HITACHI ENERGY TECHNOLOGY SERVICES PRIVATE LIMITED,BENGALURU V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BENGALURU

ITTPA 1529/BANG/2024

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Hitachi Energy Technology Services Pvt. Ltd. (formerly ABB Power Technology Services Pvt. Ltd.) appealed against the assessment order for the assessment year 2020-21, which included a transfer pricing adjustment of INR 127,330,000. The adjustment was initially proposed by the Transfer Pricing Officer (TPO) and later modified by the Dispute Resolution Panel (DRP). The main contention in the appeal was the computation of margins for Mahindra Consulting Engineers Ltd., a comparable company, where the assessee argued that bad debts written off were not considered as operating expenses, leading to an incorrect PLI computation. The Tribunal found merit in the assessee's argument and directed a re-computation of the PLI for the said comparable company.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 25096 (ITAT-BANGALORE)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 30-12-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2020-2021
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: KETAN VED
• Keywords: Transfer pricing; International transaction; Bad and doubtful debts; Related party transaction
• Section: 143(3); 144C

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI SOUNDARARAJAN K., JUDICIAL MEMBER IT(TP)A No.1529/Bang/2024 Assessment year: 2020-21 Hitachi Energy Technology Services Pvt. Ltd., (formerly ABB Power Technology Services Pvt. Ltd.) 7th Floor, Brigade Opus, 70/401, Kodigehalli Main Road, Kodigehalli, Bengaluru – 560 092. PAN: AASCA 2682D Vs. The Deputy Commissioner of Income Tax, Circle 3(1)(1), Bengaluru. APPELLANT RESPONDENT Appellant by : Shri Ketan Ved, CA Respondent by : Ms. Nandini Das, CIT(DR)(ITAT), Bengaluru. Date of hearing : 11.12.2024 Date of Pronouncement : 30.12.2024 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Hitachi Energy Technology Services Private Limited (formerly known as ABB Power Technology Services Private Limited) [the assessee/appellant] for assessment year 2020– 21 against the assessment order passed by the Assessment Unit Income Tax Department (the ld. assessing officer) u/s. 143(3) IT(TP)A No.1529/Bang/2024 Page 2 of 10 r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (the Act) wherein the return income of the assessee of Rs.358,786,510/– is assessed at Rs.486,116,510/– incorporating adjustment as per the order of the Assistant Commissioner of Income Tax, Transfer Pricing–1(3)(1), Bangalore (the ld. TPO) making the adjustment of Rs. 127,330,000/–. The learned transfer pricing officer passed an order u/s. 92C(3) of the Act dated 26/5/2023 proposing the transfer pricing adjustment of Rs.151,910,000/– incorporated in the draft assessment order u/s. 144C (1) of the Act dated 26/9/2023 which was objected before the learned Dispute Resolution Panel–1, Bangalore (the ld. DRP) who passed the directions on 31.5.2024 and pursuant to that, the adjustment was restricted to 12,73,30,000/–. 2. The assessee has raised 15 grounds of appeal as under: – “1. That on the facts and circumstances of the case, the Assessment order dated June 18, 2024 passed by the Additional / Joint / Deputy / Assistant Commissioner of Income Tax / Income-tax Officer, National Faceless Assessment Centre, Delhi (hereinafter referred to as \"Ld. Assessing Officer\" or \"Ld. AO\") under section 143(3) r.w.s. 144C(13) and 144B of the Income Tax Act, 1961 the Act\") is bad in law. 2. That on the facts and circumstances of the case, the learned AO / Transfer Pricing Officer (\"TPO\") Dispute Resolution Panel (\"DRP\") have erred in not accepting the economic analysis undertaken by the Company in accordance with the provisions of the Act read with the Income Tax Rules, 1962 he Rules\"), and modifying the same for determination of arm's length price (\"ALP\") of the provision of engineering design services and holding that the said transaction is not at arm's length. IT(TP)A No.1529/Bang/2024 Page 3 of 10 3. That on the facts and circumstance of the case, the Ld. AO / TPO / DRP erred in making a transfer ping adjustment of INR 12,73,30,000 towards provision of engineering design services. 4. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in conducting search using limited keywords as against the robust search criteria performed in the Transfer P-1c.ing (\"TP\") documentation and thereby non- inclusion of various functional comparable companies in the search matrix resulting in narrow comparable set. 5. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in selecting following comparable companies as comparable, despite them failing the test of comparability: • Sikraft Infotech Limited • Genesys International Corporation Ltd 6. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in rejecting following companies considered in TP documentation of the Company despite them passing the test of comparability: • Axiscades Engineering Technologies Limited • May Softech Private Limited • XS Cad India Private Limited 7. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not considering bad debts written off as operating in nature while computing the operating mark-up of Mahindra Consulting Engineers Ltd. 8. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in stating that bad debts written off is an unascertained liability in order to erroneously treat such costs as non-operating item in the operating mark-up computation of comparable companies and thereby failed to differentiate the actual bad debts written off from the provision for bad and doubtful debts as recognised in the statutory books of accounts. 9. That on the facts and circumstances of the case, the learned AO / TPO / DRP have erred in modifying application of IT(TP)A No.1529/Bang/2024 Page 4 of 10 persistent loss filter as adopted by the Assessee without providing any cogent reasons. 10. That on the facts and circumstances of the case, the Ld. AO I TPO / DRP erred in not excluding the Genesys International Corporation Ltd. and Mahindra Consulting Engineers Ltd. despite the fact that these companies failed the TPO's own export filter for 2 out of 3 years which resulted in not satisfying the multiple year data criteria to be adopted for comparability analysis. 11. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not excluding the Sikraft Infotech Private Limited despite the fact that it failed the RPT filter for 2 out of 3 years which resulted in not satisfying the multiple year data criteria to be adopted for comparability analysis. 12. That on the facts and circumstances of the case, the Ld, AO / TPO / DRP erred in applying an export earning filter of 75% of the total sales, leading to a narrower comparable set. 13. That on the facts and circumstances of the case. the Ld. AO / TPO / DRP erred in wrongly computing the operating mark- up of the companies identified as comparable and not rectifying the mistake apparent from record as highlighted by the Assessee in such operating mark-up computation of the comparable companies. 14. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not making suitable adjustments to account for differences in the working capital of the Assessee vis- a-vis the comparable companies. 15. That on the facts and circumstances of the case, the Ld. AO / TPO / DRP erred in not making suitable adjustments to account for differences in the risk profile of the Assessee vis-a- vis the comparable companies.” 3. The brief facts of the case show that the assessee is a company engaged in the business of providing information technology, support activity and caters to the internal need of power grids IT(TP)A No.1529/Bang/2024 Page 5 of 10 business of ABB Hitachi affiliates, including developing software, configuration, testing activity and also deputy engineers on need basis for providing the IT support. The assessee filed its return of income at a total income of Rs.35,87,86,510/– which is selected for the scrutiny under CAAS where one of the reason is large value of international transaction in services in comparison to revenue from sale of services for ITeS and low profitability. Consequently the international transactions of the assessee were referred to the learned transfer pricing officer on 30/1/2022. 4. The assessee as per the documents filed has international transaction of revenue from operation and other income of Rs. 23,611,771,90/- wherein the assessee has three different segment of information technology, information technology enabled services, engineering services and has earned operating profit percentage of 20.95%, 20.22% and 11.64% respectively. The assessee adopted the transactional net margin method as the most appropriate method and selected the profit level indicator of operating profit/operating cost. In the transfer pricing study report, it has considered the benchmarking analysis and the result of its ITeS fellow subsidiary ABB Global Industries and Services Private Limited which has a similar functional profile, wherein seven comparable companies were selected in respect of the engineering services segment. As the margin of the assessee was within the range of the margin of the comparable companies it was stated to be at arm’s-length. IT(TP)A No.1529/Bang/2024 Page 6 of 10 5. The learned transfer pricing officer examined the TP study report and held that assessee has not applied the filter with respect to the significant related party transaction as well as where the insufficient financial information is available. Therefore the learned TPO adopted the filters of use of current year data, similar financial year, companies having turnover less than rupees one crore, companies having 75% of its operating revenues from the business segment, 25% related party transactions of the revenue, export services less than 75%, companies having persistent losses and companies having negative worth. On the basis of these filters, he examined the comparable selected by the assessee and rejected all the seven comparables of the assessee. He carried out fresh search wherein six comparable companies were selected, out of which four companies were selected from AceTP database and three companies were selected from Prowess database. One company was common in both the database and therefore ultimately the financial of six companies were verified wherein the median percentage of the margin of PLI was 23.19%. Accordingly the assessee was issued a show cause notice which was replied to on 17/1/2023 the assessee objected to the filters and also the comparable companies. After considering the objection of the assessee, the learned TPO retained five comparables and computed the average margin of 24.45%. While taking the three years financial data of these five comparables, the financial data for financial year 17–18 and 18–19 were not included, as it either fails IT(TP)A No.1529/Bang/2024 Page 7 of 10 export filter or RPT filter adopted by the TPO. The assessee’s margin was considered at 15.49% compared with average margin of the comparable set at 24.45% and accordingly an adjustment was made at Rs. 151,910,000 by order u/s. 92CA(3) of the Act dated 26/5/2023. 6. The learned dispute resolution panel passed the direction, according to which, the order giving effect was passed by the learned TPO and the adjustment of Rs. 127,330,000 was retained. 7. The learned authorized representative submitted that one comparable company is Mahindra Consulting Engineers Ltd. While computing the margin of the same, the learned AO/TPO and the DRP has not taken into consideration the bad debt written off as operating in nature. He submitted that bad debt written off cannot be an unascertained liability but is an ascertained liability which is written off in the books of the accounts and is different from the provision for bad and doubtful debts. If that adjustment is made, there is no other grievance of the assessee. It was submitted that ground of objection number 10 is with respect to the error in margin computation of the comparable companies. The learned authorized representative referred to the annual accounts of Mahindra Consulting Engineers Ltd and submitted that in note number 23 at (o), bad debts written off is mentioned at 3,23,09,057/–, if the same is adjusted and considered as an operating loss, the margin of that comparable company will IT(TP)A No.1529/Bang/2024 Page 8 of 10 change. He further referred to paragraph number 2.10.1 of direction of the learned dispute resolution panel wherein the learned TPO was directed to adopt the figures as per the annual report and accordingly the PLI of the margins, but despite this fact he has not done so in case of Mahindra Consulting Engineers Ltd. 8. The learned CIT DR vehemently supported the order of the learned lower authorities and with respect to direction of the learned dispute resolution panel, it was submitted that it binds the assessing officer/transfer pricing officer. 9. We have carefully considered the rival contention and perused the orders of the learned lower authorities. The only ground of appeal that has been argued before us is with respect to the computation of the margin in case of Mahindra Consulting Engineers Ltd which has been taken by the learned TPO as a comparable company on fresh search. The argument of the learned authorized representative is that in the computation of PLI of that margin, the learned TPO has not included the bad debts written off which have been disclosed in note number 23 of the profit and loss account. We have carefully perused the profit and loss account of the comparable company and find that at note number 23 – other expenses – (o) bad debts written off of Rs. 32,309,057 are debited. The learned dispute resolution panel also has categorically directed the learned transfer pricing officer to compute the margins of the comparable as per the annual accounts. The learned TPO, despite IT(TP)A No.1529/Bang/2024 Page 9 of 10 the same, has not computed it. According to the provisions of section 144C(10), every direction issued by the dispute resolution panel shall be binding on the assessing officer. Despite the same, as the learned transfer pricing officer has not computed the PLI of the margins as per the annual accounts and specifically in case of Mahindra Consulting Engineers Ltd. is in violation of the provisions of the Act. The learned assessing officer/transfer pricing officer is directed to compute the bad debt expenses as an operating expenditure and then compute the PLI of comparable company i.e. Mahindra Consulting Engineers Ltd. After that, if there is any adjustment on account of arm’s-length price of international transaction, only to that extent it should be retained. Accordingly ground no 7 & 8 of the appeal are allowed. 10. No other Grounds were pressed, hence Ground no. 1 to 6 and 9 to 15 are dismissed as not argued. 11. In the result, the appeal of the assessee is partly allowed for statistical purposes. Pronounced in the open court on this 30th day of December, 2024. Sd/- Sd/- (SOUNDARARAJAN K.) (PRASHANT MAHARISHI) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 30th December 2024. /Desai S Murthy / IT(TP)A No.1529/Bang/2024 Page 10 of 10 Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. "