Income Tax Appellate Tribunal - Delhi
M/S. Virginia Transformer India Pvt. ... vs Ito, New Delhi on 31 July, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES "I-2" : DELHI
BEFORE SHRI VIJAYPAL RAO, JUDICIAL MEMBER
AND
SHRI O.P. KANT, ACCOUNTANT MEMBER
I.T.A.No.1001/Del./2014
Assessment Year 2009-2010
Virginia Transformer India P. The Income Tax Officer
Ltd., 202, Nanda Devi Tower, Ward-17(4), Room No.159-D
D-11, 2nd Floor, Comm. Complex, vs. C.R. Building
Prashant Vihar, New Delhi-085. New Delhi - 110 002.
PAN AABCV1941M
(Appellant) (Respondent)
For Assessee : Shri Vidur Puri, C.A.
For Revenue : Mr. Choudhary, CIT-D.R.
Date of Hearing : 27.07.2017
Date of Pronouncement : 31.07.2017
ORDER
PER VIJAYPAL RAO, J.M.
This appeal by the assessee is directed against the assessment order of the A.O. dated 31st December, 2013 passed under section 144C (13)/143(3) of the I.T. Act, 1961 in pursuance to the directions of the DRP dated 31st October, 2013 for the A.Y. 2009-2010. The assessee has filed the following concise grounds.
1. "The learned Assessing officer erred in law in disregarding mandatory CBDT instructions while making reference to determine arm's length price of Assessee's international transactions to Transfer Pricing Officer u/s 92CA, when the international transactions with its Associated Enterprises (AE) are less than Rs. 5 crores.
2. On the facts and in law the learned Assessing Officer (Ld. AO) and learned Transfer Pricing Officer (Ld. TPO) erred and Hon'ble DRP erred in confirming the addition in income by Rs.41,59,420/- as adjustment at arm's length price of international transactions.
3. On the facts and in law, the Id. AO, Id. TPO and Hon'ble DRP erred in proceeding on the premise that the Assessee is providing Engineering Services to AE whereas the Assessee is providing only its manpower for low end engineering services for designing, sourcing and other services to A.E. 2 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
4. On the facts and in law, the Id. AO, Id. TPO and Hon'ble DRP erred in rejecting cost plus method as most appropriate method to benchmark international transaction with AE as chosen by Assessee and instead applying T M method as most appropriate method.
5. On the facts and in law, the Id. AO, Id. TPO and Hon'ble DRP erred in not making adjustments in operating profit on account of functional differences between the assessee and comparable companies on account of market risk, credit risk, working capital adjustment and warranty other risks.
6. On the facts and in law, the Id. AO, Id. TPO and Hon'ble DRP erred in not allowing benefit of variation of 5% while determining the adjustments of Rs. 41,59,420/- on the basis of arm's length price of international transaction, which is allowable as per Proviso to. section 92C (2) of the Income Tax Act, 1961".
2. The first issue raised by the assessee in this appeal is regarding foreign exchange gain claimed as revenue in nature which was disallowed by the TPO as well as DRP. The Ld. A.R. of the Assessee submitted that the gain arising due to foreign exchange fluctuation is on the receivables from A.E. on account of export/rendering of services. Therefore, the said gain due to foreign exchange fluctuation is part and parcel of the revenue earned by the assessee from the activity of rendering services to the A.E. and cannot be excluded from the revenue for the purpose of computing margins of the assessee while comparing the same with the comparables. Thus, Learned Counsel for the Assessee has contended that the authorities below are not justified in excluding the foreign exchange gain on the receivables from the A.Es. He has relied upon various decisions of this Tribunal as under :
1. Cisco Systems Services B.E. India Branch vs. ADIT 68 SOT 18 (Bang.).
2. Sap Labs India (P) Ltd. vs. ACIT (2011) 44 SOT 156 (Bang.)
3. Luxottica India Eyewear Pvt. Ltd. vs. DCIT (ITA.No.617/Del./2014).
4. Kenexa Technologies (P) Ltd. vs. DCIT 67 SOT 195 (Hyd.)
5. DHL Express (India) P. Ltd. vs. ACIT 46 SOT 379 (Mum.)
6. Rolls Royce India (P) Ltd. vs. DCIT (2016) 176 TTJ 1.3
ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
3. On the other hand, Ld. D.R. has submitted that though the definition of operating cost and operating revenue has not been given in the provisions of T.P. as well as Rule 10B. However, as per Rule 10TA the term "operating cost" and "operating revenue" has been defined under clauses J & K respectively. He has referred to the definition of operating expenses and operating revenue under Rule 10A of I.T. Rules and submitted that the loss or income arising on account of foreign currency fluctuation have been specifically excluded from the operating expenses or operating revenue as the case may be. Thus the Learned CIT-DR. has submitted that the definition provided under Rule 10TA has to be adopted for the purpose of Rule 10B as well as section 92 of the I.T. Act. He has relied upon the orders of the authorities below.
4. We have considered the rival contentions as well as relevant material on record. Since it is a case of foreign exchange gain on the receivables from the A.E. on account of services rendered by the assessee therefore, such gain becomes part and parcel of the revenue receivable or received by the assessee from its A.E. and cannot be separated from the revenue of the assessee for the purpose of computing the margins to be compared with the comparables. There is no quarrel on the point that in case an exchange loss or gain is considered as part of the operating cost or revenue of the assessee then on the principle of parity the same has to be considered as part of the operating cost/operating revenue in case of comparable companies. The Tribunal has taken a consistent view on this issue in series of decisions as relied upon by the Learned Counsel for the Assessee. Therefore, without deliberating much on the issue, we concur with the earlier views of the Tribunal wherein it has been held that if the loss or gain arising due to fluctuation of foreign exchange 4 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
on account of revenue receivables on exports then the same will be treated as part of operating cost or operating revenue of the assessee as well as comparable companies. Though the Ld. D.R. has placed reliance on Rule 10TA however, we find that the definition as provided under Rule 10TA of the Income Tax Rules are only for specific purpose to consider the price under Advance Price Agreement. Therefore, to avoid any further ambiguity and uncertainty in the process of advance pricing agreements, the definition has been provided under Rule 10TA which may not be adopted for the purpose of taking the actual margins of the assessee as well as the comparable companies for the purpose of determining the ALP under TNMM method. Thus, in view of the above facts, where the gain earned by the assessee due to foreign exchange fluctuation on the receivables which are revenue in nature, the claim of the assessee is allowed and consequently, the A.O./TPO is directed to compute the margins of the assessee as well as the comparable by considering the loss or gain arising due to foreign exchange fluctuation on revenue receivables as part of the operating cost or operating revenue as the case may be. This ground of the assessee appeal is allowed.
5. The second issue raised by the assessee is regarding the adjustment claimed by the assessee on account of idle personnel and rent paid in respect of new office as an abnormal cost to be excluded from the operating cost for the purpose of computing the margins of the assessee. The A.R. of the assessee has submitted that the assessee was earlier operating from its Mumbai office. However, during the year under consideration, the assessee has set-up new office in Delhi and hired trainee engineers. Though the assessee has incurred the cost on account of the hired engineers as well as lease rental of the office from 1st April, 2008 however, the said expenditure has been reimbursed by 5 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
the A.E. only from October, 2008 onwards. The Ld. A.R. has referred to the agreement dated 27th September, 2002 between the assessee and its A.E. and submitted that the A.E. of the assessee is paying @ 250% of remuneration towards services of engineers who are assigned to the work on the A.E. project. Whereas the trainee engineers were hired by the assessee from April, 2008 but not utilised prior to October, 2008 and therefore, the expenditure incurred by the assessee on this account as well as on account of lease rentals from April, 2008 to September, 2008 is abnormal cost and should be excluded from the operating cost of the assessee for the purpose of computing the margins. In support of its contention, the Learned Counsel for the Assessee has relied upon the following decisions :
1. DCIT vs. Genesis Integrating Systems (Ind.) (P) Ltd., 2016) 66 taxmann.com 20 (Bang.)
2. Transwitch India (P) Ltd., vs. DCIT (2012) 53 SOT 151 (Del.)
3. Global Turbine Services Ind. Vs. ADIT (2013) 38 taxmann.com 220 (Del.)
4. Bechtel India (P) Ltd., vs. DCIT (2016) 66 taxmann.com 160 (Del.)
5. HCL Technologies BPO Services Ltd. vs. ACIT (2015) 60 taxmann.com 186 (Del.).
5.1. Hence, the Learned Counsel for the Assessee has argued that when the assessee's new office was remained idle from April, 2008 to October, 2008 then the non-utilisation of that facility/capacity is an abnormal cost required to be excluded from the operating cost of the assessee. He contended that this Tribunal in a series of decision has taken a consistent view that appropriate adjustment on account of abnormal cost or under utilisation has to be given while computing the margins of the assessee. This cost is an 6 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
additional burden due to opening of the office at New Delhi but remain unutilised due to the initial training of the engineers and therefore, the services of the engineers could not be gain fully utilised. Thus, Learned Counsel for the Assessee has submitted that the cost during the period from date of employment of various employees to 30th September, 2008 amounting to Rs.23,93,164 as well as rent paid during April, 2008 to September, 2008 of Rs.5,10,000 should be treated as abnormal cost.
6. On the other hand, the Ld. CIT-DR has submitted that the employment of the engineers is not an exceptional activity of the assessee rather it is a normal business activity of the assessee to carry out the manufacturing, marketing and services to be rendered to the A.E. The Ld. D.R. has further submitted that when the assessee was not forced by any exceptional circumstances or other compulsion to keep the facility idle then this claim of the assessee cannot be accepted as an abnormal cost. He has referred to the agreement dated 27th September, 2012 and submitted that as per clause-13 of the agreement, the A.E. of the assessee is responsible for any loss of profit or business due to exclusive use of the such personnel. Thus, it was the obligation of the A.E. to bear the cost of engineers employed by the assessee for the purpose of carrying out the business activity as a captive service provider to the A.E. He has relied upon the orders of the authorities below.
7. We have considered the rival contentions and perused the material on record. The assessee is a wholly owned subsidiary of VTC Varginia, USA. The assessee is engaged in designing transformer components etc., under the projects provided by its A.E. VTC USA. Since the entire work has been outsourced by its A.E. to the assessee and therefore, the assessee is working only as a captive service 7 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
provider of designing of transformers and transformer components. The assessee is remunerated by its A.E. on the basis of 250% of the remuneration of service engineers who are assigned to work on A.Es project. For ready reference, we reproduce the relevant clauses of the agreement dated 27th September, 2002 as under :
"A. VTC is a Corporation registered in USA and engaged in the business of marketing, sourcing, .manufacturing and dealing in dedicated medium and high power transformers. VTC has as its targeted markets USA. Mexico & Other countries around the world.
B. VIPL a company registered in India, VTIPL is a wholly owned subsidiary of VTC holds the appropriate approvals to do business in India. VTIPL Is at present involved in the designing transformers, transformer components, etc. VIPL has to substantiate and well equipped designing team which is in the know of international standards of technique as also' market acceptability and is capable of designing· made to. order high power transformers.
C. VTC has decided to outsource its designing activities to VTIPL for its projects from time to time upon the terms and conditions as agreed herein."
"3. Particulars etc., VTC shall provide to VTIPL the particulars dimensions, battery and specifications of the transformers to be designed. The details and specifications shall be exploit in all respects to enable VTIPL to design the end product to the best of their ability and professional expertise.
5. Representations :
VTIPL has represented to VTC that VTIPL has the required manpower and expertise to carry out the tasks as required under this Agreement by VTC.
6. Personnel :
VTIPL shall from time to time appoint such persons as it would require to appoint for the purpose of executing the designing contracts on behalf of VTC. Even though VTC has no control over the appointment policies of VTIPL, VTC shall be entitled to screen the names of the personnel designated by VTIPL to execute the VTC contracts (reason being the confidentiality and proprietary nature of the designs.) 8 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
9. Exclusive License :
VTC's license in respect of the designs created by VTIPL from VTC under agreements to VTIPL shall be an exclusive license,. VTC may license the designs to any third party.
10. Remuneration :
In consideration of the designs services rendered by VTIPL to VTC, VTC shall remit to VTIPL 250% of remuneration of service engineers who are assigned to work on VTC projects. VTIPL shall forward to VTC debit notes quantifying the work done and the corresponding Schedule of charges to VTC on a periodical basis.
13. Secondment :
VTC if so desires shall be entitled to seek on an availability basis secondment of VTIPL employees to USA or anywhere else in the world for training and upgrade of their knowledge. Costs of such secondment including salaries of the seconded personnel shall be to VTC's account. VTC shall also reimburse VTIPL as to loss of profit and business if any due to the exclusive use of the seconded personnel by VTC 7.1. From the perusal of the relevant clauses of the agreement, it is clear that the sole purpose of incorporation of the assessee as a wholly owned subsidiary of the A.E. is to render the services as captive service provider to the A.E. Assessee has been rendering service on the produce of the A.E. as per their specification. Further the man power and personnel designated by the assessee to execute the contracts of the A.E. are to be screened by the A.E. of the assessee. Therefore, the entire work process of the assessee is under the supervision and as per the specifications provided by the A.E. of the assessee. The assessee is compensated in terms of 250% of the remuneration of service engineers. Hence, the other cost and expenditure incurred by the assessee are not relevant for the purpose of deciding the payment by the A.E. to the assessee for the work executed and services rendered. There is also an agreement between the parties that in case 9 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
the A.E. of the assessee desires it shall be entitled to seek on an availability basis secondment of assessee's employees to USA or anywhere else in the world for training and upgrade of their knowledge. Thus the training and up-gradation of the employees of the assessee was to be assessed and to be kept as per the requirement was to be decided by the A.E. of the assessee. The salaries and other cost on account of those employees which are taken on secondment by the A.E. are to be borne by the A.E. and therefore, any loss on account of the secondment of the personnel were to be reimbursed by the A.E. of the assessee. It is manifested from the terms and conditions of the agreement that the assessee was fully reimbursed by the A.E. on account of the remuneration paid to the engineers who are assigned to the work for carrying out and executing the project of the A.E. The assessee has claimed that since the assessee has set-up a new office in Delhi which could not be fully utilised for the initial period from 1st April to 30th September, 2008 and therefore, the cost incurred by the assessee on account of the salary to the trainee engineers as well as on account of lease rentals be treated as abnormal cost. We do not find any substance in this claim of the assessee because when the assessee is entitled to be reimbursed fully in respect of the remuneration paid to the service engineers then this cost of the salary paid to the trainee engineers cannot be considered as an abnormal cost. Assessee is being remunerated by the A.E. on the basis of 250% of the cost of salary paid to the service engineer therefore, this is a normal business expenditure of the assessee to pay salary to the hired employees. Further, it is not a case of giving a training to the personnels prior to hiring them on permanent basis for rendering of services but the nomenclature given as trainee engineers who continue even after 30th September, 2008 and were rendering services in the projects of the A.E. Thus, trainee engineers who were doing the 10 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
same job and work on the execution of the projects of the A.E. then the salary paid to these engineers from 1st April to 30th September, 2008 cannot be considered as an abnormal cost. Similarly when the assessee is not charging its A.E. on the basis of cost of the services rendered by the assessee but the assessee is charging A.E. at 250% of the remuneration of the service engineer then the other cost which are other than the salary are not relevant and subsumed in the payment which is based on 250% of the remuneration of the service engineers. The decisions relied upon by the assessee are all on the point of under-utilisation of the capacity due to exceptional circumstances and beyond the control of the assessee. Thus, when it was found that the assessee could not utilise its capacity to the optimum level in comparison to the comparable companies and therefore, the Tribunal has taken a consistent view that substantial difference in the capacity utilisation warrants a proper adjustment in the margins of the comparable so that the loss to the assessee on account of un- utilisation can be equalised. In this case, it is not the case of the assessee that their capacity is un-utilisation comparison to the comparables. Therefore, the decisions relied upon by the Ld. A.R. of the assessee will not help the case of the assessee on the issue of claim of abnormal cost to be excluded for the purpose of computing the margins of the assessee. We find that the rent paid by the assessee for the new office as well as the salary paid to the engineers hired by the assessee is not an abnormal cost as the assessee has not brought any material on record to show that these office building as well as engineers who were hired from 1st April, 2008 could not be used for the purpose of execution of the work but it may the assessee's own decision not to charge its A.E. to compensate the assessee in respect of the remuneration of these engineers which was otherwise agreed between the parties as per clause-10 of the agreement. Thus when the 11 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
assessee was to be compensated by the A.E. at 250% of the remuneration of service engineers then the salary paid to the service engineer cannot be considered as an abnormal cost. Hence, in view of the above discussion, we do not find any subsistence or merit in the claim of the assessee.
8. The next issue raised by the assessee is regarding exclusion of two comparable companies namely L & T Ramboll Cons and WAPCOS Ltd.,
9. At the time of hearing, the Ld. A.R. of the assessee has stated at Bar that the assessee is pressing only the exclusion of these two companies and therefore, the other comparable companies which are selected by the TPO has not been disputed by the assessee. We will deal with the comparability of these companies one by one.
WAPCOS Ltd.,
10. The Ld. A.R. of the assessee has submitted that this is a Government of India undertaking and therefore, cannot be considered as a good comparable of the assessee for the purpose of determining the ALP. He has referred to the annual report of this company at page 114 of the paper book and submitted that this company has clearly mentioned that it is a Government of India undertaking. The Ld. A.R. of the assessee then referred to the order of the TPO and submitted that the TPO has accepted the objections of the assessee in respect of two other companies namely the RITES & Engineers India Ltd., a Government of India enterprise. Therefore, on the same analogy and maintaining consistency, this company cannot be considered as a good comparable.
11. The Ld. D.R. on the other hand, has submitted that though the TPO has excluded the Government of India undertaking from the 12 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
set comparables, however, as far as WAPCOS Ltd., is concerned, the assessee did not raise this objection before the authorities below and therefore, the TPO was not having any occasion to examine this objection of the assessee. He has relied upon the orders of the authorities below.
12. We have considered the rival contentions as well as relevant material on record. We find that the assessee raised the objections regarding the comparability of certain companies on the ground that the Government of India undertaking cannot be considered as a comparable to the assessee which were accepted by the TPO that being a Government of India undertaking these companies cannot be used as a comparable. As regards WEPCOS Ltd., though the assessee raised objections, however, this particular point regarding Government of India undertaking was not raised by the assessee before the TPO. There is no dispute that WAPCOS Ltd., is a Government of India undertaking and once the TPO has accepted that the Government of India undertaking cannot be considered as a good comparable of the assessee then to maintain the rule of consistency, this company cannot be considered as a good comparable solely on this ground. Accordingly, once this company is found to be a Government of India undertaking this cannot be accepted as a comparable to the assessee as per the TPO's own finding in respect of other Government of India undertaking. Hence, we direct the TPO/A.O. to exclude this company WAPCOS Ltd., from the set of comparable.
L & T RAMBOLL CONS. :
13. The Ld. A.R. of the assessee has submitted that the TPO while selecting the comparables has applied a filter of 25% of 13 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
related party transactions. However, the TPO has not examined the related party transactions of L & T Ramboll Cons, the Ld. A.R. of the assessee has furnished details of the related party transactions and submitted that the related party transaction of this company is 59.28%. Thus, he has submitted that having the related party transaction of more than 25% of the total sales, this company does not satisfy the filter applied by the TPO and therefore, has to be excluded from the set of comparables.
14. On the other hand, the Ld. D.R. has objected to the contention of the assessee and submitted that assessee has given its own working on related party transaction without furnishing complete details and annual report of this company. Therefore, the details furnished by the assessee cannot be accepted. He has further contended that assessee did not furnish any record before the TPO to show that related party transaction of this company are more than 25%. He has relied upon the orders of the authorities below.
15. We have considered the rival submissions as well as relevant material on record. There is no dispute that the TPO applied filter of 25% RPT while selecting the comparable companies. Even otherwise, the tolerance raised of 25% of the related party transaction is an extreme limit and therefore, if the company having more than 25% of related party transaction cannot be considered as an uncontrolled price and consequently, not a good comparable for the purpose of determining ALP of the international transaction. Though as per the provisions of T.P. the uncontrolled and unrelated transaction has to be compared with the controlled transaction however, it is not feasible to find out the comparable company having 0% related transaction. Therefore, in due course of deliberations and considering this issue the Tribunal has taken a consistent view that 14 ITA.No.1001/Del./2014 Virginia Transformer India P. Ltd., New Delhi.
the related party tolerance raised can be considered ranging from 5% to 25% of the total sales. Thus the maximum tolerance range on related party transaction should not exceed 25%. Though the assessee has not disputed the filter of 25% applied by the TPO regarding related party transaction however, once the TPO has applied this filter for the purpose of selecting the comparable companies it is incumbent upon TPO to verify the relevant record of each and every company considered for the selection in the set of comparable to see whether the related party transactions of the comparable companies are within the tolerance raised as applied by the TPO. We do not find any force in the contention of the Ld. D.R. that assessee has failed to produce the authentic record and complete details of this company because of the reason that it is the duty of the TPO to verify the relevant record at the time of selection of comparable companies. Therefore, once the Ld. A.R. of the assessee has filed the details of related party transaction of this company which show more than 25% then this issue requires a proper verification and examination. Accordingly, in the facts and circumstances of the case, we set aside this issue of verification of the related party transaction of this company namely L & T Ramboll Cons. to the record of the TPO/A.O. and then consider the comparability of this company only on the issue of related party transactions.
16. In the result, appeal of the assessee partly allowed.
Order pronounced in the open Court.
Sd/- Sd/-
(O.P. KANT) (VIJAYPAL RAO)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Delhi, Dated 31st July, 2017
VBP/-
15
ITA.No.1001/Del./2014
Virginia Transformer India P. Ltd., New Delhi.
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