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Income Tax Appellate Tribunal, DELHI BENCH ‘I-2’ : NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
(PAN : AACCS5323F) (APPLICANT) (RESPONDENT) ASSESSEE BY : Shri Percy Pardiwala, Senior Advocate REVENUE BY : Shri H.K. Choudhary, CIT DR Shri Rakesh Kumar, Senior DR Date of Hearing : 19.03.2019 Date of Order : 15.04.2019
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : Present cross appeals filed by the Revenue as well as by the assessee/taxpayer are being disposed off by way of composite order to avoid repetition of discussion.
The Appellant, DCIT, Circle 2, Gurgaon (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 30.06.2014 passed by the ld. CIT (Appeals)-2, Faridabad qua the assessment year 2008-09 on the grounds inter alia that :-
“(i) That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in excluding Alphageo (India) Ltd. as comparable due to the following reasons: • The TPO clearly stated that the assessee has nowhere in its TP report gone into the verticals within the engineering services industry in its comparability study and has searched for comparables which are engaged in the engineering and software services. • The assessee is engaged in carrying out engineering design services in the nature of tendering, setting up, harmonizing, basic and detailed design and erection, installation and commissioning of power plant. But the assessee has not gone into any verticals in its search process and the TPO has reexamined it's accept/reject matrix accepting the keywords of assessee. • The TNMM method is more tolerant and less susceptible to the transactional and functional differences and therefore, if the companies are broadly comparables to the tested party, the same should be accepted. (ii) That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in treating the miscellaneous income of Rs.17,90,39S/- from notice period pay from its ex-employees as income derived from export of article or thing to be eligible for deduction u/s 19B of the IT. Act, 1961. (iii) That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in holding that notice period pay received should be considered as income while computing deduction under section 10B, where as the said income was not derived from industrial undertaking for the benefit of deduction u/s 10B of the I.T. Act, 1961.”
The Appellant, M/s. Siemens Power Engg. Pvt. Ltd.
(hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 30.06.2014 passed by the ld. CIT (Appeals)-2, Faridabad qua the assessment year 2008-09 on the grounds inter alia that :-
“1. On the facts and in law, the Hon'ble Commissioner of Income Tax (Appeals)-2 ("Ld. CIT(A)") erred in partially confirming the addition made by the Learned Transfer Pricing Officer (hereinafter referred to as "Ld. TPO") and the Learned Assessing Officer (hereinafter referred to as "Ld. AO") under section 92CA(3) of the Income Tax Act, 1961 ("the Act").
2. On facts and in law, the Ld. CIT(A)/ Ld. AO/ Ld. Ld. TPO erred in rejecting the economic analysis and filters applied in the Transfer Pricing ("TP") Documentation maintained u/s 92D of the Income Tax Act, 196 I read with Rule 10D of Income Tax Rules 1962 and in calling for a fresh search during the assessment proceedings based on arbitrary additional filters without discharging the statutory onus to establish that any of the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have not been satisfied.
3. On facts and in law, the Ld. CIT(A)/ Ld. AO/ Ld. TPO violated the provisions of Rule 10B (2) of the Rules by rejecting a company, Indium Software Ltd. considered as comparable by the Appellant in its TP Documentation, incorrectly holding it to be functionally dissimilar to the Appellant.
4. On facts and in law, the Ld. CIT(A)/ Ld. AO/ Ld. TPO violated the provisions of Rule 10B (2) of the Rule by rejecting a company, Chakkilam Infotech Ltd. considered as comparable by the Appellant in I TP Documentation, incorrectly holding it to be functionally dissimilar to the Appellant.
5. On facts and in law, the Ld. AO/ Ld. TPO violated the provisions of Rule 10B (2) of the Rules by rejecting a company, Vama Industries Ltd. considered as comparable by the Appellant in its TP documentation, holding that the company has service income to total income less than 75 percent, without appreciating the fact that the segmental results were considered by the Appellant. The Ld. CIT(A) further erred in rejecting the Company as a comparable holding it to be functionally dissimilar to the Appellant based on conjectures and surmises.
6. On facts and in law, the Ld. CIT(A)/ Ld. AO/ Ld. TPO violated the provisions of Rule 10B(2) of the Rules by rejecting a company Tata Elxsi Ltd. considered as comparable by the Appellant in its TP documentation, holding it to be functionally dissimilar to the Appellant.
7. On facts and in law, the Ld. CIT(A)/ Ld. AO/ Ld. TPO violated the provisions of Rule 10B (2) of the Rules by rejecting a comparable company Powersoft Global Solutions Ltd. identified by the Appellant in its TP documentation, holding that the Company's accounting year ended on 30 September instead of 31 March.
8. On facts and in law, the Ld. CIT(A)/ Ld. AO/ Ld. Ld. TPO have violated the provisions of Rule 10B (2) of the Rules by arbitrarily adding a new company, Stup Consultants Pvt. Ltd. as comparable to the Appellant, disregarding the fact that the Company is functionally dissimilar to the Appellant as the Company is a full service project delivery consultancy company offering integrated planning, architectural, engineering and project management services to varied industries and ignoring that there was an abnormal increase in the income growth during FY 2007-08.
9. On facts and in law, the Ld. CIT(A)/ Ld. AO/ Ld. TPO erred in re-computing the operating profit to operating cost ("OPITC") margin of the Appellant after incorrectly treating provision for anticipated loss guarantee (Rs.15,166,484) and provision for anticipated loss guarantee written back (Rs.43,779,784) as non-operating items and not appreciating the Appellant's consistent treatment of the above as operating item was also accepted by the Ld. TPO the in preceding and succeeding financial year.
10. The Ld. CIT(A)/ Ld. AO/ Ld. TPO grossly erred on the facts and in law in not allowing appropriate adjustments in accordance with the provisions of Rule 10B(I)(e)(iii) and IOB(3) of the Rules to account for difference in risk assumed, between the Appellant and the comparable companies selected by the Ld. TPO and affirmed by the Ld. CIT(A).
11. The Ld. CIT(A)/ Ld. AO/ Ld. TPO erred in misinterpreting the requirement of 'contemporaneous' data in the Rule 10B(4) by using current year data (i.e. financial year 2007-08), thereby breaching the principles of natural justice and 'impossibility of performance'.
12. On facts and in law, the CIT(A)/ Ld. AO/ Ld. AO erred in initiating penalty proceedings under section 271( I)(c) of the Act.
13. On facts and in law, the Ld. CIT(A)/ Ld. AO erred in levying the interest under section 234B and 234D and recovering the interest under section 244A of the Act.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : Siemens Power Engineering Pvt. Ltd., a subsidiary of Siemens AG, Germany (holding 99.99% shares) is into the business of preparing and developing drawings and designs in the form of customized software which helps in planning and setting up of power plants worldwide. In order to develop the drawing and designs for the power plants, the taxpayer uses customized software for doing 3D planning and generation of engineering documentation.
During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AE) as under :-
S.No. Nature of transaction Method Value of used by the international Assessee transaction 1 Payment for services TNMM 4,41,95,028 received 2 Provision of engineering TNMM 72,99,54,589 design and drawing services 3 Reimbursement of travel CUP 8,82,42,450 expenses received Total 86,23,92,067
For benchmarking the international transactions for provision of engineering design and drawing services, the taxpayer applied Transactional Net Margin Method (TNMM) with OP/TC as the Profit Level Indicator (PLI) as the Most Appropriate Method (MAM). The taxpayer in its TP documentation computed its PLI at 20.53% on cost which has been recomputed at 18.14%, then recomputed at 14.35% as against the PLI of comparables at 40.50% by considering the data for AYs 2005-06, 2006-07 and 2007-08.
The TPO in order to carry out the TP analysis applied filters as under :-
(i) Use of current year data;
(ii) Reject companies where related party transactions exceed 25% of sales; and (iii) Companies that are affected by some peculiar economic circumstances.
TPO after FAR analysis examined the comparables on quantitative filters and qualitative filters with ratio of service income to total income at least 75%. TPO also proposed to consider the comparability in the economic activity of technical consultancy and engineering services and not in computer services.
After applying the aforesaid filters, TPO rejected 5 comparables out of 7 comparables chosen by the taxpayer and comparables at 29.70% and adjusted OP/TC at 28.26% and thereby proposed an adjustment of Rs.9,65,99,160/- on Arm’s Length Price (ALP). AO disallowed the claim of the taxpayer for including the income of Rs.17,90,395/- being misc. income in the net profit of the business of the undertaking while computing the same for benefit of deduction u/s 10B of the Income-tax Act, 1961 (for short ‘the Act’) and thereby assessed the total income at Rs.10,98,76,429/-.
The taxpayer carried the matter before the ld. CIT (A) by way of an appeal who has partly allowed the appeal. Feeling aggrieved, the taxpayer as well as Revenue has come up before the Tribunal by way of filing the present appeals.
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.
(REVENUE’S APPEAL) TRANSFER PRICE GROUND GROUND NO.(i)
Undisputedly, in order to benchmark the international transactions qua engineering design services TNMM as MAM with TPO. It is also not in dispute that ld. CIT (A) has considered foreign exchange loss as non-operating, which has been accepted by the Revenue. It is also not in dispute that the taxpayer is a captive service provider qua engineering design services.
Ld. TPO in his TP analysis selected 4 comparables in order to benchmark the international transactions qua engineering design services which are as under :-
S.No. Name of the Company OP/TC Adjusted OP/TC 1 Accuspeed Engineering Device 12.97% 12.68% Services 2 Mahindra Engineering, Design 27.54% 27.81% and Development Co.Ltd. 3 Alphageo (India) Ltd. 41.58% 40.81% 4 Stup Consultants Pvt. Ltd. 36.72% 31.74% Mean 29.70% 28.26%
With taxpayer’s margin at 14.35% as against margin of comparable companies at 28.26%, the TPO computed the ALP after allowing working capital adjustment of the margin of comparables as under :-
Operating Cost 68,16,20,185 OP/TC 28.26% Margin 19,26,25,864 Arm’s Length Price 87,42,46,049 Price Charged by the assessee 77,76,46,889 Difference 9,65,99,160 % of difference with the value of International 13.23% transaction Consequently, TPO proposed the adjustment of Rs.9,65,99,160/- in order to benchmark the international transactions qua engineering design services being the difference in ALP and the price charged by the taxpayer from its AE.
Ld. CIT (A) accepted the TP analysis made by the TPO except rejection of one comparable, namely, Alphageo (India) Ltd..
Now, the Revenue has challenged exclusion of Alphageo (India)
Ltd. by the ld. CIT (A). Ld. CIT (A) has also considered foreign exchange loss as non-operating. We would examine the comparability of Alphageo (India) Ltd. vis-à-vis the taxpayer to benchmark the international transactions qua engineering design services as under.
ALPHAGEO (INDIA) LTD. (ALPHAGEO)
Ld. DR for the Revenue challenging the exclusion of Alphageo drew our attention to paras 7.2 and 7.3 at page 16 of the impugned order passed by ld. CIT (A) and contended that findings are cryptic one which need to be extensive one with FAR analysis and profit of business is very important. Ld. DR also relied upon the order passed by the TPO.
However, on the other hand, ld. AR for the taxpayer relied upon the order passed by the ld. CIT (A) excluding Alphageo and to satisfy the filter of export turnover which is less than 25% as proposed by the TPO.
Perusal of the annual report, available at page 1468 of the paper book, shows that Alphageo is providing 2D and 3D seismic services; design and preplanning of 2D and 3D surveys; seismic data acquisition in 2D and 3D; seismic data processing/ reprocessing/ special processing; seismic data interpretation; generation, evaluation and ranking of prospects; reservoir data acquisition; reservoir analysis; topographic surveys with GPS/RTK; digitization of hard copies of maps, seismic sections and well logs into CGM/SEGY/LAS formats; and third party quality control for acquisition and processing.
Alphageo also fails export turnover filter which is less than 25% proposed by the TPO himself in the show-cause notice.
However, ld. CIT (A) has declined the argument as to failing the export turnover filter on the ground that taxpayer himself has not applied this filter in TP documentation.
When we examine the functionality of Alphageo vis-à-vis the taxpayer, Alphageo is into providing seismic services which include design and preplanning of 2D and 3D surveys; topographic surveys with GPS/RTK; seismic data acquisition in 2D and 3D; seismic data interpretation; seismic sections and well logs into CGM/SEGY/LAS formats; third party quality control for acquisition and processing; etc. whereas the taxpayer is into the business of preparing and developing drawings and designs in the form of customized software which helps in planning and setting up of power plants world-wide as a captive service provider.
Alphageo has also changed its classification to “offshore drilling services” and NCC code as services incidental to offshore oil extraction, so it cannot be classified as technical consultancy provider.
The ld. CIT (A) has also rightly observed that there is a stark difference between employee cost to total cost ratio in the case of Alphageo of 7.55% as against 60.35% in case of the taxpayer.
Further when we examine the show cause notice issued by the TPO in para 4.2 sub-para 3 at page 609 of the paper book, the TPO has himself applied the export filter that the company having export turnover less than 25% is not to be taken as comparable. So, when Alphageo fails the export filter which is less than 25% as against 100% export of the taxpayer company, the same cannot be a valid comparable. So, we are of the considered view that Alphageo is not a suitable comparable vis-à-vis the taxpayer and as such has been rightly excluded by the ld. CIT (A). Consequently, ground no.(1) of the Revenue’s appeal is determined against the Revenue.
CORPORATE GROUNDS GROUNDS NO.(ii) & (iii)
AO while computing allowable deduction u/s 10B of the Act excluded misc. income of Rs.17,90,395/- from the net profit of the business of the undertaking on the ground that the taxpayer has not fulfilled three conditions laid down u/s 10B inter alia that (i) profits should be directly derived from industrial undertaking and should not be merely attributable to the industrial undertaking; (ii) there should be a direct and proximate nexus between the income received and the activity carried out by the industrial undertaking; and the source of the income of profits should be the industrial undertaking itself.
AO further observed that the export incentive income is not having any direct nexus with the activities carried out by the taxpayer and relied upon the decision rendered by Hon’ble Supreme Court in the case cited as Liberty India vs. CIT – SLP CCJ No.5827/07 dated 31.08.2009.
However, ld. CIT (A) included the misc. income of Rs.17,90,395/- in the net profit of business of the taxpayer for distinguishing the decision of Liberty India (supra) relied upon by the AO.
Undisputedly, the taxpayer has duly shown the misc. income of Rs.17,90,395/- in profit & loss account under the head “other income”, which represents amount recovered from its employees towards the notice pay in relation to the period of notice not served.
It is also not in dispute that the salary of the employees is claimed as expenses of the undertaking of the taxpayer and that subsequent recovery on termination of the employee should also be credited to the respective undertaking.
In the backdrop of the aforesaid undisputed facts, we are of the considered view that by applying the decision rendered by the coordinate Bench of the Tribunal in Birla Soft (India) Ltd. vs. DCIPT – (2012) 20 taxmann.com 43 (Delhi), ld. CIT (A) has rightly allowed the notice period pay received as income while computing the deduction u/s 10B of the Act because amount received towards notice period pay was to be treated as income derived from the eligible undertaking. The decision rendered by the Hon’ble Supreme Court in Liberty India (supra) applies to DEPP/Duty Drawback benefits which do not form part of net profit for the purpose of computation of profits and do not fall within the expression “profits derived from industrial undertaking” for the purpose of section 80IB. So, ld. CIT (A) has rightly held that Liberty India (supra) is not applicable to the facts and circumstances of the case. So, we find no illegality or perversity in the findings returned by the ld. CIT (A) on this issue, hence grounds no.(ii) & (iii) are determined against the Revenue.
ITA NO.4751/DEL/2014 (TAXPAYER’S APPEAL)
At the very outset, ld. AR for the taxpayer in order to compress the issue raised in the appeal fairly conceded that in case appeal filed by the Revenue is dismissed, the taxpayer only challenges the inclusion of Stup Consultants Pvt. Ltd. as a comparable. So, in view of our findings returned in the preceding paras, dismissing the appeal filed by the Revenue, we would examine the suitability of Stup Consultants Pvt. Ltd. as a comparable for benchmarking the international transactions undertaken by the taxpayer with its AE.
STUP CONSULTANTS PVT. LTD. (STUP)
Perusal of para 9.5 of the TP order shows that the taxpayer has challenged the inclusion of Stup that it is functionally dissimilar and it fails export filter of < 25%. But the TPO retained Stup as a suitable comparable.
The taxpayer challenged Stup before the ld. CIT (A) as is evident form ground no.7 extracted at page 449 of the paper book but ld. CIT (A) has not returned any findings on this issue.
When we examine the submissions made by the taxpayer before the ld. CIT (A), available at pages 411 to 453 of the paper book, relevant page 452, which is based upon Prowess Data Base, it has come on record that Stup Consultants Pvt. Ltd. is purely a consultancy firm which, renders consultancy and project management services for power, transportation, telecommunications, commercial, institutional, recreational and manufacturing facility infrastructure, whereas the taxpayer is into providing engineering design services in the form of customs software for planning and set up of power plants, hence Stup is not functionally comparable vis-à-vis the taxpayer.
Furthermore, Stup also fails export filters applied by the ld. TPO himself as it has export of > 25% as against 100% export of the taxpayer. So, when TPO has himself applied this export filter, he cannot be allowed to make pick and choose in order to apply this filter as per his convenience. Ld. CIT (A) has rejected the contention of the taxpayer that since this filter has not been applied by the taxpayer in its TP documentation, it is not a valid objection raised by the taxpayer. So, we are of the considered view that when final filters are to be decided by the ld. TPO, it does not matter if such like filter is applied by the taxpayer or not.
Coordinate Bench of the Tribunal in case cited as Emerson Process Management Power & Water Solutions India (P.) Ltd. vs. ACIT – (2016) 69 taxmann.com 185 (Delhi-Trib.) examined the suitability of Stup vis-à-vis Emerson Process Management Power & Water Solutions India (P.) Ltd. which is engaged in providing “Application Engineering” software development and related services to its group company and found the same as not a suitable comparable for AY 2008-09 by returning following findings :-
“26. A perusal of the aforesaid observation returned by the TPO apparently shows that the assessee has raised specific objection as to dissimilarity of this company by highlighting that this company is primarily engaged in providing range of services in field of engineering and architecture and that no segmental information is available but the ld. TPO by relying upon the segment information, lying at page 13 of the Annual Report, rejected the objection raised by the assessee on the ground that the company is engaged in providing consultancy in both the segments i.e. civil and engineering, consultancy and architectural consultancy and is driving its total fee from consultancy only and disposed off the objection of abnormally high margin on the ground that the company has a different functional profile compared to the assessee which explains why it is earning such high profit margin. All these findings are self contradictory because on the one hand, the TPO observed that this company is taken as a comparable and on the other hand, recorded the finding that this company has a different functional profile compared to the assessee company. So, we are of the considered view that this company is not fit for taking as comparable and has to be excluded and fresh search is required to be made by the TPO by providing an opportunity of being heard to the assessee.”
In view of what has been discussed above, we are of the considered view that Stup is not a suitable comparable vis-à-vis taxpayer on ground of functional dissimilarity, non-availability of segmental information and on ground of failing the export filter, hence we order to exclude it from the final set of comparables.
The ld. AR for the taxpayer has not pressed the inclusion/ exclusion of other companies as comparable for benchmarking the international transactions.
Resultantly, the appeal filed by the Revenue is dismissed and the appeal filed by the taxpayer is allowed. Order pronounced in open court on this 15th day of April, 2019.