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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-2’ NEW DELHI
Before: SHRI N. K. BILLAIYA & MS SUCHITRA KAMBLE
This appeal is filed against the assessment order dated 25/11/2014 passed by DCIT, Circle 19(2), u/s 143(3) read with Section 144C(13) of the Income Tax Act, 1961.
The grounds of appeal are as under:-
“That on the facts and circumstances of the case, and in law;
The assessment order passed by the Ld. AO in pursuance to the directions issued by the Hon’ble DRP is a vitiated order as the Hon’ble DRP erred both on facts and in law in confirming Transfer Pricing (‘TP’) additions made by the Ld. AO/ Ld. TPO to the Appellant’s income by issuing an order without appreciation of facts and law.
2. Ld. AO / Ld. TPO and the Hon’ble DRP erred in not appreciating that none of the conditions set out in section 920(3) of the Income Tax Act, 1961 (“Act”) are satisfied in the present case.
3. The Ld. AO and the Hon’ble DRP erred both on facts and in law in confirming the transfer pricing adjustment to the income of the Appellant by holding that its international transactions pertaining to provision of engineering consultancy services do not satisfy the arm’s length principle envisaged under the Act. In doing so, the Hon’ble DRP has grossly erred in agreeing with the Learned Transfer Pricing Officer’s (“Ld. TPO’s) action of: 3.1. disregarding the arm’s length price (“ALP”) as determined by the Appellant in the Transfer Pricing (“TP”) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (‘Rules’);; 3.2. disregarding multiple year / prior years’ data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2009-10) data for comparable companies should be used despite the fact that the same was not necessarily available to the Appellant at the time of preparing its TP documentation; 3.3. rejecting, without reason, the quantitative and qualitative screens/filters applied and set of comparables arrived at by the Appellant, following a detailed and robust search methodology carried out in the TP Report, and proceeding to arrive at the fresh comparables set by applying certain arbitrarily selected filters and arriving at his own comparables set instead; 3.4. including high-profit making companies in the final comparables’ set for benchmarking a comparatively low risk unit such as the Appellant (disregarding judicial pronouncements on the issue), thus demonstrating an intention to arrive at a pre-formulated opinion without complete and adequate application of mind with the single-minded intention of making an addition to the returned income of the Appellant; 3.5. including certain companies that are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.6. excluding certain companies on arbitrary/ frivolous grounds even though they are comparable to the Appellant in terms of functions performed, assets employed and risks assumed; 3.7. disregarding judicial pronouncements in India in undertaking the TP adjustment 4. Without prejudice to the other grounds, the economic adjustments are required to be made to the operating margin of comparable companies such as difference in working capital employed by the Appellant and comparable companies should be accounted for.
5. Without prejudice to the other grounds, the Ld.AO/TPO has failed to appreciate that the margin earned by the Assessee from services provided to its AEs is higher than the margin earned by the Assessee from services provided to third parties thereby satisfying the arm’s length principle.
6. The Ld. AO/Hon’ble DRP has erred both on facts and in law in initiating the penalty under section 27i(i)(c) of the Act 7. The Ld. AO/Hon’ble DRP has erred both on facts and in law in charging interest under section 234B and 234D of the Act The above grounds are without prejudice to each other. The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing.”
The assessee Company is engaged in the business of activities of providing Engineering Consultancy Services and Supply of man power services to the Indian Power and Infrastructure Sector, providing multi disciplinary Consultancy Services and providing Engineering Consultancy Services for Power and Infrastructural Project outside India. Return declaring Nil income was e-filed on 14/10/2010. The Assessee claimed benefit of brought forward losses while filing return of income. The return was processed u/s 143(1) of the Income Tax Act, 1961. The case was selected for scrutiny assessment. Statutory notices u/s 143(2) and 142(1) of the Income Tax Act were issued and duly complied with. In response to the notices, Chartered Accountant/Authorized Representative of the assessee company attended the assessment proceeding and furnished details in support of return filed by the assessee as well as in response to queries raised during the course of assessment proceedings. During the year under consideration, the assessee has entered into international transactions with Associated Enterprises as detailed below:-
S. No. International Transaction Method used by Value of the assessee transaction 1 Provision of services TNMM 7,79,44,594/- 2 Availing of Services TNMM 6,19,40,541/- 3 Cost reimbursement paid CUP 34,92,265/- 4 Cost reimbursement - 1,17,06,011/- received
The assessee filed details of international transactions in Form No. 3CEB u/s 92E of the Income Tax Act. Accordingly, Arms Length Price determination was referred to TPO u/s 92CA(1) of the Act. The TPO vide order dated 28/1/2014 computed Arms Length Price of the International transactions and suggested an upward adjustment of Rs. 1,40,69,150/- in respect of Arms Length Price. A draft assessment order u/s 143(3) read with Section 144C of the Act was passed on 6/2/2014 and an upward adjustment of Rs.1,40,69,150/- was made to the business income and income for the Assessment Year 2010-11 was determined at Rs. 4,99,286/-. Since, the assessee has a total brought forward losses and unabsorbed depreciation of Rs.3,44,07,988/-. Therefore, after allowing benefit of set up of losses as well as benefit of set off of unabsorbed depreciation, total income of the assessee for Assessment Year 2010-11 was determined at Rs.56,91,298/-. The assessee company filed objection before the DRP against the additions made in the draft Assessment Order. The DRP after considering the objections of the assessee company has issued its directions u/s 144C (5) of the Act on 30/10/2014. After considering the DRP’s directions, the Assessing Officer made addition of Rs.1,23,61,456/- being the difference between Arm’s Length Price and price charged by the assessee from its AEs from provision of Market Support Services.
The assessee is aggrieved by the Assessment Order and has filed the present appeal before us.
The Ld.AR submitted that Ground No. 1 to 3.1 is general in nature. Therefore, Ground No. 1 to 3.1 are dismissed.
Ground No. 3.2 to 3.7 are relate to the comparables. The Ld. AR submitted that the Transfer Pricing Officer has selected 12 comparables as final comparables for the purpose of bench marking international transaction relating to business/technical support service segment. The Ld. AR submitted that the assessee is challenging 5 comparables which has to be excluded for the reasons given during the hearing.
The Ld. AR submitted that the assessee is a subsidiary of Parsons Brinckerhoff International Inc. USA, is engaged in the provision of engineering consultancy services to the Indian power sector and for infrastructure projects. The primary business of the Assessee is to provide design and engineering services for a range of infrastructure and facilities, including highways, tunnels, bridges, transit systems, airports, railroads, ports, power facilities, telecommunications, water and petroleum, environmental projects, buildings, oil/gas/petroleum pipeline, etc. As a part of its business operations, PB India primarily receives contracts and engages in transactions with Non AEs. Therein, PB India may it require engineering consultancy services from its associated enterprises, for which its AEs second personnel to PB India for rendering services. Similarly, PB India’s associated enterprises also while rendering services may require some services from PB India and accordingly, PB India seconds personnel to its AEs for rendering services. PB India provided engineering consultancy services to both AEs as well independent third parties. The proportion of revenues from AEs and independent third parties was 31% and 69% respectively. PB India is responsible for supervision of the entire construction work. It administers the construction contracts and ensures that the contractual requirements, with respect to both quality and quantity of work, are followed and the works arc constructed in accordance with the provision of the construction contracts. PB India has provided engineering design and consultancy services for various projects of the AEs. For these projects of the AEs, it is the responsibility of the AEs to determine the overall scope of the services and communicate its communicate its requirements to PB India. PB India is in turn responsible for monitoring the quality of its services. It is also responsible for adhering to the standard and time for performance of the services as detailed in the agreement entered. The services include preparation of a desktop study, review of drawings, on-site supervision, etc. The Ld. AR submitted that the functional profile of the assessee i.e. PB India has also availed engineering and other support services from its AEs for execution its projects in India. PB India provided support services:
-Assistance in preparation of reports and presentations
-Assistance in preparation of engineering drawings and planning layouts.
-Preparation of feasibility study in relation to the project - Review of documents
PB India also undertook certain business support functions that are the part of the normal course of any business i.e. Finance and Accounting and IT wherein it prepares its own financial statements and its budget on a periodical basis and Human Resource Management wherein it performs recruitment, soft skill training, performance evaluation and other related functions.
9. The Ld. AR submitted that the assessee applied Transactional Net Margin Method (TNMM). The margin of the assessee is that of 8.25%. The Ld. AR submitted a the assessee is challenging following 5 comparables which has to be excluded on account of functional dissimilarities and other various reasons:- (1) Engineers India (2) HSCC (India) (3) IBI Chematur (4) RITES Ltd. (5) TCE Consultancy Engineering Ltd. The Ld. AR submitted that if these comparables are excluded the margin will come to approximately 13% to 14%. The Ld. AR further submitted that if these comparables are excluded then Ground No. 4, 5 remains academic and need not to be commented upon. Ground NO. 6 & 7 as per the Ld. AR are consequential.
10. COMPARABLES (1) Engineers India:- The Ld. AR submitted that this comparable has high turnover of INR 1193.75 crore and the assessee’s turnover was 25.17 crore. Thus, there is super normal profits and hence that does not represent industry margins. The Ld. AR further submitted that its a Government Company. Thus, the Ld. AR submitted that the Government Company/Public Sector undertaking company of Government of India has an edge over private firms in securing contracts. The Ld. AR submitted that when direct comparables are available segment results should not be considered. Thus, this comparable is functional dissimilar and it provides complete range of project services from conceptualization, planning, design, engineering and construction activities in the sectors of petroleum refining, petrochemicals, offshore oil and gas, onshore oil and gas, terminals and storages, mining and metallurgy and infrastructure. It provides the services of commissioning and beyond the commissioning of clients through monitoring and operations of plants. This comparable has made significant R & D efforts.
(2) HSCC (India):- The Ld. AR submitted that this comparable is engaged in the provision of architectural planning, design, engineering, project management and procurement management services. This is Government company. The customers of the company include central government, state government, state government hospitals and institutes. Hence, the transaction with other government undertaking including central and state government would be categorized as ‘controlled transactions'. The Company provides professional consultancy services in healthcare and social sector. Profile of employees (doctors, pharmacists, health planners and computer experts) is different from the assessee company. The Ld. AR relied upon the following decisions:
(3) IBI Chematur:- The Ld. AR submitted that this comparable is functionally dissimilar. There is provision of planning and engineering services for chemical manufacturing industry in this comparable company. It provides detailed engineering intelligent 3D plant modeling, 2D conversion services, smart plant instrumentation, piping stress analysis, procurement assistance, process simulation, process equipment design, inspection services, project planning and management and erection suspension. There is significant R&D efforts. The company provides basic and detailed engineering services in the field of petrochemicals, fine chemicals, cosmetics, pharmaceuticals, industrial explosives and waste acid recovery and not infrastructure related consultancy projects. Possible related party transaction IBI Chematur in association with Chematur Engineering AB have built several plants in India to manufacture chemicals and the Website indicates that company provides detailed engineering services to Chematur Engineering AB on regular basis which indicates rim there are high related party transactions.
(4) RITES Ltd:- This comparable is Government Company as per the Ld. AR. There is high turnover of this company which is INR 623.26 crore. The comparable company is engaged into consultancy services, construction projects, export of rolling stock equipment and spares, leasing of railway rolling stock equipment. The customers of the company included central government, state government, state government hospitals and institutes. Hence, the transaction with other government undertaking including central and state government would be categorized as 'controlled transactions'.
(5) TCE Consultancy Engineering Ltd:- The Ld. AR submitted that this comparable Company offers multidisciplinary services relating to project engineering the industry of power plants, water supply, waste water projects. It has high turnover of 354.36 Crore.
The Ld. AR relied upon the following decisions:
1) M/s ThyssenKrupp Industries India Private Limited vs. ACIT (2013) 25 ITR 243
2) ACIT Vs. M/s. Jacob Engineering India Pvt. Ltd. vs. ACIT- [C.O No. 36/Mum/20l7 (A.Y. 2010-11) order dated 10.01.2018]
3) AT & T Communication Services India vs. ACIT (2018) 91 Taxmann.com 58
4) M/s Eli Lily & Co. (India) Ltd. Vs. ACIT [ITA No. 6819/Del/2014] (A. Y. 2004-05) order dated 11.04.2018]
5) Capital IQ Information Systems [India ) Pvt. Limited vs. DCIT (ITA No.1961/Hyd/2011 order dated 23.11.2012)
6) Mentor Graphics Noida Private Limited vs. DCIT [(2007) 109 ITD 101 (Delhi)]
7) M/s Premier Exploration Services Pvt. Ltd. vs ITO 291 ITR 427
8) Granite Services International Private Ltd. vs. ACIT (2017) 87 Taxmann.com 24
9) Bechtel India Pvt. Ltd. Vs. DCIT (2016) 66 Taxmann.com 6
10) Pyramid IT Consulting Pvt. Ltd. Vs. ITO (ITA No. 5401/Del/2012 order dated 11.12.2014)
11) ACIT Vs. M/s Chemtix Global Engineers P. Ltd. (2014) 147 ITD 488
12) Microchip Technology (India) Private Limited vs. ACIT [IT(TP) A No. 1247/Bang/2011 and 44/Bang/2012 order dated 31.10.2016]
The Ld. DR submitted that merely the Companies are of Government entity cannot be excluded as comparable when the functional profile is similar to that of the assessee company. The Ld. DR relied upon the decision of Luise Dreyfus wherein it is observed by the Tribunal that merely company is Government Company that cannot be the sole ground for excluding the comparables. The Ld. DR also relied upon the decision of Chryscapital Investment Advisors (India) (P) Ltd. vs. DCIT – (2015) 56 taxmann.com 417 (Delhi):376 ITR 183 for high turnover criteria. Thus, the Ld. DR submitted that the comparables selected by the TPO are just and proper and should be retained.
The Ld. AR relied heavily on the decision of the ThyssenKrupp (supra) and submitted that the said case law was not cited before the Tribunal in case of Louis Dreyfus. The Ld. AR further submitted that all these companies are functionally dissimilar and, therefore, the same should be taken into account and there is no segmental bifurcation given of the comparables.
We have heard both the parties and perused the material available on record. As regards Engineers India, HSCC (India) and RITES Ltd. these are government based companies and also having different functional profile than the assessee company. From the annual reports of these companies, it is clear that the functional profile and the OP/OC margin in each case is higher than the assessee company except HSCC India Limited. But all these companies have the customers mainly of that of Government for which there is limited risk factor involved. Thus, they are not suitable with the assessee’s functional profile. As regards TCE Consultancy Engineering Ltd. and IBI Chematur, the functional profiles of these companies are different. There is no segmental bifurcation given in these companies details. Therefore, all these 5 comparables are not appropriate comparables chosen by the TPO/AO. The case laws cited by both the parties are taken into account and after considering the facts of the present case we decide accordingly. Thus, we direct the TPO/AO to exclude all the 5 comparables contested herein. As regards Ground No. 4 and 5, the same are academic, hence dismissed. As regards Ground No. 6 and 7 are consequential, hence dismissed.