DONGFANG ELECTRIC (INDIA) PVT. LTD.,KOLKATA vs. ACIT,CIRCLE-14(1), KOL, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘C’ BENCH, KOLKATA (Before Sri J. Sudhakar Reddy, Accountant Member & Sri Aby T. Varkey, Judicial Member) Assessment Year: 2012-13 Dongfang Electric (India) Pvt. Ltd..................................................................……………….…......Appellant Plot No. AH-5 Premises No. 16-1111 Action Area –IA New Town Kolkata – 700 107 [PAN : AACCD 9336 K] Vs. Asstt. Commissioner of Income Tax, Circle-14(1), Kolkata……..................………....…....Respondent Appearances by: Shri Nageshwar Rao, Advocate, appeared on behalf of the assessee. Dr. P.K. Srihari, CIT Sr. D/R, appearing on behalf of the Revenue. Date of concluding the hearing : August 29th, 2019 Date of pronouncing the order : October 23rd, 2019 ORDER Per J. Sudhakar Reddy, AM :-

This appeal filed by the assessee is directed against the order of Assessing Officer passed u/s 143(3) r.w.s. 144C(5) of the Income Tax Act, 1961 (the ‘Act’), dt. 25/11/2016, for the Assessment Year 2012-13.

Assessment Year: 2012-13 Dongfang Electric (India) Pvt. Ltd For the purpose of determining the arm’s length for the combined transaction of For the purpose of determining the arm’s length for the combined transaction of For the purpose of determining the arm’s length for the combined transaction of payment of service charges and royalty, TNMM was chosen as MAM and OP/OR was payment of service charges and royalty, TNMM was chosen as MAM and OP/OR was payment of service charges and royalty, TNMM was chosen as MAM and OP/OR was considered as PLI. The tested party margin was worked out at 0.62 % and was . The tested party margin was worked out at 0.62 % and was . The tested party margin was worked out at 0.62 % and was considered as ALP. The TPO identified fresh comparables for both the trading segment and technical The TPO identified fresh comparables for both the trading segment and technical The TPO identified fresh comparables for both the trading segment and technical segment and computed the ALP and recommended adjustments in both the segments. segment and computed the ALP and recommended adjustments in both the segments. segment and computed the ALP and recommended adjustments in both the segments. Though, the assessee gave detailed justification for working capital adjustment, the TPO ee gave detailed justification for working capital adjustment, the TPO ee gave detailed justification for working capital adjustment, the TPO did not grant the same. Objections were raised before the DRP. did not grant the same. Objections were raised before the DRP. The DRP rejected the contention of the assessee that the TPO has not provided The DRP rejected the contention of the assessee that the TPO has not provided The DRP rejected the contention of the assessee that the TPO has not provided the assessee with the details of the search the assessee with the details of the search process employed by him for selecting the employed by him for selecting the comparables. This, in our view, is violation of principles of natural justice. The DRP comparables. This, in our view, is violation of principles of natural justice. The DRP comparables. This, in our view, is violation of principles of natural justice. The DRP upheld the order of the TPO to a large extent. As the DRP had not adjudicated all the upheld the order of the TPO to a large extent. As the DRP had not adjudicated all the upheld the order of the TPO to a large extent. As the DRP had not adjudicated all the objections raised by the assessee, a rec objections raised by the assessee, a rectification petition was filed and in response, the tification petition was filed and in response, the DRP issued modified directions dt. 22 DRP issued modified directions dt. 22nd March, 2017. 2.2. The Assessing Officer passed and order u/s 143(3) r.w.s. 144C(5) of the Act on The Assessing Officer passed and order u/s 143(3) r.w.s. 144C(5) of the Act on The Assessing Officer passed and order u/s 143(3) r.w.s. 144C(5) of the Act on 25/11/2016, determining the total income of the assessee at Rs.3,94, 25/11/2016, determining the total income of the assessee at Rs.3,94, 25/11/2016, determining the total income of the assessee at Rs.3,94,68,890/- interalia making adjustment/additions /additions under the transfer pricing provisions, interest on tax, provisions, interest on tax, preliminary expenses and disallowance u/s 40A(3) of the Act. Other corporate preliminary expenses and disallowance u/s 40A(3) of the Act. Other corporate preliminary expenses and disallowance u/s 40A(3) of the Act. Other corporate disallowances were also made. made. Before us, the assessee disputes the Transfer Before us, the assessee disputes the Transfer Pricing (TP) adjustments made Pricing (TP) adjustments made with regard to the technical services segment i.e., chnical services segment i.e., payment for technical services. technical services. Though the assessee has raised a number of grounds, the issue Though the assessee has raised a number of grounds, the issue Though the assessee has raised a number of grounds, the issues that was argued before us, are regarding the are regarding the inclusion and exclusion of certain comparable companies, n comparable companies, for the purpose of computation of arms’ length price. for the purpose of computation of arms’ length price. Hence we adjudicate only the issue Hence we adjudicate only the issue as to whether a particular company is to be included as a comparable company or not as to whether a particular company is to be included as a comparable company or not as to whether a particular company is to be included as a comparable company or not for the purpose of computation of ALP of the international for the purpose of computation of ALP of the international transaction. transaction.

Assessment Year: 2012-13 Dongfang Electric (India) Pvt. Ltd 4. As regards inclusion/exclusion of comparable companies: /exclusion of comparable companies:- Cades Digitech Private Limited: Cades Digitech Private Limited:- The DRP vide rectification order dt. 22 The DRP vide rectification order dt. 22nd March, 2017, directed the Transfer Pricing Officer (TPO) to verify the financial results to retain 2017, directed the Transfer Pricing Officer (TPO) to verify the financial results to retain 2017, directed the Transfer Pricing Officer (TPO) to verify the financial results to retain the comparable, in case, he finds the cla the comparable, in case, he finds the claim of the assessee as correct. The TPO had im of the assessee as correct. The TPO had earlier excluded this comparable on the presumption that it incurred persistent loss. earlier excluded this comparable on the presumption that it incurred persistent loss. earlier excluded this comparable on the presumption that it incurred persistent loss. The financials presented by the assessee The financials presented by the assessee states that this company had earned profit that this company had earned profit before tax for the financial years 2009 for the financial years 2009-10 to 2011-12. It was also 12. It was also claimed that the assessee had earned operating profits for the Assessment Year 2009 assessee had earned operating profits for the Assessment Year 2009 assessee had earned operating profits for the Assessment Year 2009-10 to 2011-12. Thus, this company was excluded as a comparable on wrong assumption of facts by the Thus, this company was excluded as a comparable on wrong assumption of facts by the Thus, this company was excluded as a comparable on wrong assumption of facts by the TPO. Not carrying out the directions of the DRP b Not carrying out the directions of the DRP by the TPO/Assessing Officer, y the TPO/Assessing Officer, is not in accordance with law. Thus, we direct the TPO/Assessing Officer to include . Thus, we direct the TPO/Assessing Officer to include . Thus, we direct the TPO/Assessing Officer to include “Cades Digitech Pvt. Ltd.”, as a comp , as a comparable, while computing the ALP after verification of this arable, while computing the ALP after verification of this claim of the assessee, that the company had claim of the assessee, that the company had earned profits from Financial Year 2009 earned profits from Financial Year 2009-10 to 2011-12. Telecommunications Consultants India Ltd. (Seg): Telecommunications Consultants India Ltd. (Seg):- The DRP vide rectification The DRP vide rectification order dt. 22nd March, 2017, directed the Transfer Pricing Officer (TPO) to verify the March, 2017, directed the Transfer Pricing Officer (TPO) to verify the March, 2017, directed the Transfer Pricing Officer (TPO) to verify the financial results and to retain th retain the comparable, in case, he finds the claim of the assessee e comparable, in case, he finds the claim of the assessee is correct. The TPO had earlier excluded this comparable on the presumption that it correct. The TPO had earlier excluded this comparable on the presumption that it correct. The TPO had earlier excluded this comparable on the presumption that it incurred persistent loss. The financials presented by the assessee incurred persistent loss. The financials presented by the assessee incurred persistent loss. The financials presented by the assessee claims that this company had earned profit befo company had earned profit before tax for the financial years 2009-10 & 2011 10 & 2011-12. It was also claims that the assessee had earned operating profits for the Assessment Year that the assessee had earned operating profits for the Assessment Year that the assessee had earned operating profits for the Assessment Year 2009-10 to 2011-12. Not carrying out the directions of the DRP by the TPO/Assessing 12. Not carrying out the directions of the DRP by the TPO/Assessing 12. Not carrying out the directions of the DRP by the TPO/Assessing Officer, is not in accordance wi is not in accordance with law. Wrongful assumption of facts resulted in this th law. Wrongful assumption of facts resulted in this company being excluded as a comparable company being excluded as a comparable. Thus, we direct the TPO/Assessing Officer to . Thus, we direct the TPO/Assessing Officer to include Telecommunications Consultants India Ltd., as a comp include Telecommunications Consultants India Ltd., as a comparable, while computing arable, while computing the ALP after verifying the claim the ALP after verifying the claim of the assessee that it had in fact earned profits, in the of the assessee that it had in fact earned profits, in the earlier years. Accuspeed Engineering Services India Ltd.: Accuspeed Engineering Services India Ltd.:- The DRP vide rectification order dt. The DRP vide rectification order dt. 22nd March, 2017, directed the Transfer Pricing Officer (TPO) to verify the financial March, 2017, directed the Transfer Pricing Officer (TPO) to verify the financial March, 2017, directed the Transfer Pricing Officer (TPO) to verify the financial results to retain the comparable, in case, he finds the claim of the assessee as correct. ain the comparable, in case, he finds the claim of the assessee as correct. ain the comparable, in case, he finds the claim of the assessee as correct. The TPO had earlier excluded this comparable on the presumption that it incurred The TPO had earlier excluded this comparable on the presumption that it incurred The TPO had earlier excluded this comparable on the presumption that it incurred Assessment Year: 2012-13 Dongfang Electric (India) Pvt. Ltd persistent loss. The financials presented by the assessee persistent loss. The financials presented by the assessee claimed that this company had that this company had earned profit before tax for the financial years 2009 it before tax for the financial years 2009-10 & 2011-12. It was also 12. It was also claimed that the assessee had earned operating profits for the Assessment Year 2009 that the assessee had earned operating profits for the Assessment Year 2009 that the assessee had earned operating profits for the Assessment Year 2009-10 to 2011-12. Not carrying out the directions of the DRP by the TPO/Assessing Officer, is 12. Not carrying out the directions of the DRP by the TPO/Assessing Officer, is 12. Not carrying out the directions of the DRP by the TPO/Assessing Officer, is not in accordance with law. Thus, we direct the TPO/Assessing Officer to include . Thus, we direct the TPO/Assessing Officer to include . Thus, we direct the TPO/Assessing Officer to include Accuspeed Engineering Services India Ltd. (Seg) Engineering Services India Ltd. (Seg), as a comparable, while computing the ALP after arable, while computing the ALP after verifying this claim of the assessee that it is not a persistent loss making company. verifying this claim of the assessee that it is not a persistent loss making company. verifying this claim of the assessee that it is not a persistent loss making company. Tata Consulting Engineering Ltd. (TCEL): Consulting Engineering Ltd. (TCEL):- The functional profile of the assessee The functional profile of the assessee company is different from the functional profile of Tata Consulting Engineering Ltd. The company is different from the functional profile of Tata Consulting Engineering Ltd. The company is different from the functional profile of Tata Consulting Engineering Ltd. The assessee company is engaged in the business of service in the field of power and also assessee company is engaged in the business of service in the field of power and also assessee company is engaged in the business of service in the field of power and also provides after sales service to its customers des after sales service to its customers, whereas TCEL is in the field of project, as TCEL is in the field of project, consultancy and management services which includes design and engineering consultancy and management services which includes design and engineering consultancy and management services which includes design and engineering consultancy. TCEL is engaged in multifarious activities. Segmental data is not available. is engaged in multifarious activities. Segmental data is not available. is engaged in multifarious activities. Segmental data is not available. On these facts, the ld. D/R, agreed that this company cannot be taken as a comparable. he ld. D/R, agreed that this company cannot be taken as a comparable. he ld. D/R, agreed that this company cannot be taken as a comparable. In view of the above, we direct the TPO/Assessing Officer to exclude TCEL as a In view of the above, we direct the TPO/Assessing Officer to exclude TCEL as a In view of the above, we direct the TPO/Assessing Officer to exclude TCEL as a comparable while computing the ALP. comparable while computing the ALP. Acropetal Technologies Ltd.: Acropetal Technologies Ltd.:- This company is engaged in IT Industry and 79% of is engaged in IT Industry and 79% of its revenue is from IT. It is also engaged in R&D activities. The DRP in its rectification its revenue is from IT. It is also engaged in R&D activities. The DRP in its rectification its revenue is from IT. It is also engaged in R&D activities. The DRP in its rectification order dt. 22nd March, 2017, directed the TPO to verify the margin and use the correct March, 2017, directed the TPO to verify the margin and use the correct March, 2017, directed the TPO to verify the margin and use the correct figures. The TPO is bound by the directio figures. The TPO is bound by the directions of the DRP. In view of the above discussion, ns of the DRP. In view of the above discussion, the TPO is directed to exclude the comparable while computing the ALP. the TPO is directed to exclude the comparable while computing the ALP. the TPO is directed to exclude the comparable while computing the ALP. After conducting the verification as directed by the DRP. conducting the verification as directed by the DRP. 4.1. The ld. Counsel for the assessee submitted that he would not be insisting The ld. Counsel for the assessee submitted that he would not be insisting The ld. Counsel for the assessee submitted that he would not be insisting on the inclusion of the following comparables inclusion of the following comparables, if his pleadings on the issue of other his pleadings on the issue of other comparables have been accepted by the Bench comparables have been accepted by the Bench:- 1) Simon India Ltd. Simon India Ltd. 2) MN Dastur & Co. Pvt. Ltd. MN Dastur & Co. Pvt. Ltd. 3) Mahindra Consulting Engineers Ltd. Mahindra Consulting Engineers Ltd. Hence, we do not adjudicate the inclusion or Hence, we do not adjudicate the inclusion or exclusion of the above three exclusion of the above three companies. We have these issues open for adjudication at the appropriate time. We have these issues open for adjudication at the appropriate time. We have these issues open for adjudication at the appropriate time.

Assessment Year: 2012-13 Dongfang Electric (India) Pvt. Ltd 5. The next argument of the assessee is that work The next argument of the assessee is that working capital adjustment is to be capital adjustment is to be granted. The DRP on this issue, on this issue, has directed as follows:- “The Panel directs the TPO to verify the margin calculations and correct if any l directs the TPO to verify the margin calculations and correct if any l directs the TPO to verify the margin calculations and correct if any errors are there. The adjustment in working capital has to be given errors are there. The adjustment in working capital has to be given in case, the in case, the assessee is able to make out a case for varying profile of working capital and assessee is able to make out a case for varying profile of working capital and assessee is able to make out a case for varying profile of working capital and that adjustment is called that adjustment is called for. The assessee did not establish it before the panel. for. The assessee did not establish it before the panel. The panel is hence not able to allow the adjustment to the assessee. This The panel is hence not able to allow the adjustment to the assessee. This The panel is hence not able to allow the adjustment to the assessee. This objection is hence dismissed.” objection is hence dismissed.” 5.1. In view of the above, the TPO is directed to consider the claim of the assessee for In view of the above, the TPO is directed to consider the claim of the assessee for In view of the above, the TPO is directed to consider the claim of the assessee for working capital adjustment afresh. This is ing capital adjustment afresh. This is in line with the directions given by the in line with the directions given by the Tribunal in the assessee’s own case in Assessment Year Tribunal in the assessee’s own case in I.T.A. No. 2356/Kol/2017; Assessment Year Tribunal in the assessee’s own case in I.T.A. No. 2356/Kol/2017; Assessment Year 2013-14. Hence this ground of the assessee is allowed for statistical purposes 14. Hence this ground of the assessee is allowed for statistical purposes 14. Hence this ground of the assessee is allowed for statistical purposes 6. The assessee, in this case has raised a number of other objections including the in this case has raised a number of other objections including the in this case has raised a number of other objections including the argument that there was no valid reference made to the TPO etc. argument that there was no valid reference made to the TPO etc. It was contended that It was contended that the final assessment order is time barred due to the fact that the reference was made by the final assessment order is time barred due to the fact that the reference was made by the final assessment order is time barred due to the fact that the reference was made by the Assessing Officer to the TPO was, bad in law Officer to the TPO was, bad in law. That as the TPO and the ld. Assessing . That as the TPO and the ld. Assessing Officer completely failed to give effect to the mandatory directions issued by the DRP, Officer completely failed to give effect to the mandatory directions issued by the DRP, Officer completely failed to give effect to the mandatory directions issued by the DRP, final assessment order has to be modified by holding the adjustments made on account final assessment order has to be modified by holding the adjustments made on account final assessment order has to be modified by holding the adjustments made on account of Transfer Pricing (TP). As the ld. Counsel for the assessee submits that, the TP As the ld. Counsel for the assessee submits that, the TP As the ld. Counsel for the assessee submits that, the TP adjustment gets nullified on the inclusion on the inclusion of the comparables Cades Digitech Pvt. Ltd. Cades Digitech Pvt. Ltd., Telecommunications Consultants India Ltd. Telecommunications Consultants India Ltd. and Accuspeed Engineering Services India Accuspeed Engineering Services India Ltd. (Seg), and exclusion of comparable and exclusion of comparables Tata Consulting Engineering Ltd. Tata Consulting Engineering Ltd. and Acropetal Technologies Ltd., if ordered by the Bench, adjudication of all these legal issues would ordered by the Bench, adjudication of all these legal issues would ordered by the Bench, adjudication of all these legal issues would be an academic exercise. Hence we leave these issues open. Hence we leave these issues open.