M/s. Boeing International Corporation India Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 1118/DEL/2014

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5849 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 11-04-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 27-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.1118/DEL./2014 (ASSESSMENT YEAR : 2009-10) BOEING INTERNATIONAL CORPORATION VS. ITO, WARD 3 (1 ), INDIA PRIVATE LIMITED, NEW DELHI. 3 RD FLOOR, DLF CENTRE, SANSAD MARG, NEW DELHI 110 001. (PAN : AACCB3303J) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI KANCHAN KAUSHAL, ADVOCATE REVENUE BY : SHRI H.K. CHOUDHARY, CIT DR DATE OF HEARING : 31.05.2018 DATE OF ORDER : 07.06.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. BOEING INTERNATIONAL CORPORATI ON INDIA PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER ) BY FILING THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORD ER DATED 27.01.2014, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TPO UNDER SECTION 143 (3) REA D WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (FOR SHORT THE AC T) QUA THE ASSESSMENT YEAR 2009-10 ON THE GROUNDS INTER ALIA T HAT :- ITA NO.1118/DEL/2014 2 1. THE LD. AO ERRED IN ASSESSING THE INCOME OF THE APPELLANT AT RS.30,75,37,020/- AS AGAINST THE RETUR NED INCOME DECLARED BY THE APPELLANT AT RS.16,08,18,590 /-. 2. THE LD. AO/ LD. TRANSFER PRICING OFFICER ('TPO') HAS GROSSLY ERRED ON FACTS AND IN LAW IN ENHANCING THE INCOME OF THE APPELLANT BY RS.6,91,66,692 ON ACCOUN T OF INCORRECTLY CHARACTERISING THE APPELLANT AS A TECHN ICAL CONSULTANCY SERVICE PROVIDER WITHOUT TAKING COGNIZA NCE OF THE FACT THAT THERE HAS BEEN NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE BUSINESS OF THE APPELLANT FROM THE IMMEDIATELY PRECEDING YEAR, WHEREIN IT HAS BEEN CHARACTERIZED AS A BUSINESS DEVELOPMENT, ADVISORY A ND OTHER SUPPORT SERVICE PROVIDER AND SUCH CHARACTERIZATION HAS BEEN ACCEPTED IN THE TRANSFER PRICING ('TP') ORDER FOR A Y 2008- 09; 3. PURSUANT TO THE ABOVE ERRONEOUS RE-CHARACTERIZA TION THE LD. AO/ LD. TPO: 3.1 INCORRECTLY REJECTED THE ECONOMIC ANALYSIS AND THE COMPARABLE RESULTS CONTAINED IN THE TP REPORT; 3.2 INCORRECTLY REJECTED COMPARABLES AS FUNCTIONAL LY NOT COMPARABLE WITHOUT TAKING COGNIZANCE OF THE ORDER R ECEIVED FROM THE LD. AO'S OFFICE IN THE APPELLANT'S CASE FO R THE EARLIER YEAR (I.E. AY 2008-09); 3.3 CONDUCTED A FRESH SEARCH FOR COM PARABLES AND IN THE PROCESS INCORRECTLY APPLIED CERTAIN FILTERS TO SELE CT COMPARABLE COMPANIES; 3.4 ARBITRARILY SELECTED COMPANIES ENGAGED IN HIGH END ENGINEERING SERVICES, CONSTRUCTION SERVICES, CERTIF ICATION AND SURVEYS SERVICES AS COM PARABLES, WHICH ARE FUNCTIO NALLY DIFFERENT FROM THE BUSINESS DEVELOPMENT, ADVISORY A ND OTHER SUPPORT SERVICE RENDERED BY THE APPELLANT; 3.5 INCORRECTLY INCLUDED THE REIMBURSEMENTS RECEIV ED BY THE APPELLANT AS A PART OF ITS COST BASE TO ARRIVE AT A LOWER OPERATING PROFIT/ TOTAL COST (OP / TC') MARGIN OF THE APPELLANT; AND 3.6 ERRONEOUSLY COMPUTED THE WORKING CAPITAL ADJUS TMENT TO ARRIVE AT AN INFLATED ARM'S LENGTH MARGIN WITHOU T PROVIDING AN OPPORTUNITY TO BE HEARD. ITA NO.1118/DEL/2014 3 4. THE LD. AO/ LD. TPO INCORRECTLY IMPUTED INTEREST OF RS.7,75,51,735 FOR THE PERIOD OF DELAY IN REALIZATI ON OF RECEIVABLES - 4.1 DISREGARDING THE FACT THAT THE LD. DRP HAD ALL OWED WORKING CAPITAL ADJUSTMENT AND THEREBY HAD ALREADY TAKEN COGNIZANCE OF THE DIFFERENCES IN WORKING CAPITAL (I NCLUDING RECEIVABLES) OF THE APPELLANT VIS-A-VIS THE COM PAR ABLES AND HENCE, A SEPARATE ADJUSTMENT ON RECEIVABLES WAS NOT WARRANTED. 4.2 WITHOUT PREJUDICE TO THE ABOVE SUB-GROUND, THE LD. AO/ LD. TPO CALCULATED THE ADJUSTMENT ON THE OPENIN G BALANCE OF RECEIVABLES FOR THE ENTIRE YEAR (MINUS 3 0 DAYS PAYMENT PERIOD ALLOWED AS PER SERVICE AGREEMENT) WI THOUT CONSIDERING THE ACTUAL AGEING OF THE RECEIVABLES; 4.3 ARBITRARILY APPLYING AN INTEREST AT THE RATE O F 15.77% ON THE ALLEGED DELAY IN THE RECEIPT OF RECEIVABLES. 5. THE LD. AO ERRED IN INITIATING PENALTY PROCEEDI NGS UNDER SECTION 271(1)(C) OF THE ACT. 6. THAT THE LD. AO ERRED IN PROPOSING TO LEVY INTER EST UNDER SECTION 234B, 234C AND 234D OF THE ACT. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TAXPAYER IS WHOLLY OW NED SUBSIDIARY OF BOEING INTERNATIONAL CORPORATION, USA WHICH IS A LSO A SUBSIDIARY OF THE BOEING COMPANY (TBC), ENGAGED IN PROVIDING BUSINESS DEVELOPMENT, ADVISORY AND OTHER SUPPORT SE RVICES TO THE BOEING GROUP ON A COST PLUS BASIS. DURING THE YEAR UNDER TRANSACTION, THE TAXPAYER ENTERED INTO INTERNATIONA L TRANSACTIONS WITH ITS ASSOCIATE ENTERPRISES (AE) AS UNDER :- ITA NO.1118/DEL/2014 4 S.NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1 PROVISION OF SERVICES TNMM 754,641,094 2 PURCHASE OF FIXED ASSETS TNMM 2,739,688 3 REIMBURSEMENT OF EXPENSES (PAID) TNMM 349,831,404 4 REIMBURSEMENT OF EXPENSES (RECEIVED) CUP 11,670,5 26 3. AS PER TP ANALYSIS MADE BY THE ASSESSEE, THE TAX PAYER SERVED AS A COMMUNICATION CHANNEL BETWEEN TBC AND INDIAN C USTOMERS AND ITS PRIMARY FUNCTIONS ARE THE PROVISION OF MARK ETING INFORMATION AND KNOWLEDGE RELATED SUPPORT BOEING GR OUP ENTITIES, WHICH COMPRISES BUSINESS DEVELOPMENT, COLLECTION OF INFORMATION OF BUSINESS ACTIVITIES OF INTEREST OF TBC AND SUPPO RTING SOURCING ACTIVITIES. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER CONTINUED TO PROVIDE COMMUNICATION AND INFORMATION INTERFACE FOR THE COMMERCIAL AIRPLANE MARKET IN INDIA. THE TAXPA YER TEAM IS ALSO ENGAGED IN INTEGRATED DEFENCE SYSTEM SEGMENT, BOEIN G MILITARY AIRCRAFT SEGMENT, NETWORK & SPACE SYSTEMS, GLOBAL S ERVICES & SUPPORT AND BOEING CAPITAL CORPORATION. 4. THE TAXPAYER STATED IN ITS TP DOCUMENTATION THAT IT PROVIDES INTRA-GROUP SUPPORTING SERVICE INVOLVING ANALYSIS A ND VERIFICATION OF PRODUCT DESIGN, PERFORMANCE OF ADEQUACY AND RELI ABILITY, PLANNING AND RESEARCH AND DEVELOPMENT PROGRAMS, ON- SITE REPRESENTATION AND TECHNICAL SUPPORT TO THE CUSTOME R, PARTICIPATION IN TECHNICAL REVIEWS AND APPLICATION OF EXPERTISE I N THE DEFINITION OF ITA NO.1118/DEL/2014 5 NEW DESIGN AND PROCEDURES AND OTHER ASSISTANCE TO M EET CUSTOMERS NEED. 5. ASSESSEE IN ORDER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) WITH OPERATING PROFIT/TOTAL COST (OP/TC) AS PROFIT LEVEL INDICATOR (PLI) FOR ITS TRANSACTIONS RELATING TO PROVISIONS O F SERVICES, PURCHASE OF FIXED ASSETS AND REIMBURSEMENT OF EXPEN SES (PAID), SELECTED 14 COMPARABLES WITH OP/TC AT 13.21% AS AGA INST RESULT OF THE TAXPAYER AT 19.50%. FOR TRANSACTION QUA REIMBU RSEMENT OF EXPENSES, THE TAXPAYER APPLIED CUP METHOD WHICH HAS NOT BEEN BENCHMARKED AS THE EXPENSES HAVE BEEN REIMBURSED ON COST BASIS. 6. TPO IN ITS TP ANALYSIS CHANGED THE CHARACTERIZAT ION OF ASSESSEE FROM A BUSINESS MODEL, ADVISORY AND OTHER SUPPORTING SERVICES PROVIDER TO TECHNICAL CONSULTANCY SERVICE PROVIDER AND FINALLY SELECTED 10 COMPARABLES HAVING AVERAGE OP/T C AT 28.18%. TPO ALSO INCLUDED REIMBURSEMENT EXPENSES RECEIVED B Y THE TAXPAYER IN THE INCOME AS WELL AS COST FOR THE PURP OSE OF DETERMINING THE MARK-UP EARNED BY THE TAXPAYER AND CONSEQUENTLY MARK-UP EARNED BY THE TAXPAYER HAS BEEN REDUCED TO 19.13% FROM 19.50% AND MADE THE ADJUSTMENT OF TRANSFER PRICING AT RS.11,42,15,144/- (PROVISIONS OF TECHNICAL SUPPORT SERVICES ITA NO.1118/DEL/2014 6 RS.5,84,43,117/- + INTEREST IMPOUND ON OUTSTANDING RECEIVABLES RS.5,57,72,027/-). 7. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY FILING OBJECTIONS WHO HAS DISPOSED OF THE OBJECTIONS BY DI RECTING THE AO TO COMPLETE THE ASSESSMENT AS PER DIRECTIONS. FEEL ING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. UNDISPUTEDLY, AFTER THE DIRECTIONS ISSUED BY THE LD. DRP, 10 COMPARABLES HAVE BEEN TAKEN UP TO ARRIVE AT THE FIG URE OF MARK-UP EARNED BY THE COMPARABLE COMPANY IN ORDER TO BENCHM ARK THE INTERNATIONAL TRANSACTION WHICH ARE EXTRACTED AS UN DER :- SL.NO. NAME OF THE COMPANY ADJUSTED OP/TC (%) 1. ALPHAGEO (INDIA) LTD. 19.11% 2. CERTIFICATION ENGINEERS INTERNATIONAL LTD. (CEIL) 95.07% 3. CETHAR CONSULTING ENGINEERS LTD. 27.49% 4. LURGI INDIA PVT. LTD. 8.95% 5 . KIRLOSKAR CONSULTANTS LTD. 18.06% 6 . M N. DASTUR & CO. PVT. LTD. 0.36% 7. MAHINDRA CONSULTING ENGINEERS LTD. 24.32% 8. SEMAC LTD. 26.18% 9. WAPCOS LTD. 28.71% 10. NTPC ELECTRIC SUPPLY CO. LTD. 50.16% AVERAGE 29.84% ITA NO.1118/DEL/2014 7 10. IT IS ALSO NOT IN DISPUTE THAT TPO COMPUTED THE INTEREST ON OUTSTANDING RECEIVABLES BY CONSIDERING CLOSING OUTS TANDING RECEIVABLES AS ON 31.03.2009. IT IS ALSO NOT IN DI SPUTE THAT THE LD. DRP AFTER ACCEPTING THE OBJECTIONS RAISED BY THE AS SESSEE ARRIVED AT THE CONCLUSION THAT THE INTEREST HAS BEEN COMPUTED BY THE TPO FOR THE PERIOD 31.03.2009, WHICH PERTAINS TO THE INCOME FOR THE AY 2010-11 BY RETURNING FOLLOWING FINDINGS :- DATE OF INVOICE AMOUNT OF INVOICE PAYMENT OUTSTANDING DATE OF WHICH PAYMENT WAS RECEIVED PERIOD OF CREDIT PERIOD EXCEED -ING 30 DAYS INTEREST 31-MAR-09 5,49,62,183 1,11,18,337 26-MAY-09 56 26 1 ,24,897 31-MAR-09 43,43,11,566 10,00,00,000 23-JUL-09 114 8 4 36,29,260 1,26,53,195 20-OCT-09 203 173 9,45,769 8.09.16.557 19-FEB-10 325 295 1,03,13,314 24,07,41,813 25-MAR-10 359 329 3,42,20,492 31-MAR-09 4,14,60,331 4,14,60,331 7-MAR-11 706 365 65,38,294 TOTAL 5,57,72,026 11. ASSESSMENT ORDER PASSED BY THE AO GOES TO PROVE THAT HE HAS NOT CARRIED OUT THE DIRECTIONS ISSUED BY THE LD . DRP, SO WE DIRECT AO TO COMPUTE ON INTEREST RECEIVABLES IN ACC ORDANCE WITH THE DIRECTIONS ISSUED BY THE LD. DRP. 12. LD. AR FOR THE ASSESSEE IN ORDER TO CUT SHORT T HE CONTROVERSY HAS CHALLENGED THE FINDINGS RETURNED BY THE TPO/DRP /AO TO THE EXTENT THAT ONLY THREE COMPARABLES VIZ. CERTIFICATI ON ENGINEERS INTERNATIONAL LTD., WAPCOS LTD AND NTPC ELECTRIC SU PPLY CO. LTD., WHICH ARE GOVERNMENT COMPANIES BEING NOT VALI D ITA NO.1118/DEL/2014 8 COMPARABLES VIS--VIS ASSESSEE TO BENCHMARK THE INT ERNATIONAL TRANSACTIONS. 13. THE LD. DR FOR THE REVENUE IN ORDER TO REPEL TH E CONTENTIONS RAISED BY THE ASSESSEE CONTENDED THAT GOVERNMENT CO MPANIES CAN ONLY BE EXCLUDED FROM THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS IF THES E COMPANIES ARE FOUND TO HAVE TAKEN ANY GRANT/SUBSIDY OR BENEFICIAL TREATMENT FROM THE GOVERNMENT IMPACTING THEIR PROFIT. 14. UNDISPUTEDLY, GOVERNMENT COMPANIES ARE ORDINARI LY ESTABLISHED BY THE GOVERNMENT IN ORDER TO ACCELERAT E ITS PUBLIC WELFARE POLICY AND GROWTH OF THE CORE SECTOR AND TO GENERATE EMPLOYMENT AND IT IS ALSO NOT IN DISPUTE THAT INVAR IABLY, THE GOVERNMENT COMPANIES GET CONTRACTS BY GETTING PREFE RENTIAL TREATMENT FROM THE GOVERNMENT AS IN THE CASE OF NBC C, A PUBLIC SECTOR UNDERTAKING, WHICH IS GETTING MOST OF ITS CO NSTRUCTION CONTRACT FROM THE GOVERNMENT OF INDIA. 15. SO, IN VIEW OF THE MATTER, WE ARE OF THE CONSID ERED VIEW THAT THE TPO TO REEXAMINE THE COMPARABILITY OF AFORESAID GOVERNMENT COMPANIES VIS--VIS ASSESSEE FOR BENCHMARKING THE I NTERNATIONAL TRANSACTION BY ANALYZING THE FACTORS IF THESE COMPA NIES ARE GETTING GRANTS/SUBSIDY, PREFERENTIAL TREATMENT IN GETTING C ONTRACTS FROM THE GOVERNMENT WORKING IN CONTROLLED ENVIRONMENT, IMPAC TING THEIR ITA NO.1118/DEL/2014 9 PROFIT IN THE LIGHT OF THE DECISIONS RELIED UPON BY THE ASSESSEE VIZ. HONBLE BOMBAY HIGH COURT IN THYSSEN KRUPP INDUSTR IES (P.) LTD. IN ITA NO.2218 OF 2013, COORDINATE BENCHES OF THE TRIBUNAL IN AT & T COMMUNICATION SERVICES INDIA (P.) LTD. (2 018) 91 TAXMANN.COM 58 (DELHI-TRIB.), BECHTEL INDIA PRIVATE LTD. IN ITA NO.6779/DEL/2015, M/S. WORLEY PARSONS INDIA PVT. LT D. IN ITA NO.273/HYD./2016, M/S. NOVARTIS HEALTHCARE PVT. LTD . IN ITA NO.7643/M/2012 AND BECHTEL INDIA PRIVATE LTD. IN IT A NO.1476 & 1477/DEL/2015 . 16. NEEDLESS TO SAY THAT THE TPO IS ALSO DIRECTED T O EXAMINE THE FUNCTIONAL COMPARABILITY OF ASSESSEE VIS--VIS AFOR ESAID GOVERNMENT COMPANIES IN ORDER TO BENCHMARK THE INTE RNATIONAL TRANSACTION. 17. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE I SSUES IN CONTROVERSY ARE SET ASIDE TO THE FILE OF AO/TPO TO DECIDE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO TH E ASSESSEE IN THE LIGHT OF THE OBSERVATIONS MADE HEREIN ABOVE. HENCE , THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PU RPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 07 TH DAY OF JUNE, 2018. SD/- SD/- (R.K. PANDA) (KULDIP S INGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 7 TH DAY OF JUNE, 2018/TS ITA NO.1118/DEL/2014 10 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.