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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 ..... tax (DRP) Rules, 2009, dated 28/03/2016 for Asst.Year 2011-12. The revenue has also, filed cross objection against order of the DRP-1, Mumbai, dated 15/09/2015 for Asst.Year 2011-12. Since, the facts are identical and issues are common, for the sake of convenience, the appeals filed by the assessee, as well as the revenue and cross objection filed by the revenue were heard together and are disposed-off by this consolidated order. ITA No.4722/Mum/2016 for Asst.Year 2010-11:- 2. The assessee has raised the following grounds of appeal: 1. Transfer Pricing 1.1 The learned Commissioner of Income Tax (Appeals) has erred in confirming the transfer pricing adjustment of Rs. 2,16,04,328 made by the learned Assessing Officer ('AO) to the value of International Transaction entered into by the Appellant Company with its Associated Enterprise ('AE') as the same is based on an incorrect understanding of the facts of the case and thereby incorrect application of the law. 1.2 The learned Commissioner of Income Tax (Appeals) has legally and factually erred in confirming the action of learned AO/TPO by rejecting 3 companies adopted by the Appellant Company as comparables in its T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le companies, and also not making such adjustments themselves, thereby, failing to appreciate the provisions of Rule 10B(l)(e) of the Income Tax Rules, 1962. 1.8 Without prejudice to the above grounds, the learned Commissioner of Income Tax (Appeals) has legally and factually erred in not giving any finding on the Appellant's ground against action of learned AO/TPO in making transfer pricing adjustments to the total revenue of the Appellant Company instead of restricting it to the value of the international transaction. 2. Addition of Undisclosed receipts of Rs. 40,16,243 The learned Commissioner of Income Tax (Appeals) has erred in confirming addition of Rs. 40,16,244 as receipt from IOT Mabagas Limited (erstwhile known as IOT Cuddalore Construction & Terminalling Limited) as undisclosed receipts to the total income of the Appellant Company without appreciating the fact that the said receipt has already been considered in the total income of the Appellant Company in AY 2009-10 on accrual basis and offered to tax and said addition amounts to double taxation of same income. 3. Disallowance of professional fees of Rs. 31,48,179 The learned Commissioner of Income Tax (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2010- 11 on 14/10/2010, declaring total income at Rs. 47,23,023/-. The case was selected for scrutiny and during the course of assessment proceedings, a reference u/s 92CA(1) of the I.T.Act, 1961 was made to the Transfer Pricing Officer (TPO) to determine ALP of international transactions with the AE's. During the course of Transfer Pricing proceedings, the TPO has rejected three companies selected by the assessee from the set of comparables and added four new companies and determined arithmetic mean of 23.90% and has made Transfer Pricing Adjustment (TPA) of Rs. 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% Arithmetic Mean 23.90% Operating Cost (Refer TPO Order) (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 assesee and accordingly, included in the final set of comparables and hence, there is no reason to deviate from the findings recorded by the Ld.CIT(A). 9. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that although, the Ld.TPO and Ld.CIT(A) has recorded finding that MCEL is f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 of the government company are entirely different from that of the assessee, because in Government of India undertakings, the profit motive is not the main objects of the company and they are mainly in furtherance of social obligations of the Government. We further noted that WAPCOS Ltd. is functionally dissimilar, which is evident from the fact that the company is engaged in pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 1,055 crores, which is more than '40' times of the turnover of the assessee company, which is at Rs. 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 good comparable to the assessee, which is mainly providing services to its AE in the field of EPC projects and mainly with resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 TDS claim made as per Form- 26AS. Since, the assessee was not able to reconcile the difference between income reported in books of accounts and TDS claim as per Form-26AS, the Ld. AO has made addition of Rs. 40,16,243/-. 20. The Ld. AR for the assessee submitted that after the assessment proceedings, the assessee noticed that name of IOT Cuddalore Construction & Terminalling Limited has changed to IOT Mabagas Limited and that income received from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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. Therefore, we deem it proper to adjudicate the ground raised by the assessee, as well as the revenue with reference to each comparable included and excluded by the Ld.TPO and the Ld.DRP. 28. The assessee has challenged inclusion of Mahindra Consulting Engineers Ltd., on the ground that the company is dissimilar to functions performed by the assessee and also, there is no segmental data in financials of MECL. Although, it has provides various services to different segments of industries. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 taken by the co-ordinate bench in assessee own case, we direct the Ld. TPO to exclude Mahindra Consulting Engineers Ltd, from the final set of comparables. 32. The assesee has challenged exclusion of Chemtex Global Engineers Pvt.Ltd. from final set of comparables. The Ld. AR for the assessee submitted that the company is functionally comparable, because the functions performed by the company are similar to functions performed by the assessee. Further, the TPO in Asst.Year 2010-11 has selected this company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 the government company are entirely different from that of the assessee, because in Government of India undertakings, the profit motive is not the main objects of the company and they are mainly in furtherance of social obligations of the Government. We further noted that WAPCOS Ltd. is functionally dissimilar, which is evident from the fact that the company is engaged in pre-investments surveys and investigations, topographic surveys, operation and maintenance of all kinds of works involved in the development and utilization of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineering 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 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 Engineers India Limited from the final set of comparables. 40. In this view of the matter and consistent with view taken by the co-ordinate bench, we direct the Ld.TPO to exclude Engineers India Limited and accordingly, reject the ground taken by the revenue. iv. Rites Limited:- 41. We find that the Tribunal has considered Rites Limited in assessee own case for Asst.Year 2010-11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 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, submitted that though, the adjustment is computed at the entity level, but the same is only with respect to international transactions and not in relation to the non AE transactions. The Ld. DRP, without appreciating the facts has directed the TPO to make adjustment only to transactions with AE. In this regard, he has filed a detailed written submission, which has been reproduced as under;- 4. At the outset, it is stated that there is no quarrel to the proposition that the TP adjustment if any is to be made to the value of International transaction, as has been laid down by the various d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered 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 conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions -[or specified du»*ij»6c transactions, as the case may be] ; (h) a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction - -[or specified domestic transaction]; (i) a description of the methods considered for determining the arm's length price in relation to each international transaction [or specified domestic transaction] or class of transaction, the method selected as the most appropriate method along with explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 also depends on the comparability between the international transaction and the uncontrolled transaction, A choice of the method is governed by the availability of reliable data necessary for application of method. Thus, even for the purposes of selecting the most appropriate method, it is necessary to have complete information about the international transaction, the uncontrolled transaction and the comparability between the same. 13. At this juncture, it is relevant to note the provisions of Rule 10B(1)(e) which provides for the manner of determination of ALP of an international transaction while applying TNMM. which reads as under: [10B. Determination of arm's length price under section 92C. (1) For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ep 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 uncontrolled transaction. 17. It is submitted that it is the responsibility of the assessee / taxpayer to provide data of profitability of AE segment and also of Non-AE segment. This is due to the reason that special facts are in the knowledge of the assessee and it is the taxpayer who has responsibility to discharge the onus. In this case, the assessee has not discharged its onus to provide data of AE and Non-AE segment. There is no dispute with regard to this fact 18. In view of the documentation requirement as per the Act discussed above it may be noted that the purpose is to determine the profitability of the AE segment as well as the non AE segment. Having not complied with the documentation requirement as prescribed by law, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 level (consisting both of AE sales as well as non AE sales) and has itself applied External TNMM, it means that the assessee has not considered Internal TNMM as an appropriate method for comparison. In other words, even as per the assessee, the profit of non AE segment was not comparable to the AE segment International transactions. This also means that even as per the assessee out of the entity level cost, the cost attributable to the AE segment and the non AE segment cannot be allocated on a proportionate basis of sales. Had it been so. the assessee would have prepared the accounts of AE and Non AE segment separately and would have done Internal TNMM analysis and would have justified the ALP of the International Transaction on this basis itself. 21. By claiming propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 held that the Non-AE transactions would be at arm's length in absence of any relationship which is likely to influence the price. This assumption of the assessee. therefore, is erroneous. In case this assumption of the assessee is held acceptable, it would amount to existence of internal TNMM which has not been considered as the most appropriate method by the assessee and for which it has not furnished any details, which are in special knowledge of the assessee 25. Example to explain the contention of Revenue: (Column) AE NON-AE TOTAL SALES ENTITY A 100.00 100.00 200.00 suppose actual OP/OC At entity level (%) B 10.00 operating cost at entity level C=Total sales/110% 181. 82 total op. profits at entity level D=A-C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the operating profit earned for the AE segment of Rs. 5.14, the total works out to Rs. 14.23 (Column M) * This total profit of Rs. 14.23 works out to 15% of the OC of AE segment of Rs. 94 86 (Column N), which is the ALP which should have been earned on the AE transaction 27. Thus, it may be seen that the proportionate adjustment as sought by the assessee is purely misleading and not warranted. It is again emphasized that though the adjustment is computed at entity level, but, the same is only with respect to the international transaction and not in relation to the Non-AE transaction. 28. Further, if the proportionate adjustment as sought by the assessee is allowed, the position in the above example would be as under: Column AE Non-AE Total sales A B 10000 100.00 20000 OC as per books 94.86 86.96 181.82 OP. PROFITS EARNED AS PER BOOKS (Rs} C=A-B 5.14 13.04 18.18 Adjustment proposed to profits on prorate basis of sales D 4.55 4. 55 9.09 Total segment wise profit earned 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 proportionat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts. Case Law Name Citation Bombay High Court CIT v. Tara Jewels Export (P.) Ltd. [2017] 80taxmann.com 117 (Bombay) Ratilal Becharlal & Sons v. CIT [2016] 65 taxmann.com 155 (Bombay) CPT v. Thyssen Krupp Industries India [2016] 70 taxmann.com 329 (Bombay) CITv. Firestone International (P.) Ltd. [2015] 60 taxmann.com 235 (Bombay) - Bombay High Court Mumbai ITAT DOT vs Tara Jewels Export (P) Ltd. [2018] 96 taxmann.com 429 (Mumbai -Trib.) Smt. Dina Sudhir Shah vs ACIT [2015] 53 taxmann.com 496 (Mumbai -Trib 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 Materi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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