BECHTEL INDIA PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

ORDER

PER BEENA PILLAI, JUDICIAL MEMBER:

(‘FAS’) services and (c) IT Infrastructure support services (‘IT Infra’) to its Associated Enterprises (‘AEs’), to support the oversea office’s turnkey project execution. The international transactions entered into by the assessee are as under: S. No. International Transaction Amount (in Rs.) 1. Engineering services/Other services 114,37,93,036/- 2. Financial and accounting support 4,57,02,508/- services 3. IT infrastructure support services. 5,50,04,596/- 4. Reimbursement of expenses(paid) 6,70,973/- 5. Reimbursement of expenses(received) 21,97,07,529/-

The DRP accepted the approach and the comparable set considered by ld. TPO. All additional comparables proposed by the assessee in the fresh search were rejected. Also, the DRP accepted the approach of the ld. TPO which was to adopt the same set of comparables for both these segments. The DRP directed the ld. TPO/Ld. Assessing Officer to make working capital adjustment. The DRP also confirmed the TP adjustment made by the ld. TPO on account of interest on intercompany receivables.

8. TCS E-Serve Ltd. 63.88% 9. Jindal Intellicom Ltd. 13.43% 10. Microland Ltd. -1.05% Mean 29.75%

1. “That on facts and circumstances of the case and in law, the ld. AO/ld. Transfer Pricing Officer/Ld. Dispute Resolution Panel erred in making an addition of INR 15,45,32,767/- to the returned income of the Appellant by re-computing the arm’s length price of the international transactions pertaining to all three segments of the Appellant Company viz. engineering services, financial support and IT infrastructure support u/s 92 of the Act. Thus, in passing the order, the ld. AO/ld. TPO/ld. DRP erred in: 1.1Rejecting the comparable companies adopted by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning.

1.2 Accepting companies which were functionally not comparable to the Appellant. 1.3Including companies with high/supernormal margins as comparables. 1.4Not considering the correct computation of operating margins of certain comparables. 1.5Denying the benefit of economic adjustments on account of difference in risk profile in arriving at the arm’s length margin. 1.6That on facts and circumstances of the case and in law, the ld. AO/TPO/ld. DRP erred in selecting the current year (i.e. financial year 2009-10) data for comparability despite the fact that at the time of preparation of Transfer Pricing Documentation by the Appellant, the complete data for financial year 2009-10 was not available within the public domain.

2. That without prejudice to the above, if comparables selected the ld. AO/TPO/DRP that do not meet the parameters of functional comparability are accepted, then the comparables selected by the Appellant that were rejected by ld. AO/TPO/DRP on account of functional comparability must also be accepted.

4. That the ld. AO has erred in charging interest u/s 234B of the Act amounting to INR 3,04,06,530/-.

5. That on the facts and in the circumstances of the case and in law, the ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the course of the proceedings before the Hon’ble Income Tax Appellate Tribunal in the interest of the natural justice. The aforesaid grounds are mutually exclusive and without prejudice to each other.”

11.1 We have heard the rival contentions. On a careful consideration of the facts of the case, perusal of the papers on record and the orders of the authorities below. The only issue that is argued before us is the correctness of the comparables considered in the final assessment order by the Assessing Officer.

We find it as undisputed that Engineers India Limited is a Government company. It has several segments which also include ‘Turnkey project’ page 700 of the paper book is a copy of annual report of Engineers India Limited on turnkey project. It can be seen that the revenue has arisen from completing paraxylene plant of IOCL and further that company is engaged in execution of other unit of IOCL’s Panipat Naphtha cracker project. In our considered opinion’ this case should not have been included in the list of final comparables for two reasons. First reason is that profit motive is not a relevant consideration in case of Government undertakings. Many Government Undertakings even operate on losses in furtherance of the social obligations of the government. The second reason is that Engineers India Limited earned income from turnkey project by successfully completing the project of IOCL and other Public Sector Undertakings. In that sense of the matter, the related party transactions are much more than the filter of 25%. We, therefore, order for the exclusion of this case from the list of comparables. Unquote [Emphasis Supplied] 12.5 In the above ruling, the comparable M/s. Engineers India Limited was rejected primarily on the ground that it was working for government/public sector undertakings and since the company also being a government owned enterprise; the transactions tantamount to related party transactions. The same is true for the said comparable as Kitco Ltd., transactions are primarily with government owned enterprises.Applying the preposition laid down in the case of M/s ThyssenKrupp Industries India Private Limited (supra), we hold that Kitco Ltd., cannot be accepted as a comparable company. Hence the same is directed to be eleminated.

2) TCE Consulting Engineers Ltd. 12.6 The Comparable Company is involved in activities beyond engineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the annual report of the Company which provides profitability, for the engineering design segment. Hence the same cannot be accepted as a comparable. 3) IBI Chematur Ltd. 12.7 The comparable Company is involved in activities beyond engineering design which assessee provides. Apart from detailed engineering, the comparable company, also provides project planning, management services, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision etc. Further, there is no segmental accounting available in the annual report of the Company which provides profitability for the engineering design segment. The comparable company undertakes substantial R&D activities (R&D expense 5.41% of turnover) which is not a function performed by the assessee. Hence this company cannot be accepted as a comparable.

Now we take-up the comparables selected by the assessee company but rejected by DRP/ld.TPO, which are in dispute: 4) Accuspeed Engineering Services India Limited 12.8 The ld. TPO in his order, has rejected the said comparable based on its functional profile, holding that the comparable company is involved in software services. The Ld.AR submitted that this comparable company is not into software services, instead, is engaged in providing consultancy activities in Engineering solutions and services covering design, detailed engineering, project construction & management. The ld.AR submitted that this comparable company provides engineering design solutions, and other related services, which is functionally similar to that of the assessee. We observe that the DRP has not given any reasons for rejecting this comparable. On examination of the papers on record, we are in agreement with the submissions of the ld. AR. Hence we direct the A.O to include this company as a comparable. 5) Development Consultants Private Limited 12.9 The ld.TPO/DRP rejected the comparable company on the ground that it is functionally different, without providing any reason thereof. The Ld.AR submitted that this comparable company provides engineering consultancy services for the entire gamut of project engineering and other pertinent activities namely, vendors design and drawing review, detailed engineering, project management, construction management and site supervision, site selection & site survey, etc. We observe that the DRP has not given any reasons for rejecting this comparable. On examination of the papers on record, we are in agreement with the submissions of the ld. AR. Hence we direct the A.O to include this company as a comparable. 6) M N Dastur & Co. Private Limited 12.10 The ld. TPO/DRP rejected this comparable company on the ground that the Annual report for F.Y. 2009-10 is not available in public domain. The ld.AR submitted that though the annual report for F.Y. 2009-10 of this comparable company is not available, this comparable company is functionally similar as it provides services related to engineering projects like feasibility studies, design & engineering, construction management, project management, inspection, operational assistance and business & technology consulting. The ld.AR submitted that, annual report for F.Y.2010-11is available on the database of Capitaline Plus. It is relevant to note that the Ld. TPO/DRP has accepted M N Dastur & Co. Pvt. Ltd., as a comparable in the assessee’s own case for assessment year 2009-10. Under such circumstances, we direct the A.O to include this company as a comparable. 7) Mott Macdonald Private Limited 12.11 The ld.TPO has rejected the company as a comparable on the ground of being widely diversified and that segmental information was not available. The ld.AR submitted that this comparable company is involved in the provision of multi-disciplinary management and engineering consultancy services like business advice for development planning to engineering design to project management. It is engaged in planning, developing and delivering projects across many sectors such as energy, industry, water and environment to transport, buildings, urban infrastructure and social development. We observe that the Ld.DRP has not given any reasons for rejecting this comparable. We observe that the functions of this comparable company are diversified in nature. As we have rejected company like TEC on similar ground, this company also cannot be accepted as a comparable. Hence we direct the A.O not to include this company as a comparable IT Infra & FA segment 13. In respect of IT Infra & FA segment, the comparables selected by the ld. TPO are common. 13.1 In the IT Infra segment the assessee monitors and manages various IT Infrastructure components such as servers, networks, storage equipment, managing etc. The services include data centre and system management, infrastructure management, web hosting and internet excess, desktop solution etc. 13.2 In the FA segment, the functions of the appellant company are, invoice processing, help desk support, account closing and management reporting, tax advisory services, management of fund. The assessee contended that the ld. TPO/ DRP has accepted certain comparables, which perform altogether different functions as compared to assessee’s FAS and IT Infra segment, and have extra-ordinary circumstances based on which they should not be included.

13.3 We would now examine each of the comparable company in dispute to arrive at a conclusion. Comparables included by the ld.TPO/DRP but disputed by the assessee: 1) TCS E-Serve International Limited & TCS E-serve Limited This company has been selected by the ld.TPO as a comparable. This company undertakes, customer service, transaction processes, collections, risk management, and analytics, and has created a lot of applications which are in the nature of intellectual property in terms of reconciliation software, fund transfers, etc. The company also undertakes software testing and validation activities. Possession of intellectual property rights has to be factored if such a company is to be taken as comparable. This cannot be done unless there is appropriate data. Further, from the TP study we observe that, this company is a wholly owned subsidiary of TCS E serve International Ltd. During the year under consideration, this company has made payments towards use of Tata brand. Consequentially use of the TCS brand has substantially increased the operating profits post acquisition. Hence we are of the opinion that this company cannot be taken as a comparable. We therefore direct to exclude this comparable. 2) Accentia Technologies Limited This company has been included by the ld.TPO as a comparable. Functionally, Accentia Technologies Ltd., is into development of software products for healthcare. It is submitted by the ld.AR that Accentia Technologies Ltd is also engaged into diversified activities such as Knowledge Process outsourcing(KPO), Legal process outsourcing(LPO), Data process Outsourcing(DTO), high end software services. It is also submitted by the ld.AR that segmental information in respect of this company is not available. It has been further brought to our notice that this company has been rejected by the Ld.TPO in the earlier year. The company has also had business restructuring during the year under consideration thereby giving rise to extraordinary circumstances. For all these reasons we direct the Assessing Officer to exclude this company as a comparable. 3) E4e Healthcare Business Services Private Limited This company has been included by the ld.TPO as a comparable. Functionally the company is into health care outsourcing services and in addition it also renders software development services. It is also observed that segmental information in respect of this company is not available. The company is also a 100% EOU, under STPI guidelines. We are therefore inclined to accept the contention of the assessee that this company should be excluded as a comparable. Hence we direct the Assessing Officer to do so. Comparable company selected by the assessee, but rejected by DRP/ld.TPO: 1) Omega Healthcare Management Services Pvt. Ltd.

Ld. TPO has rejected the company on the basis that the annual report is not available in public domain. However, we find that the data can be extracted from the Capitaline database. The company is involved in the provision of offshore healthcare business outsourcing services, like medical coding, billing, accounts receivable management, claims processing, and healthcare revenue management. It also provides services to AR Management companies, and their hospital clients, for their credit balance account, regular accounts receivable and facility coding needs. It is noticed that this company is basically into ITES business. The ld. TPO has rejected the company on the ground that financial statement of the company was not available. However, the financial data of the company is available on the database. The ld. TPO however did not give proper opportunity to the assessee to substantiate the inclusion of this company as a comparable. The issue was carried further before the Ld.DRP, and the Ld.DRP also did not comment upon the economic analysis of the company. We therefore set aside this issue of selecting this company, to be considered by the TPO as a comparable, and to include the same in the event it satisfies all the filters applied by the ld.TPO. 2) Techprocess Solutions Ltd. (Processing Services segment) Ld. TPO has rejected the company on the basis that current year database are not available. It is observed that the processing service segment of this company is involved in the provision of transacting processing services, document processing services, activation services and system integration services and is also involved in the provision of comprehensive payments processing solutions like ECS processing and cheque processing services. It is further submitted that the Annual report for FY 2009-10 is available in public domain, and can be used for the purpose of margin computation. The ld. TPO has rejected the company on the ground that financial statement of the company was not available. The issue was carried further before the Ld.DRP, and the Ld.DRP also did not comment upon the economic analysis of the company. We therefore set aside this issue of selecting this company be considered by the TPO as a comparable, and to include the same in the event it satisfies all the filters applied by the ld.TPO. Ground nos. 1 & 2 stands disposed off accordingly. Adjustment on account of Receivables 14.7 During the course of the proceedings before TPO, he observed that payments on account of sales to the AE, is realized after a significant time period. The ld.TPO ascertained that payment for invoices raised by the assessee has not been paid within the stipulated time as provided in the service agreement and accordingly treated the delayed payments as loan facility advanced to the AE’s. The ld.TPO charged 14.88% interest for the delayed period, beyond a period of 30 days. The ld. DRP upheld the adjustments made by the ld.TPO. 14.8. The ld.AR submitted that during the financial year, the assessee had entered into international transactions pertaining to provision of support services to its AE’s. In this regards, the details of the invoices TPO/DRP. The ld.AR has submitted that thought there was no credit period that was specified in the service agreement, however the assessee had agreed a credit period of 60 days with its AE’s. The ld.AR submits that it has sufficient cash balance to manage its cash flow requirements. 14.9. He further submitted that the assessee does not earn any interest on the current account maintained with the bank. Except for interest earned from fixed assets, the assessee has not earned any interest, on any advances paid to third parties. The ld.AR further submitted that being a captive undertaking, the assessee does not render similar services to any other concern. He submitted that, excess credit period arises, only when there is a standard credit period for the services sold at the same price to independent enterprises. He submitted that the cost of funds blocked in the credit period was inbuilt in the sale price. 14.10. The ld.AR relies on the judgment of Indo American Jewellery in wherein it has been held that the transaction of sale and lending are distinctly set out as per section 92 of the Act. The Tribunal further held that interest income is associated more with lending or borrowing of money and not with sale. The Tribunal further held while determining the ALP of sale transaction, all relevant aspects, including credit period allowed, are taken into consideration and that interest aspect is embedded in the sale price. The Tribunal held that there can be no separate international transaction of interest, on outstanding receivables and that early of late realization of the sale proceeds is incidental to transaction of sale. The l d.AR also places his reliance on the Delhi Tribunal decision in the case of Kusum Healthcare Pvt.Ltd., reported in TS-129-ITAT-2015(Del)-TP. 14.11. The ld. DR relied on the orders of the authorities below.