Income Tax Appellate Tribunal - Delhi
Nortel Networks India Pvt. Ltd., New ... vs Acit, New Delhi on 24 April, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1', NEW DELHI
BEFORE SH. I.C. SUDHIR, JUDICIAL MEMBER
AND
SH. O.P. KANT, ACCOUNTANT MEMBER
ITA No. 1402/Del/2014
Assessment Year: 2009-10
M/s. Nortel Networks India Pvt. Vs. Asstt. Commissioner of Income
Ltd., C-227, Ground Floor, Near Tax, Circle -13(1), New Delhi
Garden of Five Senses Westend
Marg, Paryavaran Complex,
New Delhi
PAN : AABCN1424B
(Appellant) (Respondent)
Appellant by S/sh. Nageswar Rao, & Purushottam
Anand, Advocates
Respondent by Sh. Amrendra Kumar, CIT(DR)
Date of hearing 02.02.2017
Date of pronouncement 24.04.2017
ORDER
PER O.P. KANT, A.M.:
This appeal by the assessee is directed against assessment order dated 30/01/2014 passed by the Assistant Commissioner of Income-tax, Circle-13(1), New Delhi (in short 'the Assessing Officer') for assessment year 2009-10 under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (in short 'the Act'). The assessment order was passed by the Assessing Officer in pursuance of the direction of the Ld. Dispute Resolution Panel (in short 'the DRP') dated 20/12/2013. The grounds of appeal raised by the assessee are reproduced as under:
1) That, the impugned order of assessment framed by the learned Assistant Commissioner of Income-tax, Circle 13(1), New Delhi (hereinafter referred to as 'the learned AO') pursuant to the 2 ITA No. 1402/Del/2014 directions of the Hon'ble Dispute Resolution Panel - II (hereinafter referred to as 'the Hon'ble DRP') under section 143(3) read with section 144C of the Income-tax Act, 1961 ('Act'), is a vitiated order having been passed in violation of principles of natural justice and is otherwise arbitrary and is thus bad in law and is void ab-initio.
2) That, without prejudice, the learned AO has grossly erred in making a transfer pricing addition of Rs. 116,939,450/- while computing the income of the Appellant. The addition made to the returned income is highly unjustified and also suffers from mistakes apparent from record.
3) That the Hon'ble DRP has committed gross errors in confirming the order passed u/s 92CA(3) of the Act by the learned Transfer Pricing officer (the learned TPO') proposing a transfer pricing adjustment to the actual value of the international transactions of the Appellant with its associated enterprises and only granting a partial relief thereof.
4) That, on the fact and the circumstances of the case and in law, the learned TPO/Hon'ble DRP has grossly erred in not accepting the economic analysis of the Appellant for international transactions related to (a) provision of marketing and after sales support services; (b) Technical services (Reliance and others);
and (c) Bharti IVR business segments and re-determining the arm's length price ('ALP') which is not in accordance with the provisions of the Act read with the Income Tax Rules, 1962 ("the Rules") and also suffers from mistakes apparent from record.
4.1 That, on the facts and circumstances of the case and in law, the learned TPO/Hon'ble DRP has erred in
(a) rejecting the data used by the Appellant which was available to it at the relevant time and proceeding to use the data which was available only at the time of transfer pricing assessment; and
(b) using data for a single year instead of multiple year data.
4.1 That on the facts and the circumstance of the case and in law, the learned TPO/ Hon'ble DRP has erred in selection of certain companies which are functionally non comparable to the 3 ITA No. 1402/Del/2014 Appellant's business segments and applied certain arbitrary filters for the purpose of re-determining the arm's length price of international transactions pertaining to (a) provision of marketing and after sales support services; (b) Technical services (Reliance & others); and (c)^Bharti IVR business segments, which is not in accordance with the provisions of Act read with Rules.
5) That, on the facts and the circumstances of the case and in law, the learned TPO/Hon'ble DRP has erred by incorrectly bifurcating a single international transaction related to provision of marketing and after sales support services into two parts (a) business support services; and (b) technical support services; in arbitrary and ad-hoc manner using employee headcount, when no such bifurcation is contractually possible.
6) That, on the facts and in law, the learned AO and the learned TPO has grossly erred in making the transfer pricing addition in case of international transactions relating to the Technical services (Reliance & others) and Bharti IVR business segments which is contrary to the findings of the Hon'ble DRP by not restricting the transfer pricing adjustment, if any, to the proportion of international transactions vis- a-vis the total cost of respective segments and also suffers from mistakes apparent from record.
7) That on the facts and circumstances of the case and in law, the learned TPO/ Hon'ble DRP has erred by selecting certain companies which are earning super normal profits as comparable to the Appellant to benchmark the international transactions.
8) That on the facts and in law, the learned TPO has grossly erred in treating foreign exchange gain/ loss as non-operating item while determining the arm's length price of the international transactions of the Appellant without considering the terms & conditions of the inter-company transactions of the Appellant.
9) That without prejudice, on the fact and the circumstances of the case and in law, the learned TPO / Hon'ble DRP has erred in not allowing a risk adjustment to the Assessee on account of the fact that the Appellant is remunerated on a cost plus basis for the international transaction related to provision of marketing and after sales support services to associated enterprise irrespective 4 ITA No. 1402/Del/2014 of the outcome of the services provided and hence undertakes no market risk, service liability risk, credit and collection risk as against comparable companies that are the full-fledged risk taking entrepreneurs.
10) 10. That without prejudice, on the facts and circumstances of the case and in law, the learned AO/ TPO has made apparent mistakes in calculation of the operating margin of certain companies as well as in the working capital computation while calculating working capital adjusted margin of the comparable companies in respect of the international transactions.
11) That without prejudice, on the facts and circumstances of the case and in law, the learned AO / TPO / Hon'ble DRP has erred in not allowing the benefit of downward adjustment of 5 percent, as provided in the Proviso to section 92C of the Act, from the ALP of the international transactions as determined by them.
12) 12. That on the facts and circumstances of the case and in law, the learned AO has erred in levying consequential interest under section 234D of the Act.
13) That on the facts and circumstances of the case and in law, the learned AO has erred in withdrawing the interest under section 244A of the Act.
14) 14. That on the facts and circumstances of the case and in law, the learned AO has erred in initiating penalty proceedings under section 271 (1 )(c) of the Act.
All the above grounds are without prejudice to each other.
The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal.
The Appellant prays that appropriate relief be granted based on the above grounds of appeal and the facts and circumstances of the case.
2. The facts in brief of the case are that the assessee company is a wholly-owned subsidiary of 'Nortel Networks Corporation', Canada and 5 ITA No. 1402/Del/2014 was incorporated in 1996, under Indian Companies Act, 1956. During the year under consideration, the company was engaged:
(i) in providing 'marketing' and 'after sales support' services to 'Nortel' group companies;
(ii) in providing technical services to independent customers in India in the nature of installation, maintenance , testing and commissioning services in relation to telecom equipment and other products, including repair and maintenance services in relation to telecom equipment/IT products supplied by the 'Nortel' group companies in India; and
(iii) in supply and installation of networking equipment under a turnkey contract with telecom operator in India.
2.1 The assessee company filed return of income for the year under consideration on 05/05/2010 declaring total income of Rs.46,74,11,416/-. The case was selected for scrutiny and notice under section 143(2) of the Act was issued on 19/09/2011 and duly served upon the assessee within the prescribed statutory period. The learned Assessing Officer referred the case to the ld. Transfer Pricing Officer (TPO) for determination of the arm's length price of the international transactions carried out by the assessee. In transfer pricing study submitted before the ld. TPO, the assessee reported following international transactions and method of benchmarking of the transactions as under:
Sl. Nature of Transaction Approach of taxpayers Value of transaction No. Method PLI
1. Availing of technical TNMM OP/OR Rs. 503,120,607 services (for providing technical services to Reliance & Others)
2. Provision of marketing and TNMM OP/OC Rs. 3,198,610,466 after sales support services 6 ITA No. 1402/Del/2014
3. Import of TNMM OP/OR Rs. 133,082,754 telecommunication equipment for BSNL contract
4. Import of components and TNMM OP/OR Rs. 4,599,982,641 availing of technical services for Bharti IVR contract
5. Reimbursement of BNR NA Rs. 327,634,879 expenses to AEs
6. Reimbursement of BNR NA Rs. 203,080,093 expenses from AEs Total Rs. 8,965,511,440 2.2 The Ld. TPO accepted the arm's length value of the transactions reported at serial No. 3, 5 and 6 in the above table. 2.3 While benchmarking, the technical service segment (Sl. No. in table above), the assessee applied Transactional Net Margin Method (TNMM) and took operating profit to operating revenue (OP/OR) ratio as profit level indicator (PLI) in the TNMM analysis. The PLI of the assessee company was arrived at 14.08%. The assessee company selected three comparables, namely, Himachal Futuristic Telecommunications Ltd (HFTL), Telecommunication Consultants of India Ltd (TCIL) and ORG Informatics. The average PLI of the comparables was arrived at 5.82%.
While computing the PLI of the comparables, the assessee adopted weighted average for the current year and the immediately preceding two years. The average PLI of the comparables being less than the PLI of the assessee, no adjustment was made to the transaction value declared by the assessee. The ld. TPO rejected the comparables selected by the assessee company on the ground of functional dissimilarity and extraordinary events during the year. The ld. TPO observed that filters applied by the assessee, while choosing comparables, were not appropriate. The learned TPO carried out his own search on the database and after applying various filters, selected 12 comparables. He 7 ITA No. 1402/Del/2014 used current year data of those comparables for computing PLI. He excluded forex gain/loss while computing the PLI of comparables. The TPO worked out average PLI of the comparables as 19.44% as under:
No. Company Sales NW Int/TC% Services% Emp% RPT% OP/OR OP/OR Name (W/o FX)
1. Archohm 1.94 0.64 3.33 100.00 28.67 0.00 29.79 22.95 Consulta
2. Engineers 1532.46 1375.34 0.17 100.00 31.29 0.32 59.16 37.17 India
3. IBI 13.54 7.39 0.00 100.00 43.94 0.00 20.66 17.12 Chematur
4. Indus 1.45 0.83 0.72 98.62 27.74 NA 6.78 6.35 Technical & Financial Consultants Ltd.
5. L&T 24.46 16.94 0.39 100.00 51.52 0.00 41.79 29.47 Ramboll Cons
6. Mahindra 8.48 3.50 0.00 99.07 38.62 0.08 25.75 20.48 Consulting Engineers Ltd.
7. MN Dastur 162.82 99.75 0.00 100.00 42.14 9.49 7.42 6.91
8. Rites 582.84 609.75 0.19 100.00 40.37 6.12 24.83 19.89
9. Semac Ltd. 34.68 14.60 0.22 97.31 43.22 NA 25.22 20.14
10. TCE 319.05 116.47 0.66 98.29 50.10 0.05 27.20 21.38 Consulting Engineers Ltd.
11. WAPCOS 223.92 75.21 0.41 100.00 27.92 0.00 25.57 20.36 Ltd.
12. Zipper 1.02 1.04 1.16 93.58 62.35 NA 34.11 25.43 Trading Enterprises Ltd.
13. TCIL (Seg.) 5.39 5.11 25.66 19.44 After applying the PLI of 19.44 % over the operating revenue of the technical service segment computed the adjustment of Rs.3,16,62,222/-
as under:
Operating Revenue 59,06,42,570
Arm's Length Margin 19.44% of Op. revenue
Arm's Length Price (ALP) 11,48,20,916
Profit shown by taxpayer 8,31,54,694
Shortfall being adjustment u/s 92CA 3,16,66,222
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ITA No. 1402/Del/2014
2.4 In the case of transaction of business support services (marketing and sales support services), the assessee applied Transactional Net Margin Method (TNMM) and Operating Profit to Total Cost (OP/TC) ratio as the profit level indicator. The PLI of the assessee company was arrived at 12.98% on cost. The assessee chosen 12 comparables and average PLI of those comparables was arrived at 8.97% adopting weighted average of the current year and the immediately preceding two years. The average PLI of the comparables being less than the assessee company, no adjustment was made to the price of the international transaction of marketing and sales support services. The ld. TPO, bifurcated the transactions relating to provision for marketing and after sales support services in two parts i.e. technical support services and business support services on the ground that marketing support services provided by the assessee were not general in nature and required specialization and technical expertise. The assessee submitted list of employees is required by the Ld. TPO and from which, he concluded that 15% of the employees were providing technical support services and rest were providing business support services. The Ld. TPO, accordingly allocated the revenue and cost for both the technical support services and business support services for the year under consideration as under:
Particulars Amount (Rs.) Total revenue under marketing and after sales support 112,01,52,059/- services furnished by taxpayers 15% of Revenue as Technical Services Revenue 16,80,22,809/- 85% of Revenue as Business Services Revenue 95,21,29,250/- Total cost under marketing and after sales support services 99,15,03,433/- furnished by taxpayer 15% of cost as Technical Services cost 14,87,25,515/- 9 ITA No. 1402/Del/2014 85% of cost as Business Services cost 84,27,77,918/-
2.5 The Ld. TPO, then carried out a fresh search of database and chosen following comparables for 'technical support service' segment:
No. Company Sales NW Int/TC% Service% Emp% RPT% OP/OC OP/OC Name (W/o Fx)
1. Archohm 1.94 0.64 3.33 100.00 28.67 0.00 29.79 29.79 Consulta
2. Engineers 1532.46 1375.34 0.17 100.00 31.29 0.32 59.16 59.16 India
3. IBI 13.54 7.39 0.00 100.00 43.94 0.00 20.99 20.66 Chematur
4. Indus 1.45 0.83 0.72 98.62 27.74 NA 6.78 6.78 Technical & Financial Consultants Ltd.
5. L&T 24.46 16.94 0.39 100.00 51.52 0.00 41.79 41.79 Ramboll Cons
6. Mahindra 8.48 3.50 0.00 99.07 38.62 0.08 25.67 25.75 Consulting Engineers Ltd.
7. MN Dastur 162.82 99.75 0.00 100.00 42.14 9.49 7.42 7.42
8. Rites 582.84 609.75 0.19 100.00 40.37 6.12 24.83 24.83
9. Semac Ltd. 34.68 14.60 0.22 97.31 43.22 NA 25.22 25.22
10. TCE 319.05 116.47 0.66 98.29 50.10 0.05 27.20 27.20 Consulting Engineers Ltd.
11. WAPCOS 223.92 75.21 0.41 100.00 27.92 0.00 25.57 25.57 Ltd.
12. Zipper 1.02 1.04 1.16 93.58 62.35 NA 34.11 34.11 Trading Enterprises Ltd.
27.38 27.36 2.6 Applying the average PLI of 27.36% of the comparables chosen above, over the cost of technical support service , which was bifurcated by the ld. TPO and the adjustment of Rs. 2,13,94,007/- was worked out as under:
10 ITA No. 1402/Del/2014Operating Cost as calculated above 14,87,25,515 Arm's Length Margin 27.36% of Op. Cost Arm's Length Price (ALP) 18,94,16,816 Price shown in the international 16,80,22,809 transactions as calculated above Shortfall being adjustment u/s 92C 2,13,94,007 2.7 The learned TPO selected new comparables for market/business support services and average PLI of those comparables was worked out at 22.41% as follows:
No. Company Name Sales NW lnt/TC% Service% Emp% RPT% OP/OC OP/OC (w/o Fx) Apitco Ltd. 11.03 12.43 0.00 96.33 28.35 #N/A 37.70 37.70 1 2 Cameo Corp. Serv. 24.37 3.42 5.35 100.00 63.19 0.00 14.95 14.95 3 Cyber Media Research Ltd. 16.85 4.90 1.39 99.65 26.96 12.34% 10.44 10.89 4 Global Procurement Consultants Ltd. 3.41 4.03 0.00 90.69 34.73 #N/A 35.89 30.37 5 H C C A Business Services Pvt. Ltd. 20.89 8.47 0.00 100.00 51.36 13.88% 20.12 20.12 6 Kiliick Agencies & Mkfg. Ltd. 1.39 0.48 0.83 99.29 38.66 #N/A 29.48 29.48 7 Orient Engineering & Commercial Co. Ltd. 1.41 3.77 0.00 87.58 44.44 #N/A 34.47 34.47 8 TSR Darashaw. 18.71 19.67 0.45 100.00 50.80 0.00 26.98 26.98 9 ICRA Management Consulting Services 18.91 18.32 0.35 93.43 51.20 8.09% -3.24 -3.24 Ltd.
22.98 22.41 2.8 The Ld. TPO applied the above average PLI of 22.41% over the cost of market business support services, which was bifurcated by the Ld. TPO and the adjustment of Rs. 7,95,15,199/-was worked out is as under:
Operating Cost 84,27,77,918
Arm's Length Margin 22.41% of Op. Cost
Arm's Length Price (ALP) 1,03,16,44,449
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ITA No. 1402/Del/2014
Price shown in the international transactions 95,21,29,250
Shortfall being adjustment u/s 92CA 7,95,15,199
2.9 The learned TPO also applied the average PLI of 19.44% in
respect of technical service segment on the International transaction of import of components and availing of technical services for Bharti IVR contract and computed the arm's length price of the transaction and adjustment as follows:
Operating Revenue 51,46,04,454
Arm's Length Margin 19.44% of Op. revenue
Arm's Length Price (ALP) 10,00,39,106
Price shown by taxpayer 8,89,52,048
Shortfall being adjustment u/s 92CA 1,10,87,058
2.10 In this manner, the ld. TPO vide his order under section 92CA dated 30/01/2013 proposed a transfer pricing adjustment of Rs.14,36,62,486/-, which is summarized as under:
A. Technical services under Mktg. & after sales support segment :Rs.2,13,94,007/- B. Business Support under Mktg. & after sales support segment :Rs.7,95,15,199/- C.Technical Services Segment :Rs.3,16,66,222/- D. Bharti IVR Project Segment :Rs.1,10,87,058/-
Total :Rs.14,36,62,486/-
2.11 The learned Assessing Officer after incorporating the transfer pricing adjustment proposed by the TPO, passed a draft assessment order under section 143(3) read with section 144C of the Act on 22/03/2013. The assessee filed objections to the draft assessment order before the Ld. DRP on 29/04/2013. The Ld. DRP after taking into account submission filed on behalf of the assessee and hearing the Authorized Representative of the assessee, issued direction to the Assessing Officer under section 144C(5) of the Act on 20/12/2013. The 12 ITA No. 1402/Del/2014 Assessing Officer, in compliance to the direction of the Ld. DRP , recomputed the transfer pricing adjustment at Rs. 11, 69, 39, 450/-and passed the impugned assessment order on 30/01/2014 assessing the total income at Rs.58,43,50,870/-. Further, on the request for rectification, the Ld. DRP on 30/10/2014, rectified its direction directing to re-compute that adjustment in respect of technical services (reliance on the segment) and accordingly the ld. TPO, also recomputed that adjustment. Aggrieved with the direction of the Ld. DRP and the consequent impugned assessment order, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. Before us, the Ld. counsel of the assessee submitted that grounds No. 1 to 3 are general in nature. Accordingly, we are not required to adjudicate upon those grounds and same are dismissed as infructuous.
The issue of use of multiple year data versus current year data for computing PLI of the comparables raised in ground No. 4.1 was also not specifically pressed and thus dismissed as infructuous. In ground No. 4, 4.2 and 6 also, the Ld. counsel did not press, the adjustment made to Bharti IVR segment and thus that part of the ground is also dismissed as infructuous.
4. In respect of issues raised related to marketing and sales support services segment in the grounds, the Ld. counsel submitted that Ld. TPO/DRP has incorrectly bifurcated a single transaction of marketing and after sales support services into two parts in arbitrary and ad-hoc manner using employee headcount. He submitted that the functions performed by the assessee in year under consideration in respect of market support and after sales support services were same, as were the functions performed by the assessee for those services in preceding assessment year 2008-09. In this regard the Ld. counsel submitted a copy of order of the TPO for assessment year 2008-09 and referred to 13 ITA No. 1402/Del/2014 para-four of that order. He submitted that in assessment year 2008-09, the TPO has accepted market and sales support services as one single segment and technical services as other segment. He further submitted that marketing and after sales support services provided in the year under consideration as well as in earlier assessment years were pursuant to the same service agreement dated 01/07/2000 and thus there was no question of any change in the function performed by the assessee in this assessment year viz-a-viz earlier assessment years in respect of the services. The Ld. counsel further submitted that international transaction undertaken by the assessee in present assessment year being similar to the transaction in earlier assessment year and there is no change in the functionality of the assessee, the rule of consistency should have been followed and there is no reason why the comparables which were not considered earlier should be included in the list of comparable in the present assessment year. Reliance in this regard was placed on the order of the Mumbai bench of the Tribunal in the case of Thomas Cook (India) Limited Vs. Deputy Commissioner of Income Tax, in ITA No. 1261 and 1238/Mum/2015. The learned consul further submitted that the Ld. DRP did not consider the arguments in respect of consistency in the approach of the ld. TPO followed in earlier years. The Ld. counsel also submitted a chart showing status of companies selected as comparable by the TPO in the year under consideration for marketing support services vis-à-vis position of the TPO in earlier years as under:
POSITION OF S.No NAME OF THE COMPANIES TPO IN AY 2009-10 AY 2006-07 AY 2007-08 AY 2008-09 AY 2010-11 AY 2011-12 ASSESSEE'S COMPARABLES 1 IDC (India) Ltd ACCEPTED ACCEPTED ACCEPTED ACCEPTED ACCEPTED 14 ITA No. 1402/Del/2014 ICRA Management Consulting NOT IN TP 2 ACCEPTED ACCEPTED ACCEPTED ACCEPTED Services Ltd STUDY Educational Developments No such 3 REJECTED ACCEPTED ACCEPTED ACCEPTED ACCEPTED Consultants India Ltd segment NOT IN TP available in NOT IN TP 4 ITDC Ltd (Segmental) REJECTED STUDY ACCEPTED ACCEPTED TP Study STUDY In House Productions Ltd NOT IN TP NOT IN TP 5 REJECTED STUDY ACCEPTED ACCEPTED (Segmental) STUDY NOT IN TP NOT IN TP NOT IN TP 6 Access Advisors REJECTED STUDY STUDY ACCEPTED STUDY TPO's COMPARABLES 1 Apitco Limited ACCEPTED NC NC NC NC NC 2 Cameo Corp. Services ACCEPTED NC NC NC NC NC Global Procurement 3 Consultants Ltd ACCEPTED NC NC NC NC NC HCCA Business Services Pvt 4 Ltd ACCEPTED NC NC NC NC NC Killick Agencies & Marketing 5 Ltd ACCEPTED NC NC NC NC NC Orient Engineering & 6 Commercial Co. Ltd ACCEPTED NC NC NC NC NC 7 TSR Darashaw Limited ACCEPTED NC NC NC NC NC
5. In respect of technical service segment, the learned counsel submitted that there is no change in facts/function or any other details compared to earlier and later years before the year covered in present appeal, however, the Ld. AO/TPO adopted a completely different stand in the year under consideration. He submitted that when relevant facts/FAR for current year remain same as in earlier and later years, both the assessee and the comparables, there is no justification to adopt completely different stand. Accordingly, he submitted that the comparables selected by the ld. TPO need to be excluded. Without prejudice to this claim, the Ld. counsel prayed for exclusion of comparables, namely, Archohm Consultant, Engineers India Ltd, IBI Chematur, L & T Ramboll Cons, Rites Ltd, TCE Consulting Engineers Ltd., Wapcos, Zipper Trading Enterprises Ltd, as the same would result in deletion of the TP adjustment. The ld. Counsel submitted a chart showing status of companies selected as comparable by the TPO in the 15 ITA No. 1402/Del/2014 year under consideration for technical services viz-a-viz position of the TPO in earlier years, which is as under:
POSITION S. No NAME OF THE COMPANIES OF TPO IN AY 2009-10 AY 2006-07 AY 2007-08 AY 2008-09 AY 2010-11 AY 2011-12 ASSESSEE'S COMPARABLES Telecommunications 1 Consultants India Ltd ACCEPTED ACCEPTED ACCEPTED ACCEPTED ACCEPTED ACCEPTED (Segmental) Himachal Futuristic 2 Communications Ltd REJECTED ACCEPTED ACCEPTED ACCEPTED ACCEPTED ACCEPTED (Segmental) NOT IN TP 3 ORG Informatics Limited REJECTED ACCEPTED ACCEPTED ACCEPTED NOT IN TP STUDY STUDY TPO's COMPARABLES 1 Archolm Consultant ACCEPTED NC NC NC NC NC 2 Engineers India Ltd ACCEPTED NC NC NC NC NC 3 IBI Chematur ACCEPTED NC NC NC NC NC Indus Technical & Financial 4 Consultants Ltd ACCEPTED NC NC NC NC NC 5 L&T Ramboll Cons. ACCEPTED NC NC NC NC NC Mahindra Consulting 6 Engineers Ltd ACCEPTED NC NC NC NC NC 7 Rites Ltd ACCEPTED NC NC NC NC NC 8 MN Dastur ACCEPTED NC NC NC NC NC 9 Semac Ltd ACCEPTED NC NC NC NC NC 10 WAPCOS Ltd ACCEPTED NC NC NC NC NC Zipper Trading Enterprises ACCEPTED NC NC NC NC NC 11 Ltd
6. In view of the submissions made in respect of segment of marketing and sales support services and technical services, the Ld. counsel submitted that if the arguments are accepted than other grounds challenging risk adjustment (ground No. 9), mistaken calculation of margins of certain comparables (ground No. 10) and benefit of download adjustment of 5% (ground No. 11) may not required to adjudicate upon.
7. The Ld. CIT(DR) supported the order of the AO/TPO and the Ld. DRP. The Ld. CIT(DR) was asked by the bench to address position of the Department on the issue of consistency in respect of treating the marketing and sales support services segment as single segment as well 16 ITA No. 1402/Del/2014 as rejection of comparables chosen by the assessee. He was also asked to address the issue of consistency raised by the ld. counsel of the assessee in respect of the comparables chosen by the assessee in technical service segment. The Ld. CIT(DR) expressed his inability to address the position in the year under consideration viz-a-viz earlier or subsequent years in absence of record, and, requested for consultation with the current Assessing Officer, which was allowed by the bench. The Assessing Officer holding jurisdiction over the case also appeared in the hearing dated 2/02/2017 and filed the copy of letter addressed to the ld. CIT(DR). In the letter, he submitted the reasons stated by the ld. TPO for rejecting the comparables chosen by the assessee, both in the technical service segment as well as in the marketing and sales support service segment. But he also could not address the issue raised by the assessee as why comparables having similar FAR have been selected in earlier and subsequent years but rejected in the year under consideration.
8. We have heard the rival submissions and perused the relevant material on record. The first issue raised by the Ld. counsel, citing the rule of consistency, is that in earlier years, the marketing and sales support services segment has been considered as single transaction as against two separate transactions of marketing support services and technical support services considered by the learned AO/TPO. The ld. Counsel has asserted that marketing and after sales support services provided in the year under consideration as well as in earlier assessment year were pursuant to the same service agreement dated01/07/2000 and thus there was no question of change in the functions performed by the assessee in the assessment year under consideration viz-a-viz earlier assessment year in respect of the services. The Ld. CIT(DR) could not address on this issue before us in absence of records of earlier years. In the case of Thomas Cook (India) limited (supra), the TPO had accepted 17 ITA No. 1402/Del/2014 the same comparables in earlier years, however rejected in the relevant year. The coordinate bench of the Tribunal in the said case observed as under:
"7.3. We find that the assessee was engaged in travel industry primarily providing travel and tour services, that the travel and related segment activities of the assessee included two IT.s- handling of inbound tourists and handling of out bound tourists, that both the transactions were aggregated for the purpose of bench - marking analysis, that the assessee-company was selected as tested part, that TNMM was adopted as most appropriate method, that the profit level indicator (PLI) used was operating profit/operating cost (OP/TC),that it had selected four comparables to prove the arm's length of the IT.s., that the operating margin of the assessee was 10.76% as against the margin of 4.39% of the comparables, that the updated margin was found to be within the +- 5% range, that while making the adjustment the TPO had rejected three comparables namely CTL,TTPL and BLCL, that after rejecting the three comparables he had recomputed the operating margin of balance one comparable i.e. TWL @ 45.06%, that while making the adjustment the TPO reduced bad debt expenses from operating cost on the ground that same was abnormal in nature, that he increased the margin of the comparable to 45.06% and benchmarked the same against assessee's operating margin of 11.52% after reducing bad debt expenses of the assessee, that he made an adjustment of Rs.12.08 Crores, that the DRP confirmed the rejection of comparables and dismissed other arguments.
We are aware that the principles of res-judicata do not apply to the income tax proceedings. But, the rule of consistency applies. Without assigning valid reason for rejecting the earlier years' stand, the TPO should not have rejected the comparables that were found valid comparables in previous years. Without bringing on record the salient features of the year under consideration as compared to the facts of the earlier years, the departmental authorities cannot take an opposite view. It brings uncertainty in the assessment proceedings. In our opinion, stand taken in the earlier years should not be disturbed in the subsequent years until and unless new facts emerge and the same are confronted to the assessee. Here, we would like to refer to the case of Galileo Nederland BV,(367ITR319),of the Hon'ble Delhi High Court wherein it has been held that decision on an issue or question taken in earlier years though not binding should be followed and not ignored unless there 18 ITA No. 1402/Del/2014 are good and sufficient reasons to take a different view, that said principle was based upon rules of certainty and that a decision taken after due application of mind should be followed consistently as this lead to certainty, unless there were valid and good reasons for deviating and not accepting earlier decision. The Hon'ble Bombay High Court in the case of Aroni Commercials Ltd.(362 ITR 403) has held as under:
"Though the principle of res judicata is not applicable to tax matters as each year is separate and distinct, nevertheless where facts are identical from year to year, there has to be uniformity and in treatment."
In the case under consideration we find that the TPO/DRP has not proved that there was a change in the facts, as compared to earlier years and even if they existed same were not brought on record. In short, the TPO/DRP has failed to prove the justification for deviating from the decision taken earlier."
9. Though in our opinion, if there is a change in functions carried out, assets employed and risk taken (FAR analysis) of the comparables in the year under consideration viz-a-viz earlier years, the comparables selected in earlier year might be rejected in the year under consideration, but following the observation of the Tribunal in the Thomas Cook (India) limited (supra) , the TPO should assign reasons as what are the differences in the FAR analysis of the comparables as compared to the earlier years, which led to rejection of those in the current year. The departmental authorities (i.e. ld. TPO/DRP) are required to bring on record the salient feature of the year under consideration as compared to the facts of the earlier years, in absence of which, the departmental authorities cannot taken opposite view. This issue was taken up by the assessee before the Ld. DRP while challenging the approach of bifurcating single transaction of marketing and after sales support service into the separate transaction of marketing support service and technical 19 ITA No. 1402/Del/2014 support service, however, the issue of consistency was not addressed by the Ld. DRP .
10. Similarly, on the issue of following the rule of consistency in respect of rejection of the comparables in both the segments, the Ld. counsel has submitted that FAR analysis of the assessee as well as comparables was similar in earlier years and therefore there was no reason for rejection of the comparables chosen by the assessee. On the other end, the Ld. CIT(DR) contended that the AO/TPO has given reasons for rejection of the comparables chosen by the assessee. In our opinion, issue before us is if the comparables chosen by the assessee in earlier years were having FAR analysis similar to FAR analysis in year under consideration, how the same were accepted by the TPO in earlier years but rejected in the current year. If there is no change in the FAR analysis of the comparables and the assessee in earlier years viz-a-viz current year, then the rule of consistency demands that comparables chosen by the assessee should be accepted. We find that in absence of records of earlier years, the Ld. CIT(DR) could not address on the issue, and therefore in such circumstances, we feel it appropriate to restore following issues to the file of the Assessing Officer for deciding afresh in the light of rule of consistency:
(i) the issue of single transaction of marketing and sales support services viz-a-viz two separate transactions of marketing support services and technical support services,
(ii) accepting the comparables chosen by the assessee for marketing and sales support services segment
(iii) accepting the comparables chosen by the assessee for technical services segment The learned AO/TPO is directed accordingly to re-compute the arm's length price of the international transaction carried out by the 20 ITA No. 1402/Del/2014 assessee. It is needless to mention that the assessee shall be afforded sufficient opportunity of hearing on the issues in dispute. Accordingly, ground No. 4, ground No. 4.2(part other than dismissed), ground No. 5, ground No. 6 are allowed for statistical purpose.
11. The decision in respect of ground No. 8 to 11, is dependent on the decision taken in ground No. 4, ground No. 4.2 (part other than dismissed), ground No. 5, ground No. 6, which we have already restored to the Assessing Officer for deciding afresh, in the light of rule of consistency, and therefore we are not required to adjudicate upon on grounds No. 8 to 11 at this stage and accordingly held as infructuous.
12. Grounds No. 12 to 13 of the appeal are related to consequential interest or penalty proceedings, which being consequential in nature or premature, are held as infructuous and accordingly dismissed.
13. In the result, appeal of the assessee is allowed partly for statistical purpose.
The decision is pronounced in the open court on 24th April, 2017.
Sd/- Sd/-
(I.C. SUDHIR) (O.P. KANT)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 24th April, 2017.
RK/-(D.T.D)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar, ITAT, New Delhi