2018 (8) TMI 2130 - AT - Income Tax

TP Adjustment - Segregation of services - Assessee furnished separate set of comparables for Trading Segment and Services Segment - TPO determined ALP of the transactions by segregating the services rendered by the assessee company into two different segments, viz., Trading segment for supply of materials and Services segment for services actually rendered - DRP also upheld the same - According to the assessee, both are composite services and hence the TPO was not right in determining ALP separately for Products and Services - HELD THAT - As rightly pointed out by Ld D.R, we are of the view that this specific contention of the assessee requires examination at the end of AO/TPO, since these aspects have not been taken into consideration by them while determining the ALP of the assessee. The co-ordinate bench of Tribunal, in the cases relied upon by the assessee Boskalis International Dredging International 2014 (7) TMI 866 - ITAT MUMBAI AND Gates India (P) Ltd 2017 (8) TMI 282 - ITAT DELHI has expressed the view that the closely linked transactions/composite transactions have to be examined together. Since this contention of the assessee goes to the root of the issue, we are of the view the same needs to be examined at the end of AO/TPO. Accordingly we set aside the matter relating to determination of ALP of the transactions entered by the assessee with its AE to the tile of AO/TPO for examining them afresh by duly considering the various contentions of the assessee. Direct expenses computation for the purpose of computing gross profit margin - Decision of TPO in including liquidated damages as part of direct expenses - D.R submitted that the liquidated damages have been incurred by the assessee in connection with rendering of services and accordingly submitted that the TPO has rightly included it as part of direct cost - HELD THAT - As relying on Emerson Process Management (India) (P) Ltd. 2012 (9) TMI 42 - ITAT MUMBAI liquidated damages cannot be considered as direct cost for the purpose of computing Gross profit margin. Delayed employees contribution to PF and ESI - amount not been remitted within the due date prescribed in the respective Acts - A.R submitted that he has paid the same within the due date prescribed for filing return of income u/s 139(1) and hence the same is allowable as deduction as per the decision of CIT vs. Ghatge Patil Transports Ltd 2014 (10) TMI 402 - BOMBAY HIGH COURT - HELD THAT - We set aside the order passed by the AO on this issue and direct the AO to allow the deduction after satisfying himself that the impugned employees contribution have been remitted before the due date prescribed u/s 139(1) of the Act for filing return of income for the year under consideration.

Summary

Issues:
1. Transfer Pricing Adjustment
2. Consideration of Liquidated Damages as Direct Expenses
3. Disallowance of Employees' Contribution to PF and ESI

Transfer Pricing Adjustment:
The assessee, an Indo-Russian Joint Venture company, challenged the assessment order for the assessment year 2013-14, specifically disputing three issues. The primary contention was regarding the Transfer Pricing (T.P) adjustment of Rs.1579.94 lakhs. The company facilitated after-sales services for military hardware and software supplied by a Russian company to the Ministry of Defence of the Government of India. The dispute arose when the Taxation Officer (TPO) segregated the services provided by the assessee into "Trading Segment" and "Services Segment" for determining the Arms Length Price (ALP). The assessee argued that the services were composite and interlinked, objecting to the TPO's segregation. The Tribunal agreed with the assessee, emphasizing that closely linked or composite transactions should be examined together. Consequently, the matter was remanded to the AO/TPO for a fresh examination considering the assessee's contentions.

Consideration of Liquidated Damages as Direct Expenses:
The second issue revolved around the inclusion of liquidated damages as part of direct expenses by the TPO. The assessee argued that liquidated damages, paid for breach of contract terms, should not be considered part of the cost incurred in rendering services. Citing a precedent, the assessee contended that the liquidated damages should not be included in the direct expenses for computing the gross profit margin. Conversely, the Department contended that such damages were connected to service rendering and should be considered as direct costs. The Tribunal referred to a similar case where it was held that liquidated damages cannot be considered direct costs for computing the gross profit margin, aligning with the assessee's argument.

Disallowance of Employees' Contribution to PF and ESI:
The final issue pertained to the disallowance of employees' contribution to Provident Fund (PF) and Employee State Insurance (ESI) due to non-remittance within the prescribed due dates. The assessee argued that the contributions were paid before the due date for filing the income tax return under section 139(1) of the Act, relying on a decision by the Bombay High Court. The Tribunal, in line with the precedent, directed the AO to allow the deduction after verifying that the contributions were remitted before the due date. Consequently, the AO's order disallowing the deduction was set aside, and the appeal was treated as allowed for statistical purposes.

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