Income Tax Appellate Tribunal - Delhi
Triune Energy Services Pvt. Ltd., New ... vs Dcit, New Delhi on 27 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-2', NEW DELHI
BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No.1744/Del/2015
Assessment Year: 2010-11
M/s. Triune Energy Services Vs. DCIT,
Pvt. Ltd., Cricle-25(2), C.R. Building,
B-1, H4A, Mohan Cooperative New Delhi
Industrial Estate, Mathura
Road, New Delhi
PAN : AAKCS1045E
(Appellant) (Respondent)
Appellant by Sh. Gautam Jain, Adv.; Sh. Lalit
Mohan, CA; and Sh. Piyush Kumar,
Adv.
Respondent by Sh. Sanjay Kumar Yadav, Sr.DR
Date of hearing 27.03.2018
Date of pronouncement 27.04.2018
ORDER
PER O.P. KANT, A.M.:
This appeal by the assessee is directed against order dated 26/12/2014 of the Deputy Commissioner of Income Tax, circle- 25(2), New Delhi (in short 'the Assessing Officer') for assessment year 2010-11, which has been passed in compliance to the directions of the Ld. Dispute Resolution Panel (DRP). The grounds raised in the appeal are reproduced as under:
The aforementioned Appellant appeals against the order of Dy. Commissioner of Income Tax, Circle- 25(2), Central revenue 2 ITA No.1744/Del/2015 Building, New Delhi, dated 26 December, 2014. The following are the grounds of objections to the order passed:-
1. That the Assessing Officer ('AO')/Dispute Resolution Panel ('DRP') has erred in making an addition of Rs.
5,14,35,841/- under Section 92CA(3) of Income Tax Act, 1962 ('Act') to the total income of the Appellant on account of adjustment in the Arm's Length Price ('ALP') of the international Transactions.
a) Ld. AO/DRP has erred in considering Transactional Net Margin Method ('TNMM')as Most Appropriate Method ('MAM') instead of Comparable Uncontrolled Price method.
b)(i) Without prejudice to ground 1(a), and based on facts and circumstances of this case, Ld. AO/DRP has even erred in computing transactional net margin earned from services provided to Associated Enterprise
b)(ii) Without prejudice to ground 1(a), and based on facts and circumstances of this case, Ld. AO/DRP has erred in facts and law while considering certain companies as comparables to the Appellant with respect to the provision of services to Associated Enterprises
2. That the AO/ DRP erred in disallowing the claim of Rs. 4,28,07,185/- on account of depreciation on intangibles and concurring the findings of Assessing Officer in assessment year 2007-08.
3. That the DRP has failed to appreciate the evidence produced by Appellant.
2. Briefly stated facts of the case are that the assessee was engaged in the business of engineering and design services with a specific strength in oil and gas, petroleum refinery, chemicals, petrochemicals and pipeline sectors. For the year under consideration i.e. assessment year 2010-11, the assessee filed 3 ITA No.1744/Del/2015 return of income electronically on 20/09/2010 declaring total income of Rs.4,71,01,470/-. The case was selected for a scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short 'the Act') was issued and complied with. During the scrutiny proceedings, the Assessing Officer noted the international transaction carried out by the assessee with its Associated Enterprises (AEs) and, accordingly, he referred the matter to the Ld. Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) of the international transaction. The Ld.TPO vide order dated 30/01/2014 under section 92CA(3) of the Act, proposed adjustment of Rs.5,14,35,841/- to the international transaction. Besides the transfer pricing adjustment proposed by the learned Transfer Pricing Officer, the Assessing Officer made certain additions/disallowances in the draft assessment order passed on 28/03/2014. Aggrieved, the assessee filed objections against the draft assessment order before the Ld. DRP on 30/04/2014. The Ld. DRP in its directions dated 16/12/2014 allowed part relief to the assessee. In compliance to the direction of the Ld. DRP, the Assessing Officer issued final assessment order on 26/12/2014 assessing the total income at Rs.14,15,70,800/-. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. The ground No. 1 of the appeal relates to transfer pricing adjustment of Rs.5,14,35,841/-.
3.1 The facts in respect of the transfer pricing adjustment are that the assessee was engaged in providing engineering and design services in sector of oil and gas services including offshore 4 ITA No.1744/Del/2015 construction and drilling to its Associated Enterprises (AEs) as well as to Non-Associated Enterprises (Non-AEs). The assessee also procured engineering services from its Associated Enterprises. The international transactions entered into by the assessee with its Associated Enterprises have been summarized by the Ld. TPO as under:
S. No. Nature of transaction Method Amount (in INR)
1. Provision of engineering CUP 13,64,58,873 and design services
2. Procurement of TNMM 11,55,48,939 engineering services
3. Recovery of expenses - 11,37,410 3.2 The Ld. TPO accepted value of the transaction of procurement of engineering services reported by the assessee as at arm's length, however, transaction of providing engineering and design services was not accepted by him. For benchmarking the provision of engineering and design services to the AEs, the assessee selected Comparable Uncontrolled Price (CUP) method as the most appropriate method. According to the assessee, man-
hour rate charged to the non-AEs was Rs.18.83, whereas the man-hour rate charged to AEs was Rs. 32.76, which being higher, the transaction with AEs was at arm's length. This contention of the assessee was rejected by the Ld. TPO on the ground that transaction with AEs was not strictly comparable uncontrolled transaction with the transaction with non-AEs, in view of Rule 10B(2) of the Income Tax Rules, 1962 (in short 'the Rules'), which state that comparability of an international transaction with uncontrolled transaction shall be judged with reference to 5 ITA No.1744/Del/2015 conditions prevailing in the market, the geographical location, the size of the market, cost of labour, overall economic development, level of competition etc. According to the Ld. TPO, the assessee had not provided details of services provided to AEs and non-AEs as required for a strict comparability under the CUP method and the geographical area of the AE and Non-AE was also different. The Ld. TPO also relied on the OECD guidelines and the decision of the Tribunal, Mumbai Bench in the case of Intervet India (P) Ltd Vs. ACIT (2010) 130 TTJ 301, to reject the CUP method as the most appropriate method (MAM).
3.3 The Ld. TPO chosen Transactional Net Margin Method (TNMM) as most appropriate method using the operating Profit/Total Cost (OP/TC) and Profit Level Indicator (PLI) for benchmarking the international transaction of the assessee. The Ld. TPO allocated the operating cost in respect of the AE transaction in the ratio of total man-hours consumed (81962) towards AE transactions to the total man-hours (359692) consumed both for the AE and non-AE. The said allocation made by the Ld. TPO, wherein he computed the total cost (total expenses) of Rs. 13,77,66,716/- towards AE transactions, is reproduced as under:
Particulars AE Non-AE Total Man hours consumed 81962 277730 359692 Service Income Utilized (AE + Non AE) 31068901 474344273 505413174 Unutilized 93423354 - 93423354 Other income (Divided on Man- 941606 3338422 4280028 hour Basis) Total Income 125433861 477682695 603116556 6 ITA No.1744/Del/2015 As you have not provided any basis for cost allocation, these will be divided on Man-hour basis Consultancy & sub-contract 27670815 98105618 125776433 charges Personal Expense 65172441 231065929 296238370 Administrative Expense 28329889 100442335 128772224 Less:Foreign exchange loss Less: Loss on sale of fixid assets Marketing expense 1100619 3902198 5002817 Bank Charges 1440971 5108897 6549868 Depreciation 14051981 49820660 63872641 Total Expenses 137766716 488445637 626212353 Operating Profit (-12332855) (-10762942) (-23095797) (Operating Profit/Total Expenses (-8.95%) (-2.20%) (-3.68%)
3.4 The assessee objected to the above allocation of cost towards AEs transaction. According to the assessee, out of the total man- hours of 81,962 billed to AE, only 5695 hours were utilized and balance 76267 hours were non-utilized. The assessee provided segmental accounts of the AE for utilized as well as un-utilized man-hours. The Ld. TPO rejected the segmental cost allocation computed by the assessee.
3.5 The Ld. TPO selected 11 comparables and worked out their averages profit margins (OP/OC) at 27.70%. The Ld. TPO applied this average margin over the Operating Cost (Rs.13,77,66,716/-) of AE transactions and computed the arm's length price at Rs.17,59,28,096/- and after subtracting the price of Rs.3,10,68,901/- for utilised man-hours and Rs. 9,34,23,354/- for unutilised man-hours received by the assessee, adjustment for balance amount of Rs.5,14,35,841/- was proposed. Before the Ld. DRP, the assessee objected to TNMM as the most appropriate method as well as selection of comparables. The Ld. DRP rejected 7 ITA No.1744/Del/2015 the objections raised by the assessee and affirmed the finding of the Ld. TPO.
3.6 Before us, the learned counsel objected on the basis adopted by the Ld. TPO of allocation of cost to AE transactions. The Ld. Counsel referred to page 361 of the paper book, which is part of transfer pricing report of the assessee and submitted that according to the terms of agreement between the assessee and its AEs, in case if the actual utilization of the hours of the assessee falls below the committed hours, the AEs shall pay to the assessee for the unutilized hours at an agreed rate. The Ld. Counsel submitted that only 5695 man-hours were utilized towards AE transaction as against committed man-hours of 81,962. The Ld. counsel referred to para 5 of the show cause notice issued to the assessee by the Ld. TPO, wherein he has referred the fact of committed man-hours and utilised man-hours towards the AE transactions.
3.6.1 The Ld. counsel submitted that, if utilized man-hour is taken as basis of allocation of cost for AE transactions, then the said cost would work out to Rs.99,14,814/- and arm's length price applying the average margin of comparables of 27.70 %, would work out to Rs.1,26,61,217/-, which being less than the price charged by the assessee of Rs.3,10,68,901/- for man-hours utilized, no adjustment would be required to the value of the transaction reported by the assessee. The Ld. counsel of the assessee submitted a chart of computation of cost of AE transactions and arm's length price based on the man-hours utilized, which is placed on the file.
8 ITA No.1744/Del/20153.7 The Ld. DR was provided a copy of the chart submitted by the Ld. counsel on last date of hearing, for pointing out any arithmetical error, however, he did not point out any such arithmetical error in the above chart and concurred that if the man-hours utilized is taken as basis of allocation of cost towards AE, then no transfer pricing adjustment would be required. The Ld. DR, however, submitted that cost towards AE should be allocated on the basis of the committed man-hours rather than the man-hours utilised on the basis of the matching principles of revenue and expenses.
3.8 We have heard the rival submissions of the parties and perused the relevant material on record. In the facts of the case the issue in dispute before us is only in respect of basis of allocation of costs towards AE transactions. The chart submitted by the Ld. counsel comparing the allocation of cost as done by the Ld. TPO and on the basis of man-hours utilized by the AE, is reproduced as under:
Particulars As per TPO As per
Assessee
AE NON AE Total AE
(23%) (77%) 1.58%
Man Hours Consumed 81,962 2,77,730 3,59,692 5,695
Service Income ----
Utilized (AE + Non AE) 3,10,68,901 47,43,44,273 50,54,13,174 3,10,68,901
Unutilzed 9,34,23,354 - 9,34,23.354
Other income 9,41,606 33,38,422 42,80,028 65,426
(Divided on Man hour Basis)
Total Income (I) 12,54,33,861 47,76,82,695 60,31,16,556 3,11,34,327
As you have not provided any (22%) (78%)
basis for cost allocations, these
will be divided on Man- hours
basis |
9
ITA No.1744/Del/2015
Consultancy and sub-contract 2,76,70,815 9,81,05,618 12,57,76,433 19,91,417
charge
Personal Expenses 6,51,72,441 23,10,65,929 29,62,38,370 46,90,340
Administrative Expense 2,83,29,889 10,04,42,335 12,87,72,224 20,38,849
Less: Foreign exchange loss ----- -----
Less: Loss on sale of fixed
------ ------
assets
Marketing expense 11,00,619 39,02,198 50,02,817 79,209
Bank Cheques 14,40,971 51,08,897 65,49,868 1,03,704
Depreciation 1,40,51,981 4,98,20,660 6,38,72,641 10,11,295
Total Expenses (II) 13,77,66,716 48,84,45,637 62,62,12,353 99,14,814
Operating Profit (III = I-II) (1,23,32,855) (1,07,62,942) (2,30,95,797) 2,12,19,513
Operating Profit /Total (-8.95%) (-2.20%) -3.69% 214%
Expenses (IV- 111/11*100)
Arm's length margin (%) (V) 27.70% 27.70%
Arm's length margin (in Rs.) 3,81,61,380 27,46,403
(VI=II*V)
Arm's length price (VII-II+VI) 17,59,28,096 1,26,61,217
Price charged by Assessee
(VI11) 3,10,68,901 3,10,68,901
Difference for which 14,48,59,195 No Adjustment
adjustment is required to be
made (IX = VII- VIII)
3.8.1 It is evident that total cost of Rs.62,62,12,353/- has been incurred by the assessee towards man-hours utilized for AE as well as non-AE. The Ld. TPO added man-hours committed (81,962) by the AE and the man-hours utilized (2,77,730) towards non-AE transactions and worked out total man-hours to 3,59,692. He worked out ratio of the man-hours consumed (committed) by the AE as compared to total man-hours consumed as 23%. He then mentioned the receipt of Rs. 3,10,68,901/- from the AE corresponding to man-hours utilized and receipt of Rs.9,34,23,354/-from AE corresponding to the unutilized man- hour. The Ld. TPO then applied this ratio of utilized man-hours of AE to total man-hours over the total expenses of Rs.
10 ITA No.1744/Del/201562,62,12,353 and worked out total operating cost of AE transactions at Rs.13,77,66,716/-. In this manner, the Ld. TPO allocated the cost of Rs.13,77,66,716/- towards the AE transactions. Whereas, the contention of the Ld. counsel is that for allocating costs toward the AE transactions, the total cost incurred by the assessee should be allocated in the ratio of man- hours utilised by the AE to the total man-hours utilised, both by the AE and non-AE. He also drawn our attention to para 5 of the show cause notice issued by the Ld. TPO, acknowledging utilized man-hours toward AE transactions, which reads as under:
"5. As per the information provided during the TP proceedings it has been explained that out of the 81,962 man hours consumed by the assessee company in the AE segment, only 5,695 man hours have been actually utilized. The payment has been made by the AE for the entire 81,962 man hours, which was committed by the AE to the assessee company. The cost incurred by the assessee company is, therefore, for only 5695 man hours utilized and not for entire 81962 man hours. As per the agreement between assessee and the AE, if the work assigned to the assessee company exceeds the committed work load for a year, then the payment made for the unutilized man hours shall be adjusted in the subsequent years."
3.8.2 According to, the Ld. counsel, if basis of allocation of costs towards AE transaction out of the total cost incurred i.e. allocation key, is taken as the man-hours utilized than there would not be any adjustment even after adopting TNMM as most appropriate method and working out arms length price applying average margins of comparables selected by the learned TPO.
11 ITA No.1744/Del/20153.8.3 In our opinion, the contention of the Ld. counsel is logical and on scientific basis. For allocation of cost between the AE and the non-AE transactions, different basis cannot be taken. In other words, we cannot take different yardsticks for measuring cost incurred toward AE and non-AE transaction by same set of manpower. Taking committed man-hours in the case of AE, which also included unutilized man-hours, would distort the allocation key. Thus, the basis of allocation of the cost towards the AE trasnaction should be on man-hours utilized only and not on man-hours which have been committed by the AE for payment. In para 10.1 of the order of the Ld. TPO, he has considered the price charged by the assessee for AE transaction at Rs.3,10,68,901/- which means that receipt from unutilized man-hours has been treated by him as non-operating income. On this account also, the Ld. TPO should have only computed the cost allocated towards utilized man-hours of AE transactions according to the matching principle of revenue & expenses. In our opinion, the total cost incurred by the assessee is for total man-hours utilized, both for the AE as well as non-AE transactions, and thus, while allocating the cost to the AE transactions, non-utilized man- hours cannot be included.
3.8.4 Since the man-hours utilized for the AE are 5695 and man-hours utilized for non-AE are 2,77,730, the total man-hours utilized would be (5695 + 2,77,730 =) 2,83,425 and the ratio of man-hours utilized by the AE to the total man-hours utilized would be (5695/283425)X 100 = 2%.
12 ITA No.1744/Del/20153.8.5 Accordingly, out of the total cost of Rs.62,62,12,353/- of the assessee, the cost which could be allocated to the AE transaction would be worked out to [( 62,62,12,353 X 2)/100]= Rs. 1,25,82,797/-.
3.8.6 On applying the average margin of 27.70% of comparables as computed by the Ld. TPO, on the operating cost of AE transactions of Rs.1,25,82,797, the arm's length margin works out to Rs. [( 1,25,82,797 X 27.70/100]= 34,85,434/. When we add the operating cost towards AE transaction of Rs.1,25,82,797/- to arm's length margin of Rs.34,85,434/-, the arm's length price of AE transaction works out to Rs. 1,60,68,232/-.
3.8.7 Since the amount received by the assessee corresponding to the man-hours utilised by the AE has been worked out by the Ld. TPO at Rs. 3,10,68,901/-, which being less than the arm's length price of Rs. 1,60,68,232/- computed above , in our opinion, no adjustment to the price of International transaction of provision of engineering and design services is required. 3.8.8 Accordingly, the ground No. 1(b)(i) of the appeal is allowed and ground Nos. 1(a) and 1(b)(ii) of the appeal dismissed as infructuous as the addition in question already stands deleted by our decision in ground No. 1(b)(i).
4. The ground No. 2 of the appeal relates to disallowance of depreciation of Rs.4,28,07,185 on intangibles. 4.1 Before us, the Ld. counsel of the assessee submitted that said disallowance has been made by the Ld. Assessing Officer on the basis of order of assessment for assessment year 2007-08. He 13 ITA No.1744/Del/2015 submitted that in assessment year 2007-08, the issue has been decided by the Hon'ble Delhi High Court in favour of the assessee following the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Smifs Securities Limited reported in 348 ITR 302. Accordingly, he submitted that disallowance in question might be deleted.
4.2 The Ld. DR, on the other hand, could not controvert the above statement of the Ld. Counsel of the assessee. 4.3 We have heard the rival submission and perused the relevant material on record. The finding of the Assessing Officer on the issue of disallowance of deposition on intangibles is reproduced as under:
"Assessee was specifically asked to submit that why depreciation on intangible should not be disallowed. Assessee submitted that a sum of Rs. 40,58,00,000/- was attributable to intangible assets relating to design engineering capability in the hydro carbon in sector, which was acquired by the assessee as part of aforesaid business. Assessee further submitted that as these assets were required as a result of slump sale, it is undoubted that TPPL carried significant goodwill in terms of such capability and recognition, for which any purchasing party would be willing to pay substantial premium, or in other words,' goodwill'.
The assessing Officer did not allow depreciation on the aforesaid intangible assets in the assessment year 2007- 08, doubting the existence and acquisition of the aforesaid intangible assets by the assessee and raising various allegations or the bona fide on the intangible asset. Facts remaining same for this year's also, claim of depreciation of Rs.4,28,07,185/- is disallowed and added back to the total income of the assessee company.
..............................................................."14 ITA No.1744/Del/2015
4.4 The Ld. DRP also upheld the action of the Assessing Officer. We note that the Hon'ble Delhi High Court in the case of the assessee itself for assessment year 2007-08 in ITA 40/2015 decision dated 19/11/2015, which is reported in 237 taxman 230(Del) has decided this issue in favour of the assessee. The relevant finding of the Hon'ble High Court is reproduced as under:
"19. In view of the above, we are inclined to accept the contention advanced on behalf of the Assessee that the consideration paid by the Assessee in excess of its value of tangible assets was rightly classified as goodwill.
20. In the facts of the present case, the ITAT has rejected the view that the slump sale agreement was a colourable device. Once having held so, the agreement between the parties must be accepted in its totality. The Agreement itself does not provide for splitting up of the intangibles into separate components. Indisputably, the transaction in question is a slump sale which does not contemplate separate values to be ascribed to various assets (tangible and intangible) that constitute the business undertaking, which is sold and purchased. The Agreement itself indicates that slump sale included sale of goodwill and the balance sheet drawn up on 22nd September, 2006 specifically recorded goodwill at Rs.40,58,75,529.40/-. As indicated hereinbefore Goodwill includes a host of intangible assets, which a person acquires, on acquiring a business as a going concern and valuing the same at the excess consideration paid over and above the value of net tangible assets is an acceptable accounting practice. Thus, a further exercise to value the goodwill is not warranted.
21. In view of the aforesaid, the question framed is answered in the negative, that is, in favour of the 15 ITA No.1744/Del/2015 Assessee and against the Revenue. The Assessee's appeal (ITA No. 40/2015) is, accordingly, allowed."
4.5 Thus, respectfully following the above finding of the Hon'ble Delhi High Court, which being a binding precedent, we direct the Ld. AO to delete the above disallowance of Rs.4,28,07,185/- on account of depreciation on intangibles. The ground No. 2 of the appeal is accordingly allowed.
5. The ground Nos. 3 & 4 were not pressed by the Ld. counsel before us and, thus, these grounds are dismissed as infructuous.
6. In the result, the appeal of the assessee is allowed partly.
The decision is pronounced in the open court on 27th April, 2018.
Sd/- Sd/-
(AMIT SHUKLA) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 27th April, 2018.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi