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Income Tax Appellate Tribunal, DELHI BENCH ‘I-1’, NEW DELHI
Before: SH. R. K. PANDA
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I-1’, NEW DELHI BEFORE SH. R. K. PANDA, ACCOUNTANT MEMBER AND SH. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA No.740/Del/2017 Assessment Year: 2012-13 M/s. Granite Services DCIT International India Private Vs Circle-10(2), Limited, Building No.7A, New Delhi 5th Floor, DLF Cyber City, Phase-III, Sector -25A, Gurgaon-122002 PAN AACCG3374Q (APPELLANT) (RESPONDENT)
Appellant by Sh. K. M. Gupta, Advocate Respondent by Sh. Sanjay I. Bara, CIT DR Date of hearing: 21/03/2018 Date of Pronouncement: 19/06/2018 ORDER PER R.K. PANDA, AM:
This appeal filed by the assessee is directed against the order dated 26.12.2016 passed by the DCIT, Circle – 10 (2), New Delhi u/s. 143 (3) r/w 144C(13) of the IT Act 1961 for the A. Y. 2012-13.
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Facts of the case, in brief, are that the assessee was incorporated in India on February, 2005 as a wholly owned subsidiary of Granite Services International Inc., USA (Granite USA). During the year under consideration, it was primarily engaged in providing technical support to its associated enterprises (AEs). The technical support services provided by the Appellant to its AEs relate to provision of erection, installation, commissioning, warranty administration, operation and maintenance, inspection, renovation and modernization services for power plants and turbines. The assessee filed its return of income on 25.10.2012 declaring total income of Rs.7,91,22,173.
Since the assessee had undertaken international transaction with its AE’s, the Assessing Officer referred the matter to the TPO u/s. 92 CA (3) of the IT Act. The TPO during the T. P. assessment proceedings observed that assessee has undertaken the following international transactions which it is AE’s during the year.
S. No. Nature of Transactions Amount in INR 1. Provision of technical services 323.487,821/- 2 Provision of payroll administration services 85,544,679/- 3 Purchase of payroll administration services 6,553,185/- 4. Reimbursement of expenses 90,509,257/- Total 506,094,942/-
The TPO passed the order u/s 92CA(3) dated 28.01.2016, wherein he took due consideration to the objections of the assessee in regard to inclusion of comparables and errors in arm’s length margin calculations and determined the following comparables to be used in the assessee’s case for computing the arm’s length margin:
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S. Company Name OP/OC % No. HSSC (India) Ltd. 48.91% 1 Mahindra Consulting 26.67% ] 2 Engineers Ltd. 3 Mitcon Consultancy & 34.84% Engg. Services Ltd. 4 T C E Consulting Engineers 21.15% Ltd. 5 Mahindra Engineers 30.68% Services Ltd.
Average 32.45%
Accordingly the TPO computed the arm’s length price of assessee’s international transactions related to the provision of IT enabled services as under:
Operating cost 37,61,02,774 OP/OC (%) 32.45% Arm’s Length Price 49,81,48,124 Price shown by assessee 44,36,13,016 Difference 5,45,35,108 International Transaction 32,34,57,096 % of International Transaction to Total Sales 72.91% Proposed Adjustment u/s 92CA 3,97,61,547
The Assessing Officer in the draft assessment order proposed the above adjustment. Aggrieved with the Draft Assessment Order passed u/s 144C r. w. s 143(3) by Assessing Officer, the assessee approached the DRP who vide its order dated 18.11.2016 directed the TPO to recalculate the transfer pricing adjustment. Following the direction of the DRP, the Transfer Pricings Officer passed an order giving effect to the direction of the DRP by considering the following comparables after working capital adjustment, the details of which are as under :-
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S r. Co mpan y Na me O P/O C% No . 1 H S CC ( I n di a) Ltd. 39.90% 2 'M ah i i n dra Co n su l ti n g En g i n ee rs Ltd. 27.12% 3 M i tco n Co n su l tan cy & En g g . S e rvi ce s Ltd. 33.36% 4 TC E Co n su l ti n g En g i n ee rs Ltd. 19.98% 5 M ah i n dra En g i n e e rs Se rvi ce s Ltd. 27.63% A ve rag e 29.62% Arm’s Length Price for software technical support services :
O pe rati n g Co st 37,61, 02,774 O P/O C% 29.62% A rm’s Le n g th Pri ce at a M arg i n 48,75, 04,415 o f29.62% Pri ce sh o w n by the asse ssee 44,36, 13,016 D i ffe re n ce 4,38,9 1,399 I n te rn ati o n al Tr an sacti o n 32,34, 57,096 % of I n te rn ati o n al Tr an sacti o n to 72.91% To tal s al e A dj u stme n t ( D i ffe re n ce * 72.9 1% ) 3,20,0 1,219
The AO accordingly made an upward adjustment of Rs.3,20,01.219/- being the ALP of the international transaction entered into by the assessee with its AE.
Aggrieved with such order of the Assessing Officer/DRP/TPO the assessee is in appeal before the Tribunal by raising the following grounds of appeal :- “1. That in the facts and circumstances of the case and in law, the assessment order passed by the Ld. AO pursuant to the directions of the Hon’ble Dispute Resolution Panel (DRP) is bad in law and invalid to the extent the additions made in the final assessment order. 2. That on the facts and circumstances of the case and in law, the transfer pricing adjustment undertaken by the Ld. AO / Ld. Transfer Pricing Officer (Ld. TPO) is bad in law and therefore the adjustment should be deleted.
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That on the facts and circumstances of the case and in law, the Ld. AO following the directions of the Ld. TPO/ Hon’ble DRP erred on facts and in law in making an upward adjustment to the income of the Appellant by INR 3,20,01,219 holding that the international transactions of the appellant pertaining to provision of Technical Services does not satisfy the arm’s length principle envisaged under the Act and in doing so, have grossly erred in:
3.1. not appreciating that none of the conditions set out in section 920(3) of the Act are satisfied in the present case; 3.2. 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); 3.3. arbitrarily rejecting/modifying the filters adopted by the Appellant in the TP study and imposing additional filters for the selection of comparables; 3.4. incorrectly selecting functionally different companies engaged in high-end technical, engineering and consultancy services as comparables and thereby resorting to cherry picking of comparables with a prejudicial mind set for making an upward adjustment to the income of the Appellant; 3.5. including companies having abnormal margins in the final comparables’ set for benchmarking the international transaction of the Appellant ; and 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 and clears the filters as applied by the Ld. TPO.
That 011 the facts and circumstances of the case and in law', the Hon’ble I)RP/ Ld. TPO has erred in rejecting certain companies as comparable to the Appellant by citing that the annual reports of such companies are not available, in spite of the fact that the audited annual reports of the same for the relevant year were filed before the Hon’ble DRP/ Ld. TPO during the course of respective proceedings. 5. That on the facts and circumstances of the case and in law, the Hon’ble DRP erred in following their directions issued for AY 2011-12 and summarily rejecting Raunaq International Ltd., Sterling & Wilson Ltd. and Supreme Offshore Constructions & Technical Services Ltd. without undertaking and appreciating the functional analysis undertaken by the Appellant for the said year under consideration.
That on the facts and circumstances of the case and in law, the Hon’ble DRP erred in computing incorrect ratio for service revenue filter of 75% as applied by the Ld. TPO and upheld by the Hon’ble DRP. While computing such ratio the Hon’ble DRP/ Ld. TPO failed to rely upon the financial data as per the audited annual reports of such companies for the year under consideration.
That on the facts and circumstances of the case and in law, the Hon’ble DRP erred in alleging that the Appellant failed to provide evidences for the calculation of the quantitative filters of certain companies rejected as comparables.
That on the facts and circumstances of the case and in law, the Ld. AO and the Hon’ble DRP erred in holding that the Travel and Conveyance expenses of INR 2,28,15,393 warrant disallowance under section 4o(a)(i) of the Act.
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8.1. The Ld. AO and the Hon’ble DRP erred in holding Travel and Conveyance expenses to be in the nature of Fee for Technical Service (FTS) as per section 9(i)(vii) of the Act and Fee for Included Services (FIS) as per article 12(4) of Double Taxation Avoidance Agreement (DTAA) between India and the USA. 8.2. The Ld. AO and the Hon’ble DRP failed to appreciate that the said amount represents merely reimbursement of expenses on a cost-to-cost basis to the group company. 8.3. Without prejudice, that on the facts and circumstances of the case and in law, the Ld. AO and the Hon’ble DRP erred in not appreciating that the services provided by the employees seconded to Appellant company do not ‘make available’ any technical know-how, skills, etc., as provided under the DTAA between India and USA. 9. That in the facts and circumstances of the case and in law, the Ld. AO and the Hon’ble DRP failed to appreciate that the sum of INR 6,64,77,837 was incurred on account of mere reimbursement of Salary and Other Allowances, paid to group company for secondment of employees to work for the Appellant during the concerned Assessment Year. 9.1. That the Ld. AO and the Hon’ble DRP erred in holding such payments to be in the nature of FTS as per section g(i)(vii) of the Act and FIS as per article 12(4) of DTAA between India and the USA. 9.2. That the Ld. AO and Hon’ble DRP erred in holding that such payments warrant disallowance under section 4o(a)(i) of the Act. 9.3. Without prejudice, that on the facts and circumstances of the case and in law, the Ld. AO and the Hon’ble DRP erred in not appreciating that the services provided by the employees seconded to Appellant company do not ‘make available’ any technical know-how, skills, etc., as provided under the DTAA between India and USA. 10. That in the facts and circumstances of the case and in law, the Ld. AO and the Hon’ble DRP erred in making disallowance of Employee's contribution to the Provident Fund (PF) to the extent of INR 517,463. That the Ld. AO and the Hon’ble DRP erred in not appreciating that the 10.1. said amount was duly deposited on or before the filing of return of income for the year under consideration and therefore is allowable in view of section 43B of the Act.
That in the facts and circumstances of the case and in law, the Ld. AO erred in levying interest under section 234B of the Act.
That in the facts and circumstances of the case and in law, the Ld. AO erred in proposing to initiate the penalty proceedings under section 27i(i)(c) of the Act. The above grounds are independent and without prejudice to each other.”
Ground No. 1 and 2 of appeal being general in nature are dismissed.
In grounds of appeal No.3 to 7 of appeal, the assessee has basically challenged the transfer pricing adjustment on account of selection of certain comparables. So far as HSCC (India) Ltd. is concerned the Ld. Counsel for the assessee submitted that the above company is
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functionally dissimilar since it is engaged in diversified activities including engineering/ architectural design. Further it has reported super normal growth of 48.91% in the current year as against 17.11 % in the preceding year which shows super normal growth of about 180%. He submitted that HSCC (India) Private Ltd., is also a Government company. Referring to the decision of the Tribunal in assessee’s own case in the immediately preceding assessment year he submitted that HSCC (India) Ltd. was rejected as a comparable being a Government company. He accordingly submitted that HSCC (India) Limited be rejected from the list of comparables. He also relied on the decision of the Mumbai Bench of the Tribunal in the case of Shell India Markets Pvt. Ltd. Vs. ACIT vide ITA No. 193/M/2013 and Delhi Bench of the Tribunal in the case of Bechtel India Pvt. Ld. Vs. DCIT in ITA No. 882/Del/2014.
So far as Mahindra Consulting Engineers Limited is concerned he submitted that it is a consultancy company and is engaged in under taking diversified projects in the infrastructure sector by providing consultancy services in the area of SEZ, water supply and the sewerage, solid waste management, urban infrastructure etc. Based on the above, it was rejected in the case of Emerson Process Management Power & Water Solutions India Private Limited vide ITA No.5343/Del/2012) comparable.
Referring to the decision of the Bangalore Bench of the Tribunal in the case CISCO Systems (India) (P.) Ltd vide ITA No.271/Bang/2014 he submitted that Mahindra Consulting Engineers Limited was excluded from the list of comparables on the ground that it is engaged in provision of infrastructure consulting services. Referring to the decision of the Tribunal in the case of Rolls Royce India (P.) Ltd vide ITA No. 6636/Del/2015 he submitted that this company was excluded from the list of comparables on the ground that it has highly technical capabilities
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of infrastructure development projects. Referring to pages 250, 936, 940 of the paper book, the Ld. Counsel for the assessee submitted that the above company has significant RPT of 41.50% which is as under :-
Related Party Transaction Amount (in NR) Income from consultancy services 61,780,888 Reimbursement of expenses 1,007,003 Purchases 252,000 Professional charges 240,000
Total RPT 63,279,891 Sales 152,277,017 Total RPT / Sales (%) 41.56
10.1 He accordingly submitted that in view of the functional dissimilarities and significant RPT, this company should be excluded from the list of comparables.
So far as Mitcon Consultancy and Engineering services Limited is concerned he submitted that the above company provides services to banking division, entrepreneurship and vocational training division, E- schools and BT Pharma sector. Referring to page 109 of Form 35 A he submitted that the revenue earned by the above company from services other than consultancy is approx. 43% of the total revenue. Referring to page 257 of paper book he submitted that Mitcon owns fixed assets such as wind turbine generators and therefore, has a high fixed assets to sales ratio of 34.09%.
Referring to the order of the Tribunal in assessee’s own case in A. Y. 2011-12 he submitted that this company was rejected on account of multi dimensional functionality and mostly serving the related parties apart from non availability of segmental data. He accordingly submitted
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that Mitcon Consultancy and Engineering Services Ltd. should be excluded from the list of comparables.
So far as Mahindra Engineering Services Limited is concerned, the Ld. Counsel for the assessee referring to page 262 of the paper book submitted that the company is engaged in providing design consulting services to automotive, aerospace, defense, and manufacturing industries. It offers vehicle development services in various automotive segments that include two-wheeler, passenger car, commercial vehicle, off-highway, farm and construction, and aerospace equipment in body engineering, chassis design, powertrain, interior trims, electronics, telematcis, and tool design domains. He submitted that this company has 58.63% RPT and therefore, should be excluded from the list of comparables.
The Ld. Counsel for the assessee also requested for inclusion of the 2 comparables companies namely MN Dastur & Company Pvt. Ltd. and EDCA Engineering Private Limited.
14.1 So far as MN Dastur & Company Pvt Ltd. is concerned he submitted that the company was not selected by the assessee in the T. P. documentation on account of non-availability of data in public domain. However, at present the Annual Report of the company is available in public domain, a copy of which is enclosed at pages 1032 to 1182 of the paper book. It is involved in provision of services related to engineering projects like feasibility study, design and engineering, construction management, product management, inspection, operational assistance and business and technology consulting etc. which is akin to the functions carried out by the assessee. Referring to the decision of the Tribunal in assessee’s own case for A. Y. 2010-11 and 2011-12 he submitted that MN Dastur Private Limited was accepted as comparable.
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Therefore, this company being functionally similar and in the light of the decision of the Tribunal for A. Y. 2010-11 and 2011-12 be included in the list of comparables.
So far as EDAC Engineering Limited is concerned he submitted that the annual report of the company is available in the public domain according to which this company is engaged in providing design and detailed engineering, procurement, shop fabrication, construction, operation and maintenance, commissioning and renovation services. These services are rendered to power sector, petrochemical and oil and gas sector, and steel and cement sector. Referring to the decision of the Tribunal in assessee’s own case for A. Y. 2011-12 he submitted that the Tribunal restored the issue to the file of the TPO to include the company in the list of comparables with certain directions. He accordingly submitted that EDSA Engineering Private Limited be included in the list of comparables.
The Ld. DR on the other hand heavily relied on the order of the Assessing Officer/ TPO/ DRP. He submitted that the assessee failed to establish that HSCC (India) Limited is functionally different from that of the assessee so as to render it unsuitable even in TNMM comparison. So far as Mahindra Consulting Engineers Limited is concerned he submitted that in assessment year 2011-12 this company was selected as comparable by the TPO which was upheld by the DRP. The assessee failed to show why this decision of DRP in the preceding year should not be followed. So far as Mahindra Engineering Services Ltd., is concerned, he submitted that TPO has given valid reasons for including this company as comparable. Similar is the case with Mitcon Consulting and Engineering services Limited. As regards the arguments of Ld. Counsel for the assessee for inclusion of the 2 comparables are concerned he submitted that assessee has not given any justifiable reason so as to
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includes the 2 comparables. He accordingly submitted that order of the Assessing Officer/ TPO/ DRP should be upheld.
We have considered the rival arguments made by both the sides and perused the material available on record. So far as the exclusion of HSCC India Ltd is concerned we find HSCC India Ltd. is a Government company. However, it is not clear from the submission filed by the assessee as to whether HSCC (India) Ltd. has received any grant or incentives from the Government. Further the submission of Ld. Counsel for the assessee that HSCC (India) Ltd. is engaged in diversified activities also requires to be verified. We, therefore, restore the issue of inclusion / exclusion of this company to the file to the TPO with the direction to verify from the annual accounts and other details to be furnished by the assessee and decide the issue. While doing so he shall also keep in mind the decision of the Tribunal in assessee’s own case for A. Y. 2011-12 wherein this company was excluded from the list of comparables. We, therefore, restore this comparable to the file of the TPO with the direction to decide the issue of exclusion of HSCC India Ltd afresh after giving due opportunity of being heard to the assessee.
So far as exclusion of Mahindra Consulting Engineer Limited is concerned we find from the order of the Tribunal in assessee’s own case for A.Y. 2010-11 that the Tribunal vide in ITA No. 1486/Del/2015 order dated 04.08.2017 had direct the TPO to retain this company in the list of comparables by observing as under :-
‘8.1. The TPO proposed this company as the same, in his opinion, was also rendering consultancy services, such as, opportunity analysis, expediting services, etc. in the areas of SEZ, industrial parks and townships, profitization. environment and other areas. The assessee objected to the same before the TPO by arguing that this company was providing consultancy services in the areas of Special Economic Zone, urban infrastructure,
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industrial infrastructure and renewable energy, etc. The TPO did not agree with the contention of the assessee and included it in the list of comparables. The assessee is aggrieved against the same. 8.2 Having heard the rival submission and perused the relevant material on record, we find from the Annual report of this company, a of which has been placed in the paper book, that it received contracts for various companies infrastructure sector including industrial plants & systems etc. The Ld. AR was fair enough to agree that this company was rendering end-to-end services. It was however claimed that the assessee was only providing technical Personnel and, hence, the same should be excluded. We are not agreeable with the Transfer Pricing study documentation and the TPO’s order elaborately state that the assessee is engaged in providing end- to-end services. While advocating the inclusion of M. N. DAstur & Co. Pvt. Ltd., which was one of the comparables taken note of by the assessee, the Ld. DR drew our attention to the fact that the company is rendering end-to- end services, being similar activity as is done by the assessee. We have ordered for the inclusion of this company on the ground that the same is also rendering end-to-end services starting with feasibility studies and ending with project management inspection. Now the assessee cannot turn around for the instant comparable and contend that it is simply supplying personnel and not doing any other service. Even otherwise, this contention is contrary to what has been ordered in the TP documentation about the functional profile of the assessee. AS the assessee is also doing similar end-to-end activity as done by Mahindra Consulting Engineers Ltd., we uphold the inclusion of this company in the list of comparables by the TPO. The impugned order is upheld to this extent.
However, it is the submission of Ld. Counsel for the assessee that this company is functionally dissimilar being a consulting company and is engaged in undertaking diversified projects in the infrastructure sector by providing consultancy services in the area of SEZ, water supply and sewerage, solid waste management, urban infrastructure etc. It has highly technical capabilities of excluding infrastructure development projects further it has got significant RPT of 41.56% which is more than trash hold limit of 41.56 %. We, therefore, restore this issue to the file of the Assessing Officer / TPO to verify the functional dissimilarity as well
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as the RPT and decide the issue of inclusion or exclusion of this company afresh. Needless to say that the Assessing Officer / TPO shall given due opportunity of being heard to the assessee.
So far as Mitcon Consultancy and Engineering Services Ltd., is concerned we find this company provides services to the banking division, entrepreneurship and vocational training division, E-schools and BT and Pharma sector. Revenue earned by the company from services other than consultancy is approx.43% of the total revenue. Milton also owns fixed assets such as wind turbine generators and therefore, has a high fixed asset to sales ratio of 34.09 %. We find this company was rejected by the Tribunal in assessee’s own case vide ITA No. 532/Del/2016 for A. Y. 2011-12 by observing as under:-
“7. Similarity, in respect of Mitcon Consultancy and Engineering Services Limited and Rites Ltd. it is submitted that both these companies have multi dimensional functionality and mostly serving the related parties, and apart from that the segmental data is not available. On this aspect also Ld. AR submits that these two companies cannot be good comparables. On facts, Ld. DR does not dispute the same. We, therefore, hold that these two companies also cannot be comparables to the assessee company.”
20.1 We therefore, restore this issue to the file of the TPO to find out whether RPT is more than the threshhold limit and whether segmental data is available or not and decide the issue in the light of the order of the Tribunal in assessee’s own case for A. Y. 2011-12. Needless to say the Assessing Officer shall give one opportunity of being heard to the assessee and decide the issue as per law.
So far as Mahindra Engineering Services Ltd. is concerned it is the submission of Ld. AR that apart from RPT of 58.63% this company is also functionally dissimilar being engaged in providing design consulting
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services to automotive, aerospace, defence and manufacturing industries. It offers vehicle development services in various automotive segments that include two-wheeler, passenger car, commercial vehicle, off-highway, farm and construction, and aerospace equipment in body engineering chassis design, powertrain, interior trims, electronics, telematics and tool design domains. It is an admitted fact that this company was retained as a com-parable by the Tribunal in assessee’s own case for A. Y. 2010-11 and 2011-12. It is not verifiable from the earlier orders of the Tribunal as to whether the RPT was more in those years. We, therefore, deem it proper to restore this issue to the file of the Assessing Officer with the direction to adjudicate the issue from the angel of higher RPT. While doing so he shall keep in mind the various decisions on this issue including the decision of the Tribunal in assessee’s own case in the 2 preceding years. Needles to say, the Assessing Officer shall give opportunities of being heard to the assessee.
So far as inclusion of M. N. Dastur & Company Private Ltd. is concerned we find this company was directed to be retained in the list of comparables by the Tribunal in assessee’s own case for A. Y. 2010-11 and 2011-12. We find the Tribunal in assessee’s own case for A. Y. 2010- 11 has directed the TPO to retain this company by observing as under :-
i) MN Dastur & Co Pvt. Ltd. 7.1 The Assessee treated this company as comparable. The TPO excluded the same by holding that the Annual Report of this company was not available in public domain. The Assessee objected before the DRP against the exclusion of this company by urging that: ‘the company is engaged in engineering projects from initial feasibility to commencement of operations under one single umbrella. It is involved in provision of services related to engineering projects like feasibility study, design & engineering, construction management, product management, inspection, operational assistance I and business and technology consulting’. The DRP did not take cognizance of this contention raised before it vide para 4.132 of the Assessee’s objections. This is how this company was finally excluded from the list of comparables. The Assessee is aggrieved against the exclusion of this company.
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7.2 Having heard both the sides and perused the relevant material on record, it is seen that the Annual Report of this company is available at page 169 onwards of the paper book. In view of the fact that this company is also providing end-to-end services starting with feasibility study, extending to design and engineering, thereafter construction and inspection, etc., being the similar activity as pursued by the Assessee, we hold that this company is includible in the list of comparables
We find following the above, decision the Tribunal in assessee’s own case for A. Y. 2011-12 directed the TPO to include this company as a comparable. Respectfully following the orders of the Tribunal in assessee’s own case in the 2 preceding years, we direct the Assessing Officer / TPO to include this company as a comparable.
In so far as inclusion EDAC Engineering Limited as a comparable is concerned, we find the Tribunal in assessee’s own case for A. Y. 2011-12 at para 9 of the order has restored the issue to the file of the TPO with the following observations :-
“9. Now coming to the EDAC Engineering Limited, it is the observation of the TPO, vide paragraph no.8.1 (b) that on the analysis of the annual report of the company which was found that the company was having 100% RPT with AEs. Ld. AR submits that factually this finding is incorrect and invited our attention to paragraph no.4.121 & 4.122 at page No.4, wherein they have stated that the RPT of the EDAC Engineering is only 14.79 % basing on the following computation details :
Particulars Amount (INR)
Other 21,927,843
Sales 998,373,958
Sub contract 25,067,448
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Total RPT 1,045,369,249
Total Sales 7,066,591,068
RPT/ Total Sales 14.79%
This percentage of 14.79 is much below the 25% filter. Ld. Counsel drew our attention to page nos.51 to 53 of the annual report of the EDAC Engineering Limited for the financial year ended March 31, 2011 vide notes relating to related parties, and submitted that these figures are the basis for the submissions in the table referred to above, and there is a failure on the part of the authorities below to appreciate this fact. On the face of this submission with reference to the annual report of EDAC Engineering Limited and submissions are made before the DRP, we are of the considered opinion that this fact needs verification. We, therefore, set aside this aspect to the file of the TPO to verify the RPT of EDAC Engineering Company Services Ltd. with reference to the annual report and other record, if any, to be submitted by the assessee. ” 25. Respectfully following the order of the Tribunal in assessee’s own case cited (Supra) we restore this issue to the file of the TPO to adjudicate the inclusion of this company in the light of the direction of the Tribunal. Needless to say, the Assessing Officer shall give due opportunity of being heard to the assessee. The above grounds are accordingly allowed for statistical purposes.
In grounds of appeal No. 8 and 9 the assessee has challenged the action of the Assessing Officer in disallowing re-imbursement of travelling and conveyance expenses of Rs.2,28,15.393/- and the reimbursement of Salary and Allowance of Rs.6,64,77,837/- u/s 40 (a) (i) of the I. T. Act, 1961.
So far as reimbursement of Travel and Conveyance expenses of Rs.2,28,15,393 is concerned, the Ld. Counsel for the assessee submitted that the said amount represents reimbursement of travel and conveyance expenses by the assessee to its group company Granite USA. He submitted that the said amount doesn’t warrant any disallowance under section 4o(a)(i) of the Act since the amount is paid towards
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reimbursement of travel and conveyance expense and is not chargeable to tax under the Act. Referring to provisions of section 40 (a) (i) he submitted that the said section provides for disallowance of certain amounts paid outside India or to non-residents on which appropriate TDS compliance has not been made.
Referring to the said section, he submitted that any royalty, Fees for Technical Service (FTS) or other sum chargeable under the Act payable to a non resident, on which tax is deductible under Chapter XVII B of the Act but has not been deducted and/ or paid, needs to be disallowed in the hands of payer. Referring to provisions of section 195(1) of the Act he submitted that as per the said section any person responsible for paying to a non-resident, any sum which is chargeable to tax in India is required to deduct tax thereon at the rates in force. However, the liability to deduct tax at source under the aforesaid section arises only if the amount paid/ payable to the non-resident is chargeable to tax in India.
Referring to the decision of Hon’ble Supreme Court in the case of GE India Technology Centre (P) Ltd. [2010] 327 ITR 456 he submitted that the Hon’ble Supreme Court has held that the expression ’chargeable under the provisions of the Act’ is to be understood as a liability to pay Income-tax under the Act and unless, there is a liability to pay income- tax under the Act, it cannot be said that tax has to be deducted from the payment/remittances made by an Appellant in India to a non-resident. The Hon’ble Supreme Court has further observed that one cannot read section 195 of the Act to give rise to TDS obligation, the moment there is remittance to a non-resident. If such a view is adopted, then mere payment would give rise to income to accrue or arise in India and such interpretation would mean obliteration of expression “sum chargeable under the provisions of the Act”
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Referring to the following decisions, he submitted that similar view has been taken by the Courts.
(1) Van Oord ACZ India (P) Ltd. vs. CIT [2010] 323 ITR 130 (Delhi HC) (2) ITO vs. Prasad Production Ltd. [2010] 129 TTJ 641 (Chennai ITAT) (3) DCIT vs. Dhaanya Seeds (P) Ltd. [2013] 64 SOT 15 (Bangalore ITAT) (4) CIT vs. EON Technology (P.) Ltd. [2011] 343 ITR 366 (Delhi HC) (5) DIT vs. Ericsson Communications Ltd. [2015] 61 taxmann.com 117 (Delhi HC) (6) CIT vs. Divi's Laboratories Ltd. [2011] 12 taxmann.com 103 (Hyderabad ITAT)
He submitted that the travel and conveyance expenses/payments were in nature of reimbursement of expenses, made on cost to cost basis without there being any element of income embedded therein. Referring to the copy of invoices raised by Granite USA and the backup documentation (on sample basis) filed before AO vide letter dated March 17, 2016 he submitted that on a perusal of supporting evidences, it is seen the payments are actual reimbursement of expenses incurred by these parties outside India and there is no element of income embedded in such payments. 32. Referring to the following decisions, he submitted that reimbursement of expenses with no income element embedded therein requires no tax deduction in India.
(1) CIT vs. Tejaji Farasram Kharawalla Ltd. [1968] 67 ITR 95 (2) Mahindra & Mahindra Ltd. vs. DCIT [2009] 313 ITR (AT) 263 (Mumbai) (SB) : 22 DTR 361 (Mumbai ITAT) (SB)
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(3) Expeditors International (India) P. Ltd vs. Addl. CIT [2010] 2 ITR 153 (Delhi ITAT) (4) Global E-Business Operations (P) Ltd. vs. DCIT [2012] 52 SOT 457 (Bangalore ITAT). (5) CIT vs. Tata Engg. & Locomotive Co. Ltd. [2001] 114 Taxman 141 (Bombay HC) (6) JDIT (Int. Tax) vs. KRUPP UHDE GmbH [2009] 26 DTR 289 (Mumbai ITAT): [2010] 1 ITR 614 (Mumbai) (7) Nathpa Jhakri Joint Venture vs. ACIT [2010] 5 ITR 75 (Mumbai ITAT) (8) Coca-Cola India Inc. vs. Addl. CIT [2006] 7 SOT 224 (Delhi ITAT) (9) ITO vs. Dr. Willmar Schwabe India (P) Ltd. [2005] 95 TTJ 53 (Delhi ITAT) 33. He accordingly submitted that reimbursement of Travel and conveyance expenses by the assessee to Granite USA does not warrant any tax deduction under section 195 of the Act. Since the amount as such is not chargeable to tax in India, disallowance under section 40(a)(i) of the Act is uncalled for. 34. Without prejudice to the aforesaid submission, he submitted that the reimbursement of Travel & Conveyance to Granite USA and its various branch offices do not fall within the purview of FTS as defined under section 9(i)(vii) of the Act.
Referring to paragraph 4 of Articles 12 of India – USA DTAA he submitted that Travel & Conveyance expense do not fit into the definition of ‘Fees for Included Services’ (FIS) as defined under India-USA tax treaty/Double Taxation Avoidance Agreement (DTAA).
He accordingly submitted that Travel & Conveyance expenses do not fit anywhere in the above two definitions. Accordingly, making a disallowance by treating them as FTS or FIS in nature for non deduction of tax would be complete injustice & uncalled for.
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So far as reimbursement of Salaries and Allowances of Rs.6,64,77,837 is concerned he submitted that the said amount represents reimbursement of salaries and allowances of seconded employees to Granite USA. The salary and allowances of such seconded employees was paid overseas through Granite USA for the sake of administrative convenience and later, amount equivalent to the salary and allowances so paid was reimbursed by the assessee. The Appellant made appropriate TDS compliance under section 192 of the Act in respect of the salary and allowances paid to such seconded employees. Therefore, the amount paid by assessee to Granite USA towards salaries and allowances is nothing but reimbursement of the cost which was initially incurred by Granite USA on behalf of the assessee. Relying on various decisions, he submitted that being mere reimbursement of Salary and Allowance cost, no deduction of tax is warranted in respect of such amount paid to Granite USA. He relied on the decisions which were cited while arguing disallowance of Travel and Conveyance expenses.
to the aforesaid submission that the Without prejudice reimbursement of salaries and allowances to Granite USA is in the nature of reimbursement of expenses and not liable to tax deduction in India, he submitted that in the case of the assessee, the services provided by seconded employees do not fall in the purview of FIS under India- USA DTAA and therefore, not liable to tax in India. He submitted that in the present case, the employees who were seconded in India were rendering services which were in the nature of erection, installation, commissioning, warranty administration, operation and maintenance, inspection, renovation and modernization in relation to power plants and turbines. The services of the seconded employees are procured on a regular basis and there is no imparting of any technical knowledge, skill or know-how etc. by the seconded employees to the Appellant. He also
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drew attention of the bench to Paragraph 4 of Article 12 of the India- USA DTAA and submitted that the definition of FIS, inter-ali a, requires making available of technical knowledge, experience, skill, know-how etc. The term ‘make available’ has been explained in the Memorandum of Understanding (‘MOU’) forming part of the India- USA DTAA. Relying on various decisions, he submitted that no disallowance u/s. 40 (a) (i) can be made on account of non-deduction of tax from re- imbursement of salaries and allowances. 39. The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer/ TPO/ DRP. 40. We have considered the rival arguments made by both the sides and perused the material available on record. We find identical issue of disallowance u/s. 40 (a) (i) for A. Y. 2011-12 had come up before the Tribunal. We find, the Tribunal in ITA No. 5321/Del/2016 order dated 12.09.2017has restored the issue to the file of the TPO by observing as under :- “14. Ld. AR further argued that the DRP vide paragraph No.6.10(1) directed the AO to compute the disallowance u/s 40(a)(i) of the Act in accordance with the CBDT Circular no. 3/2015 dated 12.02.2015 and the AO was expected to verify the factual situation while computing the disallowance u/s 40(a)(i) of the Act. Ld. Counsel drew our attention to page nos. 547 to 558 of the Paper Book, containing the submissions made by the assessee before the Ld. DRP and submitted that no sufficient time was granted for submitting the response o: the assessee on this aspect, and the AO also did not do any exercise pursuant to the directions of the Ld. DRP but proceeded to compute the disallowance. Ld. AR submits that while computing the disallowance u/s 40(a)(i) of the Act the AC should have considered the factual situation that has a bearing on the computation of disallowance u/s. 40 (a) (i) of the Act. From a reading of the assessment order, we find that the Assessing Officer did not consider any further facts while complying with the directions of the DRP, as such, this fact needs verification at the end of the Assessing Officer, after affording an opportunity to the assessee to furnish the requisite details that have a bearing on the disallowance u/s. 40 (a) (i) of
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the Act. We, therefore, set aside this aspect to the file of the Assessing Officer. ”
Respectfully following the order of the Tribunal in assessee’s own case in the preceding assessment year we deem it proper to restore this issue to the file of the Assessing Officer/TPO for adjudication of the issue afresh. Needless to say, the Assessing Officer / TPO shall give due opportunity of being heard to the assessee and decide the issue as per fact and law. We hold and direct accordingly. The above grounds are accordingly allowed for statistical purposes. 42. Ground of appeal No. 10 relates disallowance of Rs. 517,463/- on account of delayed contribution made to Employees Provident Fund (EPF) 43. Ld. Counsel for the assessee submitted that in the final assessment order, following the directions of DRP, the AO made disallowance of Rs. 5,17,463 on account of delay in deposit of EPF as per the due dates defined under the PF Act. However, the AO ignored the fact that the said EPF contributions have been duly deposited before the filing of return of income and accordingly allowable as per Section 43B of the Act. He submitted that the amount of Rs.517,463/- falling due on 20.06.2011 was deposited on 24.06.2011. The AO merely relying on section 2(24)(x) read with section 36(i)(va) of the Act disallowed the amount of Rs. 5,17,463. Relying on various decisions, he submitted that the amount cannot be disallowed. 44. The Ld. DR on the other hand heavily relied on the order of the Assessing Officer. 45. We have considered the rival arguments made by both the sides and perused the orders of the authorities below. It is an admitted fact that the contributions to employee’s provident fund though deposited
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beyond the prescribed date as per the PF act, however, the same has been deposited prior to the due date of filing of return of income. The co- ordinate Benches of the Tribunal are taking the consistent view that where the EPF is deposited prior to due date of filing of return of income, no disallowance u/s. 43B or 2 (24) (x) read with 36 (1) (va) can be made. Since admittedly the EPF has been deposited prior to due date of filing of return of income, therefore, we hold that no disallowance is called for in the instant case. We, therefore, direct the Assessing Officer to delete the disallowance. The ground raised by the assessee on this issue is accordingly allowed.
Ground of appeal No. 11 and 12 being premature at this juncture are dismissed.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 19.06.2018 Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER *NEHA* Date:- 19 .06.2018 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI
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Date of dictation 18.06.2018 Date on which the typed draft is placed 19.06.2018 before the dictating Member Date on which the typed draft is placed 19.06.2018 before the Other member Date on which the approved draft comes to 19.06.2018 the Sr.PS/PS Date on which the fair order is placed before 19.06.2018 the Dictating Member for Pronouncement Date on which the fair order comes back to 25.06.2018 the Sr. PS/ PS Date on which the final order is uploaded 26.06.2018 on the website of ITAT Date on which the file goes to the Bench Clerk Date on which file goes to the Head Clerk. The date on which file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order