Income Tax Appellate Tribunal - Delhi
M/S. Eli Lily & Co. (India) Pvt. Ltd., ... vs Acit, Gurgaon on 11 April, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'C ' NEW DLEHI
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER
AND
SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER
I.T.A. No.6819/Del/2014
Assessment Years: 2004-05
M/s Eli Lily & Co. (India) Ltd. vs Asstt. Commissioner of Income-tax
Plot No.92, Sector 32, Circle, Gurgaon.
Institutional Area, Gurgaon.
(PAN:AAACE8901F)
(Appellant) (Respondent)
Appellant by: S/Shri Neeraj Jain and Abhishek
Respondent by: H.K. Choudhary, CIT- DR
Date of hearing: 14.03.2018
Date of Pronouncement: 11 .04.2018
ORDER
PER NARASIMHA K. CHARY, JM
Aggrieved by the order dated 19.08.2014 in appeal No. 169/GGN /06-07 passed by the Ld. Commissioner of income tax (appeals), Faridabad ( for short called "Ld. CIT(A)"), assessee preferred this appeal.
2. Assessee is 100% subsidiary of Elli Lilly Netherlands B.V. and is engaged in the business of formulations, which it purchases from its Associated Enterprises (AEs) as well as unrelated third parties. It also renders other services to its AEs namely, clinical trials, medical information services including answering medical 2 queries and creation and distribution of product/medical information literature to other AEs.
3. For the assessment year 2004-05, the assessee filed their return of income on 29/10/2004 declaring a total income of Rs.7,70,56,740/-. During scrutiny, learned Assessing Officer (Ld. AO) noticed the following international transactions entered into by the assessee company with its associated enterprises:-
S.No. International Transactions Method Value (Rs)
1 Purchase of formulations & service kit TNMM 89,78,62,302/-
2 Clinical trial TNMM 4,62,43,599/-
3 Quality control, audit services and market TNMM 1,84,70,653/-
research income
4 Interest on ECB CUP 47,48,163/-
5 Link charges, travel expenses, - 42,49,29,586/-
miscellaneous, Relocation, conference
expenses and subversion
4. Matter was referred to the learned Transfer Pricing Officer (Ld.TPO ) to determine the Arm's-Length Price (ALP) under section 92-CA(3) of the Income Tax Act, 1961 ("the Act) in respect of the International transaction. Assessee used multi-year data for benchmarking the international transaction, but the Ld. AO rejected the same and used only single year data for that purpose. In respect of the international transactions of coordination of clinical trial and business support services, Ld. TPO increased the book value by Rs.54,64,835/-and since the difference in Arm's-Length Price and book value is more than 5% of book value, suggested to the Assessing Officer to add the said sum to the taxable income of the assessee. Ld. AO accordingly passed the assessment order dated 27/12/2006.
35. When the assessee carried the matter in appeal, the CITA, by way of impugned order, dismissed the appeal and confirmed the assessment order. Assessee, therefore, filed this appeal before us on the following grounds:-
"1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in upholding addition on account of transfer pricing adjustment to the extent of Rs.54,64,835 allegedly on account of difference in arm's length price of international transactions of providing medical information and other business support services .
2. That the Commissioner of Income-tax (Appeals) erred on facts and in law considering single year data for determination of arm's length price instead of multiple year data which evens out variations in industry and produce cycles.
3. That the Commissioner of Income-tax (Appeals) erred in facts and in law in considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant:
(i) Engineers India Limited
(ii) RITES Limited
(iii) Mahindra Acres Consulting Engineers Ltd.
(iv) TCE Consulting Engineering Ltd.
(v) Water & Power Consulting Services Ltd.
4. That the Commissioner of Income-tax (Appeals) erred in facts and in law in not appreciating that companies engaged in engineering services does not satisfy the test of comparability laid down under Rule 10B(2) of the Income- tax Rules, ('the Rules').
5. Thatthe Commissioner of Income-tax (Appeals) erred on facts andin law in not appreciating that the appellant operates as a low-risk-bearing contract service provider and a risk adjustment over the cost should be provided, as risk and reward to this extent vest with the overseas associated enterprises to which the assessee renders off-shore contract services.
6. Thatthe Commissioner of Income-tax (Appeals) on facts and in law in 4 rejecting comparability adjustment to account for difference in working capital employed by the appellant vis-a-vis comparable companies considered by the TPO, allegedly holding that the onus in this regard was on the appellant to demonstrate the reasons and calculation of working capital adjustment, which was not discharged.
7. Thatthe Commissioner of Income-tax (Appeals) erred on the facts and in law in not being consistent while denying on the claim of working capital adjustment by the appellant, when working capital adjustments have been allowed in case of other assesses.
8. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act."
6. This appeal is filed with a delay of 30 days. Assessee submits that when they have engaged the advocate for preparing the appeal and filing the same in the tribunal, due to some technical reasons the material sent by them did not reach the counsel till after the actuary of the limitation or filing the appeal. It is submitted on behalf of the assessee that the delay occurred in filing the appeal is neither intentional no deliberate but only accidental. Reliance is placed on the decision of the Hon'ble apex court in collector, land acquisition Vs. Mst. Katiji 167 ITR 471.
7. We have considered the facts and circumstances of the case. There is no reason for us not to believe the facts separated by the assessee. Normally the assessee does not stand to gain by allowing the matters to be bought by limitation. Inasmuch as no rights are crystallized in any party by afflux of time, we are inclined to condone the delay and to give an opportunity to the assessee to present their case on merits so that the cause of justice would be advanced. Ld. 5 DR fairly conceded to condone the delay. The delay is, therefore, is condoned and will proceed to hear the matter on merits.
8. In respect of the consideration of single year data for determination of arm's-length price instead of multiple year data, according to the assessee, it evens out variations in industry and produce cycles, as such, it has to be preferred. Assessee complaints that the authorities below erred in not considering the multiple year data. On this aspect Ld. TPO observed that,-
"In these two segments the assessee has calculated OP/TC of comparables using financial data for multiple years. 10B (4) of the IT Rules provides only for the use of data relating to the financial year in which the International transaction has been entered into for analyzing the comparability of uncontrolled a transaction with an International transaction. Proviso to the said rule, provides for use of data relating to the period not being more than two years prior to such financial year if such data reveals facts which could not have an influence on the determination of the transfer prices in relation to the transaction being compared.
The assessee has nowhere stated how the transactions pertaining to the year prior to the year in which the International transaction has taken place, reveals facts which could have an influence on the determination of transfer price. The exception provided in rule 10B(4) covers a special circumstances and is to be invoked when there is a special condition relating to existence of facts which could have an influence on determination of transaction price is demonstrated to be there. No such effort has been made by the assessee, and therefore, it is concluded that for all the segments while benchmarking international transactions using transactional net margin method, data of comparables used would be for the year ending 2004."
9. Ld. CITA found that this issue is no longer res integra and is covered by the decisions reported in CIT vs, Denso Haryana Private Limited (2009 TIOL 696 Del IT) 6 followed by the Delhi Tribunal in the matters of M/s Haworth (India) Private Ltd. (2011-TII-64-ITAT-DEL-TP).
10. We have gone through the provisions under Rule 10 B(4) of the IT Rules. In the light of the proviso to this rule, use of data relating to the period not being more than two years prior to such financial year is permissible if such data reveals facts which could have an influence on the determination of the transfer prices in relation to the transaction being compared. As rightly pointed out by the AO, assessee did not bring to our notice any factors that would influence the determination of the transaction price. In the absence of any special reasons to invoke the proviso to Rule 10 B (4), we find it difficult to reach the conclusion that the authorities below committed any mistake in considering the single year data for determination of arm's-length price instead of multiple year data, or that such data evens out the variations in industry and produce cycles. This ground is answered accordingly.
11. Now coming to the question of considering certain companies as comparables in the final set of comparable companies, during the course of arguments the assessee confined the challenge in respect of only four companies, namely, Engineers India Ltd, RITES limited, TCE Consulting Engineering Ltd and Water And Power Consulting Services Ltd, though in the grounds of appeal there is a reference to Mahindra Acres Consulting Engineering Ltd also. Now, we will proceed to look into the dispute as to the comparability of the four companies challenged before us on the ground that these four companies are engaged in engineering services and do not satisfy the test of comparability laid down under Rule 10B(2) of the Income Tax Rules.
712. At the outset, it is submitted on behalf of the revenue that all the four companies now challenged by the assessee were originally selected by the assessee themselves, but however at a later point of time the assessee started challenging the same by disputing their original selection. Though not the principles of estoppels or res judicata are applicable to the tax proceedings, it is incumbent on the part of the assessee to explain what makes them take a diametrically opposite approach, in the absence of which plea of assessee has to be rejected.
13. It is submitted on behalf of the assessee that there is no estoppels under the Income-tax proceedings and the assessee can make a claim notwithstanding the fact that the same was made at previous stage or not. Though the assessee himself has considered the above mentioned four companies in the Transfer Pricing documentation for benchmarking the international transaction, they can seek rejection of such companies from determination of Arm's Length Price of the specified domestic transaction of purchase of goods at a later stage.
14. Reliance in this regard is placed on the recent decision of Hon'ble Delhi High Court in the case of CIT vs. Verizon India (P) Ltd. (ITA No. 271 &277 of 2013), wherein the Hon'ble High Court was pleased to observe that the companies considered by the assessee in the Transfer Pricing Documentation can be rejected at a later stage of appellate proceedings. The relevant extract of the decision is reproduced as under:
"5. The Tribunal examined the issue of whether the four comparables selected by the Transfer Pricing Officer were functionally comparable to the services rendered by the respondent / assessee to its associated enterprise. In this context, the Tribunal examined each of the four entities namely EIL, RITES Ltd. TCE Consulting Engineers Ltd. and Water & Power Consultancy Services 8 Ltd. and found that these four entities were not functionally comparable in respect of the services rendered by the respondent/assessee to its associated enterprise in Singapore. It has been established on facts that while the services rendered by the respondent/assessee were in the nature of marketing services, the services rendered by the so-called four comparables were in the nature of engineering services. On facts, the Commissioner of Income-tax (Appeals) as well as the Tribunal have held that the two services, that is, marketing services and engineering services, were functionally different and were, hence, not comparable. The Tribunal arrived at the following conclusion:--
"23. A perusal of the above demonstrates that the assessee has not conducted a proper TP. study and has wrongly chosen these four comparables. When on facts, we are of the opinion that the T.P. study wherein these four comparables taken were wrong as apparently there is no functional comparability, we cannot approve such T.P. study, even if the T.P.O. has accepted it. Wrong facts have to be corrected. There can be no estoppel in such factual situation. The Ld. CIT(A) has the power to accept fresh claim of the assessee. Marketing support services cannot be compared with turn key Engineering services. We agree with the view of the First Appellate Authority that EIL. Rites. Wapcos and TCE are engineering companies that provide end-to-end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk provision is vastly different and hence on this count also they are not comparable. This factual conclusions are not disputed by the Ld. D.R.
24. On these facts we find no infirmity in the Commissioner of Income- tax (Appeals) admitting a ground by the assessee, wherein it argued that the comparables selected by it in the T.P. report are erroneous."
6. It would be relevant to point out that in view of the above conclusion arrived at by the Tribunal, the respondent/assessee did not press the cross objections and the same were dismissed as non-pressed.
97. We have heard the learned counsel for the assessee and examined the matter in detail and find that the conclusion arrived at by the Tribunal on facts clearly demonstrates that the services rendered by the respondent / assessee to its associated enterprise are in the nature of marketing services which are entirely different to the set of services in the nature of engineering services rendered by the so called four comparables. Consequently, the adjustment arrived at by the Transfer Pricing Officer and the addition made by the Assessing Officer cannot be sustained on the basis of the Transfer Pricing Study with regard to the four companies which were clearly functionally not comparable. So, no question of law arises for our consideration. "
15. Considering the aforesaid settled position, notwithstanding the fact that the assessee has considered the aforesaid companies as comparable in the Transfer Pricing document, since based on the information and data available now, in terms of Rule 10B(3) of the Income-tax Rules, these companies are sought to be rejected on the ground of non-suitability for comparison, we deem it just and proper to consider the question of comparability of these companies on the touch-stone of functions performed, assets employed and risks assumed.
Engineers India Ltd
16. Firstly, in respect of Engineers India Ltd, assessee is challenging the inclusion of this company on three aspects, namely, firstly, the company is inter alia, engaged in construction and overall project management in hydrocarbon, metallurgy, power and ports & terminals; secondly, Financial statement does not provide separate profit from provision of low end services, if any and lastly, difference in business model. It is submitted on behalf of the assessee that Engineers India Limited is a Government of India Enterprise, which was established in 1965. Engineers India Ltd (EIL) is a leading global engineering consultancy and EPC company, providing engineering consultancy and EPC 10 services principally focused on the oil & gas and petrochemical industries. The Company has also diversified into sectors like infrastructure, water and waste management, solar & nuclear power and fertilizers to leverage its strong technical competencies and track record. It is submitted that the company being a public sector enterprise, operates under a different business and commercial environment, in as much as (i) it receives assignments from many other Indian and International Government enterprises and being funded through grants and aids.
17. We have gone through the profile of this company as is evident from the annual report. Relevant extract of page 11 to 20 of the Annual report of the company show that apart from rendering knowledge processing services such as process design, engineering, procurement, the company is also engaged in construction and overall project management in hydrocarbon, metallurgy, power and ports & terminals as well as information technology and other sectors of the industry.
18. Ld. AR placed reliance in this regard on the decision of the Mumbai bench of the Tribunal in case of Thyssenkrupp Industries India Pvt. Ltd. vs. ACIT (ITA No. 6460/Mum/2012), wherein, the Tribunal made distinction between a government enterprise and a private company holding that (i) profit motive is not a relevant considerations in the case of Government undertaking and (ii) government companies works for other public sector undertakings and in that sense, the related party transactions are much more than the filter of 25%. The said decision of the ITAT was upheld by the Hon'ble High Court of Bombay in ITA No. 2218 of 2013. He further submitted that the Hon'ble Delhi High Court in the 11 case of Pr. CIT vs. International SOS Services India P. Ltd., following the decision of Hon'ble High Court of Bombay in the case of Thyssenkrupp, upheld the exclusion of ECU, ITDCL and Apitco from the final set of comparable companies.
19. In the case of AT & T Communication Services India Pvt. Ltd. vs. ACIT (ITA No. 1016/Del/2015), a coordinate Bench of this Tribunal directed that Engineers India Ltd. be excluded as comparable company on account of being a govt. undertaking/ company, by observing that:
"32. By applying the decision rendered by the coordinate Bench of the Tribunal in Bechtel India (P.) Ltd. (supra) and Hon'ble Bombay High Court in Thy seen Krupp Industries India (P.) Ltd. (supra), the coordinate Bench of the Tribunal in case of WSP Consultants India (P.) Ltd. in ITA No.344/Del/2016 ordered to exclude Kitco, a 100% Government undertaking.
33. So, in view of the matter, we are of the considered view that Government undertakings/companies are not the suitable comparables for benchmarking the international transaction. So, the AO is directed to verify all the Government undertakings / companies from the final set of comparables which are taking preferential treatment from Government in getting contract etc. and are not driven by profit motive alone impacting the profit margin and to exclude the same and then benchmark the international transactions qua Network Support Services. Consequently, grounds no.4 to 4.12 are determined in favour of the taxpayer. "
20. Further, Pune bench of the Tribunal in case of Behr India Ltd. vs. ACIT (ITA No. 566/Pn/2013) too, directed exclusion of Engineers India Limited as comparable holding that substantial part of its revenue came from executing projects of Public Sector Undertakings and is, therefore, ought not to be considered as comparable, with the observation that:
"34. We have heard the rival contentions and perused the record. In the IT Enabled Services Division, the assessee was providing services to its parent company in Germany and was a limited scope service provider. The assessee adopted TNMM method as the most appropriate method to benchmark its international transactions and had applied PLI of OP/OC. For benchmarking the said transactions, the Ld. TPO had selected certain concerns as comparable. Out 12 of five external comparables selected, the Ld. TPO finally taken M/s. Kitco Ltd., M/s. Water & Power Consultancy Services (India) Ltd. and M/s. Engineers India Ltd. The assessee is aggrieved by the inclusion of said three concerns in the final set of comparables, wherein the said three concerns were Public Sector Enterprises providing consultancy and end to end solutions to government and other companies. The said concerns i.e. WAPCOS is a Mini Ratna - I Public Sector Enterprise; Engineers India Ltd. was a Government of India Enterprise and became Public Listed Company in 1996 and KITCO was established in 1972 by IDBI, Government of Kerala, seven Public Sector Banks and other National and State level financial institutions, to provide technical assistance and consultancy. We find merit in the plea of the assessee that where the concerns were working on governmental policies and social obligations, the risk profile and functions of the said Public/Government Enterprises were completely distinct and dissimilar from a concern which was a captive service provider to its associated enterprises. The assessee was operating on Cost Plus Method which was distinct from the operations of the Public Sector/Government Enterprises. Further, even from the risk perspective, the assessee does not bear material risk including credit risk product liability, etc., whereas the said concerns bear the market and credit risk and other risks. 35. The Hon'ble Bombay High Court in Thyssen Krupp Industries India (P.) Ltd. (supra) had excluded Engineers India Ltd. being government company and where substantial part of its revenue came from executing projects of Public Sector Undertakings. Following the same parity of reasoning, we hold that Engineers India Ltd. and the other concerns M/s. KITCO and M/s. WAPCOS are to be excluded from the final list of comparables."
21. Further, from a reading of the Profit and Loss account of this company we find that the entire income of Rs.128163.17 lacs earned by the company is shown under head 'Consultancy and Engineering services' and 'Lump sum turnkey project'. So also, in the segmental results provided by the company, the consultancy and engineering services are shown under a single head. Accordingly, profit earned by the company from provision of low end services is not provided in the financial accounts of the company.
22. In view of the difference in the business model and the entire revenue of this company is earned from 'Consultancy and Engineering services' and 'Lump 13 sum turnkey project', besides this being a Government company, we find that this company is not a good comparable to the assessee for benchmarking the international transaction.
RITES LIMITED
23. Ld. TPO, included RITES Limited as comparable company with operating profit margin over cost ratio of 43.74%, stating that this company is functionally comparable to the assessee.
24. It is submitted on behalf of the assessee that RITES Limited is a Government of India Enterprise, which was established in 1974 under the aegis of Indian Railways. RITES is incorporated in India as a Public Limited Company under the Companies Act, 1956 and is governed by a Board of Directors which includes persons of eminence from various sectors of engineering and management. RITES Ltd., an ISO 9001:2008 company, is a multidisciplinary consultancy organization in the fields of transport, infrastructure and related technologies. Further this company being a public sector enterprise of Indian Railways, operates under a different business and commercial environment, in as much as (i) it receives assignments from many other Indian and International Government enterprises and (ii) being funded through grants and aids. For these reasons, it is submitted it is not a good comparable company to the assessee.
25. Reliance in this regards is placed on the decision of Mumbai bench of the Tribunal in the case of ACIT vs. Chemtex Global Engineers Pvt. Ltd. (ITA 3590/Mum/2010) wherein RITES Ltd. was directed to be excluded holding that, the company is a Govt. of India undertaking therefore not comparable on account of the difference in the nature of contracts of a government company, with the 14 following observation that, -
25. Even with regard to the comparable companies which are taken into consideration by the AO/Ld. TPO the learned CIT(A) has correctly held that Rites Limited is a Government of India enterprise and considering the nature of the contracts and the implicit guarantee provided by the Government of India, etc. Rites Limited cannot be taken as a comparable case and hence the learned CIT(A) was justified in excluding the same.
26. Further reliance is placed on the decision of a coordinate bench of this Tribunal in the case of AT & T Communication Services India Pvt. Ltd. vs. ACIT (ITA No. 1016/Del/2015), wherein, RITES Ltd. was included as a comparable company and the Hon'ble bench directed to exclude all comparable companies that were Govt. undertakings/companies, holding that:
"32. By applying the decision rendered by the coordinate Bench of the Tribunal in Bechtel India (P.) Ltd. (supra) and Hon'ble Bombay High Court in Thy seen Krupp Industries India (P.) Ltd. (supra), the coordinate Bench of the Tribunal in case ofWSP Consultants India (P.) Ltd. in ITA No.344/Del/2016 ordered to exclude Kitco, a 100% Government undertaking.
33. So, in view of the matter, we are of the considered view that Government undertakings/companies are not the suitable comparables for benchmarking the international transaction. So, the AO is directed to verify all the Government undertakings / companies from the final set of comparables which are taking preferential treatment from Government in getting contract etc. and are not driven by profit motive alone impacting the profit margin and to exclude the same and then benchmark the international transactions qua Network Support Services. Consequently, grounds no. four to 4.12 are determined in favour of the taxpayer. "
27. On this aspect, the Mumbai Bench of Tribunal in the case of Novartis Healthcare Pvt. Ltd. vs ACIT (ITA No. 7643/Mum/2012), while rejecting (i) Rites Limited being Government undertaking, as comparable to the assessee engaged in providing medical support services, observed that,-
15i) Rites Ltd.
The Revenue has not disputed that Rites Ltd. is a government company established under the Ministry of Indian Railways and is providing the services in the field of architecture and planning, bridge and tunnel engineering, construction project, electrical engineering etc. to the government organizations and public section undertakings. The functions performed and carried out by Rites Ltd. are entirely different from the functions and services provided by the assessee to its AE. The assessee is providing the support service in the field of pharmaceutical and medical support service, therefore on the face of it, this company cannot be a functionally comparable with the assessee.
28. In support of their contention that this company had multi-dimensional functionality and the segmental data in respect of various activities were not available rendering this company not a good comparable, Ld. AR placed reliance on a decision of Delhi Bench of Tribunal in the case of Granite Services International Pvt. Ltd. vs. ACIT, wherein the exclusion of RITES Ltd. was directed with the observation that,-
"6. On the basis of the above decision, he argued that the public sector undertakings have to be rejected to be comparables. Having regard to the OP/OC percentage of HSCC India Limited comparative to the ratio of the assessee company Ld. DR also submitted that HSCC India Limited cannot be a comparable.
7. Similarly, in respect of Mitcon Consultancy and Engineering Services Limited and Rites Ltd. it is submitted that both these companies have multi-dimensional functionality and mostly serving the related parties, and apart from that the segmental data is not available. On this aspect also Ld. AR submits that these two companies cannot be good comparables. On facts, Ld. DR does not dispute the same We, therefore, hold that these two companies also cannot be comparables to the assessee company. "
29. In view of the above, we find that this company, being a Government enterprise, engaged in provision of services to other government enterprise in undertaking turnkey projects, cannot be considered as comparable to the assessee and ought to be excluded from the final set of comparable companies.
16Water and Power Consulting Services Limited
30. According to the assessee, this company is not comparable on account of WAPCOS Limited being a "Mini Ratna" public sector enterprise under the aegis of the Union Ministry of Water Resources. Apart from India, is providing its consultancy services in 40 other countries. WAPCOS has been providing consultancy services in 3 main centres i.e. water resources, power and infrastructure. A spectrum of services provided by WAPCOS. It is further submitted that WAPCOS renders consultancy services relating to water, power and infrastructure sectors internationally in over 30 developing countries. Services offered include market intelligence, feasibility studies, planning/ project formulation, field investigations, geo-technical investigations and testing, engineering design, contract management, quality assurance & management and human resource development. WAPCOS main fields of specialization cover irrigation and drainage, flood control and land reclamation, river management, dams, reservoir engineering and barrage, integrated agriculture development, watershed management, and so on and so forth. It would be pertinent to note that WAPCOS is primarily engaged in providing engineering consultancy and undertake turnkey contracts on a regular basis. The inherent factors of this industry i.e. marketing strategies, competitive edge, level of technological development, operational efficiency, competence and effectiveness of management, cash flow trends and potential, liquidity, financial flexibility, government policies, sensitivity to possible changes in business/economic circumstances affect the functioning of these companies.
1731. Our attention is drawn to the decision of a coordinate bench of this tribunal in DCIT vs. MCI Com India P. Ltd. (2012) 19 ITR 0042 wherein the profile of the water and Power consultancy services (India) limited was noticed as follows,-
"WAPCOS provides consulting in the domestic and international water and power sectors. Services offered include market intelligence, feasibility studies, planning/project formulation, field investigations and testing, engineering design, contract management, quality assurance & management and human resource development.
The company has identified its business activity into two business segment i. e. Consultancy & Engineering projects and Lump Sum Turnkey projects (As per the Annual Report for financial year 2003-04). WAPCOS has been providing consultancy services in all facets of Water Resources, Power and Infrastructure Sectors in India and Abroad.
"Main fields of the company cover Irrigation, Water Management, Drainage, Ground Water Exploration, Development, Flood Control, Reclamation and River Management, Dam and Reservoir, Power Engineering; Hydro Power Generation; Agricultural Development; Waterways; Systems Studies and Information Technology, Human Resources Development.
WAPCOS has also been venturing into newer fields such as Software Development, City Development Plans, Financial Management System, Technical Education, Quality Control and Construction Supervision, Roads & Bridges. "
32. As is evident from the description of the engineering consultancy activity, given the complexity of the function coupled with the technical expertise required in providing engineering consultancy, the same activity cannot be considered comparable to function of providing routine business support services due to functional differences, differences in industry and difference in market dynamics. It is submitted that the company being a public sector enterprise of Union Ministry of Water Resources, operates under a different business and commercial environment, in as much as (i) it receives assignments from many 18 other Indian and International Government enterprises and (ii) being funded through grants and aids.
33. In support of the argument that WAPCOS Limited has specifically been excluded on account of being a Government undertaking, Ld. AR drew our attention to the decisions in Intrepid Travel Pty. Ltd. Vs. ADIT (ITA No. 5582/Del/2012), Novartis Healthcare (P.) Ltd. Vs. ACIT (ITA No. 7643/Mum/2014), Yum! Resturants (India) (P.) Ltd. Vs. ITO (ITA No. 6168/Del/2013), Nortel Networks India (P.) Ltd. Vs. ACIT (ITA No. 4765/Del/2011), DCIT vs. MCI Com India Pvt. Ltd. (ITA 2766/Del/2010), H&M Hennes & Mauritz India Pvt. Ltd. vs. DCIT (ITA No. 4704/Del/2012), and BG India Energy Ltd, vs. ACIT (ITA 6486/Del/2012).
34. Having regard to the factual and legal position stated above, we find that this company, being a Government enterprise, which is engaged in providing routine support services only to its associated enterprise and in provision of services to other government enterprise and body corporate, cannot be considered comparable to the assessee, TCE Consulting Engineers Limited
35. Lastly coming to another comparable retained by the Ld. Ld. TPO , namely, Tata Consultancy Engineers Limited of TCE Consulting Engineers Limited, assessee contends that it is not functionally comparable to the assessee and ought to be rejected from the final set of comparable companies, because this company is engaged in providing engineering consultancy services to its group companies and unrelated third parties. The services rendered during the year under consideration are described in the annual report of the company, which is reproduced as under:
19"Operations During the year April 2003 to March 2004 the Company secured jobs worth Rs. 889.6 million (previous year Rs. 567 million).
Some of the major projects secured in India included 1x500 MW Bellary Thermal Power Station Stage-1 for BHEL; 1x20 MW Cogeneration plant for expansion of Chennai Petrochemicals Limited; 1x120 MW Unit four at Jojobera for Tata Power Company Limited; 2x250 MW Thermal Power Station Expansion for Neyveli Lignite Corporation; 660 MW Vijaywada Thermal Power Plant for Vattenfall Europe Power Consult GMBH; Solid Propellant Plant for Indian Space Research Organisation; New Zirconium Oxide Plant for Nuclear Fuels Complex; Engineering for Naval base Project at Vizag and Capacity Building for Thane & Nasik Districts for Water Supply & Sewerage Department.
Overseas projects secured include Water and Waste Water projects for United Utilities in UK, additional services for Eben City Project in Mauritius, services for setting up two cement plants in Nigeria for Associated Cement Companies and 90 MW combined cycle power plant for Dangote Industries Limited, Nigeria.
Engineering activities on several projects secured in the previous year are in an advanced stage of completion. These include 750 MW Ras Laffan Combined Cycle Power Plant in Qatar for Enel Power SPA, Italy; 1x100 MW and 1x130 MW power project for Jindal Vijayanagar Steel Limited, 220 kV Semtokha - Basochu line and substations for Royal Government of Bhutan; Project Management Services for Eben Cyber City in Mauritius; Spent Fuel Facilities for BARC; Water and Sewerage sector projects in Nagpur, Mumbai, Delhi and Bangalore, and Urban Development Projects in Rajasthan and Gujarat.
Major projects completed during the year include Engineering Services for Tata Consultancy Services' Global Development Centre at Madhapur in Hyderabad; Operation and Design Engineering of Water Supply projects for Erbil and Sulemaniyah in Northern Iraq; Bandra Sewage Disposal project for Municipal Corporation of Greater Mumbai; Canal based Industrial Water Supply project in Vishakapatnam for Andhra Pradesh Industrial Infrastructure Corporation; Privatisation of Electrical distribution in Karnataka (with CMS Cameroon McKenna, UK); Upgradation, renovation and extension of five Government Hospitals and two District Hospitals in Nagpur Region, funded by World Bank; Plant layout and engineering for Phase 1 & II of the 500 MW prototype Fast Breeder Reactor for Indira 20 Gandhi Centre for Atomic Research; Engineering, survey and field investigations for the Mulwad Lift Irrigation Project and Almatti Right Bank Canal at Almatti Dam for Krishna Bhagya Jala Nigam Ltd.; Deinking plant of Hindustan News Print Ltd. and 2x20 MW gas turbine co- generation plant for Chennai Petrochemicals Limited.
The company's commitment to quality system has been reinforced with the smooth transition to the ISO 9001:2000 certification by the Lloyd's Register of Quality Assurance, UK".
36. In support of the contention that this company is not a good comparable with the assessee, reliance is placed on the decisions in Microsoft Corporation India Pvt. Ltd. vs. DCIT (ITA No. 5855/Del/2010) which was followed by the ITAT for the assessment year 2007-08 and 2008- 09 in ITA No.5766/Del/2011 and ITA No. 6417/Del/2012, respectively, DCIT vs. MCI Com India Pvt. Ltd.(ITA No. 2766/Del/2010), Bechtel India (P.) Ltd. vs. DCIT (ITA No. 1478/Del/2015), Verizon (India) Pvt. Ltd. Vs JCIT [ITA No: 4187/Del/2010] and Rolls-Royce India Pvt. Ltd. vs. DCIT (ITA No. 6636/Del/2015), wherein, TCE Engineers Consulting Limited has specifically been excluded on account of being engaged in providing engineering consultancy services.
37. On a careful perusal of the profile of this company as is incorporated in its Annual report, we find that this company is engaged in providing high end engineering services and therefore, cannot be compared to the assessee who has been engaged in providing low end business support services, therefore, on that ground, this company ought to be excluded from the final set of comparable companies considered for the purpose of benchmarking low end business support services provided by the appellant to its associated enterprise.
38. We, therefore, for the reasons recorded above, find the four companies disputed by the assessee, namely, Engineers India Ltd, RITES limited, TCE 21 Consulting Engineering Ltd and Water And Power Consulting Services Ltd are not good comparables to the assessee to benchmark the international transaction. Ld. AO/TPO will exclude the same from the final list of comparables.
39. In the result, appeal of the assessee is allowed for statistical purpose.
Order pronounced in the Open Court on 11th April, 2018.
Sd/- sd/-
(R.K. PANDA) (K. NARASIMHA CHARY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 11th April, 2018
'VJ'
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A) By order
5. DR, ITAT
Asstt. Registrar, ITAT