TMI Blog2020 (12) TMI 778X X X X Extracts X X X X X X X X Extracts X X X X ..... ORDER PER O.P. KANT, AM: This appeal by the assessee is directed against final assessment order passed by the Ld. Additional Commissioner of Income-tax, Special Range-2, New Delhi [in short the Ld. Assessing Officer] for assessment year 2013-14, pursuant to the direction of the Ld. Dispute Resolution Panel (DRP). The grounds raised in the appeal are reproduced as under: 1. That on facts and circumstances of the case and in law, the Ld. AO / Ld. Transfer Pricing Officer ( TPO ) / Ld. Dispute Resolution Panel ( DRP ) erred in making an addition of INR 27,32,88,151 to the returned income of the Appellant by re-computing the arm s length price of the international transaction pertaining to engineering design and related services segment of the Appellant, under section 92 of the Act. In passing the order, the Ld. AO / Ld. TPO / Ld. DRP erred in: 1.1. Rejecting comparable companies selected by the Appellant in its transfer pricing documentation on the basis of additional/modified quantitative filters which lacked valid and sufficient reasoning; 1.2. Accepting companies which are functionally not comparable; 1.3. Including enterprises owned or affil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. Thus, in passing the order, the Ld. AO / Ld. TPO / Ld. DRP grossly erred in: 5.1. Re-characterizing the receivables due after a certain credit period as unsecured loans advanced by the Appellant to its Associated Enterprises; 5.2. not appreciating that working capital adjustment has been accepted by the Ld. DRP and that the arm s length price determination for outstanding receivables is subsumed within the arm s length price determination of the principal international transaction itself; 5.3. completely disregarding the orders passed by the Hon ble Supreme Court, Hon ble High Court and Hon ble Income Tax Appellate Tribunal in the Appellant s own case for Assessment Year 2010-11 which is squarely applicable in the instant case as well, thus violating the principal of judicial discipline; and 5.4. selecting an ad hoc interest rate of LIBOR plus 400 basis points while computing the addition. 6. That the Ld. AO has erred in charging interest under section 234B of the Act amounting to INR INR 4,06,44,495/-. 7. That on the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree segments: (a) Engineering design and related services (b) Financial and accounting support services (c) Information technology infrastructure support services 5.1 The summary of the economic analysis of the international transaction undertaken by the assessee during the year under consideration with its AEs is summarised below: Nature of international transactions Value (in 1NR Crores) Most Appropriate Method Profit Level Indicator ( PLI ) BIPL s Margin Margin of comparable s in TP study Updated Margins of Comparables Provision of engineering design and related services 241.96 Transaction al Net Margin Method ( TNMM ) Operating profit / operating cost ( OP/OC ) 14.00% 13.87% 10.02% Provision of financial and accounting support services 8.94 TNMM OP/OC 17.7% 12.03% 12.59% Provision of information technology infrast ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Learned TPO applied various filters for selection of the comparables and finally selected 11 comparables with the average PLI of 25.09%. The Learned TPO accordingly computed adjustment of ₹ 27,32,88,151/- to the international transaction of Engineering and related services . 5.5 The learned DRP directed the Learned AO/TPO to exclude the company Holtec Consulting Private Limited as comparable relying on the order of the Tribunal in the case of the assessee for assessment year 2005-06. The learned DRP also directed for granting working capital adjustment, considering foreign exchange gain/loss as operating in nature and considering correct margin computation for selected comparable companies. Based on the direction of the Learned DRP, the final set of the comparable companies and their working capital adjusted PLI as worked out by the Learned TPO in rectification order dated 20/12/2017 is reproduced as under: S. No. Name of comparable Submitted by Appellant (TP Study) Introduced by Ld. TPO Working capital adjusted OP/OC 1. IOT Design and Engineering L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation in hydrocarbon and other sectors. The assessee also submitted that company was rejected by the Tribunal as comparable in the case of the assessee for assessment year 2009-10 and assessment year 2011-12. The Learned Counsel of the assessee submitted before us that the learned DRP though rejected the company as suitable comparable, however while giving the final direction, retained the company as comparable. The learned Counsel before us submitted that company being government company, also cannot be compared with the assessee. 7.2 The Learned DR on the other hand relied on the observation of the learned DRP. 7.3 We have heard submission of the parties. In profit and loss account for the year under consideration, available on page 462 of the paper-book, we find that company has shown revenue of ₹ 28,43,13,270/- from operations. On perusal of page 12 of the Annual Report, available on page 444 of the paper-book, we find that operations mainly include certification activities, third-party inspection activities, safety audit and ERDMP audits. The relevant part of management discussion and analysis is reproduced as under: During the financial year company was able ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantially rely on government projects and, therefore, being transaction in the nature of related party, same need to be excluded. In the case of the assessee for assessment year 2009-10, 2010-11 and 2011-12, the Tribunal has rejected government-owned enterprises as comparable. The relevant part of the decision of the Tribunal in ITA No. 882/Del/2014 for assessment year 2009-10 is reproduced as under: 17. In view of proposition laid down by the ITAT, Mumbai, we observe that in that case, Engineers India Ltd., earned income from turkey projects by successfully completing the project of IOCL and other public sector undertaking and the related party transaction were much more than the filter of 25%, therefore, the order for exclusion of Engineers India Ltd. was passed by the Tribunal. In the present case, the NTPCES was sheltered by its holding company NTPCES and government companies and departments awarded/entrusted various projects/contracts for rural electrification, distribution of power and project management consultancy, therefore, NTPCES loses the tag of comparability with the assessee Bechtell India. We also find it appropriate to mention that it cannot be ignored that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper-book, the consultancy income has been shown from designing and engineering, project management and procurement of medical equipments, drugs and pharmaceutical etc. The activity of providing consultancy cannot be held as functionally similar to the activity of preparing engineering design and drawings. Therefore, the company is not comparable being functionally dissimilar with the assessee. We note that company has been rejected on the grounds of the functional dissimilarity by the Learned DRP in assessment year 2009-10. The company is also a government undertaking and earns revenue from government contracts, which is evident from page 418 of the paper-book. We have already excluded government-controlled enterprises as comparable with the assessee in para 7.6 of this order. Accordingly to have consistency in our decision, this company is also rejectable on the ground of being governmentowned enterprise. Accordingly, we direct the Learned AO/TPO to exclude this company from the set of the final comparables. 9. Mitcon Consultancy Engineering Services Ltd.(Mitcon) 9.1 Before the Learned TPO and the DRP the assessee submitted that company is engaged in providing tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is also engaged in the banking and finance, entrepreneurship and vocational training. In our considered opinion, the functional profile of this company is not at all comparable with the function performed by the appellant company. Therefore, this company cannot be a good comparable. We, accordingly, direct for exclusion of Mitcon Consultancy and Engineering Services from the final set of comparables. 9.4 In view of the above, we direct the Learned AO/TPO to exclude the company from the final set of the comparables. 10. In view of the above finding, the ground No. 1 to 4 of the appeal is allowed for statistical purposes. 11. The ground No. 5 of the appeal relates to transfer pricing adjustment for interest on receivables. 11.1 The facts qua the issue in dispute are that in view of payments against invoices raised by the assessee to associated enterprises were received with the delay more than industry standard. The Learned TPO proposed a separate transfer pricing adjustment re-characterizing the outstanding receivables as unsecured loans. He applied CUP method for benchmarking the transaction of interest on receivables and using SBI prime lending rate, compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the Tribunal in assessment year 2012-13 noted the decision of the Hon ble High Court in assessment year 2010-11 and after taking into consideration the Explanation inserted by way of the Finance Act, 2012 to section 92B with retrospective effect from 01/04/2002, held that any delay in realization of debt arising during the course of the business is liable to be visited with TP adjustment on account of interest income short charged or uncharged. In view of the learned DR, the Learned DRP is justified in following the order of the Tribunal in assessment year 2012-13. 11.4 We have heard rival submission of the parties on the issue in dispute and relevant material on record including the decisions cited by the Learned Counsel of the assessee as well as by the Learned DR. In the instant case, the Learned DRP has noted the decisions of the Tribunal and High Court in the earlier years. In assessment year 2010-11 the Tribunal in ITA No.1478/Del/2015 placed reliance on the decision of the Tribunal in the case of Kusum Healthcare Private Limited (supra) and held that impact of credit period was duly factored in working capital adjustment allowed while determining the arm s-lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to late realisation of proceedings from receivables. The assessee's reliance as noted earlier, is on the decisions in its own cases for assessment year 2010-11 and 2011-12. The issue has been elaborately considered in the case of Ameriprise India Pvt. Ltd. (supra) and, again, in the case of Mckinsey Knwledge Centre Pvt. Ltd. (supra). In the case of Techbooks India International Pvt. Ltd. vs. DCIT (supra), taking note of the Explanation inserted by the Finance Act, 2012 to Section 92B, it was observed that there remained no doubt that apart from any short-term or long-term borrowing, etc., or even advance payments or deferred payments, 'any other debt arising during the course of business' had also been expressly recognized as an international transaction. In the said decision, the decision of the Hon'ble Bombay High Court in the case of CIT vs. Patni Computer Systems was also considered, wherein Hon'ble Bombay High Court set aside the view taken by the Tribunal in view of amendment to section 92B. The decision in the case of Kusum Healthcare Pvt. Ltd. was duly considered in the case of Ameriprise India Pvt. Ltd. and it was observed from para 20 to 23 as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are in agreement with the High Court that as far as Question-B concerning adjustment for interest on receivables is concerned the Tribunal has returned a finding of fact. Consequently, no substantial question of law therefore, rises, on the facts of this case. The special leave petition is dismissed. 11.8 In view of the order of the Hon ble Supreme Court, which is subsequent to the order of the Tribunal in assessment year 2012- 13, we direct the Ld. AO/TPO to delete the transfer pricing adjustment on account of the interest receivables. The ground No. 5 of the appeal of the assessee is accordingly allowed. 12. Before us the Learned Counsel of the assessee referred to ground No. 3 and submitted that segmental accounts of the assessee might be redrawan. He submitted that the assessee had submitted basis of cost allocation for the segmental profit and loss account on various allocation keys like total hours spent by the personal, payroll cost, head count, numbers of hours, however without taking due cognizance of the reasonableness of the basis, the Learned TPO allocated the expenses on revenue ratio. He submitted that in assessment year 2010-11 also the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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