Income Tax Appellate Tribunal - Delhi
Samsung Heavy Industries India Pvt. ... vs Dcit, Noida on 22 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-2 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
ITA No.436/Del/2016
Assessment Year : 2011-12
Samsung Heavy Industries India Pvt. Ltd., Vs. DCIT,
Logix Cyber Park, Circle-3,
Wing-B, 1st Floor, Noida.
C-28&29, Sector-62,
Noida.
PAN: AAKCS9098M
(Appellant) (Respondent)
Assessee By : Shri Anubhav Rastogi, Advocate
Department By : Shri H.S. Choudhary, CIT, DR
Date of Hearing : 21.08.2017
Date of Pronouncement : 22.08.2017
ORDER
PER R.S. SYAL, VP:
This appeal filed by the assessee is directed against the final assessment order dated 23.12.2015 passed by the Assessing Officer ITA No.436/Del/2016 (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2011-12.
2. The only issue raised in this appeal is against the addition on account of transfer pricing adjustment amounting to Rs.4,01,72,876/-.
3. Briefly stated, the facts of the case are that the assessee company was incorporated in India in 2007 and is a wholly owned subsidiary of SHI Korea. It provides engineering, design and related services for the offshore floaters/platform business of SHI Korea. The assessee has a pool of qualified manpower. It employs engineers having a background and experience in lay out design, electrical design, instrumentation design, piping design and mechanical design, etc. The assessee filed return and reported two international transactions in Form No.3CEB. The dispute in the present appeal is on the first international transaction of 'Provision of engineering, design and related services' with transacted value of Rs.27,11,16,647/-. The AO made reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of 2 ITA No.436/Del/2016 the international transactions. The assessee applied Transactional Net Margin Method (TNMM) with Profit level indicator of Operating Profit/Total Cost (OP/TC). The assessee computed its own PLI at 15.16%. Nine companies were chosen by the assessee as comparable. On the basis of their PLI, the assessee claimed that its international transaction was at ALP.
4. As against nine companies chosen by the assessee as comparable, the TPO introduced new seven companies in the final tally of eight comparables. After retaining one comparables chosen by the assessee, namely, Tata Elxsi Ltd., the TPO worked out the mean OP/OC of the comparables at 31.73%, as under:-
S.No. Company Name Corrected Working
OP/OC (%) capital
adjusted
OP/OC (%)
i. Accentia Technologies Ltd. 29.18% 24.71%
ii. Tata Elxsi Ltd. 7.54% 6.91%
iii. Eclerx Services Ltd. 56.83% 54.16%
iv. ICRA Techno Analytics Limited 25.32% 21.61%
v. Infosys BPO Ltd. 17.86% 17.16%
vi. TCS E-Serve Ltd. 69.31% 67.59%
vii. TCS E-Serve International Ltd. 53.89% 52.09%
viii. Acropetal Technologies Ltd. (Seg.) 14.35% 9.61%
Average 34.28% 31.73%
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ITA No.436/Del/2016
5. By applying such adjusted OP/OC of comparables at 31.73%, the TPO worked out transfer pricing adjustment amounting to Rs.4,01,72,876/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). That is how, the Assessing Officer made an addition of Rs.4.01 crore in his final order on account of transfer pricing adjustment in the international transaction of 'Provision of engineering, design and related services.' The assessee is aggrieved against the addition made by the Assessing Officer.
6. We have heard the rival submissions and perused the relevant material on record. The ld. AR submitted that the short controversy in the instant appeal is against the inclusion of four companies in the list of comparables. Thus, it is apparent that there is no quarrel on any aspect including the application of TNMM as the most appropriate method with the PLI of OP/OC.
7. Before proceeding to discuss the comparability or otherwise of the companies assailed before us, it is necessary to have a look at the nature of functions carried out by the assessee under this segment. The 4 ITA No.436/Del/2016 nomenclature of the international transaction, being, 'Provision of engineering, design and related services', indicates that the assessee was rendering engineering and design services. It is manifest from the show cause notice, whose relevant part is reproduced on page 5 of the TPO's order, that the assessee provided gamut of services to its AE ranging from feasible study, pre-design services, basic design, front end engineering design, lay out design, detailed engineering and commissioning assistance etc. The assessee claimed that its services are mainly in the nature of I.T. enabled engineering services and Knowledge process outsourcing. The TPO on page 8 of his order did not accept the assessee's contention of providing engineering support services. He came to hold that: 'the assessee is rendering services to its AE which can be classified as IT enabled services' for the reasons given in the order. That is how, the TPO proceeded with the assessee's nature of activity as that of providing `IT enabled services'. The companies so chosen by the TPO are by and large rendering services in the broader spectrum of I.T. enabled services.
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8. At this stage, we consider it expedient to note the contention of the ld. DR that the assessee was not rendering only `I.T. enabled services', but `Engineering services' as well. It was submitted that Tata Elxsi Ltd., a company included by the TPO in the final set of comparables, was not rendering IT enabled services. The ld. DR vehemently argued that the selection of comparable companies should be based by considering the assesee's functional profile as that of engineering services also.
9. We are disinclined to accept this contention advanced by the ld. DR for the obvious reason that the TPO himself declined to accept this contention and classified the assessee's services as IT enabled services. Once the TPO has treated the nature of services rendered by the assessee as `I.T. enabled' and the assessee has not objected to the same in the appeal before the Tribunal, the ld. DR cannot be allowed to set up a new case contrary to what was done by the TPO by claiming that the nature of services should be altered at this stage for evaluation of comparable companies in dispute. We will, therefore, confine ourselves in considering the comparability or otherwise of the companies in 6 ITA No.436/Del/2016 challenge before us by treating the assessee as rendering `I.T. enabled services', as was done by the TPO.
10. Now, we will take up four companies, one by one, to see whether or not these are comparable. At this juncture, it is relevant to mention that the nature of activity carried out by the assessee during the year is admittedly similar to that carried on in the preceding year. The assessee has rendered services emanating from an Agreement entered into with SHI Korea dated 1st February, 2009. Thus, it is ostensible that the nature of services rendered by the assessee during the year are similar to those rendered in the preceding assessment year i.e. 2010-11. The TPO in the preceding year, proceeded in almost the same manner, and considered all the four companies currently under challenge before us, as comparable. The matter travelled to the Tribunal and the same has been decided vide order dated 13.07.2017 in ITA No.576/Del/2015. A copy of such order has been placed on record.
7 ITA No.436/Del/2016
(i) Accentia Technologies Ltd.
11. The TPO treated this company as comparable in the same way it was done in the preceding year. The Tribunal in its order for the immediately preceding assessment year has discussed the comparability or otherwise of this company on page 21 onwards of its order. After relying on certain decisions, the Tribunal directed to exclude it from the list of comparables on account of functional dissimilarity and outsourcing of substantial amount of work. We have gone through a copy of the Annual report of this company for the year under consideration, whose copy has been placed on pages 500 onwards of the paper book. The Profit & Loss Account of this company is available at page 542 from which it can be seen that there is income from 'Sales and services' to the tune of Rs.108.31 crore. Schedule 8 gives a brief description of such `Income' as including 'Medical transcription, Billing and collections, Income from coding, Interest on FD and Income from exchange fluctuation.' Thus, income has arisen in India not only from `Services', but from sales as well. Page 552 of the paper book indicates 8 ITA No.436/Del/2016 that: 'this company has only one segment of activity, namely, healthcare management.' Page 530 discloses that apart from services, this company is earning income from Products as well. Since this company is engaged in sale of products apart from rendering IT enabled services and both these components of income lie in one segment, it is not possible to bifurcate income from IT enabled services from the common pool of Products and services, so as to make comparison with the assessee's income. Respectfully following the Tribunal order passed for the immediately preceding year, we order for the exclusion of this company from the list of comparables.
(ii) Eclerx Services Ltd.
12. The TPO included this company in the list of comparables on the same basis as was done for the preceding year. The Tribunal order for the immediately preceding assessment year has discussed the functional profile of this company. After discussion, the Tribunal has come to hold that this company is functionally different.
9 ITA No.436/Del/2016
13. We have gone through the Annual report of this company, a copy of which has been placed on record. Profit & Loss Account of this company shows 'Income from operations' at Rs.3419.11 million. The Director's report indicates that this company is rendering Financial as well as Sales & Marketing services. Income from both these services has been clubbed. Such services include Trade processing support, Reference data maintenance, Contract risk review, Reconciliation and controls, Margin and exposure management, Metrics and reporting, Expenses management, Accounting and finance, Consulting services, Online operations & Web analytics, CRM & business intelligence, Data management & Reporting, Competitor benchmarking & Pricing, Quality & compliance and Business process consulting. This company has a single primary segment i.e., 'Data analytics and process outsourcing services.' A plain reading of the nature of services carried on by this company abundantly shows that there is a vast difference with the activity carried on by the assessee. Relying on the view taken by the co-ordinate Bench for the immediately preceding assessment year, we direct to exclude this company from the list of comparables. 10 ITA No.436/Del/2016
(iii) TCS E-Serve Ltd.
14. This company was also considered by the TPO as comparable in the preceding year. The Tribunal directed to exclude this company, inter alia, on account of difference in functional profile.
15. We have gone through the principal activities done by this company in the year in question which have been set out on page 88 of its Annual report as under:-
"1. Background and principal activities TCS e-serve Limited is engaged in the business of providing Information Technology-Enabled Services (ITES)/Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally. The Company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. "
16. The assessee has also made available Annual report of this company for the immediately preceding assessment year. The principal activities of the company have been set out at page 105 of the Annual report for the preceding year, which are identical to those for the instant 11 ITA No.436/Del/2016 year. Since the Tribunal, for the immediately preceding year, has held this company to be functionally different from that of the assessee, respectfully following the precedent, we direct the exclusion of this company on account of functional dissimilarity as the nature of activity carried on by the assessee during the year also remains similar to that done for the preceding year.
(iv) TCS E-serve International Ltd.
17. The TPO included this company in the final roll of comparables. Similar view was taken by him for the immediately preceding assessment year. The Tribunal, in an appeal by the assessee, has directed to exclude this company in its order for the immediately preceding year. The principal activities of this company have been set out on page 25 of its Annual report for the year, which are as under:-
"1. Background and principal activities TCS e-serve International Limited is engaged in the business of providing Information Technology-Enabled Services (ITES)/Business Process Outsourcing (BPO) services, primarily to Citigroup entities globally.
The Company's operations broadly comprise of transaction processing and technical services. Transaction processing includes the broad 12 ITA No.436/Del/2016 spectrum of activities involving the processing, collections, customer care and payments in relation to the services offered by Citigroup to its corporate and retail clients. Technical services involve software testing, verification and validation of software at the time of implementation and data centre management activities. "
18. It can be seen that similar activities were done by this company in the preceding year as well. Since the nature of activities carried out by this company for both the years are similar and the Tribunal, for the immediately preceding year, has held this company to be functionally dissimilar, we, therefore, direct to exclude this company from the list of comparables.
19. To sum up, we set aside the impugned order on the issue of addition towards transfer pricing adjustment and remit the matter to the file of AO/TPO for fresh determination of the ALP of the international transaction of 'Provision of engineering, design and related services' in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
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20. In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 22.08.2017.
Sd/- Sd/-
[SUCHITRA KAMBLE] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 22nd August, 2017.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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