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Income Tax Appellate Tribunal, DELHI BENCHES: I-1: NEW DELHI
Before: SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee is directed against the order passed by the CIT(A) on 22.1.2014 in relation to the assessment year 2007-08.
The first issue is against the confirmation of addition on account of transfer pricing adjustment.
Briefly stated, the facts of the case are that Marubeni Itochu Steel Inc., Tokyo, Japan (MCJ) is involved in domestic trading, import/export and overseas trading of iron and steel and other related products. The assessee is a service provider to MCJ. It reported four international transactions in Form No.3CEB. The dispute in the instant appeal is only in respect of the international transaction of : ‘Provision of support services for transactions, information support services’ with transacted value of Rs.4,07,07,698/-. The Assessing Officer (AO) referred these international transactions to the Transfer Pricing Officer (TPO) for determining their arm’s length price (ALP). The TPO disputed only the international transaction of Provision of support services. He noticed that these services were in the nature of business support services and not IT enabled services. The assessee applied the Transactional net margin method (TNMM) as the most appropriate method with the Profit level indicator (PLI) of Operating profit to Total cost (OP/TC). The assessee computed its OP/TC at 10.39%. 14 companies were chosen as comparable with their average OP/OC at 8.18% with a view to demonstrate that this international transaction was at ALP. The TPO accepted the assessee’s contention about the adoption of TNMM as the most appropriate method with PLI of OP/TC. He did not consider the multiple year data as adopted by the assessee for its comparables, which fact has not been disputed by the ld. AR before us as well. The TPO refused to accept any of the companies taken by the assessee as comparable. He selected nine new companies as comparable. Average operating profit margin of these companies was determined at 19.3%.
By applying the same as benchmark, the TPO recommended transfer pricing adjustment amounting to Rs.25,36,526/-, which was made by the AO. The assessee assailed such transfer pricing addition before the ld. first appellate authority, but without any success.
We have heard the rival submissions and perused the relevant material on record. The ld. AR did not challenge the determination of assessee’s PLI by the TPO. His entire focus was on exclusion of certain companies from the TPO’s final list of comparables and inclusion of companies which were excluded by the TPO.
Before considering the comparability or otherwise of these companies, we want to highlight the nature of activity carried out by the assessee, which has been incorporated by the TPO in his order itself. He has admitted that the assessee was rendering business support services in the nature of : - -Collection of information regarding new customers, -Reporting of market conditions, -Sourcing of new/existing customers, -Providing information, guidance and assistance, -Facilitate communication, -Assist in following up for payment, -Collection and compiling of market information and -Services availed on information, market and economic research.
On a holistic basis, it is evident from the above that the assessee provided business support services in the nature of pre-sale/purchase and post-sale/purchase to its Associated enterprises (AEs). The ld. AR invited our attention towards Service agreement entered into by the assessee with MIT, its AE, a copy of which is available in the paper book. As per terms and conditions of this Agreement, the assessee is required to render the following services to Maruti with respect to its TWB, on behalf of its AE :-
i. MIIP (i.e. the assessee) is a mediator or communication between
Maruti and MIT for TWB Business; ii. MIIP visits Maruti to discuss about issues concerned TWB business upon request of MIT; and iii. MIIP shall provide MIT the necessary information regarding the TWB Business.
On going through the relevant clauses of this Agreement, it is palpable that the assessee is facilitating sale of certain products required by Maruti to be supplied by MIT. On a specific query, the ld. AR submitted that there is no other written agreement between the assessee and other AEs. He however maintained that the nature of services provided to its other AEs is similar to what has been recorded by the TPO on page 2 of his order. The ld. DR objected to the same by submitting that in the absence of any other Agreement, throwing light on the work done by the assessee, it would be difficult to appreciate the true nature of the assessee’s work and the consequential comparability of the companies under challenge. He pleaded that the entire matter be restored to the file of TPO.
We are not convinced with this submission advanced on behalf of the Revenue urging restoration for a de novo adjudication at the TPO’s end. A simple and plain reason for our this decision is that the TPO has categorically recorded the nature of services rendered by the assessee without any dispute and has also characterized the same as business support services. He has nowhere disputed the real nature of services provided by the assessee and specifically noted that none of the services rendered by the assessee are ITES. The Agreement entered into by the assessee with MIT, as discussed above, is a clear pointer that the services rendered by it are more or less of the same kind being, pre-sale and post-sale of products by its AE to Maruti. The ld. DR has not placed on record any material to controvert the factual finding recorded by the TPO qua the nature of services provided by the assessee. We could have entertained his objection on demonstrating that the contents of the Agreement with MIT run contrary to what the TPO has recorded.
In fact, the TPO has recorded the nature of services provided by the assessee, which is almost in sync with what has been put forth before us through the Agreement. In the absence of any contrary material brought on record by the ld. DR showing some inconsistency between the Agreement and the factual recordings by the TPO, we are not convinced with the view canvassed by him that the matter be restored to the TPO for a fresh determination of the ALP of the international transaction after ascertaining the true nature of the services rendered by the assessee. As such, we decline to accept the ld. DR’s objection in restoring the matter to the file of TPO for establishing the nature of services provided by the assessee.
In the backdrop of the nature of services rendered by the assessee, as flowing from the TPO’s order and Agreement with MIT, we now proceed to examine the comparability or otherwise of the companies challenged by the assessee from the list of comparables drawn by the TPO.
(i) Apitco Ltd. 10.1. This company was selected by the TPO as comparable. There is no discussion in the TPO’s order about the functional profile of this company. The ld. CIT(A) upheld its inclusion by observing in para 7 of the impugned order that it carried out functions akin to that of the assessee, such as, market/other services and arranging of seminars and training, etc.
10.2. We have analyzed the Annual report of this company, which is available at page 827 of the paper book. From this Report, it can be seen that its `Income from operations’ stands at Rs.12,48,20,104/-, break-up of which has been given as per Schedule 11, as under:-
INCOME FROM OPERATIONS Micro Enterprises Development 20,933,20 Skill Development 18,071,150 Entrepreneurship Development 4,925,000 Tourism & Research Studies 10,604,900
Project related Services, Infrastructure Planning & Development 20,104,180 Environment Management 11,973,280 Energy related Services 524,979 Cluster Development 9,712,000 Asset Reconstruction & Management Services 2,824,012 Emerging Areas 25,146,403 10.3. A careful perusal of the operations carried out by Apitco Limited divulges that it is providing services in the nature of Project management consulting, Feasibility studies, Micro enterprise development, Skill development, Environment management, Energy related services, Social research and Asset reconstruction management services. No segment-wise profitability data of these services is available. The TPO has considered this company as comparable on entity level. The services rendered by it, taken as one unit, are different from what the assesee is doing. We fail to appreciate as to how all the above listed services taken in unison, can be considered as comparable to the services provided by the assessee, which are restricted to identifying customers, sending inputs to AE, finalizing sales and, thereafter, rendering post-sale services, if required etc.
10.4. The ld. DR strenuously argued that all the activities done by this company are basically `Business services’ and the assessee is also 9 rendering business services alone. Justifying the inclusion of this company, he submitted that differentiation of functions in the overall `Business services’ umbrella is taken care of under the TNMM. He harped on the contention that there is no requirement to have identical services for the purpose of making comparison under the TNMM.
10.5. We are unable to accept this argument in view of the judgment of the Hon’ble jurisdictional High Court in the case of Rampgreen Sales Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del) in which it has been held that the comparables should be selected on the basis of similarity even under TNMM. The Hon’ble High Court has laid down that selection of comparables does not differ with the method adopted. Ex consequenti, it is no more open to argue that the functional dissimilarity of the companies under the overall broader category can be ignored under the TNMM. In view of the foregoing discussion, we find the functional similarity of Apitco Limited lacking on entity level with the assessee company. As such, we order for its exclusion from the final set of comparables.
(ii) Global Procurement Consultants Ltd. 11.1. The TPO included this company in the list of comparables despite the assessee’s objection that it is engaged in providing consultancy services and review of procurement processes for various projects funded by the World Bank. The assessee failed to convince the ld. CIT(A) for its exclusion.
11.2. After considering the rival submissions and perusing the relevant material on record, we consider it expedient to first discuss the nature of activities carried out by Global Procurement Consultants Ltd. A copy of Annual report of this company for the relevant year is available on record. As per this Report, this company is promoted by Export-Import Bank of India in association with leading Indian Public Sector and Private Sector consultancy organisations on the basis of Public-private partnership model that offers collective Indian experience and expertise through the provision of a range of advisory services with particular focus on `Procurement’. This company provides technical assistance in enhancing quality, transparency, efficiency and effectiveness of procurement and implementation service to help attain desired institutional and corporate objectives. The expertise of this company is available to various sectors including power, water resources, transportation, industries, etc. From the services rendered by this company, as outlined in the Annual report, it can be noticed that it is conducting Independent Procurement Review of multilaterally funded projects spread across the globe. It also undertakes Procurement audits.
This company is providing full time advice on procurement and contract related aspects to several agencies across the globe. For example, in Georgia, it provided advice on procurement and contract related services to Municipal Development Fund (MDF), Republic of Georgia. In Iran, this company provided procurement advisory services to international forums, such as, Bam Reconstruction Office of Ministry of Housing, Tehran. In Guyana, this company was selected through an international competitive process in assisting the Government of Guyana in ‘strengthening of its procurement administration’ under Technical Assistance Credit from the World Bank. In India, it provided Procurement Advisory Services to IIT, Baramathy, Pune, India in the 12 implementation of World Bank administered ‘Empowering Poor: A pilot ICT programme for rural areas of Pune District’ funded by Japan Social Development Fund Grant. It has also carried out review of Procurement Systems and Organisation in the State of Madhya Pradesh, particularly, covering the health, public health, engineering and women and child development departments. When we go through the kind of services provided by this company, which basically aim at giving advice on procurement and also carrying out procurement audits, it becomes vivid that there is an absolute mismatch with the kind services rendered by the assessee. The work done by Global Procurement Consultants Ltd. is miles apart from that done by the assessee, which, in turn, is largely confined to assisting AEs in identifying customers/suppliers and, then, facilitating sale/purchase of goods. By no standard, Global Procurement Consultants Ltd., can be considered as comparable to the assessee company. We, therefore, order for the elimination of this company from the final list of comparables.
(iii) NTPC Electric Supply Ltd. 12.1. The TPO included this company in the list of comparables.
There is no discussion in his order about its functional profile. The assessee challenged its inclusion before the CIT(A) who upheld the order of the lower authority. The assessee is aggrieved against the inclusion of this company in the final set of comparables.
12.2. We have heard the rival submissions and perused the relevant material on record. We have also gone through the Annual report of this company, a copy of which is available from page 929 onwards of the paper book. “Sales” have been shown in its Profit & Loss Account at a figure of Rs.17,95,43,780/-. On going through the detail of this amount as per Schedule X, it emerges that the Revenue arose from ‘Consultancy project management and supervision fees.’ From the ‘Operational Review’ of this company as set out in the Annual Report, it can be seen that its activities as `Advisory-cum-Consultants’ are under the Accelerated Power Development Reforms programme (APDRP), which is an initiative taken by the Ministry of Power for power development reforms. This company was assigned implementation of Rural electrification work on turnkey basis in five states covering approximately 40000 villages in 31 districts. Kerala Government, during the year, entrusted rural electrification work to this company on turnkey basis under Rajiv Gandhi Gramin Vidyutikaran Yojana (RGGVY) covering several districts. In addition, consultancy services for ‘Post award project monitoring and supervision of quality of work’ for the projects executed by the State utilities was also given to this company.
Its Annual report further manifests that this company assisted DISCOMS and Utilities in the sectoral reform process and was participating in the distribution infrastructural development under Consultancy assignments. It also carried out consultancy work of project monitoring and quality assurance under various projects for Bhopal and Gwalior regions. From the above description of the nature of works carried out by this company, it clearly emerges that it is absolutely incomparable to the assessee, which is basically engaged in providing pre-sale/purchase and post-sale/purchase services to its AE that include collection of information about new customers, reporting of market conditions, sourcing of customers, facilitating in sale and 15 assisting in the follow up for payment etc. The activities carried out by the assessee in facilitating purchase and sale of goods for its AEs, can by no standard, be compared with the nature of activity carried out by NTPC Electric Supply Ltd. We, therefore, order for the exclusion of this company from the list of comparables.
Now, we take up the companies which were not included by the TPO in the list of comparables and the assessee wants their inclusion.
(i) Askme Info Hubds Ltd. 14.1. The assessee treated this company as comparable which was rejected by the TPO. The assessee intends its inclusion in the final tally of comparables.
14.2. After considering the rival submissions and perusing the relevant material on record, we find that this company is simply engaged in the business of information vending. It provides telephone related and other directory services. Essence of its activities on macro level is merely to give information about the willing sellers to the willing buyers. Once such information about the name of the seller and his company, his 16 address and contact numbers etc. is given, its job comes to an end. It neither facilitates the actual sale nor acts as a mediator between the intending buyer and seller so as to ensure that the deal is finalized. In contrast, the assessee in question is not only giving name of intending buyers or sellers to its AE, but, is also providing information facilitating communication, assisting in the finalisation of sale and, thereafter, in follow-up of payment etc. Thus, it is evident that this company hardly bears any similarity with the assessee company. We, therefore, reject the assessee’s contention for including this company in the list of comparables.
(ii) Crisil Research & Information Services Ltd. 15.1. The TPO refused inclusion of this company in the list of comparables on the ground that it has calendar year ending and the information for the relevant financial year is not available. The ld. AR fairly accepted that the above company was following calendar year for maintaining its accounts, in contrast to the assessee following financial year ending 31st March. It was, however, submitted that this company ought not to have been excluded for this reason alone when it is otherwise functionally similar, a fact which has not been disputed by the TPO. The ld. DR opposed this contention by submitting that the data for the year ending of this company is not similar to that of assessee company and hence it was rightly excluded.
15.2. Having heard the rival submissions and perused the relevant material, it is noticed that the assessee company is having financial year ending covering the period 1.4.2006 to 31.3.2007. In that view of the matter, a valid comparison can be made only if the corresponding figures of comparable company for the same financial year are available.
In this regard, we consider it apt to note the relevant part of sub-rule (4) of Rule 10B which provides that: “the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction had been entered into.” It is obvious from the language of sub-rule (4) that the comparability of an uncontrolled transaction can be analyzed only with the “data relating to the financial year” in which the international transaction has been entered into. In other words, if the tested party has March as year ending, then, the figures of comparables relating to the financial year ending 31st March itself should be available. If such a data is either not available or is not capable of ascertainment with precision and without distortion, then, a company, albeit functionally comparable, disqualifies.
15.3. Espousing the facts of the extant case, we find that insofar as the functional comparability of this company is concerned, the TPO has not touched this aspect. The only reason given for its exclusion is the non- availability of data for the relevant financial year. The ld. AR fairly admitted that it is not possible to deduce operating profit margin of this company for the financial year ending 31.3.2007 on the basis of information as is available in public domain. As such, we hold that the authorities were justified in excluding this company from the list of comparables on this score alone.
16.1. Ground no. 5 relates to non-granting of working capital adjustment. The assessee requested the TPO to allow working capital adjustment, which was refused. The ld. CIT(A) too, did not concur with the submissions advanced on behalf of the assessee in this regard.
16.2. We are not inclined to accept, in principle, the view canvassed by the authorities below that the assessee cannot be allowed a working capital adjustment. Such an adjustment is restricted to inventory, trade receivables and trade payables. If a company carries high trade receivables, it would mean that it is allowing its customers relatively longer period to pay their amounts, which will result into higher interest cost and the resultant low net profit. Similarly, by carrying high trade payables, a company benefits from a relatively longer period available to it for paying back to its suppliers, which reduces the interest cost and increases profits. In order to neutralize differences on account of inventory, trade payables and trade receivables, it becomes essential to allow working capital adjustment for bringing the case of the assessee at par with other functionally comparable entities. We, therefore, agree in principle with the grant of working capital adjustment.
16.3. However, we find that there is insufficient material on record for calculating the working capital adjustment in respect of comparables vis- a-vis the assessee. Under such circumstances, we are of the considered opinion that it would be more appropriate if this issue is considered and examined by the original authority. We order accordingly and direct the AO/TPO to compute working capital adjustment, if any, available to the assessee.
In the final analysis, we set aside the transfer pricing addition sustained in the first appeal and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction undertaken by the assessee, in consonance with the discussion made and findings rendered above. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such determination.
18.1. The only other ground raised in this appeal is against the confirmation of addition of Rs.23,91,810/- towards the expenditure incurred on account of leasehold improvements by treating the same as capital in nature.
18.2. The facts apropos this issue are that the assessee claimed leasehold improvement expenses of Rs.23.90 lac and architect fee of Rs.33.14 lac as revenue. The AO observed that the assessee started its business during this year only and civil and construction work was done on the premises taken on lease. He treated this work as construction of a permanent structure on leasehold premises. After entertaining objections from the assessee, he made disallowance of Rs.51,34,426/- (Capitalization of two amounts of Rs.23.90 lac and Rs.33.14 lac as reduced by depreciation). The ld. CIT(A) allowed the assessee’s claim in respect of payment to architect amounting to Rs.33.14 lac. However, the remaining amount of Rs.23.90 lac was treated as capital in nature.
The assessee is aggrieved against the confirmation of addition to this extent, while there is no appeal filed on behalf of the Revenue.
18.3. We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee took the premises on lease and also started business during the year under consideration. A sum of Rs.23.90 lac was incurred on complete renovation of such premises as it is apparent from the details placed on record. The Hon’ble Supreme Court in Ballimal Naval Kishore vs. CIT 1997 224 ITR 414 (SC) has held that the expenditure incurred by the assessee on total renovation of cinema theatre by installing new machinery, new furniture, new sanitary fitting and new electrical installation besides extensive repair of structure of building, to be capital expenditure and not allowable as current repairs. This judgment indicates that any capital expenditure on total renovation is liable to be considered as capital expenditure. The Hon’ble jurisdictional High Court in Bigjo’s India Ltd. vs. CIT (2007) 293 ITR 170 (Del) considered almost a similar situation as is obtaining before us in the present appeal. In that case, the assessee, a licensee of the showroom, erected new counters and built a new lift shaft at a new site. It was held that such amount was not in the nature of current repairs but a capital expenditure not deductible in full.
18.4. Adverting to the facts of the instant case, we find that the present facts are on all fours with those considered by the Hon’ble High Court in Bigjo”s (supra). It is evident from the description of the items on which the above referred expenditure has been incurred that it is a case of renovation of premises immediately after taking it on lease. As such, there can be no question of replacement. We cannot help if the Revenue has accepted the part deletion of disallowance by the ld. CIT(A). Be that as it may we are concerned only with the items of disallowance raked up in the appeal before us and hold that the ld. CIT(A) has taken unimpeachable view in treating the instant amount as capital expenditure.
18.5. At this stage, it is relevant to note that the Tax Laws (Amendment and Miscellaneous Provisions) Act, 1986 inserted Explanation 1 to section 32 w.e.f. 1.4.1988, reading as under : -
“Explanation-1. Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of, or improvement to the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.”
18.6. A circumspection of the above Explanation reveals that where a business is carried on in a building not owned by the assessee but in respect of which it holds a lease or either occupancy rights, then the expenditure on i. the construction of a structure or ii. doing of any work in or in relation to and by way of renovation or extension of, or improvement to the building, shall be considered as structure or work in the nature of building owned by the assessee for the purpose of depreciation. Spirit and text of Explanation 1 to section 32 is that any capital expenditure by the assessee on a building not owned by him, in which he carries on the business, shall be considered as building owned by him for the purposes of section 32, to the extent of the amounts spent on the construction of structure or doing of any work in or in relation to and by way of renovation or extension or improvement to the building. It therefore, follows that in order to bring any amount within the ambit of Explanation 1 to section 32, it is paramount that the expenditure incurred by the assessee on the premises in the capacity of non-owner should firstly be in the nature of capital expenditure and then it should fall within any or both the clauses as discussed above. If these conditions get satisfied, as is the case under consideration, then the amount incurred for such works falls for consideration under Explanation 1 to section 32.
In other words, the amount so incurred would be capitalized entitling the assessee to depreciation as per the eligible rate. In view of the foregoing discussion, we uphold the impugned order on this issue subject to grant of depreciation.
In the result, the appeal is partly allowed for statistical purposes.
The order pronounced in the open court on 15.02.2016.