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Income Tax Appellate Tribunal, KOLKATA BENCH (C
Before: Shri P.M. Jagtap, AM & Shri S.S. Godara, JM]
order : September 12 , 2018 ORDER PER P.M. JAGTAP, AM These two appeals are preferred by the revenue against two separate orders both dated 15.03.2017 passed by the Ld. CIT(A) – 22, Kolkata for A.Y. 2010-11 and 2011-12 and since the solitary issue involved therein relating to deletion by the Ld. CIT(A) of the addition made by the A.O. on account of Transfer Pricing Adjustment is common, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience.
2. The assessee in the present case is a branch of M/s. Steel Plus Ltd., a company incorporated in the Republic of Cyprus. The activity of the assessee is providing Steel Detailing Services. It is an approved STP unit and after claiming deduction u/s 10 of the Act for its entire profit, the return of income for the year consideration was filed by it
2 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited on 17.09.2010 declaring total income at Nil. During the year under consideration, international transactions involving provision of Engineering Design Services were entered into by the assessee with its AE namely Technyx (Canada). In order to determine arm’s length price of the said transactions, reference was made by the AO to TPO u/s 92CA(1) of the Act. In the transfer pricing study report filed along with the return of income, arm’s length price of the said international transactions was determined by the assessee by applying or Transitional Net Margin Method (TNMM) with Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI). Total 5 entities were selected as comparables and since their average OP/OC as worked out in the TP study report at 5.61% was less than the OP/OC of 12.78% as declared by the assessee, price charged in the international transactions with its AE was claimed to be at arm’s length by the assessee.
3. The TPO accepted the TNMM adopted by the assessee as the most appropriate method for determining the arm’s length price of the international transactions entered into by the assessee with its AE. He also accepted OP/OC as the profit level indicator. He however worked out the OP/OC by making certain changes in the working furnished by the assessee at 11.27% instead of 12.78%. As regards the 5 entities selected as comparables in the TP study report, the Assessing Officer rejected after applying different criterias, 4 entities taken as comparables for the following reasons given in his order: SL No. Name of the Remark comparable 1. M/s. Cades The company has accumulated losses Digitech (P) Ltd. of Rs. 50.59 crore as at 31st of March 3 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited 2010 which had significantly eroded its net worth. Consequently this creates a substantial doubt about the companies ability to continue as a going concern. Further the company was acquired by axis I T and T Ltd. with effect from 24th October, 2009. Further to augment its resources the company has infused 17.50 crore as a subordinate debt from Asianet TV Holding Pvt. Ltd. Because of this abnormal situation this company cannot be considered as comparable accordingly rejected.
2. M/s. Harita This company has negative net worth. TechServ Ltd. Hence not considered as comparable.
3. M/s. I Design This company is taken as comparable. Engineering Solutions (P) Ltd.
4. M/s. Autoline The segment of the company has Design Software income less than 1 crore. More the Ltd. company has related party transaction greater than 25%.
M/s. Trishul The data for F.Y 2009-10 is not Engineering available. The assessee is required to Solutions (P) Ltd. submit the annual report of the company. From the submission of the assessee it is found that the total sales of the company is less than 1 crore. The company is also into persistent loss.
Even the only entity taken in the TP study report as comparables and accepted initially by the TPO namely M/s. I-Design and Engineering Solutions Pvt. Ltd. was subsequently rejected by the TPO on the ground that the income of the said entity from design charges was minuscule as compared to other income.
The TPO then proceeded to make his own search and selected the following 4 entities as functionally comparable to the assessee: SL No. Company Description 4 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited 1. Acropetal Acropetal Technologies Limited (ATL) Technologies Ltd. focuses on Engineering Design Services and it offers a broad spectrum of Engineering Design Services to reduce product design cycle time and costs. The portfolio of services includes concept design, product design and development, advances analysis, reliability engineering and value engineering.
ASE Structure ASE Structure Design Pvt. Ltd. was Design Pvt. Ltd. incorporated in the year 2003 to offer offshore CADD and engineering design services enabling companies to optimize their costs, increase their capacities and to win global projects through timely, accurate and quality work. The company is an execution partner to Telecom Infrastructure Design & Engineering Design house around the world.
Babcock Borsig BBSPL is a multi-disciplinary design Softtech (P) Ltd. and detailed engineering consultancy company based at Chennai. The company was originally a 100% subsidiary of IDEA (International Development and Engineering Associates Ltd.) and has reputed customers in India and abroad. BBSPL is also a 100% Export Oriented Unit and is registered with the Software Technology Park of India (STP).
4. Nauvata Nauvata Engineering Pvt. Ltd. is fully Engineering Pvt. committed to being the leading Ltd. provider of engineering design services.
Since the average OP/OC of the above 4 entities selected as comparables by him was 34.73%, he worked out the arm’s length price of the international transactions of the assessee-company with its AE at 4,68,42,025/- by applying the OP/OC of 34.73% to the operating cost of Rs. 3,47,67,331/- as against the price of Rs. 3,86,88,036/- charged by the assessee. Accordingly, the difference of 5 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited Rs. 81,53,989/- was proposed by the TPO as the addition to be made to the total income of the assessee on account of transfer pricing adjustment vide his order dated 22.01.2014 passed u/s 92CA(3) of the Act. In the assessment made u/s 143(3) vide an order dated 12.03.2014, addition of Rs. 81,53,989/- accordingly was made by the A.O. to the total income of the assessee on account of transfer pricing adjustment.
5. The addition made by the A.O. of Rs. 81,53,989/- on account of transfer pricing adjustment was challenged by the assessee in the appeal filed before the Ld. CIT(A). During the course of appellate proceedings before the Ld. CIT(A), elaborate submissions were made by the assessee in writing in support of its case that the addition made by the AO/TPO on account of transfer pricing adjustment was not sustainable. After reproducing this entire submissions made on behalf of the assessee in his impugned order, the Ld. CIT(A) deleted the addition of Rs. 81,53,989/- made by the AO/TPO on account of transfer pricing adjustment for the following reasons given in paragraph no 7 to 10 of his impugned order: “7. I have noted the facts and circumstances of the case. I have considered the arm's length analysis performed by the appellant under the TNMM, I have also considered the arm's length analysis documented by the Ld. TPO in the TPO's order. It is noted that the Ld. TPO did not provide an opportunity to the appellant to have the audited financial statements along with the FAR analysis of the following comparable companies selected by7 the Ld. TPO inspite of the fact that the appellant communicated in writing to the TPO that it could not find the audited financial statements of these companies during the course of hearing: Babcock Borsig Softech (P) Ltd Nauvata Engg. (P) Ltd.
In my considered view, the ld, TPO violated the principles of natural justice which enunciate that before proceeding to use some material against assessee, the same should be supplied to the assessee and the issue should be decided after hearing the objections from the assessee in this behalf. As per the judicial precedents of our country, the information gathered by the Ld. TPO should be provided to the assessee to enable it to verify the comparable figures with a right to file objection/ apply thereon, I have further noted that the Ld. TPO made certain incorrect assertions / statements in paragraph no. 6.1 of the order under section 92CA(3) of the Act that the appellant had not made any specific objection with regard to the companies selected by the Ld. TPO as the same was not provided to the appellant and also that the appellant had not asked for the same. During the course of hearing before me, the appellant collected and submitted the annual financial statements of aforesaid companies for the relevant financial year. I have noted that the ‘Function-Asset-Risk’ (FAR) of Babcock Borsig Softech (P) Ltd. for the relevant financial year is completely different from the FAR of the appellant. I have further noted that the audited financial statements of Nauvata Engg. (P) Ltd. and ASE Structure and Designs (p) Ltd. for the relevant financial year do not disclose ‘profit & loss account statement’ without which it is not feasible to perform the FAR analysis and compute net profit indicator under the TNMM. I therefore reject Babcock Borsig Softech (P) Ltd., Nauvata Engg. (P) Ltd. and ASE Structure and Designs (P) Ltd. as comparable under the TNMM.
In final analysis, I have noted the FAR of Cades Digitech (P) Ltd, Harita Techserv Ltd. and I-Design and Engineering (P) Ltd. taken by the appellant and the allegations made by the TPO for rejecting these three companies as comparables. In my considered view, the FAR of the aforesaid companies are comparable to the FAR of the appellant and hence, these companies should be taken as comparables under the TNMM. I therefore reject the allegations made by the TPO in this regard. Based on FAR analysis, I consider that the ‘Engineering Design Services’ segment of Acropetal Technologies Ltd. taken by the TPO was comparable to the appellant. However, it is noted that the appellant correctly computed the net profit indicator of Acropetal Technologies Ltd. (Segment) at 21.90%. I reject the computation of net profit indicator done by the TPO for the ‘Engineering Design Services’ segment of Acropetal Technologies Ltd. I further reject Trishul Engineering Solutions (P) Ltd. taken by the 7 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited appellant as comparable for incurring substantial amount of loss during the relevant financial year.
Thus, the arm’s length net profit indicator (arithmetic mean) for the relevant financial year stands at 9.93%, whereas the net profit indicator of the appellant, as submitted to me by the appellant, stands at 11.28%. In my considered view, the international transaction under consideration is at arm’s length under the TNMM. I therefore direct the Ld. TPO/AO to delete the adjustment of Rs. 81,53,989/-. Thus the grounds No. 4, 5(a), 5(b), 5(c) stand allowed. As the entire arm’s length price adjustment is directed to be deleted, I find no need to adjudicate ground no 6, which is rendered infructuous.”
Aggrieved by the order of the Ld. CIT(A), the revenue has preferred this appeal before the Tribunal.
We have heard the arguments of both the sides and also perused the relevant material available on record. Although as many as 12 grounds are raised by the revenue in its appeal for A.Y. 2010-11 and the learned counsel for the assessee has filed a written submission in a tabular form on each and every ground separately, the learned DR has submitted that the solitary issue involved in this appeal of the revenue relates to the deletion by the Ld. CIT(A) of the addition of Rs. 81,53,989/- made by the AO on account of transfer pricing adjustment and the limited grievance of the revenue is that the Ld. CIT(A) while giving relief to the assessee on this issue did not ask for the remand report from the AO/TPO which was warranted in the facts and circumstances of the case. In this regard, he has invited our attention to the finding recorded by the Ld. CIT(A) in paragraph no 7 of his impugned order to the effect that TPO did not provide an opportunity to the assessee to have the audited financial statements along with the FAR analysis of the 3 entities namely M/s. Bapcock Pvt.
8 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited Ltd., M/s. Nowata Engineering Pvt. Ltd. and M/s. AAC Structure and Design Pvt. Ltd. selected a comparables by the TPO. He has contended that this finding recorded by the Ld. CIT(A) on the basis of submissions made on behalf of the assessee before him was contrary to the finding recorded by the TPO in paragraph no 6.1 of his order wherein it was clearly mentioned by him that the financial statements of all the entities selected by him as comparables were available in the public domain and the assessee did not ask for the same. He has also pointed out from paragraph no 8 of the impugned order of the Ld. CIT(A) that the assessee-company itself collected the financial statements of the said comparables and submitted the same before the Ld. CIT(A) who held on perusal of the said financial statements that the FAR of M/s. Babcock Borsig Softech (P) Ltd. was completely different from the FAR of the assessee-company while the profit and loss accounts of the other two comparables namely M/s. Nauvata Engg. (P) Ltd. and M/s. ASC Structure & Designs (P) Ltd. for the relevant financial year were not available. He has contended that the Ld. CIT(A) accordingly rejected all these 3 comparables taken by the TPO without even pointing out as to how the FAR of M/s. Babcock Borsig Softtech Pvt. Ltd. was completely different from the FAR of the assessee-company. The Ld. CIT(A) also ignored the vital fact that OP/OC of the other two comparables was worked out by the TPO which was not possible without their profit and loss accounts.
The learned DR has further pointed out from page no 11 of the TPO’s order that one comparable namely Cades Digitech (P) Ltd. selected by the assessee was rejected by the TPO on the ground that the said entity had accumulated loss of more than 50 crores which 9 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited had significantly eroded its networth and there was a substantial doubt about the ability of the said entity to continue as a going concern. Moreover the said company was acquired by Axis IT and T Ltd. with effect from 24.10.2009 and keeping in view this abnormal situation, the said entity was rejected by the TPO as comparables. He has contended that the Ld. CIT(A) however accepted the said entity as comparable on the ground that its FAR was comparable to the FAR of the assessee. Without assigning any reasons to come to this conclusion and also failed to consider the abnormal situation pointed out specifically by the TPO while rejecting the said entity as comparables. The learned DR has submitted that similarly the other two comparables namely Harita Techserv Ltd. and I-Designer & Engineering Pvt. Ltd. taken by the assessee were rejected by the TPO for specific reasons and without considering or discussing the same, the Ld. CIT(A) accepted the same on the ground that the FAR of the said companies was comparable to the FAR of the assessee-company. He has contended that no reason whatsoever is given by the Ld. CIT(A) in his impugned order to come to this conclusion.
8. After considering the submissions made by the learned DR as well as the written submissions filed by the learned counsel for the assessee, we find merit in the contention of the learned DR that the Ld. CIT(A) ought to have given an opportunity to the AO/TPO to offer their comments on the various aspects of the matter by seeking remand report before accepting the submissions made on behalf of the assessee. We find that the Ld. CIT(A) has passed a very cryptic order and after extracting the submissions made on behalf of the assessee on page no 3 to 58 of his impugned order, he has given his
10 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited conclusions hardly on one and half pages. As rightly pointed out by the learned DR, the comparables selected by the assessee were rejected by the TPO on specific grounds, but the Ld. CIT(A) has accepted the same only by stating that the FAR of the said entities was comparable to the FAR of the assessee-company. He has not given any reason whatsoever to come to that conclusion and has also not commented upon the specific grounds given by the TPO for rejecting the said comparables. Similarly the entities selected by the TPO as comparables on specific grounds were rejected by the Ld. CIT(A) on the ground that their profit and loss account was not available. As rightly pointed out by the learned DR, the OP/OC of the said entities was worked out by the TPO in his order which was not possible without having their profit and loss account. This aspect, therefore, should have been confronted by the Ld. CIT(A) to the AO/TPO seeking their comments.
9. It is noted that the Ld. CIT(A) in his impugned order has observed that the TPO did not provide an opportunity to the assessee to have the audited financial statements along with the FAR analysis of the comparables selected by him and there was thus a violation of principles of natural justice by the TPO. In this regard, it is observed that the TPO has clearly mentioned in his impugned order that the financial statements of the said comparables were available in public domain and the assessee did not ask for the same specifically. In these circumstances, the Ld. CIT(A) at least should have remanded the matter to the AO/TPO for providing an opportunity to the assessee to have the audited financial statements along with the FAR analysis of the said comparables if at all, according to the Ld. CIT(A), there was 11 & 1321/Kol/2017 Assessment Years: 2010-11 &2011-12 Steel Plus Limited any violation of principles of natural justice by the TPO. We, therefore, consider it just and proper to set aside the impugned order of the Ld. CIT(A) and remit the matter back to him for deciding the same afresh after getting the remand report from the AO/TPO and by passing a well reasoned and well discussed order. The appeal of the revenue for A.Y. 2010-11 thus is treated as allowed for statistical purpose.
10. As regards the appeal of the revenue for A.Y. 2011-12 being it is observed that the only issue involved therein relating to the deletion by the Ld. CIT(A) of the addition made by the AO on account of transfer pricing adjustment is similar to the one involved the revenue’s appeal for A.Y. 2010-11. As all the material facts relevant to the said issue as well as the arguments of the learned representatives of both the sides are similar to A.Y. 2010-11, we follow our decision rendered in A.Y. 2010-11 and remit the matter back to the Ld. CIT(A) for deciding the same afresh as per the same direction as given for A.Y. 2010-11.
In the result, both the appeals of the revenue are treated as allowed for statistical purpose. Order Pronounced in the Open Court on 12th September, 2018.