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Income Tax Appellate Tribunal, DELHI BENCHES: Bench ‘I-1’, NEW DELHI
Before: SHRI R.K.PANDA & SMT. BEENA A PILLAI
ORDER PER BEENA A PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against final assessment order dated 29/01/16 passed by Ld.AO under section 143(3) read with section 144C of the Income Tax Act, 1961 (the Act) on following grounds of appeal:
1. The Ld. Assessing Officer (‘AO’) / Ld. Transfer Pricing Officer (‘TPO’) erred on facts and in law by making an adjustment to the arm’s length price of the Appellant’s international transactions
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT which resulted in the enhancement of returned income of the Appellant by INR 7,44,04,229.
That the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO has not recorded any reasons in the assessment order based on which he reached the conclusion that it was ‘expedient and necessary’ to refer the matter to the Ld. TPO for computation of the arm’s length price, as required under section 92CA(1) of the Act.
3. The Ld. AO/Ld. TPO/ Ld. Dispute Resolution Panel (‘DRP’) erred on facts and in law in making an upward adjustment to the arm’s length price of the Appellant’s international transaction in relation to provision of engineering design services amounting to INR 7,44,04,229 by: 3.1. Rejecting the comparable companies selected by the Appellant in its Transfer Pricing documentation; 3.2. Accepting companies, which are not comparable to the Appellant in terms of functions, assets and risks; 3.3. Erroneously ignoring comparable companies, obtained by way of a fresh search, provided by the Appellant as a response to the show cause notice; and 3.4. Not granting an economic adjustment for the risk mitigated environment in which the Appellant operates.
4. That on the facts and circumstances of the case and in law the Ld. AO/ Ld. TPO erred in not examining the validity of initiation of penalty proceedings u/s 271 (1) (c) of the Act. That the appellant craves leave to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal as they may be advised. That, the above grounds are independent and without prejudice to each other.”
Brief facts of case are as under: 2. Assessee filed its return of income on 29/11/11 declaring total income of Rs.19,87,61,183/-. The return was revised on 30/11/11 declaring total income of Rs.19,87,61,183/-. The case was selected for scrutiny, and notice under section 143 (2) of the AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT Act, followed by notices under section 142 (1), along with questionnaire was issued to assessee. In response to statutory notices, representative of assessee appeared before Ld.AO and filed details as called for. 2.1. Ld.AO observed that assessee is engaged in the business of providing engineering and design services. During the course of assessment proceedings, it was observed that assessee has entered into international transactions with its Associated Enterprises (AEs), and accordingly reference was made to Transfer Pricing Officer (TPO) in respect of international transaction entered into by assessee for computing its ALP. 2.2. Upon receipt of reference, Ld.TPO issued notice to assessee for filing details regarding international transaction undertaken by assessee, which was complied by filing documentation under Rule 10 D along with other details as called for. 2.3. Ld.TPO observed that assessee is a subsidiary of US company, by the name, Fluor Corporation and Daniel International. It was observed that assessee was engaged in providing engineering and design services. The international transaction undertaken by assessee with its AEs as under:
Sl. International Transaction Amount (in Rs.) No. 1. Provision of services 1,224,193,283 2. Receipt of services 45,276,486 3. Training costs 4,960,379 4. Payment of software charges 47,515,618 5. Reimbursements received 21,037,547 2.4. Assessee used TNMM as most appropriate method and computed margin by using OP/OC as PLI. In its comparability
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT analysis assessee considered following 8 comparables with an average of 6.99% and assessee had worked out its own margin to be 12.70%.
Sl. Name of the Company Remark of the TPO No. 1. Acropetal Technologies Ltd. This is a suitable comparable. (Engineering Design Services Segment) 2. Consulting Engineering Services Data for the current year is not India Pvt.Ltd. available in the public domain. Hence, not a suitable comparable.
3. Development Consultants Ltd. Data for the current year is not available in the public domain. Hence, not a suitable comparable
4. Engineering Projects (India) Ltd. This company is in construction business of many spheres. Hence, not a suitable comparable.
Kitco Ltd. This is a suitable comparable.
6. KLG Systel Ltd. (Life Cycle Solutions This company fails service income Segment) filter (28.19%) and this company as per disclosure made in Annual Report is in Computer Software & Hardware. Hence, not a suitable comparable.
7. Project and Development India This is a suitable comparable. Limited.
8. Simon India Limited This company is engaged in ‘Construction contract’ which are functionally different from the tax payer and fails service filter also (4.09%). Hence, not a suitable comparable.
2.5. Ld.TPO has not disputed regarding functional profile of assessee, most appropriate method used and PLI in respect of service rendered by assessee. Only dispute raised by Ld.TPO is in respect of comparables, chosen by assessee. He thus, by applying
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT various filters, rejected certain comparables from assessee’s list and included 2 new comparables, details of which are as under:
Sl. Name of the Company OP/OC for FY 2010-11 No.
Acropetal Technologies Ltd. (Segment) 14.36% 2. Accuspeed Engineering Services Inida 10.37% Ltd.
3. Cades Digitech Private Limited 5.47% 4. Kitco Limited 27.48% 5. Project and Development India Ltd. 39.32% 6. Mahindra Consulting Engineers Ltd. 30.92% 7. T C E Consulting Engineers Ltd. 29.29% Arithmetic Mean 27.46% 2.6. Ld.TPO thus determined average mean to be 27.46%. Ld.TPO thus proposed an adjustment of Rs.10,05,97,632/- after determining the ALP of international transactions at Rs.1,34,21,10,505/-. 2.7. Aggrieved by adjustment proposed by Ld.TPO, assessee raised objections before DRP. The DRP though upheld approach adopted by Ld.TPO and comparables selected by him, allowed benefit of working capital adjustment. On giving effect to directions of DRP, arithmetic mean of comparables reduced to 20.07%, pursuant to which, adjustment reduced to Rs.7,44,04,229/-. 2.8. Ld.AO upon receipt of order of DRP, passed final assessment order by making addition of Rs.7,44,04,229/-in hands of assessee.
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT 2.9. Aggrieved by order of Ld.AO, assessee is in appeal before us now.
Ground No.1& 2 raised by assessee are general in nature and therefore do not require any adjudication.
Ground No. 3 is in respect of comparables disputed by assessee having been included/excluded by Ld.TPO. 4.1. By this ground, assessee is disputing inclusion of following comparables: • Kitco Ltd., • TCE Consulting Engineers Ltd., • Project and Development India Ltd., • Mahindra Consulting Engineers Ltd., 4.2. Assessee is disputing exclusion of following comparable: • Tismo Technology Solutions Pvt.Ltd., 5. Before we undertake comparability analysis, it is sine qua non to understand FAR of assessee. (i) Functions: Assessee provides engineering design and related services to Fluor group, pursuant to specific client contracts, which are executed on project by project basis. In TP study, it has been submitted that contract require one Fluor entity to lead the project (also referred to as “prime contractor”) and other Fluor affiliates in variety of jurisdictions, to assist in performing work on the project (also referred to as sub-contractors”). At page 35 of paper book volume 1 of transfer pricing study, categorises assessee as providing engineering design and related services. It has been submitted that once a contract has been awarded by ultimate customer, Fluor Affiliates may sub-contract different tasks such as engineering design, procurement,
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT commissioning etc. to different group companies depending upon their core competency. Final service provided to end-user, generally requires integration of different services, sub-contracted to different group companies. The engineering design activities sub-contracted to assessee, are thus part of the total contract awarded to the Fluor Affiliates by an unrelated party.
Briefly, functions performed by assessee (more particularly detailed at page 35-37) are as under: a. Business Development: As the affiliate is responsible for all marketing efforts for engineering design and related services rendered by assessee, and assessee has no role to play, vis-a-vis business development. b. Engineering Design Services: Assessee is engaged in the business of providing detailed engineering and design services to its affiliate which is a part of total contract awarded to the affiliate. Assessee provides said services on cost plus basis. c. Invoicing, Collection and Delivery: It is the responsibility of Fluor affiliate to realise project compensation from the customers. Assessee is not engaged in any form of distribution, invoicing, collection, ordering or delivery vis-a-vis end-user. All the engineering design activities carried out by assessee are part of larger project led by its affiliate. d. Marketing and Sales: Fluor affiliates are solely responsible for determining the overall marketing strategy of the group. The primary role of assessee is to provide engineering design and related services to its affiliate.
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT e. Support Services: Assessee provides back-office support service in the nature of bank reconciliation, transbilling, cash receipt, intercompany reconciliation etc. to its affiliate.
Other routine functions performed by assessee are: • providing input on strategic policies relating to assessee • Finance and Accounting, IT and Legal wherein assessee is responsible for performing day-to-day financial matters and deals with local tax and regulatory issues • Human Resource Management: recruitment, soft skills training, employees evaluation related functions are performed by assessee.
(ii) Assets employed:
Assessee utilises routine tangibles like computers and peripherals, office premises, communication facilities etc. for the purpose of its business. It does not own any significant intangibles and does not undertake any significant research and development on its account that leads to the development of non- routine intangibles. Assessee uses intangibles, process, know- how, methodologies, operating/quality standards etc. developed/owned by its Affiliates. Accordingly assessee has been characterised as not owning any significant non-routine intangibles.
(iii) Risks assumed:
Assessee is remunerated on hourly rates from April, 2010 to July,2010 and was remunerated on a cost plus basis for the rest of the year. Thus assessee is not exposed to market risk, service 8
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT liability risk, credit risk, price risk, capacity utilisation risk. It is thus exposed to the manpower risk as it is responsible for retaining skilled and trained workforce to carry out its activities and foreign exchange risk as the remuneration is received by assessee in foreign currency.
Thus based upon the above FAR, assessee is characterised as performing engineering design services as a sub contractor to Fluor Affiliate, exposed to limited risk associated with carrying out such business.
On the basis of above, we shall compare FAR undertaken by the comparables disputed by assessee for being included/excluded as the case may be.
Before we proceed to examine comparables, several decisions of various Tribunals have been cited by parties regarding its inclusion /exclusion by submitting that, these comparables should be excludible/includible based on those decisions. We are of the view that each decision has rendered particular comparable excludible/includible, based on facts of that case, as well as FAR of assessee whose issues are decided. We are also aware about precedent value of those decisions, while deciding comparables regarding its suitability. However, we feel, paramount importance shall be on Rule 10B (2) of Income Tax Rules 1962 which is as under:— “(2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:— (a) the specific characteristics of the property transferred or services provided in either transaction;
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail.”
Therefore it may so happen that, a comparable engaged in similar business which is having similar FAR may be included, though same might have been held to be not includible by Courts/Tribunals in other cases. Further, contractual terms as well as host of other factors stated in above sub-rule, may determine comparability analysis. Thus in our opinion, if difference arising on comparability analysis does not affect price or profitability of comparable, or if it can be reasonably adjusted, same should be taken as good comparable for Comparability analysis. Therefore, it should not be assumed that, if a comparable is held to be excludible in one case, it shall always be excluded in decisions to follow subsequently. Thus, while deciding comparability, decisions cited definitely would be perused from this angle by us.
Kitco Ltd. Ld.TPO included this comparable into the final list, as it provides engineering and designs services to its customers. On the contrary Ld.Counsel submitted before us that it is not a fit comparable as it is a Government owned and the shares of this AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT company are primarily held by public sector financial institutions/public sector banks owned or controlled by the central and state government. He also placed reliance upon various decisions of this tribunal as well as Hon’ble high courts in support of its exclusion. Ld.CIT DR however submitted that, in the process of comparability analysis Rule 10 B (2) has to be considered and merely because a particular company is owned by government would not lead to its exclusion under less functional dissimilarity is established. We have perused submissions advanced by both sides and the light of the records placed before us. Functional profile of this company, as submitted by assessee, and as per annual report placed at page 277-309 of paper book is as under: KITCO, the first Technical Consultancy Organization(TCO) in India, was established in 1972 by Industrial Development Bank of India, other national and state level financial institutions, Govt. of Kerala and 7 Public Sector Banks for rendering services to Entrepreneurs, Govt. Departmental PSUs, Local Bodies, etc. Presently, Small Industries Development Bank of India (SIDBI) is the prime shareholder with 49% shares of the company. Would KITCO successfully implemented projects like Cochin International Airport Ltd., , Cochin Special Economic Zone, etc and is involved in implementing a multimodal Mobility Hub at Cochin, all of which are first of its kind in the country in their own respect. KITCO successfully is stated to have completed
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT Phase-1 of CIAL Golf Course & Country Club and Ghallah Wentworth Golf Course at Muscat, Sultanate of Oman, thereby establishing itself in an area, which was considered to be the forte of European Consultants. The prestigious overseas assignments completed by KITCO include technical evaluation of electrical power distribution network at King Abdul Aziz International Airport, Jeddah. It is also observed that this company is working in divisions like infrastructure, tourism, aviation, IT services, HRD, financial services etc. which are dissimilar to the functional profile of the assessee company. Snapshot enclosed. In our considered opinion this company is involved in executing huge projects with a motive to earn profits. We therefore reject the argument of Ld.Counsel that since this company is owned by government it cannot be considered to be a fit comparable. However we observe that functions performed, risks assumed and assets owned by this company is huge and fast as compared to that of assessee who is acting as a sub contractor for its AE, rendering engineering and design services and is remunerated on cost plus basis. We therefore reject this company as it does not satisfy the functionality test with that of assessee’s. (II) Project and Development India Ltd: Ld.TPO included this comparable into the final list, as it provides engineering and designs services to its customers. On the contrary Ld.Counsel submitted before us that it is not a fit comparable as it is functionally dissimilar.
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT On the contrary Ld. CIT DR placed reliance upon the observations of Ld. TPO/DRP. We have perused submissions advanced by both sides in the light of records placed before us. Functional profile of this company, as submitted by assessee, and as per the annual report placed at page 396-479 of paper book is as under: Under engineering and consultancy division this company has played a vital role in development of fertiliser industries in India. It is still maintaining strength in the sector and is ready to take up new challenges in executing the Brownfield, Greenfield, revamp and expansion projects of many fertiliser units in country. Ld.Counsel submitted that the services rendered by this company are directly to its clients and not on a sub-contract basis. From the above, it is evident that this comparable is not functionally comparable due to difference in functions performed by this company with that of assessee, In our view this company cannot be compared with limited functions performed by assessee, because it is the nature of services rendered and not per se rendering of services that is relevant in accepting or rejecting it as comparable. Therefore, we direct exclusion of this comparable from the list of comparables. (III) TCE Consulting Engineers Ltd. Ld.TPO included this comparable into the final list, as it provides engineering and designs services to its customers. On the AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT contrary Ld.Counsel submitted before us that it is not a fit comparable as it is functionally dissimilar. On the contrary Ld. CIT DR placed reliance upon the observations of Ld. TPO/DRP. We have perused submissions advanced by both sides in the light of records placed before us. It is submitted that this company is engaged in providing high- end technical services. Profile submitted by the assessee at page 310-395 of paper book volume 1 shows that it successfully managed complex engineering projects across infrastructure spectrum and is associated with prestigious urban infrastructure facilities such as Airports, Railways and metropolis engineering consulting projects. Therefore, in our view it is apparent that this company is engaged in providing high end engineering consulting services which is not comparable with limited functions performed by assessee. Therefore we direct to exclude this comparable. (IV) Mahindra Consulting Engineers: Ld.TPO included this comparable into the final list, as it provides engineering and designs services to its customers. On the contrary Ld.Counsel submitted before us that it is not a fit comparable as it is functionally dissimilar. On the contrary Ld. CIT DR placed reliance upon the observations of Ld. TPO/DRP. We have perused submissions advanced by both sides in the light of records placed before us.
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT It has been submitted that this company is engaged in services which are highly technical. Functional profile is placed at page no.271, 272 of the Paper Book and objections before the ld. TPO at page 480-498 of Paper Book volume 1. It is observed from the functional profile that this company is part of 'Mahindra Partners'. It does not show functional profile of Mahindra Consulting Engineers. However it shows that this company is engaged in providing services and has proved its capability to execute innovative projects and to penetrate into new areas of operation. It is further submitted that it is engaged in providing infrastructure engineering and consulting services. Therefore it is apparent that it is functionally different. We therefore direct to exclude this company, in view of highly technical capabilities of executing infrastructure development projects vis-a-vis that of assessee who is rendering engineering and related services as a sub-contract limited to specific functions as per the requirement of its affiliate. (V) Tismo Technology Solutions Ltd: Ld.TPO rejected this comparable only due to non-availability of financials at the time of Transfer Pricing proceedings. Ld.AR however submitted that the financial data is now available on the capital in database and its margin calculation. He also submitted that this company passes through all filters that has been applied by Ld.TPO and determined in the comparables. He thus requested for remanding this comparable back to Ld.TPO for verification of the financials. Ld.Sr.DR did not object for the request advanced by Ld.AR.
AY-2011-12 Fluor Daniel India Pvt.Ltd. vs. ACIT Considering the submissions advanced by both sides, we are of considered opinion that this comparable deserves to be remanded back to Ld.TPO for verification of the financials that are available after applying relevant filters. Needless to say that assessee is to be given opportunity of hearing by following principles of natural Justice. 11. Accordingly this ground raised by assessee stands allowed as discussed above.
12. Ground No. 4 raised by assessee is premature and does not require any adjudication.
13. In the result appeal filed by assessee stands allowed. Order pronounced in the Open Court on 17th January, 2019.