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2020 (9) TMI 314
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....f the DRP-1, Mumbai under Rule 13 of Income 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....
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.... allowing the Appellant Company to make functional and risk adjustments, including working capital adjustments, to the PLI of comparable 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 sa....
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....d 1.55% 5 Molind Engineering Ltd (1.33%) Arithmetic Mean (1.64%) B Appellant Company IOT Design & Engineering Limited 13.74% 4. The assesee has filed its return of income for Asst.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 Glo....
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....tionally 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 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, ....
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....aid company is functionally dissimilar and also, it has high turnover, which is evident from the fact that the company has recorded Rs. 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 of the government company are en....
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.... 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 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....
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....ctions, 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 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....
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.... 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. Therefore, we deem it proper to adjudicate the ground raised by the assessee, as well as the revenue wit....
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....o 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 Rs. 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 taken by the co-ordinate bench in assessee own case, we direct the Ld. TPO to exclude Mahindra Con....
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....hat 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 the government company are entirely different from that of the assessee, because in Government o....
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....ernment 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 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 ....
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....e 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, submitted that though, the adjustment is computed at the entity level, but the same is only with resp....
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....nternational 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 conditions relating to any uncontrolled transaction with third parties which may be of relevanc....
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....ansaction 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 also depends on the comparability between the international transaction and the uncontrolled transaction, A....
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....ty 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 uncontrolled transaction. 17. It is submitted that it is the responsibil....
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.... 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 level (consisting both of AE sales as well as non AE sales) and has i....
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....on 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 held that the Non-AE transactions would be at arm's len....
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....ate of 15% to non AE sales, OC of Non-AE sales works out to Rs. 86 96 (Column G) * Accordingly, since out of entity level OC of Rs. 181.82. Rs. 86.96 is Non-AE, the AE cost is the difference amount of Rs. 94.86 (Column H) ^ Thus, when we deduct the segment OC from the segment sales segment wise OP works out to Rs. 5.14for AE segment and Rs. 13.04 for Non-AE segment {Column I) ^ This OP segment wise in terms of % works out to 5.42% for AE, 15% for Non-AE and 10% at entity level (Column J). It may be noted that Non-AE segment profitability is same as 15% which is the ALP margin. *- The entity level profit on OC of Rs. 181.82 with OP/OC as PLI @15% works out to Rs. 27.27 (Column K) > Hence there is difference in overall entity level profitability of Rs. 909 which is proposed as adjustment to the AE segment (Column L). * If this adjustment proposed of Rs. 9.09 is added 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....
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....AE transactions at whatever price they are entered into are at arm's length.. In fact, the object of TP provisions is to determine whether the profit on AE transactions (where TNMM method is adopted) is better than the profits on non-AE transactions. Under such circumstances, the assumption that all assessee's transactions, whether with AE or non-AE, result in same rate of profit is to assume the correctness of the conclusion which should have actually been independently established, and which the assessee has failed to demonstrate. . 45. The Ld. AR for the assessee, on the other hand submitted that this issue is covered in favour of the assessee by the decision of Hon'ble Bombay High Court, in the case of CIT vs Tara Jewels Exports Pvt.Ltd. (2017) 80 taxmann.com 117, where it was held that the value of the TP adjustment needs to be made to the value of the international transactions instead of making the adjustments at entity level. In this regard, he has relied upon the following judicial precedents. Case Law Name Citation Bombay High Court CIT v. Tara Jewels Export (P.) Ltd. [2017] 80taxmann.com 117 (Bombay) Ratilal Becharlal & Sons v. CIT ....