2020 (5) TMI 459 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - NTPCESL is entirely provided work by its holding company, NTPC, and various projects and contracts are being awarded by Government companies/Departments and as such, is functionally dissimilar vis- -vis the taxpayer. What has been discussed above, we are of the considered view that ld. DRP has rightly excluded NTPCESL as a comparable on ground of functional dissimilarity.

Summary

Issues Involved:
1. Inclusion of UB Engineering Ltd., Tata Projects Ltd., and L&T Sargent Lundy Ltd. as comparables for AY 2004-05 and AY 2005-06.
2. Exclusion of NTPC Electricity Supply Company Ltd. as a comparable for AY 2005-06.

Issue-wise Detailed Analysis:

1. Inclusion of UB Engineering Ltd., Tata Projects Ltd., and L&T Sargent Lundy Ltd. as comparables for AY 2004-05 and AY 2005-06:

The Revenue challenged the inclusion of UB Engineering Ltd., Tata Projects Ltd., and L&T Sargent Lundy Ltd. as comparables, arguing that their functional profiles differ from the taxpayer's profile. This case represents the second round of litigation, with the Tribunal previously remitting the matter back to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) afresh.

The taxpayer, a subsidiary of Bechtel Corporation, USA, provides engineering design and drawing services to its associated enterprises (AEs). During the assessment years 2004-05 and 2005-06, the taxpayer entered into international transactions involving engineering services and related services. The taxpayer initially selected 9 comparables for AY 2004-05 and 10 for AY 2005-06, but the TPO rejected most of these, conducting a fresh TP study and selecting new comparables.

The Dispute Resolution Panel (DRP) directed the TPO to include UB Engineering Ltd., Tata Projects Ltd., and L&T Sargent Lundy Ltd. as comparables, which the TPO had previously excluded based on a service income filter of 75%. The Tribunal noted that the TPO did not reject these comparables due to functional dissimilarity but because they failed the service income filter. The Tribunal emphasized that the annual reports of these companies showed they met the service income filter of 75%.

The Tribunal also highlighted that UB Engineering Ltd. had been accepted as a suitable comparable in the taxpayer's own case for AY 2010-11, and the TPO had included it in AYs 2007-08 and 2008-09. The Tribunal directed the TPO to verify the data from the annual reports to confirm that these companies had service incomes exceeding 75% to retain them as suitable comparables.

2. Exclusion of NTPC Electricity Supply Company Ltd. as a comparable for AY 2005-06:

The Revenue also challenged the exclusion of NTPC Electricity Supply Company Ltd. (NTPCESL) as a comparable, arguing that the DRP ignored the OECD Guidelines, which advocate using the Transactional Net Margin Method (TNMM) for comparability based on functions rather than strict product/service comparability.

The Tribunal examined the functional profile of the taxpayer, which provides engineering support services, including preparing designs and drawings for its AEs. The Tribunal compared this with NTPCESL, a 100% government-owned subsidiary of NTPC, involved in advisory-cum-consultancy services under the Accelerated Power Development Reforms Programme (APDRP). NTPCESL's activities included project monitoring, quality assurance, and consultancy work, primarily awarded by government entities.

The Tribunal noted that NTPCESL had been excluded as a comparable in the taxpayer's own case for AY 2009-10 due to functional dissimilarity and the benefits it received from its holding company, NTPC. The Tribunal reiterated that NTPCESL's work, awarded by government companies and departments, made it functionally dissimilar to the taxpayer.

The Tribunal concluded that the DRP rightly excluded NTPCESL as a comparable due to functional dissimilarity and dismissed the appeals filed by the Revenue.

Conclusion:

The Tribunal upheld the DRP's directions to include UB Engineering Ltd., Tata Projects Ltd., and L&T Sargent Lundy Ltd. as comparables and exclude NTPCESL, emphasizing the need for functional comparability and adherence to the service income filter. The appeals filed by the Revenue were dismissed.