TMI Blog2018 (4) TMI 1631X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) ), assessee preferred this appeal. 2. Assessee is 100% subsidiary of Elli Lilly Netherlands B.V. and is engaged in the business of formulations, which it purchases from its Associated Enterprises (AEs) as well as unrelated third parties. It also renders other services to its AEs namely, clinical trials, medical information services including answering medical queries and creation and distribution of product/medical information literature to other AEs. 3. For the assessment year 2004-05, the assessee filed their return of income on 29/10/2004 declaring a total income of ₹ 7,70,56,740/-. During scrutiny, learned Assessing Officer (Ld. AO) noticed the following international transactions entered into by the assessee company with its associated enterprises:- S.No. International Transactions Method Value (Rs) 1 Purchase of formulations service kit TNMM 89,78,62,302/- 2 Clinical trial TNMM 4,62,43,599/- 3 Quality control, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sulting Services Ltd. 4. That the Commissioner of Income-tax (Appeals) erred in facts and in law in not appreciating that companies engaged in engineering services does not satisfy the test of comparability laid down under Rule 10B(2) of the Incometax Rules, ( the Rules ). 5. Thatthe Commissioner of Income-tax (Appeals) erred on facts andin law in not appreciating that the appellant operates as a low-risk-bearing contract service provider and a risk adjustment over the cost should be provided, as risk and reward to this extent vest with the overseas associated enterprises to which the assessee renders off-shore contract services. 6. Thatthe Commissioner of Income-tax (Appeals) on facts and in law in rejecting comparability adjustment to account for difference in working capital employed by the appellant vis-a-vis comparable companies considered by the TPO, allegedly holding that the onus in this regard was on the appellant to demonstrate the reasons and calculation of working capital adjustment, which was not discharged. 7. Thatthe Commissioner of Income-tax (Appeals) erred on the facts and in law in not being consistent while denying on the claim of working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransfer prices in relation to the transaction being compared. The assessee has nowhere stated how the transactions pertaining to the year prior to the year in which the International transaction has taken place, reveals facts which could have an influence on the determination of transfer price. The exception provided in rule 10B(4) covers a special circumstances and is to be invoked when there is a special condition relating to existence of facts which could have an influence on determination of transaction price is demonstrated to be there. No such effort has been made by the assessee, and therefore, it is concluded that for all the segments while benchmarking international transactions using transactional net margin method, data of comparables used would be for the year ending 2004. 9. Ld. CITA found that this issue is no longer res integra and is covered by the decisions reported in CIT vs, Denso Haryana Private Limited (2009 TIOL 696 Del IT) followed by the Delhi Tribunal in the matters of M/s Haworth (India) Private Ltd. (2011-TII-64-ITAT-DEL-TP). 10. We have gone through the provisions under Rule 10 B(4) of the IT Rules. In the light of the proviso to this rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer Pricing documentation for benchmarking the international transaction, they can seek rejection of such companies from determination of Arm s Length Price of the specified domestic transaction of purchase of goods at a later stage. 14. Reliance in this regard is placed on the recent decision of Hon ble Delhi High Court in the case of CIT vs. Verizon India (P) Ltd. (ITA No. 271 277 of 2013), wherein the Hon ble High Court was pleased to observe that the companies considered by the assessee in the Transfer Pricing Documentation can be rejected at a later stage of appellate proceedings. The relevant extract of the decision is reproduced as under: 5. The Tribunal examined the issue of whether the four comparables selected by the Transfer Pricing Officer were functionally comparable to the services rendered by the respondent / assessee to its associated enterprise. In this context, the Tribunal examined each of the four entities namely EIL, RITES Ltd. TCE Consulting Engineers Ltd. and Water Power Consultancy Services Ltd. and found that these four entities were not functionally comparable in respect of the services rendered by the respondent/assessee to its associated ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the set of services in the nature of engineering services rendered by the so called four comparables. Consequently, the adjustment arrived at by the Transfer Pricing Officer and the addition made by the Assessing Officer cannot be sustained on the basis of the Transfer Pricing Study with regard to the four companies which were clearly functionally not comparable. So, no question of law arises for our consideration. 15. Considering the aforesaid settled position, notwithstanding the fact that the assessee has considered the aforesaid companies as comparable in the Transfer Pricing document, since based on the information and data available now, in terms of Rule 10B(3) of the Income-tax Rules, these companies are sought to be rejected on the ground of non-suitability for comparison, we deem it just and proper to consider the question of comparability of these companies on the touch-stone of functions performed, assets employed and risks assumed. Engineers India Ltd 16. Firstly, in respect of Engineers India Ltd, assessee is challenging the inclusion of this company on three aspects, namely, firstly, the company is inter alia, engaged in construction and overal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DCL and Apitco from the final set of comparable companies. 19. In the case of AT T Communication Services India Pvt. Ltd. vs. ACIT (ITA No. 1016/Del/2015), a coordinate Bench of this Tribunal directed that Engineers India Ltd. be excluded as comparable company on account of being a govt. undertaking/ company, by observing that: 32. By applying the decision rendered by the coordinate Bench of the Tribunal in Bechtel India (P.) Ltd. (supra) and Hon'ble Bombay High Court in Thy seen Krupp Industries India (P.) Ltd. (supra), the coordinate Bench of the Tribunal in case of WSP Consultants India (P.) Ltd. in ITA No.344/Del/2016 ordered to exclude Kitco, a 100% Government undertaking. 33. So, in view of the matter, we are of the considered view that Government undertakings/companies are not the suitable comparables for benchmarking the international transaction. So, the AO is directed to verify all the Government undertakings / companies from the final set of comparables which are taking preferential treatment from Government in getting contract etc. and are not driven by profit motive alone impacting the profit margin and to exclude the same and then benchmark the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Bombay High Court in Thyssen Krupp Industries India (P.) Ltd. (supra) had excluded Engineers India Ltd. being government company and where substantial part of its revenue came from executing projects of Public Sector Undertakings. Following the same parity of reasoning, we hold that Engineers India Ltd. and the other concerns M/s. KITCO and M/s. WAPCOS are to be excluded from the final list of comparables. 21. Further, from a reading of the Profit and Loss account of this company we find that the entire income of ₹ 128163.17 lacs earned by the company is shown under head Consultancy and Engineering services and Lump sum turnkey project . So also, in the segmental results provided by the company, the consultancy and engineering services are shown under a single head. Accordingly, profit earned by the company from provision of low end services is not provided in the financial accounts of the company. 22. In view of the difference in the business model and the entire revenue of this company is earned from Consultancy and Engineering services and Lump sum turnkey project , besides this being a Government company, we find that this company is not a good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, holding that: 32. By applying the decision rendered by the coordinate Bench of the Tribunal in Bechtel India (P.) Ltd. (supra) and Hon'ble Bombay High Court in Thy seen Krupp Industries India (P.) Ltd. (supra), the coordinate Bench of the Tribunal in case ofWSP Consultants India (P.) Ltd. in ITA No.344/Del/2016 ordered to exclude Kitco, a 100% Government undertaking. 33. So, in view of the matter, we are of the considered view that Government undertakings/companies are not the suitable comparables for benchmarking the international transaction. So, the AO is directed to verify all the Government undertakings / companies from the final set of comparables which are taking preferential treatment from Government in getting contract etc. and are not driven by profit motive alone impacting the profit margin and to exclude the same and then benchmark the international transactions qua Network Support Services. Consequently, grounds no. four to 4.12 are determined in favour of the taxpayer. 27. On this aspect, the Mumbai Bench of Tribunal in the case of Novartis Healthcare Pvt. Ltd. vs ACIT (ITA No. 7643/Mum/2012), while rejecting (i) Rites Limited being Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Limited 30. According to the assessee, this company is not comparable on account of WAPCOS Limited being a Mini Ratna public sector enterprise under the aegis of the Union Ministry of Water Resources. Apart from India, is providing its consultancy services in 40 other countries. WAPCOS has been providing consultancy services in 3 main centres i.e. water resources, power and infrastructure. A spectrum of services provided by WAPCOS. It is further submitted that WAPCOS renders consultancy services relating to water, power and infrastructure sectors internationally in over 30 developing countries. Services offered include market intelligence, feasibility studies, planning/ project formulation, field investigations, geo-technical investigations and testing, engineering design, contract management, quality assurance management and human resource development. WAPCOS main fields of specialization cover irrigation and drainage, flood control and land reclamation, river management, dams, reservoir engineering and barrage, integrated agriculture development, watershed management, and so on and so forth. It would be pertinent to note that WAPCOS is primarily engaged in providing e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise of Union Ministry of Water Resources, operates under a different business and commercial environment, in as much as (i) it receives assignments from many other Indian and International Government enterprises and (ii) being funded through grants and aids. 33. In support of the argument that WAPCOS Limited has specifically been excluded on account of being a Government undertaking, Ld. AR drew our attention to the decisions in Intrepid Travel Pty. Ltd. Vs. ADIT (ITA No. 5582/Del/2012), Novartis Healthcare (P.) Ltd. Vs. ACIT (ITA No. 7643/Mum/2014), Yum! Resturants (India) (P.) Ltd. Vs. ITO (ITA No. 6168/Del/2013), Nortel Networks India (P.) Ltd. Vs. ACIT (ITA No. 4765/Del/2011), DCIT vs. MCI Com India Pvt. Ltd. (ITA 2766/Del/2010), H M Hennes Mauritz India Pvt. Ltd. vs. DCIT (ITA No. 4704/Del/2012), and BG India Energy Ltd, vs. ACIT (ITA 6486/Del/2012). 34. Having regard to the factual and legal position stated above, we find that this company, being a Government enterprise, which is engaged in providing routine support services only to its associated enterprise and in provision of services to other government enterprise and body corporate, cannot be considered comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Engineering Services for Tata Consultancy Services Global Development Centre at Madhapur in Hyderabad; Operation and Design Engineering of Water Supply projects for Erbil and Sulemaniyah in Northern Iraq; Bandra Sewage Disposal project for Municipal Corporation of Greater Mumbai; Canal based Industrial Water Supply project in Vishakapatnam for Andhra Pradesh Industrial Infrastructure Corporation; Privatisation of Electrical distribution in Karnataka (with CMS Cameroon McKenna, UK); Upgradation, renovation and extension of five Government Hospitals and two District Hospitals in Nagpur Region, funded by World Bank; Plant layout and engineering for Phase 1 II of the 500 MW prototype Fast Breeder Reactor for Indira Gandhi Centre for Atomic Research; Engineering, survey and field investigations for the Mulwad Lift Irrigation Project and Almatti Right Bank Canal at Almatti Dam for Krishna Bhagya Jala Nigam Ltd.; Deinking plant of Hindustan News Print Ltd. and 2x20 MW gas turbine cogeneration plant for Chennai Petrochemicals Limited. The company s commitment to quality system has been reinforced with the smooth transition to the ISO 9001:2000 certification by the Lloyd's Regi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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