Income Tax Appellate Tribunal - Delhi
Terex India Pvt. Ltd., Tamil Nadu vs Dcit, New Delhi on 30 May, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-2' : NEW DELHI)
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.4791/Del/2015
(ASSESSMENT YEAR : 2010-11)
M/s. Terex India Private Ltd., vs. DCIT, Circle 25 (1),
Plot No.E - 18, Phase II, New Delhi.
Expansion II, SIPCOT Indl. Park,
Hosur,
Tamil Nadu - 635 109.
(PAN : AACCT6500D)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ved Jain, Advocate
Shri Ashish Goel, CA
Shri Rishabh Jain, CA
REVENUE BY : Shri H.K. Choudhary, CIT DR
Date of Hearing : 09.05.2019
Date of Order : 30.05.2019
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, M/s. Terex India Private Ltd. (hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 27.01.2015 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 2 ITA No.4791/Del/2015 (for short 'the Act') qua the assessment year 2010-11 on the grounds inter alia that :-
"The grounds of appeal listed below are without prejudice to each other:
1. The order of the learned Deputy Commissioner of Income Tax, Circle - 25(1), New Delhi ('Assessing Officer' or 'AO') passed pursuant to the order of the learned Additional Director of Income Tax (Transfer Pricing Officer) - II (4), New Delhi (Transfer Pricing Officer' or TPO') and the directions issued by the Hon'ble Dispute Resolution Panel (the 'DRP'), to the extent prejudice to the Appellant, is erroneous, bad in law and contrary to the facts and circumstances of the case.
2. That on the facts and in the circumstances of the case the AO, TPO and DRP erred in making an adjustment of INR 9,87,50,638/- in the Arm's Length Price (,ALP') of the Appellant's international transactions with Associated Enterprises ('AEs').
Grounds in relation to Engineering Design Services COEDS') segment
3. The TPO, AO and DRP have erred, in law and in facts, by not accepting the economic analysis in respect of EDS segment undertaken by the Assessee in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Assessee's international transaction is not at arm's length.
4. The TPO, AO and DRP have erred, in law and in facts, by not providing the details of the search process in respect of the EDS segment.
5. The TPO, AO and DRP have erred, in law and in facts, by applying certain quantitative and qualitative filters which are arbitrary in nature for computing the ALP in respect of EDS segment.
6. The TPO, AO and DRP have erred, in law and in facts, by selecting certain additional companies as comparables which do not satisfy various comparability criteria and also erred in rejecting pertain companies identified by the Assessee based on incorrect reasons in respect of EDS segment.
3 ITA No.4791/Del/2015
7. The TPO, AO and DRP have erred, in law and in facts, by not making suitable adjustments to account for various differences in the risk profile of the assessee vis-à-vis the comparables.
Grounds relating to Manufacturing segment
8. The TPO, AO and DRP have erred, in law and facts, by not appreciating that the losses incurred by the Appellant was on account of economic and commercial reasons due to the first year of operation of the Appellant.
9. The TPO, AO and DRP have erred, in law and facts, by not appreciating the fact that the AEs have not made excessive margins on the exports made to the Appellant and accordingly, the loss was not attributable to the international transactions undertaken by the Appellant with the AEs.
10. The TPO, AO and DRP have erred, in law and facts, by not providing for suitable adjustments for differences like under- utilization of capacity, excessive customs duty to account for differences in the capacity utilisation and other adjustments for economic and commercial reasons by the Assessee vis-a-vis the com parables. By not doing so, neglecting the Indian transfer pricing regulations and the OECD guidelines on transfer pricing and judicial precedence.
11. The learned TPO and the learned AO have erred, in law and in facts, by not restricting the transfer pricing adjustment in respect of the import of raw materials transaction to the value of consumption of materials of the Assessee.
Grounds common to both EDS and Manufacturing segments
12. The TPO, AO and DRP have erred, in law and in facts, by determining the arm's length margin / price using only FY 2009- 10 data which was not available to the Assessee at the time of complying with the transfer pricing documentation requirements.
13. The TPO, AO and DRP have erred, in not allowing the benefit under the proviso to section 92C(2) of the Income-tax Act ('the Act')."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : The taxpayer, M/s. Terex India Private Limited, being an Indian company engaged in the manufacturing of 4 ITA No.4791/Del/2015 material processing equipments like crushers, screeners etc and is also into providing sales and post-sales business support and engineering design services to its Associated Enterprises (AE). During the year under assessment, the taxpayer entered into international transactions with its AE as under :-
Nature of International Transaction Method Amount (In INR) Purchase of raw material TNMM 160,782,287 Purchase of spare TNMM 3,502,093 Purchase of services TNMM 69,705,032 Receipt of services TNMM 34,491,124 Interest of ECB CUP 8,155,970 Corporate Chargers NA 16,313,777 Receipt of interest on overdue TNMM 989,789 Payment of interest on overdue TNMM 43,565 Reimbursements NA 9,992,070 Receipt of share application money NA 63,093,299
3. The taxpayer in order to benchmark its international transactions qua business support services segment provided to its AE undertaken TP analysis by applying Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit to Total Cost (OP/TC) as Profit Level Indicator (PLI) and computed OP/OC of comparables at 13.90% as against the average OP/OC of taxpayer at 16.00% and found its international transactions at arm's length. 5 ITA No.4791/Del/2015
4. TPO, after accepting TNMM as the MAM with OP/OC as PLI, however, questioned the TP analysis undertaken by the taxpayer applied filters as under :-
(i) Use of correct keywords;
(ii) Companies with positive networth;
(iii) Use of current year data;
(iv) Reject comparables having different financial year;
(v) Reject companies where turnover is less than Rs.1 crores;
(vi) Select companies where the ratio of service income to total
income is at least 75%;
(vii) Reject companies where related party transactions exceed
25% of sales;
(viii) Reject companies that have employee cost less than 25% of total cost;
(ix) Reject companies that are affected by some peculiar economic circumstances;
(x) Select companies providing business services, facility management services, technical services, advisory services.
5. By applying the aforesaid criteria, ld. TPO rejected all the comparables selected by the taxpayer and on the basis of fresh search chosen, 10 new comparables with average PLI at 28.20% and thereby made an adjustment of Rs.62,57,762/-.
6. Ld. TPO has not given adjustment claimed by the taxpayer on account of capacity utilization and customs duty and order of the ld. TPO in this regard has been confirmed by the ld. DRP. Ld. TPO as well as AO has also not allowed restricting the transfer pricing adjustment in respect of import of raw material transaction 6 ITA No.4791/Del/2015 to the value of consumption of materials by the taxpayer, which has been confirmed by the ld. DRP.
7. The taxpayer carried the matter before the ld. DRP by way of filing objections who has retained the final set of comparables chosen by the TPO by dismissing the objections raised by the taxpayer. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
8. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1 & 2
9. Grounds No.1 & 2 are general in nature and do not require any adjudication.
GROUNDS NO.3 TO 5
10. Grounds No.3 to 5 are also general in nature relating to engineering design segment and do not require any adjudication. ENGINEERING DESIGN SEGMENT GROUND NO.6
11. The ld. TPO in order to benchmark the international transactions qua engineering design segment services provided by 7 ITA No.4791/Del/2015 the taxpayer to its AE rejected all the 8 comparables chosen by the taxpayer and selected 10 new comparables with average OP/OC at 28.20% which are as under :-
S.No. Company Name OP/OC (%)
1. Cades Digitech Pvt. Ltd. 9.02
2. Dalkia Energy Services Ltd. 20.81
3. Engineers India 62.94
4. IBI Chematur 52.66
5. I-Design Engg. 11.88
6. Kirloskar Consultants Ltd. 15.64
7. Kitco Ltd. 14.01
8. Mahindra Consulting Engineers Ltd. 23.50
9. Rites Ltd. 45.71
10. T C E Consulting Engineers Ltd. 25.88
Average 28.20
12. Consequently, the ld. TPO proposed the ALP for engineering design services segment as under :-
Operating Cost 5,12,95,776
Arm's Length Margin OP/OC % 28.20%
Arm's Length Price (ALP) 6,57,61,185
Price shown in the international transactions 5,95,03,423
Shortfall being adjustment u/s 92CA 62,57,762
13. The ld. DRP accepted the final set of comparables selected by the TPO by rejecting the objections raised by the taxpayer.
14. The taxpayer challenged the order passed by the TPO/DRP/AO by seeking exclusion of 8 comparables viz. (i) Engineers India Ltd.; (ii) IBI Chematur; (iii) Mahindra Consulting Engineers Ltd. ; (iv) Rites Ltd. ; (v) Kitco Ltd. ; 8 ITA No.4791/Del/2015
(vi) TCE Consulting Engineers Ltd.; (viii) Kirloskar Consultants Ltd.; and (vii) Dalkia Energy Services Ltd..
15. The taxpayer also sought inclusion of two of its comparables viz. (i) Neilsoft Ltd. and (ii) Vama Industries Ltd. to benchmark its international transactions qua engineering design services segment.
16. We would discuss the suitability of each of the comparable companies vis-à-vis taxpayer challenged by it to benchmark the international transactions one by one.
ENGINEERS INDIA LTD. (EIL)
17. The taxpayer sought to exclude EIL on grounds inter alia that it is a Government company surviving on the basis of contracts provided by the Government of India; that it is functionally different; that it has incurred substantial expenditure of Rs.11.40 crores on its R&D activities; and relied upon the decision rendered by the coordinate Bench of the Tribunal in case of Boeing International Corporation India Pvt. Ltd. vs. DCIT in ITA No.1127/Del/2015 dated 30.10.2018 and decision rendered by Hon'ble Bombay High Court in case of CIT vs. Thyseen Krupp Industries Pvt. Ltd. (2016) 385 ITR 612. On the other hand, ld. DR for the Revenue supported the retention of EIL by the ld. TPO 9 ITA No.4791/Del/2015 and contended that there is no bar to select Government company as comparable unless its entire revenue is from the Government.
18. Perusal of the annual report of EIL shows that it is providing complete range of services ranging from conceptualization, planning, design, engineering and construction activities to meet with the specific requirement of its clients in the several fields - petroleum refining, petro-chemicals, pipelines, offshore oil & gas, onshore oil & gas, terminals & storages, mining & metallurgy; and infrastructure. EIL is also executing turnkey projects of Lump Sum Turn Key (LSTK) mode or on the recently introduced concept of Open Book Estimate. EIL is also having Government contracts in its hand pertaining to High-Density Polyethylene (HDPE)/ Linear Low-Density Polyethylene (LLDPE) Swing Unit of IOCL at their Panipat Naphtha Complex on LSTK basis. 18.1 On the other hand, the taxpayer being a captive entity is engaged in providing engineering design services to its AE as against high end and full-fledged engineering and technical services being provided by EIL for petroleum refineries and other industrial projects. EIL has incurred huge R&D expenditure to the tune of Rs.11.40 crores which is 0.53% of the turnover which makes it not a suitable comparable.
10 ITA No.4791/Del/2015
19. Hon'ble Delhi High Court in case of Pr.CIT vs. International SOS Services India P. Ltd. - 2017 (5) TMI 1588 while examining the comparability of Government company vis-à- vis private company held that EIL could not be considered to be a comparable for the reason that the contracts between public sector undertaking are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligation etc. by returning following findings :-
"10 The Court on perusing the aforementioned judgment of the Bombay High Court finds that in para 4(a) and 4(b) of the said order the Bombay High Court has held that the view taken by the Mumbai Bench of the ITAT "is a reasonable and plausible view." It noted that the ITAT, Mumbai Bench had held that the Engineers India Ltd. could not be considered to be comparable for the reason "that contracts between Public Sector Undertakings are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc. Thus, it is not comparable." Interestingly in the present case the Assessee itself picked up two of the 100% government owned companies namely ECIL and ITDCL as its comparables but that was not accepted by the TPO or the DRP. The reason for the ITAT excluding Apitco as a comparable is also for the same reason that it was a 100% government owned company".
20. In view of what has been discussed above, we are of the considered view that EIL cannot be retained as a suitable comparable, hence ordered to be excluded from the final set of comparables.
11 ITA No.4791/Del/2015IBI CHEMATUR (ENGINEERING & CONSULTANCY) LTD. (IBI CHEMATUR)
21. The taxpayer sought exclusion of IBI Chematur from the final set of comparables for benchmarking the international transaction on grounds inter alia that it is functionally dissimilar to the taxpayer that it has significant R&D expenditure and relied upon the decisions of the coordinate Bench of the Tribunal in (i) taxpayer's own case in ITA No.6783/Del/2015 for AY 2011-12 dated 26.03.2019; (ii) BG Exploration and Production India Ltd. vs. JCIT in ITA No.1170/Del/2015 dated 24.04.2017; (iii) Bechtel India P. Ltd. vs. DCIT in ITA No.1478/Del/2015 dated 21.12.2015; and (iv) ITO vs. Colt Technology Services India (P.) Ltd. - (2014) 146 ITD 46.
22. However, on the other hand, ld. DR for the Revenue contended that in engineering design services, R&D expenditure are inbuilt in every company and as such, it cannot be excluded on the basis of the fact that it has incurred significant R&D expenditure. Ld. DR also emphasized that there is no need for separate segmentation keeping in view the fact that the entire income is from engineering service charges to profit & loss account, available at page 371 of the paper book. 12 ITA No.4791/Del/2015
23. When we examine annual report under the head "Review of Performance" at page 361 of the paper book, it shows that IBI Chematur has progressed on use of Summary Plant Suite of Software. All engineers are trained about new software and the company has undertaken continuously upgrading technologies and also improving competence of staff which has employed highly trained technical staff. The company is planning to bring Technologies of BIOSTIL, 2000 Process. These technologies find synergy with BIOSTIL, 2000. The activity in BIOSTIL 2000 takes us to Sugar Industry, which remains as the biggest Biomass Processors in the country. The company continues to carry out Domestic Business activities in "IBIC Engineering (Div. of IBI Chematur (Eng.. & Cons.) Ltd.) division of the company as stated in the year.
24. Furthermore, IBI Chematur has started its new division in the name and style as "IBIC Research and Technology Centre"
wherein all in house engineering research and development activities undertaken relating to the Business activities of your company. Such in-house R&D centre will be providing its services in the areas of modernization, technological up gradation and additions, modification and troubleshooting of plants for our own as well as clients plants, New division has started Research & 13 ITA No.4791/Del/2015 Development activities during the year. The research and development activities carried out in Division, has resulted in improvement in process and productive capacity, better quality and marketability of technology.
25. Profit and loss account, available at page 371 of the paper book, shows that it has incurred huge R&D expenditure during the year under assessment to the tune of Rs.1,16,99,720/- which is 5% of the total turnover.
26. No doubt, every engineering design services provider needs to have an inbuilt R&D centre but IBI Chematur is having a specialized R&D centre on which it has huge expenditure of 5% leading to the creation of intangibles and as such cannot be compared to the taxpayer who has not incurred a single penny under the specified head. Moreover, IBI Chematur is into providing high end services whereas the taxpayer, a captive service provider, is providing routine engineering design services to its AE only.
27. Coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra) directed to exclude IBI Chematur from the final set of comparables by returning following findings :-
"We have perused the financial statements of the company placed at Paper Book pages 461 - 490. On going through the same, we note that this company fails the 75% service revenue 14 ITA No.4791/Del/2015 filter which has been adopted by the TPO. This fact is corroborated from the Profit & Loss account of the company, wherein the Engineering Service charges of the company are shown at Rs.18,88,21,452/-, out of the total revenue of the company of Rs.29,74,92,912/-. Therefore, the service/revenue ratio of the company comes out to 63.47%, which is less than 75%, which is one of the filters adopted by the TPO himself. Moreover, no segmental information with regard to the different segments of the company is available in the financial statements. This company has been considered by the ITAT Delhi Bench in the case of Bechtel India (P.) Ltd. v. DCIT in ITA No.1478/Del/2015 dated 21.12.2015 and in the case of BG Exploration & Production India Ltd. v. JCIT in ITA Nos. 1170 & 1581/Del/2015 dated 24.04.2017 wherein it has been held to be not a good comparable. Taking into consideration all the above facts, we are of the view that this company is not a good comparable with that of the assessee company and, accordingly, we direct the AO to exclude this comparable."
28. Coordinate Bench of the Tribunal in case cited as BG Exploration and Production India Ltd. vs. JCIT, International Taxation, Dehradun for AY 2010-11 (supra) also ordered to exclude IBI Chematur in identical set of facts by returning following findings :-
"This comparable has been selected by the Ld. Transfer Pricing Officer which is a joint venture company promoted in association with Swedish company to render basic engineering, detailed engineering and consultancy services in the field of petrochemicals, fine chemicals and chemicals, cosmetics, pharmaceuticals, industrial explosive and west acid recovery. The Ld. Authorised Representative submitted that The company generates income from provision of engineering services like designing and drawing, 3D modeling, piping and instrumentation diagram, smart plant instrumentation, process simulation, inspection services and erection supervision services, which are not similar to services provided by the Assessee. The company generates income from provision of engineering services and software services. It is further submitted that company has earned a high profit margin of 52.66% during the FY 2009-10. It was further stated that there is an existence of significant research and development cost to sales ratio for the FY 2009-10 is 5.41%. He further placed reliance on the decision 15 ITA No.4791/Del/2015 of Delhi ITAT in case of iQor India Services Private Ltd. Vs ITO where in the Hon'ble ITAT held that the high end services involving special knowledge cannot be compared with the low end ITES services provided by the Assessee. We have carefully perused the annual accounts of the company, which are placed at page No. 93 -117 of the paper book. At page No. 94 of the paper book where review of performance of company is noted, it shows that company has employed highly trained technical staff and is also marketing these capabilities in the domestic as well as the overseas market. It further uses SMART plant foundation, which is software for bringing the technologies specific to several industries. It also has the new division in the form of research and technology Centre, which started functioning during the year. Looking to the assets employed by the company, It uses the computer software in the name of smart plant suite. Further during the year. It has incurred research and development expenditure of Rs. 11699720/- which was not there in the earlier year. Further, the company is also planning to use Smart plant foundation for integration of other smart plant tools. In view of this we agree with the argument of the Ld. Authorised Representative that this company is engaged in the business of high-end engineering services which is based and supported by the use of a specific technologies and huge research and development expenditure along with an R&D centre. In view of this, the functions performed by this comparable company are not comparable with the Assessee's functions. For this reason only, we direct the Ld. Transfer Pricing Officer/AO, rejecting this comparable, to exclude the same for the comparability analysis."
29. In view of what has been discussed above, we are of the considered view that IBI Chematur is not a suitable comparable vis-à-vis the taxpayer, hence ordered to be excluded. MAHINDRA CONSULTING & ENGG.
SERVICES LIMITED (MAHINDRA)
30. The taxpayer sought exclusion of Mahindra on grounds inter alia that in the absence of segmental information, it cannot be considered as a valid comparable; that Mahindra recognizes its revenue on percentage completion method which is not in the case 16 ITA No.4791/Del/2015 of taxpayer; and relied upon the decisions rendered by the coordinate Benches of the Tribunal in taxpayer's own case for AY 2011-12 (supra), Alcatel Lucent India Ltd. vs. ITO in ITA Nos.2154 7 2209/Del/2014 dated 06.04.2018 and Rolls Royce India (P.) Ltd. vs. DCIT in ITA No.6636/Del/2015 dated 22.04.2016.
31. To counter the arguments addressed by the ld. AR for the taxpayer, ld. DR for the Revenue contended that a company cannot be excluded on the basis of use of percentage completion method as it is one of the recognised method.
32. Perusal of functions of Mahindra, available at page 444 of the paper book, shows that it is engaged in providing consulting services in infrastructure sector in the area of Special Economic Zones, Water supply & sewerage, solid waste management, urban infrastructure, agri & horti infrastructure, social infrastructure, marine infrastructure, industrial infrastructure, renewable energy, sustainability studies, institutional strategies / planning studies, industrial plants and systems etc..
33. Coordinate Bench of the Tribunal examined the comparability of Mahindra vis-à-vis the taxpayer in taxpayer's own case for AY 2011-12 (supra) (though a different year but business model has not undergone any change), found the same to 17 ITA No.4791/Del/2015 be not a suitable comparable on ground of non-availability of segmental information about engineering design services and on the ground that the company has recognised its revenue on percentage completion method. No doubt, a comparable cannot be excluded merely on the basis of different revenue accounting method which is recognised one but non-available of segmental information in the face of the fact that it is into diversified services as discussed above, we find it not a suitable comparable vis-à-vis taxpayer which is into providing routine low end engineering design services. Hence, we order to exclude Mahindra as a valid comparable.
RITES LTD. & KITCO LTD.
34. The taxpayer sought to exclude both the aforesaid companies i.e. Rites Ltd. & Kitco Ltd. on the grounds inter alia that both are Government of India undertaking and mostly gets its contracts from Government of India; that both are functionally dissimilar vis-à-vis taxpayer.
35. Annual report of Rites Ltd., available at page 464 of the paper book, shows that this company is having a brand image of "The Infrastructure People" and the global and domestic experience in transportation & project management services is likely to emerge as a major beneficiary of enhanced infrastructure spending. 18 ITA No.4791/Del/2015 Company continued to provide specialized, integrated, single roof services in transportation infrastructure sector and export packages for supply of locomotives, coaches, spare parts and modernization of workshops. Company is also intending to expand the rolling stock leasing business activities in domestic market. The company is exploring business opportunities in captive railway systems in India through equity participation with other stake holders, with a main focus to prove total transportation solution as against pure consultancy assignment). The company has secured new orders worth of Rs. 972.59 crores during the year 2009-10. So, functional profile of Rites Ltd. goes to prove that it is dissimilar to taxpayer being diversified services like providing single roof services in transportation infrastructure sector and export packages for supply of locomotives, coaches, spare parts and modernization of workshop. It is also getting into business of captive railway systems in India having a preferential treatment in business avenue being a Government company.
36. Similarly, Kitco Ltd. is also a 100% Government owned company. Profile of Kitco Ltd., available at the website of this company, shows that its technical services include services like asset valuation, energy audits, revival study, etc. Kitco Ltd. is also a permanent player in energy studies, skill certification and 19 ITA No.4791/Del/2015 placement services. It is having multi-functional, multi- disciplinary organization and infrastructure sector having wide range of clientele.
37. Hon'ble Delhi High Court in case of Pr.CIT vs. International SOS Services India P. Ltd. - 2017 (5) TMI 1588 while examining the comparability of Government company vis-à- vis private company held that EIL could not be considered to be a comparable for the reason that the contracts between public sector undertaking are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligation etc. by returning following findings :-
"10 The Court on perusing the aforementioned judgment of the Bombay High Court finds that in para 4(a) and 4(b) of the said order the Bombay High Court has held that the view taken by the Mumbai Bench of the ITAT "is a reasonable and plausible view." It noted that the ITAT, Mumbai Bench had held that the Engineers India Ltd. could not be considered to be comparable for the reason "that contracts between Public Sector Undertakings are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc. Thus, it is not comparable." Interestingly in the present case the Assessee itself picked up two of the 100% government owned companies namely ECIL and ITDCL as its comparables but that was not accepted by the TPO or the DRP. The reason for the ITAT excluding Apitco as a comparable is also for the same reason that it was a 100% government owned company".
38. In view of what has been discussed above, we are of the considered view that both Rites Ltd. and Kitco Ltd. being 100% Government owned company and into dissimilar business are not 20 ITA No.4791/Del/2015 suitable comparables vis-à-vis taxpayer, hence ordered to be excluded.
TCE Consulting Engineers Ltd. (TCE CONSULTING)
39. The taxpayer sought to exclude TCE Consulting as comparable on the grounds inter alia that it is functionally dissimilar; that its segmental financials are not available; that TCE Consulting is into providing high end consulting services and relied upon taxpayer's own decision in AY 2011-12 (supra).
40. Perusal of the annual report of TCE Consulting, available at pages 538 to 559 of the paper book, shows that it is into various other services apart from engineering services like providing services of designing, development of new product and Computer Aided Designing (CAD), but its segmental financials are not available.
41. Coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra) ordered to exclude TCE Consulting from final set of comparables on two grounds, viz., (i) it does not satisfy the upper turnover filter of Rs.200 crores; and (ii) that brand name of the company has enabled this company to capture major Government contracts and other high end customers.
42. So far as question of excluding this company on ground of upper turnover filter is concerned, this filter has not been applied 21 ITA No.4791/Del/2015 by the taxpayer as well as TPO during the year under assessment. However, we are of the considered view that it is not a valid comparable on account of functional dissimilarity and non- availability of its segmental financials. Moreover, in 2009-10, TPO himself excluded TCE Consulting from final set of comparables on raising objections by the taxpayer and since then, taxpayer's business profile has not undergone any change.
43. Coordinate Bench of the Tribunal in case of Bechtel India Pvt. Ltd. vs. DCIT - 2015 (12) TMI 1560 - ITAT Delhi for AY 2010-11 has ordered to exclude TCE Consulting as a comparable vis-à-vis routine engineering design service provider by returning following findings :-
"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."
44. In view of what has been discussed above, we are of the considered view that TCE Consulting having a big brand value and being into high end engineering consulting services with no 22 ITA No.4791/Del/2015 financial segmental available is not a suitable comparable vis-à-vis taxpayer, hence ordered to be excluded.
KIRLOSKAR CONSULTANTS LTD. (KIRLOSKAR)
45. The taxpayer sought exclusion of Kirloskar on the ground that sufficient information is not available in annual report to know the nature and volume of services of consultancy being provided by it. Its financial segmental are also not available and relied upon BG Exploration and Production India Ltd. vs. JCIT - 2017 (4) TMI 1145- ITAT Delhi.
46. Ld. DR for the Revenue, on the other hand, contended that from the profit & loss account, available at page 403 of the paper book, shows that substantial income is from consultancy fees and in such circumstances, no segmental information is required.
47. Perusal of the annual report fails to disclose the requisite information to look into the nature and volume of services of consultancy being provided by the company. Even in the annual report, income is shown under vague head i.e. income of Rs.59,685,941/- & Rs.5,861,557/- on account of consultancy fees & other income. So, it fails to disclose required segmental information. Merely on the basis of the fact that substantial income is from consultancy fees, it is difficult to accept the 23 ITA No.4791/Del/2015 argument made by the ld. DR for the Revenue that no segmental information is required.
48. Comparability of Kirloskar has been examined by the coordinate Bench of the Tribunal vis-à-vis routine engineering design service provider and found to be not a suitable comparables in case cited as BG Exploration and Production India Ltd. for AY 2010-11 (supra) by returning following findings :-
"This comparable is selected by the Ld. Transfer Pricing Officer which is engaged in the area of engineering consultancy, project management services and architectural consultancy. The comparable company specializes in conceptualizing, designing and executing architectural, civil, structural, electrical, mechanical fire and life safety, water supply, drainage, storm water management, networking, surveillance, telephone and building management systems required for any large integrated project. According to the Ld. Authorised Representative, this company is engaged in the high-end service provider segment and it was also stated that he does not have the segmental information pertaining to the segment in which the Assessee operates, and therefore, this cannot be accepted as a comparable. We have carefully considered the rival contention and also perused the annual report of the company available in paper book at page No. 246 - 304. No information is available with respect to the provision of the services of consultancy, its nature, and its volume. It is simply mentioned that this company is engaged in the business of consultancy services at the consultancy revenue shown in the profit and loss account as a single item. There are no specific bifurcations given of various services provided by the Assessee as well as the nature of such services or the segmental information. Further, it is also noted that during the year the Assessee has entered into transactions for receipt of the consultancy fee from the related parties to the tune of Rs. 89.59 lakhs out of the total consultancy fee receipt of Rs. 586 Lacs. Though the related party filter has passed but during the year itself the Assessee has entered into all these transactions, which were not there in the past year. However, in view of the absence of complete information about the business profile of the company as well as the nature of the services rendered by the company, this comparable cannot be accepted. Hence, we reject this comparable due to inadequate information available before us."24 ITA No.4791/Del/2015
49. In view of what has been discussed above, we are of the considered view that Kirloskar is not a valid comparable for final set of comparables, hence ordered to be excluded. DALKIA ENERGY SERVICES LTD. (DALKIA)
50. The taxpayer sought to exclude Dalkia on the grounds inter alia that as per its annual report, sufficient information regarding the nature of its business is not available; that it is functionally dissimilar and relied upon the decision of BG Exploration and Production India Ltd. for AY 2010-11 (supra).
51. Perusal of the annual report, available at pages 148 to 196 of the paper book, does not provide complete information as to the nature of its business. However, information available at the website shows its business profile as under :-
"Dalkia Energy Services Company Ltd. offers alternate energy sources. The Company develops renewable energy power projects for the biomass and hydro sector. Dalkia Energy Services also provides energy cost reduction consulting services for industrial, commercial, fertilizer, chemicals, plastics, cement, sugar, power generation and municipal sectors."
52. Comparability of Dalkia has been examined by the coordinate Bench of the Tribunal in BG Exploration and Production India Ltd. for AY 2010-11 (supra) vis-à-vis routine engineering designs service provider and has found to be not a suitable comparable by returning following findings :- 25 ITA No.4791/Del/2015
"This comparable selected by the Ld. Transfer Pricing Officer is engaged in the business of service in the area of energy manner and developing energy efficiency and energy projects with focus on reducing the energy cost and deriving of consequent environment benefiting the various sectors of economy in India and abroad. The comparable company adopts a multiproject approach when the individual customer defines the scope and structure of the services beginning with relatively simple projects, depending on the comfort level of the client, the scope and complexity of the service is expanded to multitier product package. The Ld. Authorised Representative objected to the inclusion of the above company as comparable for the simple reason that it did not have the financial available in the public domain. Neither the Ld. Transfer Pricing Officer nor the Ld. DRP has considered this aspect that when the financial of the comparable is not available how the assets employed by that company vis-a-vis's risk assumed and functions performed can be compared. Therefore, in absence of any financial information available of this company, either in the order of the Ld. Transfer Pricing Officer or available with the Assessee, we reject this comparable at the threshold itself."
53. So, following the order passed by the coordinate Bench of the Tribunal in BG Exploration and Production India Ltd. for AY 2010-11 (supra), we are of the considered view that Dalkia being into more projects approached with complexity of service of which complete information is not available in the public domain, it cannot be a valid comparable vis-à-vis taxpayer, hence ordered to be excluded from the final set of comparables.
54. The taxpayer sought inclusion of two comparables, viz., Neilsoft Limited and Vama Industries Ltd.
INCLUSION SOUGHT FOR BY THE TAXPAYER NEILSOFT LIMITED 26 ITA No.4791/Del/2015
55. The taxpayer sought inclusion of Neilsoft Ltd. in the final set of comparables on the grounds inter alia that the nature of business of Neilsoft Ltd. is similar to the taxpayer and this comparable has already been ordered to be included by the Tribunal in taxpayer's own case for AY 2009-10 dated 14.12.2018 in the final set of comparables. The TPO rejected Neilsoft Ltd. as comparable on the ground that it is functionally dissimilar being engaged into the business of software engineering services and sale of software projects. However, ld. AR for the taxpayer by referring to annual report of Neilsoft Ltd., available at pages 560 to 615 of the paper book, contended that Neilsoft Ltd. is into providing software engineering services which are similar to taxpayer's engineering design segment services.
56. However, when we examine company's overview of Neilsoft Ltd. at page 572 of the paper book, it shows that apart from providing software engineering services to its clients, Neilsoft Ltd. is also engaged in the business of selling software products. When we examine the profit & loss account of Neilsoft Ltd. for the year under assessment, available at page 565 of the paper book, it has shown its substantial income from "services and products" with no segmental information available.
27 ITA No.4791/Del/201556.1 No doubt, Neilsoft Ltd. was ordered to be included in the final set of comparables in taxpayer's own case for AY 2009-10, but the year under assessment being different, the same order cannot be relied upon and a company having income from products though rendering software engineering services, in the absence of segmental information cannot be a suitable comparable. So, the contention of the taxpayer to include Neilsoft Ltd. in the final set of comparables is not sustainable, hence we confirm the order passed by the TPO as well as DRP.
VAMA INDUSTRIES LTD. (VAMA)
57. The taxpayer sought to include Vama in the final set of comparables being functionally similar on the ground that the taxpayer has considered software development and services segment for the purpose of comparability. However, TPO has rejected this comparable on the ground that it is engaged in providing information technology and computer service activities. 57.1 Perusal of the annual report of Vama particularly its financial highlights at page 8 shows that out of the total turnover of Rs.903.17 lakhs, Vama has earned income from software development and ITES to the tune of Rs.561.86 lakhs. The ld. AR for the assessee contended that in its TP analysis the taxpayer has 28 ITA No.4791/Del/2015 considered software development and service segment for the purpose of comparability. However, when we examine profit & loss account of Vama, available at page 33 of the paper book, it has shown income under the head Domestic Rs.50,387,389/-, Export Rs.39,929,771/- and other income Rs.329,272/-, but no segmental information is available so as to compute actual profitability of Vama. Moreover, in the financial highlights, available at page 8, it is categorically mentioned that it has earned income from product/hardware sales and services, but again segmental financials are not available in the profit & loss account. 57.2 No doubt, comparability of Vama was examined by the coordinate Bench of the Tribunal in assessee's own case for AY 2009-10 and directed the AO/TPO to consider the software development and service for the purpose of comparability but the same cannot be followed being of different assessment year and that time complete financials of Vama might not be brought before the Bench. So, when segmental financials are not available on record Vama cannot be a valid comparable, hence rightly been not included by the TPO.
GROUND NO.7
58. The taxpayer challenged the order passed by the TPO as well as DRP for not providing working capital adjustment and risk 29 ITA No.4791/Del/2015 adjustment. While carrying out the comparability analysis under Rules 10B(1)(e) and 10B(3), the difference between controlled and uncontrolled transaction is required to be taken into account by providing necessary adjustment. So, in order to bring two comparable companies at par, necessary working capital adjustment and risk adjustment is required to be made.
59. Coordinate Bench of the Tribunal in Mentor Graphics (Noida) P. Ltd. vs. DCIT - (2007) 109 ITR 101 (Delhi) has decided the identical issue for providing working capital adjustment and risk adjustment for the purpose of comparability by returning following findings :-
"27. After the selection of the comparables, best method of determining Arm's Length Price is selected. Thereafter, functional analysis is carried to identify functions, risk and assets of uncontrolled transactions and comparison is carried with characteristics of the controlled transaction. This is necessary to find whether comparable selected are really comparable and reliable. Comparison based on functional analysis include economically significant activities and responsibilities undertaken or to be undertaken by the independent and associated enterprises. The structure and organization of the group and more particularly the judicial relationship between different entities of same group are to be seen. The function that need to be identified while carrying comparison as per OECD guidelines include design, manufacturing, assembling, research and development, servicing, purchasing, distribution, marketing, advertising, transportation, financial and management activities. It is also necessary to examine as to what is the principal function of the entities. The analysis of comparison should consider total assets employed and assets used to earn profit. The risk assumed by respective parties is a very important consideration. It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparable 30 ITA No.4791/Del/2015 identified are not correct as appropriated adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered. However, it can always be shown on the given facts of the case that comparable found are similar or almost similar to the controlled transaction and no adjustments are needed. It is useful to see the level of intangible assets in comparable to an appropriate base. Depending on facts of the case, final set of comparables may need to eliminate differences by making adjustments for the following:
(a) working capital
(b) adjustment for risk and growth
(c) adjustment of R&D expenses.
27.1 The risk not only due to human resources, infrastructure and quality which are normally taken into account yet more significant risks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property are being ignored here. In most of the comparable analysis carried in India, the latter type of risk are not being taken into consideration although these can lead to major difference in Market Value of transactions."
60. So, we are of the considered view that TPO/DRP are required to provide working capital adjustment and risk adjustment to the taxpayer as well as comparable company to bring them at par with each other. So, ground no.7 is determined in favour of the taxpayer.
GROUNDS NO.8 & 9
61. Grounds NO.8 & 9 being general in nature need no adjustment.
GROUND NO.10
62. The taxpayer has sought adjustment on account of capacity utilization as well as customs duty which the TPO as well as DRP 31 ITA No.4791/Del/2015 has declined. The ld. AR for the taxpayer contended that the issue as to the providing adjustment on account of capacity utilization as well as customs duty has already been decided in favour of the taxpayer in its own assessment for AY 2011-12 (supra). 62.1 It is not in dispute that the taxpayer has started its commercial operation in October 2009. It is also not in dispute that during the year under assessment, the taxpayer has produced only 17 units of equipments as against the installed capacity of 238 equipments, as is evident form financials statement, available at page 16 of the paper book. So, the capacity utilization ratio of taxpayer's company is only 7.14%.
63. The taxpayer has provided capacity utilization to ld. TPO as well as DRP in tabulated form which is as under :-
A.Y. Installed capacity Actual
production
2010-11 238 17
2011-12 238 98
2012-13 238 128
2013-14 252 175
64. Coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra) dealt with the issue in question by returning following findings :-
"3.5.14 Now, coming to the methodology to be adopted for allowing the capacity adjustment in this case. The Ld. DRP has taken cognizance of the same but instead of allowing the adjustment on account of 32 ITA No.4791/Del/2015 capacity utilization, it has directed to exclude depreciation and repairs of machinery from the comparables as well as the assessee. We are of the view that capacity adjustment is not limited to depreciation and repair of machinery. In a business entity, there are certain fixed overheads such as rent, administrative expenses etc., which have to be incurred irrespective of the percentage of capacity utilization. There are variable expenditures which are in direct proportion to the production i.e. the capacity utilized. The net margin of an entity will vary with that of another entity in case there is a difference in the capacity utilization. If there is higher capacity utilization, then the fixed overheads get spread over such higher capacity utilization with the result that the net margin of such entity will be much higher as compared to the another entity where the capacity utilization is low and as such there is a higher proportion of fixed overheads which get allocated to such lower capacity/production. Thus, the right method is to identify all the fixed expenses including depreciation and to adjust the same in the ratio of the capacity utilized. In view of the above analysis, we direct the TPO to exercise his powers under section 133(6) of the Act and to call for the information on capacity utilization of comparable companies. After obtaining the information, he will share the details so obtained with the assessee and give an opportunity to the assessee and grant adjustment for capacity under- utilized."
65. So, the issue being covered in favour of the taxpayer in taxpayer's own case, TPO is directed to identify all the fixed expenses including depreciation and to adjust the same in capacity utilized by exercising his powers available under the Act by calling information qua the capacity utilization by comparable companies. So, this issue is remanded back to the TPO to decide afresh in view of the direction given in taxpayer's own case for AY 2011-12 33 ITA No.4791/Del/2015 (supra) by the Tribunal. So, ground no.10 is determined in favour of the taxpayer for statistical purposes.
66. So far as customs duty adjustment as sought for by the taxpayer is concerned, this issue has also been decided in favour of the taxpayer in its own case for AY 2011-12 (supra) by returning following findings :-
"3.8.3 We have considered the rival submissions and perused the order passed by the authorities below. The Ld. DRP has rejected this contention of the assessee company on the ground that custom duty does not have any impact on the net profit level of the assessee. While deciding the issue of the capacity adjustment, we have held that in terms of Rule 10B (3) all the adjustments which are materially affecting the transaction being compared need to be eliminated. Thus, in case non-cenvat-able custom duty on import made by the assessee company is materially affecting the transaction vis-à-vis the comparables being considered by the TPO then the same needs to be eliminated. Since, this issue has not been considered by the TPO and considering the fact that we have remitted the matter back to AO for allowing adjustment on account of capacity utilization, we deem it fit to restore this issue also to the TPO. The TPO will examine whether non-cenvat-able custom duty on imports paid by the assessee is materially affecting the PLI of the assessee company and if he finds that this payment of non-cenvat-able custom duty is materially affecting the transaction with that of the comparables then he will suitably make adjustment thereof."
67. The taxpayer has brought on record the impact of customs duty on profitability of the taxpayer company in tabulated form which is as under :
(Rs. in lakhs) A.Y. Import Sales Import/Sales in Ratio 2010-11 1586.44 1302.01 121.85% 2011-12 5573.74 9882.41 56.40% 2012-13 8070 19954 40.44% 2013-14 10914 23257 46.93% 2014-15 7060.64 21916.36 32.22% 34 ITA No.4791/Del/2015
68. Following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra), we direct the TPO to examine if non-cenvat-able customs duty of import paid by the taxpayer is materially affecting the PLI of taxpayer company as per mandate of Rule 10B(3) then suitable adjustment be provided to the taxpayer.
GROUND NO.11
69. TPO/DRP have not restricted transfer pricing adjustment in respect of import of raw material transaction to the value of consumption of material of the taxpayer, which is challenged by the taxpayer before the Tribunal. The ld. AR for the taxpayer contended that this issue has already been decided in favour of the taxpayer in AY 2011-12 (supra).
70. Coordinate Bench of the tribunal decided the issue in controversy by returning following findings as under :-
"3.10.3 We have considered the rival contentions. It is undisputed fact that the assessee has made purchases of Rs.105,55,16,000/- during the year out of which material worth Rs.41,34,29,000/- was not consumed during the year and, therefore, the impact on the margin, if any, in respect of such purchases during the year is only of the material consumed and not of the material purchased and which is lying unutilized at the end of the year as closing stock. The purchase cost debited in respect of such raw material and the valuation of such material as closing stock is at same cost. Considering this fact, we direct 35 ITA No.4791/Del/2015 the TPO that in case any adjustment is required to be made after giving effect to the adjustment on account of capacity and other issues decided by us in this appeal the same is to be restricted to the material purchased from the AE and consumed during the year."
71. So, following the aforesaid order passed by the coordinate Bench of the Tribunal, TPO is directed to restrict the adjustment, if any, after providing adjustment on account of capacity utilization and other risk adjustments, to the material purchased from AE and consumed during the year under assessment in line with the directions issued by the coordinate Bench of the Tribunal in AY 2011-12. So, this ground is determined in favour of the taxpayer. GROUND NO.12
72. Ground No.12 is dismissed having not been pressed during the course of arguments.
GROUND NO.13
73. Ground No.13 being consequential in nature needs no specific findings.
74. Resultantly, the appeal filed by the taxpayer is partly allowed for statistical purposes.
Order pronounced in open court on this 30th day of May, 2019.
Sd/- sd/-
(N.K. BILLAIYA) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 30th day of May, 2019/TS
36 ITA No.4791/Del/2015
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.