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Income Tax Appellate Tribunal, DELHI BENCH : I-1 : NEW DELHI
Before: SHRI N.K. BILLAIYA & MS SUCHITRA KAMBLE
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER Assessment Year: 2010-11 Boeing International Corporation Vs. DCIT, India Pvt. Ltd., Circle-5(1), 3rd Floor, DLF Centre, New Delhi. Sansad Marg, New Delhi. PAN: AACCB3303J (Appellant) (Respondent) Assessee by : Shri Kanchun Kaushal, AR Revenue by : Shri Sanjay I Bara, CIT, DR Date of Hearing : 25.10.2018 Date of Pronouncement : 30.10.2018 ORDER PER N.K. BILLAIYA, AM: With this appeal, the assessee has challenged the correctness of the order dated 17.02.2014 framed u/s 143(3) read with section 147C read with section 92CA(3) of the Act.
The sum and substance of the grievance of the assessee is that the DRP/TPO/A.O. erred in enhancing the income of the assessee by Rs.13,38,73,412/- and, in doing so, arbitrarily selected companies engaged in performing services which are functionally different from the business development, advisory and other support services rendered by the assessee.
The appellant is a captive service provider to its associated enterprises (AEs) and is primarily engaged in providing business development advisory and other support services to its AEs on a cost plus basis. The international transactions reported during the year read:-
Sl. Description of transaction Amount in INR Method Used No.
Purchase of Traded Goods 20,928 Transactional Net Margin Method 2. Purchase of fixed assets 7,21,51,740 Transactional Net Margin Method 3. Provision of Services 87,33,97,543 Transactional Net Margin Method 4. Commission Income 39,54,027 Transactional Net Margin Method 5. Reimbursement of expenses 36,02,54,953 Transactional Net Margin Method paid 6. Reimbursement of expenses 7,02,942 Comparable Uncontrolled Price received Method 131,04,82,133
The transaction under dispute relates to ‘Provision of business support services’ amounting to Rs.87,73,51,570/-. TNMM was taken as the most appropriate method with OP/TC as the PLI. The assessee showed PLI at 18.82% by using following set of comparables:-
(i) Cyber Media Events Ltd. (ii) Mahindra Consulting Engineers Ltd., (iii) Wapcos Ltd. (iv) Hindustan Housing Company Ltd., (v) Empire Industries (Trading & Indenting Segment) (vi) Entertainment Network (I) Ltd. (vii) Hansa Vision Pvt. Ltd. (viii) Priya International Ltd.
Out of the above comparables, the TPO accepted only Mahindra Consulting Engineers Ltd. and rejected all other comparables holding that they are functionally different from the assessee.
After rejecting the comparables of the assessee, the TPO chose the following companies as comparables:- (i) Certification Engineers International Ltd. (ii) Engineers India Ltd., (iii) HSCC (India) Ltd., (iv) Rites (v) TCE Consulting Engineers (vi) NTPC Electric Supply Co. Ltd.
The final comparables were chosen as under:- (i) Certification Engineers International Ltd. (ii) Engineers India Ltd., (iii) HSCC (India) Ltd., (iv) Mahindra Consulting Engineers Ltd., (v) NTPC Electric Supply Co. Ltd. (vi) Rites (vii) TCE Consulting Engineers
(viii) Kitco Ltd., (ix) Alphageo (India) Ltd.
And, accordingly, arm’s length price and the adjustment was computed as under:- Operating Cost 739114405 Arms Length Margin (%) 41.3 Arms Length Price (ALP) 1044368654 Price received 874100485 Shortfall being adjustment u/s 92CA 170,268,169
The assessee raised objections before the DRP and after considering the objections of the assessee, the DRP directed for the inclusion of Wapcos Ltd., which was rejected by the TPO. The DRP further directed for the exclusion of HSCC (India) Ltd. which was taken by the TPO. Before us, the counsel for the assessee vehemently opposed inclusion of following five comparables:- (i) Certification Engineers International Ltd. (ii) Engineers India Ltd., (iii) NTPC Electric Supply Co. Ltd. (iv) Kitco Ltd., (v) Rites Ltd.
It is the say of the counsel that all these companies are government companies or Public Sector Undertakings and, therefore, should not be taken as comparable. The counsel relied upon several judgments of the coordinate Benches where the coordinate Benches have rejected government companies to be taken as good comparables.
Per contra, the DR strongly opposed the contentions of the counsel stating that what needs to be compared is the functional similarity. It is the say of the DR that it does not make any difference whether a company is a private company or a government owned company as long as it is functionally similar to the assessee company.
To a certain extent we may agree with the DR, but, at the same time, we may have to point out that not only the comparables should be functionally similar, but, the business model should also be similar, so that the tested party and the comparables not only have a level playing field, but, are also on the same platform. For this proposition, we derive support from the judgment of the Hon'ble jurisdictional High Court of Delhi in the case of Rampgreen Solutions Pvt. Ltd. (ITA No.102 of 2015). The relevant paragraphs of the judgment read:-
“20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be, of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the business model; and the assets and resources employed. It cannot be disputed that the functions performed by an entity would have a material bearing on the value and profitability of the entity. It is, therefore, obvious that the comparables selected and the tested party must be functionally similar for ascertaining a reliable ALP by TNMM. Rule 10B(2) of the Income Tax Rules, 1962 also clearly indicates that the comparability of controlled transactions would be judged with reference to the factors as indicated therein. Clause (a) and (b) of Rule 10B(2) expressly indicate that the specific characteristics of the services provided and the functions performed would be factors for considering the comparability of uncontrolled transactions with controlled transactions.
21. Rule 10B(2) reads as under:-
“(2) For the purpose 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; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; the contractual terms (whether or not such terms are formal or in (c) 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; conditions prevailing in the markets in which the respective (d) 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.”
The coordinate Bench in the case of Philip Morris Services India S.A. (2018)
95 taxmann.com 156 (Delhi-Trib.) observed as under:-
“28. The profile of this Global Procurement Consultants Ltd., as narrated by the Ld. TPO himself speaks in unequivocal terms that this Global Procurement Consultants Ltd., is a company established by the government to serve the purpose of professional procurement and management services needs and also to provide combines management services required by the government departments or their project execution agencies to carry out the procurement in a time bound and efficient manner within the framework of government regulations and guidelines of international institutions, which is not such a characteristic of the business of the assessee. The business model itself is different, let alone the disproportion is of the financials. We have no hesitation, in the face of the profile of Global Procurement Consultants Ltd., that it is not a good comparable at all to the assessee and for that matter to any private marketing support service provider, as such we direct the Ld. TPO to exclude this company from the list of comparables to benchmark the international transaction of the assessee in providing the market support services to its AEs.”
Again, the Mumbai Bench of the ITAT in M/s Novartis Healthcare Pvt. Ltd. (ITA No.7643/M/2012), has observed as under:-
“The Revenue has not disputed that Rites Ltd. is a government company established under the Ministry of Indian Railways and is providing the services in the field of architecture and planning, bridge and tunnel engineering, construction project, electrical engineering etc. to the government organizations and public section undertakings. The functions performed and carried out by Rites Ltd. are entirely different from the functions and services provided by the assessee to its AE. The assessee is providing the support service in the field of pharmaceutical and medical support service, therefore on the face of it, this company cannot be a functionally comparable with the assessee. An identical issue has come up before Delhi Benches of this Tribunal in the case of "Nortel Networks India Pvt. Ltd." (supra) wherein the Tribunal has observed in para 11 and 11.1 as under: "11. We have heard the rival contentions and perused the material available on record. Apropos the issue of comparability and the exclusion of Choksi, Rites and WAPCOS, Delhi Tribunal in the cases of M/s MCI Com India P. Ltd. and M/s Verizon India P. Ltd. has held that companies like EIL, Rites, Wapcos and TCE are engineering companies which provide end to end solutions and therefore they cannot be compared with assessees who provide marketing support services to the parent company. They were held to be functionally not comparable with these engineering companies.
11.1. Following the orders of coordinate benches of lTAT in the cases of M/s MCI Com India P. Ltd.; M/s Verizon India P. Ltd. (supra); Estel in and our own decision in case of Actis Advisers Pvt. Ltd. ITA No. 6390/Del/2012, we hold that Choksi, Rites and WAPCOS being functionally different cannot be applied as appropriate comparable to the assessee. Therefore, they are to be excluded from TP adjustment while determining the ALP. "A similar finding has been given by the Tribunal regarding the comparability of this company in the case of MCI Com India Pvt. Ltd. as well as M/s. Chemtex Global Engineers Pvt. Ltd. Thus, having regard to the nature of functions and activities performed by the Rites Ltd., we find that this company cannot be regarded as a good comparable for determining the arms length price in respect of the services rendered by the assessee to its AE."
The Bangalore Bench of ITAT in KHF Components Pvt. Ltd. [IT (TP) A No.1748/Bang/2013, while deciding the inclusion/exclusion of a Government company, observed as under:-
“We have considered the rival submissions. It is undisputed fact that this company is a public sector undertaking company. Its operations are based on policy requirements of the Government and it is a preferred company of the Govt. of India for entrusting of work and therefore, it totally operates in a controlled environment. Hence, this company cannot be compared with that of the assessee-company, which is a private company operating in uncontrolled business environment. In this regard we rely on the decision of co- ordinate bench in the case of Delhi Adidas Technical Services (P) Ltd. vs. DCIT (69 taxmann.com)"
A similar view was taken by the Tribunal’s Mumbai Bench in Chemtex Global Engineers Pvt. Ltd. [ITA No.3590/Mum/2010]. The relevant observations read:
“25. Even with regard to the comparable companies which are taken into consideration by the A.O./TPO, the learned CIT(A) has correctly held that Rites Limited is a Government of India enterprise and considering the nature of the contracts and the implicit guarantee provided by the Government of India, etc. 8
Rites Limited cannot be taken as a comparable case and hence the learned CIT(A)was justified in excluding the same.”
We will now take up each comparable one by one. (i) Certification Engineers International Ltd.
This company is a wholly owned subsidiary of Engineers India Ltd., a Government of India Undertaking. It has the support and backing of the Government which is sufficient to make it uncomparable to the appellant. This company is engaged in certification, re-certification, safety audit and HSB management systems for offshore and onshore oil and gas facilities. It also supplies manpower to its holding companies. These activities can be seen from the annual report and the website of this company. As discussed elsewhere, being a government company, we are not inclined to allow the TPO to use this company as a comparable. We, accordingly, direct for its exclusion. (ii) Engineers India Ltd.
As mentioned elsewhere, this is a Government of India Undertaking which has the support and backing of the Government and is engaged in providing engineering procurement, construction, lumpsum turnkey projects and total solutions consultancy, high end and full-fledged engineering and related technical services for petroleum refineries, pipelines and other industrial projects. The various activities carried out by EIL in Engineering Service Division include feasibility studies, project management, planning and scheduling, cost engineering, process and equipment design, total engineering, procurement and construction management, materials and maintenance services. As compared to its diversified activities, the activities of the assessee are not only low-end, but, are also restricted to captive service provided to its AE. This company is not only functionally dissimilar, but, also a government owned company, hence, we direct for the exclusion of this company. (iii) NTPC Electric Supply Company
This company is also a Government of India Undertaking and, therefore, has the support and backing of the government and is engaged in electrification services and has undertaken several activities for the generation of power during the year. NTPC has also undertaken several rural electrification projects under Rajiv Gandhi Gramin Vidyut Yojana (RGGVY) during the relevant year. It is seen that 87% of its operating revenues are earned from electrification services. Such functions, in addition to being a government company, makes this company functionally dissimilar from the appellant company, hence, we direct the A.O./TPO to exclude this company from the
This, again, is a Government of India Undertaking and has the support and backing of the Government. The website of this company indicates that it is a Government of India Undertaking and is engaged in project management consultancy and turnkey project for enhancement of post production facilities. It operates as a multi-disciplinary organization in the fields of transportation, infrastructure and related technologies. The operations of this company are diversified in the field of rail infrastructure, building and airport transportation and economics, technical services, 10 transport infrastructure, urban infrastructure, quality assurance and training. In our considered opinion, this company is functionally dissimilar and, hence, cannot be considered as a good comparable. In addition, as mentioned elsewhere, being a government company, is not in the same platform as the appellant company. We
This company is also a government company and has the support and backing of the government. As per the website of this company, the technical services include services like asset valuation, energy audits, revival studies, etc. Some of the other fields where Kitco is a permanent player are energy studies, skill certification and placement services. This company is a multi-functional, multi-disciplinary organization offering wide range of services to the industrial and infrastructure sector and to a wide spectrum of clientele. In our considered opinion, a company engaged in undertaking asset valuation, energy audits, revival studies, etc., and market assessment studies cannot be taken as comparable to assessee which is engaged as a business support and consulting service provider to its AEs who assumes minimal risk as it is compensated on a cost plus basis. Considering the functions of this company in the light of the fact that it is a government company, we direct the A.O./TPO to exclude this company from the final set of comparables.
To sum up, we direct the A.O./TPO to exclude all the five companies mentioned hereinabove at para 9.