Income Tax Appellate Tribunal - Mumbai
Rolls Royce Marine India P.Ltd, Navi ... vs Dcit Cir 15(3)(2), Mumbai on 18 October, 2017
आयकर अपीलीय अिधकरण, अिधकरण मुंबई " के " खंडपीठ Income-tax Appellate Tribunal -"K"Bench Mumbai सव ी राजे ,ले लेखा सद य एवं, राम लाल नेगी, ी याियक सद य Before S/Shri Rajendra,Accountant Member and Ram Lal Negi,Judicial Member आयकर अपील सं./I.T.A./689/Mum/2017, िनधा रण वष /Assessment Year: 2012-13 Rolls-Royce Marine India Private Limited Dy. CIT , Circle-15(3)(1) Plot No. D-505, TTC Industrial Area, Room No.473, Aayakar Bhawan MIDC Sharaya Hundai Lane, Opp.Balmer Vs. M.K. Road Lawrie, Turbhe, Navi Mumbai-400 710. Mumbai-400 020.
PAN:AAACU 4687 L
(अपीलाथ /Appellant) ( यथ / Respondent)
Revenue by: Shri Saurabh Deshpande-DR
Assessee by: Ms. Karishma R. Phatarphekar/Harsh R. Shah & Jigna Talari सुनवाई क तारीख / Date of Hearing: 16.08.2017 घोषणा क तारीख / Date of Pronouncement: 18.10.2017 आयकर अिधिनयम,1961 अिधिनयम क धारा 254(1)के के अ तग त आदे श Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद य राजे के अनुसार /PER RAJENDRA, AM-
Challenging the order dated, 30/11/2016 of the Assessing Officer (AO) passed u/s. 143 (3) r.w.s.144C(13)of the Act,the assessee has filed the present appeal.Assessee-company- engaged in the business of sales support of marine equipment for group companies,servicing of marine equipment,sale of marine spares and assembly of marine electrical system/ switch - boards for group companies-filed its return of income on 28/03/2014, declaring total income at Rs. 5.56 crores.
2.During the assessment proceedings,the AO found that the assessee had entered into International Transactions (IT.s) with its Associated Enterprise(AE's). He made a reference to the Transfer Pricing Officer (TPO). After receiving the order of the TPO, he issued a draft order to the assessee proposing offered adjustments under the heads 'provision of application engineering services' and 'corporate fees'.The assessee filed objections before the Dispute Resolution Panel(DRP)-2, Mumbai.After receiving the directions of the DRP,dated 09/09/ 2016,the AO finalised the assessment, determining the income of the assessee at Rs.11. 28 crores.
2.1.Vide its application,dated 25/07/2017,the assessee has requested for admitting additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963 (Rules).In its application,the assessee has stated that ground number 8 to 12 were about TP adjustment of Rs.4.88 crores relating to corporate fees for intra-group services, that it had furnished details about services rendered before the TPO and the DRP,that both the authorities completed the 689 of 2017- Rolls Royce Marine India Pvt.Ltd.
Arm's Length Price(ALP)at nil holding that no services were received by the assessee from the AE's,that it wanted to file certain documents to the decision of the revenue authorities were not based on facts, that the TPO and the DRP had acknowledged the fact that it had received services from its AE's, that after receiving the final order of the AO it realised that there was an understanding mismatch between it and the Department authorities about the evidences for receiving services,that at the time of preparation of paper book for the Tribunal Counsel pointed out that there was a discrepancy in placing the evidence in the paper book, that it was found that assessee had failed to attach certain important documents,that the documents submitted in form of additional evidences would prove beyond doubt that the assessee had received services from AE's, that the evidences should be taken on record in the interest of Justice.
2.2.During the course of hearing before us, the Authorised Representative (AR) and reiterated the arguments that are part of the application filed by the assessee. The Departmental Representative (DR) opposed the admission of evidences.
2.3.We have perused the additional evidences submitted by the assessee and the application made by it.After going through the same, we are of the opinion that they would be useful to decide the issue regarding TP adjustment made under the head corporate fees and the assessee was prevented from submitting them before the departmental authorities by a reasonable cause.Therefore, in the interest of justice,we admit the additional evidences under Rule 29 of the Rules.
3.First effective ground of appeal (GOA-2) is about mistake in considering the returned income of the assessee at Rs.5,60,97,490/-instead of Rs.5,56,17,488/-. We direct the AO to verify the fact and pass necessary orders if the claim made by the assessee is found factually correct.Second ground of appeal is decided in favour of the assessee, in part.
4.Next effective ground of appeal(GOA 3-7)deals with TP adjustment of Rs. 78.71 lakhs under the head provision of Application Engineering Service(AES).During the TP proceedings,the TPO found that the assessee had adopted Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) using operating profit to operating costs (OP/ OC)as Profit Level Indicator (PLI), that it had selected for comparable companies having a margin of 7.07%, that it had earned margin of 5.60%, that it was claimed that margin earned by it fell within 5% safe harbour as per the proviso to section 92C (2) of the Act, that the assessee claimed that IT.s entered into it with its AE's were at ALP.The TPO selected three 2 689 of 2017- Rolls Royce Marine India Pvt.Ltd.
additional comparables namely,Acropetal Technologies Ltd.(ATL),Holtech Consulting Private Ltd.(HCPL) and Cather Consulting Engineers Ltd(CCEL) having margin of 18.92%, 47.36% and 54.5% respectively.He directed the assessee to explain as to why the above- mentioned comparable should not be considered for deciding the ALP of the IT.s. After considering the submission of the assessee, the TPO selected seven companies in the final set of comparables and arrived at arithmetic mean of 20.51 for benchmarking the IT.s entered into by the assessee. He held that margin earned by the assessee fell beyond the range of (+/-) 5%,that the transactions were not at arm's length. He proposed an addition of Rs. 78.71 lakhs.
4.1.As stated earlier,the AO,in his draft order proposed to made the addition of the said amount under the head AES.The assessee filed detailed objections before the DRP stating that TPO did not conduct a structured search, that he had done cherry picking of companies as comparables,that cherry picking of comparables had distorted the comparability analysis.It also raised objections about inclusion of three new comparables by the TPO.After considering the order of the TPO and the submission of the assessee,the DRP held that the TPO had not resorted to cherry picking,that he had merely added a few comparables to make the comparability analysis more accurate, scientific and logical. Referring to the provisions of section 92C(3)(c) of the Act the DRP held that the determination of ALP by the assessee would be disturbed if the information or data used by it in computation of ALP was not reliable or correct, that there was no violation of the TP provisions by the TPO it referred to certain case laws. It was further observed that in the transfer pricing study report the assessee had categorised itself as a provider of administrative and other services, that it was providing highly technical engineering services and design solution,that categorisation of the assessee company is a mere administrative service provider was incorrect,that the comparables introduced by the TPO were performing broadly similar function as were rendered by the assessee to its AE's, that broadly similar comparables could be used for benchmarking the ALP under TNMM.
With regard to ATL,the DRP observed that the assessee had raised objection about inclusion of the said comparable stating that there were extraordinary events,that it could not justify as to how those events had impacted the margin of the engineering design segment, that CCEL was providing consultancy services for power, oil and gas sectors,that HCPL was also into provision of engineering consulting services, that all the functions performed by the comparable companies were similar to that of the assessee.Finally,the DRP rejected the objections raised by it.
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5.Before us,the AR contended that the TPO/DRP erred in arbitrarily selecting comparable based on incorrect appreciation of functional asset and risk profile, that in the case of ATL various extraordinary events(mergers/amalgamations) had taken place in the year under appeal,that approval to give effect to such events was pending before the Hon'ble High Court of Karnataka,that the impact of such events was not taken into account in the financial statements of the comparable,that ATL could not be taken as a company comparable,that the correct margin of the comparable was not taken into consideration.,that HCPL was involved in providing comprehensive services from concept to commissioning for greenfield moderni- sation/conversion/expansion of cement as well as captive power plant/waste heat recovery based power plants, that as per the website of HCPL the auditor had qualified his report and had mentioned that the company had not provided any segmental report as required by the Accounting Standards (page 474 of PB), that it was having machinery as part of its fixed assets and inventory in its books of accounts, that it had also large portion of costs as sub- contracting,that the assessee was engaged in engineering design and drawing services for various overseas clients.With regard to CCEL,he argued that it was involved in providing comprehensive services,that the report of the director of the company mentioned that it had received various orders for project management services for a thermal power plant and order for preparation of thermal power plant, that it had also received orders for basic and detailed imaging services, that no segmental details were available for such activities. Referring to the page 56 of the PB,he stated that it was operating only in segment which was engineering consultancy. He referred to the case of Bechtel India Private Ltd.(66 taxmann.com 160) in his support.
The DR argued that in the matter of ATL the assessee had failed to prove that the alleged extra ordinary event affected the profit margin,that there was functional similarities in the job profile of the assessee and ATL,that in two other cases also there was broad comparabili
-ty,that in TP proceedings overall comparison had to be seen.
6.We have heard the rival submissions and perused the material before us.We find that the assessee had selected 4 comparables to prove that IT.s entered into with AE.s were at arm's length,that it had adopted TNMM as MAM,that as per the TPS the profit margin of the assessee was within the permissible limits,that the TPO added three more comparables and 4 689 of 2017- Rolls Royce Marine India Pvt.Ltd.
proposed upward adjustments of Rs.78.71 lakhs under the head AES,that the DRP rejected the objection raised by the assessee about three comparables-namely ATL,HPCL and CCEL,that DRP had held that companies selected by the TPO were performing functions similar to the functions of the assessee,it was argued that there was no functional comparability between the assessee and the comparables selected by the TPO. So,it would be useful to take up the justification of inclusions of above referred three comparables in the final list of companies selected for benchmarking the ALP.In the case of CCEL it is found that it is involved in providing comprehensive consultancy services in the fields of Power,Oil and Gas sectors in India and overseas.As per the report of the Director,during the year under consideration,it had received orders for project management services for a thermal power plant and order for preparation of thermal power plant. In our opinion,there is no functional comparability between the assessee and CCEL.One is in field of engineering consultancy services-specially in the areas of power/oil/gas,whereas the other is engaged in the business of sales support of marine equipment for group companies, servicing of marine equipment, sale of marine Spares and assembly of marine electrical system/switchboards for group companies.The main business of the assessee is with the group entities. Secondly,segmental results of basic and detailed engineering services of CCEL are not available for the year under appeal.Thus,in our opinion the DRP was not justified in holding that CCEL was a valid comparable and that the assessee and CCEL were performing similar functions.Here,we would like to refer to the case of Bechtel India (P.) Ltd. (supra).We are reproducing the relevant portion of the order of the Tribunal and it reads as under :
"13.A bare perusal of the profile of the aforesaid company goes to prove that the same is engaged in offerings comprehensive services from concept to commissioning for green-field, modernization/conversion expansion of cement as well as captive power plant/waste heat recovery based power plant projects. Holtec also engaged in providing engineering support services for bulk material handling and structural steel detailing etc. having plant and machinery as part of its fixed assets and inventory in its books, it has also large portion of cost as sub-contracting and profile of Holtec is diametrically opposed to the assessee company which is engaged in engineering design and drawing for various overseas AEs to support overseas offices turnkey project execution. The assessee company has neither any plant and machinery as part of its fixed assets and inventory in its books nor has large portion of its cost as sub-c0ntracting cost. So, it cannot be taken as a comparable in any case."
In case of ATL it is found that extra ordinary events had taken place and the impact of mergers/acquisitions were not considered in the financial functions of the company.So,it cannot be taken as a valid comparable.As far as HPCL is concerned,we find that it is engaged in providing consulting services in the areas of power,highway,bridges,engineering support 5 689 of 2017- Rolls Royce Marine India Pvt.Ltd.
services for bulk material handling and structural steel detailing.Its portfolio of services include all discipline of engineering,business consulting,geology and mining,project and construction-management,environment-management and performance-management.Clearly, HPCL is engaged in providing comprehensive services from concept to commissioning for green field,modernization/expansion of cement as well as captive power plant,that the assessee unlike HPCL is not providing engineering support services for bulk material handling and structural steel detailing.Besides segmental data of HPCL are not available that could be compared.It is also a fact the HPCL is having plant and machinery as part of its fixed assets and inventory in its books of accounts.Sub-contracting is a large portion of cost of HPCL.In our opinion,there is no similarity between the functions of the assessee and HPCL.
In short,all the three comparables,selected by the TPO and approved by the DRP,have to be rejected for arriving at the ALP of the IT.s of the assessee .If these comparables are not considered for benchmarking the margin of profit for the year under appeal,as compared to other comparables,is within the prescribed limits i.e.(+/- 5%).Therefore,we decide the second effective ground of appeal (GOA 3-7) in favour of the assessee.
7.Last ground of appeal deals with levy of interest u/s.234 of the Act,is of consequential nature.Hence,it is not being adjudicated.
As a result,appeal file by the assessee stands partly allowed. फलतः िनधा रती ारा दािखल क गई अपील अंशतः मंजूर क जाती है.
Order pronounced in the open court on 18th October, 2017.
आदेश क घोषणा खुले %यायालय म' (दनांक 18 अ)टूबर, 2017 को क गई ।
Sd/- Sd/-
(राम लाल नेगी / Ram Lal Negi) (राजे / Rajendra)
याियक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मुंबई Mumbai; (दनांक/Dated : 18.10.2017.
Jv.Sr.PS.
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1.Appellant /अपीलाथ- 2. Respondent /./यथ-
3.The concerned CIT(A)/संब1 अपीलीय आयकर आयु2, 4.The concerned CIT /संब1 आयकर आयु2
5.DR "A " Bench, ITAT, Mumbai /िवभागीय .ितिनिध, खंडपीठ,आ.अ.%याया.मुंबई
6.Guard File/गाड फाईल स/यािपत .ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.
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