2019 (10) TMI 1261 - AT - Income Tax

Tribunal rules in favor of assessee, directs exclusion of inappropriate comparables and deletion of contract revenue additions.

Veolia India Pvt Ltd [Earlier known as Veolia Water [I] Pvt Ltd] Versus The Dy. C.I.T, Circle 26 (1), New Delhi

Veolia India Pvt Ltd [Earlier known as Veolia Water [I] Pvt Ltd] Versus The Dy. C.I.T, Circle 26 (1), New Delhi - TMI Issues Involved:1. Transfer Pricing Adjustment2. Addition towards Contract Revenue Recognized under AS-7Detailed Analysis:1. Transfer Pricing Adjustment:The assessee is engaged in consultancy and advisory services in the water management industry and provides support and consultancy services to its group companies. The international transactions with its Associated Enterprises (AEs) included rent received, fees for personnel deployment, purchase of used fixed assets, reimbursements, and rendering of consultancy services. The assessee used the Transaction Net Margin Method (TNMM) and Comparable Uncontrolled Price (CUP) method to determine the arm's length price, reporting a profit level indicator (PLI) of 10.90% on cost compared to 8.55% for comparables.The Transfer Pricing Officer (TPO) accepted only two comparables from the assessee's list and suggested new comparables, leading to an average PLI of 25.23%. The Dispute Resolution Panel (DRP) directed the TPO to exclude CDSL Ventures Ltd and Global Procurement Consultants Ltd from the final set of comparables, resulting in a revised average PLI of 16.94%. The TPO's final adjustment was Rs. 5,368,398.The Tribunal found that certain comparables used by the TPO, such as Apitco Ltd, Cameo Corporate Services Ltd, TSR Darashaw Ltd, and Killick Agencies & Marketing Ltd, were not appropriate due to their differing business activities. The Tribunal directed the TPO to exclude these comparables, allowing the assessee's appeal on transfer pricing adjustments.2. Addition towards Contract Revenue Recognized under AS-7:The assessee's core activities include water supply, distribution, treatment, and management, involving the construction and maintenance of water infrastructure facilities. For the year under consideration, the assessee executed two contracts: Project Kanhan and Project Demo Zone. The assessee followed AS-7 to measure the extent of activity completed and recognized revenue based on the percentage of completion method.The Assessing Officer (AO) disagreed with the budgeted contract costs used by the assessee and computed the costs indirectly using a gross margin of 6.97% reported by the tax auditor. This led to additions of Rs. 4,35,49,020 for Project Kanhan and Rs. 2,90,308 for Project Demo Zone. The DRP directed the AO to add other operating expenses to the budgeted costs, reducing the additions to Rs. 21,70,078 for Project Kanhan and Rs. 4,051 for Project Demo Zone.The Tribunal noted that the AO's method was corrected by the DRP by including other operating expenses. However, the Tribunal found merit in the assessee's contention that the gross margin of 6.97% should not be uniformly applied to all contracts. Referring to previous Tribunal orders and subsequent assessment orders, the Tribunal directed the AO to delete the additions for both projects, allowing the assessee's appeal on this issue.Conclusion:The Tribunal allowed the assessee's appeal on both issues, directing the TPO to exclude inappropriate comparables for transfer pricing adjustments and the AO to delete the additions towards contract revenue recognized under AS-7. The Revenue's appeal was dismissed.