRP's order) has erred on facts and in law in not accepting that the order passed by the Ld. TPO is bad in law on the ground that no Show Cause Notice [SCN] was issued to the appellant in respect of transfer pricing assessment, thereby, denying the opportunity of being heard on transfer pricing issues. Hence, the order passed is bad in law being wholly arbitrary and against the principles of natural justice.
2. The learned Addl. CIT (after incorporating Hon’ble DRP’s and Ld. TPO’s order) has erred on facts and in law in not removing M/s Mahindra Engineering Services Ltd. from the list of final comparables since it fails RPT filter despite the direction of the Hon’ble DRP in para 4.4.3 of its order dated 26.12.2016.
3. The learned Addl. CIT (after incorporating Hon’ble DRP’s and Ld. TPO’s order) has erred on facts and in law in making addition of Rs. 2,35,50,348 on account of: adjustment in value of international transaction (by (a) increasing the margin of comparable companies to 19.40% as against actual margin of 12.65% of the assessee), on account of the following: • Selecting 3 new comparable companies which were not selected by the assessee • Rejecting 5 comparable companies selected by the assessee Rejecting adjustment in margin due to different risk (b) profile of comparable companies.
4. The learned Addl. CIT (after incorporating Hon'ble DRP’s order) has erred on facts and in law in initiating penalty proceedings u/s 271(l)(c).
5. The appellant craves leave to add to or modify the above grounds of appeal at or before the hearing of the appeal.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Holder Topsoe India Pvt. Ltd. (HTIPL) is fully owned subsidiary of Topsoe Group (with 99.99% shares being held by HTIAS and 1% share being held by another group company- Subcontinent Ammonia Investment Company Aps). HTIPL provides Engineering services (including preparation of engineering packages, equipment designs, etc.) and Technical assistance services (including providing engineers for supervision) to HTAS for their global projects (including projects in India).
Taxpayer in order to benchmark its international transaction qua engineering and technical assistance services applied Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with OP/OC as the Profit Level Indicator (PLI) by using multiple years data. The taxpayer chosen 7 comparables with average margin of 6.53% as against actual margin of the taxpayer of 12.65% and found its international transaction at arm’s length.
However, Ld. TPO in its TP analysis selected 5 comparables to benchmark the international transaction of the taxpayer qua technical assistance services by accepting TNMM as the Most Appropriate Method with OP/OC as PLI and computed the average margin of 32.45% and thereby made an adjustment of Rs. 6,90,87,015/-.
The taxpayer carried the matter before Ld. DRP by way of filing objections which have been partly allowed. Feeling aggrieved taxpayer has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly the taxpayer has ended into international transactions with its Associated Enterprises (AE’s) qua rendering of engineering and technical assistance services as under :-
S. No. Nature of Transactions Values (Rs.) 1. Engineering & Technical Assistance 39,30,83,980 Services Rendered 2. Reimbursement of Expenses 1,22,713
The Ld. TPO has not disputed the TNMM as MAM applied by the taxpayer to benchmark the international transactions. Post- DRP directions, the Ld. TPO after granting working capital adjustment calculated the margin of 8 comparables at 19.40%. It is also not in dispute that after allowing rectification application by the taxpayer TPO excluded one more comparables and calculated the margin at 18.65%.
Post- DRP directions and after passing order by the Ld. TPO dated 28.02.2017 u/s 154 of the Act final list of comparables for benchmarking international transactions entered into by the taxpayer with its AEs is as under :-
S. No. Name of the Company Comments OP/OC% 1. HSCC (INDIA) Ltd. NA 41.70 2. Mitcon Consultancy & NA 32.26 Engg. Services Ltd. 3. TCE Consulting NA 19.12 Engineerings Ltd. 4. UB Engineering Ltd. The company 4.07 passes all the filters 5. Cades Digitech P. Ltd. The Company 0.03 passes all the filters 6. Kratos Energy & The company Infrastructure Ltd. passes all the filters 7. Mahindra Consulting NA 26.43 Engineerings Ltd. Average 18.65
After computing the average of comparables at 18.65% as against average of the tested party as 6.53%. The Ld. TPO proposed the Arm’s Length Price of international transaction as under :-
Particular Amount Operating Cost 34,89,39,974 OP/OC (%) 18.65% Arm’s length margin 6,50,77,305 Arm’s length price (A) 41,40,17,279 Price shown by the assessee (B) 39,30,83,980 ADJUSTMENT (DIFFERENCE A- 2,09,33,299 B)
Hence adjustment has been reduced from Rs. 2,35,50,348/- to Rs. 2,09,33,299/-.
Now to compress the controversy at hand raised by the assessee by way of filing the present appeal, ld. AR for the taxpayer contended that the taxpayer challenges the exclusion of three comparables companies viz. Mahindra Consulting Engineers Ltd., Mitcon Consultancy & Engg. Services Ltd. and HSCC (INDIA) Ltd. and also sought inclusion of 3 companies as comparable in the final set of comparables viz. Petron Engineering Construction Ltd., Simon India Ltd. and Toyo Engineering Ltd.
Now we would examine the suitability of aforesaid comparables for the purpose of exclusion and inclusion as contended by Ld. AR for the taxpayer one by one.
GROUND NO. 1 13. Ground no. 1 is dismissed having not been pressed by Ld. AR for the taxpayer.
GROUND NO. 2 AND 3 EXCLUSION OF COMPARABLES SOUGHT BY THE TAXPAYER M/s. Mahindra Consulting Engineers Ltd.(Mahindra) 14. The Ld. AR for the taxpayer sought exclusion of Mahindra on the ground that this comparables fails the Ld. TPOs own related party transactions (RPT) filter as Mahindra’s own RPT transactions are 40.60%.
The Ld. DR for the revenue, on the other hand, relied upon the order passed by lower revenue authorities below. When we examine para 4.5 at page 6 of the TP order TPO himself has applied filter to exclude the companies as comparables having more than 25% of related party transactions (RPT) of sales. This objection has been specifically raised by the taxpayer before TPO as well as DRP but has not been addressed to and they continued to retain the Mahindra as a comparable.
When we examine profit and loss account of Mahindra available at page 107 of the paper book., it has come on record that Mahindra has income from consultancy services to the tune of Rs. 15.22 crores and income from consultancy services with related parties is to the tune of 6.18% as is evident from detail of related party given at page 109 and 110 of the paper book which comes to 40.60%. In these circumstances when Mahindra fails the RPT filter applied by TPO it cannot be a suitable comparable. Hence, ordered to be excluded from the final set of comparables to benchmark the international transactions.
M/s. Mitcon Consultancy & Engg. Services Limited (Mitcon) 17. The taxpayer sought to exclude Mitcon from the final list of taxpayer on the grounds inter alia that it is functionally dissimilar vis-à-vis taxpayer ; that Mitcon fails revenue from services filter applied by the TPO and relied upon order passed by co-ordinate bench of Tribunal is Granite Services International (P.) Ltd. v. ACIT [2017] 87 taxmann.com 24 (Delhi Trib.) Taxpayer raised this objection before TPO as well as Ld. DRP but the same have not been addressed to.
Ld. DR for the revenue, on the other hand, relied upon the order passed by lower authorities below.
When we examine para 4.5 at page 5 and 6 of the TPO order.
The Ld. TPO himself applied the filters to exclude companies from the final list of comparables whose revenue is less than 75% of the total income. However, when we examine profit and loss account of the Mitcon available at page 44 of the paper book revenue earned by the Mitcon from consultancy fee during the year under assessment comes to 55.65%, which is less than the filter of 75% applied by the TPO.
Co-ordinate bench of Tribunal examined the suitability of Mitcon inGranite Services International (P.) Ltd. (supra) vis-à- vis a routine engineering and technical assistant service Provider and order to exclude the same by returning following findings :-
20. So far as Mitcon Consultancy and Engineering Services Ltd., is concerned we find this company provides services to the banking division, entrepreneurship and vocational training division, E-schools and BT and Pharma sector. Revenue earned by the company from services other than consultancy is approx. 43% of the total revenue. Milton also owns fixed assets such as wind turbine generators and therefore, has a high fixed asset to sales ratio of 34.09%. We find this company was rejected by the Tribunal in assessee’s own case Granite Services International (P) Ltd. v. Asstt. CIT [2017] 87 taxmann.com 24 (Delhi-Trib) by observing as under :- “7. Similarity, in respect of Mitcon Consultancy and Engineering Services Limited and Rites Ltd. it is submitted that both these companies have multi dimensional functionality and mostly serving the related parties, and apart from that the segmental data is not available. On facts, Ld. DR does not dispute the same. We, therefore, hold that these two companies also cannot be comparables to the assessee company.
In view of the matter, we are of the considered view that Mitcon is not a suitable comparable vis-à-vis taxpayer on account
of functional dissimilarity as it is providing solution in power, energy efficiency, renewable energy, climate change and environmental management sectors besides training courses & skill based training programmes. And on the ground that it fails
TPO’s filters of 75% revenue earning from services whereas
Mitcon is having revenue from consultancy fee is only 55.65%, hence, we order to exclude Mitcon from the final set of comparable for benchmarking the international transaction.
HSCC (INDIA) LTD. (HSCC) 22. Taxpayer sought to exclude HSCC from the final set of comparable for benchmarking the international transaction on the grounds inter alia that it is a Mini Ratna category government company and a subsidiary of NBCC (India Ltd.) ; that it has earned unusually high margin of 48.91% ; that it is functionally dissimilar and relied upon DCIT v. Terex India (P) Ltd. [2019] 104 taxmann.com 28, Rampgreen Solution v. CIT 60 taxmann.com 355 (Delhi HC) and Avenue Asia Advisors (P.) Ltd. v. Dy. CIT [2017] 85 taxmann.com 311 (Delhi HC), Li & Fung (India) (P.) Ltd. v. ACIT [2018] 96 taxmann.com 151 (Delhi-Trib.) 23. Ld. DR for the revenue, on the other hand, relied upon the order passed by lower authorities below. 23.1 Suitability of HSCC as a comparable vis-à-vis a routine engineering and consultancy provider has been examined by the Coordinate Bench of Tribunal in case of Terex India (P) Ltd. (supra) available at page 16 to 44 of the paper book wherein it has been ordered to be excluded being a Government of India Enterprise as major part of its business is from the Government itself.
Even functional profile of HSCC is dissimilar to taxpayer as it is also into providing health services being a multi disciplinary organization with experienced professionals like health planners and economists, doctors, biomedical engineers, computer experts, pharmacists, architects and public health engineers etc. So the function of HSCC are dissimilar to taxpayer who is a routine engineering consultancy service provider, hence we order to exclude the same from final list of comparable to the benchmark of international transactions.
GROUND NO. 3B
INCLUSION OF COMPARABLES
SOUGHT FOR BY THE TAXPAYER Petron Engineering Construction Ltd. (Petron) 25. This is taxpayer’s comparables which has been rejected by the TPO on the ground that it fails service filter and that it is functionally dissimilar. DRP also confirmed the findings of the TPO.
So far as question of qualifying the service filter of 75% applied by the TPO is concerned, when we examine the contentions raised by the Ld. AR for the assessee that Petron qualifies the service filter of 75% applied by the TPO, audited financials have not been brought on record by the taxpayer.
Moreover Petron as a comparable has been accepted by the Tribunal in assessee’s own case in A.Y. 2009-10, copy of order is available at page 116 to 142, by returning following findings :-
“We are of the considered opinion that there is no functional dissimilarity between the tested party and the comparable as both of them are providing similar services although the sectors might be a little different and the Ld. TPO was wrong in excluding it. We direct the inclusion of this comparable in the final set of comparables.”
In AY 2010-11 also Petron has been accepted as a suitable comparable vis-à-vis taxpayer in its own case, copy of order is available at page 155 to 265. Following the decision rendered by Co-ordinate Bench of Tribunal in assessee’s own case, as there is a no change in the business model during the year under assessment , we are of the considered view that Petron is a suitable comparable vis-à-vis taxpayer and the TPO/DRP have wrongly rejected the same on ground of failure of service filter of 75%. So, we order to include Petron in the final set of comparables for the benchmarking of international transaction.
Simon India Ltd. (Simon)
This is again taxpayers comparables rejected by the TPO/DRP on ground that it fails service filters. Again when we examine audited financial of Simon available at page 53 to 54 of the paper book, it is proved on record that Simon sale of Engineering supplies and services amounts to Rs. 9575.41 lakhs, enough to qualify the service filter applied by the TPO. Moreover Simon has been accepted as a suitable comparables by the Tribunal in assessee’s own case for AY 2009-10 (copy of order is available at page 116 to 142) and there is no change in the business model of the taxpayer during the year under assessment.
So, following the order passed by the Co-ordinate Bench of Tribunal and in view of facts discussed above, we are of the considered view that Simon is a suitable comparables vis-à-vis taxpayer, hence, order to be included in the final set of comparables for benchmarking the International Transactions.
Subject to verification of financials available at page 53,54 of the paper book by AO/TPO.
Toyo Engineering Ltd. (Toyo) 29. This comparable of the taxpayer has been rejected by the TPO on ground of functional dissimilarity. The Ld. AR for the assessee contended that TOYO is also rendering similar services as that of the taxpayer in the field of Petrochemical & fertilizers, Refinery, Oil & Gas etc., and further contended that this company is the competitor of the taxpayer.
When, we examine the TP order at page 7, the Ld. TPO rejected Toyo as comparable vis-à-vis taxpayer by merely recording that company is functionally different from the taxpayer, hence, not a suitable comparable. At the same time, assessee has not brought on record annual reports of Toyo to work out it is suitability. In these circumstances, we are of the considered view that matter is required to be remanded back to TPO/AO to decide afresh after providing an opportunity of being heard to the assessee.
GROUND NO. 3b :- 31. The Ld. TPO/DRP made addition of Rs. 2,35,50,348/- on account of rejecting adjustment in the margin due to different risk profile of the comparable companies. Ld. DRP denied this risk adjustment on the ground that the taxpayer is a captive service provider to its AE and operates in a risk insulated environment being working on a cost plus model and is compensated for all the cost borne by it.
The Ld. AR as well as Ld. DR for the revenue brought to notice of the Bench that in AY 2009-10 and 2010-11, this issue has been restored back to the TPO/AO by the Tribunal vide order dated 02.05.2017 and 26.02.2018 passed in and ITA No. 654/Del./2015. In view of the matter, we are of the considered view that identical issue of this year is also required to be remanded back to the TPO/AO to decide afresh after providing an opportunity of being heard to the assessee.
Taxpayer is directed to bring on record the evidence to prove the risk adjustment vis-à-vis comparables if any. Consequently, Ground No. 3b is decided in favour of the assessee for statistical purposes. 33. In view of what has been discussed above, appeal filed by the assessee is allowed for statistical purpose. Order pronounced in open court on this 19th November, 2019.