The DCIT(OSD)Range-1, Ahmedabad V. Babtie Consultants (India) Pvt.Ltd., Ahmedabad

ITA 1018/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 94257 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 4 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 20-07-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 07-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C O NO AHD
• Assessee Lawyers: IN ITA NO AHD ASSESSMENT YEAR
• Keywords: Related party transaction; Depreciation; Transfer pricing; Onus to prove

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI KUL BHARAT, JUDICIAL MEMBER ./ ITA NO. 1018/AHD/2011(BY REVENUE) C.O. NO.128/ AHD/2011 (BY ASSESSEE) (IN ITA. NO.1018/AHD/2011) / ASSESSMENT YEAR: 2005-06 DEPUTY COMMISSIONER OF INCOME TAX (1) AHMEDABAD. V/S. BABITE CONSULTANTS (INDIA) PRIVATE LTD., 8 3 NEW YORK TOWER, NEAR THALTEJ ROAD, THALTEJ, AHMEDABAD. PAN :AAACB 6233 B / (APPELLANT) / (RESPONDENT) REVENUE BY : SHRI NARENDRA SINGH, SR.D.R. ASSESSEE(S) BY : SHRI S.N. SOPARKAR, SR. ADV. / DATE OF HEARING : 20-07-2015 / DATE OF PRONOUNCEMENT : 20/08/2015 / O R D E R PER G.D. AGRAWAL, VICE PRESIDENT: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-VI, AH MEDABAD DATED 18.01.2011 FOR ASSESSMENT YEAR 2005-06. I.T.A. NO.1018/AHD/2011. ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 2 2. THE ONLY GROUND RAISED IN THIS APPEAL BY THE REV ENUE READS AS UNDER:- 1 THE LD. CIT (A) ERRED IN LAW AND ON FACTS IN DELE TING THE ADDITION OF RS.56,75,810/- MADE ON ACCOUNT OF TPO O RDER U/S. 92CA(3) OF THE ACT. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY WHICH DERIVES INCOME FROM THE BUSINESS OF E NGINEERING AND RELATED ACTIVITIES. FOR THE YEAR UNDER CONSIDERATI ON THE OPERATING MARGIN OF THE ASSESSEE WAS 10.23%. THE TRANSFER PRI CING OFFICER WORKED OUT OPERATING MARGIN OF COMPARABLES AT 22.47 % AS UNDER:- 1. TCE CONSULTING ENGINEERS LTD. 24.02% 2. WATER & POWER CONSULTANCY SERVICES LTD. 9.33% 3. L & T SARGENT & LUNDRY LTD. 4.32% 4. AGRIMA CONSULTANTS INTERNATIONAL LTD. 3.05% 5. ALPHAGEO (INDIA)LTD. 16.92% 6. CERTIFICATION ENGINEERS INTERNATIONAL LTD. 93.32% 7. HICON TECHNOCONSULT LTD. 6.31% ARITHMETIC MEAN 22.47% APPLYING THE 22.47% AS OPERATING MARGIN OF THE ASS ESSEE THE TPO PROPOSED THE TRANSFER PRICING ADJUSTMENT AT RS.56,7 5,810/-. ASSESSING OFFICER COMPLETED THE ASSESSMENT AFTER MAKING THE A DDITION OF RS.56,75,810/- AS THE TRANSFER PRICING ADJUSTMENT. ON APPEAL, THE LD. ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 3 CIT (A) EXCLUDED THE CERTIFICATION ENGINEERING INTE RNATIONAL LTD., (FOR SHORT CEIL) FROM THE COMPARABLE FOR WORKING OUT THE OPERATING MARGIN OF COMPARABLES. AFTER EXCLUDING THE CEIL FRO M COMPARABLE OPERATING MARGIN OF THE COMPARABLE WORKS OUT TO ARO UND 10% THAT WAS ALMOST THE SAME AS THE OPERATING MARGIN OF THE ASSE SSEE. THEREFORE, CIT (A) DELETED THE ADDITION MADE BY THE A.O. RELEV ANT FINDING OF THE CIT (A) READS AS UNDER:- 1. CERTIFICATION ENGINEERS INTERNATIONAL LTD., WAS HA VING ABNORMAL PROFIT OF 94% WHICH IS FAR AWAY FROM TH E BEST IN THE INDUSTRY. SUCH COMPANY CANNOT BE COMPARED FOR PROFITABILITY SINCE SUCH HIGH PROFITABILITY IS ON A CCOUNT OF ABNORMAL FACTORS NOT APPLICABLE TO OTHER COMPANIES IN THE SAME LINE. THE PRICES ARE ALSO REGULATED BY THE GOV ERNMENT HENCE PROFITABILITY OF THIS COMPANY CANNOT BE COMPA RED WITH FAIR MARKET PRICE. 2. FROM THE DETAILS SUBMITTED BY THE APPELLANT, IT IS CLEAR THAT THIS COMPANY IS HAVING CONTROLLED TRANSACTIONS TO T HE EXTENT OF MORE THAN 50% AND THEREFORE THE SAME CANNOT BE CONSIDERED AS COMPARABLE IN VIEW OF THE DECISION OF ITAT DELHI DISCUSSED BY THE APPELLANT IN ITS SUBMISSION. 3. THE ACTIVITIES OF THIS COMPANY ARE QUITE DIFFERENT THAN THE APPELLANT COMPANY. IN A BROAD CATEGORIZATION, BOTH THE COMPANIES MAY BE PUT IN SAME BROADER CATEGORY BUT T HERE IS NO FUNCTIONAL SIMILARITY. AS DISCUSSED EARLIER AND DETAILED BY THE APPELLANT, THERE ARE NO COMMON FUNCTIONS OR LIN E OF BUSINESS CARRIED ON BY THE APPELLANT AND CERTIFICAT ION ENGINEERS INTERNATIONAL LIMITED. IN ABSENCE OF SAME LINE OF BUSINESS AND FUNCTIONAL SIMILARITY, THE PROFITABILI TY OF THIS COMPANY CANNOT BE COMPARED WITH THE APPELLANT. IN VIEW OF THE ABOVE, CERTIFICATION ENGINEERS INTER NATIONAL LIMITED IS NOT A COMPARABLE AS FAR AS PROFITABILITY IS CONCERNED. I AGREE ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 4 WITH THE APPELLANT THAT THIS COMPANY HAS TO BE EXCL UDED WHILE WORKING OUT PROFIT MARGIN IN THE INDUSTRY. IF THIS COMPANY IS EXCLUDED, EVEN AS PER TPOS CALCULATION THE AVERAGE PROFIT GETS REDUC ED TO ABOUT 10% WHICH IS MARGIN OF PROFIT OF THE APPELLANT. AFTER C ONSIDERING SAFE HARBOR RULE OF +- 5, NO ADJUSTMENT CAN BE MADE TO THE INTE RNATIONAL TRANSACTION OF THE APPELLANT WITH RELATED PARTIES. ACCORDINGLY THE ADJUSTMENT MADE BY THE TPO IS DELETED. 4. AGGRIEVED WITH THE ORDER OF CIT (A), REVENUE IS NOW IN APPEAL BEFORE US. AT THE TIME OF HEARING BEFORE US THE MAI N CONTENTION OF THE LD. D.R. WAS THAT THE ASSESSEE ITSELF HAS TAKEN THE CEI LTD., AS ONE OF THE COMPARABLE. HE ALSO SUBMITTED THAT NO EVIDENCE IS PRODUCED BY THE ASSESSEE SO AS TO ESTABLISH THAT THE RELATED PA RTY TRANSACTION OF CEI LTD., WAS MORE THAN 50%. HE THEREFORE, SUBMITTED TH AT THE ORDER OF THE LD. CIT (A) SHOULD BE REVERSED AND THAT OF ASSESSIN G OFFICER BE RESTORED. 5. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HA ND REFERRED TO THE REPLY FURNISHED BEFORE THE ASSESSING OFFICER DU RING THE ASSESSMENT PROCEEDINGS AND POINTED OUT THAT THE ASSESSEE HAS N OT CONSIDERED THE CEI LTD., AS COMPARABLE IN HIS SUBMISSION. HE REFER RED TO THE ASSESSEES SUBMISSION DATED 3-10-2008 AS WELL AS D ATED 13-10-2008 FURNISHED BEFORE THE A.O. HE ALSO STATED THAT EVEN IF THE ASSESSEE HAS CONSIDERED THE COMPANY AS A COMPARABLE BUT IF ITS M ARGIN IS EXTRA ORDINARY AND IT HAS MORE THAN 50% TRANSACTION WITH THE RELATED PARTIES THEN THE SAME CANNOT BE CONSIDERED AS A PROPER COMP ARABLE. HE POINTED OUT THAT IN LARGE NUMBER OF CASES, ITAT HAS TAKEN VIEW THAT IF ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 5 RELATED PARTY TRANSACTION IS MORE THAN 25% THEN THE SAID COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. IN SUPPORT OF HIS CONTENTION HE RELIED ON THE FOLLOWING DECISIONS:- 1. DELHI ITAT IN THE CASE OF GLOBAL LOGIC INDIA (P) LTD. VS. DCIT (12 TAXMANN.COM 295. 2. MUMBAI ITAT IN THE CASE OF ACIT VS. HAPAG LLOYD GLOBAL SERVICES (P) LTD. (34 TAXMANN.COM.241). 3. MUMBAI ITAT IN THE CASE OF ACIT VS. ZEE ENTERTAI NMENT ENTERPRISES LTD. (ITA NO.2414/MUM/2013). 4. BANGALORE ITAT IN THE CASE OF M/S. CISCO SYSTEM S (INDIA) PVT. LTD. VS. DCIT (IT (TP) A. NO.271/BANG/2014). 5. DELHI ITAT IN THE CASE OF TOLUNA INDIA PVT. LTD. VS. ACIT (ITA NO.5645/DEL/2011). 6. DELHI ITAT IN THE CASE OF ACTIS ADVISERS PVT. LT D. VS. DCIT (ITA NO. 5277/DEL/2011). 7. HYDERABAD ITAT IN THE CASE OF ADP (P) LTD. VS. D CIT (45 SOT 172). 6. HE ALSO REFERRED TO THE ANNUAL REPORT AND ACCOUN T OF CEI L AND POINTED OUT AT PAGE-3 OF THE SCHEDULE-I, WHICH CONT AIN THE DETAILS OF RELATED PARTY TRANSACTION. THE SCHEDULE IS REPRODUC ED BELOW FOR READY REFERENCE. RELATED PARTY TRANSACTIONS. ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 6 DURING THE YEAR, ENDED 31 ST MARCH, 2005 THE COMP[ANY HAD FOLLOWING TRANSACTIONS WITH RELATED PARTIES:- ( RS. IN THOUSANDS) NAME OF RELATED PARTY. PARTICULARS RELATIONSHIP. AMOUNT PAYABLE/ RECEIVABLE AS ON 31-3-2005 ENGINEERS INDIA LIMITED PURCHASE OF PROFESSIONAL AND TECHNICAL SERVICES AND FACILITIES HOLDING COMPANY. 89,310.74 (53,598.70) PAYABLE 11,682.08 (RS.13,550.46) -DO- EXECUTION OF CONTRACT FOR TPI SERVICE. -DO- 27,292.64 (NIL) RECEIVABLE 11,496.55 (NIL) -DO- DIVIDEND -DO- 20,000.00 (NIL) IT WAS STATED BY THE LD. COUNSEL FOR THE ASSESSEE T HAT INCOME FROM SERVICES RENDERED BY CEIL IS 2,11,885 THOUSAND AND THE RELATED PARTY TRANSACTION AS PER ABOVE SCHEDULE IS 1,16,603 THOUS AND. THUS RELATED PARTY TRANSACTION IS MORE THAN 50% OF THE RECEIPT O F CEIL. HE THEREFORE, SUBMITTED THAT THE CIT (A) WAS FULLY JUS TIFIED IN EXCLUDING THE CEIL FROM COMPARABLE. 7. WE HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF BO TH THE SIDES AND PERUSED THE MATERIAL PLACED BEFORE US. IT IS NO T IN DISPUTE THAT THE NET PROFIT OF CEI LTD., WAS 93.32% WHICH WAS ABNORM ALLY HIGH AND THEREFORE, THE PROBABILITY OF SOME ABNORMAL FACTOR FOR SUCH HIGH PROFIT CANNOT BE RULED OUT. THIS OPINION OF THE CIT (A) HA S NOT BEEN CONTROVERTED BEFORE US. CIT (A) HAS ALSO RECORDED T HAT THE CEI LTD., IS A GOVERNMENT OF INDIA UNDERTAKING AND ITS PRICES ARE REGULATED BY THE ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 7 GOVERNMENT AND THEREFORE IT CANNOT BE COMPARED WITH NON GOVERNMENT COMPANY WHOSE PRICES ARE DETERMINED BY T HE MARKET FORCES. CIT (A) HAS ALSO RECORDED THE FACT THAT THE RELATED PARTY TRANSACTION IN THE CASE OF CEI LTD., WAS MORE THAN 50%. THIS HAS ALSO NOT BEEN CONTROVERTED BY THE LD. D.R. THE VARIOUS B ENCHES OF ITAT, THE LIST OF WHICH GIVEN ABOVE IN PARAGRAPH- 5 HAS T AKEN THE CONSISTENT VIEW THAT IF THE RELATED PARTY TRANSACTION IS MORE THAN 25% THEN SUCH ENTITY CANNOT BE TAKEN TO BE A PROPER COMPARABLE. IN VIEW OF THESE FACTS WE ARE OF THE OPINION THAT THE CIT (A) WAS FU LLY JUSTIFIED IN EXCLUDING THE CEI LTD., FROM COMPARABLE. IT IS NOT IN DISPUTE THAT WHEN THE CEIL IS EXCLUDED FROM COMPARABLE THEN THE OPERATING MARGIN OF COMPARABLE FALLS WITHIN THE AMBIT OF +-5% OPERATING MARGIN OF THE ASSESSEE. THEREFORE, IN OUR OPINION, THE CIT (A) RIGHTLY DELETED THE ADDITION MADE BY THE A.O. ON ACCOUNT OF TRANSFE R PRICING ADJUSTMENT. HIS ORDER IS UPHELD AND REVENUES APPEA L IS DISMISSED. 8. C.O. NO.128/AHD/2011 - IN THE CROSS OBJECTION VARIOUS GROUNDS ARE RAISED HOWEVER AT THE TIME OF HEARING, BEFORE US THE ONLY GROUND CONTENDE D BY THE LD. COUNSEL WAS WITH REGARD TO THE ALLOCATION OF DEPREC IATION BETWEEN THE TWO UNITS OF THE ASSESSEE-COMPANY. THE FACTS OF THE CASE ARE THAT THE ASSESSEE HAS TWO UNITS ONE OF WHICH IS ENTITLED FOR EXEMPTION U/S. 10A. IT WAS CONTENDED BY THE LD. COUNSEL THAT THE ASSESS EE HAS MAINTAINED SEPARATE BOOKS OF ACCOUNTS FOR BOTH THE UNITS AND T HE DEPRECIATION ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 8 HAVE BEEN DEBITED FOR EACH UNIT ON THE BASIS OF THE ASSETS IN EACH UNIT. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE T URNOVER OF THE UNIT WHICH IS ENTITLED TO EXEMPTION U/S. 10A WAS TWICE T HE TURNOVER OF THE UNIT WHICH DID NOT HAVE THE EXEMPTION. HE THEREFOR E, ALLOCATED TOTAL DEPRECIATION IN THE RATIO OF TURNOVER OF BOTH THE U NITS. CIT (A) SUSTAINED THE ORDER OF THE A.O. WITH THE FOLLOWING FINDING. 2.3. I HAVE CONSIDERED THE FACTS OF THE CASE, ASSE SSMENT ORDER AND APPELLANTS SUBMISSION. APPELLANT CLAIMED HIGHER DE PRECIATION IN NON- EXEMPT UNIT AS COMPARED TO EXEMPT UNIT. THE REASONS FOR THAT ARE AUDITOR HAS CERTIFIED THE CLAIM AND SEPARATE ASSET REGISTERS ARE KEPT FOR BOTH THE UNITS. HOWEVER ASSESSING OFFICER FOUND TH AT VEHICLES, PLANT AND MACHINERY AND COMPUTER SOFTWARE ARE MORE RELATE D TO TURNOVER AND THEREFORE THE USE OF THESE ASSETS SHOULD BE ALLOCAT ED ON THE BASIS OF TURNOVER. THE MAINTENANCE OF SEPARATE REGISTER FOR FIXED ASSETS CANNOT PRECLUDE APPELLANTS ONE UNIT USING OTHER UNITS AS SETS. DEPRECIATION IS CLAIMED ON USE OF THE ASSETS AND NOT ON WHOSE REGIS TER THE ASSET IS RECORDED. THERE IS ALWAYS A TENDENCY TO CLAIM MORE EXPENSES IN NON- EXEMPT UNIT SO THAT OVERALL TAX IMPACT CAN BE REDUC ED. ONE CANNOT DENY THE FACT THAT USE OF EQUIPMENT AND MACHINES AR E RELATABLE TO OPERATIONS AND MORE SPECIFICALLY TURNOVER. SINCE A PPELLANT DID NOT SUBMIT ANY REASON, APART FROM WHAT IS MENTIONED AND DISCUSSED EARLIER, FOR CLAIMING HIGHER DEPRECIATION IN NON-EXEMPT UNIT AS COMPARED TO EXEMPT UNIT, I AGREE WITH THE ASSESSING OFFICER THA T DEPRECIATION SHOULD BE ALLOCATED ON THE BASIS OF TURNOVER. ONUS TO PROVE THE CORRECTNESS OF ANY CLAIM IS ON APPELLANT WHICH WAS NOT DISCHARGED. ACCORDINGLY THE ADDITION MADE BY THE ASSESSING OFFI CER IS CONFIRMED. 9. ASSESSEE AGGRIEVED WITH THE ORDER OF THE CIT (A) IS IN CROSS OBJECTION. ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 9 10. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED BEFORE US. IN OUR OPINION SO FAR AS THE PLANT AND M ACHINERY OF EACH UNIT IS CONCERNED THE DEPRECIATION HAS TO BE ALLOWE D INDEPENDENTLY UNITWISE I.E. DEPRECIATION ON THE PLANT AND MACHINE RY FOR THE UNIT WHICH IS ENTITLED TO EXEMPTION U/S. 10A IS TO BE CO NSIDERED WHILE DETERMINING THE PROFIT OF THE SAID UNIT AND SIMILAR LY PLANT AND MACHINERY OF THE UNIT WHICH IS NOT ENTITLED TO EXEM PTION U/S. 10A IS TO BE CONSIDERED WHILE CONSIDERING THE PROFIT OF SAID UNIT. HOWEVER, SO FAR AS THE OFFICE EQUIPMENT, FURNITURE AND FIXTURES , VEHICLES ETC., ARE CONCERNED IN OUR OPINION IT WOULD BE UTILIZED FOR B OTH THE UNITS AND IT WAS IMMATERIAL IN WHICH UNIT THE ASSET IS DEBITED. IT IS NOT THE CASE OF THE ASSESSEE THAT THERE IS ABSOLUTELY SEPARATE AND INDEPENDENT OFFICE FOR BOTH THE UNITS OR THE VEHICLES OF BOTH THE UNIT S ARE ABSOLUTELY SEPARATE. ADMITTEDLY BOTH THE UNITS ARE SITUATED I N THE SAME FACTORY BUILDING. IT IS ALSO NOT DISPUTED THAT THE OFFICE I S ONLY ONE FROM WHERE THE ACTIVITY OF BOTH THE UNITS ARE BEING MANAGED. T HEREFORE, WE UPHOLD THE FINDING OF A.O. FOR ALLOCATING DEPRECIATION OF OFFICE EQUIPMENT, FURNITURE AND FIXTURES, VEHICLE ETC. ON THE BASIS O F TURNOVER OF BOTH THE UNITS. SO FAR AS THE COMPUTER SOFTWARE IS CONCERNED IN OUR OPINION THE COMPUTER SOFTWARES WHICH ARE RELATED TO OFFICE EQUI PMENT OR ACCOUNTING SYSTEM ETC., ARE TO BE ALLOCATED ON THE BASIS OF TURNOVER AND IF ANY SOFTWARE IS RELATED TO PLANT AND MACHINERY O R MANUFACTURING ACTIVITY THEN THE SAME HAS TO BE CONSIDERED IN THE UNIT TO WHICH SUCH PLANT AND MACHINERY IS RELATED. THE ASSESSING OFFI CER WILL RE-WORK OUT THE DEPRECIATION AS PER THE DIRECTION ABOVE. ITA NO1018/AHD/2011 WITH .O.NO.128/AHD/2011 DY.CIT VS. BABITE CONSULTANTS(INDIA) P.LTD. FOR A.Y. 2005-06. 10 11. IN THE RESULT, REVENUES APPEAL IS DISMISSED WH ILE ASSESSEES CROSS OBJECTION IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 20TH AUGUST, 2015 AT AHMEDABAD. /- SD/- SD/- ( KUL BHARAT) JUDICIAL MEMBER (G.D. AGRAWAL) VICE-PRESIDENT AHMEDABAD; DATED 20 /08/2015 PATKI. !'!# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. !' # / CONCERNED CIT 4. # ( ) / THE CIT(A) 5. &'( ' , ' , ! / DR, ITAT, AHMEDABAD 6. (-. / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD