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Income Tax Appellate Tribunal, ‘D’ BENCH : CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE]
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
In this appeal filed by the assessee, it assails an order dated 22.02.2016 of the ld. Assessing Officer passed pursuant to directions
ITA No. 581/Mds/2016. :- 2 -: issued by the ld. Dispute Resolution Panel (in short the ‘’DRP’’) u/s.144C(3) of the Income Tax Act, 1961 (in short the ‘’Act’’).
Assessee has raised altogether fourteen grounds of which 2. grounds No.1 & 14 are general in nature needing no specific adjudication. Ground No.13 is on levy of interest u/s.234B and 234C of the Act which are consequential in nature.
Vide its Grounds 2 to 4, assessee assails the Transfer Pricing adjustments made with regard to engineering services rendered by the assessee to its Associated Enterprises abroad and imputing of interest on alleged delay in collection of receivables from Associated Enterprises. Apart from this, assessee has also raised certain corporate tax grounds which assails disallowances of employee’s contribution to Provident Fund, disallowance u/s.14A of the Act, disallowance of depreciation on goodwill and not giving credit for tax deducted at source and advance tax.
Ld. Counsel for the assessee submitted that out of the very 4. many grounds assailing the Transfer Pricing adjustment he was pressing those seeking exclusion of M/s. Mahindra Consulting Engineers Limited, M/s. TCE Consulting Engineering Ltd, M/s. IBI Chematur (Engineering & Consultancy) Ltd and M/s. Kitco Ltd from the list of comparables considered by the ld. TPO and confirmed by the ld.
ITA No. 581/Mds/2016. :- 3 -:
DRP, for bench marking the international transactions comprising of engineering services rendered by the assessee to its Associated Enterprises. Ld. Authorised Representative also submitted that he was also pressing the grounds seeking inclusion of M/s. Technip K T India Ltd and L & T Gulf Pvt. Ltd in the list of comparables. As per the ld. Authorised Representative, specific grounds were raised before ld.DRP on these exclusions and inclusions, but ld. DRP had summarily dismissed its claim without properly adjudicating as to how these companies functionally were comparable or not comparable to the assessee. As per the ld. Authorised Representative all supporting documentation like Annual reports of these companies were filed before the ld. DRP but proper consideration was not given by the ld. DRP. As for the adjustment made for delay in collection in collection of receivables, ld. Authorised Representative submitted that once working capital adjustment were carried out on the PLI of comparables as well as that of the assessee it would subsume the impact of delay in collection of receivables.
On the corporate tax grounds, the ld. Authorised Representative alluding to the disallowance of employee’s contribution to Provident Fund submitted that the ld. DRP had failed to consider the law as it stood now, which clearly admitted such allowance of the remittances when made before the due date for filing the return. As ITA No. 581/Mds/2016. :- 4 -:
for the disallowance u/sec. 14A of the Act, ld. Authorised Representative submitted that an erroneous presumption was taken by the ld. DRP that loan funds were utilized for making investments which yielded tax free income. Coming to the claim of depreciation on goodwill which was not allowed, ld. Authorised Representative submitted that whether assessee had preferred such a claim was immaterial, since it was a statutory allowance. As per the ld. Authorised Representative none of these issues were properly adjudicated by the ld. DRP.
Per contra, ld. Departmental Representative strongly supported the orders of the authorities below.
We have perused the orders and heard the rival 7. contentions. It is not disputed that the adjustments that were sustained with regard to ALP of the international transactions undertaken by the assessee were confined to the engineering services segment and imputed interest on delay in collecting the receivables.
Assessee and ld. TPO had followed the Transactional Net Margin Method for analyzing the pricing of the international transactions with Associated Enterprises undertaken by the assessee during the relevant previous year. Assessee had selected seven comparables in its TP study yielding an average PLI of 7.37%. Ld. TPO after considering
ITA No. 581/Mds/2016. :- 5 -: the comparables selected by the assessee retained four out of them and added another nine comparables chosen by him from the same database as was considered by the assessee. The thirteen comparables selected by the ld. TPO and average PLI read as under:-
1 Acropetal Technologies 14.26% 2 I design engg solutions 14.13% 3 KLG Systel Ltd 16.42% 4 CSS Technergy Ltd 10.45% 5 Synetairos Technolgies Ltd 12.17% 6 Vama industries (-) 0.39% 7 Telecommunications (-) 2.69% 8 Accuspeed Eng. Services 10.49% 9 Kirloskar Consultants Ltd 2.29% 10 Mahindra Consulting 29.52% Engineers Ltd 11 TCE consulting engineers 26.27% ltd. 12 Kitco Ltd 27.45% 13 IBI Cehmatur Engg & 25.96% Consultancy Ltd
Average margin on cost 14.33% of comparables.
The adjustment proposed by the ld. TPO based on the above PLI was as under:-
OP/OC of the assessee company (A) 7.61% Average Margin of comparables (B) 14.33% Difference in margins (C) 6.72% Value of Intl. transaction for Eng & design 28,11,30,900 services Expected OP Profit @14.33% 29,86,86,886
ITA No. 581/Mds/2016. :- 6 -:
Upward Adjustment proposed 1,75,55,986
Before ld. DRP assessee had assailed the computation of PLI of the selected companies which according to assessee was made disregarding the annual report of such companies. The said ground was desposed of the ld.DPR with the following directions.
‘’3.2 The submissions of the assessee as regards error in calculation of arithmatic mean, have duly been considered. The TPO is directed to verify the same from records as to whether some arithmetical errors are there and make necessary correction, if required’’. Assessee had also assailed inclusion of M/s. Mahindra Consulting Engineers Limited, M/s. TCE Consulting Engineering Ltd, M/s. IBI Chematur (Engineering & Consultancy) Ltd and M/s. Kitco Ltd in its objection No.4 and also assailed exclusion of M/s. Technip K T India Ltd, L & T Gulf Pvt. Ltd and M/s. Development Consultants Pvt. Ltd as proper comparables as its objection No.5. Ld. DRP has given the following direction on these objections:-
‘’The aspects of fresh TP study, selection of comparables, opportunity to assessee in form of SCN and rejection/ selection of comparables with justification have already been discussed under preceding para in this order. Margins of the comparables have been computed and informed to the assessee. Two of the comparables selected by the assessee have been accepted by the TPO. Reasons are specified by TPO for rejecting the comparables suggested by the assessee. Hence, this panel finds the approach and process adopted by ITA No. 581/Mds/2016. :- 7 -: the TPO are proper. Therefore, the objections in this regard are not acceptable.
Viz-a-viz working capital adjustment sought by the assessee, ld.DRP observed that factual details regarding working capital position of the comparables were not furnished by the assessee and hence it’s request for granting such adjustment could not be granted. In so far as imputing interest on delayed payment from Associated Enterprise was concerned, observation of the ld. DRP was that the extended payment terms given to Associated Enterprise without charging interest was exigible to a transfer pricing adjustment, even if commercial expediency was shown by the assessee. As for assessee’s claim for depreciation on goodwill, observation of the ld. DRP was that no such disallowance made by the ld. Assessing Officer and no claim was preferred by the assessee during the assessment proceedings. Coming to the disallowance for delayed remittance of employee’s contribution of Provident Fund, observation of the ld. DRP was that judgment of Hon’ble Jurisdictional High Court in the case of CIT vs. Madras Radiators and Pressing Ltd (2013) 264 ITR 620 went in favour of the Revenue and it was rightly disallowed by the ld. Assessing Officer. In so far as disallowance u/s.14A of the Act was concerned, ld. DRP held that such disallowance was justified even though assessee had not earned any exempted income.
ITA No. 581/Mds/2016. :- 8 -:
In our opinion, the ld. DRP had disposed off the grounds taken by the assessee in a summary manner without properly considering the objections raised by the assessee. As for the comparables sought to be excluded/included by the assessee, the ld. DRP had not compared the functional profile of those companies with that of the assessee before deciding on the desirability of their exclusion /inclusion.
In so far as working capital adjustment sought by the assessee was concerned, ld. DRP had not considered the present position of law as laid by a plethora of decisions of this Tribunal which mandated such adjustment as a necessary one while computing profit level indicator. As for interest on delayed receivables, ld. DRP had not dealt with the objections of the assessee against comparing the receivables with pure loans, without considering the commercial expediency factor. On the claim of depreciation of goodwill, ld. DRP had not given any finding why the claim made for the first time before it could not be considered. As for the remittances to employer contribution to Provident Fund, ld. Departmental Representative had not considered the effect of Section 43B on such claim, where remittances of the deducted amount were made before the due date of filing the return. Coming to the disallowance made u/sec. 14A of the Act, the ld. DRP had not ITA No. 581/Mds/2016. :- 9 -:
adjudicated as to how such disallowance could be made where the claim of the assessee was that it had not earned any exempt income.
In the circumstances of the case, we are of the opinion that all the issues raised by the assessee requires a fresh look by the ld. DRP. We therefore set aside the orders of the ld. DRP as well as ld. Assessing Officer and remit all the issues raised by the assessee to the ld. DPR for consideration afresh in accordance with law. Thereafter, ld. Assessing Officer shall reframe the assessment for the impugned assessment year considering such directions.
In the result, appeal of the assessee is treated as allowed for statistical purpose.
Order pronounced on Wednesday, the 14th day of December, 2016, at Chennai.