2020 (12) TMI 1368 - AT - Income Tax

TP Adjustment - technical services segment - Comparable selection - HELD THAT - Exclude Engineers India Ltd. being a public sector undertaking and not comparable with the assessee. CEIL is a wholly-owned subsidiary of Engineers India Ltd. which is a government of India undertaking. The Engineer India Ltd. has already been held by the Tribunal as a government of India undertaking. We find that Wapcos has been mentioned as government of India undertaking-Ministry of water resources. Similarly Projects and Development India Ltd. is also one of the Government of India undertakings as evident from the Annual Report of the Company. The Projects and Development India Ltd. is Mini Ratna Company under the Department of Fertilizers Government of India. In view of the above factual position respectfully following the finding of the Tribunal in 2010-11 these companies being Government of India undertakings are directed to be excluded from the set of the comparables. The Learned AO/TPO is accordingly directed to re-compute the transfer pricing adjustment after excluding above for companies. Adjustment for interest on receivables - TPO observed that assessee has received payment against invoices raised on Associated Enterprises after delay of substantial period which in case of some invoices has been allowed for more than 200 days - HELD THAT - In the case of Kusum Healthcare Private Limited 2017 (4) TMI 1254 - DELHI HIGH COURT held that wherever working capital adjusted margin of comparables has been taken into consideration while benchmarking the main international transaction of sales to AEs no separate adjustment on account of interest on receivable is required as same get subsumed in working capital adjustment. In the instant case pursuant to the direction of the Learned DRP the Learned TPO has computed mean margin of the comparables at 19.93 % which is available on page 44 of the appeal set. This average margin has been computed using working capital adjusted OP/OC for comparable companies. Thus it is evident that in the instant case working capital adjusted margin of the comparable companies has been considered for determination of arm s-length price of the international transaction and therefore following the decision of the Hon ble jurisdictional High Court (supra) no separate adjustment for interest on receivable is required. Disallowance u/s 40(a)(ia) - travelling and conveyance cost and salaries paid to the seconded employees constitute fee for technical services - HELD THAT - As in earlier year identical expenses incurred on travel and conveyance and salary on seconded employees has not been found is liable for disallowance u/s 40(a)(ia) of the Act. This action of the Assessing Officer has not been found erroneous or fraud by the higher authorities of the Income Tax Department and therefore once the AO has accepted that the payments are not liable for disallowance we do not find any reason for agitating those very payments by the Assessing Officer in the year under consideration. Accordingly we direct the AO to delete the disallowance made under section 40(a)(ia) of the Act on payments reimbursed to foreign AEs towards travel and conveyance cost on salary cost of the seconded employees. The grounds of the appeal are accordingly allowed.

Issues Involved:

1. Validity of the assessment order.
2. Transfer pricing adjustment for technical services.
3. Inclusion/exclusion of comparables for transfer pricing.
4. Adjustment for interest on receivables.
5. Disallowance under section 40(a)(ia) of the Act for travel and conveyance expenses and salary costs.
6. Claim of professional fees.
7. Levy of interest under section 234B of the Act.
8. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of the Assessment Order:
The appellant challenged the assessment order passed by the AO pursuant to the directions of the DRP, claiming it to be invalid and bad in law to the extent of the additions made. However, this ground was considered general in nature and not specifically adjudicated upon.

2. Transfer Pricing Adjustment for Technical Services:
The assessee contested the transfer pricing adjustment made by the AO/TPO, arguing that the international transactions related to technical services were at arm's length. The TPO had proposed an adjustment of Rs. 1,59,03,863, later rectified to Rs. 1,38,64,533. The DRP granted working capital adjustments but upheld the inclusion/exclusion of certain comparables. The Tribunal directed the exclusion of government companies (Certification Engineering Solutions Ltd., Engineers India Ltd., Projects and Development India, and Wapcos) from the set of comparables, following the precedent set in earlier years. The AO/TPO was instructed to recompute the transfer pricing adjustment accordingly.

3. Inclusion/Exclusion of Comparables for Transfer Pricing:
The Tribunal found that government companies like Engineers India Ltd. and others were not comparable to the assessee due to their public sector status and government backing. This decision was consistent with earlier Tribunal findings and was applied to the current case, leading to the exclusion of these companies from the comparables set used for benchmarking.

4. Adjustment for Interest on Receivables:
The TPO had made an adjustment of Rs. 19,49,156 for interest on receivables, applying the SBI prime lending rate. The assessee argued that no separate adjustment was needed as working capital adjustments had already been made. The Tribunal agreed, citing the Delhi High Court's decision in Kusum Healthcare Pvt. Ltd., which held that separate adjustments for interest on receivables are not warranted when working capital adjustments are factored in. Consequently, the adjustment was deleted.

5. Disallowance under Section 40(a)(ia) of the Act:
The AO disallowed expenses related to travel and conveyance and salary costs under section 40(a)(ia), treating them as fees for technical services due to the lack of an employer-employee relationship. The assessee argued that these were reimbursements and not fees for technical services. The Tribunal noted that in earlier years, similar expenses were not disallowed upon re-examination by the AO. Following the principle of consistency, the Tribunal directed the AO to delete the disallowance.

6. Claim of Professional Fees:
The assessee did not press this ground, and it was dismissed as infructuous.

7. Levy of Interest under Section 234B of the Act:
The Tribunal did not specifically address this issue in the detailed analysis provided.

8. Initiation of Penalty Proceedings under Section 271(1)(c) of the Act:
Similarly, the Tribunal did not specifically address the initiation of penalty proceedings in the detailed analysis provided.

Conclusion:
The appeal was partly allowed, with significant relief granted on the issues of transfer pricing adjustments and disallowances under section 40(a)(ia). The Tribunal's directions emphasized consistency with earlier years' findings and adherence to legal precedents.

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