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Income Tax Appellate Tribunal, “K” Bench, Mumbai
O R D E R Per B.R. Baskaran (AM) :-
The assessee has filed this appeal challenging the assessment order dated 26-10-2017 passed by the assessing officer for assessment year 2013-14 u/s 143(3) r.w.s. 144C(13) of the Act pursuant to the directions given by the Dispute Resolution Panel. 2. The grounds urged by the assessee relate to following three issues:- (a) T.P Adjustment of Rs.1579.94 lakhs (b) Consideration of Liquidated damages as direct expenses for the purpose of computing Gross Profit margin.
(c) Disallowance of employees contribution to PF and ESI.
The assessee company is an Indo-Russian Joint Venture company. The Ministry of Defence of Government of India procured different military hardware and software from Russian company for use by Indian Armed forces. The primary objective of forming the assessee company was to improve “after sales product and services support” for the military hardware and software supplied by its Russian AE. The “after sales services” are primarily provided
2 Rosoboronservice India Ltd. by the Russian AE through the products supplied by it and technical employees deputed by it. It is stated that the assessee has merely facilitated the after sales services by co-ordinating between Ministry of defence and the Russian AE. The Russian company used to raise bill on the assessee company for the product supplied and services rendered, which in turn, would raise bill on the Ministry of Defence by adding its profit. In its T.P study, the assessee did not initially furnish any comparable due to peculiar nature of the “After sales services” provided by the assessee company.
At the insistence of the TPO, the assessee furnished certain comparable companies. The assessee furnished separate set of comparables for “Trading Segment” and “Services Segment”. The TPO determined Arms Length Price of the transactions by segregating the services rendered by the assessee company into two different segments, viz., “Trading segment” for supply of materials and “Services segment” for services actually rendered. The Ld DRP also upheld the same.
The Ld A.R submitted that the assessee has provided only support services, which involve supply of parts and providing services. He submitted that both the activities are composite services and interlinked to each other. Hence the assessee has specifically objected to the segregation of services into “product Segment” and “service Segment” before TPO, but the same was not considered by TPO. He further submitted that the assessee has filed similar objections before Ld DRP also, but the Ld DRP did not address the same in its report.
The Ld A.R further submitted that segregation of composite services is not justified when they are interlinked with each other. In this regard, he took support of the decision rendered by the Tribunal in the following cases:- (a) Boskalis International Dredging International CV vs. DDI (2014)(47 taxmann.com 150)(Mumbai – Trib)
(b) ACIT vs. Gates India (P) Ltd (ITA No.75/Del/2011 dated 31.7.2017)
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The ld A.R submitted that the Tribunal, in the above cited cases, have held that the closely linked transactions or composite transactions have to be examined by considering totality of the transactions.
With regard to the comparables, the Ld A.R submitted that proper opportunity was not provided by TPO to the assessee. Accordingly he submitted that the issue relating to determination of ALP should be examined afresh on composite basis.
8. The Ld D.R, on the contrary, submitted that the facts prevailing in the instant case requires examination for the purpose of ascertaining as to whether they are composite transactions or independent transactions. Accordingly he submitted that these aspects may be restored to the AO to examining the claim of the assessee.
We have heard rival contentions and perused the record. It is the case of the assessee that it is providing “after sales support services”, which would normally involve supply of materials as well as providing of services. According to the assessee, both are composite services and hence the TPO was not right in determining ALP separately for Products and Services. As rightly pointed out by Ld D.R, we are of the view that this specific contention of the assessee requires examination at the end of AO/TPO, since these aspects have not been taken into consideration by them while determining the ALP of the assessee. The co-ordinate bench of Tribunal, in the cases relied upon by the assessee (supra), has expressed the view that the closely linked transactions/composite transactions have to be examined together. Since this contention of the assessee goes to the root of the issue, we are of the view the same needs to be examined at the end of AO/TPO. Accordingly we set aside the matter relating to determination of ALP of the transactions entered by the assessee with its AE to the tile of AO/TPO for examining them afresh by duly considering the various contentions of the assessee.
4 Rosoboronservice India Ltd.
The second issue urged by the assessee relates to the decision of TPO in including liquidated damages as part of direct expenses. The Ld A.R submitted that the liquidated damages are in the nature of damages paid by the assessee for the breach of contract terms and hence the liquidated damages cannot be considered to be part of cost incurred in rendering the services. Accordingly he submitted that the TPO was not correct in law in including the liquidated damages as part of direct expenses for the purpose of computing gross profit margin. In support of his proposition, he placed reliance on the decision rendered by Co-ordinate bench in the case of Emerson Process management (India) P Ltd vs. DCIT (2012)(53 SOT 0281).
On the contrary, the Ld D.R submitted that the liquidated damages have been incurred by the assessee in connection with rendering of services and accordingly submitted that the TPO has rightly included it as part of direct cost.
We heard rival contentions on this issue. The nature of liquidated damages has been examined by the co-ordinate bench in the case of Emerson Process Management (India) (P) Ltd (supra). In the said case, the assessee has pleaded that the liquidated damages should be considered as direct cost, which has been rejected by the Tribunal with the following observations:-
As regards the provision for liquidated damages, the Ld. Counsel for the assessee has submitted that the assessee company has an arrangement with its customers wherein any delay in the order completion is compensated on a mutually agreed basis. He has submitted that this arrangement is in line with industry norms and is made in the normal course of business. He has contended that the same is operating in nature and will have to be considered while working out the operating profit margin of the company. We find it difficult to accept this contention of the Ld. Counsel for the assessee. The liquidated damages are required to be paid only when there is a delay in completion of the order by the assessee company which event is only a contingency and cannot be a regular feature of the business. Moreover, there is nothing on record to show the basis on which provision was made by the assessee for liquidated damages and whether there is any policy consistently adopted by the assessee in making such provision.
5 Rosoboronservice India Ltd.
Having regard to this fact of the case, we find it difficult to accept the contention of the Ld. Counsel for the assessee that the provision for the liquidated damages is a part of operating expenses and the same needs to be taken into account for the purpose of computing OPM. We, therefore, reject the contention raised by the assessee on this issue.
Consistent with the view taken by the co-ordinate bench in the above said case, we hold that the liquidated damages cannot be considered as direct cost for the purpose of computing Gross profit margin.
The Last issue relates to the disallowance of employees’ contribution to PF and ESI on the ground that they have not been remitted within the due date prescribed in the respective Acts. The Ld A.R submitted that the assessee has paid the same within the due date prescribed for filing return of income u/s 139(1) of the Act and hence the same is allowable as deduction as per the decision rendered by Hon’ble Bombay High Court in the case of CIT vs. Ghatge Patil Transports Ltd (2014)9368 ITR 749). In view of the above, we set aside the order passed by the AO on this issue and direct the AO to allow the deduction after satisfying himself that the impugned employees contribution have been remitted before the due date prescribed u/s 139(1) of the Act for filing return of income for the year under consideration.
In the result, the appeal of the assessee is treated as allowed for statistical purposes. Order has been pronounced in the Court on 1.8.2018.