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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
O R D E R
PER DIVA SINGH, JUDICIAL MEMBER :
The present appeal has been filed by the Revenue assailing the correctness of the order passed by the assessing officer under section 144C read with section 143(3) of the Income-tax Act, 1961 ( for short ‘the Act’) pursuant to the directions of the DRP on the following grounds :- “
1. The Ld. DRP has erred in law and on facts in directing the TPO to include M/s. U.B. Engineering Ltd. as comparables without giving economic rationale / justification for application of employee cost filter.”
2. The CIT-DR Mr. Bara inviting attention to the TPO’s order submitted that cogent reasons have been given by him for the rejection of the specific comparable. The direction of the DRP ignoring the reasons set out therein requiring the TPO to include the said comparable was assailed. Referring to the TPO’s order, it was submitted that the specific comparable had been rejected applying the employee cost filter and since the specific comparable failed the employee cost filter, it was hence declared to be not a suitable comparable. In the circumstances, the directions of the DRP directing the TPO to accept the same were objected to.
ITA-1503/Del/2015 Page 2 of 7
The ld. AR on the other hand, inviting attention to the impugned order submitted that the DRP considering the facts of the case has upheld the specific filter of the TPO. Referring to the facts, it was submitted that the TPO considering the FAR of the assessee applied the employee cost filter @ 25% holding it to be most appropriate keeping the assessee's facts in mind. The application of the said filter had been upheld by the DRP. The assessee had also argued that M/s UB Engineering Ltd. infact fulfilled the requirements of the TPO’s said filter. The DRP considering the submissions of the assessee, directed the TPO to consider the said claim on facts. Referring to the facts of the case, it was his submission that the TPO on carrying out the verification has found that the said company fulfills the specific filter. Thus, in the peculiar facts, the grievance of the Revenue, it was submitted, is not maintainable.
3.1 It was also submitted that the correctness of the DRP’s order had come up before the ITAT in assessee’s own case in and the ITAT passed the order dated 21.12.2015 which was challenged before the Hon’ble High Court. The Department’s appeal, it was submitted, was dismissed vide order dated 21.07.2016 in ITA 379/2016, copy of the order is available at pages 170 and 171 of the paper book.
3.2 It was also his submission that apart from this, the specific comparable has been accepted by the TPO himself in 2007-08 and 2008-09 AYs which would be evident from paper book pages 206 & 207 and 252 respectively.
3.3 Referring to the order dated 21.12.2015, it was his alternate submission that even if, UB Engineering Ltd. is excluded from the final set of comparables even then the revised arm’s length price would be 7.36% whereas the margin earned by the assessee is 13.04%. Accordingly, it was ITA-1503/Del/2015 Page 3 of 7 his submission that exercise is academic as nothing much turns on the grievance of the Revenue.
We have heard the rival submissions and perused the material available on record. In facts of the present case, it is seen that the assessee is engaged in the business of export of customized electronic data in the form of designs, drawings, calculations and other relevant datasheets relating to project engineering and commercial solutions for power plants, refineries, petrochemical plants etc. The assessee is a captive service provider, providing (a) engineering design and relates services, (b) financial and accounting support services and (c) IT infrastructure support services to its AE to support the overseas office’s turnkey projection execution. The dispute in the present proceedings is limited to the directions of the DRP to include UB Engineering Ltd. as a comparable in the engineering design and related services segment. The TPO as per his order has noted that the Bechtel India Private Limited (BIPL) was set up in April 1994 to render engineering support service in respect of engineering designs and drawings. It was noticed that BIPL executes engineering designs and drawings for various overseas AEs to support the overseas offices’ turnkey project execution. He noted that for bench marking of the international transactions relating to provision of engineering design services, the assessee had selected TNMM as the most appropriate method with (OP/TC) as PLI. The PLI of the assessee, it was noted was 13.04%. He considered that the assessee had selected 6 comparable companies and the weighted average margin of comparables was computed at 11.79%. The weighted average margin was not approved by the TPO. The data for the specific year under consideration was taken on record. Apart from that, the filters proposed by the assessee and the comparables selected, admittedly were not fully accepted by the TPO who modified the filters and also selected
ITA-1503/Del/2015 Page 4 of 7 certain comparables. He also directed the assessee to file a list of comparables after carrying out a fresh search in line with the filters selected. As per page 35 of the TPO’s order, it is noticed that considering the fresh search submitted by the assessee on 16.08.2013, the TPO, out of the 9 comparables proposed, accepted one comparable and rejected all others. It is seen that the specific comparable under challenge by the Revenue in the present proceedings i.e. UB Engineering Ltd. was rejected on the reasoning that it “fails employee cost filter”, hence not a suitable comparable”. It is seen that the assessee carried the issue before the DRP. The specific objections of the assessee were summed up issue-wise by the DRP wherein the application of filter applied by the TPO was upheld by the DRP and addressing the inclusion/exclusion of various comparables, the DRP passed a detailed order. The discussion for the specific comparable has been carried out at internal pages 24 & 25 of the DRP’s order. For ready reference, we reproduce the same as under :- 7.4.2 U B Engineering Ltd. The TPO has rejected this comparable on the basis of employee cost filter whereas the taxpayer claims that this comparable was accepted functionally in assessment year 2008-09 and the employees cost filter has not been applied by the TPO. On going through the TPO's order and taxpayer's contentions in this regard the view of this Panel is that, if the employee cost of the taxpayer is very low, there is a possibility that it is not engaged in service activity (engineering design and related services), therefore, this filter is a starting point to carry out a more thorough functional analysis. In view of above, this Panel holds that since wages constitute the main cost component in this ratio, so this comparison would give closest comparables. Therefore, this filter is very important to carry out comparative analysis especially in a business in which the taxpayer is operating. TPO is accordingly, directed to go through the financials and other information available in public domain (to be provided by the taxpayer also) and if the employees cost is more than the 25% of total operating expenses than include this comparable for making further functional analysis. If this comparable company passes the functional profile then include this company as a valid comparable for the purpose of comparability analysis.” 4.1. On going through the same, we find that the application of the filter has been upheld by the DRP. Accordingly, we find there is no occasion for the Revenue to be aggrieved. We note that the decision to uphold the filter is based on sound reasoning which we approve. We also find that it cannot be said to be a biased non-speaking conclusion, we note that considering
ITA-1503/Del/2015 Page 5 of 7 the peculiar facts of the assessee qua the segment i.e. Engineering design and related services, the incurring of employee cost upto a certain threshold necessarily is a relevant criteria as incurring a very low employee cost may suggest that the specific company is not engaged in a service activity and/or in the alternative may be indulging in outsourcing the service which could be the reason for low employee cost. Thus, the starting point, of the analysis after a thorough functional analysis of the assessee would necessitate a bare minimum threshold of employee cost. Thus, the application of the employee cost filter, we are of the view, would necessarily be a relevant criteria. We find that in the facts of the present case, that the bar has been set at 25% of the total operating expenses on facts. The said conclusion of the TPO is not and cannot be assailed by the Revenue on the grounds of being arbitrary etc. as it is the TPO’s filter. The said filter has been upheld by the DRP. we find the said conclusion is based on a sound reasoning and cannot be a cause of grievance to the Revenue. Going further, it is seen that the taxpayer has made out a case before the DRP that the specific comparable crosses the threshold set out by the TPO. The DRP instead of examining the issue itself, we note has not outrightly accepted the claim and has remanded the issue back to the TPO directing the taxpayer to demonstrate its claim which the TPO was required to verify. We find that admittedly the TPO has verified and accepted the comparable. In these circumstances, we find that the ground raised by the AO in the peculiar facts and circumstances cannot be allowed as no justification for allowing the same has been placed before us either pointing out that said direction was contrary to the peculiar facts and circumstances of the present case or that incorrect facts have been considered by the TPO. It is not in dispute that the wages constitute the main cost component in an engineering design and related services segment and thus the employee
ITA-1503/Del/2015 Page 6 of 7 cost necessarily needs to be suitable to justify the inclusion of a comparable. In the facts of the present case, we have noticed that apart from this bald argument, nothing has been placed before us to show that the direction was not maintainable. Accordingly, we find no merit in the appeal of the Revenue.
Even otherwise, we also note that the said comparable has been included by the TPO in 2007-08 & 2008-09 AYs and in the functional profile of the taxpayer or the comparable, no change has been brought to our notice. Accordingly, we find that the appeal of the Revenue on facts is not maintainable.
The assessee has also argued that even otherwise, if the said comparable is excluded, even then the margin of the revised list of comparables would result in average of 7.36% and in the facts of the present case, the margin earned by the taxpayer is admittedly 13.04%, therefore, the exercise even otherwise becomes academic. The said argument has been supported by the assessee by referring to the following chart which demonstrates that even after including the said comparable in the list of final comparables selected by the ITAT the margin is 7.97% : S.No. Company Name Working capital adjusted OP/OC 1 Kirloskar Consultants Limited 11.85% 2 Mahindra Consulting Engineers Ltd. 23.55% 3 Cades Digitech Limited 1.00% 4 UB Engineering Limited 11.65% 5 Accuspeed Engineering Services India Ltd. -2.37% 6 Development Consultants Private Limited 16.17% 7 MN Dastur & Co. Private Limited -6.05% Mean 7.97% It is submitted that even if UB Engineering Limited is excluded from the final set of comparable companies, the revised arm’s length mark-up shall be 7.36% whereas the margin earned by BIPL is 13.04%. The arm’s length criteria is still satisfied.”
We, thus find that the aforesaid facts also support the conclusion drawn. Accordingly, considering the facts, we dismiss the departmental appeal on the reasoning that employee cost filter has been applied by the TPO himself and rightly so and on an incorrect appreciation of facts UB