Income Tax Appellate Tribunal - Chennai
J Ray Mcdermott Engineering Services ... vs Dcit Corporate Circle 2(2), Chennai on 7 July, 2021
आयकर अपील य अ धकरण,'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL , 'D' BENCH, CHENNAI
ी महावीर संह, उपा य एवं ी जी. मंजुनाथ, लेखा सद&य के सम
BEFORE SHRI MAHAVIR SINGH, VICE-PRESIDENT
AND SHRI G.MANJUNATHA, ACCOUNTANT MEMBER
आयकरअपीलसं./I.T. A.No.3239/Chny/2017
( नधारणवष / Ass essm ent Year: 2013-1 4)
M/s. J Ray McDermott Engineering Vs The Deputy Commissioner of
Services Pvt. Ltd. Income Tax,
th Corporate Circle-2(2)
RMZ Millenia Business Park, 6
floor, Campus 3B, No.143, 512, Wanaparthy Block,
Dr.MGR Road, Kandanchavady, Chennai-34.
Chennai-600 096.
PAN: AAB CJ 6787H
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओरसे/ Appellant by : Mr.Ashik Shah,C.A
यथ क ओरसे/Respondent by : Mr.G.Srinivasa Rao, CIT
सुनवाईक तार ख/Da t e of h ear in g : 05.07.2021
घोषणाक तार ख /D at e of Pr on o unc e m en t : 07.07.2021
आदे श / O R D E R
PER G.MANJUNATHA, AM:
This appeal filed by the assessee is directed against final assessment order passed by the Assessing Officer u/s.143(3) r.w.s. 144C(13) of the Income Tax Act, 1961, in turn which has arisen out of the directions of DRP-2, Bengaluru dated 23.08.2017 and pertains to assessment year 2013-14.
2. The assessee has raised the following grounds of appeal:-
"1. The Assessing Officer ("AO"), Dispute Resolution Panel ("DRP") and Transfer Pricing Officer ("TPO") have erred in finalizing an order of assessment, which is against the 2 ITA No.3239/Chny/2017 principles of natural justice, violative of provisions of the Act, devoid of merits, without appreciating the facts involved, without appreciating the documents submitted in proper light, without conducting adequate inquiries and as such is without jurisdiction.
2. Transfer Pricing:
2.1 The TPO and DRP erred in rejecting the transfer pricing documentation/ benchmarking conducted by the Appellant without providing any cogent reasons for the same.
2.2 The DRP, AO and TPO erred in considering Acropetal Technologies Limited ("Acropetal") as a comparable company when the Appellant had demonstrated that the Company is not comparable and that in the year under assessment, Acropetal earned exorbitant margins.
2.3 The DRP, AO and TPO erred in considering Vama Industries Limited ("Vama") as a comparable company despite demonstrating that Vama is functionally different from the Appellant.
2.4 The DRP, AO and TPO erred in disregarding the usage of multiple year data for comparability analysis.
2.5 The DRP, AO and TPO erroneously applied the export turnover filter, despite, the Appellant demonstrating various practical difficulties in applying the filter. The DRP, AO and TPO erred in introducing the filter without providing any threshold for application of the said filter.
2.6 The DRP and TPO erred in excluding comparable companies which were otherwise comparable to the Appellant by applying incorrect filters.
3 Corporate Tax.:
3.1 On facts and circumstances of the case, the DRP and AO have erred in disallowing the club membership fee to the tune of INR 1,68,540 without appreciating that the expenditure 3 ITA No.3239/Chny/2017 towards club membership fee is for business purposes and without providing adequate opportunity of being heard. 3.2 On the facts and circumstances of the case, the DRP and AO have erred in disallowing interest on delayed remittance of statutory dues without appreciating that the same is compensatory in nature and without providing adequate opportunity of being heard."
3. Brief facts of the case are that the assessee company is a wholly owned subsidiary of McDermott Asia Pacific Pte Ltd., Singapore. The assessee is a captive service provider of engineering design and related services to McDermott group. The company provides engineering design and related services to J.Ray McDermott Middle East Inc.,Dubai and is compensated on a cost plus basis. The assessee filed its return of income for assessment year 2013-14 on 28.11.2013 declaring taxable income at Rs.11,37,53,110/-. The assessee has entered into various international transactions with its AEs and such transactions have been reported in Form 3CEB filed in accordance with provisions of Indian Transfer Pricing regulations contained in section 92, 92A to 92F of the Income Tax Act, 1961. The assessee has aggregated all transactions with its AEs and substantiated international transactions by using TNMM as most appropriate method. Further, 4 ITA No.3239/Chny/2017 international transactions in the nature of reimbursement of expenses received were justified for arm's length price by using CUP method. The assessee had operating margin at 18.57% and same was compared with comparable companies margin at 12.03%.
4. The case was taken up for scrutiny and during the course of assessment proceedings, a reference was made to TPO to determine arm's length price of international transactions of the assessee with its AEs. During the course of transfer pricing proceedings, the TPO has re-characterised TP study conducted by the assessee and has excluded certain companies selected by the assessee and has also included certain new comparables and arrived at average arithmetical mean margin of 27.98%. The TPO has also recomputed margin of the assessee by including forex income as operating income and computed margin of 19.66% as against margin computed by the assessee at 18.57%. Thus, the TPO has recomputed arm's length price of international transactions by taking comparable margin of 27.98% and made TP addition of Rs.4,94,25,547/-.
5ITA No.3239/Chny/2017
5. Pursuant to transfer pricing adjustment as suggested by TPO, the Assessing Officer has passed draft assessment order u/s.143(3) r.w.s 144C(I) of the Act on 15th November, 2016 and made TP adjustment of Rs.4,94,25,547/-, as suggested by the TPO. The Assessing Officer had also made two corporate tax adjustment of disallowance of membership fees paid to clubs for employees of the assessee for Rs.1,68,540/- and has also made disallowance of interest paid for delayed remittance of service tax for Rs.1,40,951/-. The assessee has filed objections against draft assessment order passed by the Assessing Officer before the Dispute Resolution Panel-2, Bangalore and challenged re-characterization of TP study and inclusion of certain comparables. The assessee has also challenged additions made by the Assessing Officer towards disallowance of club membership fees and disallowance of interest paid for delayed remittance of statutory payments.
6. The learned DRP vide its directions dated 23.08.2017 has rejected objections filed by the assessee regarding TP adjustment in respect of inclusion of M/s. Acropetal 6 ITA No.3239/Chny/2017 Technologies Ltd. as comparable by holding that mere allegations of fraud against company and its margins are not sufficient ground to exclude the company from the list of comparables when functions performed by comparables are similar to functions carried out by the assessee. The DRP has also rejected the objections filed by the assessee towards club membership fees paid to Madras club on the ground that the same is in the nature of personal expenditure and not allowable as deduction under the Act. Similarly, the DRP has rejected objections filed by the assessee regarding disallowance of interest on delayed payment of remittance of income tax and service tax. Aggrieved by the DRP directions, the assessee is in appeal before us.
7. The first issue that came up for our consideration from ground no.2 of the assessee appeal is inclusion of M/s. Acropetal Technologies Ltd. as comparable company. The learned AR for the assessee submitted that M/s. Acropetal Technologies Ltd. is not a good comparable, because it has high margins and also SEBI has passed an order on alleged 7 ITA No.3239/Chny/2017 fraud committed by the company and hence, financials of the company which cannot be relied upon. Therefore, the TPO as well as DRP were erred in inclusion of M/s. Acropetal Technologies Ltd. as good comparable. The learned A.R for the assessee referring to paper books filed for this purpose submitted that the ITAT., Chennai in the case of M/s. Bloom Energy India Pvt.Ltd., in ITA No.2857/Chny/2017 dated 20.06.2018 has clearly held that there were several allegations of window dressing its statement of accounts for the relevant assessment year and further, it has abnormal variations in operating margins, therefore, same cannot be considered as good comparable. The AR further referring to report of SEBI submitted that SEBI has conducted a thorough inquiry on the affairs of M/s. Acropetal Technologies Ltd. and held that the company has diverted its IPO funds to non-business purpose and same has been treated as fraud within the meaning of PFUTP regulations. Therefore, when the companies financials are not to be considered as genuine, the same cannot be considered as good comparable for a company, which is providing captive service to its AEs.
8ITA No.3239/Chny/2017
8. The learned DR, on the other hand, strongly supporting the order of TPO as well as DRP directions, submitted that mere allegations of fraud and high margins is not a ground to exclude a company from the list of comparables, when FAR analysis of the company are similar to the assessee.
9. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The TPO has included M/s. Acropetal Technologies Ltd. as comparable to determine operating margin of the assessee company. The Assessing Officer has included M/s. Acropetal Technologies Ltd. as comparable by rejecting objections filed by the assessee on the ground that mere allegation of fraud and high margins is not a reason for exclusion of company, when FAR analysis are similar to functions carried out by the assessee. We have given our thoughtful consideration to reasons given by the Assessing Officer to include M/s. Acropetal Technologies Ltd. as comparable and arguments advanced by the learned A.R for the assessee in light of SEBI report on alleged irregularities in 9 ITA No.3239/Chny/2017 the financials of the company and find that SEBI has clearly stated that the company has committed a fraud in utilization of funds raised in IPO and has diverted majority of funds to non- business purposes and which has a significant effect on operating margins. We further noted that co-ordinate Bench of this Tribunal in M/s. Bloom Energy India Pvt.Ltd (supra) has also considered comparability of M/s. Acropetal Technologies Ltd. and after considering financials held that financials of M/s. Acropetal Technologies Ltd. cannot be relied upon for the assessment year 2013-14, because there is a finding from SEBI regarding diversion of funds to non-business purposes and which is a fraud within the meaning of PFUTP regulations. The Tribunal further noted that even if it is considered, but the profit of the companies are abnormally high during the relevant assessment year and hence, it cannot be considered as good comparable to a company, which is providing captive service to its AEs. The ITAT., Chennai in the case of M/s.Cameron Manufacturing India Pvt.Ltd., vide its order dated 16.10.2018 has once again reiterated its finding and held that M/s. Acropetal Technologies Ltd. is having abnormal operating 10 ITA No.3239/Chny/2017 margin, which cannot be compared with the margin of a company which is providing captive service to its AEs. We further noted that SEBI has conducted inquiry about the activities of M/s. Acropetal Technologies Ltd. and observed that it has diverted its IPO proceeds to various group companies for non-business purposes and concluded that diversion of IPO funds is a fraud within the meaning of PFUTP regulations . Therefore, we are of the considered view that a company which has committed a fraud, as per findings of SEBI regulations cannot be considered as good comparable for a company, which is providing captive service to its AEs in the area of engineering design service. Therefore, considering facts and circumstances of the case and also by following decision of the co-ordinate Bench in the case of M/s.Bloom Engineering India Ltd.(supra), we are of the considered view that M/s. Acropetal Technologies Ltd. is not a good comparable and hence, we direct the TPO to exclude M/s. Acropetal Technologies Ltd. from the list of comparables and recompute margin after exclusion of the company.
11ITA No.3239/Chny/2017
10. The next issue that came up for our consideration from ground no.3 of the assessee appeal is disallowance of expenditure incurred on membership fees paid to Madras Club. The Assessing Officer has disallowed membership fees paid to Madras Club on the ground that it is in the nature of personal expenditure cannot be allowed as deduction. It was claim of the assessee before lower authorities that expenditure towards club membership fees was for business purpose and without providing adequate opportunity of being heard to the assessee, the Assessing Officer has treated same as personal in nature.
11. Having heard both sides and considered materials available on record, we do not find any merit in the arguments of the learned AR for the assessee that membership fees paid to Madras club is having bearing on business of the assessee. Further, club membership fees paid is definitely in the nature of personal expenditure, unless the assessee demonstrates with evidence that it has been incurred for the purpose of promoting business of the assessee. In this case, the assessee has not produced any details to prove that club membership fees paid to Madras club is having been incurred for the purpose of 12 ITA No.3239/Chny/2017 promoting business of the assessee. Therefore, we are of the considered view that there is no error in the findings recorded by the Assessing Officer to disallow club membership fees paid to Madras club and hence, we are inclined to uphold the findings of the DRP and reject the ground taken by the assessee.
12. The next issue that came up for our consideration from ground no.3.2 of the assessee appeal is disallowance of interest on delayed statutory payments. The assessee has claimed deduction towards interest on delayed / deferred payment of income-tax, delayed payment of provident fund and delayed payment of service tax. The Assessing Officer has disallowed all three payments on the ground that they are not allowable as deduction. It was claim of the assessee that interest on delayed / deferred payment of income-tax of Rs.32,107/- has been added back in the statement of total income and hence, same cannot be once again disallowed. As regards interest on delayed payment of PF and service tax, the assessee claimed that it is in the nature revenue expenditure and needs to be allowed.
13ITA No.3239/Chny/2017
13. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. As regards interest on delayed payment of income-tax, there is no dispute with regard to the fact that the learned DRP has recorded categorical finding that assessee itself has added back said interest in the statement of total income and hence, same cannot once again be disallowed. If the assessee has already disallowed interest paid on delayed payments of income tax, then the Assessing Officer is not required to disallow once again said payment, because it amounts to double disallowance. Hence, we direct the Assessing Officer to verify claim of the assessee and take appropriate decision.
14. As regards interest on delayed payment of PF, we find that it is a penal in nature for delayed remittance of statutory dues payable under respective Acts and cannot be allowed as deduction. Therefore, there is no merit in the arguments of the assessee that interest paid on delayed remittances of Provident Fund is an allowable deduction.
14ITA No.3239/Chny/2017
15. Insofar as delayed remittance of service-tax, we are of the considered view that since service tax is an indirect expenditure, which is allowable under the Act, any interest paid on delayed remittances of such indirect taxes is also in the nature of revenue expenditure, because it is compensatory in nature. Hence, we direct the Assessing Officer to allow deduction towards interest on delayed payment of service tax at Rs.23,719/-.
16. In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 7th July, 2021
Sd/- Sd/-
(महावीर संह) (जी. मंजुनाथ)
(Mahavir Singh) (G. Manjunatha )
उपा य / Vice-President लेखा सद%य / Accountant Member
चे'नई/Chennai,
(दनांक/Dated 7th July, 2021
DS
आदे श क त*ल+प अ,े+षत/Copy to:
1. Appellant 2. Respondent 3. आयकर आयु-त (अपील)/CIT(A)
4. आयकर आयु-त/CIT 5. +वभागीय त न1ध/DR 6. गाड फाईल/GF.