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Income Tax Appellate Tribunal, KOLKATA ‘C’ BENCH, KOLKATA
Before: Shri P.M. Jagtap, Vice-(KZ) & Shri S.S. Viswanethra Ravi
Per Shri P.M. Jagtap, Vice-President (KZ):- This appeal filed by the assessee is directed against the order of ld. Deputy Commissioner of Income Tax, Circle-14(1), Kolkata (Assessing Officer) dated 18.09.2017 passed under section 143(3) read with section 144C(5) of the Income Tax Act, 1961.
The assessee in the present case is a Company, which is engaged in the business of Supervision of Erection & Commission, Repairs & Maintenance and Supply of Spare Parts for various Power Plants and also in Consulting Engineering and Business Auxiliaries. The return of income for the year under consideration was filed by it on 29.11.2013 declaring total income of Rs.6,73,46,720/-. As noted by the Assessing Officer, the Dongfang Electric (India) Private Limited assessee-company during the year under consideration had entered into the following international transactions with its Associated Enterprise:- (i) Import of Spare Parts valued Rs.19,42,22,986/-; (ii) Royalty and fees for Technical Services-Rs.66,62,154/-.
In order to determine the Arm’s Length Price of the abovementioned international transactions entered into by the assessee-company, a reference was made by the Assessing Officer to the Transfer Pricing Officer (TPO) under section 92CA(1) of the Act. In the order passed under section 92CA(3) of the Act dated 28.10.2016, the TPO determined the Arm’s Length Price of the international transactions entered into by the assessee-company with its Associated Enterprise (AE) in Technical Services Segment at Rs.62,23,490/- as against the value of Rs.66,62,154/- paid by the assessee-company to its AE and worked out the Transfer Pricing Adjustment to be made in respect of these transactions at Rs.4,38,664/-. As regards the trading segment involving import of spare parts by the assessee-company from its AE, the Arm’s Length Price of the relevant transactions was determined by the TPO at Rs.18,55,42,179/- as against the price of Rs.19,42,22,986/- paid by the assessee and accordingly the Transfer Pricing Adjustment in respect of these transactions was determined by him at Rs.86,80,807/-. Total Transfer Pricing Adjustment to be made on account of the international transactions of the assessee with its AE thus was worked out by the TPO at Rs.91,19,471/-.
On the receipt of the order under section 92CA(3) from the TPO, Draft Assessment Order dated 25.11.2011 was passed by the Assessing Officer making addition of Rs.91,19,471/- to the total income of the assessee on account of Transfer Pricing Adjustment as worked out by the TPO. Against the draft assessment order of the Assessing Officer, the assessee-company filed its objections before the Dispute Resolution Panel (DRP) and as per the directions given by the DRP vide its order dated
Dongfang Electric (India) Private Limited 25.07.2017 passed under section 144C(5) of the Act, the Transfer Pricing Adjustment to be made in the case of the assessee was recomputed by the TPO at Rs.80,17,341/- (Technical Service Segment Rs.5,31,750/- and Trading Segment Rs.74,85,591/-). Accordingly in the order passed by the Assessing Officer under section 143(3) read with section 144C(5) of the Act on 18.09.2017, addition on account of Transfer Pricing Adjustment of Rs.80,17,341/- was made to the total income of the assessee.
Aggrieved by the order of the Assessing Officer passed under section 143(3) read with section 144C(5) of the Act, the assessee has preferred this appeal before the Tribunal on the following grounds:- “1. That, on the facts and in the circumstances of the case, adjustments made to returned income vide impugned order of assessment framed by the Ld. AO in pursuance to the directions of the DRP under Section 143(3) read with Section 144C(5) of the Act, are bad in law.
2. That, on the facts and in the circumstances of the case, Ld. AO erred on facts and in law in computing total income of the Appellant at Rs 75,364,056 against returned total income of Rs.67,346,720.
3. That, on the facts and in the circumstances of the case, Hon'ble DRP erred in not considering the fact that no valid reference was made under Section 92CA(1) by Ld. AO to the Transfer Pricing Officer ('Ld. TPO') for computing the arm's length price of the International Transactions undertaken by the Appellant.
4. That, on the facts and in the circumstances of the case, the Hon'ble DRP have erred in upholding the action of Ld. TPO in rejecting the Transfer Pricing ('TP') documentation maintained by the company in accordance with the provisions of the Act read with the Income Tax Rules, 1962 and thereby undertaking a fresh search and subsequently making an adjustment of Rs.7,485,591 w.r.t trading segment and Rs. 531,750 w.r.t technical services and royalty segment to the international transactions entered by the company with its Associated Enterprises.
5. That, on the facts and in the circumstances of the case, the Hon'ble DRP have erred in upholding the action of the Ld. TPO in not providing the detailed search process for selecting the companies considered comparable by him w.r.t. spares segment and service and royalty segment.
Dongfang Electric (India) Private Limited
6. That, on the facts and in the circumstances of the case, the Hon'ble DRP has erred in upholding the action of the Ld. TPO in rejecting use of multiple year data for analysis and determining the arm's length margin.
7. That, on the facts and circumstances of the case, whether the Hon'ble DRP erred in upholding the action of the Ld. TPO in applying quantitative and qualitative filters of selection of data for FY 2012-13 only, related party transactions of more than 25 percent of sales and expenditure combined, diminishing revenue and different year ending, without appreciating the specific objections of the assessee .
8. That, on the facts and in the circumstances of the case, the Hon'ble DRP has erred in upholding the action of the Ld. TPO in rejecting the most appropriate method i.e. Resale Price Method ('RPM') adopted by the Appellant for benchmarking the international transaction of import of spares (trading segment).
9(a) That, on the facts and circumstances of the case and in law, the Hon'ble DRP erred in upholding the selection of comparable companies (Acropetal Technologies Ltd and Tata Consulting Engineers Ltd.) as done by the Ld. TPO for technical services and royalty segment.
9(b) That, on the facts and circumstances of the case and in law, the Hon'ble DRP erred in upholding the rejection of comparable companies (Cades Digitech Pvt. Ltd. and Telecommunications Consultants India Ltd.) as selected by the Appellant for technical services and royalty segment.
9(c) That, on the facts and circumstances of the case and in law, the Ld. TPO has erred in not considering the directions of the Hon'ble DRP for the selection of the comparable companies (Accuspeed Engineering Services India Limited and MN Dastur & Co. Pvt. Ud) for determination of arm's length price w.r.t. technical services and royalty segment.
That, on the facts and in the circumstances of the case, Ld. AO! Ld. TPO has erred in not following the directions of the Hon'ble DRP in providing adjustment to the margins of the final comparable companies on account of differences in working capital w.r.t. both the segments (spares segment and technical services and royalty segment) of the Appellant.
That, on the facts and in the circumstances of the case, the Ld. AO in the impugned order has erred in not giving effect to the demand of AY 2013-14 raised vide intimation under section 143(1) of the Act of Rs 7,380,270 (including interest under Dongfang Electric (India) Private Limited section 220(2) of the Act of Rs.351,440) already adjusted with refund of AY 2009-10.
That, on the facts and in the circumstances of the case, the Ld. AO in the impugned order has erred in levying interest under section 2348 and 234C of the Act of Rs.1,565,590 and Rs.129,437 respectively.
That, on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under sections 271 (1 )(c) of the Act.
The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, amend, substitute or withdraw any grounds of appeal in the interest of natural justice either before or during the course of appellate proceedings”.
We have heard the arguments of both the sides and also perused the relevant material available on record. The ld. Counsel for the assessee, at the outset, has argued that the issue involved in Ground No. 10 relating to the claim of the assessee for working capital adjustment. He has submitted that this issue relating to the assessee’s claim for working capital adjustment was raised by the assessee before the DRP and after considering the objection raised by the assessee in this regard, the DRP gave the following directions to the TPO:- “Working capital requirements affect the margins and costs because this is an implication which is recovered /recoverable from the customers. Considering Rule 10B(30 and the facts in this case, working capital adjustment should be made provided reliable data is furnished by the assessee to the TPO. The claim for working capital adjustment has consistently been accepted in several decisions of the ITAT. Considering the facts, the TPO is directed to give working capital adjustment using the methodology given in Annexure to Chapter III of OECD guidelines and apply SBI Prime Lending rate (as on 30th June of the relevant financial year) as the interest rate. The assessee is directed to provide the necessary data/details with computation of the working capital of the tested party and the comparables.
The TPO is directed to take the following consideration while working out the working capital adjustment:
Dongfang Electric (India) Private Limited (a) Compute the average of opening and closing balances of inventories, trade debtors/receivables, trade creditors/payables of both the tested party and the comparables on revenue account only. (b) Work out the net working capital ratio (in percentage) after dividing the net working capital by operating cost/sales or such denominations is used in the PLR both for the tested party and the comparables. (c) Determine the difference between the tested party’s rate with that of the comparables. (d) Thereafter, multiply the above difference by interest rate, i.e. SBI Prime Lending Rate as on 30th June of the relevant financial year. Working capital adjustment relating to working capital which is almost always, raised within the country. The relevant rate of interest is the domestic interest rate for borrowings and not international ..........The assessee has also not claimed that its working capital was financed through international lendings in a foreign currency. Therefore, use of SBI PLR is justified. (e) Lastly, these adjustments are to be added to the profit margin, i.e. comparative companies as finally determined in accordance with the direction of this rate. (f) The TPO is directed to compute the working capital margins in accordance with the above directions”.
The ld. Counsel for the assessee has contended that the aforesaid direction specifically given by the DRP for allowing the working capital adjustment, however, is not followed by the TPO while re-computing the quantum of Transfer Pricing Adjustment and this position clearly evident from the order of the TPO dated 20.08.2017 passed under section 92CA(3) read with section 144C(5) [pages 468 to 470 of the paper book] is not disputed even by the ld. D.R. We, therefore, direct the Assessing Officer/TPO to allow the working capital adjustment while determining the Arm’s Length Price of the relevant international transactions of the Dongfang Electric (India) Private Limited assessee with its AE by following these specific directions given by the DRP. Ground No. 10 of the assesese’s appeal is accordingly allowed.
As regards the other grounds raised by the assessee in this appeal while challenging the addition made on account of Transfer Pricing Adjustment, the ld. Counsel for the assessee has submitted that if the Arm’s Length Price of the relevant international transactions of the assessee with its AE is re-computed by the TPO after allowing the working capital adjustment as per the specific directions given by the ld. DRP, the difference between the Arm’s Length Price so computed and the price paid by the assessee would be within the permissible limit requiring no addition to be made to the total income of the assessee on account of Transfer Pricing Adjustment. As we have directed the Assessing Officer/TPO to allow such working capital adjustment as per the specific directions given by the DRP, the other grounds raised by the assessee in this appeal relating to the issue of Transfer Pricing Adjustment have become infructuous and even the ld. Counsel for the assessee has accepted this position. We accordingly dismiss the said grounds as having become infructuous.
In the result, the appeal of the assessee is partly allowed as indicated above. Order pronounced in the open Court on March 27, 2019.