GRANITE SERVICES INTERNATIONAL INDIA PVT. LTD.,GURGAON vs. DCIT, NEW DELHI

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

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.

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.

3. 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.

4. 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.

6. 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.

7. 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.

8. 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.

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.

11. 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.

12. 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.”

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.

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.

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.

‘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, 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.

“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.

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

“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 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. ”

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.

27. 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 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.

28. 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.

29. 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”

(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)

(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)

(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.

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 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.