FLOWSERVE INDIA CONTROLS PRIVATE LIMITED,BANGALORE vs. DCIT, BANGALORE

Per Shri Jason P Boaz, A.M. : ORDER ON PETITION FOR CONDONATION OF DELAY IN FILING APPEAL BEFORE ITAT. 1.1.1 Admittedly, there was a delay of 20 days when the appeal filed before the Tribunal on 15.12.2011 by the assessee. The assessee has sought condonaiton of this delay and has filed an Affidavit Sworn to on 25.6.2013 putting forward therein the following reasons for the said delay :-

2 IT(TP)A No.1277/Bang/2011

3 IT(TP)A No.1277/Bang/2011

WHEREFORE, the appellant prays that the Hon'ble Tribunal be pleased to accept the appeal in Form 36 and condone the delay.”

1.1.2 The learned Authorised Representative was heard and reiterated the submissions made by the assessee in the Affidavit. Reliance was also placed on the following judicial pronouncements for condonation of delay in filing the appeal :-

(i) Collector, Land Acquisition V MST Katiji & Others (167 ITR 471)( SC) (ii) Raghavendra Constructions in ITA No.425/Bang/2012 dt.14.12.2012. (iii) Radhakrishna Rai Vs. Allahabad Bank & Others (2009) 9 SCC 733.

4 IT(TP)A No.1277/Bang/2011 (iv) Shakuntala Hegde, L/R of R K Hegde V ACIT in ITA No.2785/Bang/2004. 1.2 Per contra, the learned Departmental Representative opposed the condonation of delay in filing the appeal.

1.3 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncements cited. At the outset, we observe that the Hon'ble Apex Court in the case of MST Katiji (supra) while explaining and laying down the principles that need to be kept in mind while considering an application for condonation of delay has emphasized that substantial justice should prevail over technical considerations. The Hon'ble Court also explained that a litigant does not stand to benefit by lodging the appeal late and that the expression ‘every day’s delay must be explained does not that a pedantic approach should be taken. The doctrine should be applied in a rational, common sense and pragmatic manner. Taking into account the aforesaid principles laid down by the Hon'ble Apex Court and after careful consideration of the submissions / reasons put forth by the assessee in the Affidavit, we are of the opinion that there was no malafide on the part of the assessee ;and there was sufficient and reasonable cause for delay of 20 days delay in filing the appeal. We are also of the view that even if the delay is condoned, there would be no loss to the Revenue as legitimate taxes payable in accordance with law alone will be collected. We, therefore, being of the opinion that this is a fit case for condonation of delay; accordingly

5 IT(TP)A No.1277/Bang/2011 condone the delay in filing this appeal before the Tribunal and admit the appeal for consideration and adjudication. It is ordered accordingly.

O R D E R This appeal by the assessee is directed against the final order of assessment passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') vide order dt.23.9.2011 for Assessment Year 2007-08; in pursuance to the directions issued by the Dispute Resolution Panel (DRP), Bangalore under Section 144C of the Act on 20.9.2011. 2. Briefly stated, the facts of the case are as under :- 2.1 The assessee company, a wholly owned subsidiary of Flowserve Corporation, USA, is engaged in the manufacture of pumps, valves and precision mechanical seals. For the year under consideration, the assessee filed its return of income on 31.10.2007 declaring total income of Rs.13,56,34,717. The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. In view of the international transactions entered into by the assessee with its Associated Enterprises (AE) in the year under consideration, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO) for determining the Arm’s Length Price (ALP) thereof. The TPO passed an order under Section 92CA of the Act dt.27.10.2010 proposing an aggregate adjustment of Rs.4,36,75,742; which comprised of adjustments of Rs.1,17,94,751 under the Design Services Segment and Rs.3,18,80,991 towards management charges. After receipt of the TPO’s order, the Assessing Officer passed the draft order of assessment for Assessment Year 2007-08 under Section 143(3) r.w.s. 144C of the Act

6 IT(TP)A No.1277/Bang/2011 dt.6.12.2010, incorporating, inter alia, the above Transfer Pricing Adjustments proposed by the TPO. Aggrieved with the draft order of assessment, the assessee filed its objections thereto before the DRP which disposed off the assessee's objections and issued its directions under Section 144C of the Act dt.20.9.2011, confirming the adjustments proposed by the TPO. Thereafter, the Assessing Officer concluded the impugned final order of assessment under Section 143(3) r.w.s. 144C of the Act vide order dt.9.1.2014 wherein the assessee's total income, after incorporation of Transfer Pricing Adjustment was determined at Rs.18,09,45,130. Aggrieved by the impugned order of assessment dt.23.9.2011 for Assessment Year 2007-08, the assessee has filed this appeal before the Tribunal. 3.1 Along with the present appeal proceedings before the Tribunal, the assessee had filed an application for Mutual Agreement Procedure (MAP) before the competent authority under Article 25 of the India-USA DTAA with respect to the Transfer Pricing Adjustment made towards management fees. The MAP proceedings concluded and the resolution / conclusions thereof and the decision on margins were conveyed to the assessee by the Assessing Officer vide letter dt.27.7.2017. Pursuant thereto, the assessee filed revised grounds of appeal vide letter dt.3.10.2017, whereby the assessee has withdrawn the appeal related to ‘Management Charges’ and had retained other grounds, including those related to adjustments made towards Design Services Segment. 3.2 The assessee has two manufacturing divisions, one manufacturing pumps and the other manufacturing valves. The assessee

7 IT(TP)A No.1277/Bang/2011 also renders engineering and design services to its AEs. The segmental details were provided by the assessee before the TPO and the TPO has accepted the transactions related to the manufacturing segment to be at arm’s length and did not propose any adjustment in this segment. However, the TPO determined the ALP of management charges to be NIL. The TPO also rejected the comparability analysis carried out by the assessee, with regard to the Design and Engineering Services Segment and conducted his own TP Study. While doing so, the TPO characterized the design services as ‘ITES’ ; conducted his own comparability analysis, selected a set of 20 comparable companies and determined the margin at 23.65% thereby making an adjustment of Rs.68,31,724 to the Design and Engineering Services Segment. The entire management charges of Rs.7,70,99,285 was added to income of the assessee by way of an adjustment by treating its ALP to be NIL. Before us, the learned Authorised Representative for the assessee submitted a copy of the letter of the Assessing Officer dt.27.7.2017 conveying the MAP resolution of Management Charges for five years, ie. Assessment Years 2007-08 to 2011-12 in the case on hand and therefore the grounds raised under “Management Charges” stands withdrawn. 4. The revised grounds of appeal filed after withdrawal of the appeal / grounds related to Management Charges.

“ I. Transfer Pricing 1. The learned Assessing Officer ("AO") and the learned Additional Commissioner of Income Tax (Transfer Pricing - I), Bangalore ("Transfer Pricing Officer" or "TPO") grossly erred in law and facts of the case in determining the arm's length

8 IT(TP)A No.1277/Bang/2011 price ("ALP") of the international transaction of the Appellant and thereby making an adjustment of Rs.1l,794,751 with respect to the design and engineering services rendered by the Appellant u/s.92CA of the Income Tax Act.

A. Design and engineering services 2. That on the facts and circumstances of the case, the learned AO and the learned TPO erred in rejecting the Transfer Pricing ("TP") documentation without appreciating the contentions, arguments, and evidentiary data furnished by the Appellant during the course of the proceedings before them, and in doing so have grossly erred: 2.1. in characterizing the design and engineering services rendered by the Appellant as information technology enabled services ("ITES") and comparing the same with business process outsourcing ("BPO") services; 2.2. in rejecting the comparability analysis carried in the TP documentation and conducting a fresh comparability analysis for determining the arm's length price by the learned TPO; 2.3. in adopting the alleged arm's length mark up at 28.65% in respect of the international transaction pertaining to the rendering of design and engineering services by the Appellant; 2.4. in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Income-tax Act, 1961 ('the Act'), which in many instances are inconsistent with the data disclosed in audited reports; 2.5. in considering 25 percent as the threshold limit for the Related Party Transactions filter arbitrarily without any judicial precedence or reasonable basis; and 2.6. That the learned TPO and the learned AO erred in concluding that the assessee is exposed to single customer risk without evaluating the business arrangement of the Appellant. 3. That the learned TPO and the learned AO erred in disregarding the use of multiple year data, instead of accepting the use of contemporaneous data due to non-availability of current year data in the public domain at the time of preparing the

9 IT(TP)A No.1277/Bang/2011 documentation. 4. That the learned TPO and the learned AO erred in not allowing the benefits of market risk adjustment to the Appellant.

6.1. The learned Assessing Officer (AO) has erred in re- computing the deduction under section lOA and lOB of the Act by adjusting the following expenses from the Export Turnover: 6.2. The learned AO has erred in reducing foreign travel expenditure incurred in foreign currency from Export Turnover unit by considering the same as attributable to providing technical services outside India for the purpose of computing the deduction under section lOA and lOB of the Act.

6.3. The learned AO ought to have appreciated that the STPI unit of the Appellant is engaged in creating drawings using CAD/CAM softwareas per the specifications and inputs provided by the group companies and hence, there would be no instances of technical services being provided outside India.

6.4. The learned AO erred in ignoring the fact that freight expenditure pertaining to the EOU unit of Rs. 3,217,117 was incurred towards carriage of goods from the factory to the custom station in India and not towards delivering goods Jutside India and should not be reduced from the Export Turnover of the lOB unit of the Appellant.

6.5. The learned AO ought to have observed that the definition of 'Export Turnover' as per section lOA and lOB of the Act provides that 'freight, telecommunication charges or insurance attributable to the delivery of the

10 IT(TP)A No.1277/Bang/2011 article or things or computer software outside India should be reduced from Export Turnover.' Hence, expenditure that may be reduced from the Export Turnover should be such expenditure which is attributable to the delivery of the articles/software outside India. The learned AO ought to have appreciated the fact that for an expense to be considered as 'attributable' to some activity, it should have been specifically and exclusively incurred and identifiable with that activity.

6.6. Notwithstanding and without prejudice to the above, should the travel and freight expenditure reduced from Export Turnover, the same should also be reduced from the Total Turnover in arriving at the deduction under section lOA and lOB of the Act.

6.7. The learned AO also erred in not accepting the contention of the Appellant that the definition of 'Total Turnover' under section 80RRE should be used to compute the deduction under section lOA /lOB of the Act

6.8. Notwithstanding the above, the learned AO further ought to have taken cognizance of the decision of the Jurisdictional High Court Karnataka in the case of Tata Elxsi Ltd. (ITA No. 70 of 2009), dated 30th August 2011, wherein it has been held that if the telecommunication, freight and insurance expenses are reduced from the Export Turnover then the same would also have to be reduced from the Total Turnover in order to compute the deduction under section lOA. 7. Interest levied under section 234B of the Act The learned AO has erred in levying interest under section 234B of Rs.8,138,410 which is consequential in nature.

11 IT(TP)A No.1277/Bang/2011 6. Ground Nos.2 to 5 – Design &Engineering Services. 6.1 Several grounds (supra) have been raised in respect of the Design & Engineering Services Segment. 6.2.1 The assessee has also filed a letter dt.3.10.2017 i.e. an application under Rule 11 of ITAT Rules, 1963 seeking permission for raising additional grounds, inter alia, specifying the companies that are to be excluded from the set of comparable companies; the companies it seeks inclusion in the set of comparable companies applying the employee cost filter of 25% on sales, etc. which are extracted hereunder :- “ Ground No. 2.2.1: The Learned Transfer Pricing Officer (“Ld. TPO”)/Learned Assessing Officer (“Ld. AO”) and Hon’ble Dispute Resolution Panel (“Hon’ble DRP”) erred in not rejecting the following companies from the list of comparable companies proposed by the Ld. TPO: • Accentia Technologies Limited; • Asit C Mehta Financial Services Limited; • Bodhtree Consulting Limited; • Caliber Point Business Solutions Limited; • Eclerx Services Limited; • HCL Comnet Systems & Services Limited; • ICRA Techno Analytics Limited; • Informed Technologies India Limited • Infosys BPO Limited; • Maple E-solutions Limited; • Mold-Tek Technologies Limited; • R Systems International Limited; • Spanco Limited; • Vishal Information Technologies Limited; • Wipro Limited; and • Accurate Data Converters Limited Reason for filing Additional Ground of Appeal

12 IT(TP)A No.1277/Bang/2011 The Appellant submits that a ground pertaining to rejection of companies not comparable to the Appellant has already been included in the grounds of appeal as Ground no. 2.2. However, for the sake of clarity, the Appellant is filing this additional ground, specifying the companies that are to be excluded. The Appellant relies on various judicial precedents to validate the ground taken. Therefore, by applying similar approach the Appellant humbly requests the Hon’ble bench members to reject the above-mentioned companies. Ground No. 2.2.2: The Ld. TPO/ Ld. AO/ Hon’ble DRP erred in rejecting companies that ought to have been included as comparable companies: • Ace Software Exports Limited; • Akshay Software Limited; • Colour Chips India Limited; • Essel Softwares & Services Limited; • Tata Elxsi Limited; • Technosoft Information Technologies (India) Limited; and • Zigma Software Limited Reason for filing Additional Ground of Appeal The Appellant submits that a ground pertaining to inclusion of companies that are comparable to the Appellant has already been included in the grounds of appeal as Ground no. 2.2. However, for the sake of clarity, the Appellant is filing this additional ground, specifying the companies that are to be included. The Appellant relies on various judicial precedents to validate the ground taken. Therefore, by applying similar approach the Appellant humbly requests the Hon’ble bench members to accept the above-mentioned companies. Ground No. 2.7: The Ld. TPO/ Ld. AO/ Hon’ble DRP erred in not applying employee cost filter of greater than 25% on sales while selecting the comparable companies. Reason for filing Additional Ground of Appeal The Appellant during the proceedings before the Hon’ble DRP had raised the above ground. However, it is submitted that due to clerical oversight, the ground was omitted to be included in the Form 36B preferred before this Hon’ble ITAT. Accordingly, the Appellant humbly requests the Hon’ble Bench members to accept the above ground. Ground No. 2.8: The Appellant seeks exclusion of the following companies from the list of companies proposed as comparables by the Ld. TPO. • Allsec Technologies Limited; • I Services India Private Limited; and

13 IT(TP)A No.1277/Bang/2011 • Triton Corp Limited Reason for filing Additional Ground of Appeal The Appellant submits that it had not raised grounds for rejection of the above-mentioned companies before the Ld. TPO or before the Hon’ble DRP due to lack of relevant details during that time. However, subsequent to filing the Form 36B, the Appellant has come to the notice that by way of various tribunal rulings the above- mentioned companies have been directed to be rejected. Therefore, by applying similar approach the Appellant humbly request the Hon’ble bench members to reject the above-mentioned companies.”

6.2.2 We have heard the rival contentions on the issue of raising of the additional grounds (supra), the reasons cited by the assessee for raising the same and material on record. After due consideration of the assessee's plea, we are of the view that since the issues raised could go to the very root of the transfer pricing dispute before us and would not require examination of fresh facts other than those already on record, in keeping with the principles laid down by the Hon'ble Apex Court in the case of NTPC Ltd. (229 ITR 383) (SC) we admit the additional grounds raised for consideration and adjudication. 6.3.1 In the course of proceedings before the Bench, the learned Authorised Representative for the assessee drew our attention to Ground No.2.1, wherein the assessee has assailed the decision of the TPO in characterizing the Design and Engineering Services rendered by the assessee as ITES and comparing the same with BPO companies. According to the learned Authorised Representative, this characterization of the assessee by the TPO as an “ITES Service Provider” is patently wrong. In this regard, the learned Authorised Representative put forth the following submissions :-

14 IT(TP)A No.1277/Bang/2011 (i) The TPO had accepted the characterization of these services as “Design and Engineering Services” in the earlier two years i.e. Assessment Years 2005-06 and 2006-07. (ii) As per the FAR analysis, this segment constitutes developing drawings of mechanical seals in 2D and 3D and provides support as a back office design and drawing services to its AEs worldwide and as such, these services are significantly different from ITES. (iii) The fact that the assessee has got certain patents registered for the design and engineering services establishes that it is not providing ITES. (iv) For Assessment Year 2011-12, the assessee has opted for MAP resolution for the adjustment made under Design & Engineering Services and as per the MAP resolution, the CBDT has accepted the services as Design & Engineering Services. In view of the above submissions, the learned Authorised Representative contended that the characterization of the assessee's services rendered to its AEs in this segment as “ITES” was wrong and the same should have been characterized as “Design and Engineering Services”. 6.3.2 As an alternate argument, learned Authorised Representative submitted that the assessee has got partial relief from MAP resolution with respect to payments of “Management Charges”, pursuant to which there should be a revision in the operating margin of the assessee. Therefore, the TPO should rework the margin of the assessee pursuant to MAP resolution and the adjustments needs to be reworked. In support of this alternate contention, it was pointed out that the Assessing Officer

15 IT(TP)A No.1277/Bang/2011 himself has reworked the margin for Assessment Year 2011-12 as “Management Charges” has been partially disallowed as evidenced in the Assessing Officer’s letter dt.27.7.2017, conveying the MAP resolution to the assessee. It is submitted that in view of the above, the TPO should re-examine this issue afresh in the light of the submissions put forth above. 6.4 Per contra, the learned Departmental Representative while agreeing to the proposal that the issue requires a fresh examination, pointed out that the assessee has identified itself as an ITES provider in the search process. 6.5.1 We have carefully considered the submissions made and the material on record and are of the view that it was not correct to characterize the assessee as providing ITES. First of all, the TPO does not appear to be following a consistent position over the years. Further, in Assessment Year 2011-12, Revenue has also accepted the services rendered by this segment as ‘Engineering & Design Services’. We also find that the characterization is not in tune with the functional analysis done in the TP Study as the TPO has not brought on record any evidence which might establish that the characterization has to be ITES only. In view of the unclear / unestablished factual position as emerges from an appreciation of the details on record, we deem it appropriate to remand the matter back to the file of the TPO and direct that the characterization of the assessee shall be done in accordance with law, after affording the assessee adequate opportunity of being heard and to make submissions and file details etc required which shall be duly considered.

16 IT(TP)A No.1277/Bang/2011 Consequently, Grounds 2 to 5 and the additional ground (supra) are treated as allowed for statistical purposes. 7. Ground No.6 – Deduction u/s.10A of the Act. 7.1 This ground (supra), is related to the computation of deduction under Section 10A of the Act. The learned Authorised Representative for the assessee submitted that only Ground No.6.6, seeking parity between export turnover and total turnover is pressed and this aspect is squarely covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. (349 ITR 98) (Kar.) 7.2 We have heard the rival contentions, perused and carefully considered the material on record; including the judicial pronouncement cited. The issue before us is the assessee's plea for exclusion of expenses incurred on freight and travel in foreign currency from both export turnover as well as the total turnover. This issue is no longer res integra and is covered by the judgment of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. (supra), wherein it has been held that if certain expenses are excluded from export turnover, the same should be excluded from total turnover. Respectfully following the aforesaid decision of the Hon'ble Karnataka High Court (supra), we reverse the decision of the learned CIT (Appeals) and direct the Assessing Officer to compute the deduction under Section 10A of the Act by reducing the said expenses from both export turnover and total turnover. Consequently, Ground 6.6 of the assessee's appeal is allowed.

17 IT(TP)A No.1277/Bang/2011 8. Ground Nos.7 & 8 - Charging of interest under

Section 234B & 234D of the Act.

8.1 In these grounds, the assessee denies itself liable to be charged interest under Section 234B & 234D of the Act. The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala (252 ITR 1) (SC) and we therefore uphold the action of the Assessing Officer in charging the said interest in the case on hand. The Assessing Officer is, however, directed to recompute the interest chargeable under Section 234B & 234D of the Act, if any, while giving effect to this order.

Order pronounced in the open court on the 2nd day of May, 2018.

Sd/- Sd/- (SUNIL KUMAR YADAV) (JASON P BOAZ) Judicial Member Accountant Member Bangalore, Dt.02.05.2018

*Reddy gp

18 IT(TP)A No.1277/Bang/2011 Copy to : 1 Appellant 4 CIT(A) 2 Respondent 5 DR. ITAT, Bangalore 3 CIT 6 Guard File

Senior Private Secretary Income Tax Appellate Tribunal Bangalore.