TMI Blog2019 (5) TMI 1706X X X X Extracts X X X X X X X X Extracts X X X X ..... e customs duty of import paid by the taxpayer is materially affecting the PLI of taxpayer company as per mandate of Rule 10B(3) then suitable adjustment be provided to the taxpayer. - ITA No. 4791/Del/2015 - - - Dated:- 30-5-2019 - SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For the Appellant : Shri Ved Jain, Advocate, Shri Ashish Goel, CA, Shri Rishabh Jain, CA For the Respondent : Shri H.K. Choudhary, CIT DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. Terex India Private Ltd. (hereinafter referred to as the taxpayer ) by filing the present appeal sought to set aside the impugned order dated 27.01.2015 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short the Act ) qua the assessment year 2010-11 on the grounds inter alia that :- The grounds of appeal listed below are without prejudice to each other: 1. The order of the learned Deputy Commissioner of Income Tax, Circle - 25(1), New Delhi ('Assessing Officer' or 'AO') passed pursuant to the order of the learned Additional Dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, the loss was not attributable to the international transactions undertaken by the Appellant with the AEs. 10. The TPO, AO and DRP have erred, in law and facts, by not providing for suitable adjustments for differences like underutilization of capacity, excessive customs duty to account for differences in the capacity utilisation and other adjustments for economic and commercial reasons by the Assessee vis-a-vis the com parables. By not doing so, neglecting the Indian transfer pricing regulations and the OECD guidelines on transfer pricing and judicial precedence. 11. The learned TPO and the learned AO have erred, in law and in facts, by not restricting the transfer pricing adjustment in respect of the import of raw materials transaction to the value of consumption of materials of the Assessee. Grounds common to both EDS and Manufacturing segments 12. The TPO, AO and DRP have erred, in law and in facts, by determining the arm's length margin / price using only FY 2009- 10 data which was not available to the Assessee at the time of complying with the transfer pricing documentation requirements. 13. The TPO, AO and DRP have erred, in not al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) Use of current year data; (iv) Reject comparables having different financial year; (v) Reject companies where turnover is less than ₹ 1 crores; (vi) Select companies where the ratio of service income to total income is at least 75%; (vii) Reject companies where related party transactions exceed 25% of sales; (viii) Reject companies that have employee cost less than 25% of total cost; (ix) Reject companies that are affected by some peculiar economic circumstances; (x) Select companies providing business services, facility management services, technical services, advisory services. 5. By applying the aforesaid criteria, ld. TPO rejected all the comparables selected by the taxpayer and on the basis of fresh search chosen, 10 new comparables with average PLI at 28.20% and thereby made an adjustment of ₹ 62,57,762/-. 6. Ld. TPO has not given adjustment claimed by the taxpayer on account of capacity utilization and customs duty and order of the ld. TPO in this regard has been confirmed by the ld. DRP. Ld. TPO as well as AO has also not allowed restricting the transfer pricing adjustment in respect of import of raw materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,12,95,776 Arm s Length Margin OP/OC % 28.20% Arm s Length Price (ALP) 6,57,61,185 Price shown in the international transactions 5,95,03,423 Shortfall being adjustment u/s 92CA 62,57,762 13. The ld. DRP accepted the final set of comparables selected by the TPO by rejecting the objections raised by the taxpayer. 14. The taxpayer challenged the order passed by the TPO/DRP/AO by seeking exclusion of 8 comparables viz. (i) Engineers India Ltd.; (ii) IBI Chematur; (iii) Mahindra Consulting Engineers Ltd. ; (iv) Rites Ltd. ; (v) Kitco Ltd. ; (vi) TCE Consulting Engineers Ltd.; (viii) Kirloskar Consultants Ltd.; and (vii) Dalkia Energy Services Ltd.. 15. The taxpayer also sought inclusion of two of its comparables viz. (i) Neilsoft Ltd. and (ii) Vama Industries Ltd. to benchmark its international transactions qua engineering design services segment. 16. We would discuss the suitability of each of the comparable companies vis- -vis taxpayer challenged by it to benchmark the international transactions one b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e but other consideration also weigh in such as discharge of social obligation etc. by returning following findings :- 10 The Court on perusing the aforementioned judgment of the Bombay High Court finds that in para 4(a) and 4(b) of the said order the Bombay High Court has held that the view taken by the Mumbai Bench of the ITAT is a reasonable and plausible view. It noted that the ITAT, Mumbai Bench had held that the Engineers India Ltd. could not be considered to be comparable for the reason that contracts between Public Sector Undertakings are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc. Thus, it is not comparable. Interestingly in the present case the Assessee itself picked up two of the 100% government owned companies namely ECIL and ITDCL as its comparables but that was not accepted by the TPO or the DRP. The reason for the ITAT excluding Apitco as a comparable is also for the same reason that it was a 100% government owned company . 20. In view of what has been discussed above, we are of the considered view that EIL cannot be retained as a suitable comparable, hence ordered to be excluded f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technological up gradation and additions, modification and troubleshooting of plants for our own as well as clients plants, New division has started Research Development activities during the year. The research and development activities carried out in Division, has resulted in improvement in process and productive capacity, better quality and marketability of technology. 25. Profit and loss account, available at page 371 of the paper book, shows that it has incurred huge R D expenditure during the year under assessment to the tune of ₹ 1,16,99,720/- which is 5% of the total turnover. 26. No doubt, every engineering design services provider needs to have an inbuilt R D centre but IBI Chematur is having a specialized R D centre on which it has huge expenditure of 5% leading to the creation of intangibles and as such cannot be compared to the taxpayer who has not incurred a single penny under the specified head. Moreover, IBI Chematur is into providing high end services whereas the taxpayer, a captive service provider, is providing routine engineering design services to its AE only. 27. Coordinate Bench of the Tribunal in taxpayer s own case for AY 2011-12 (supra) di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring services and software services. It is further submitted that company has earned a high profit margin of 52.66% during the FY 2009-10. It was further stated that there is an existence of significant research and development cost to sales ratio for the FY 2009-10 is 5.41%. He further placed reliance on the decision of Delhi ITAT in case of iQor India Services Private Ltd. Vs ITO where in the Hon ble ITAT held that the high end services involving special knowledge cannot be compared with the low end ITES services provided by the Assessee. We have carefully perused the annual accounts of the company, which are placed at page No. 93 -117 of the paper book. At page No. 94 of the paper book where review of performance of company is noted, it shows that company has employed highly trained technical staff and is also marketing these capabilities in the domestic as well as the overseas market. It further uses SMART plant foundation, which is software for bringing the technologies specific to several industries. It also has the new division in the form of research and technology Centre, which started functioning during the year. Looking to the assets employed by the company, It uses the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stems etc.. 33. Coordinate Bench of the Tribunal examined the comparability of Mahindra vis- -vis the taxpayer in taxpayer s own case for AY 2011-12 (supra) (though a different year but business model has not undergone any change), found the same to be not a suitable comparable on ground of non-availability of segmental information about engineering design services and on the ground that the company has recognised its revenue on percentage completion method. No doubt, a comparable cannot be excluded merely on the basis of different revenue accounting method which is recognised one but non-available of segmental information in the face of the fact that it is into diversified services as discussed above, we find it not a suitable comparable vis- -vis taxpayer which is into providing routine low end engineering design services. Hence, we order to exclude Mahindra as a valid comparable. RITES LTD. KITCO LTD. 34. The taxpayer sought to exclude both the aforesaid companies i.e. Rites Ltd. Kitco Ltd. on the grounds inter alia that both are Government of India undertaking and mostly gets its contracts from Government of India; that both are functionally dissimilar vis- -v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned judgment of the Bombay High Court finds that in para 4(a) and 4(b) of the said order the Bombay High Court has held that the view taken by the Mumbai Bench of the ITAT is a reasonable and plausible view. It noted that the ITAT, Mumbai Bench had held that the Engineers India Ltd. could not be considered to be comparable for the reason that contracts between Public Sector Undertakings are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc. Thus, it is not comparable. Interestingly in the present case the Assessee itself picked up two of the 100% government owned companies namely ECIL and ITDCL as its comparables but that was not accepted by the TPO or the DRP. The reason for the ITAT excluding Apitco as a comparable is also for the same reason that it was a 100% government owned company . 38. In view of what has been discussed above, we are of the considered view that both Rites Ltd. and Kitco Ltd. being 100% Government owned company and into dissimilar business are not suitable comparables vis- -vis taxpayer, hence ordered to be excluded. TCE Consulting Engineers Ltd. (TCE CONSULTING) 39. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering design segment. Hence the same cannot be accepted as a comparable. 44. In view of what has been discussed above, we are of the considered view that TCE Consulting having a big brand value and being into high end engineering consulting services with no financial segmental available is not a suitable comparable vis- -vis taxpayer, hence ordered to be excluded. KIRLOSKAR CONSULTANTS LTD. (KIRLOSKAR) 45. The taxpayer sought exclusion of Kirloskar on the ground that sufficient information is not available in annual report to know the nature and volume of services of consultancy being provided by it. Its financial segmental are also not available and relied upon BG Exploration and Production India Ltd. vs. JCIT 2017 (4) TMI 1145- ITAT Delhi. 46. Ld. DR for the Revenue, on the other hand, contended that from the profit loss account, available at page 403 of the paper book, shows that substantial income is from consultancy fees and in such circumstances, no segmental information is required. 47. Perusal of the annual report fails to disclose the requisite information to look into the nature and volume of services of consultancy being provided by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has passed but during the year itself the Assessee has entered into all these transactions, which were not there in the past year. However, in view of the absence of complete information about the business profile of the company as well as the nature of the services rendered by the company, this comparable cannot be accepted. Hence, we reject this comparable due to inadequate information available before us. 49. In view of what has been discussed above, we are of the considered view that Kirloskar is not a valid comparable for final set of comparables, hence ordered to be excluded. DALKIA ENERGY SERVICES LTD. (DALKIA) 50. The taxpayer sought to exclude Dalkia on the grounds inter alia that as per its annual report, sufficient information regarding the nature of its business is not available; that it is functionally dissimilar and relied upon the decision of BG Exploration and Production India Ltd. for AY 2010-11 (supra). 51. Perusal of the annual report, available at pages 148 to 196 of the paper book, does not provide complete information as to the nature of its business. However, information available at the website shows its business profile as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of two comparables, viz., Neilsoft Limited and Vama Industries Ltd. INCLUSION SOUGHT FOR BY THE TAXPAYER NEILSOFT LIMITED 55. The taxpayer sought inclusion of Neilsoft Ltd. in the final set of comparables on the grounds inter alia that the nature of business of Neilsoft Ltd. is similar to the taxpayer and this comparable has already been ordered to be included by the Tribunal in taxpayer s own case for AY 2009-10 dated 14.12.2018 in the final set of comparables. The TPO rejected Neilsoft Ltd. as comparable on the ground that it is functionally dissimilar being engaged into the business of software engineering services and sale of software projects. However, ld. AR for the taxpayer by referring to annual report of Neilsoft Ltd., available at pages 560 to 615 of the paper book, contended that Neilsoft Ltd. is into providing software engineering services which are similar to taxpayer s engineering design segment services. 56. However, when we examine company s overview of Neilsoft Ltd. at page 572 of the paper book, it shows that apart from providing software engineering services to its clients, Neilsoft Ltd. is also engaged in the business of selling software products ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the same cannot be followed being of different assessment year and that time complete financials of Vama might not be brought before the Bench. So, when segmental financials are not available on record Vama cannot be a valid comparable, hence rightly been not included by the TPO. GROUND NO.7 58. The taxpayer challenged the order passed by the TPO as well as DRP for not providing working capital adjustment and risk adjustment. While carrying out the comparability analysis under Rules 10B(1)(e) and 10B(3), the difference between controlled and uncontrolled transaction is required to be taken into account by providing necessary adjustment. So, in order to bring two comparable companies at par, necessary working capital adjustment and risk adjustment is required to be made. 59. Coordinate Bench of the Tribunal in Mentor Graphics (Noida) P. Ltd. vs. DCIT (2007) 109 ITR 101 (Delhi) has decided the identical issue for providing working capital adjustment and risk adjustment for the purpose of comparability by returning following findings :- 27. After the selection of the comparables, best method of determining Arm s Length Price is selected. Thereafter, functional a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable analysis carried in India, the latter type of risk are not being taken into consideration although these can lead to major difference in Market Value of transactions. 60. So, we are of the considered view that TPO/DRP are required to provide working capital adjustment and risk adjustment to the taxpayer as well as comparable company to bring them at par with each other. So, ground no.7 is determined in favour of the taxpayer. GROUNDS NO.8 9 61. Grounds NO.8 9 being general in nature need no adjustment. GROUND NO.10 62. The taxpayer has sought adjustment on account of capacity utilization as well as customs duty which the TPO as well as DRP has declined. The ld. AR for the taxpayer contended that the issue as to the providing adjustment on account of capacity utilization as well as customs duty has already been decided in favour of the taxpayer in its own assessment for AY 2011-12 (supra). 62.1 It is not in dispute that the taxpayer has started its commercial operation in October 2009. It is also not in dispute that during the year under assessment, the taxpayer has produced only 17 units of equipments as against the installed capacity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies. After obtaining the information, he will share the details so obtained with the assessee and give an opportunity to the assessee and grant adjustment for capacity underutilized. 65. So, the issue being covered in favour of the taxpayer in taxpayer s own case, TPO is directed to identify all the fixed expenses including depreciation and to adjust the same in capacity utilized by exercising his powers available under the Act by calling information qua the capacity utilization by comparable companies. So, this issue is remanded back to the TPO to decide afresh in view of the direction given in taxpayer s own case for AY 2011-12 (supra) by the Tribunal. So, ground no.10 is determined in favour of the taxpayer for statistical purposes. 66. So far as customs duty adjustment as sought for by the taxpayer is concerned, this issue has also been decided in favour of the taxpayer in its own case for AY 2011-12 (supra) by returning following findings :- 3.8.3 We have considered the rival submissions and perused the order passed by the authorities below. The Ld. DRP has rejected this contention of the assessee company on the ground that custom duty does not have any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the taxpayer, which is challenged by the taxpayer before the Tribunal. The ld. AR for the taxpayer contended that this issue has already been decided in favour of the taxpayer in AY 2011-12 (supra). 70. Coordinate Bench of the tribunal decided the issue in controversy by returning following findings as under :- 3.10.3 We have considered the rival contentions. It is undisputed fact that the assessee has made purchases of ₹ 105,55,16,000/- during the year out of which material worth ₹ 41,34,29,000/- was not consumed during the year and, therefore, the impact on the margin, if any, in respect of such purchases during the year is only of the material consumed and not of the material purchased and which is lying unutilized at the end of the year as closing stock. The purchase cost debited in respect of such raw material and the valuation of such material as closing stock is at same cost. Considering this fact, we direct the TPO that in case any adjustment is required to be made after giving effect to the adjustment on account of capacity and other issues decided by us in this appeal the same is to be restricted to the material purchased from the AE and consumed d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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