IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: Bench `I-1', NEW DELHI
BEFORE SHRI R.K.PANDA, ACCOUNTANT MEMBER
AND SMT. BEENA A PILLAI, JUDICIAL MEMBER
ITA No. 973/Del/2016
AY: 2011-12
Fluor Daniel India Pvt. Ltd. vs. ACIT
B 9, LGF Circle 9(1), Room
Green Park (Main) No.194
New Delhi 110 016 C.R.building
I.P.Estate
PAN: AAACF0927G New Delhi
(Appellant) (Respondent)
Appellant by : S/Shri: S.P.Singh, Manoneet Dalal,
Yishu Goel & Prasoon Mangal, Advs
Respondent by : Sh. Sanjay I Bara, CIT, D.R.
Date of Hearing : 09/01/2019
Date of Pronouncement : 17/01/2019
ORDER
PER BEENA A PILLAI, JUDICIAL MEMBER
Present appeal has been filed by assessee against final
assessment order dated 29/01/16 passed by Ld.AO under
section 143(3) read with section 144C of the Income Tax Act,
1961 (the Act) on following grounds of appeal:
1. The Ld. Assessing Officer (`AO') / Ld. Transfer Pricing Officer
(`TPO') erred on facts and in law by making an adjustment to the
arm's length price of the Appellant's international transactions
ITA No. 973/Del/2016 AY-2011-12
Fluor Daniel India Pvt.Ltd. vs. ACIT
which resulted in the enhancement of returned income of the
Appellant by INR 7,44,04,229.
2. That the reference made by the Ld. AO suffers from
jurisdictional error as the Ld. AO has not recorded any reasons in
the assessment order based on which he reached the conclusion
that it was `expedient and necessary' to refer the matter to the Ld.
TPO for computation of the arm's length price, as required under
section 92CA(1) of the Act.
3. The Ld. AO/Ld. TPO/ Ld. Dispute Resolution Panel (`DRP') erred
on facts and in law in making an upward adjustment to the arm's
length price of the Appellant's international transaction in relation
to provision of engineering design services amounting to INR
7,44,04,229 by:
3.1. Rejecting the comparable companies selected by the
Appellant in its Transfer Pricing documentation;
3.2. Accepting companies, which are not comparable to the
Appellant in terms of functions, assets and risks;
3.3. Erroneously ignoring comparable companies, obtained by
way of a fresh search, provided by the Appellant as a
response to the show cause notice; and
3.4. Not granting an economic adjustment for the risk mitigated
environment in which the Appellant operates.
4. That on the facts and circumstances of the case and in law
the Ld. AO/ Ld. TPO erred in not examining the validity of
initiation of penalty proceedings u/s 271 (1) (c) of the Act.
That the appellant craves leave to add, alter, amend or withdraw
any ground of appeal either before or at the time of hearing of this
appeal as they may be advised. That, the above grounds are
independent and without prejudice to each other."
Brief facts of case are as under:
2. Assessee filed its return of income on 29/11/11 declaring total
income of Rs.19,87,61,183/-. The return was revised on
30/11/11 declaring total income of Rs.19,87,61,183/-. The case
was selected for scrutiny, and notice under section 143 (2) of the
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Fluor Daniel India Pvt.Ltd. vs. ACIT
Act, followed by notices under section 142 (1), along with
questionnaire was issued to assessee. In response to statutory
notices, representative of assessee appeared before Ld.AO and
filed details as called for.
2.1. Ld.AO observed that assessee is engaged in the business of
providing engineering and design services. During the course of
assessment proceedings, it was observed that assessee has
entered into international transactions with its Associated
Enterprises (AEs), and accordingly reference was made to
Transfer Pricing Officer (TPO) in respect of international
transaction entered into by assessee for computing its ALP.
2.2. Upon receipt of reference, Ld.TPO issued notice to assessee
for filing details regarding international transaction undertaken
by assessee, which was complied by filing documentation under
Rule 10 D along with other details as called for.
2.3. Ld.TPO observed that assessee is a subsidiary of US
company, by the name, Fluor Corporation and Daniel
International. It was observed that assessee was engaged in
providing engineering and design services. The international
transaction undertaken by assessee with its AEs as under:
Sl. International Transaction Amount (in Rs.)
No.
1. Provision of services 1,224,193,283
2. Receipt of services 45,276,486
3. Training costs 4,960,379
4. Payment of software charges 47,515,618
5. Reimbursements received 21,037,547
2.4. Assessee used TNMM as most appropriate method and
computed margin by using OP/OC as PLI. In its comparability
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Fluor Daniel India Pvt.Ltd. vs. ACIT
analysis assessee considered following 8 comparables with an
average of 6.99% and assessee had worked out its own margin to
be 12.70%.
Sl. Name of the Company Remark of the TPO
No.
1. Acropetal Technologies Ltd. This is a suitable comparable.
(Engineering Design Services
Segment)
2. Consulting Engineering Services Data for the current year is not
India Pvt.Ltd. available in the public domain.
Hence, not a suitable comparable.
3. Development Consultants Ltd. Data for the current year is not
available in the public domain.
Hence, not a suitable comparable
4. Engineering Projects (India) Ltd. This company is in construction
business of many spheres.
Hence, not a suitable comparable.
5. Kitco Ltd. This is a suitable comparable.
6. KLG Systel Ltd. (Life Cycle Solutions This company fails service income
Segment) filter (28.19%) and this company
as per disclosure made in Annual
Report is in Computer Software &
Hardware. Hence, not a suitable
comparable.
7. Project and Development India This is a suitable comparable.
Limited.
8. Simon India Limited This company is engaged in
`Construction contract' which are
functionally different from the tax
payer and fails service filter also
(4.09%). Hence, not a suitable
comparable.
2.5. Ld.TPO has not disputed regarding functional profile of
assessee, most appropriate method used and PLI in respect of
service rendered by assessee. Only dispute raised by Ld.TPO is in
respect of comparables, chosen by assessee. He thus, by applying
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ITA No. 973/Del/2016 AY-2011-12
Fluor Daniel India Pvt.Ltd. vs. ACIT
various filters, rejected certain comparables from assessee's list
and included 2 new comparables, details of which are as under:
Sl. Name of the Company OP/OC for FY 2010-11
No.
1. Acropetal Technologies Ltd. (Segment) 14.36%
2. Accuspeed Engineering Services Inida 10.37%
Ltd.
3. Cades Digitech Private Limited 5.47%
4. Kitco Limited 27.48%
5. Project and Development India Ltd. 39.32%
6. Mahindra Consulting Engineers Ltd. 30.92%
7. T C E Consulting Engineers Ltd. 29.29%
Arithmetic Mean 27.46%
2.6. Ld.TPO thus determined average mean to be 27.46%.
Ld.TPO thus proposed an adjustment of Rs.10,05,97,632/- after
determining the ALP of international transactions at
Rs.1,34,21,10,505/-.
2.7. Aggrieved by adjustment proposed by Ld.TPO, assessee
raised objections before DRP. The DRP though upheld approach
adopted by Ld.TPO and comparables selected by him, allowed
benefit of working capital adjustment. On giving effect to
directions of DRP, arithmetic mean of comparables reduced to
20.07%, pursuant to which, adjustment reduced to
Rs.7,44,04,229/-.
2.8. Ld.AO upon receipt of order of DRP, passed final
assessment order by making addition of Rs.7,44,04,229/-in
hands of assessee.
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Fluor Daniel India Pvt.Ltd. vs. ACIT
2.9. Aggrieved by order of Ld.AO, assessee is in appeal before us
now.
3. Ground No.1& 2 raised by assessee are general in nature and
therefore do not require any adjudication.
4. Ground No. 3 is in respect of comparables disputed by
assessee having been included/excluded by Ld.TPO.
4.1. By this ground, assessee is disputing inclusion of following
comparables:
· Kitco Ltd.,
· TCE Consulting Engineers Ltd.,
· Project and Development India Ltd.,
· Mahindra Consulting Engineers Ltd.,
4.2. Assessee is disputing exclusion of following comparable:
· Tismo Technology Solutions Pvt.Ltd.,
5. Before we undertake comparability analysis, it is sine qua non
to understand FAR of assessee.
(i) Functions:
Assessee provides engineering design and related services to
Fluor group, pursuant to specific client contracts, which are
executed on project by project basis. In TP study, it has been
submitted that contract require one Fluor entity to lead the
project (also referred to as "prime contractor") and other Fluor
affiliates in variety of jurisdictions, to assist in performing work
on the project (also referred to as sub-contractors").
At page 35 of paper book volume 1 of transfer pricing study,
categorises assessee as providing engineering design and related
services. It has been submitted that once a contract has been
awarded by ultimate customer, Fluor Affiliates may sub-contract
different tasks such as engineering design, procurement,
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Fluor Daniel India Pvt.Ltd. vs. ACIT
commissioning etc. to different group companies depending upon
their core competency. Final service provided to end-user,
generally requires integration of different services, sub-contracted
to different group companies. The engineering design activities
sub-contracted to assessee, are thus part of the total contract
awarded to the Fluor Affiliates by an unrelated party.
Briefly, functions performed by assessee (more particularly
detailed at page 35-37) are as under:
a. Business Development: As the affiliate is responsible for all
marketing efforts for engineering design and related services
rendered by assessee, and assessee has no role to play, vis-a-vis
business development.
b. Engineering Design Services: Assessee is engaged in the
business of providing detailed engineering and design services to
its affiliate which is a part of total contract awarded to the
affiliate. Assessee provides said services on cost plus basis.
c. Invoicing, Collection and Delivery: It is the responsibility of
Fluor affiliate to realise project compensation from the
customers. Assessee is not engaged in any form of distribution,
invoicing, collection, ordering or delivery vis-a-vis end-user. All
the engineering design activities carried out by assessee are part
of larger project led by its affiliate.
d. Marketing and Sales: Fluor affiliates are solely responsible for
determining the overall marketing strategy of the group. The
primary role of assessee is to provide engineering design and
related services to its affiliate.
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Fluor Daniel India Pvt.Ltd. vs. ACIT
e. Support Services: Assessee provides back-office support
service in the nature of bank reconciliation, transbilling, cash
receipt, intercompany reconciliation etc. to its affiliate.
Other routine functions performed by assessee are:
· providing input on strategic policies relating to assessee
· Finance and Accounting, IT and Legal wherein assessee is
responsible for performing day-to-day financial matters and
deals with local tax and regulatory issues
· Human Resource Management: recruitment, soft skills
training, employees evaluation related functions are
performed by assessee.
(ii) Assets employed:
Assessee utilises routine tangibles like computers and
peripherals, office premises, communication facilities etc. for the
purpose of its business. It does not own any significant
intangibles and does not undertake any significant research and
development on its account that leads to the development of non-
routine intangibles. Assessee uses intangibles, process, know-
how, methodologies, operating/quality standards etc.
developed/owned by its Affiliates. Accordingly assessee has been
characterised as not owning any significant non-routine
intangibles.
(iii) Risks assumed:
Assessee is remunerated on hourly rates from April, 2010 to
July,2010 and was remunerated on a cost plus basis for the rest
of the year. Thus assessee is not exposed to market risk, service
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Fluor Daniel India Pvt.Ltd. vs. ACIT
liability risk, credit risk, price risk, capacity utilisation risk. It is
thus exposed to the manpower risk as it is responsible for
retaining skilled and trained workforce to carry out its activities
and foreign exchange risk as the remuneration is received by
assessee in foreign currency.
6. Thus based upon the above FAR, assessee is characterised as
performing engineering design services as a sub contractor to
Fluor Affiliate, exposed to limited risk associated with carrying
out such business.
7. On the basis of above, we shall compare FAR undertaken by
the comparables disputed by assessee for being
included/excluded as the case may be.
8. Before we proceed to examine comparables, several decisions
of various Tribunals have been cited by parties regarding its
inclusion /exclusion by submitting that, these comparables
should be excludible/includible based on those decisions. We are
of the view that each decision has rendered particular
comparable excludible/includible, based on facts of that case, as
well as FAR of assessee whose issues are decided. We are also
aware about precedent value of those decisions, while deciding
comparables regarding its suitability. However, we feel,
paramount importance shall be on Rule 10B (2) of Income Tax
Rules 1962 which is as under:--
"(2) For the purposes of sub-rule (1), the comparability of an
international transaction [or a specified domestic transaction] with
an uncontrolled transaction shall be judged with reference to the
following, namely:--
(a) the specific characteristics of the property transferred or
services provided in either transaction;
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Fluor Daniel India Pvt.Ltd. vs. ACIT
(b) the functions performed, taking into account assets
employed or to be employed and the risks assumed, by the
respective parties to the transactions;
(c) the contractual terms (whether or not such terms are formal
or in writing) of the transactions which lay down explicitly
or implicitly how the responsibilities, risks and benefits are
to be divided between the respective parties to the
transactions;
(d) conditions prevailing in the markets in which the respective
parties to the transactions operate, including the
geographical location and size of the markets, the laws and
Government orders in force, costs of labour and capital in
the markets, overall economic development and level of
competition and whether the markets are wholesale or
retail."
9. Therefore it may so happen that, a comparable engaged in
similar business which is having similar FAR may be included,
though same might have been held to be not includible by
Courts/Tribunals in other cases. Further, contractual terms as
well as host of other factors stated in above sub-rule, may
determine comparability analysis. Thus in our opinion, if
difference arising on comparability analysis does not affect price
or profitability of comparable, or if it can be reasonably adjusted,
same should be taken as good comparable for Comparability
analysis. Therefore, it should not be assumed that, if a
comparable is held to be excludible in one case, it shall always be
excluded in decisions to follow subsequently. Thus, while
deciding comparability, decisions cited definitely would be
perused from this angle by us.
10. Kitco Ltd.
Ld.TPO included this comparable into the final list, as it provides
engineering and designs services to its customers. On the
contrary Ld.Counsel submitted before us that it is not a fit
comparable as it is a Government owned and the shares of this
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Fluor Daniel India Pvt.Ltd. vs. ACIT
company are primarily held by public sector financial
institutions/public sector banks owned or controlled by the
central and state government. He also placed reliance upon
various decisions of this tribunal as well as Hon'ble high courts
in support of its exclusion.
Ld.CIT DR however submitted that, in the process of
comparability analysis Rule 10 B (2) has to be considered and
merely because a particular company is owned by government
would not lead to its exclusion under less functional dissimilarity
is established.
We have perused submissions advanced by both sides and the
light of the records placed before us.
Functional profile of this company, as submitted by assessee,
and as per annual report placed at page 277-309 of paper book is
as under:
KITCO, the first Technical Consultancy Organization(TCO) in
India, was established in 1972 by Industrial Development Bank
of India, other national and state level financial institutions,
Govt. of Kerala and 7 Public Sector Banks for rendering services
to Entrepreneurs, Govt. Departmental PSUs, Local Bodies, etc.
Presently, Small Industries Development Bank of India (SIDBI) is
the prime shareholder with 49% shares of the company.
Would KITCO successfully implemented projects like Cochin
International Airport Ltd., , Cochin Special Economic Zone, etc
and is involved in implementing a multimodal Mobility Hub at
Cochin, all of which are first of its kind in the country in their
own respect. KITCO successfully is stated to have completed
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Fluor Daniel India Pvt.Ltd. vs. ACIT
Phase-1 of CIAL Golf Course & Country Club and Ghallah
Wentworth Golf Course at Muscat, Sultanate of Oman, thereby
establishing itself in an area, which was considered to be the
forte of European Consultants. The prestigious overseas
assignments completed by KITCO include technical evaluation of
electrical power distribution network at King Abdul Aziz
International Airport, Jeddah. It is also observed that this
company is working in divisions like infrastructure, tourism,
aviation, IT services, HRD, financial services etc. which are
dissimilar to the functional profile of the assessee company.
Snapshot enclosed.
In our considered opinion this company is involved in executing
huge projects with a motive to earn profits. We therefore reject
the argument of Ld.Counsel that since this company is owned by
government it cannot be considered to be a fit comparable.
However we observe that functions performed, risks assumed
and assets owned by this company is huge and fast as compared
to that of assessee who is acting as a sub contractor for its AE,
rendering engineering and design services and is remunerated on
cost plus basis.
We therefore reject this company as it does not satisfy the
functionality test with that of assessee's.
(II) Project and Development India Ltd:
Ld.TPO included this comparable into the final list, as it provides
engineering and designs services to its customers. On the
contrary Ld.Counsel submitted before us that it is not a fit
comparable as it is functionally dissimilar.
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Fluor Daniel India Pvt.Ltd. vs. ACIT
On the contrary Ld. CIT DR placed reliance upon the
observations of Ld. TPO/DRP.
We have perused submissions advanced by both sides in the light
of records placed before us.
Functional profile of this company, as submitted by assessee,
and as per the annual report placed at page 396-479 of paper
book is as under:
Under engineering and consultancy division this company has
played a vital role in development of fertiliser industries in India.
It is still maintaining strength in the sector and is ready to take
up new challenges in executing the Brownfield, Greenfield,
revamp and expansion projects of many fertiliser units in
country. Ld.Counsel submitted that the services rendered by this
company are directly to its clients and not on a sub-contract
basis.
From the above, it is evident that this comparable is not
functionally comparable due to difference in functions performed
by this company with that of assessee, In our view this company
cannot be compared with limited functions performed by
assessee, because it is the nature of services rendered and not
per se rendering of services that is relevant in accepting or
rejecting it as comparable.
Therefore, we direct exclusion of this comparable from the list of
comparables.
(III) TCE Consulting Engineers Ltd.
Ld.TPO included this comparable into the final list, as it provides
engineering and designs services to its customers. On the
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Fluor Daniel India Pvt.Ltd. vs. ACIT
contrary Ld.Counsel submitted before us that it is not a fit
comparable as it is functionally dissimilar.
On the contrary Ld. CIT DR placed reliance upon the
observations of Ld. TPO/DRP.
We have perused submissions advanced by both sides in the light
of records placed before us.
It is submitted that this company is engaged in providing high-
end technical services. Profile submitted by the assessee at page
310-395 of paper book volume 1 shows that it successfully
managed complex engineering projects across infrastructure
spectrum and is associated with prestigious urban infrastructure
facilities such as Airports, Railways and metropolis engineering
consulting projects.
Therefore, in our view it is apparent that this company is engaged
in providing high end engineering consulting services which is
not comparable with limited functions performed by assessee.
Therefore we direct to exclude this comparable.
(IV) Mahindra Consulting Engineers:
Ld.TPO included this comparable into the final list, as it provides
engineering and designs services to its customers. On the
contrary Ld.Counsel submitted before us that it is not a fit
comparable as it is functionally dissimilar.
On the contrary Ld. CIT DR placed reliance upon the
observations of Ld. TPO/DRP.
We have perused submissions advanced by both sides in the light
of records placed before us.
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Fluor Daniel India Pvt.Ltd. vs. ACIT
It has been submitted that this company is engaged in services
which are highly technical. Functional profile is placed at page
no.271, 272 of the Paper Book and objections before the ld. TPO
at page 480-498 of Paper Book volume 1. It is observed from the
functional profile that this company is part of 'Mahindra
Partners'. It does not show functional profile of Mahindra
Consulting Engineers. However it shows that this company is
engaged in providing services and has proved its capability to
execute innovative projects and to penetrate into new areas of
operation. It is further submitted that it is engaged in providing
infrastructure engineering and consulting services. Therefore it is
apparent that it is functionally different.
We therefore direct to exclude this company, in view of highly
technical capabilities of executing infrastructure development
projects vis-a-vis that of assessee who is rendering engineering
and related services as a sub-contract limited to specific
functions as per the requirement of its affiliate.
(V) Tismo Technology Solutions Ltd:
Ld.TPO rejected this comparable only due to non-availability of
financials at the time of Transfer Pricing proceedings. Ld.AR
however submitted that the financial data is now available on the
capital in database and its margin calculation. He also submitted
that this company passes through all filters that has been
applied by Ld.TPO and determined in the comparables.
He thus requested for remanding this comparable back to
Ld.TPO for verification of the financials.
Ld.Sr.DR did not object for the request advanced by Ld.AR.
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Considering the submissions advanced by both sides, we are of
considered opinion that this comparable deserves to be remanded
back to Ld.TPO for verification of the financials that are available
after applying relevant filters. Needless to say that assessee is to
be given opportunity of hearing by following principles of natural
Justice.
11. Accordingly this ground raised by assessee stands
allowed as discussed above.
12. Ground No. 4 raised by assessee is premature and does not
require any adjudication.
13. In the result appeal filed by assessee stands allowed.
Order pronounced in the Open Court on 17th January, 2019.
(R.K.PANDA) (BEENA A PILLAI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dt. 17th January, 2019
· Gmv
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ITA No. 973/Del/2016 AY-2011-12
Fluor Daniel India Pvt.Ltd. vs. ACIT
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
- TRUE COPY -
By Order,
ASSISTANT REGISTRAR
ITAT Delhi Benches
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ITA No. 973/Del/2016 AY-2011-12
Fluor Daniel India Pvt.Ltd. vs. ACIT
S.No. Details Date
1 Draft dictated on Dragon 10/01/19
11/01/19
2 Draft placed before author
Draft proposed & placed before the 16/01/19
3
Second Member
Draft discussed/approved by Second 16/01/19
4
Member
5 Approved Draft comes to the Sr. PS/PS
Kept for pronouncement &
6 Order uploaded On:
7 File sent to Bench Clerk
Date on which the file goes to Head
8
Clerk
9 Date on which file goes to A.R.
10 Date of Dispatch of order
18
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