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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’, NEW DELHI
Before: MS. SUSHMA CHOWLA & SHRI PRASHANT MAHARISHI
आदेश/ORDER आदेश आदेश आदेश
PER SUSHMA CHOWLA, JM: Out of this bunch of appeals, one appeal filed by the assessee is against the order of the A.O. dated 29.01.2015 passed under Section 143(3)/144C/92CA(4) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to assessment year 2010-11. Further, both the assessee and the Revenue have filed cross-appeals relating to assessment year 2011-12 against the order of the AO under Section 143(3)/144C/92CA(4) of the Act.
All the appeals on similar issue were heard together and are being disposed off by this consolidated order for the sake of convenience.
The assessee in assessment year 2010-11, has raised the following grounds of appeal: 1.1 That on the facts and circumstances of the case and in law, the Assessing Officer (hereinafter referred to as the “AO”) erred in assessing the total income of the appellant at Rs. 49,577,793 /- as against a returned total income of Nil.
6854/Del/2015 & 6799/Del/2015 Transfer Pricing Adjustment of Rs 41,666,810/- 2. That on facts and in law the AO/Transfer Pricing Officer (hereinafter referred to as the “TPO”)/ Dispute Resolution Panel (hereinafter referred to as the “DRP”) erred in making/proposing/confirming Transfer Pricing adjustment of Rs. 41,666,810 /- under Chapter X of the Income Tax Act, 1961 (hereinafter referred as “the Act”). 2.1 The AO/TPO/DRP erred in facts and circumstances of the case and in law by misunderstanding RTIPL's business model and functional & risk profile. 2.2 Without prejudice to any other ground, the AO/TPO/DRP erred in computing the correct operating margin of the assessee while making/proposing/confirming Transfer Pricing adjustment. 2.3 The AO/TPO/DRP erred in facts and circumstances of the case and in law, by inappropriately modifying the economic analysis undertaken by the assessee and re-computing the ALP of the transactions by conducting a fresh search. 2.4 The AO/TPO/DRP erred in facts and circumstances of the case and in law, in rejecting certain companies as comparable. 2.5 Without prejudice to any other ground, the AO/TPO/DRP erred in facts and circumstances of the case and in law in considering companies functionally, different from RTIPL as comparable. 2.6 Without prejudice to any other ground, the AO/TPO/DRP erred in facts and circumstances of the case and in law, by inappropriately adding quantitative search filters to modify the economic analysis undertaken by the assessee. 2.7 Without prejudice to any other ground, the AO/TPO/DRP has adopted a flawed approach by using single year data as against the multiple year data used by the assessee, to compute the arm’s length price of the international transaction of the assessee using TNMM method. 2.8 Without prejudice to any other ground, the AO/TPO/DRP erred in facts and circumstances of the case and in law, in not allowing economic adjustments for differences on account of risks assumed by the assessee vis-a-vis the comparable companies. 2.9 Without prejudice to any other ground, the AO/TPO/DRP erred in facts and circumstances of the case and in law, by not applying 6854/Del/2015 & 6799/Del/2015 the Proviso to section 92C(2) of the Act and has failed to allow the assessee the benefit of upward variation of 5 percent in determining the Arm’s Length Price. 2.10 Based on the facts and circumstances of the case, the TPO/AO/DRP erred in facts and circumstances of the case and in law, by not taking cognizance of the fact that same international transactions of assessee has been accepted by Revenue authorities to be at arm’s length in previous years. 2.11 Without prejudice to any other ground, the AO/TPO erred in facts and circumstances of the case and in law, by incorrectly applying the directions issued by DRP.
Briefly stated the facts of the case are that the assessee for the year under consideration had furnished the return of income declaring nil income. The assessee had entered into various international transactions with its Associated Enterprises (AEs), hence, reference was made to the Transfer Pricing Officer (TPO) under Section 92CA(1) of the Act. The TPO noted the business profile of the assessee and also noted that the assessee had undertaken the transactions of provision of management consultancy and support services and payment of service charges to its AEs, totaling Rs.21,49,37,293/-. The assessee had benchmarked the said transaction by using Transactional Net Margin Method (TNMM) as most appropriate method with Profit Level Indicator (PLI) of OP/OC. The margin of the assessee at 11.82% was compared with the mean margins of selected comparable companies at 7.42% and the assessee claimed the transaction to be at arm’s length. The assessee had selected 8 comparables for benchmarking its international transaction. The TPO issued the show cause notice to the assessee and noted the fact that the 6854/Del/2015 & 6799/Del/2015 assessee had applied weighted average margins of the comparables, as against the margin of contemporaneous period to benchmark the international transaction. The use of multiple year data was observed to be inappropriate and show cause notice was issued to the assessee in this regard. Further, vide para 8 of the show cause notice, the TPO also noted various service agreements entered into by the assessee with its AEs and nature of services were analyzed. The TPO was of the view that as the MD of the assessee company was Phd. (Geology), and that since the identification of business opportunities involved technical evaluation of mines, technical data etc.; hence companies providing technical services should be considered as comparable in the case of the assessee.
He, thus, applied certain filters and was of the view that ICRA Management Consulting Services Ltd. and IDC India Ltd. could be selected from the list of the comparables prepared by the assessee.
Balance six concerns were held to be not functionally comparable to the assessee. He then selected two sets of comparables, totaling 20 concerns, i.e., in all 22 concerns, as per list at pages 14 & 15 of the TPO's order and show caused the assessee as to why the said concerns should not be picked up as functionally comparable to the assessee. The assessee objected to the said exercise carried on by the TPO. However, the TPO was of the view that the assessee had only searched for comparable, which were engaged in the management consultancy and support services, immaterial of the vertical/functional or service line, in which the 6854/Del/2015 & 6799/Del/2015 company was engaged and hence, search process was not correct. The TPO vide para 4.4 at page 18, analyzed the employee profile of the assessee for providing various business services to its AEs and he was of the view that the assessee was providing high-end services. The TPO, thus, benchmarked the international transaction after dealing with objections raised by the assessee and finally selected 20 concerns as functionally comparables. The mean margin of comparables is computed at 34.53% and he proposed an upward adjustment of Rs.5,06,79,911/-.
The AO issued draft assessment order to the assessee proposing upward adjustment of Rs.5.06 crores. The assessee filed objections before the DRP, who rejected the same and the AO passed the final assessment order, against which the assessee is in appeal before us.
The learned AR for the assessee pointed out that the concerns which were finally selected by the TPO were objected by the assessee in the transfer pricing proceedings itself. Even before the DRP, objections were raised in respect of concerns finally selected by the TPO and also in respect of concerns which were selected by the assessee, but excluded by the TPO. The learned AR for the assessee stressed that both on factual and legal aspects, the objections raised by the assessee before the DRP have not been dealt with by the Panel, i.e., where the assessee was providing only support services to its AEs for investment in India, then the margin of the assessee would be compared with such concerns which were carrying on similar functions. On the other hand, both the stand of 6854/Del/2015 & 6799/Del/2015 the DRP and the TPO were that the assessee was providing high-end services to its AEs, so the companies providing high-end services were selected as comparables. He took us through the objections filed before the DRP and stressed that the DRP has failed to take cognizance of the same and the order of the AO/DRP suffers from infirmity. He fairly suggested that the issue may be looked into by the DRP and the issue be decided after meeting the objections raised by the assessee.
The learned DR for the Revenue, on the other hand, strongly placed reliance on the orders of the authorities below.
We have heard the rival contentions and perused the relevant material available on record. The assessee was a subsidiary of Rio Tinto (Mauritius) Pvt. Ltd. and was engaged in rendering management consultancy and support services to its AEs in the mining industry. It also acted as separate shared service centre for common business support processes such as payroll processing, human resource management, accounts, finance, information technology, healthy safety environment and community functions for its AEs. The company had offices in Delhi, Bhubaneswar and Bangalore. While rendering the services to its AEs, the key services/functions performed by the assessee had been documented in the transfer pricing study report and also as noticed by the Transfer Pricing Officer in his order, which were as under:
6854/Del/2015 & 6799/Del/2015 “Analyzing Investment opportunities RTIPL prepares reports and analyze on specific projects of AEs which assist its AEs in taking an investment decision. In addition to this, RTIPL also analyses probable business opportunities for its Ads and prepares and delivers reports to its AEs on the basis of such analysis. However, any decision to invest lies with the AEs only. Management consultancy RTIPL provides consultancy services from time to time in relation to coal and other metals and mineral marketing opportunities in India. They provide information to AEs on such opportunities in India. Liaison with government offices RTIPL liaises with the government offices, on behalf of its AEs for the purposes of taking approvals or ensuring statutory compliance. Support in relation to procurement activity RTIPL provides support in relation to purchase of goods from India to some of its AEs.”
The assessee had selected TNMM as most appropriate method with PLI over OP/OC and the margin of the assessee worked out to 11.82%.
Further, the assessee had selected 8 concerns as functionally comparable whose mean margin on weighted average method worked out to 7.42%.
Hence, the assessee claimed that its transaction was at Arm’s Length.
The TPO after analyzing the business profile of the assessee in the field of profession, management consultancy and support services by the assessee to its AEs, first rejected the weighted average mean margin, which was objected by the assessee. There is no dispute with regard to the said approach of TPO and only the data for contemporaneous period needs to be applied. On analysis of various/different agreements entered into by the assessee with its AEs, the TPO was of the view that, where the 6854/Del/2015 & 6799/Del/2015 services provided by the assessee to the AEs were in the nature of management consultancy, investment advisory, liaison services and procurement support, and also where the employee profile included several geologist and geoscientist and where the MD of the assessee company was also highly qualified, then the companies providing technical services should be considered as comparable in the case of the assessee. Consequently, he revised the filters to be applied and in the final analysis selected 20 concerns as comparables, for which, show cause notice was issued to the assessee. He also rejected 6 comparables selected by the assessee and only accepted two of the comparables; in all 22 comparables were selected. Show cause notice was issued to the assessee as to why the mean margin of the said concerns should not be applied to benchmark the international transaction of the assessee. It may be pointed out herein that the assessee raised objections to the selection of comparable companies before the TPO both with regard to the fresh selection and also with regard to the exclusion of the companies, which were selected by the assessee in its Transfer Pricing Report. The TPO had considered the objections of the assessee, but he finally drew-up list of 19 concerns as comparables to the assessee whose mean margins worked out to 34.53% and made upward adjustment of Rs.5.06 crores.
Before the DRP, the assessee filed objections, firstly, on the analysis drawn-up by the TPO vis-à-vis business profile of the assessee
6854/Del/2015 & 6799/Del/2015 and calling it to be high-end service provider. The assessee also filed objections against the selection of concerns by the TPO and also filed objections against the rejection of the concerns, which were selected by the assessee. The DRP upheld the order of the TPO against which the assessee has filed the present appeal before us.
10. The learned Authorized Representative for the assessee strongly opposed the orders of the authorities below and pointed out that both the DRP and TPO have not considered the factual aspects of the case in the right perspective. It was stressed by him that the assessee was only providing support services to its AEs, which in turn were engaged in providing high-end services. But no such high-end services were being provided by the assessee. Though the Managing Director of the assessee company was highly qualified but the services provided by the assessee to its AEs were support services. He took us through the objections filed before DRP and in fairness submitted that matter should be remitted back to DRP.
The Learned DR for the Revenue placed reliance on the orders of the authorities below.
We have heard the rival contention and perused the issue which arises in the present appeal is against the benchmarking of international transaction undertaken by the assessee with its AEs and the selection of comparable. The dispute which needs adjudication is the selection of 6854/Del/2015 & 6799/Del/2015 comparables wherein out of 8 comparables selected by the assessee, 2 were held to be functionally comparables and 6 companies were rejected.
The assessee is aggrieved by the rejection of the said comparables.
Further, the assessee is also aggrieved by the fresh selection made by the TPO by applying different set of filters both on functionality and other aspects. The copy of the objections filed before DRP are placed on record and have been perused by us, at the instance of the learned AR for the assessee. The assessee had raised various facets of the different concerns finally picked-up, as to its dissimilarity to the functions of assessee vis-à- vis the functional profile and other aspects of comparables.
We find that the DRP has in mechanical manner rejected the objections raised by the assessee and has concluded by observing that where the TPO's order makes it clear that the aforesaid segment carved out was basically to identify the high-end transactions, then to benchmark the same by using companies which were providing high-end services. It concluded by holding that since the assessee had not disputed that the assessee was providing high-end services, therefore, the reason given by the TPO were justified. We find no merit in the aforesaid observations of the DRP as it had failed to consider the different facets of the objections raised by the assessee vis-à-vis selection/rejection of the companies as comparables. It is incumbent upon the DRP to consider the objections raised by the assessee and then decide the same. But no such exercise has been carried out by the DRP.
6854/Del/2015 & 6799/Del/2015 We find no merit in the order of the DRP. Accordingly, we remit this issue back to the file of the DRP with the direction to look into the functions performed by the assessee company and the activities carried out by the assessee and whether the same were high-end or low-end activities. The DRP is also directed to consider whether the concerns finally selected by the TPO were functionally comparable or not and also look into the functionality and other aspects of the concerns, which were selected by the assessee, but were rejected by the TPO. The DRP after examining the facts, and making far analysis of the activities performed by the assessee and functional profile of the comparables selected, shall benchmark international transaction of management consultancy and support services provided by the assessee company to its AEs and determine the Arm’s Length Price of the international transaction, if any. Reasonable opportunity of being heard shall be afforded to the assessee in this regard. Hence, the matter is set aside to the file of the DRP with our direction mentioned above.
The ground of appeal no. 1.1 is general in nature, which does not require any adjudication, accordingly, the same is dismissed as such.
The ground of appeal nos. 2 to 2.6 on the transfer pricing adjustment, i.e., inclusion/exclusion of comparables to benchmark the international transaction undertaken by the assessee is allowed for statistical purposes. The ground of appeal no. 2.7 related to use of single year data is against the assessee and hence, dismissed. The ground of appeal no.
6854/Del/2015 & 6799/Del/2015 2.8 of appeal is not pressed, hence dismissed as not pressed. The ground of appeal no. 2.9 is against the allowability of benefit of upward variation of + 5% in determining the Arm’s Length Price, is also decided against the assessee by various decisions and hence, the same is dismissed. The ground of appeal nos. 2.10 and 2.11 are general in nature, which do not require any adjudication, accordingly, the same are dismissed. Assessment year : 2011-12
The learned AR for the assessee pointed out that the issue raised of transfer pricing adjustment in the present appeal is similar to the issue raised in the appeal for assessment year 2010-11, except the ground no.
Since the issue raised in the present appeal for assessment year 2011-12 vis-à-vis transfer pricing adjustment is similar to the issue raised in the assessment year 2010-11, following our decision in the forgoing paragraphs, we remit the issue back to the file of the DRP, to adjudicate the issue on transfer pricing adjustment, following our directions for assessment year 2010-11 and after allowing reasonable opportunity of being heard to the assessee. Hence, the ground of appeal nos. 4 to 9 raised in this regard are allowed for statistical purposes.
The ground of appeal nos. 11 & 12 are not pressed, hence, the same are dismissed as not pressed. The ground of appeal no. 13 relating to use of multiple year financial data and ground of appeal no. 14 relating to the benefit of deduction of + 5% are against the assessee and 6854/Del/2015 & 6799/Del/2015 hence, the same are dismissed. The ground of appeal no. 15 against initiation of penalty proceedings is premature, hence, the same is dismissed.
Now, coming to ground of appeal no. 10 raised by the assessee, which is with regard to the computation of segmental profit margin of company Priya International Agencies Ltd. (segment). The said concern was selected as comparable and DRP vide para 10 directed the AO/TPO to re-verify the computation of profit margins and adopt the correct margins. However, the AO/TPO has failed to carry out the said exercise and determine the profit margin of the concern, M/s. Priya International Agencies Ltd. The AO is directed to verify the stand of assessee.
Accordingly, the ground of appeal no. 10 is allowed for statistical purposes.
Now, coming to ground of appeal nos. 1 to 3, the issue is against the disallowance made of Rs.7,31,504/- in respect of lease rental paid by the assessee, i.e., principal payment towards finance lease in respect of motor vehicles taken on lease. The assessee claimed the said expenditure as deductible and the case of the Revenue is that the payments made were towards acquisition of capital asset and were capital expenditure and not allowable in the hands of the assessee.
The learned AR of the assessee stressed that the issue stands covered by the order of the Tribunal in the case of M/s. NIIT Ltd. Vs.
6854/Del/2015 & 6799/Del/2015 DCIT, passed in for assessment year 2009-10, order dated 01.11.2019.
The learned DR for the Revenue, on the other hand, points out that the issue stands covered against the assessee by the order of the Tribunal in assessee’s own case for assessment year 2007-08 reported in [2012] 24 taxmann.com 124 (Delhi)
The learned AR for the assessee stressed that the Tribunal in relating to assessment year 2008-09, vide order dated 26.06.2018, had remitted the issue back to the file of the AO.
We have heard the rival contentions and perused the record.
Without going into the merits or demerits of the deduction claimed by the assessee, we are of the view that in view of the issue being set aside by the Tribunal to the file of AO in later decision relating to assessment year 2008-09, we deem it fit to restore this issue back to the file of AO to decide the same in the light of the direction of the Tribunal in assessment year 2008-09. Hence, grounds no. 1 to 3 raised by the assessee are allowed for statistical purposes. Assessment year AY: 2011-12
Now, coming to the appeal filed by the Revenue for assessment year 2011-12, the learned DR fairly pointed out that the tax effect 6854/Del/2015 & 6799/Del/2015 involved in the present appeal was below the prescribed limit fixed by CBDT vide Circular No.17/2019 dated 08.08.2019.
The CBDT vide Circular No.17/2019 dated 08.08.2019 has revised the monetary limit for filing the appeals before the Tribunal to Rs.50 Lacs. Further, CBDT vide letter dated 20.08.2019 has also clarified that Circular No.17/2019 would be applicable to all pending appeals. In such circumstances, the present appeal filed by the Revenue in case of low tax effect is not maintainable.
Before parting, we clarify here that the Revenue shall be at liberty to approach the Tribunal for re-institution of appeal, if the requisite material is brought to show that the appeal is protected by the exceptions prescribed in para 10 of the Circular dated 11.07.2018.
In conclusion, by applying the CBDT Circular dated 08.08.2019 and letter dated 20.08.2019 (supra), the captioned appeal of the Revenue is dismissed as withdrawn/not pressed.
Hence, both the appeals of the assessee are partly allowed and the appeal of the Revenue is dismissed.
Order pronounced in the open court on 27th day of November, 2019.