KYOCERA ASIA PACIFIC INDIA PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

This is an appeal by the assessee against the order dated 30.12.2015 passed by the AO u/s 143(3) r.w.s. 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act).

Following grounds have been raised in this appeal: “1. That the Ld DRP erred in upholding Ld TPO's approach of rejecting the comparable set selected by the Appellant in its Transfer Pricing Study (‘TP Study') for benchmarking the international of provision of technical support services. The rejection is neither supported by an analysis nor corroborative evidence, which renders the process arbitrary and liable for outright rejection.

Facts of the case in brief are that the assessee filed the return of income on 27.09.2012 declaring an income of Rs.1,75,29,130/- which was processed u/s 143(1) of the Act. Later on, the case was selected for scrutiny. The AO referred the matter to the TPO u/s 92CA(3) of the Act in respect of international transaction entered into by the assessee, for determining the arm’s length price. The TPO noted that the primary functions performed by the assessee were following: “I. Local Sales and Marketing II. Marketing Support Service III. Technical Support Service”

The assessee had choosen following six comparables in the Trading Segments: “I. A C L Components Ltd. II. Associated Auto Parts Pvt. Ltd. III. India Motor Parts & Accessories Ltd. IV. Jullundur Motor Agency (Delhi) Ltd. V. Sai Service Spares & Accessories Kyocera Asia Pacific India Pvt. Ltd. VI. Stanes Motor Parts Ltd.” 6. The TPO rejected M/s Sai Service Spares & Accessories Ltd. and M/s Stanes Motor Parts Ltd. The TPO also included a new comparable M/s Cuprum Bagrodia Ltd. and worked out the operating margin at 10.70% instead of 4.47% declared by the assessee in the following manner: S. No. Name of the comparable OP/OC 1. A C L Components Ltd. 11.07% 2. Associated Auto Parts Pvt. Ltd. 9.20% 3. India Motor Parts & Accessories 8.92% Ltd. 4. Jullundur Motor Agency (Delhi) Ltd. 6.59% 5. Cuprum Bagrodia Ltd. 17.72% Average 10.70% The TPO proposed the adjustment of Rs.3,16,27,488/- in trading segment.

In Market Support Service Segment, the assessee selected three comparables having arithmetic mean of 8.88% while the margin of the comparables selected by the assessee was at 12.81%. So, it was claimed that this transaction was at arm’s length price. The TPO, however, selected 15 comparables which included two comparables selected by the assessee and one of the comparable, namely, M/s Entertainment Network (India) Ltd. was rejected. The TPO worked out the average margin at 23.24% and proposed the adjustment of Rs.11,30,190/-

In Technical Support Segment, the assessee selected seven comparables with average OP/TC ratio at 17.57%. The TPO Kyocera Asia Pacific India Pvt. Ltd. accepted five comparables selected by the assessee and rejected two comparables, namely, M/s Nicco Parks & Resorts Ltd. and M/s Telecommunications Consultants India Ltd. The TPO also introduced 13 new comparables and worked out average margin at 32.67% in the following manner: Company Name OP/OC (%) Ashok Leyland Project Services Ltd. 24.70% Bengal S R E I Infrastructure Devp. Ltd. 42.14% Certification Engineers International 78.45% Ltd. Global Procurement Consultants Ltd. 30.86% H S C C (India) Ltd. 21.04% Indus Technical & Financial Consultants 14.78% Ltd. Kitco Ltd. 27.48% Mahindra Consulting Engineers Ltd. 30.92% Mitcon Consultancy & Engg. Services 40.19% Ltd. Pallavan Transport Consultancy Services 25.59% Ltd. R E C Power Distribution Co. Ltd. 39.44% T C E Consulting Engineers Ltd. 29.29% Usha Hydro Dynamics Ltd. 29.45% Gujarat Industrial & Technical 7.89% Consultancy Org Ltd. IBI Chematur (Engineering & 25.96% Consultancy) Ltd. Rites Ltd. 58.27% NTPC Electric Supply Company Ltd. 18.01% Wapcos Ltd. 43.68% Average 32.67% Accordingly, the TPO worked out the adjustment of Rs.14,54,754/- in the following manner:

The AO passed the impugned order and finally made the adjustment of Rs.8,96,937/- in the Technical Support Service on the basis of the TPO’s order dated 28.12.2015 passed in pursuant to the direction of the ld. DRP.

Now the assessee is in appeal. The ld. Counsel for the assessee submitted that following three comparables selected by the TPO deserve to be excluded: “1. Certification Engineers International Ltd. 2. REC Power Distribution Co. Ltd. 3. Usha Hydro Dynamics Ltd.”

It was stated that the aforesaid three comparables were functionally different and that the ITAT Delhi Bench ‘I’, New Delhi vide order dated 14.10.2015 for the assessment year 2009-10 in the case of M/s Bechtel India (P) Ltd. Vs DCIT, Circle-2(1), New Delhi (2015) 64 taxmann.com 180 directed to exclude M/s Certification Engineers International Ltd., a reference was made to paras 28 to 32 of the said order (copy of which is placed on the record).

After considering the submissions of both the parties and the material on record, it is noticed that the said comparable M/s Certification Engineers International Ltd. has been directed to be excluded by the Co-ordinate Bench in the aforesaid referred to order dated 14.10.2015 in the case of Bechtel India (P) Ltd. Vs DCIT, Circle-2(1), New Delhi (supra) and the relevant findings have been given in paras 28 to 32 which read as under: “28. The next issue for our consideration is the functional comparability of the assessee Bechtel India with CIEL. We have already noted the functional profile of the taxpayer assessee in para 16 as stated above. That the functional profile of CIEL has been submitted by the ld. Counsel of the assessee which explains the details of services offered by CIEL, area of certification expertise and another important area of energy efficiency audit functions by the assessee CIEL. The relevant operative part reads as under:— "4. Services Offered by CEIL:

Areas of Certification Expertise: CEIL avails a total synergetic support of its parent company EIL which has skilled and experienced professionals located at Head Office and spread across India and abroad who are fully conversant with national and international codes backed by over 4 million man hours of experience. It has on its roll Engineers qualified by various recognized NDT bodies like ASNT, ISNT and QMS. CEIL's expertise covers Design Verification, Quality Services and Commissioning Assistance on: - High pressure Reactors, Pressure Vessels, Columns, Heat Exchangers, Reformers of carbon steel, stainless steel, alloy steels & non ferrous materials - Clad Columns, Storage Tanks, Horton Spheres, Mounded Tanks - Equipment for Combustible/Explosive Classifications, Occupational Safety and Hazardous Area Classifications - Instrument Air/Plant Air Systems, Air Drying Plants, Gas dehydration units - Heating, Ventilation and Air Conditioning (HVAC) Systems - Line Pipes, Pipe Coating and Piping Appurtenances"

In view of above, the assessee taxpayer Bechtel India which is rendering engineering support services including related design and drawing as per specification of its foreign AE Bechtel Corporation USA cannot be compared with a company which is engaged in the functions of third party inspections (TPI), certification of equipment supplied by vendors & installation of work of contractors of ONGC and other government departments and private Kyocera Asia Pacific India Pvt. Ltd. sector undertakings. The CIEL having domestic consumers, government companies and public sector undertaking having insignificant export surplus cannot be compared with the assessee Bechtel India which is 100% exporter of services to its AE Bechtel Corporation, USA.

We may point out that functions of a company should be determined having regard to its data mentioned in the financial results filed along with return of income and annual report which is a primary resource and general information in the annual report is more accurate and this fact has not been controverted by the ld. CIT DR. From the functional profile of assessee Bechtel India and functional profile of CIEL as reproduced hereinabove, it is amply clear that the CIEL carries on business of certification and third party inspection of equipments provided by a contractor and obviously certification and TPI functions are dissimilar form the business of rendering engineering support services including related design and drawing as per specifications of foreign AE and by using intangibles/IPR of parent company.

Ld. DR could not demolish this factum that the certification/TPI involves testing/assessing and auditing of the work done by the high-end technocrats which conforms to specifications prescribed in the contract; meets quality standard of work and material; meets safety standards; meets environmental standards and satisfactory works, plant commissioning and installation of various works and projects for the employer like ONGC. The CIEL certifies the work of the contractor that the employer accepts the work undertaken as per specifications of the contract and then makes the payment. Per contra, the business functional profile of assessee company is to perform the work of preparing and supplying design and drawings given by its parent Bechtel Corporation USA. In this modus operandi this work is outsourced by the non- resident AE to the assessee Bechtel India which carry out the work as per specifications given by the outsourcing company AE. We may also point out that the revenue of CIEL form export of surplus is 3% which is insignificant and the income from export of Kyocera Asia Pacific India Pvt. Ltd. services by the assessee Bechtel India is 100% of operating income as there is no domestic client, thus, as per Rule 10B(2)(d) of the Rules, the comparability test also fails on this count.

On the basis of foregoing discussion, we have no hesitation to hold that the functions of assessee Bechtel India are quite dissimilar with CIEL which was wrongly taken by the TPO as a suitable comparable for benchmarking of impugned international transaction undertaken by the assessee during the relevant financial period. The functional dissimilarity as well as distinction in the geographical market in the light of foreign exchange fluctuation risk of the assessee company coupled with below 25% RPT undertaken by the CIEL, we, therefore, decline to agree with the conclusion of the AO/DRP/TPO that the CIEL is a suitable comparable for the purpose of proposed TP adjustment made by the authorities below. Functional dissimilarity and other aspects cannot be ignored and these factors clearly demonstrate that CIEL should not have been included in the final set of comparables for making transfer pricing adjustment pertaining to the impugned international transactions of the assessee company and we order to exclude the same from the final set of comparables. It is ordered accordingly.” So, respectfully following the aforesaid referred to order, this comparable is directed to be excluded, since, it is functionally different from the assessee.

As regards to the comparable M/s REC Power Distribution Co. Ltd., the ld. Counsel for the assessee submitted that it was involved in providing third party inspection, feeder renovation programs, material inspection and preparation of detailed review projects. The said functions were different from the functions performed by the assessee who was engaged into marketing and sales and cutting tools and other components. It was further submitted that the said Kyocera Asia Pacific India Pvt. Ltd. company was primarily engaged in providing third party inspection, detailed project report for Government Power Project. A reference was made to page nos. 2680 & 2681 of the assessee’s paper book volume (V) which is the copy of Director report and included review of operation. It was also stated that the said company had taken new initiatives, initiated the TPI works of High Voltage Distribution System, completed field inspections of 17 feeders and it also conducted Energy Audit at IIM, Lucknow, Noida Campus and NIPFP, New Delhi. It had also taken up the work of Energy Accounting and Energy Audit in distribution network, it was appointed to act as Lenger’s Engineer for various renewable energy projects including solar power project under Jawaharlal Nehru National Solar Mission Scheme launched by Ministry of New and Renewable Energy. It was pointed out that the said company had entered into a MoU with M/s North Delhi Power Limited to undertake the business of distribution of electricity jointly by RECPDCL and NDPL and had also taken new initiative to promote and implement as a “Developer”, one of the key program of the Ministry of Power viz. Decentralized Distruibution system under Rajiv Gandhi Grameen Vidyutikaran Yojana, a scheme of Rural Electricity Infrastructure and Household Electrification of remote villages, therefore, the comparable M/s REC Power Distribution Co. Ltd. is having all together different functions from the assessee, as such it is not a comparable.

In his rival submissions, the ld. CIT DR supported the orders of the authorities below.

After considering the submissions of both the parties and the material on record, it appears that the said comparable M/s REC Power Distribution Co. Ltd. was having different functions than the assessee who was mainly engaged in marketing and sale of cutting tools and other components manufactured by parent company Kyocera Group while the comparable company was engaged in third party inspection of HVDS feeders, energy audit, making the detailed project for Government Power Project, and also had undertaken new initiative to promote and implement as a “Developer”, one of the key programe of the Ministry of Power. Therefore, it was not functionally comparable with the assessee. Accordingly, we direct the AO/TPO to exclude M/s REC Power Distribution Co. Ltd. from the list of the comparable while working out the arm’s length price.

As regards to the company M/s Usha Hydro Dynamics Ltd., the ld. Counsel for the assessee submitted that this company was in all together different kind of business as it was doing business of cleaning of various machines equipments etc. for various industries and also doing trading business. A reference was made to page no. 2795 of the assessee’s paper book volume (V). It was also stated that the said company was not earning any foreign exchange whereas the assessee was earning foreign exchange. It was accordingly submitted that this company having different function was to be excluded on account of functional dissimilarity.

We have considered the submissions of both the parties and carefully gone through the material available on the record, it appears that the company M/s Usha Hydro Dynamics Ltd. was engaged in industrial cleaning activity by high pressure water jet technology while the assessee was not engaged in such activity. Therefore, it was to be excluded on account of functional dissimilarity. Moreover, the said company was not having any earning in foreign exchange while the assessee was having foreign exchange earnings and that the said company was not having market support functions while the profile of the assessee clearly shows that it was having market support functions. It is also evident from para 3 of the TPO’s order that the assessee entered into international transactions with its AE for Rs.1,22,24,024/- for marketing support fee. The TPO in para 4.2 clearly mentioned that the primary function performed by the assessee was marketing support service and that the assessee was providing information on market trends, products and strategies of competitors, future customers needs etc., acting as channel of communication between parent company Kyocera Asia Pacific India Pvt. Ltd. and its buyers/prospective buyers thereby licensing with the buyers to understand their needs and acting as the window for any claim or enquiry from the customers which clearly shows that the assessee Kyocera Asia Pacific India Pvt. Ltd. was engaged in marketing support service while M/s Usha Hydro Dynamics Ltd. was not engaged in such type of service.

In the result, the appeal of the assessee is partly allowed. (Order Pronounced in the Court on 26/11/2018)