Income Tax Appellate Tribunal - Delhi
M/S. Alcatel-Lucent India Limited ... vs Ito, New Delhi on 6 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No.2209/Del/2014
Assessment Year : 2008-09
Alcatel-Lucent India Limited Vs. Income Tax Officer,
("ALIL"), Ward 1(4),
15th Floor, Tower-C, New Delhi.
DLF Cyber Greens,
DLF City, Phase-III,
Gurgaon.
PAN: AACCA8667N
ITA No.2154/Del/2014
Assessment Year : 2008-09
Income Tax Officer, Vs. Alcatel-Lucent India
Ward 1(4), Limited ("ALIL"),
New Delhi. 15th Floor, Tower-C,
DLF Cyber Greens,
DLF City, Phase-III,
Gurgaon.
PAN: AACCA8667N
(Appellant) (Respondent)
ITA Nos.2209 & 2154/Del/2014
Assessee By : Shri Himanshu Sinha, Advocate
Department By : Shri Kumar Pranav, Sr.DR
Date of Hearing : 04.04.2018
Date of Pronouncement : 06.04.2018
ORDER
PER R.S. SYAL, VP:
These two cross appeals - one by the assessee and the other by the Revenue arise out of the order passed by the CIT(A) on 28.01.2014 in relation to the assessment year 2008-09.
2. The first issue raised in the assessee's appeal is against the confirmation of transfer pricing addition in the international transaction of 'Rendering of marketing support services.'
3. Briefly stated, the facts of the case are that the assessee is engaged in manufacture, distribution and sale of digital switching equipments, cellular exchange equipments and other telecommunication equipments and also in the provision of related services. It also provides intra-group marketing, technical support and contract software development services. The assessee has Trading segment, Manufacturing segment, Technical support services segment, Marketing support services segment and Software development 2 ITA Nos.2209 & 2154/Del/2014 services segment. Return was filed declaring certain international transactions in Form No.3CEB. The Assessing Officer (A.O.) made a reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of such international transactions. Instantly, we are concerned with the international transaction of 'Rendering of Marketing support services' whose transacted value was shown at Rs.21,50,07,391/-. The assessee applied Transactional Net Margin Method (TNMM) with the Profit level indicator (PLI) of Operating Profit/Total Cost (OP/TC) for demonstrating that this international transaction was at ALP. Six comparables were chosen by the assessee which have been listed on page 67 of the TPO's order. The TPO rejected all the comparables selected by the assessee. In the final analysis, the TPO selected ten new comparables as have been specified on page 87 of his order. Considering the adjusted mean margin (after working capital adjustment) of these comparables at 22.55%, the TPO proposed transfer pricing adjustment of Rs.2,64,17,933/-. The Assessing Officer passed final order making transfer pricing addition in the international transaction. Aggrieved thereby, the assessee moved the ld. CIT(A), who directed to exclude Rites Ltd. (Seg.) and WAPCOS Ltd. 3
ITA Nos.2209 & 2154/Del/2014 (Seg.) from the list of comparables. This resulted into the transfer pricing addition in the international transaction of rendering `Marketing support services segment', which has been assailed by the assessee in the instant appeal.
4. We have heard the rival submissions and gone through the relevant material on record. The ld. AR did not dispute any aspect of the determination of the ALP of the international transaction of marketing support services except the inclusion of Apitco Ltd.
5. Before analyzing the comparability or otherwise of this company, it is sine qua non to first comprehend the functional profile of the assessee in this international transaction. The transfer pricing study report of the assessee, whose copy is available in the paper book, discusses the nature of Marketing support services on page 26. It has been mentioned that the assessee rendered marketing support services with focus on carrier and non- carrier segments. The assessee acts as a channel of communication between the group companies and distributors/customers for providing product related information like technical specifications and features etc. 4 ITA Nos.2209 & 2154/Del/2014 and is also engaged in the provision of sales services to support the core activities.
6. With this understanding of the nature of services rendered by the assessee under this international transaction, let us turn to Apitco Ltd., which was selected by the TPO as comparable and the assessee's challenge before the TPO on the strength of different functional profile, remained unsuccessful. We have analyzed the Annual report of this company, which is available at page 981 onwards of the paper book. From this Report, it can be seen that its `Income from operations' stands at Rs.10,51,40,438/-, break-up of which has been given in Schedule 11, as under :-
INCOME FROM OPERATIONS Micro Enterprises Development 15,008,500 Skill Development 11,287,965 Entrepreneurship Development 3,479,000 Research Studies 12,622,090 Project related Services 20,164,045 Infrastructure Planning and Development 13,614,966 Environment Management 4,207,748 Energy Related Services 1,624,195 Cluster Development 2,408,000 Technology Facilitation -
Asset Reconstruction & Management Services 20,193,454
Emerging Areas 530,475
___________
105,140,438
___________
5
ITA Nos.2209 & 2154/Del/2014
7. 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 under this international transaction. We fail to appreciate as to how all the above listed services, taken in unison, can be construed as comparable to the services provided by the assessee, which are restricted to marketing support services discussed above.
8. The ld. DR strenuously argued that all the activities done by this company are basically `Business services' and the assessee is also 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 6 ITA Nos.2209 & 2154/Del/2014 contention that there is no requirement to have identical services for the purpose of making comparison under the TNMM.
9. 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 the 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 lacking the functional similarity of Apitco Limited on entity level with the assessee company. As such, we order for its exclusion from the final set of comparables.
10. The only other issue raised by the assessee and the sole issue raised by the Revenue is in respect of transfer pricing addition in the international transaction of `Technical support services'.
7
ITA Nos.2209 & 2154/Del/2014
11. Briefly stated, the facts apropos this issue are that the assessee, under this segment, is engaged in providing technical support services. In this context, the TPO has noted 8 international transactions on pages 2 and 3 of his order. The 8th transaction is of `Marketing support services', which we have dealt with above. All the remaining international transactions from Sl.No.1 to 7 are combined under the instant overall international transaction of `Technical services'. These seven transactions comprise of Receipt/rendition of technical support services including purchase/sale of spare parts in such rendition of technical services. The assessee computed its PLI of this international transaction under TNMM at 7.59% and the mean margin of 11 comparables selected by it at 11.82%. The TPO rejected all the comparables chosen by the assessee and selected six fresh comparables, which have been listed on page 45 of his order. Mean margin of these comparables at 30.19% was taken as benchmark. Applying the same, he worked out the amount of transfer pricing adjustment. The ld. CIT(A) directed to exclude Alphageo India Ltd. from and include TCIL in the final list of comparables drawn by the TPO. Whereas the assessee is aggrieved against three inclusions sustained in the first appeal and two non- 8
ITA Nos.2209 & 2154/Del/2014 inclusions, the Revenue has challenged the exclusion of Alphageo and the inclusion of TCIL in the final set of comparables.
12. Before we proceed to consider the comparability or otherwise of the companies assailed by both the sides, it is significant to note the functional profile of the assessee under this international transaction. Page 26 of the Transfer pricing study report gives details of `Technical services' under para 4.3.25 which is as under:-
"4.3.25 Alcatel Lucent India provides technical services with respect to telecom equipment sold to customers in India. Alcatel Lucent India's services include services in the range of installation, commissioning, testing, software configuration, system integration to post implementation equipment support. Typically, Alcatel Lucent India provides services like:
• Project management services;
• Installation and commissioning services;
• After sales support services: This includes post-installation
equipment support and maintenance services to its customers; • Emergency services: Consisting of telephone support or on-site support to take care of emergency situations;
• Trouble report-handling services: Provision of answers to trouble reports pertaining to any fault or problem relating to the system; • Consultation services: Answers/recommendations relating to general system operation and maintenance queries of the customer; and • Repair services: It extends services to customers for repair of faulty hardware that does not function in accordance with prescribed specifications."
9
ITA Nos.2209 & 2154/Del/2014
13. On consideration of the above extraction from the TP Study report, it is clear that the assessee provided services, primarily, of installation, commissioning and testing of telecommunication equipments; post- implementation equipment support; and after-sales support and maintenance services. With the above understanding of the nature of services provided by the assessee, now we will venture to examine the comparables challenged by the assessee in its appeal.
(i) Mahindra Consulting Engineers Ltd.
14. The TPO included this company in the list of comparables without any discussion in his order. The ld. CIT(A) upheld the inclusion, against which the assessee has approached the Tribunal.
15. We have examined the Annual report of this company, a copy of which has been placed in the paper book. It can be seen from the Director's report that the company provided consultancy services in the areas of Special Economic Zones, water supply and sewage, solid waste management, urban infrastructure, agro infrastructure, social infrastructure, port and harbor and offshore terminal and industrial infrastructure etc. This 10 ITA Nos.2209 & 2154/Del/2014 company also worked on innovative projects like centre of excellence of horticulture, dedicated offshore terminal for coal handling. The above description of the consultancy services rendered by this company divulges that the same are quite diverse in nature. As against this, the assessee is providing services of installation and post-implementation of telecommunication equipments along with after-sales support and maintenance. It is apparent that nature of services rendered by the assessee is quite different from those rendered by Mahindra Consulting Engineers Ltd. The mere nomenclature of rendering 'Consultancy services' does not make two companies comparables. An assessee selling cars cannot be compared with another assessee selling electronics simply on the ground that both are making some `sales'. To ensure comparability, we need to see the nature of products sold. Sale of cars and electronics can't be compared because of difference in functions, assets employed and risks assumed. Comparability can be established only w.r.t. the nature of goods sold. Similar is the position qua `Consultancy services'. One needs to examine the nature of consultancy services rendered by two companies so as to decide on their comparability. When we examine the nature of consultancy 11 ITA Nos.2209 & 2154/Del/2014 services rendered by the assessee, the same are found to be quite different from those rendered by Mahindra Consulting Engineers Ltd. We, therefore, order for the exclusion of this company from the list of comparables.
(ii) STUP Consultants Pvt. Ltd.
16. The TPO included this company in the list of comparables on the basis of his own search process. There is no discussion on the functional profile of this company in his order. The ld. CIT(A) retained it in the list of comparables by observing that the majority of income of this company was from `Professional fee' from technical services. The assessee is aggrieved against its inclusion.
17. We have gone through the Annual report of this company, whose copy is available in the paper book. Segmental information given on page 20 of its Annual Report shows that it : ` is carrying on profession of Civil Engineering and Architecture Consultancy'. Thus it is evident that the nature of civil engineering and architecture consultancy services provided by this company are quite different from the services of installation and post-implementation of telecommunication equipments along with after- 12
ITA Nos.2209 & 2154/Del/2014 sales support and maintenance rendered by the assessee company. These services are no match to each other. We, therefore, order to exclude this company from the list of comparables.
(iii) Semac Ltd.
18. The TPO obtained the Annual report of this company by means of notice u/s 133(6) of the Act, whose copy was provided to the assessee along with relevant show cause notice. It was observed that entire income of this company was from `Professional fee'. The assessee's objections about non-comparability of services, were rejected. The ld. CIT(A) echoed the assessment order on the inclusion of this company, against which the assessee has come up in appeal before the Tribunal.
19. We have gone through the Annual report of this company from which it emerges that this: "company operates mainly in one business segment, viz., engineering consultancy of industrial projects being primary segment and all other activities revolved around the main activity." Thus, it is apparent that this company is engaged in providing `Engineering consultancy for industrial projects'. As against this, the assessee in appeal is rendering technical support services mainly in installation and 13 ITA Nos.2209 & 2154/Del/2014 commissioning of telecommunication equipments and also providing after- sales support services. Obviously, there can be no match of the technical consultancy services provided by the assessee with those rendered by Semac Ltd. At the cost of repetition, we state that the mere nomenclature of consultancy or professional services does not make two companies comparables. Since the nature of consultancy services provided by the assessee and Semac Ltd. are quite different from each other, we, therefore, hold that this company cannot be included in the list of comparables.
20. Apart from challenging the inclusion of above three companies, the assessee has also assailed non-inclusion of the following two companies:-
(i) Intarvo Technologies Ltd.
21. During the course of proceedings before the ld. CIT(A), the assessee submitted results of fresh search for comparables in `Technical support services segment' which were forwarded to the Assessing Officer/TPO for examination and comments. Intarvo Technologies Ltd., is the first company, which the assessee sought to include in the list of comparables for the first time before the ld. CIT(A). In the absence of the availability of 14 ITA Nos.2209 & 2154/Del/2014 the audited accounts of this company in the data base, the TPO as well as the ld. CIT(A) decided not to include it in the list of comparables.
22. A copy of Annual report has been now placed on record. We have gone through such Annual report which is available in the paper book. Under the head 'Segment reporting', this company has mentioned that the services provided by different segments include 'Call centre services of technical support' to various clients, such as, Hewlett Packard, IBM, Lenovo and Acer etc. We find that these services cater to hardware of computers, which is not the case under consideration. In addition, this company is also engaged in providing services of installation of BTS equipments for telecom towers for customers, such as, Nokia, Hutch, Idea, Reliance and Ericsson etc. A brief description of the nature of services provided by this company reveals that these are not similar to installation and testing of telecommunication equipments along with after-sales support and maintenance services etc. provided by the assessee. We, therefore, hold that this company was rightly excluded.
15
ITA Nos.2209 & 2154/Del/2014
(ii) Microland Ltd. (Infrastructure Management Service)
23. The TPO noticed that this company has two segments only, viz., ITES segment and Infrastructure Management segment. The assessee claimed that the `Infrastructure management segment' was functionally similar. The TPO did not approve the comparability of this segment with the assessee, which came to be affirmed in the first appeal.
24. We have perused the Annual report of this company, which is available in the paper book. It is manifest from such report that this company provides : `end-to-end IT infrastructure management services', which is obviously not the case insofar as the assessee is concerned. Further, para B of annexure to Director's report deciphers that this company is also engaged in Research and development of `Infrastructure management service' domain. The assessee is not into any research and development activities. These factors makes Microland Ltd. incomparable to the assessee company. The impugned order is upheld on this score.
25. The Department in its appeal is aggrieved against the exclusion of Alphageo (India) Ltd. After going through the impugned order and the 16 ITA Nos.2209 & 2154/Del/2014 other relevant material, it surfaces that this company is engaged in providing Seismic services to the oil exploration and production sectors. It also provides various services including design and pre-planning of 2D and 3D surface seismic data acquisition, seismic data processing and seismic data interpretation etc. Since the entire spectrum of the services rendered by this company is that of seismic and related services, we hold that the same cannot be considered as comparable with the assessee company. It is, therefore, held that the ld. CIT(A) was justified in excluding this company from the list of comparables.
26. The Department is aggrieved against the inclusion of TCIL. The TPO rejected this company from the list of comparables by noticing that it was undertaking turnkey projects in all fields including consultancy service segment. The ld. CIT(A) reversed the view of the TPO by observing that the consultancy services provided by this company were similar. The Revenue is accordingly aggrieved.
27. After hearing both the sides and perusing the relevant material on record, we find that though the ld. CIT(A) directed to include TCIL in the 17 ITA Nos.2209 & 2154/Del/2014 list of comparables, but, he failed to discuss the nature of consultancy services rendered by this company. It has been observed in the earlier part of this order that the nature of consultancy services provided by a company should be similar to those rendered by the assessee company, so as to merit inclusion in the list of comparables. Since there is no discussion worth the name about the nature of consultancy services rendered by this company, we deem it appropriate to set aside the impugned order on this score and remit the matter to the file of Assessing Officer/TPO for deciding the inclusion or otherwise of this company afresh by ascertaining the true nature of consultancy services.
28. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustments and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transactions of 'Rendering of marketing support services' and 'Technical support service' in consonance with our above observations/directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
18
ITA Nos.2209 & 2154/Del/2014
29. In the result, both the appeals are allowed for statistical purposes.
The order pronounced in the open court on 06.04.2018.
Sd/- Sd/-
[SUCHITRA KAMBLE] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 06th April, 2018.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
19