2017 (10) TMI 1398 - AT - Income Tax

TPA under the head provision of Application Engineering Service(AES) - Comparable selection criteria - functinal similarity - Held that - 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. 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. 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 in favour of the assessee.

Issues Involved:
1. Mistake in considering the returned income of the assessee.
2. Transfer Pricing (TP) adjustment under the head provision of Application Engineering Service (AES).
3. Admission of additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963.
4. Levy of interest under section 234 of the Income Tax Act.

Detailed Analysis:

1. Mistake in Considering the Returned Income:
The first effective ground of appeal (GOA-2) addressed an error in considering the returned income of the assessee at ?5,60,97,490/- instead of ?5,56,17,488/-. The Tribunal directed the Assessing Officer (AO) to verify the facts and pass necessary orders if the claim made by the assessee is found factually correct. This ground of appeal was decided in favor of the assessee, in part.

2. TP Adjustment under the Head Provision of Application Engineering Service (AES):
The next effective ground of appeal (GOA 3-7) dealt with a TP adjustment of ?78.71 lakhs under the head AES. During the TP proceedings, the Transfer Pricing Officer (TPO) found that the assessee had adopted the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) using operating profit to operating costs (OP/OC) as the Profit Level Indicator (PLI). The TPO selected three additional comparables: Acropetal Technologies Ltd. (ATL), Holtech Consulting Private Ltd. (HCPL), and Cather Consulting Engineers Ltd. (CCEL), which had significantly higher margins. The TPO proposed an addition of ?78.71 lakhs, which was upheld by the Dispute Resolution Panel (DRP).

The assessee contended that the TPO/DRP erred in selecting comparables based on an incorrect appreciation of the functional asset and risk profile. The Tribunal found that there was no functional comparability between the assessee and the comparables selected by the TPO. Specifically:
- CCEL: Involved in providing comprehensive consultancy services in power, oil, and gas sectors. The Tribunal found no functional comparability with the assessee, whose main business was sales support of marine equipment for group companies.
- ATL: Had extraordinary events (mergers/amalgamations) impacting its financials, making it an invalid comparable.
- HCPL: Engaged in providing comprehensive services from concept to commissioning for various projects, with no segmental data available for comparison. The Tribunal found no similarity between the functions of the assessee and HCPL.

The Tribunal concluded that all three comparables selected by the TPO and approved by the DRP should be rejected for arriving at the Arm's Length Price (ALP) of the assessee's international transactions. Consequently, the second effective ground of appeal (GOA 3-7) was decided in favor of the assessee.

3. Admission of Additional Evidences:
The assessee requested the admission of additional evidences under Rule 29 of the Income Tax Appellate Tribunal Rules, 1963, arguing that these documents would prove that the assessee had received services from its Associated Enterprises (AEs). The Tribunal admitted the additional evidences, stating that they would be useful in deciding the issue regarding TP adjustment made under the head corporate fees and that the assessee was prevented from submitting them earlier by a reasonable cause.

4. Levy of Interest under Section 234:
The last ground of appeal dealt with the levy of interest under section 234 of the Income Tax Act, which was of a consequential nature and hence not adjudicated by the Tribunal.

Conclusion:
The appeal filed by the assessee was partly allowed. The Tribunal directed the AO to verify the returned income and rejected the comparables selected by the TPO for TP adjustment, thereby deciding in favor of the assessee on significant grounds. The additional evidences were admitted, and the issue of interest levy under section 234 was deemed consequential. The order was pronounced in the open court on 18th October 2017.

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