Income Tax Appellate Tribunal - Delhi
Eigen Technical Services Private Ltd., ... vs Dcit, New Delhi on 22 January, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-1", NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER
ITA No.244/Del/2012
Assessment Year : 2007-08
Eigen Technical Services Pvt. Ltd., DCIT, Circle- 11(1),
5th Floor, Tower B, Vatika Atrium, New Delhi.
Vs.
Golf Course Road, Sector- 53,
Gurgaon.
PAN : AAACL9591N
(Appellant) (Respondent)
Appellant by : Shri Ravi Sharma, Adv.
Shri Anubhav Rastogi, Adv.
Respondent by : Shri Sanjay I. Bara, CIT-DR
Date of hearing : 19-12-2017
Date of pronouncement : 22-01-2018
ORDER
PER R. K. PANDA, AM :
This appeal filed by the assessee is directed against the order dated 28.10.2011 passed by the Assessing Officer u/s 143(3)/144C for the assessment year 2007-08.
2. Facts of the case, in brief, are that the assessee is a company engaged in the business of providing services in the field of Information Technology and Information Technology enabled engineering services (ITES) etc.. It filed its return of income on 02.11.2007 declaring total income of Rs.20,92,30,794/-. Since the assessee had undertaken international transactions with its AE which exceeded more than 50 crores, the Assessing Officer referred the matter to the 2 ITA No.244/Del/2012 TPO for determination of arm's length price of the international transactions undertaken by the assessee. The TPO during the course of TP assessment proceedings observed that the assessee company has entered into the following international transactions with its AE :-
Nature of transaction Method selected Total value of transaction (Rs.) Provision of Software Development Services TNMM 14,913,278 Provision of Engineering design Services TNMM 195,214,578 Cost reimbursement received CUP 532,039
3. He observed that the assessee has used TNMM as the method and OP/TC as the PLI. He further observed that the assessee has arrived at a set of 6 comparables for its engineering design segment. The average margin of the comparables, using multiple year data is 5.03%. The assessee's margin in this segment is 8.9%. So far as software development segment is concerned, the assessee has arrived at a set of 18 comparables with an average margin of 13.43%. Since the assessee's margin is 21.47%, it was concluded that the transactions are at arm's length price.
4. The TPO, in order to benchmark the international transactions, rejected the application of multiple year data which was used by the assessee in some of the comparables and applied current year data. The TPO further rejected the assessee's approach of benchmarking engineering design segment and software development segment separately and adopted entity level approach. Accordingly, he undertook a fresh search for comparables since the 3 ITA No.244/Del/2012 comparables used by the assessee according to him were found to be functionally in comparable. After rejecting some of the comparable taken by the assessee as not comparable and considering certain other comparables, the TPO finally selected the following comparables and determined adjustment of Rs.26,026,695/- as per the following calculation :-
S.No. Name OP/TC (%)
1 Alphageo (India) Ltd. 40.64
2 L&T Valdel Engs. (P) ltd. 22.43
3 M J B India Gas Turbine Services Ltd. 7.11
4 Mahindra Consulting Engineers Ltd. 2.71
5 Mahindra Engineering Services Ltd. 36.31
6 Mitcon Consulting Services Ltd. 36.32
7 Oil Field Instrumentation (India) Ltd. 74.83
8 Stup Consultation (P) Ltd. 25.07
9 T C E Consultation (P) Ltd. 20.99
10 Accuspeed Engineering Ltd. 2.34
11 ASE Structure Desgn (P) Ltd. (-) 0.95
12 Geometric Ltd. 13.18
13 MN Dastur Co. (P) Ltd. 5.63
Arithmetic Mean 22.04
Calculation of arm's length price
Total cost of the assessee Rs.20,97,81,615/-
ALP at a margin of 22.04% Rs.25,60,17,482/-
Revenue shown Rs.22,99,90,787/-
Adjustment u/s 92CA Rs.2,60,26,695/-
5. The Assessing Officer accordingly passed the draft assessment order making upward adjustment of Rs.26,026,695/- towards the arm's length price of the international transactions undertaken by the assessee.
6. The Assessing Officer further observed that the assessee in its STPI unit has claimed deduction u/s 10A of the I.T. Act. The Assessing Officer asked the assessee to explain as to why the insurance expenses amounting to 4 ITA No.244/Del/2012 Rs.9,79,500/- attributable to the delivery of goods should not be excluded from the total export turnover for deduction u/s 10A of the I.T. Act. He also asked the assessee to explain as to why the other income should not be excluded from the business income for deduction u/s 10A of the I.T. Act. Rejecting the various arguments advanced by the assessee and relying on various decisions including the decision of the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. vs. CIT reported in 129 taxmann.com 539, he held that the other income is attributable to business but not derived from business and, therefore, the same has to be excluded from the profit eligible for deduction u/s 10A of the I.T. Act. The Assessing Officer, in view of the above, further held that the insurance charges amounting to Rs.9,79,500/- has to be excluded from the export turnover. He accordingly recomputed the deduction u/s 10A of the I.T. Act. The Assessing Officer in the draft assessment order made addition of Rs.2,44,840/- by restricting the depreciation on computer peripherals at 15% as against 60% claimed by the assessee. The Assessing Officer accordingly determined the total income of the assessee at Rs.3,09,95,020/-.
7. The assessee approached the DRP who gave partial relief on account of reducing insurance charges from export turnover for calculating deduction u/s 10A and allowed depreciation at the rate of 60% on some of the parts of the computer peripherals. The rest other additions made by the Assessing Officer were sustained.
5ITA No.244/Del/2012
8. Aggrieved with such order of the DRP/Assessing Officer/TPO, the assessee is in appeal before the Tribunal by raising the following grounds :-
"That on the facts and circumstances of the case, and in law.
1. The Assessing Officer passed in pursuance of the directions issued by the Learned Dispute Resolution Panel ('Ld. DRP') is a vitiated order as the Ld. DRP erred both on facts and in law in confirming the addition made by the Ld. Assessing Officer ('Ld. AO') to the Appellant's income by issuing an order without appreciation of facts and law;
2. The Ld. DRP erred in confirming the addition of Rs.2,60,26,695 to the income of the Appellant by holding that the international transactions do not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. DRP has grossly erred in agreeing with the Ld. Transfer Pricing Officer's ('TPO') action of:
2.1 not appreciating that the Appellant and prepared the detailed contemporaneous Transfer Pricing documentation bona fide and in compliance with the Income tax Act, 1961 ('the Act') and Income Tax Rules, 1962 ('the Rules').
2.2 not appreciating the fact that the Appellant had selected uncontrolled comparable companies based on a detailed Functional Asset and Risk ('FAR') analysis following a methodical benchmarking process and completely disregarding the comparable companies identified by the Appellant.
2.3 clubbing/ aggregating the activities of IT enabled engineering design services and software development services for the purpose of economic analysis and ignoring the fact that these activities have distinct functions, assets and risk profile and thus should not be aggregated for the purpose of determination of arm's length price. 2.4 selecting comparable companies whose FAR is different from the Assessee rendering them non-comparable to the Assessee. 2.5 disregarding the companies as identified by the Assessee, on a without prejudice basis, following the same methodology as adopted b the TPO. 2.6 failing to appreciate that the margin earned by the Assessee from services provided to its AEs is higher than the margin earned by the Assessee from services provided to third parties thereby satisfying the arm's length principle.
2.7 disregarding the certificate by independent chartered accountant duly certifying the computation of operating margin earned by the Assessee with respect to its business segments and also with respect to sales made to its overseas group companies and to third parties within the IT enabled engineering design services segment.
2.8 erroneous application of related party transactions filter by the Ld. TPO. 2.9 denying the benefit of idle capacity adjustment. 2.10 disregarding prior year's data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2006-07) data for comparable companies should be used despite the fact that the same was 6 ITA No.244/Del/2012 not necessarily available to the Appellant at the time of preparing its TP documentation.
2.11 failed to consider and appreciate that the Appellant is entitled to the benefit of the option of +/- 5% as per the provisions of proviso to Section 92C(2) of the Act.
3. The Ld. AO erred in excluding leaseline expenses amounting to INR 232,264 from business income for computing profits eligible for deduction under section 10 of the Act.
3.1 The Ld. AO erred in not appreciating that leaseline expenses written back amounting to Rs.232,264 were not considered for the purpose of computation of business profits eligible for deduction under section 10A in previous year 2005-06.
4. The Ld. AO erred in allowing the depreciation on computer peripherals at the rate of 15 per cent, which is the rate allowable for general plant and machinery, instead of at the rate of 60% per cent.
5. Without prejudice to the above grounds, the Ld. AO has, erred in not allowing deduction under section 10A of the Act on the income enhanced on account of disallowances made in the assessment order passed under section 143(3) of the Act.
6. The Ld. AO has erroneously considered income from business and profession as INR 28,358,727 instead of INR 27,268,942 while computing the taxable income of the Appellant.
7. The Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation.
8. The Ld. AO has erred in law in proposing to charge interest under section 234B of the Act.
The above grounds are without prejudice to each other.
The appellant craves leave to alter, amend or withdraw all or any of the grounds herein or add any further grounds as may be considered necessary either before or during the hearing."
9. Ground no.1 by the assessee being general in nature is dismissed.
10. Ground no.2.3 was not pressed by the assessee for which ld. DR has no objection. Accordingly, ground no.2.3 is also dismissed.
11. So far as remaining set of grounds of appeal no.2 are concerned, they relate to the order of the Assessing Officer/DRP on account of adjustment of Rs.2,60,26,695/- to the income of the assessee.
7ITA No.244/Del/2012
12. Ld. counsel for the assessee while arguing the case limited his argument to five of the comparables from the final set of comparables as chosen by the TPO and upheld by the DRP which are as under :-
S.No. Company Name OP/OC %
1 Alphageo (India) Ltd. 40.64
2 Mahindra Engineering Services Ltd. 36.31
3 Mitcon Consultancy Services Ltd. 36.32
4 Oil Field Instrumentation (India) Ltd. 74.83
5 T C E Consulting Engineers Ltd. 20.99
13. So far as Alphageo (India) Ltd. is concerned, ld. counsel for the assessee referred to page 3 to 5 and 33 to 37 of the Annual Report of the said company and submitted that the above company is engaged in seismic data acquisition, processing and interpretation. Referring to page 21 of the said Paper Book, ld. counsel for the assessee drew the attention of the Bench to the service flow chart of the company which includes area reconnaissance, camp establishment, identification of drilling location, topographical survey, drilling, laying of cables and sensors, connecting the sensors to the recording instrument, interpreting and processing of data etc.. Referring to page 259 of the Paper Book, Volume - I, ld. counsel for the assessee drew the attention of the Bench to the scope of services to be provided to the AE as per the agreement. Referring to the same he submitted that these are all software driver activities and the assessee is not required to go to the site. Referring to page 260 of the Paper Book, he drew the attention of the Bench to the clause relevant to 8 ITA No.244/Del/2012 information technology. Referring to page 4 of the Annual Report compilation, he drew the attention of the Bench to the following clause :-
"Our presence India's largest private sector company to offer seismic data acquisition, data processing, data interpretation services, reservoir studies and topographic survey services."
14. He submitted that the above activities are not comparable with that of the assessee company which is engaged in engineering design services. Referring to the decision of the Tribunal in the case of Flour Daniel India (P.) Ltd. vs. DCIT reported in 78 taxmann.com 138, he submitted that under identical circumstances, the Tribunal at para 5.9 of the order has directed the Assessing Officer to exclude M/s Alphageo from the set of comparables. He accordingly submitted that following the same ratio Alphageo India Limited should be excluded from the list of comparables.
15. So far as Mahindra Engineering Design and Development company is concerned, he submitted that the related party transaction as percentage of sales is 31.07%. Referring to page 99 of the Annual Report Compendium, he drew the attention of the Bench to the RPT of the above comparable. He submitted that since this issue was not decided by the Assessing Officer/TPO or DRP, he has no objection if the matter is restored to the file of the Assessing Officer with the direction to find out the RPT and if it is more than 25%, the same should be excluded from the list of comparables.
9ITA No.244/Del/2012
16. So far as Mitcon Consultancy Services Ltd. is concerned, he submitted that the above comparable is functionally different. The above company has provided consultancy services and has organized several training programs that included workshops, vocational training centres, etc. It has incurred various vocational and IT training expenses and also has generated income from such trainings. Further, it is a power sector company and has numerous divisions engaged in diversified business. Therefore, the above company should not be considered as a comparable.
17. So far as Oil Field Instrumentation Limited is concerned, he submitted that the above company is also functionally different. It has diversified nature of operations and undertakes a wide range of services like Mud Logging services, supply of equipment etc. Referring to the Annual Report Compendium, he drew the attention of the Bench to page 122 of the Paper Book and submitted that the above company is into manufacturing activities and export of finished goods as is evident from the facts mentioned in the Annual Report. Referring to page 126 of the Paper Book, Volume-II, he submitted that a perusal of Schedule 9 of the Profit & Loss Account of the company indicates that the company is also engaged in the sales of finished goods, software and spares which comprises approximately 23% of the total sales of the company. Further, segmental details of the company are not available in the audited 10 ITA No.244/Del/2012 financials. Therefore, this company also should be excluded from the list of comparables.
18. So far as TCE Consulting Engineers Limited is concerned, he submitted that this company is also functionally different, since apart from providing engineering services, the company is engaged in providing other services also such as preliminary planning, assistance in startup, testing and commissioning etc. which are not provided by the assessee. He submitted that the technical consultancy services are not functionally comparable to that of the assessee and, therefore, TCE Consulting Engineers Ltd. cannot be considered as comparable. He submitted that although it was submitted before the DRP that the above company is not comparable, however, the DRP has not given any comments as to why the above company should be considered as comparable. He accordingly submitted that the above five companies be excluded from the final set of comparables.
19. Ld. DR on the other hand submitted that since the order of the TPO is very cryptic on the issue of the comparables and the DRP has not given any observations, therefore, this matter may be restored to the file of the Assessing Officer/TPO for adjudication of the transfer pricing adjustment issue.
20. We have considered the rival arguments made by both the sides, perused the orders of the TPO/AO/DRP and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. So far 11 ITA No.244/Del/2012 as adjustment of the arm's length price of the international transaction is concerned, the argument of the ld. counsel for the assessee is that the same is Nil if the five comparables are excluded from the final set of comparables. From the chart filed by the ld. counsel for the assessee, we find there is no observation of the DRP on the issue of the above five comparables. At the time of hearing, ld. counsel for the assessee filed a copy of the order of the Tribunal in the case of Flour Daniel India (P.) Ltd. (supra) wherein the Tribunal at para 5.9 of the order has observed as under :-
"5.9 We have heard the rival submission and perused the relevant material on record including the paper book of the assessee. On perusal of the annual report of M/s Alphageo, we find that during the year under consideration the comparable company has shown income from seismic survey and other related services. On perusal of page 326 of the paper book, which is part of the annual report of M/s Alphageo , we find that the company was engaged in providing services of design and preplanning of 2-D and 3-D surveys, seismic data acquisition, seismic data interpretation , topographic surveys etc. as compared to the services of engineering design by the assessee. Thus, in our opinion, the comparable company was engaged in providing designs for survey as well as in conducting the surveys and data acquisition etc. Thus, we find that the assessee is engaged in providing only engineering design services whereas M/s Alphageo has provided many other engineering services. Further, the asset employed by M/s Alphageo is higher in terms of net fixed assets/sales ratio. In the case of the assessee, net fixed asset/sales ratio is 4.86%, whereas the same ratio in the case of M/s Alphageo is 220.55%. Thus, there is a very large difference in the asset intensity between the assessee and the comparable. Further, we also find that in view of the decision of the Tribunal in the case of Quark System Private Limited (supra), the assessee cannot be stopped from pointing out that M/s Alphageo had wrongly been taken as comparable. In view of above facts and circumstances, we are of the opinion that M/s Alphageo need to be excluded from the set of comparables being functionally dissimilar and difference in intensity of asset employed. Accordingly, we direct the Assessing Officer to exclude M/s Alphageo from the set of comparables chosen for computing arm's length of the international transaction and compute the transfer pricing adjustment accordingly."12 ITA No.244/Del/2012
21. The Tribunal apart from holding that the above companies are functionally different has also given a finding about the net fixed assets/sales ratio and difference in the asset between the assessee and that of the comparable. We, therefore, restore the issue relating Alphageo India Ltd. to the file of the Assessing Officer/TPO with the direction to give an opportunity to the assessee to substantiate the above details and decide the inclusion/exclusion of the same in the light of the decision of the Tribunal.
22. So far as the comparable i.e. Mahindra Engineering Design and Development company is concerned, it is the submission of the ld. counsel for the assessee that RPT is 31.0% and, therefore, the same should be excluded from the list of comparables. The various Benches of the Tribunal are taking the consistent view that where the RPT are more than 25%, the comparable should be excluded. Since this aspect has never been argued before the Assessing Officer and the TPO/DRP, therefore, it was not verified by the authorities below. Therefore, we deem it proper to restore this issue to the file of the Assessing Officer/TPO with the direction to verify the RPT transactions. If the contention of the assessee that the RPT is 31.07% and, therefore, is more than 25% is correct than the said company should be excluded from the list of comparable.
23. So far as Mitcon Consultancy Limited and Oil Field Instrumentation Limited are concerned, we find the order of the TPO is very cryptic and there is 13 ITA No.244/Del/2012 no observation by DRP to the various submissions of the assessee. We, therefore, restore this issue to the file of the Assessing Officer/TPO for fresh adjudication for inclusion/exclusion of the above two comparables.
24. So far as TCE Consulting Engineers Limited is concerned, we find the order of the TPO here is also very cryptic. The order of the DRP also is silent about the various arguments advanced by the assessee before them. Therefore, we deem it proper to restore the inclusion/exclusion of the above comparable to the file of the Assessing Officer/TPO with the direction to pass appropriate order by giving reasons regarding the inclusion/exclusion of the above three comparables. Grounds no.2.2, 2.5 to 2.11 are accordingly allowed for statistical purposes.
25. So far as ground no.3 is concerned, the ld. counsel for the assessee submitted that the assessee during the assessment year 2005-06 has deducted leaseline expenses from the turnover. Therefore, when the same is included in the previous year relevant to the assessment year 2007-08, the same should not be rejected. We find the order of the Assessing Officer on this issue is contrary to what the ld. counsel for the assessee has argued before us. Even the order of the DRP also mentioned that the Assessing Officer has not understood the true nature of business. Therefore he has not considered the same in the export turnover. Although the DRP had directed the Assessing Officer to recalculate the deduction u/s 10A by not reducing insurance expenses from export turnover, 14 ITA No.244/Del/2012 the Assessing Officer, according to the ld. counsel for the assessee has not followed the direction of the DRP. We, therefore, direct the Assessing Officer to adjudicate the issue afresh as per fact and law and in the light of the direction given by the DRP. The grounds raised by the assessee are accordingly allowed for statistical purposes.
26. So far as ground no.4 is concerned, the same relates to depreciation on computer peripherals at the 15% allowed by the Assessing Officer as against 60% claimed by the assessee.
27. After hearing both the sides, we find the Assessing Officer rejected the claim of depreciation at the rate of 60% on computer peripherals such as UPS, Switches, Computer racks etc. and allowed 15% depreciation on the same treating these items as plant and machinery. The DRP in the order upheld the disallowance of depreciation proposed by the Assessing Officer in respect of UPS, switches, microwave, radio, camera, cable. They, however, directed the Assessing Officer to allow depreciation at the rate of 60% on items like switches, cables parts and connectors which are connected with a computer system. It is the submission of the ld. counsel for the assessee that the computer accessories and peripherals being integral part of computer system are eligible for depreciation at higher rate of 60%. We find merit in the argument of the ld. counsel for the assessee. The Hon'ble Delhi High Court in the case of CIT vs. BSES Yamuna Powers Ltd. reported in 358 ITR 47 has held that computer 15 ITA No.244/Del/2012 accessories and peripherals such as printers, scanners and server, etc. form an integral part of computer system and hence they are entitled to depreciation at higher rate of 60%. The Delhi Bench of the Tribunal in the case of Aircom International (India) (P.) Ltd. vs. DCIT reported in (2017) 84 taxmann.com 41 and in the case of DCIT vs. OCHOA Laboratories Ltd. reported in (2017) 85 taxmann.com 168 has held that computer peripherals such as UPS system/inverter/printers are eligible for depreciation at the rate of 60%. In view of the above decisions cited (supra), we hold that the assessee is entitled to depreciation at the rate of 60% on computer peripherals. The ground raised by the assessee is allowed.
28. So far as ground no.5 is concerned, the same relates to deduction u/s 10A of the I.T. Act on the income enhanced on account of disallowances made in the assessment order. It has been held in various decisions that whenever there is enhancement of income by the Assessing Officer on account of disallowance of expenses, the profit goes up and the enhanced profit is entitled to deduction u/s 10A of the I.T. Act. Therefore, the ground raised by the assessee is allowed.
29. So far as ground no.6 is concerned, the ld. counsel for the assessee submitted that due to some clerical errors by the Assessing Officer, there is difference in the figure in the draft assessment order and the final assessment order. Since this is a clerical error as argued by the ld. counsel for assessee, therefore, we restore the issue to the file of the Assessing Officer with the 16 ITA No.244/Del/2012 direction to verify the same and consider the correct income. The ground raised by the assessee is allowed for statistical purposes.
30. So far as ground no.7 is concerned, the same relates to initiation of penalty u/s 271(1)(c) of the I.T. Act.
31. This ground by the assessee at this juncture is premature. Therefore, this ground is dismissed.
32. So far as ground no.8 is concerned, the same relates to levy of interest u/s 234B, which in our opinion, is mandatory and consequential in nature. Therefore, this ground is dismissed.
33. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on this 22nd day of January, 2018.
Sd/- Sd/-
(SUDHANSHU SRIVASTAVA) (R. K. PANDA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 22-01-2018.
Sujeet
Copy of order to: -
1) The Appellant
2) The Respondent
3) The DRP- 1, New Delhi
4) The DR, I.T.A.T., New Delhi
By Order
//True Copy//
Assistant Registrar
ITAT, New Delhi