Referred Sections:
Section 143 (3)
Section 144C (13) of the Act
Section 92C(2) of the Act.
Sections 234B of the Act.”
Section 209(1)
Referred Cases / Judgments:
Transwitch India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151 (Delhi),
SITEL India (P) Ltd. vs. ACIT (2013) 55 SOT 541 (Mumbai),
DCIT vs. Panasonic AVC Network India Co. Ltd. (2014) 63 SOT 121(Delhi),
HCL Technologies BPO Services Ltd. vs. ACIT (2015)69 SOT 571 (Delhi),
Bechtel India (P) Ltd. vs. DCIT (2016) 66taxmann.com 160 (Delhi),
Ariston Thermo India Ltd. vs. DCIT (2014) 147 ITD 388 (Pune) and
DCIT vs. Genesis Integrating Systems (India) (P) Ltd. (2016) 66 taxmann.com 20 (Bangalore).
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH `I-1' : NEW DELHI)
BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.1817/Del./2015
(Assessment Year : 2010-11)
M/s. Lummus Technology Heat Transfer BV, vs. DCIT,
2nd Floor, Infinity Tower B, Circle-Gurgaon,
DLF Cyber City Phase II, Sector 25A, International Taxation,
Gurgaon 122 002 (Haryana). Gurgaon.
(PAN : AABCA9045K)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Vishal Kalra, Advocate
Ms. Surabhi Suri, Advocate
REVENUE BY : Shri Subha Kant Sahu, Senior DR
Date of Hearing : 15.10.2019
Date of Order : 28.11.2019
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER
The Appellant, M/s. Lummus Technology Heat Transfer BV
(hereinafter referred to as `the taxpayer') by filing the present
appeal sought to set aside the impugned order dated 28.01.2015
passed by the AO in consonance with the orders passed by the ld.
DRP/TPO under section 143 (3) read with section 144C (13) of the
Act qua the assessment year 2010-11 on the grounds inter alia
that:-
2 ITA No.1817/Del/2015
"1. That on the facts and circumstances of the case and in
law, the AO has erred in completing the assessment of the
Appellant under section 143(3) read with section 144C(13) of the
Act, at an income of INR 2,74,96,515, in pursuance to the
directions issued by the DRP, as against returned income of INR
92,81,393.
Transfer Pricing ("TP") Adjustment
2. That on the facts and circumstances of the case and in
law, the AO / Transfer Pricing Officer (TPO") / DRP have erred
in making an upward TP adjustment of INR 93,62,468, in respect
of the transaction relating to provision of design and
engineering, and supervision services to associated enterprises
CAE"), alleging that the same were not at arm's length.
3. That on the facts and circumstances of the case and in
law, the AO / DRP / TPO erred in not accepting the economic
analysis undertaken by the Appellant in accordance with the
provisions of the Act read with the Income-tax Rules, 1962
("Rules") for determination of the arm's length price ("ALP") of
provision of design and engineering, and supervision services.
4. That on the facts and circumstances of the case and in
law, the AO / DRP / TPO erred in rejecting / arbitrarily
modifying the search process and filters adopted by the Appellant
for the purpose of benchmarking its international transactions of
provision of design and engineering, and supervision services to
AEs.
5. That on the facts and circumstances of the case and in
law, the AO, DRP , TPO erred in arbitrarily rejecting the
comparable companies selected by the Appellant applying
arbitrary' subjective search filters.
6. That on the facts and circumstances of the case and in
law, the AO, DRP , TPO erred in arbitrarily rejecting the
comparable company namely, Gherzi Eastern Limited, without
appreciating that it passed all the search filters adopted by the
TPO.
7. That on the facts and circumstances of the case and in
law, the AO, DRP, TPO erred in selecting fresh comparable
companies, on the basis of arbitrary search filters and incorrect
appreciation of the functions, assets and risk ("FAR") profile of
Appellant and the comparable companies.
8. That on the facts and circumstances of the case and in
law, the AO, DRP, TPO erred in not providing appropriate
economic adjustments on account of differences in idle capacity,
3 ITA No.1817/Del/2015
working capital and risk profile between the Appellant and the
comparable companies.
9. That on the facts and circumstances of the. case and in
law, the TPO erred in reducing the amount of foreign exchange
gain from the operating income of the Appellant, for the purpose
of computing the TP adjustment.
10. That on the facts and circumstances of the case and in
law, the AO, DRP, TPO erred in ignoring the provisions of Rule
10B(4) of the Rules which allows use of multiple year data of
comparable companies for the purpose of determination of the
ALP.
11. That on the facts and circumstances of the case and in
law, the AO, DRP, TPO erred in not allowing Appellant the
benefit of 5 percent range as provided by the proviso of section
92C(2) of the Act.
Corporate Tax Adjustment
12. That on facts and circumstances of the case and in law,
the AO , DRP have erred in making an adjustment of INR
76,33,390 to the income of the Appellant, in respect of the direct
supplies' services by the head office to the Indian customers, on
the premise that such direct supplies' services were made through
the permanent establishment ("PE") of the Appellant, being the
branch office in India.
13. That on the facts and in the circumstances of the case and
in law, the AO, DRP have erred in arbitrarily alleging that the
PE of the Appellant was involved in negotiating and concluding
contracts on behalf of the head office with the Indian customers
in relation to the direct supplies" services made by such head
office.
14. That on the facts and in the circumstances of the case and
in law, the AO / DRP have erred in applying an ad-hoc and
arbitrary rate of 25 percent to determine gross profit from the
direct sales / services in India by the head office and further
erred in estimating, on an ad-hoc basis, 50 percent thereof, as
attributable to the PE of the Appellant, on conjectures and
surmises.
15. That on the facts and circumstances of the case and in
law, the AO / DRP have erred in attributing further profits to the
PE of the Appellant without appreciating that the subject
transactions have been scrutinized by the TPO and no further
profits could have been attributed.
4 ITA No.1817/Del/2015
16. That on the facts and circumstances of the case and in
law, the AO / DRP have erred by completely misinterpreting the
facts of the case and making assumptions in attributing further
profits to the PE of the Appellant, being the branch office in
India.
17. That on the facts and circumstances of the case and in
law, the AO has erred in not giving credit of taxes amounting to
INR 4,73,055, while computing the alleged tax payable by the
Appellant.
18. Without prejudice to the above grounds, the AO has also
erred in not giving credit of taxes amounting to INR 7,27,883
withheld on payments received by head office of the Appellant
from the Indian customer.
19. That on the facts and circumstances of the case and in
law, the AO has erred in applying tax rate of 10.5575 percent on
the royalty / Fee for Technical Services ("FTS") income received
by the head office of the Appellant instead of 10 percent tax rate
prescribed under the India-Netherlands tax treaty for taxation of
such income.
20. That on the facts and in the circumstances of the case and
in law, the AO has erred in charging interest under sections
234B of the Act."
2. Briefly stated the facts necessary for adjudication of the
controversy at hand are : M/s. Lummus Technology Heat Transfer
BV, the taxpayer is a company incorporated under the laws of
Netherland. It has established Liaison Office in India in
accordance with approval accorded by Reserve Bank of India
(RBI) in June 1997. Thereafter, in June 1999, Liaison Office was
converted into a Branch Office (Lummus-BO) at New Delhi after
getting necessary approval from RBI to transfer the net assets and
liabilities from the Liaison Office to the Branch Office. The
taxpayer is engaged in provision of Design & Engineering services
5 ITA No.1817/Del/2015
to its Head Office (HO) and third party customers in India along
with other supervisory support services to refinery, petrochemical
and other process industries.
3. During the year under assessment, the taxpayer entered into
international transactions with its Associated Enterprises (AE) as
under :-
S.No. Nature of transaction Method Value of
transaction
1 Supply of Equipment TNMM 55,61,847/-
2 Providing design and TNMM 10,88,12,276/-
engineering services
3 Providing supervision TNMM 76,56,808/-
services
4 Cost Allocation of office Cost to Cost 8,44,800/-
rent recharge
5 Reimbursement of Reimbursement 1,48,74,237/-
expenses paid at cost
6 Reimbursement of Reimbursement 52,24,700/-
expenses received at cost
4. The taxpayer in its TP analysis has benchmarked its
international transactions qua supply of equipment, providing
design and engineering services and providing supervision services
together on combined transaction approach on the ground that
provision of supervisory support services and supply of equipment
is interlinked with the primary transaction of provision of design
and engineering services. The taxpayer applied Transactional Net
Margin Method (TNMM) with Operating Profit/Operating Cost
(OP/OC) as Profit Level Indicator (PLI) as Most Appropriate
6 ITA No.1817/Del/2015
Method (MAM) and computed its margin at 46.54% on cost after
claiming idle capacity adjustment whereas the average margin of
comparable is 21.12% by using multiple year data and found its
international transactions at arm's length.
5. Ld. Transfer Pricing Officer (TPO) denied the idle capacity
adjustment of Rs.2,50,63,818/- i.e. 21.90% of the total cost of
Rs.11,44,23,546/- claimed by the taxpayer on the ground that the
taxpayer has failed to provide documentary evidence in respect of
basis of cost allocation under each head i.e. personnel expenses,
operating & other expenses, financial expenses and depreciation,
finally selected 10 comparables with margin of 25.21% and
proposed adjustment of RS.93,62,468/- to Arm's Length Price
(ALP) of international transactions pertaining to provision of
design & engineering services. Assessing Officer (AO)/DRP have
confirmed the additions made by the TPO in draft orders and
further made additions amounting to Rs.76,33,390/- by attributing
profits of HO to BO from HO's direct transactions with Indian
customers.
6. The taxpayer carried the matter before the ld. DRP by way
of filing objections, who has confirmed the additions/disallowances
made by the TPO/AO by dismissing the objections raised by the
taxpayer. AO consequently passed assessment order and framed
7 ITA No.1817/Del/2015
assessment of the taxpayer at Rs.2,74,96,515/-. Feeling aggrieved,
the taxpayer has come up before the Tribunal by way of filing the
present appeal.
7. We have heard the ld. Authorized Representatives of the
parties to the appeal, gone through the documents relied upon and
orders passed by the revenue authorities below in the light of the
facts and circumstances of the case.
GROUNDS NO.1 & 6
8. Ground No.1 being general in nature needs no specific
adjudication. Ground No.6 being premature needs no specific
findings.
GROUND NO.8
9. The aforesaid ground pertains to adjustment of
Rs.93,62,468/- qua provision of services to its AE. However, the
ld. AR for the taxpayer contended that first of all, issue as to
denying the idle capacity adjustment by the AO/TPO/DRP is
required to be addressed. The ld. AR for the taxpayer challenging
the impugned order passed by the AO/TPO/DRP denying the idle
capacity adjustment contended inter alia that in order to utilize the
technology by Lummus BO in its day-to-day functioning, the
personnel employed are given technical training which consumes
larger number of man-hours and as such, the man-hours consumed
8 ITA No.1817/Del/2015
in training are idle hours which are not absorbed in any specific
project; that the hours spent by employees on various jobs are
recorded to raise the bill by the taxpayer to the customers
accordingly, maintain efficiencies, attract employee performance
and asset in taking measures to reduce cost and also enables
taxpayer to analyse reasons for idle capacity; that issue of idle
capacity also arises in cases where the taxpayer is not having
sufficient number of projects to work for; that to establish
comparability, the taxpayer excluded the cost of idle hours from its
cost base in order to determine the true and fair profitability; that
similar idle capacity adjustment has been granted by the Tribunal
in taxpayer's own case for AYs 2008-09 and 2009-10 and also
relied upon the decision rendered by the Tribunal in Transwitch
India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151 (Delhi), SITEL India
(P) Ltd. vs. ACIT (2013) 55 SOT 541 (Mumbai), DCIT vs.
Panasonic AVC Network India Co. Ltd. (2014) 63 SOT 121
(Delhi), HCL Technologies BPO Services Ltd. vs. ACIT (2015)
69 SOT 571 (Delhi), Bechtel India (P) Ltd. vs. DCIT (2016) 66
taxmann.com 160 (Delhi), Ariston Thermo India Ltd. vs. DCIT
(2014) 147 ITD 388 (Pune) and DCIT vs. Genesis Integrating
Systems (India) (P) Ltd. (2016) 66 taxmann.com 20 (Bangalore).
9 ITA No.1817/Del/2015
10. However, on the other hand, ld. DR for the Revenue relied
upon the orders of the lower Revenue authorities.
11. When we examine page 36 of the paper book, it shows that
the taxpayer has given the complete calculation as to how the idle
hours are calculated. Perusal of project-wise break-up of the actual
hours at page 490 of the paper book shows that the taxpayer has
explained as to how the working hours of the employees have been
calculated.
12. However, ld. TPO denied the idle capacity adjustment
claimed by the taxpayer by returning following findings :-
"11. As per the details filed it is seen that you have claimed idle
capacity adjustment of Rs.2,50,63,818, which has lead to OP/OC
of 46.54%. However this claim cannot be allowed to you. It is not
evident from notes on account filed along with audited P&L ale
and balance sheet of the assessee and Form 3CD report of tax
auditor that idle capacity adjustment is required. The tax auditor
in his report also does not mention the requirement of this
adjustment. You have also not shown that the comparables have
idle cost and if so how it has affected their profitability.
12. Accordingly, the arm's length price of the international
transaction related to provision of support services is proposed to
be re-cast as below.
Operating cost Rs.11,15,85,601/-
ALP at a margin of29.59% Rs.14,46,03,780/-
Price received Rs.11,64,69,084/-
Difference Rs. 2,81,34,696/-
The above shortfall of Rs.2,81,34,696/- is being proposed as an
adjustment to the price shown by the taxpayer in its books of
account."
10 ITA No.1817/Del/2015
13. Similarly, ld. DRP by following its own order in AY
2009-10 also denied the idle capacity adjustment by returning
following findings :-
"5.3 A similar issue arose in A.Y. 2009-10. In their order dated
26.11.13 for A.Y. 2009-10, the DRP have rejected the arguments
of the assessee and observed as follows:
"7.2 We have gone through the above contention of the
taxpayer and facts evidences on record. As per Rule
10B(2) and 10B(3) of Income Tax Rules, 1962, Indian
transfer pricing provisions prescribe only for "reasonable
and accurate adjustment" and further adjustment to the
margins of comparables can be made only if they enhance
comparability. But at the same time the data for the same
must be relevant reliable and robust. Idle Capacity as a
general rule cannot be allowed unless the similar robust
data for comparables is also available.
The revised OECD guidelines of 2010 has also stated in
para 3.54 as under:-
"Ensuring the needed level of transparency of
comparability adjustments may depend upon the
availability of an explanation of any adjustments
performed the reasons for the adjustments being
considered appropriate, how they were calculated
how they changed the results for each comparable
and how the adjustment improves comparability.
Issues regarding documentation of comparability
adjustments are discussed in Chapter V."
Even the various judicial decisions on the issue of
adjustments and even OECD guidelines, impresses upon
time and again that the adjustment should be "reasonable
accurate adjustment".
Hence in view of the above, the TPO is right in not entertaining
the claim of adjustment of idle capacity."
14. Undisputedly, findings returned by the ld. TPO/DRP/AO in
taxpayer's own case for preceding year have been set aside by the
11 ITA No.1817/Del/2015
coordinate Bench of the Tribunal in AY 2009-10 in ITA
No.1047/Del/2014 by returning following findings :-
"8. We have considered the submissions of both the parties
and perused the material available on the record. In the present
case, it is noticed that an identical issue having similar facts was
a subject matter of adjudication in the preceding assessment year
2008-09 in ITA No. 6227/Del/2012 wherein vide order dated
21.02.2014, the issue has been decided in favour of the assessee
and the relevant findings have been given in paras 4 & 5 which
read as under:
"4. We have heard the rival contentions, perused the material on
record and duly considered factual matrix of the case in the light
of the applicable legal position.
5. Rule 10B(1)(e) of the Income Tax Rules, which deals with the
Transactional Net Margin Method, provides requires that "the
net profit margin realized by the enterprise (i.e. the assessee)
from an international transaction entered into with an associated
enterprise is computed in relation to costs incurred or sales
effected or assets employed or to be employed by the enterprise or
having regard to any other relevant base" is compared with " the
net profit margin realized by the enterprise ( i.e. the assessee) or
by an unrelated enterprise from a comparable uncontrolled
transaction or a number of such transactions is computed having
regard to the same base" of course, subject to comparability
adjustments which could affect the amount of net profit margin
in uncontrolled conditions. It is not at all necessary, as the
authorities below seem to suggest, that such net profit
computations, in the case of internal comparables (i.e. assessee's
transactions with independent enterprise), are based on the
audited books of accounts or the books of accounts regularly
maintained by the assessee. In our considered view, all that is
necessary for the purpose of computing arm's length price,
under TNMM on the basis of internal comparables, is
computation of net profit margin, subject to comparability
adjustments affecting net profit margin of uncontrolled
transactions, on the same parameters for the transactions with
AEs as well as Non AEs, i.e. independent enterprises, and as long
as the net profits earned from the controlled transactions are the
same or higher than the net profits earned on uncontrolled
transactions, no ALP adjustments are warranted. It is not at all
necessary that such a computation should be based on segmental
accounts in the books of accounts regularly maintained by the
assessee and subjected to audit. We are, therefore, of the view
that the authorities below were in error in rejecting the
segmental results on the ground that the segmental accounts
12 ITA No.1817/Del/2015
were not audited and that these segmental accounts were not
maintained in the normal course of business. As regards vague
generalizations by the TPO to the effect that these accounts are
manipulated, that allocation basis of expenses is unfair and that
these accounts conceal true profitability, we find that these
observations are too sweeping and generalized the observations
to have any merits. In any event, learned counsel for the assessee
has painstakingly taken us through the segmental accounts,
pointed out the basis of allocation of the expenses. We have noted
that the allocation of expense is on the man hour basis, which is
quite fair and reasonable, and that every person has to punch in
hours on a specific project. We have also noted that all these
details and expense allocation basis were also before the TPO
and even then, no specific defects were pointed out by the TPO.
Taking into account all these factors, as also entirety of the case,
we are of the considered view that the TPO indeed erred in
rejecting the segmental accounts and thus declining to accept the
internal comparable. We are also of the view that the size of the
uncontrolled transaction or transactions being smaller, by itself,
does not make these transactions incomparable with the
transactions in controlled conditions. Size of the comparable
does matter in entity level comparison because scale of
operations substantially vary and so does the underlying
profitability factor, but in a transaction level comparison within
the same entity, mere difference in size of the uncontrolled
transactions does not render the transaction incomparable. If the
size of uncontrolled transaction is too big, it may call for an
adjustment for volume business. If the size of the uncontrolled
transaction is too small, it may provoke an inquiry by the TPO to
ensure that it is not a contrived transaction outside the normal
course of business or with regard to other significant factors
surrounding smallness of such transaction. However, in our
considered view, in none of these cases, a comparable can be
rejected on the basis of its size per se. In this view of the matter,
the authorities below were clearly in error in rejecting the
internal comparable, i.e. profitability of assessee's transactions
with non AEs, on the ground that the volume of business with
non AEs was too small vis-à-vis business with AEs. In view of
these discussions, as also bearing in mind entirety of the case, the
assessee was quite justified in adopting internal TNMM and
comparing the profit earned on its transactions with AEs with
profit earned with non AEs. Accordingly, the ALP adjustment of
Rs 2,72,42,940 deserves to be deleted. We order so. The assessee
gets the relief accordingly."
9. So, respectfully following the aforesaid referred to order
dated 21.02.2014 for the assessment year 2008-09 in assessee's
own case in ITA No. 6227/Del/2012, this issue is decided in
favour of the assessee."
13 ITA No.1817/Del/2015
15. In view of what has been discussed above, we are of the
considered view that idle capacity from the total expenditure
incurred by the taxpayer while determining ALP is required to be
excluded as has been held by the coordinate Bench of the Tribunal
in Transwitch India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151
(Delhi) and SITEL India (P) Ltd. vs. ACIT (2013) 55 SOT 541
(Mumbai).
16. Since the taxpayer has come up with complete detail of idle
hours of its work force in order to claim the idle capacity
adjustment to be excluded from the total expenditure incurred
while determining the ALP, as discussed in the preceding paras,
but the same has not been examined by the ld. TPO/DRP, so we are
of the considered view that the issue is required to be set aside to
the ld. TPO to decide afresh after due verifications of the details
given by the taxpayer qua idle capacity adjustments in the light of
the decisions rendered by the coordinate Bench of the Tribunal in
taxpayer's own case for AY 2008-09 and 2009-10 and in view of
the decision rendered by the coordinate Bench of the Tribunal in
Transwitch India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151 (Delhi)
and SITEL India (P) Ltd. vs. ACIT (2013) 55 SOT 541 (Mumbai).
So, ground no.8 is decided in favour of the taxpayer for statistical
purposes.
14 ITA No.1817/Del/2015
GROUNDS NO.2, 3, 4, 5 & 7
17. Without prejudice, the taxpayer sought exclusion of six
comparable companies viz. Engineers India Ltd., Rites Ltd.,
HSCC (India) Ltd., Mahindra Consulting Engineers Ltd., Tata
Consulting Engineers Ltd. and Kitco Ltd. to benchmark the
international transactions qua provision of design and engineering
services along with supervisory support services and supply of
equipment & material to AE. So, we would examine the suitability
of all the aforesaid comparables vis-à-vis the taxpayer one by one
as under.
ENGINEERS INDIA LTD. (EIL)
18. The taxpayer sought exclusion of EIL on the grounds inter
alia that it is a Government of India owned company having
90.40% of total shareholding; that EIL is engaged in the business
of consultancy and engineering products and turnkey projects with
diversified area of production; that EIL is into extensive Research
and Development (R&D) activities; that EIL has huge assets; that
turnover of EIL is 150 times of the taxpayer and relied upon the
decisions of PCIT vs. International SOS Services India (P.) Ltd.
SLP (Civil) Diary No.18255/2018 (SC) upholding the decision of
Hon'ble Delhi High Court in ITA 454 of 2016, Hon'ble Delhi
High Court in PCIT vs. Bechtel India Pvt. Ltd. in ITA 655/2016
15 ITA No.1817/Del/2015
upholding the decision of the coordinate Bench of the Tribunal
in ITA No.6779/Del/2015, Hon'ble Bombay High Court in CIT
vs. Thyssen Krupp Industries India (P.) Ltd. (2016) 68
taxmann.com 248 (Bombay) upholding the decision of coordinate
Bench of the Tribunal in (2013) 154 TTJ 689, Genzyme India
(P.) Ltd. vs. ACIT (2018) 93 taxmann.com 222 (Delhi-Trib.), Eli
Lily & Co. (India) Ltd. vs. ACIT ITA No.6819/Del/2014 (Delhi-
Trib.), Boeing International Corporation India (P.) Ltd. vs. DCIT
(2019) 101 taxmann.com 349 (Delhi-Trib.) and Bechtel India (P.)
Ltd. vs. DCIT (2016) 66 taxmann.com 160 (Delhi-Trib.).
19. Ld. DR for the Revenue, on the other hand, relied upon the
orders of the lower Revenue authorities below.
20. When we examine annual report of EIL, available at pages
706 to 865 of the paper book, relevant pages 717 to 724, it is
proved on record that EIL is working in diversified areas eg.
Petroleum refining, petrochemical projects, pipelines division,
strategic storage services, metallurgy sector, infrastructure division,
turnkey projects, engineering division, construction division,
process design & development and heat & mass transfer. From
pages 722 & 723 of the annual report paper book, it shows that
EIL is into the extensive Research & Development activities and
has also filed for one patent based on innovative work for the
16 ITA No.1817/Del/2015
Oxygen enriched Claus process and presented several papers in
national and international conferences/seminar. Furthermore,
detail of distribution of shareholding during the year under
assessment of EIL given at page 747 of the annual report paper
book shows that Government of India is having 90.401% of total
shares and majority of the projects undertaken and completed by
EIL were of public sector undertakings like Indian Oil Corporation
Ltd., Oil and Natural Gas Corporation, etc. Furthermore, it has
come on record that EIL is having huge net worth of assets to the
tune of Rs.60 crore whereas the taxpayer is having routine assets
worth Rs.17 lakhs in the form of furniture etc. Perusal of profit &
loss account of EIL, available at page 743 of the annual report
paper book, shows that EIL is having turnover of Rs.1993.80
crores as against Rs.13 crores turnover of the taxpayer.
21. Coordinate Bench of the Tribunal excluded EIL as a
comparable vis-à-vis routine engineering design services provider
in case of International SOS Service India P. Ltd. vs. DCIT
(2016) 67 taxmann.com 73 (Delhi-Trib.) on the grounds inter alia
that a 100% Government company cannot be selected as
comparable and that company having no intangible assets cannot
be a valid comparable vis-à-vis a company owning intangible
assets in the form of technical know-how. Order of the coordinate
17 ITA No.1817/Del/2015
Bench of the Tribunal has been upheld by the Hon'ble Delhi High
Court vide order dated 30.05.2017 passed in ITA 454/2016 and
SLP filed by the Revenue in the Hon'ble Supreme Court has also
been dismissed.
22. EIL as a comparable has been ordered to be excluded by the
coordinate Bench of the Tribunal in case of Thyssen Krupp
Industries (P.) Ltd. vs. ACIT (2013) 25 ITR (T) 243 (Mumbai-
Trib.) on the grounds that EIL is a Government company and most
of its customers of the `Turnkey Project division' are related
parties, being other public sector undertakings, which is more than
the filter of 25%. The decision of the Tribunal has been upheld by
the Hon'ble Bombay High Court by returning following findings :-
"Tribunal records the fact that the Engineering India is a
Government company and its annual report indicates that a
substantial part of revenue of a comparable in execution of
turnkey projects arose out of executing projects of public sector
undertakings. In the circumstances, the impugned order of the
Tribunal holds that the Engineers could not be considered to be
comparable as 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 was
not comparable. Moreover, from the annual report, it is clear
that the revenue earned in executing turnkey project for other
public sector undertakings was much more than the filter of 25
per cent, which has been applied by the TPO in his order under
section 92CA(3), while taking TRF Ltd. as a comparable on the
ground that its related party transaction was not in excess of 25
per cent of its total turnover. Thus, applying consistent filter of
25 per cent or less of related party transaction alone to be
considered comparable, Engineers India Ltd. could not be
considered to be comparable."
18 ITA No.1817/Del/2015
23. Keeping in view the facts and circumstances of the case inter
alia that EIL is into the area of diverse activities whereas the
taxpayer is a routine engineering design services provider; that EIL
is into extensive Research & Development activities as against no
R&D activities of the taxpayer; and that EIL is having huge assets
of Rs.60 crores as against Rs.17 lakhs of the taxpayer cannot be a
suitable comparable vis-à-vis the taxpayer, hence ordered to be
excluded from the final set of comparables.
RITES LTD. (RITES)
24. The taxpayer sought exclusion of Rites as a comparable vis-
à-vis the taxpayer for benchmarking the international transaction
on the grounds inter alia that Rites is into providing high-end
technical services and having diverse nature of activities; that Rites
is a Government of India wholly own company; that Rites is
having huge asset base of Rs.163 crores and relied upon the
decisions of PCIT vs. International SOS Services India (P.) Ltd.
SLP (Civil) Diary No.18255/2018 (SC) upholding the decision of
Hon'ble Delhi High Court in ITA 454 of 2016, Hon'ble Delhi
High Court in PCIT vs. Bechtel India Pvt. Ltd. in ITA 655/2016
upholding the decision of the coordinate Bench of the Tribunal
in ITA No.6779/Del/2015, Hon'ble Bombay High Court in CIT
vs. Thyssen Krupp Industries India (P.) Ltd. (2016) 68
19 ITA No.1817/Del/2015
taxmann.com 248 (Bombay) upholding the decision of coordinate
Bench of the Tribunal in (2013) 154 TTJ 689, Rolls Royce India
(P) Ltd. vs. DCIT (2016) 176 TTJ 1 (Del Trib.), M/s. Terex
India Pvt. Ltd. vs. DCIT in ITA No.4791/Del/2015 order dated
30.05.2019 and Eli Lily & Co. (India) Ltd. vs. ACIT ITA
No.6819/Del/2014 (Delhi-Trib.).
25. When we examine profit & loss account of Rites, available
at page 890 of the paper book, it shows that Rites has income from
various activities like consultancy fee, construction projects, export
sales, inspection fees, lease services etc. Furthermore, perusal of
annual report, available at pages 855 & 856 of the annual report
paper book, shows that during the year under assessment, Rites
was engaged in turnkey project of enhancement of coach
production facilities for Rail Coach Factory, Kapurthala; General
consultancy for DMRC, Airport Express Link; project management
consultancy for laying water transmission line for Kolkata
Municipal Corporation; Engineering and construction management
for railway infrastructure, project report for diversion of railway,
road transmission lines and water pipelines from fire and
subsidence affected area; bridge/tunnel design and Geo-Tech
investigations for new railway liens projects in J&K; and number
of international assignments in export, lease and consultancy
20 ITA No.1817/Del/2015
services which include supply of train sets, diesel locomotives,
machinery & parts, construction of maintenance facilities &
training. It is also proved on record that Rites is possessing global
and domestic experience in transportation and project management
services and has signed biggest ever consultancy contract with
Saudi Railway Company for operation and maintenance of railway
network for Kingdom of Saudi Arabia. It is also proved on record
that Rites is a wholly owned company of Government of India and
is having huge asset base of Rs.163 crores, detailed at page 893 of
the paper book, as against Rs.17 lakhs of the taxpayer.
26. So, bare perusal of functional profile and asset base and the
fact that Rites is a wholly owned Government of India company, it
cannot be a suitable comparable of Rites vis-à-vis the taxpayer.
27. Coordinate Bench of the Tribunal excluded EIL as a
comparable vis-à-vis routine engineering design services provider
in case of International SOS Service India P. Ltd. vs. DCIT
(2016) 67 taxmann.com 73 (Delhi-Trib.) on the grounds inter alia
that a 100% Government company cannot be selected as
comparable and that company having no intangible assets cannot
be a valid comparable vis-à-vis a company owning intangible
assets in the form of technical know-how. Order of the coordinate
Bench of the Tribunal has been upheld by the Hon'ble Delhi High
21 ITA No.1817/Del/2015
Court vide order dated 30.05.2017 passed in ITA 454/2016 and
SLP filed by the Revenue in the Hon'ble Supreme Court has also
been dismissed.
28. Coordinate Bench of the Tribunal examined the suitability of
a Government company vis-à-vis routine engineering design
service provider in case of Thyssen Krupp Industries (P.) Ltd. vs.
ACIT (2013) 25 ITR (T) 243 (Mumbai-Trib.) on the grounds that
EIL is a Government company and most of its customers of the
`Turnkey Project division' are related parties, being other public
sector undertakings.
29. Coordinate Bench of the Tribunal in the case of Rolls Royce
India (P) Ltd. (supra) ordered to exclude Rites as a comparable
vis-à-vis routine engineering design services by returning
following findings :-
"The said company is a Government of India enterprise
and is a multidisciplinary consultancy organization in
the fields of transport, infrastructure and related
technologies. It provides a comprehensive array of
services under a single roof and believes in transfer of
technology to client organizations. In overseas projects,
22 ITA No.1817/Del/2015
it actively pursues and develops cooperative links with
local consultants/firms, as means of maximum
utilization of local resources and as an effective
instrument of sharing its expertise.
Thus, it is evident that RITES Ltd. is a primarily
imparting high end technical services, which cannot be
compared with low end marketing business support
services rendered by assessee. [Para 32]"
30. So, in view of the matter, we are of the considered view that
Rites being a wholly owned Government of India company into
diverse activities having huge asset base and is into providing high
end technical services and diverse nature of activities is not a
suitable comparable vis-à-vis the taxpayer.
HSCC (INDIA) LTD. (HSCC)
33. The taxpayer sought inclusion of HSCC as a comparable on
the grounds inter alia that it is into different nature of activities;
that it is operating in single segment with no availability of
segmental data; that it is a wholly owned Government company
having huge asset base and relied upon the decisions of
International SOS Service India P. Ltd., Thyssen Krupp
23 ITA No.1817/Del/2015
Industries (P.) Ltd. (supra), DCIT vs. Anglo-Eastern Ship
Management (India) Pvt. Ltd. ITA No.1053/Mum/2017 and
DCIT vs. Terex India (P) Ltd. (2019) 71 ITR (T) 259 (Delhi-
Trib.).
34. Perusal of business profile of HSCC at page 931 of the
annual report of paper book shows that HSCC was awarded the
work of rendering consultancy services for design & engineering,
project management and procurement of medical equipments,
drugs & pharmaceuticals, etc. for various prestigious &
challenging projects. Perusal of page 937 of the annual report of
paper book shows that HSCC shows that HSCC's major on-going
consultancy projects are qua architectural planning, design &
project management services, procurement management services,
studies and training services. Perusal of segmental reporting in
terms of AS-17, available at page 975 of the paper book, shows
that HSCC is confined only to consultancy in a single primary
segment, whereas no segmental data is available to explain
diversified categories of services being carried out by HSCC.
Perusal of Schedule 3 of fixed assets shows that HSCC is having
asset base of Rs.6.32 crores as against Rs.17 lakhs of the taxpayer.
24 ITA No.1817/Del/2015
35. Coordinate Bench of the Tribunal excluded a Government
company as a comparable vis-à-vis routine engineering design
services provider in case of International SOS Service India P.
Ltd. vs. DCIT (2016) 67 taxmann.com 73 (Delhi-Trib.) on the
grounds inter alia that a 100% Government company cannot be
selected as comparable and that company having no intangible
assets cannot be a valid comparable vis-à-vis a company owning
intangible assets in the form of technical know-how. Order of the
coordinate Bench of the Tribunal has been upheld by the Hon'ble
Delhi High Court vide order dated 30.05.2017 passed in ITA
454/2016 and SLP filed by the Revenue in the Hon'ble Supreme
Court has also been dismissed.
36. Coordinate Bench of the Tribunal in the case of DCIT vs.
Terex India (P.) Ltd. (supra) examined suitability of a Government
company as a comparable vis-à-vis routine engineering design
services provider and ordered to exclude the same on the ground
that it is a Government of India enterprises and major part of its
business is from Government itself.
37. In view of the matter, we are of the considered view that
HSCC being a wholly owned Government of India company
25 ITA No.1817/Del/2015
drawing most of its project from Government and its public sector
undertakings and is into diversified nature of activities having asset
base of Rs.6.32 crores as against Rs.17 lakhs of the taxpayer, it
cannot be a suitable comparable vis-à-vis the taxpayer, hence
ordered to exclude the same from the final set of comparables.
MAHINDRA CONSULTING
ENGINEERS LTD. (MAHINDRA)
38. The taxpayer sought exclusion of Mahindra on the grounds
inter alia that it is into diversified nature of activities of providing
consultancy services in the area of infrastructure viz. special
economic zones, water supply & sewerage, solid waste
management, urban infrastructure, agri and horti infrastructure,
social infrastructure, marine infrastructure, industrial infrastructure,
renewable energy, sustainable studies, etc., as detailed in the
annual report at page 979 of the paper book; that Mahindra has a
single reportable segment i.e. income from consultancy services
whereas no segmental financials are available qua diversified
categories of services being performed by it as per detail of income
& expenditure available at page 995 of the paper book and relied
upon the decisions of Terex India (P.) Ltd. vs. DCIT in ITA
26 ITA No.1817/Del/2015
No.4791/Del/2015 for AY 2010-11, DCIT vs. Terex India (P.) Ltd.
(2019) 104 taxmann.com 281 (Delhi-Trib.) for AY 2011-12,
Rampgreen Solutions (P.) Ltd. vs. CIT (2015) 377 ITR 533
(Delhi) and NCS Pearson India (P.) Ltd. vs. DCIT (2018) 91
taxmann.com 105 (Delhi-Trib.).
39. Coordinate Bench of the Tribunal in the case of DCIT vs.
Terex India Pvt. Ltd. (2019) 104 taxmann.com 281 (Delhi-Trib.)
ordered to exclude Mahindra as a comparable vis-à-vis a routine
engineering design services provider on the ground that it is into
variety of services out of which only one is engineering services
and segmental information of same is not available.
40. Coordinate Bench of the Tribunal in M/s. Terex India Pvt.
Ltd. for AY 2010-11 order dated 30.05.2019 ordered to exclude
Mahindra as a comparable by returning following findings :-
"32. Perusal of functions of Mahindra, available at page 444
of the paper book, shows that it is engaged in providing
consulting services in infrastructure sector in the area of Special
Economic Zones, Water supply & sewerage, solid waste
management, urban infrastructure, agri & horti infrastructure,
social infrastructure, marine infrastructure, industrial
infrastructure, renewable energy, sustainability studies,
institutional strategies / planning studies, industrial plants and
systems etc..
33. Coordinate Bench of the Tribunal examined the
comparability of Mahindra vis-à-vis the taxpayer in taxpayer's
own case for AY 2011-12 (supra) (though a different year but
27 ITA No.1817/Del/2015
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-à-vis taxpayer which is into providing routine low end
engineering design services. Hence, we order to exclude
Mahindra as a valid comparable."
41. In view of what has been discussed above, we are of the
considered view that Mahindra being into diversified consultancy
services with no segmental financials available to explain the
diversified categories of its services is not a suitable comparable
vis-à-vis the taxpayer who is a routine engineering design service
provider, hence ordered to be excluded.
TATA CONSULTING ENGINEERS LTD. (TCEL)
42. The taxpayer sought to exclude TCEL as a comparable on
the grounds inter alia that it is functionally dissimilar having huge
asset base; that TCEL is having a single reportable segment i.e.
income from engineering consultancy services with no bifurcation
of diversified categories of services and relied upon the decision of
Hon'ble Delhi High Court in PCIT vs. Bechtel India Pvt. Ltd.
ITA 655/2019 (Delhi HC) upholding the decision of coordinate
Bench of the Tribunal in ITA No.6779/Del/2015 and decision of
28 ITA No.1817/Del/2015
coordinate Bench of the Tribunal in DCIT vs. Terex India (P.)
Ltd. (2019) 71 ITR (T) 259 (Delhi-Trib.).
43. Perusal of information contained in website extract,
available at page 13, shows that TCEL is into providing entire
gamut of project engineering from inception to project
commissioning and turnkey design, supply and installation of
engineered equipments, which covers engineering studies and
design engineering services, project management consultancy and
construction management services and Opex services. Information
contained in the website extract also shows that TCEL is also into
providing services in infrastructure, energy, process, project
management consulting and advanced technologies.
44. Perusal of schedule forming part of the balance sheet at page
1013 shows that TCEL is having huge asset base of Rs.38 crores as
against Rs.17 lakhs of the taxpayer. Furthermore, when we
examine profit & loss account, available at page 1011 of the paper
book, there is only single reportable segment i.e. income from
engineering consultancy services without any bifurcation of
diversified categories of services being provided by the company.
45. Coordinate Bench of the Tribunal in M/s. Terex India
Private Ltd. (supra) has excluded the TCEL as comparable vis-à-
29 ITA No.1817/Del/2015
vis the routine engineering design services provider by returning
following findings :-
"40. Perusal of the annual report of TCE Consulting,
available at pages 538 to 559 of the paper book, shows that it is
into various other services apart from engineering services like
providing services of designing, development of new product and
Computer Aided Designing (CAD), but its segmental financials
are not available.
41. Coordinate Bench of the Tribunal in taxpayer's own case
for AY 2011-12 (supra) ordered to exclude TCE Consulting from
final set of comparables on two grounds, viz., (i) it does not
satisfy the upper turnover filter of Rs.200 crores; and (ii) that
brand name of the company has enabled this company to capture
major Government contracts and other high end customers.
42. So far as question of excluding this company on ground
of upper turnover filter is concerned, this filter has not been
applied by the taxpayer as well as TPO during the year under
assessment. However, we are of the considered view that it is not
a valid comparable on account of functional dissimilarity and
non-availability of its segmental financials. Moreover, in 2009-
10, TPO himself excluded TCE Consulting from final set of
comparables on raising objections by the taxpayer and since
then, taxpayer's business profile has not undergone any change.
43. Coordinate Bench of the Tribunal in case of Bechtel
India Pvt. Ltd. vs. DCIT 2015 (12) TMI 1560 ITAT Delhi for
AY 2010-11 has ordered to exclude TCE Consulting as a
comparable vis-à-vis routine engineering design service provider
by returning following findings :-
"12.6 The Comparable Company is involved in activities
beyond engineering design. It is engaged in activities that
extend from concept to commissioning. Whereas the
assessee provides services as a captive unit to its overseas
AEs. The diversified functions of this comparable
company include pre-project activities, procurement
assistance, project management, commissioning and
coordination, inspection, construction and supervision.
Further, there is no segmental accounting in the annual
report of the Company which provides profitability, for
the engineering 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
30 ITA No.1817/Del/2015
and being into high end engineering consulting services with no
financial segmental available is not a suitable comparable vis-à-
vis taxpayer, hence ordered to be excluded."
46. So, in view of what has been discussed above, we are of the
considered view that TCEL being into providing entire gamut of
project engineering from inception to project engineering and
turnkey design, supply and installation of engineered equipment,
and is into providing services of engineering studies and design
engineering services is having different functional profile vis-à-vis
the taxpayer who is a routine engineering design services and
moreover TCEL is having a single reportable segment showing
income from engineering consultancy services and no bifurcation
is available qua variety of services being provided by TCEL, hence
not a suitable comparable vis-à-vis the taxpayer. So, we order to
exclude the same from the final set of comparables.
KITCO LTD. (KITCO)
47. The taxpayer sought exclusion of Kitco on the grounds inter
alia that it is a Government of India owned company; that it is into
diversified nature of activities; that its financial segmental are not
available and relied upon the decisions of PCIT vs. SOS Services
India (P) Ltd., PCIT vs. Bechtel India Pvt. Ltd., CIT vs. Thyssen
31 ITA No.1817/Del/2015
Krupp Industries India (P.) Ltd. (supra) and Genzyme India (P)
Ltd. vs. ACIT (2018) 93 taxmann.com 222 (Delhi-Trib.).
48. Ld. DR for the Revenue, on the other hand, relied upon the
orders of the lower Revenue authorities.
49. Perusal of the annual report, available at pages 6 to 8, shows
that Kitco is into diversified field of consultancy services eg.
Management consultancy division, detailed engineering division,
technical services division and project consultancy division.
However, annual report at page 29 does not provide segmental
financials concerning diversified category of services being
provided by Kitco. Moreover, it is a Government of India
company.
50. Coordinate Bench of the Tribunal excluded EIL as a
comparable vis-à-vis routine engineering design services provider
in case of International SOS Service India P. Ltd. vs. DCIT
(2016) 67 taxmann.com 73 (Delhi-Trib.) on the grounds inter alia
that a 100% Government company cannot be selected as
comparable and that company having no intangible assets cannot
be a valid comparable vis-à-vis a company owning intangible
assets in the form of technical know-how. Order of the coordinate
Bench of the Tribunal has been upheld by the Hon'ble Delhi High
Court vide order dated 30.05.2017 passed in ITA 454/2016 and
32 ITA No.1817/Del/2015
SLP filed by the Revenue in the Hon'ble Supreme Court has also
been dismissed.
51. Coordinate Bench of the Tribunal in PCIT vs. Bechtel India
Pvt. Ltd. (supra) excluded Kitco by relying upon the decision of
Thyssen Krupp Industries India Pvt. Ltd. in ITA
No.6460/Mum/2012 by returning following findings :-
"22. The profile of this company shows that it is a 100%
Government owned undertaking rendering services primarily to
Central/State Government undertaking and PSUs. Most of the
clients or projects undertaken by this company are either for state
government or government run institutions. Therefore, the
majority revenue of this company comes from government /state
or centre run projects and the company derives benefit out of its
parental relation with the Government in getting contract and
because of this, the profit margins of this company cannot be
said to be indicative of a free market economy where the
appellant company and others operate. For these reasons, this
company was excluded by the Tribunal in assessee's own case in
assessment year 2010-11 in ITA No. 1478/DEL/2015 wherein the
Tribunal relied upon the findings of the coordinate bench in the
case of ThyssenKrupp Industries India Private Limited ITA No.
6460/MUM/2012.
23. The relevant findings given in the case of ThyssenKrupp
Industries India Private Limited and of the coordinate bench in
assessee's own case read as under:
"We find it as undisputed that Engineers India Limited is
a Government company. It has several segments which
also include 'Turnkey project' page 700 of the paper book
is a copy of annual report of Engineers India Limited on
turnkey project. It can be seen that the revenue has arisen
from completing paraxylene plant of IOCL and further
that company is engaged in execution of other unit of
IOCL's Panipat Naphtha cracker project. In our
considered opinion' this case should not have been
included in the list of final comparables for two reasons.
First reason is that profit motive is not a relevant
consideration in case of Government undertakings. Many
Government Undertakings even operate on losses in
furtherance of the social obligations of the government.
The second reason is that Engineers India Limited earned
33 ITA No.1817/Del/2015
income from turnkey project by successfully completing
the project of IOCL and other Public Sector
Undertakings. In that sense of the matter, the related
party transactions are much more than the filter of 25%.
We, therefore, order for the exclusion of this case from
the list of comparables."
12.5 In the above ruling, the comparable M/s. Engineers
India Limited was rejected primarily on the ground that it
was working for government/public sector undertakings
and since the company also being a government owned
enterprise; the transactions tantamount to related party
transactions. The same is true for the said comparable as
Kitco Ltd., transactions are primarily with government
owned enterprises. Applying the preposition laid down in
the case of M/s ThyssenKrupp Industries India Private
Limited (supra), we hold that Kitco Ltd., cannot be
accepted as a comparable company. Hence the same is
directed to be eliminated."
24. Respectfully following the findings of the coordinate bench
[supra], we direct to exclude KITCO from the final set of
comparables."
52. So, in view of the matter, we are of the considered view that
Kitco firstly being a Government of India undertaking rendering
services to Central and State undertakings and PSUs and as such,
substantial revenue of this company is from Government/State or
centre run projects and it is into diversified activities of business
qua which segmental financials are not available, is not a suitable
comparable vis-à-vis the taxpayer which is a routine provider of
design engineering services along with supervisory support
services to its AE, hence ordered to be excluded.
34 ITA No.1817/Del/2015
GROUNDS NO.9 & 10
53. Grounds No.9 & 10 are dismissed having not been pressed
during the course of arguments.
GROUND NO.11
54. Ground No.11 being consequential in nature needs no
specific findings.
GROUNDS NO.12, 13, 14 & 16
55. AO/DRP following the earlier assessment year estimated the
gross profit of such sales made by HO at 25% which comes to
Rs.1,52,66,780/-. After considering the functions performed by the
fixed place Permanent Establishment (PE)/Service PE/ Supervisory
PE, 50% of the aforesaid profit is attributed to PE which comes to
Rs.76,33,390/- on the grounds inter alia that BO was set up in India
for the business activities of HO as the BO was involved in
negotiations and other activities of HO and that expenses of BO did
not commensurate with the scale of its turnover showing more
work done than contended by the taxpayer and that the customers
of BO and HO were common and presence of BO `s employees to
provide services to HO's clients implying involvement of BO in
activities of the HO.
56. Ld. AR for the taxpayer contended that the taxpayer has a
BO in India and consequently income earned by it is taxed in India.
35 ITA No.1817/Del/2015
It is also contended by the ld. AR for the taxpayer that the
transactions between HO and BO are subject to transfer pricing
provisions and have been already benchmarked and the profit
related to that part of the contract, which is directly carried out by
the HO, shall only be taxable in Netherland and as such, no further
income is liable to be attributable to the BO and also relied upon
Article 7 of the Tax Treaty between India and Netherland.
57. The ld. AR for the taxpayer further contended that the AO
has proceeded on the basis of assumption that BO performed all the
activities detailed at page 13 of the order to facilitate HO whereas
work orders entered into by the HO with Indian customers clearly
stipulate the scale of work, amounts to be paid, liability and other
terms and conditions. So, the above mentioned facilities are
performed by the HO itself as a part of the contract for
supplies/services and the BO was nowhere involved. Ld. AR for
the taxpayer relied upon the decision of the coordinate Bench of
the Tribunal in taxpayer's own case for AYs 206-07, 2008-09 and
2009-10.
58. Identical issue has been decided by the coordinate Bench of
the Tribunal in favour of the taxpayer by returning following
findings :-
36 ITA No.1817/Del/2015
"4.3 We have considered the rival submissions and perused the
relevant material on record. It can be seen from the Assessing
Officer's final order passed u/s 144C(13) that the entire issue has
been discussed in a solitary para No. 6 of around 10 lines at page
37 of the order. It has been concluded that the assessee must
have received a sum equal to its declared receipts in respect of
direct transactions between the HO and its Indian customers and
the further presumption is that it is in nature of fees for technical
services. We are unable to appreciate the logic of the AO in
drawing inferences, one after me other and the conclusions
reached in this regard. There is no material worth the name to
suggest, even remotely, that the assessee was rendering services
to its head office or the Indian clients in respect of direct
transactions between them. There is absolutely no bedrock for
such presumption. The learned DR was required to invite our
attention towards any material indicating the assessee's
involvement in the direct transactions between the head office
and Indian customers. In the name of reply, he took us through
certain portions of the draft assessment order in which there is a
Lummus Technology Heat Transfer BV reference to certain
invoices of the HO indicating the role of the assessee in such
direct transactions. On a careful scrutiny of the dates of such
invoices, it can be seen that they relate to the financial year 2004-
05 relevant to the preceding assessment year 2005-06. A copy of
the assessment order for the A.Y. 2005-06 has been placid on
record. It can be seen from such order dated 17.12.2007, that no
addition was made in respect of such presumptions of the
Assessing Officer. It is further relevant to note that the assessee's
accounts were examined by the TPO, who has not pointed out
even a single rupee expense attributable to the direct transactions
between HO and Indian customers. When this is the position
obtaining in this case, we fail to comprehend as to how an
income can be estimated in this regard. Such addition made by
the Assessing Officer is, therefore, directed to be deleted. This
ground is allowed."
59. It is further contended by the ld. AR for the taxpayer that AO
has wrongly relied upon the order of Reserve Bank of India (RBI)
dated 13.04.1999 because BO was granted specific approval by the
RBI for performing certain activities which was restricted only to
permit activities, and the income earned from such permitted
activities has already been offered to tax in India.
37 ITA No.1817/Del/2015
60. No activities have been performed by the BO on behalf of
the HO as presumed by the AO. Moreover, the taxpayer has
specifically explained the functions performed and risk undertaken
by the HO and BO in its TP study, relevant pages 558 to 590 of the
paper book, showing activities of the BO being restricted to basic
design and engineering services. Furthermore, HO was otherwise
responsible for its own market development research and
negotiation for contract.
61. So far as grounds taken by the AO qua the expenses
attributed to expatriate Director stationed at Gurgaon, Shri Raj
Thakral that he has played a major role in supervising market
research to find out customers, procuring orders, contract
negotiations, etc. It has come on record that there is no evidence
on record brought forward by the AO to support his contention
regarding doing aforesaid work by the Director in India in market
research and related jobs. Merely because of the fact that
expatriate Director was present in India, no nexus can be held to be
established between HO and BO.
62. Ld. AR for the taxpayer drew our attention towards
document qua contracts entered into between HO directly with
Indian customers along with copy of contracts/purchase orders,
available at pages 400 to 471 of the paper book wherein it is
38 ITA No.1817/Del/2015
nowhere mentioned that said expatriate employee is involved in
negotiations or marketing. The name of Mr. Guido Herberghs of
the HO, Netherland is mentioned in most of the work orders
entered into by the HO with Indian clients who considers,
discusses, negotiates and enters into contracts with the Indian
clients only on behalf of the HO and there is no evidence
whatsoever on the file to prove that there was nexus between HO
and BO. Furthermore, AO proceeded to make an addition on this
account also on the ground that BO has debited expenses
amounting to RS.11.44 crores to its profit & loss account as against
revenue of Rs.13.08 crores and the cost so incurred is not
commensurate with the business turnover and as such, BO proved
to have performed more than what has been claimed by it.
63. We are of the considered view that account detail of any
such specific expense or revenue item, otherwise unreasonable or
under-stated, has not been pointed out, and the entire decision has
been made on the basis of assumptions. Moreover, even otherwise,
reasonableness of the expenditure has to be considered with
businessman's stand point and revenue officer cannot decide such
issue while sitting on the businessman's arm chair. This
proposition has been laid down by Hon'ble Supreme Court in CIT
39 ITA No.1817/Del/2015
vs. Walchand and Co. (P) Ltd. (1967) 65 ITR 381 (SC) and
Aluminium Corporation of India vs. CIT (1972) 86 ITR 1 (SC).
64. In view of what has been discussed above and following the
order passed by the Tribunal in taxpayer's own case in 2006-07,
2008-09 & 2009-10, we are of the considered view that aforesaid
addition made by the AO/DRP qua attribution of profits amounting
to Rs.76,33,390/- to HO from direct supplies and services to
customers in India to PE in India i.e. BO is not sustainable, hence
ordered to be deleted.
GROUND NO.15
65. AO/DRP have further attributed profits to PE of the
taxpayer ignoring the fact that the said transactions have already
been considered by the TPO and no further profits could have been
attributed.
66. Undisputedly, TPO in its TP analysis has considered all the
transactions between BO and HO and after conducting FAR
analysis the same has been compensated on arm's level basis. In
these circumstances, no further attribution of profit to BO can be
made.
67. Hon'ble Supreme Court in the case of DIT vs. Morgan
Stanley and Co. Inc. (2007) 292 ITR 416 (SC) decided the issue by
returning following findings :-
40 ITA No.1817/Del/2015
"As regards attribution of further profits to the PE of MSCo
where the transaction between the two are held to be at arm's
length, we hold that the ruling is correct in principle provided
that an associated enterprise (that also constitutes a PE) is
remunerated on arm's length basis taking into account all the
risk-taking functions of the multinational enterprise. In such a
case nothing further would be left to attribute to the PE."
68. In view of the matter, we are of the considered view that
when transaction between the HO and BO has otherwise been held
at arm's length by taking into account the risk bearing functions,
no further profit to the BO can be attributed. Consequently, ground
no.15 is decided in favour of the taxpayer.
GROUNDS NO.17 & 18
69. The taxpayer challenged the action of the AO in not giving
credit of taxes amounting to Rs.4,73,055/- while computing the
alleged tax payable by the taxpayer and without prejudice to
ground no.17 taxpayer contended that AO has erred in not giving
credit of taxes of Rs.7,27,883/- withheld on payments held by HO
from Indian customers. We are of the considered view that when
the taxpayer claimed that they are entitled for credit of taxes, the
matter is required to be set aside to the AO to verify if such taxes
have been deposited by deducting the TDS and to provide the
credit to the taxpayer under Rules.
41 ITA No.1817/Del/2015
GROUND NO.19
70. The ld. AR for the taxpayer contended that the AO has
incorrectly applied surcharge and cess over the tax rate of 10% as
per Double Tax Avoidance Agreement (DTAA) applied on the
amount of income of HO and relied upon Article 2 of DTAA
which is extracted for ready perusal as under :-
"3. The existing taxes to which the Convention shall apply
are in particular:
(b) in India:
- the income-tax including any surcharge thereon,
- the surtax,
- the wealth-tax.
(hereinafter referred to as "Indian tax'?
4. The Convention shall apply also to any identical or
substantially similar taxes which are imposed after the date of
signature of the Convention in addition to, or in place of, the
existing taxes. The competent authorities of the States shall
notify to each other any substantial changes which have been
made in their respective taxation laws."
71. Under Article 2(3) of the DTAA, tax includes Income-tax
and surcharge thereon and as such, surcharge is included in the
income-tax and the tax rate of 10% for fee for technical services as
prescribed in Article 12 is deemed to be included surcharge as cess
is nothing but an additional surcharge, so only tax rate of 10%
under DTAA is applicable. Ld. AR for the taxpayer relied upon
the decision rendered by the coordinate Bench of the Tribunal in
Soregam SA vs. DCIT (2019) 101 taxmann.com 94 (Delhi-Trib.)
42 ITA No.1817/Del/2015
wherein the identical issue has been decided in favour of the
taxpayer by holding that since education cess is a form of
additional surcharge, education cess or any other surcharge cannot
be applied additionally to increase the tax rate prescribed in the
DTAA i.e. 10%. So, we direct the AO to apply tax rate of 10% in
this case on royalty/FTS. Consequently, this issue is decided in
favour of the taxpayer.
GROUND NO.20
72. AO has charged the interest u/s 234 B, which has been
challenged by the taxpayer on the ground that this issue has been
decided in favour of the taxpayer in numerous cases and more so,
in taxpayer's own case for AY 2006-07, this issue stands covered.
Coordinate Bench of the Tribunal in taxpayer's own case for AY
2006-07 decided the issue in controversy in favour of the taxpayer
by returning following findings :-
"5.2 Having heard the rival submissions and perused
the relevant material on record in respect of this
additional ground, we find that the issue of charging
interest u/s 234B in the present case is ho more res
integra in view of the judgment of the Hon'ble Bombay
High Court in DIT (International Taxation) v. NGC
Network Asia LLC [2009J 313 ITR 187, in which it has
been held that when the duty is cast on the payer to
deduct tax at source, on failure of the payer to do no
interest can be charged from the payee assessee u/s
234B. The same view has been reiterated in DIT (IT) v.
43 ITA No.1817/Del/2015
Krupp UOHE GmbH [2013J 40 taxmann.com 38
(Bom.). As the assessee before us is a non-resident,
naturally any amount payable to it which is chargeable
to tax under the Act, is otherwise liable for deduction of
tax at source."
5.3 At this juncture, it is relevant to note that the
Finance Act, 2012 has inserted a proviso, at the end of
section 209(1) w.e.f. 1.4.2012 which provides that for
computing liability for advance tax, income-tax
calculated under clause (a) or (b) or (c) shall not, in
each case, be reduced by the aforesaid amount of
income-tax which would be deductible or collectible at
source during the said financial year under any
provision of this Act from any income, if the person
responsible for deducting tax has paid or credited such
income without deduction of tax or it has been received
or debited by the person responsible for collecting tax
without collection of such tax. The effect of this
insertion is to nullify the mandate of the above
judgments holding that no interest is chargeable if the
income received by such assessee is otherwise liable for
deduction of tax at source in the hands of the payer.
The point worth noting in this regard is that the
Finance Act, 2012 has inserted this proviso
prospectively w.e.f. 1.4.2012. Even the Memorandum
explaining the provisions of the Finance Bill, 2012
provides that: 'This amendment will take effect from 1st
April, 2012 and would, accordingly, apply in relation to
advance tax payable for the financial year 2012-13 and
subsequent financial years'. It, therefore, becomes vivid
that the insertion of the proviso to section 209(1) is
prospective and the same cannot be applied
retrospectively to the year under consideration."
73. Following the decision rendered by the coordinate Bench of
the Tribunal in taxpayer's own case, we are of the considered view
that interest u/s 234B of the Act as charged by AO/DRP is not
sustainable because when duty is on the payer to deduct tax at
44 ITA No.1817/Del/2015
source, on failure of the payer to deduct the TDS no interest can be
charged from the payee/taxpayer u/s 234B of the Act.
Consequently, this ground is determined in favour of the taxpayer.
74. Resultantly, the appeal filed by the taxpayer is allowed for
statistical purposes.
Order pronounced in open court on this 28th day of November, 2019.
Sd/- sd/-
(N.K. BILLAIYA) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 28th day of November, 2019
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.
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