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TMI Blog2020 (9) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... .Year 2009-10, then the Ld. AO is directed to delete additions for the year under consideration. Disallowances of professional fees for non deduction of TDS - HELD THAT:- We deem it appropriate to set aside the issue to the file of the Ld. AO and direct him to cause necessary enquiries, in light of claim of the assessee that said amount pertains to bad debts written off. In case, the Ld. AO found that the amount of disallowances is not pertains to professional fees on which tax is required to be deducted, and then the same may be considered in accordance with law, as applicable to write off of bad debts. Value of the TP adjustment - Whether value of the TP adjustment needs to be made to the value of the international transactions instead of making the adjustments at entity level? - HELD THAT:- Limit the adjustment only to the AE transactions by following the decision of Hon ble Bombay High court, in the case of Ratilal Becharlal Sons [ 2015 (11) TMI 1524 - BOMBAY HIGH COURT] where it was categorically held that TP Adjustment needs to be made at transactions level and not at entity level. - ITA No.4722/Mum/2016 And ITA No.536/Mum/2016 And ITA.No.63/Mum/2016 And ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cades Digitceh Private Limited 2 Easun Engineering Co. Ltd. 3 Molind Engineering Ltd. 1.3. The learned Commissioner of Income Tax (Appeals) has legally and factually erred in confirming the action of learned AO/TPO by including 2 companies, on the basis of the observation made by the learned TPO, in the final set of 6 comparables, rejected by the Appellant Company as being functionally different in its TPSR, namely: Sr.No. Name of the Company 1 Mahindra Consulting Engineers Lid. 2 WAPCOS Ltd. 1.4.1 The learned Commissioner of Income Tax (Appeals) has legally and factually erred in confirming the action of learned AO/TPO by including 2 companies, on the basis of the observation made by the learned TPO, in the final set of 6 comparables, not appearing in the search process adopted by the Appellant Company as being functionally different in its TPSR, namely: Sr.No. Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09-10 on accrual basis and offered to tax and said addition amounts to double taxation of same income. 3. Disallowance of professional fees of ₹ 31,48,179 The learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of ₹ 30,13,959 as professional fees for failure to deduct tax at source in accordance with the provisions of chapter XVII B of the Income Tax Act, 1961 without appreciating the fact that the said amount is in nature of bad debts but was erroneously disclosed in the professional fees ledger instead of separate item in the Profit Loss account. The learned Commissioner of Income Tax (Appeals) has further failed to appreciate the fact that the said write off is in nature of irrecoverable revenue which recognized as revenue and offered to tax in AY 2009-10. 4. Penalty under section 271(1)(c) of the Act. The learned Commissioner of Income Tax (Appeals) has legally and factually erred in not giving! finding against action of learned AO in initiating penalty proceedings under section 271(l)(c) of Act. 3. The brief facts of the case are that the assessee company is engaged in the business of Design Engi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables and added four new companies and determined arithmetic mean of 23.90% and has made Transfer Pricing Adjustment (TPA) of ₹ 2,16,04,328/-. The final set of comparables selected by the TPO and TPA made on international transactions is tabulated below:- Sr. No Name of the Company PLI (OP/OC) A Appellant Company IOT Design Engineering Limited 14.43% B Comparables 1 Autoline Design Software Limited (Accepted) 13.58% 2 Chemtex Global Engineers Pvt Ltd (Accepted) 15.66% 3 Mahindra Consulting Engineers Ltd (Added) 23.84% 4 WAPCOS Ltd (Added) 15.92% 5 Engineers India Ltd (Added) 43.85% 6 Rites Ltd (Added) 30.52% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at MCEL is functionally dissimilar, when compared to functions carried out by the assessee. The Ld. AR further submitted that MCEL is engaged in diversified services, which is altogether different from functions performed by the assessee. Further, MCEL provides services in different segemnts, however no segmental data is provided in the financials for the year. It has also fails export filter, because the assesee has generated revenue in foreign exchange, which is at 67.86% of total revenue, whereas MCEL has merely 0.93% revenue in foreign exchange. Further, MCEL owns intangibles of ₹ 40,69,438/-, whereas the assesse does not possess any technical know-how. The Ld. AR, further submitted that the DRP in assessee own case in Asst.Year 2008-09 has rejected MCEL, on the basis of export filter. Therefore, the Ld.TPO, as well as the Ld.CIT(A) were erred in inclusion of Mahindra Consulting Engineers Ltd for the year under consideration. 8. The Ld. DR, on the other hand supporting order of the Ld.CIT(A) submitted that the Ld.CIT(A) has brought out clear facts to the effect that Mahindra Consulting Engineers Ltd. is functionally comparable to the functions carried out by the assese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciating the fact that the said company is functionally dissimilar and also, it has high turnover, which is evident from the fact that the company has recorded ₹ 302 crores turnover, which is more than 11 times of the turnover of the assessee company. The Ld. AR, further, submitted that WAPCOS Ltd. is a Government of India undertaking and the functions and risk profile of the government company cannot be compared with that of the assessee company. In this regard, he relied upon the decision of Hon ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. and also, the decision of CIT vs Thyssenkrupp Industries India Pvt.Ltd. (2016) 68 taxmann.com 248 (Bom.) 11. The Ld. DR, on the other hand, supporting order of the Ld.CIT(A) submitted that the functions performed by the assesee are similar to functions carried out by M/s WAPCOS Ltd. and merely, because it is a Government of India undertaking, it cannot be excluded from comparables. 12. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that WAPCOS Ltd. is a Government of India undertaking and the functions and risk profile o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the parties, perused the material available on record and gone through orders of the authorities below. Basically, Engineers India Limited is a Government of India undertaking and the functions and risks profile of the government of India companies are altogether different from that of the assessee company, because government companies are working in line with objective of Government of India, in furtherance of the social obligations of the government of India. Therefore, the same cannot be considered with that of Assessee Company. We further noted that the turnover of Engineers India Limited from consultancy segment is at ₹ 1,055 crores, which is more than 40 times of the turnover of the assessee company, which is at ₹ 26.11 crores. We further noted that the company is engaged in the business of providing diversified engineering services, which includes constructions, mining, chemicals, and fertilizers etc. The Hon ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. (supra) held that turnover is a relevant factor to consider comparability. Further, the Hon ble Bombay High Court, in the case of CIT vs Tyssenkrupp Industries India (P) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness of providing diversified engineering services, which includes constructions, mining, chemicals, and fertilizers etc. The Hon ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. (supra) held that turnover is a relevant factor to consider comparability. Further, the Hon ble Bombay High Court, in the case of CIT vs Tyssenkrupp Industries India (P) Ltd. held that profit motive is not a relevant consideration in case of Government undertaking and that many government companies; even operate on losses in furtherance of the social obligations of the government. Therefore, we are of the considered view that RITES Limited is not a good comparable to the assessee, which is mainly providing services to its AE in the field of EPC projects and mainly with respect to terminals. Hence, we direct the TPO to exclude RITES Limited from the final set of comparables. 19. The next issue that came up for our consideration from ground No. 2 of assessee appeal is addition of undisclosed receipt of ₹ 40,16,243/- . During the course of assessment proceedings, the Ld. AO called upon the assesse to submit reconciliation of TDS and income offered to tax, on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. AO and direct him to cause necessary enquiries, in light of claim of the assessee that said amount pertains to bad debts written off. In case, the Ld. AO found that the amount of disallowances is not pertains to professional fees on which tax is required to be deducted, and then the same may be considered in accordance with law, as applicable to write off of bad debts. 25. The other ground taken by the assessee in its memorandum of appeal or either, withdrawn or not pressed and therefore, all other grounds are dismissed as not pressed. 26. In the result, appeal filed by the assessee is partly allowed. ITA No.536/Mum/2016 for Asst.Year 2011-12 ITA.No.63/Mum/2016 for Asst. Year 2011-12 27. The facts and issues involved in this appeal, insofar as the issue of Transfer Pricing adjustment (TPA) on international transactions of the assessee with its AE s revolves around inclusion and exclusion of certain comparables by the Ld.TPO/DRP. The assessee has challenged inclusion of Mahindra Consulting Engineers Ltd. and exclusion of Chemtex Global Engineers Ltd,. The revenue has challenged exclusion of WAPCOS Ltd., Engineers India Limited and Rites India Ltd. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f industries, but no segmental data has been provided in financials. We further noted that it also fails export filter, because, the assessee has generated revenue in foreign exchange, which is at 67.86% of total revenue, while MCEL has merely 0.93% revenue in foreign exchange. Further, MCEL carries intangibles worth of ₹ 40,69,438/-, whereas the assessee does not possess any intangibles. We further noted that the DRP for Asst.Year 2008-09 has rejected MCEL, on the basis of export filter and said findings has been accepted by the revenue. Further, the ITAT, Delhi in the case of DCIT vs Terex India Pvt. Ltd. (supra) rejected MCEL as a comparable, on the ground that it is engaged in providing a variety of services, only one of which is engineering services and also, segmental information of engineering services is not available. Therefore, we are of the considered view that the Ld.TPO, as well as the Ld.CIT(A) were erred in inclusion of Mahindra Consulting Engineers Ltd. in the final set of comparables and hence, we direct the Ld.TPO to exclude Mahindra Consulting Engineers Ltd. from the final set of comparables. 31. In this view of the matter and consistent with view tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which, the sales of the company has drastically reduced. Therefore, we are of the considered view that there is no error in findings recorded by the Ld.TPO/DRP for exclusion of Chemtex Global Engineers Pvt.Ltd. and hence, we are inclined to uphold the findings and reject ground taken by the assessee. 35. The other grounds taken by the assesee, including ground No. 4, 6, 7 and 8 are not pressed and hence, the same are dismissed as not pressed. 36. The revenue has challenged the findings of the Ld. DRP in exclusion of WAPCOS Ltd, Engineers India Limited Rites Limited. Therefore, it is necessary to discuss each comparable challenged by the revenue, in light of facts brought out by the assessee and the findings of the Ld. DRP. ii. WAPCOS Ltd: 37. We find that WAPCOS Ltd has been considered by us in assesee own case for Asst.Year 2010-11 and held that the company is not a good comparable. The relevant findings of the Tribunal are as under:- 12. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that WAPCOS Ltd. is a Government of India undertaking and the functions and risk profile of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company, because government companies are working in line with objective of Government of India, in furtherance of the social obligations of the government of India. Therefore, the same cannot be considered with that of Assessee Company. We further noted that the turnover of Engineers India Limited from consultancy segment is at ₹ 1,055 crores, which is more than 40 times of the turnover of the assessee company, which is at ₹ 26.11 crores. We further noted that the company is engaged in the business of providing diversified engineering services, which includes constructions, mining, chemicals, and fertilizers etc. The Hon ble Bombay High Court, in the case of CIT vs Pentair Water India Pvt.Ltd. (supra) held that turnover is a relevant factor to consider comparability. Further, the Hon ble Bombay High Court, in the case of CIT vs Tyssenkrupp Industries India (P) Ltd. held that profit motive is not a relevant consideration in case of Government undertaking and that many government companies even operate on losses in furtherance of the social obligations of the government. Therefore, we are of the considered view that Engineers India Limited is not a goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables. 42. In this view of the mater and consistent with view taken by the co-ordinate bench, we are inclined to uphold the findings of the Ld.DRP and reject ground taken by the revenue. 43. In the result, appeal filed by the assessee is partly allowed and appeal filed by the revenue is dismissed. ITA No.4921/Mum/2016:- 44. The only issue challenged by the revenue from its ground of appeal is Transfer Pricing adjustment made by the TPO at transaction level and deleted by the DRP. The Ld. DR submitted that there is no quarrel to the proposition that the TP Adjustment, if any is to be made to the value of international transactions, as has been laid down by the various discussions of the High Court and ITAT, however, the dispute is regarding the manner of working out said adjustment to the value of the international transaction i.e, as to whether, it should be done on a proportional basis, as claimed by the assesee. The Ld. DR, further referring to the provisions of section 92D of the I.T.Act, 1961 and Rule 10D of the I.T.Rules, 1962 has submitted that the proportionate adjustment, as sought by the assesee is purely misleading and not warranted. He, further, su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... *Sec92D Maintenance, keeping of information and document by persons entering into an international transaction.- (1) Every person who has entered into an international transaction shall keep and maintain such information and document in respect thereof, as may be prescribed. 8. Thus, Subsection (1) of section 92D mandates and puts an onus on the assessee to maintain and keep such information and documents as may be prescribed in respect of 'International Transactions'. 9. Rule 10D of the Income Tax Rules, 1962 prescribes the information and documents required to be maintained by every person who has entered into an international transaction. The same reads as follows: Information and documents to be kept and maintained under section 92D . 10D. (1) Every person who has entered into an international transaction -c'[or a specified domestic transaction] shall keep and maintain the following information and documents, namely:- (g) a record of uncontrolled transactions taken into account for analyzing with the international transactions [ or the specified domestic transactions] including a record of the nature, terms and condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant international transaction are mandatory as also the details of the comparable uncontrolled transaction being considered. 12. Rule 10C discusses the 'Most appropriate method' . Rule 10C {1} provides for selection of the method which provides the most reliable measure of ALP of international transaction. Sub rule (2) provides for various factors to be taken into account for determination of the most appropriate method This inter-alia includes 'the degree of comparability existing between the international transaction and uncontrolled transaction' and 'the nature and extent and reliability of assumptions required to be made in application of a method1. Thus, the mandate of the Rule for selection of most appropriate method is that it will provide the most reliable measure of ALP and the assumptions made in application of the method are also reliable. An evaluation of Rule 10C(2) further shows that even for the purpose of selecting the most appropriate method, maximum importance is being given to the nature and class of international transaction and the functions performed, assets employed and risks assumed therein. Choice of appropriate method als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3rd parties) which were taken into account for analyzing their comparability with international transaction [refer clause(g) of Rule 10D(1)], in line with the method selected as the most appropriate method. Thereafter, the assessee is also mandated to keep a record of the analysis performed to evaluate comparability of uncontrolled transaction with international transaction [refer clause(h) of Rule 10D(1)] in line with the method selected as the most appropriate method Further, the assessee is mandated to maintain a record of the actual working carried out for determination of ALP including details of financial information used in applying the most appropriate method [refer clause(i) of Rule 10D(1)]. Thus if TNMM is applied, the to keep a record of the actual working carried out for ALP by applying TNMM as per the method of determination Rule 10B(1)(e). 16. Thus it can be seen that the documentation requirements prescribed in Rule 10D are of such a nature that both the assessee as well as the AO is enabled to select the most appropriate method based on the documentation maintained and is also able to establish comparability between the international transaction and u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfluence the price. 19. As per facts on record, the Assessee had disclosed International transactions, for which External Transactional Net Margin method (TNMM) was considered as the most appropriate method and it was applied to determine the ALP of the said international transaction. For working out the ALP of the said International Transaction, the PI I was taken as OP/OC, with the assessee as the tested party Thus this was the admitted position of the assessee considering the various provisions of the Act discussed above. It may be noted that the assessee has not worked out separate profit from the International Transaction as per the Mandate of Rule 10D and Rule 10B(1)(e). 20 The assessee has applied External TNMM , wherein the PLI of the assessee was computed and comparison was done with the PLI of the comparable companies The PLI was worked out by the assessee for the entire company (which consists of both AE sales as well as non AE sales) and was not worked out separately for the International Transactions with AEs in contravention to the mandate of rule 10B(1)(e) discussed above. It may be stated that when the assessee itself has computed the PLI at entity le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction relating to the Non-AE part in the total transaction is at ALP. In other words, the profits earned by the assessee on Non-AE transaction is at arm's length. It automatically means that out of the total profits shown, the profit on the non AE part embedded in this total profits is at ALP i.e at the average PLI of the comparables Once it is so, the shortfall in the profits as computed at entity level is only in respect of International Transactions, for which no proportionate adjustment can be allowed. It may be noted that although in the method of computation, the entity level data comprising both of AE as well as non AE transactions has been used, the adjustment is only with respect to the international transaction, as the non AE part is already at ALP. 24 Regarding the contention raised by the assessee that the adjustment was required to be restricted only to the AE transaction and cannot be resorted to at entity level it is submitted that working of proportionate adjustment submitted by the assessee is based on an erroneous presumption that AE and non-AE transaction have actually earned same percentage of profit. As discussed, even the Bombay High Court has hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27.27 Difference of profitability at entity level/ adjustment proposed L=K-D 9.09 9.09 Total op profit of AE segment post adjustment (Rs) M=L+I 14.23 AE OP/OC post adjustment (%) N=M/H*100 15.00 6. The above is explained as under: Suppose, AE sales and Non AE sales are ₹ 100 each aggregating to ₹ 200.(Column A) Suppose, Actual entity level OP/OC is 10%. (Column B) ^ Hence, Entity level OC will be 181. 82. (Column C) ^ And, Entity level OP will be 18. 18. (Column D) Suppose, ALP Margin of comparables is worked out at 15%. (Column E) Since the transaction with Non-AE are presumed to be at arm's length as there is no relationship which is likely to influence the price, the ALP margin of Non-AE be also 15% in this example. (Column F) Applying the rate of 15% to non AE sales, OC of Non-AE sales works out to ₹ 86 96 (Colu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E=C+D 968 17.59 27.27 Profit as % of cost F=E/B*100 10.21 20.23 15.00 29. From the above chart, it may be seen that if proportionate adjustment as claimed by the assessee is allowed, in effect, it means that only ₹ 4.55 would be added to the existing AE segment profit of 5.14 This would translate into total AE segment profit of ₹ 9 68. which works out to only 1021% of the OC of the AE segment of ₹ 94 86 Thus when the AE segment is expected to earn ALP profit of 15%, the adjustment made on proportionate basis would only lead to OP/OC for the AE segment at 10.21%. Hence, the proportionate adjustment as claimed by the assessee is not called for Accordingly, although the adjustment has been computed on entity level, the adjustment is only with respect to International Transactions of the assessee. 30. To sum up, the Revenue does not have any grievance against the proposition that TP provisions do not apply to non-AE transactions. However, the issue is whether for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Aramex India (P.) Ltd vs DCIT 2014] 51 taxmann.com 573 (Mumbai - Trib.) Phoenix Mecano (India) (P.) Ltd vs (TO 2014] 42 taxmann.com 469 (Mumbai - Trib.) Sandoz(P.)Ltd vs DCIT [2013] 34 taxmann.com 28 (Mumbai - Trib.) Syscom Corporation Ltd vs ACIT [2013] 35 taxmann.com 600 (Mumbai - Trib.) TCL Holdings (P.) Ltd vs ACIT [2013] 35 taxmann.com 147 (Mumbai - Trib.) Penfort (Israel) Limited vs DCIT [2013] 36 taxmann.com 499 {Mumbai Trib.) Alstom Projects India Ltd vs ACIT [2013] 36 taxmann.com 130 (Mumbai Trib.) Star Diamond Group vs DCIT 2011] 44 SOT 532 (Mumbai) DCIT vs Starlite [2010] 40 SOT 421 (MUM.) ITAT Huntsman Advanced Materials (India) Pvt. Ltd vs DCIT I.T.A. No. 8237/Mum/2010. ITAT ITAT-Other Kirloskar T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. This appeal was heard on 29/01/2020 and ordinarily, the order shall be pronounced on or before 27/04/2020. But, this order could not be pronounced on or before 27/04/2020, due to the fact that the Govt. of India has imposed nationwide lockdown from 25/03/2020 and the same has been extended timt to time up to 31/05/2020 and because of this the office was closed up to 21/05/2020. Further, if the above lockdown period is exclued for the purpose of limitation, then the order can be pronounced on or before 23/06/2020. Further, whether lockdown period can be excluded or not has been exhastively dealt by the co-ordinate bench of ITAT, Mumbai, in the case of DCIT vs JSW Limited, in ITA No. 6264/Mum/2018, dated 14/05/2020, where it was held that due to corona virus pandamic, the period of limitation automatically gets extends till such period the lockdown is in force. We, therefore, are of the opinion that considering the prevailing situation and also, by respectfully following the decision of coordinate bench in the case of DCIT vs. JSW Limited (Supra), the order is pronounced well within the time allowed under rule 34(4) of Income Tax (Appellate Tribunal) Rules 1963. Order pronou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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