Income Tax Appellate Tribunal - Delhi
Granite Services International Pvt. ... vs Acit, New Delhi on 12 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I' NEW DELHI
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
&
SHRI K.N. CHARY, JUDICIAL MEMBER
ITA No.-532/Del/2016
(Assessment Year: 2011-12)
Granite Services International P. Ltd. vs ACIT
Building No. 7A, 5th Floor, Tower-A, Circle 10(2)
DLF Cyber City, Phase-III, Room No.
Sector-25A, Gurgaon. 416A,
AACCG3374Q C.R. Bldg.,
New Delhi.
Assessee by Sh. K.M. Gupta, Adv.
Revenue by Sh. Amrender Kumar, CIT DR
Kumar Pranav, Sr. DR
Date of Hearing 29.08.2017
Date of Pronouncement 12.09.2017
ORDER
PER K. N. CHARY, J.M.
This is an appeal by the assessee challenging the assessment order dated 31.12.2015 in respect of AY 2011-12 pursuant to the directions of the Ld. Dispute Resolution Panel- 1, New Delhi by way of order dated 25.11.2015. 2 ITA No. 532/Del/2016
2. Briefly stated facts relevant for the disposal of this appeal are that the assessee was incorporated on 15.02.2015 in India as a wholly owned subsidiary of Granite Services International Inc., USA (Granite USA) and at relevant period of time it was primarily engaged in providing technical support to its associated enterprises (AEs). The technical support services provided by the assessee to its AEs relate to provision of erection, installation, commissioning, warranty administration, operation and maintenance, inspection, renovation and modernization services for power plants and turbines. For the AY 2011-12 the assessee filed the return of income on 29.11.2011 declaring a total income of Rs. 6,95,32,697/-. In respect of the international transactions, the matter was referred u/s 92CA of the Income Tax Act, 1961 (hereinafter for short called as the 'Act') and the Transfer Pricing Officer by way of order dated 16.01.2015 proposed an adjustment to a tune of Rs. 4,24,88,928/-. By way of draft order dated 27.02.2015 AO proposed the addition of Rs. 4,24,88,928/- and computed the total income of the assessee at Rs. 11,20,21,630/-. Assessee carried the matter before the Dispute Resolution Panel by filing 3 ITA No. 532/Del/2016 objections. During the course of the proceedings before the Ld. DRP, the DRP raised a query in respect of the tax deductible at source (TDS) compliance being made in respect of certain expenses but the assessee opposed the same stating that the said issue was not borne out of draft assessment order nor from the additions proposed by the AO, but without prejudice to such contentions, furnished the details sought by the DRP. DRP gave certain directions to the AO to verify and compute the disallowance u/s 40(a)(i) of the Act. Assessee furnished the factual and legal submissions before the AO explaining the reasons as to why the disallowance was not warranted u/s 40(a)(i) of the Act with respect to the payment of travelling and conveyance, salary and allowance and submitted that the said payments were in the nature of reimbursement of expenses without any element of income being embedded therein. However, the AO reached the conclusion that the payments made towards travel and conveyance, salary and allowance and pay roll administration services of taxable as Fees for Included Services (FIS)/Fees for Technical Services (FTS) in India and accordingly liable to tax in India, and since the assessee did 4 ITA No. 532/Del/2016 not withhold any tax on these expenses, such expenses are liable to be disallowed u/s 40(a)(i) of the Act. By way of order u/s 154 of the Act the AO issued rectification, assessing the income of the assessee of Rs. 20,46,84,323/- after deleting the disallowance made in respect of purchase of pay roll administration services of Rs. 49,61,837/-. Finally the Assessing Officer made the transfer pricing adjustment of Rs. 2,88,41,266/- and disallowance u/s 40(a)(i) of the Act to a tune of Rs. 2,32,85,369/- in respect of reimbursement of travel and conveyance expenses and a sum of Rs. 8,19,24,990/- in respect of payment of salary and allowances.
3. Challenging the same, the assessee preferred this appeal on the following grounds:
1. "That in the facts and circumstances of the case and in law, the assessment order passed by the Assessing Officer (AO) pursuant to the directions of Hon'ble Dispute Resolution Panel (DRP) is bad in law and invalid to the extent the additions made in the final assessment order.
2. That in the facts and circumstances of the case and in law, the Transfer Pricing Officer (TPO)/the AO/the DRP erred in not appreciating that none of the conditions set out in section 92C(3) of the Income Tax Act, 1961 ('Act') are satisfied in the present case.
3. That the TPO/the AO/the DRP have erred on facts and in law in enhancing the income of the appellant by Rs. 2,99,41,266/-.5 ITA No. 532/Del/2016
3.1 The TPO/the AO/the DRP erred on facts and in the circumstances of the case and in law in framing the order u/s 92CA of the Act on findings which are erroneous in law, contrary to the facts and based on mere conjectures and surmises.
3.2 The TPO/the AO/the DRP failed to appreciate the submissions made/contentions raised by the appellant. 3.3 The TPO/the AO/the DRP erred in enhancing the income of the appellant by Rs. 2,99,41,266 holding that the international transactions of the appellant pertaining to provision of technical services to its Associates Enterprises (AEs) do not satisfy the arm's length principle envisaged under the Act and in doing so, have grossly erred in:
3.4 disregarding the Arm's Length Price (ALP) as determined by the appellant in the Transfer Pricing (TP) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ('Rules').
3.5 Rejecting comparability analysis undertaken by the appellant in the TP documentation and conducting a fresh comparability analysis based on application of additional/revised filters, in determining the ALP for the international transactions.
3.6 Including companies having high growth in revenues and profits in the final comparables' set for benchmarking a low risk captive unit such as the appellant;
3.7 Including certain companies in the final set of comparables that are not comparable to the appellant in terms of functions performed, assets employed and risks assumed; and excluding certain companies on arbitrary/frivolous grounds even though they are comparable to the appellant in terms of functions performed, assets employed and risks assumed; 3.8 By committing a number of factual errors in selection/rejection of proposed comparables; 3.9 Ignoring the business/commercial reality that the appellant undertakes minimal business risks as against comparable companies that are full-fledged risk taking entrepreneurs, and by not allowing a risk adjustment to the appellant on account of this fact; 3.10 Disregarding judicial pronouncements in India in undertaking the TP adjustment; and 3.11 Disregarding multiple year/prior years' data as used by the appellant in the TP documentation and holding 6 ITA No. 532/Del/2016 that current year (i.e. Financial Year (FY) 2010-11) data for comparable companies should be used.
4. That the DRP has erred in law in directing the AO to enhance the income of the appellant by invoking the provisions of Section 144C (8) of the Act without appreciating that there is no such disallowance/variation proposed by the AO under section 40(a)(i) of the Act in the draft assessment order nor there is any objections of the appellant in this regard before the DRP.
4.1 That the DRP failed to appreciate that the insertion of explanation below sub section 8 of section 144C of the Act was to make an enhancement on the variation made in the draft assessment order and not to raise a fresh issue which is not the subject matter of draft assessment order nor any such issue raised by the appellant before the DRP. 4.2 That the AO erred in making a disallowance of Rs.
110,172,196 under section 40(a)(i) of the Act in final assessment order in pursuant to direction of DRP under 144C(8) of the Act which are illegal, without jurisdiction and bad in law.
5. That on the facts and circumstances of the case and in law, the AO and the DRP erred in disallowing Payroll Administration Services of Rs. 49,61,837, under section 40(a)(i) of the Act.
6.1 The AO and the DRP failed to appreciate that the appellant has duly complied with the provisions of Chapter XVII B and section 40(a)(i) of the Act in respect of the said Payroll Administration Services.
6. That on the facts and circumstances of the case and in law, the AO and the DRP erred in holding that the Travel and Conveyance expenses of Rs. 2,32,85,369 warrant disallowance under section 40(a)(i) of the Act. 6.1 The AO and the DRP erred in holding Travel and Conveyance expenses to be in the nature of Fee for Technical Service (FTS) as per section 9(1)(vii) of the Act and Fee for Included Services (FIS) as per article 12(4) of Double Taxation Avoidance Agreement (DTAA) between India and USA.
6.2 The AO and the DRP failed to appreciate that the said amount represents merely reimbursement of expenses on a cost-to-cost basis to the group company.
6.3 Without prejudice, that on the facts and circumstances of the case and in law, the AO and the DRP erred in not appreciating that the services provided by the employees seconded to appellant company do not 'make available' 7 ITA No. 532/Del/2016 any technical know-how, skills, etc., as provided under the DTAA between India and USA.
7. That in the facts and circumstances of the case and in law, the AO and the DRP failed to appreciate that the sum of Rs. 8,19,24,990 was incurred on account of mere reimbursement of Salary and Other Allowances, paid to group company for secondment of employees to work for the appellant during the concerned assessment year.
7.1 That the AO and the DRP erred in holding such payments to be in the nature of FTS as per section 9(1)(vii) of the Act and FIS as per article 12(4) of DTAA between India and USA.
7.2 That the AO and DRP erred in holding that such payments warrant disallowance under section 40(a)(i) of the Act. 7.3 Without prejudice, that on the facts and circumstances of the case and in law, the AO and the DRP erred in not appreciating that the services provided by the employees seconded to appellant company do not 'make available' any technical know-how, skills, etc., as provided under the DTAA between India and USA.
8. That in the facts and circumstances of the case and in law, the AO erred in levying interest under section 234A of the Act without appreciating that the Income Tax return was filed within the due date.
9. That in the facts and circumstances of the case and in law, the AO erred in withdrawal of interest under section 244A and levying interest under section 234D of the Act.
10. That in the facts and circumstances of the case and in law, the AO erred in levying interest under section 234B of the Act.
11. That in the facts and circumstances of the case and in law, the AO erred in proposing to initiate the penalty proceedings under section 271(1)(c) of the Act. That the above grounds of appeal are mutually exclusive and without prejudice to each other.
That the appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. Any consequential relief to which the appellant may be entitled under law in pursuance of the aforesaid grounds of appeal, or otherwise may be granted." 8 ITA No. 532/Del/2016
4. Ld. AR submitted that grounds 1, 2, 9 & 10 are general in nature, grounds 3 and 4 are in respect of the transfer pricing adjustment, and grounds 5 & 6 are in respect of corporate tax issues. He further submitted that grounds 7 & 8 are academic in nature in view of grounds 5 & 6.
5. In so far as grounds 3 & 4 are concerned, Ld. AR submitted that they are confining their arguments to the challenge of four comparables selected by the TPO, namely, HSCC (India) Ltd., Mahindra Consulting Engineers Ltd., Mitcon Consultancy & Engg. Services Ltd. and Rites Ltd. (Consultancy division), and two comparables excluded by the TPO, namely, EDAC Engineering Limited and MN Dastur & Company (P) Limited. He further brought to our notice that in assessee's own case in ITA No. 1486/Del/2015 for the AY 2010-11 a coordinate bench of this Tribunal considered Mahendra Consulting Engineers Ltd. and MN Dastur & Company (P) Limited and found that these two companies are includible in the list of comparables and to that extent those two comparables are covered by the earlier year orders. What, 9 ITA No. 532/Del/2016 therefore, remains to be considered, it is the challenge of the assessee for the inclusion of HSCC India Limited, Mitcon Consultancy & Engg. Services Ltd. and Rites Ltd. (Consultancy division) and the exclusion of EDAC Engineering Limited. Now we shall proceed to consider the respective arguments in respect of these four companies. In so far as HSCC India Ltd. is concerned both the parties submitted that this is a Government Company with the major shareholding held by the Government. Ld. AR placed reliance on the decision reported in Thyssenkrupp Industries India (P) Ltd. vs. Additional Commissioner of Income Tax (2013) 33 taxmann.com 107 (Mumbai - Trib.) at paragraph no. 12.8.1 and 12.8.2, wherein it was held as follows:
"12.8.1 Next is the case of Engineers India Limited, which was included by the TPO at his own. The Ld. Counsel for the assessee contended that this case should be ignored because it is a Government Undertaking. It was further pointed out that most of its customers of the 'Turnkey project division' are related parties, being, other Public Sector Undertakings, which is much more than the filter of 25%. The Ld. Departmental Representative, however, accentuated that the TPO was right in including this case in the list of comparables.
12.8.2 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 10 ITA No. 532/Del/2016 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."
6. On the basis of the above decision, he argued that the public sector undertakings have to be rejected to be comparables. Having regard to the OP/OC percentage of HSCC India Limited comparative to the ratio of the assessee company Ld. DR also submitted that HSCC India Limited cannot be a comparable.
7. Similarly, in respect of Mitcon Consultancy and Engineering Services Limited and Rites Ltd. it is submitted that both these companies have multi dimensional functionality and mostly serving the related parties, and apart from that the segmental data is not available. On this aspect also Ld. AR submits that these two companies cannot be good comparables. On facts, Ld. DR does not dispute the same. We, therefore, hold that these two companies also cannot be comparables to the assessee company. 11 ITA No. 532/Del/2016
8. Now turning to the prayer of the assessee to include MN Dastur & Company (P) Limited & EDAC Engineering Limited is concerned, as already noted above, in assessee's own case for the AY 2010-11 a coordinate bench of this Tribunal has considered the includibility of MN Dastur & Company (P) Limited held that this company is includible in the list of comparables. No new facts are brought to our notice disturbing this finding. We, therefore, while respectfully following the said finding of the coordinate bench for the earlier year hold that this company has to be included in the list of comparables.
9. Now coming to the EDAC Engineering Limited, it is the observation of the TPO, vide paragraph no. 8.1(b) that on the analysis of the annual report of the company which was found that the company was having 100% RPT with AEs. Ld. AR submits that factually this finding is incorrect and invited our attention to paragraph no. 4.121 & 4.122 at page no. 38 of the objections submitted before the DRP vide annexure no. 4, wherein they have stated that the RPT of the EDAC Engineering is only 14.79 % basing on the following computation details: 12 ITA No. 532/Del/2016
Particulars Amount (INR)
Other 21,927,843
Sales 998,373,958
Sub contract 25,067,448
Total RPT 1,045,369,249
Total Sales 7,066,591,068
RPT/Total Sales 14.79%
This percentage of 14.79 is much below the 25% filter. Ld.
Counsel drew our attention to page nos. 51 to 53 of the annual report of the EDAC Engineering Limited for the financial year ended March 31, 2011 vide notes relating to related parties, and submitted that these figures are the basis for the submissions in the table referred to above, and there is a failure on the part of the authorities below to appreciate this fact. On the face of this submission with reference to the annual report of EDAC Engineering Limited and submissions made before the DRP, we are of the considered opinion that this fact needs verification. We, therefore, set aside this aspect to the file of the TPO to verify the RPT of EDAC Engineering Company Services Ltd. with reference to the annual report and other record, if any, to be submitted by the assessee.
10. Now turning to grounds no. 5 & 6, it is the submission of the Ld. AR that the query relating to the tax deductible at source raised by the DRP and the consequential disallowance u/s 40(a)(i) of the 13 ITA No. 532/Del/2016 Act does not emanate from the assessment order, as such, clearly the DRP stepped out of his jurisdiction in view of the provisions u/s 144C(8) of the Act. According to him the DRP has no jurisdiction to go beyond the issues arising from the assessment order in respect of explanation appended to Section 144C(8) by Finance Act, 2012 w.e.f. 1.4.2009. He submits that even this explanation also does not enlarge the jurisdiction of the DRP that was originally conferred by the provision.
11. As an example for his argument he submitted that in case three issues, namely issue A, issue B and issue C have arisen from an assessment order, and the assessee raises objection in respect of issue A and issue B, DRP exercising jurisdiction in respect of issues A & B is obviously well within its powers in view of the provisions of Section 144C(8) of the Act. He further submitted that in view of the explanation to the effect that the DRP shall have the power to confirm, reduced or enhanced the variations proposed in the draft order notwithstanding that the issue was raised or not by the assessee before the DRP, the DRP will have jurisdiction in respect of Issue No. C also inasmuch as such an issue emanates 14 ITA No. 532/Del/2016 from the assessing order. However, in so far as any other issue the DRP shall have no jurisdiction even after the explanation to Section 144C(8) that was inserted by the Finance Act, 2012 w.e.f. 1.4.2009. According to him whether or not the assessee raises any objection, the jurisdiction of DRP is strictly confined to the variation proposed in the assessment order but nothing else. Basing on this analogy Ld. AR submitted that the DRP raising the issues which are not relating to any variance proposed in the assessment order in this case is clearly beyond the jurisdiction of the DRP, as such, any addition proposed by the DRP to be verified by the AO has to be quashed.
12. On this aspect, it is relevant to refer to the decision of the Hon'ble Jurisdictional High Court in Lahmeyer Holding GMBH vs. Deputy Director of Income Tax (2015) 59 taxmann.com 336 (Delhi), wherein vide paragraph nos. 23 & 24 the Hon'ble High Court held as follows:
"23. One more aspect which needs some discussion is with regard to the submission that the DRP had no occasion to consider the issue of taxability of the transaction involving the transfer of the expired value of the contract in exchange of shares as no variation had been suggested by the Assessing Officer on this aspect of the matter in his draft assessment 15 ITA No. 532/Del/2016 order. It was submitted by the Ld. Counsel for the revenue that the jurisdiction of the DRP in terms of Section 144C (8) was that it could confirm, reduce or enhance the variations proposed in the draft order, but it could not introduce a new element of tax or variation. In response to this, the Ld.Counsel for the petitioner drew our attention to the Explanation added after Section 144C (8). It was submitted by the Ld. Counsel for the petitioner that by virtue of the said Explanation, the DRP always had the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee. Section 144C (8) and the Explanation appended thereto reads as under:
"144C (8) The Dispute Resolution Panel may confirm, reduce or exchange the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub- section (5) fur further enquiry and passing of the assessment order.
Explanation. - For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee."
24. The said explanation was introduced through the Finance Act of 2012. But, it was to take effect retrospectively from 01.04.2009. The Dispute Resolution Panel's directions were issued after the Explanation had come into operation. In any event, the Explanation is clarificatory. Reading the Explanation with sub section 144C(8), it is evident that the Dispute Resolution Panel could examine the issues arising out of the assessment proceedings even though such issues were not part of the subject matter of the variations suggested by the Assessing Officer. In this light, it is significant that though the draft order had not proposed any addition with regard to the restructuring and the said transaction, yet, the DRP had asked for details of the restructuring and had examined the matter. After such examination, the DRP did not direct any addition to be made in this regard. It is evident that the DRP formed an opinion that the transaction was not exigible 16 ITA No. 532/Del/2016 to capital gains tax and, to contend otherwise, in the purported reasons for re-opening of the assessment, would be nothing but a 'change of opinion' which is not permissible in law."
(Emphasis supplied by us)
13. In view of this binding precedent, while respectfully following the same, we find it difficult to agree with the submissions of the Ld. AR, as such, we reject the same.
14. Ld. AR further argued that the DRP vide paragraph No. 6.10(1) directed the AO to compute the disallowance u/s 40(a)(i) of the Act in accordance with the CBDT Circular no. 3/2015 dated 12.02.2015 and the AO was expected to verify the factual situation while computing the disallowance u/s 40(a)(i) of the Act. Ld. Counsel drew our attention to page nos. 547 to 558 of the Paper Book, containing the submissions made by the assessee before the Ld. DRP and submitted that no sufficient time was granted for submitting the response of the assessee on this aspect, and the AO also did not do any exercise pursuant to the directions of the Ld. DRP but proceeded to compute the disallowance. Ld. AR submits that while computing the disallowance u/s 40(a)(i) of the Act the AO should have considered the factual situation that has a bearing 17 ITA No. 532/Del/2016 on the computation of disallowance u/s 40(a)(i) of the Act. From a reading of the assessment order, we find that the AO did not consider any further facts while complying with the directions of the DRP, as such, this fact needs verification at the end of the AO, after affording an opportunity to the assessee to furnish the requisite details that have a bearing on the disallowance u/s 40(a)(i) of the Act. We, therefore, set aside this aspect to the file of the AO.
15. In the result, the appeal of the assessee is allowed in part for statistical purpose.
Order pronounced in the open court on 12.09.2017 Sd/- Sd/-
(N.K. SAINI) (K. N. CHARRY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 12.09.2017
*Kavita Arora
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
TRUE COPY
ASSISTANT REGISTRAR
ITAT NEW DELHI
18
ITA No. 532/Del/2016
Draft dictated on 04.09.2017/05.09.2017
Draft placed before 06.09.2017
author
Draft proposed &
placed before the
second member
Draft 12.9.17
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comes to the
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Date on which file
goes to the AR
Date on which file
goes to the Head
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