Marubeni-Itochu Steel India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 1716/DEL/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6794 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 11-02-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 24-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUMIT ARORA CAS
• Keywords: Depreciation; Transfer pricing; International transaction; Capital expenditure
• Section: 10B; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I-1: NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.1716/DEL/2014 ASSESSMENT YEAR: 2007-08 MARUBENI-ITOCHU STEEL INDIA PVT. LTD., 806-814, 8 TH FLOOR, AMBADEEP BUILDING, 14, KASTURBA GANDHI MARG, NEW DELHI. PAN: AAECM6453G VS. DCIT, CIRCLE-6(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI HIMANSHU SINHA, ADVOCATE, SHRI LALIT ATTAL, SHRI AMIT PANWAR, MS PRIYA KOHLI & SHRI SUMIT ARORA, CAS DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT,DR SHRI DEEPAK TIWARI, SR. DR DATE OF HEARING : 11.02.2016 DATE OF PRONOUNCEMENT : 15.02.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER PASSED BY THE CIT(A) ON 22.1.2014 IN RELATION TO THE ASSESSME NT YEAR 2007-08. ITA NO.1716/DEL/2014 2 2. THE FIRST ISSUE IS AGAINST THE CONFIRMATION OF A DDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT M ARUBENI ITOCHU STEEL INC., TOKYO, JAPAN (MCJ) IS INVOLVED IN DOMESTIC TR ADING, IMPORT/EXPORT AND OVERSEAS TRADING OF IRON AND STEEL AND OTHER RE LATED PRODUCTS. THE ASSESSEE IS A SERVICE PROVIDER TO MCJ. IT REPORTED FOUR INTERNATIONAL TRANSACTIONS IN FORM NO.3CEB. THE DISPUTE IN THE I NSTANT APPEAL IS ONLY IN RESPECT OF THE INTERNATIONAL TRANSACTION OF : P ROVISION OF SUPPORT SERVICES FOR TRANSACTIONS, INFORMATION SUPPORT SERV ICES WITH TRANSACTED VALUE OF RS.4,07,07,698/-. THE ASSESSING OFFICER ( AO) REFERRED THESE INTERNATIONAL TRANSACTIONS TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THEIR ARMS LENGTH PRICE (ALP). THE TP O DISPUTED ONLY THE INTERNATIONAL TRANSACTION OF PROVISION OF SUPPORT S ERVICES. HE NOTICED THAT THESE SERVICES WERE IN THE NATURE OF BUSINESS SUPPORT SERVICES AND NOT IT ENABLED SERVICES. THE ASSESSEE APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH THE PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COST (OP/TC). THE ITA NO.1716/DEL/2014 3 ASSESSEE COMPUTED ITS OP/TC AT 10.39%. 14 COMPANIE S WERE CHOSEN AS COMPARABLE WITH THEIR AVERAGE OP/OC AT 8.18% WITH A VIEW TO DEMONSTRATE THAT THIS INTERNATIONAL TRANSACTION WAS AT ALP. THE TPO ACCEPTED THE ASSESSEES CONTENTION ABOUT THE ADOPTI ON OF TNMM AS THE MOST APPROPRIATE METHOD WITH PLI OF OP/TC. HE DID NOT CONSIDER THE MULTIPLE YEAR DATA AS ADOPTED BY THE ASSESSEE FOR I TS COMPARABLES, WHICH FACT HAS NOT BEEN DISPUTED BY THE LD. AR BEFORE US AS WELL. THE TPO REFUSED TO ACCEPT ANY OF THE COMPANIES TAKEN BY THE ASSESSEE AS COMPARABLE. HE SELECTED NINE NEW COMPANIES AS COMP ARABLE. AVERAGE OPERATING PROFIT MARGIN OF THESE COMPANIES WAS DETE RMINED AT 19.3%. BY APPLYING THE SAME AS BENCHMARK, THE TPO RECOMMEN DED TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.25,36,526/-, WH ICH WAS MADE BY THE AO. THE ASSESSEE ASSAILED SUCH TRANSFER PRICIN G ADDITION BEFORE THE LD. FIRST APPELLATE AUTHORITY, BUT WITHOUT ANY SUCC ESS. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL ON RECORD. THE LD. AR DID NOT CHALLENGE T HE DETERMINATION OF ASSESSEES PLI BY THE TPO. HIS ENTIRE FOCUS WAS ON EXCLUSION OF CERTAIN ITA NO.1716/DEL/2014 4 COMPANIES FROM THE TPOS FINAL LIST OF COMPARABLES AND INCLUSION OF COMPANIES WHICH WERE EXCLUDED BY THE TPO. 5. BEFORE CONSIDERING THE COMPARABILITY OR OTHERWIS E OF THESE COMPANIES, WE WANT TO HIGHLIGHT THE NATURE OF ACTIV ITY CARRIED OUT BY THE ASSESSEE, WHICH HAS BEEN INCORPORATED BY THE TPO IN HIS ORDER ITSELF. HE HAS ADMITTED THAT THE ASSESSEE WAS RENDERING BUSINE SS SUPPORT SERVICES IN THE NATURE OF : - -COLLECTION OF INFORMATION REGARDING NEW CUSTOMERS, -REPORTING OF MARKET CONDITIONS, -SOURCING OF NEW/EXISTING CUSTOMERS, -PROVIDING INFORMATION, GUIDANCE AND ASSISTANCE, -FACILITATE COMMUNICATION, -ASSIST IN FOLLOWING UP FOR PAYMENT, -COLLECTION AND COMPILING OF MARKET INFORMATION AND -SERVICES AVAILED ON INFORMATION, MARKET AND ECONOM IC RESEARCH. 6. ON A HOLISTIC BASIS, IT IS EVIDENT FROM THE AB OVE THAT THE ASSESSEE PROVIDED BUSINESS SUPPORT SERVICES IN THE NATURE OF PRE-SALE/PURCHASE AND POST-SALE/PURCHASE TO ITS ASSOCIATED ENTERPRISES (A ES). THE LD. AR ITA NO.1716/DEL/2014 5 INVITED OUR ATTENTION TOWARDS SERVICE AGREEMENT ENT ERED INTO BY THE ASSESSEE WITH MIT, ITS AE, A COPY OF WHICH IS AVAIL ABLE IN THE PAPER BOOK. AS PER TERMS AND CONDITIONS OF THIS AGREEMENT , THE ASSESSEE IS REQUIRED TO RENDER THE FOLLOWING SERVICES TO MARUTI WITH RESPECT TO ITS TWB, ON BEHALF OF ITS AE :- I. MIIP (I.E. THE ASSESSEE) IS A MEDIATOR OR COMMUNICA TION BETWEEN MARUTI AND MIT FOR TWB BUSINESS; II. MIIP VISITS MARUTI TO DISCUSS ABOUT ISSUES CONCERNE D TWB BUSINESS UPON REQUEST OF MIT; AND III. MIIP SHALL PROVIDE MIT THE NECESSARY INFORMATION RE GARDING THE TWB BUSINESS. 7. ON GOING THROUGH THE RELEVANT CLAUSES OF THIS AG REEMENT, IT IS PALPABLE THAT THE ASSESSEE IS FACILITATING SALE OF CERTAIN PRODUCTS REQUIRED BY MARUTI TO BE SUPPLIED BY MIT. ON A SPECIFIC QUE RY, THE LD. AR SUBMITTED THAT THERE IS NO OTHER WRITTEN AGREEMENT BETWEEN THE ASSESSEE AND OTHER AES. HE HOWEVER MAINTAINED THAT THE NATUR E OF SERVICES PROVIDED TO ITS OTHER AES IS SIMILAR TO WHAT HAS BE EN RECORDED BY THE ITA NO.1716/DEL/2014 6 TPO ON PAGE 2 OF HIS ORDER. THE LD. DR OBJECTED TO THE SAME BY SUBMITTING THAT IN THE ABSENCE OF ANY OTHER AGREEME NT, THROWING LIGHT ON THE WORK DONE BY THE ASSESSEE, IT WOULD BE DIFFICUL T TO APPRECIATE THE TRUE NATURE OF THE ASSESSEES WORK AND THE CONSEQUENTIAL COMPARABILITY OF THE COMPANIES UNDER CHALLENGE. HE PLEADED THAT THE ENTI RE MATTER BE RESTORED TO THE FILE OF TPO. 8. WE ARE NOT CONVINCED WITH THIS SUBMISSION ADV ANCED ON BEHALF OF THE REVENUE URGING RESTORATION FOR A DE NOVO ADJUDICATION AT THE TPOS END. A SIMPLE AND PLAIN REASON FOR OUR THIS DECISIO N IS THAT THE TPO HAS CATEGORICALLY RECORDED THE NATURE OF SERVICES RENDE RED BY THE ASSESSEE WITHOUT ANY DISPUTE AND HAS ALSO CHARACTERIZED THE SAME AS BUSINESS SUPPORT SERVICES. HE HAS NOWHERE DISPUTED THE REAL NATURE OF SERVICES PROVIDED BY THE ASSESSEE AND SPECIFICALLY NOTED THA T NONE OF THE SERVICES RENDERED BY THE ASSESSEE ARE ITES. THE AGREEMENT E NTERED INTO BY THE ASSESSEE WITH MIT, AS DISCUSSED ABOVE, IS A CLEAR P OINTER THAT THE SERVICES RENDERED BY IT ARE MORE OR LESS OF THE SAM E KIND BEING, PRE-SALE AND POST-SALE OF PRODUCTS BY ITS AE TO MARUTI. TH E LD. DR HAS NOT ITA NO.1716/DEL/2014 7 PLACED ON RECORD ANY MATERIAL TO CONTROVERT THE FAC TUAL FINDING RECORDED BY THE TPO QUA THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE. WE COULD HAVE ENTERTAINED HIS OBJECTION ON DEMONSTRATI NG THAT THE CONTENTS OF THE AGREEMENT WITH MIT RUN CONTRARY TO WHAT THE TPO HAS RECORDED. IN FACT, THE TPO HAS RECORDED THE NATURE OF SERVICE S PROVIDED BY THE ASSESSEE, WHICH IS ALMOST IN SYNC WITH WHAT HAS BE EN PUT FORTH BEFORE US THROUGH THE AGREEMENT. IN THE ABSENCE OF ANY CONTRA RY MATERIAL BROUGHT ON RECORD BY THE LD. DR SHOWING SOME INCONSISTENCY BETWEEN THE AGREEMENT AND THE FACTUAL RECORDINGS BY THE TPO, WE ARE NOT CONVINCED WITH THE VIEW CANVASSED BY HIM THAT THE MATTER BE R ESTORED TO THE TPO FOR A FRESH DETERMINATION OF THE ALP OF THE INTERNA TIONAL TRANSACTION AFTER ASCERTAINING THE TRUE NATURE OF THE SERVICES RENDER ED BY THE ASSESSEE. AS SUCH, WE DECLINE TO ACCEPT THE LD. DRS OBJECTION I N RESTORING THE MATTER TO THE FILE OF TPO FOR ESTABLISHING THE NATURE OF S ERVICES PROVIDED BY THE ASSESSEE. 9. IN THE BACKDROP OF THE NATURE OF SERVICES RE NDERED BY THE ASSESSEE, AS FLOWING FROM THE TPOS ORDER AND AGREEMENT WITH MIT, WE NOW ITA NO.1716/DEL/2014 8 PROCEED TO EXAMINE THE COMPARABILITY OR OTHERWISE O F THE COMPANIES CHALLENGED BY THE ASSESSEE FROM THE LIST OF COMPARA BLES DRAWN BY THE TPO. (I) APITCO LTD. 10.1. THIS COMPANY WAS SELECTED BY THE TPO AS CO MPARABLE. THERE IS NO DISCUSSION IN THE TPOS ORDER ABOUT THE FUNCTION AL PROFILE OF THIS COMPANY. THE LD. CIT(A) UPHELD ITS INCLUSION BY OB SERVING IN PARA 7 OF THE IMPUGNED ORDER THAT IT CARRIED OUT FUNCTIONS AK IN TO THAT OF THE ASSESSEE, SUCH AS, MARKET/OTHER SERVICES AND ARRANG ING OF SEMINARS AND TRAINING, ETC. 10.2. WE HAVE ANALYZED THE ANNUAL REPORT OF THIS COMPANY, WHICH IS AVAILABLE AT PAGE 827 OF THE PAPER BOOK. FROM THIS REPORT, IT CAN BE SEEN THAT ITS `INCOME FROM OPERATIONS STANDS AT RS.12,4 8,20,104/-, BREAK-UP OF WHICH HAS BEEN GIVEN AS PER SCHEDULE 11, AS UNDE R:- INCOME FROM OPERATIONS MICRO ENTERPRISES DEVELOPMENT SKILL DEVELOPMENT ENTREPRENEURSHIP DEVELOPMENT TOURISM & RESEARCH STUDIES 20,933,20 18,071,150 4,925,000 10,604,900 ITA NO.1716/DEL/2014 9 PROJECT RELATED SERVICES, INFRASTRUCTURE PLANNING & DEVELOPMENT ENVIRONMENT MANAGEMENT ENERGY RELATED SERVICES CLUSTER DEVELOPMENT ASSET RECONSTRUCTION & MANAGEMENT SERVICES EMERGING AREAS 20,104,180 11,973,280 524,979 9,712,000 2,824,012 25,146,403 10.3. A CAREFUL PERUSAL OF THE OPERATIONS CARRIE D OUT BY APITCO LIMITED DIVULGES THAT IT IS PROVIDING SERVICES IN THE NATU RE OF PROJECT MANAGEMENT CONSULTING, FEASIBILITY STUDIES, MICRO E NTERPRISE DEVELOPMENT, SKILL DEVELOPMENT, ENVIRONMENT MANAGEM ENT, ENERGY RELATED SERVICES, SOCIAL RESEARCH AND ASSET RECONST RUCTION MANAGEMENT SERVICES. NO SEGMENT-WISE PROFITABILITY DATA OF TH ESE SERVICES IS AVAILABLE. THE TPO HAS CONSIDERED THIS COMPANY AS C OMPARABLE ON ENTITY LEVEL. THE SERVICES RENDERED BY IT, TAKEN AS ONE UNIT, ARE DIFFERENT FROM WHAT THE ASSESEE IS DOING. WE FAIL TO APPRECIA TE AS TO HOW ALL THE ABOVE LISTED SERVICES TAKEN IN UNISON, CAN BE CONSI DERED AS COMPARABLE TO THE SERVICES PROVIDED BY THE ASSESSEE, WHICH ARE RESTRICTED TO IDENTIFYING CUSTOMERS, SENDING INPUTS TO AE, FINALI ZING SALES AND, THEREAFTER, RENDERING POST-SALE SERVICES, IF REQUIR ED ETC. 10.4. THE LD. DR STRENUOUSLY ARGUED THAT ALL THE ACTIVITIES DONE BY THIS COMPANY ARE BASICALLY `BUSINESS SERVICES AND THE A SSESSEE IS ALSO ITA NO.1716/DEL/2014 10 RENDERING BUSINESS SERVICES ALONE. JUSTIFYING THE I NCLUSION OF THIS COMPANY, HE SUBMITTED THAT DIFFERENTIATION OF FUNCT IONS IN THE OVERALL `BUSINESS SERVICES UMBRELLA IS TAKEN CARE OF UNDER THE TNMM. HE HARPED ON THE CONTENTION THAT THERE IS NO REQUIREME NT TO HAVE IDENTICAL SERVICES FOR THE PURPOSE OF MAKING COMPARISON UNDER THE TNMM. 10.5. WE ARE UNABLE TO ACCEPT THIS ARGUMENT IN VIEW OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CAS E OF RAMPGREEN SALES PVT. LTD. VS. CIT (2015) 377 ITR 533 (DEL) IN WHICH IT HAS BEEN HELD THAT THE COMPARABLES SHOULD BE SELECTED ON THE BASIS OF SIMILARITY EVEN UNDER TNMM. THE HONBLE HIGH COURT HAS LAID DOWN THAT SE LECTION OF COMPARABLES DOES NOT DIFFER WITH THE METHOD ADOPTED . EX CONSEQUENTI , IT IS NO MORE OPEN TO ARGUE THAT THE FUNCTIONAL DISSIM ILARITY OF THE COMPANIES UNDER THE OVERALL BROADER CATEGORY CAN BE IGNORED UNDER THE TNMM. IN VIEW OF THE FOREGOING DISCUSSION, WE FIND THE FUNCTIONAL SIMILARITY OF APITCO LIMITED LACKING ON ENTITY LEVE L WITH THE ASSESSEE COMPANY. AS SUCH, WE ORDER FOR ITS EXCLUSION FROM T HE FINAL SET OF COMPARABLES. ITA NO.1716/DEL/2014 11 (II) GLOBAL PROCUREMENT CONSULTANTS LTD . 11.1. THE TPO INCLUDED THIS COMPANY IN THE LIST OF COMPARABLES DESPITE THE ASSESSEES OBJECTION THAT IT IS ENGAGED IN PROVIDING CONSULTANCY SERVICES AND REVIEW OF PROCUREMENT PROC ESSES FOR VARIOUS PROJECTS FUNDED BY THE WORLD BANK. THE ASSESSEE FA ILED TO CONVINCE THE LD. CIT(A) FOR ITS EXCLUSION. 11.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE CONSIDER IT EXPEDIE NT TO FIRST DISCUSS THE NATURE OF ACTIVITIES CARRIED OUT BY GLOBAL PROCUREM ENT CONSULTANTS LTD. A COPY OF ANNUAL REPORT OF THIS COMPANY FOR THE REL EVANT YEAR IS AVAILABLE ON RECORD. AS PER THIS REPORT, THIS COMP ANY IS PROMOTED BY EXPORT-IMPORT BANK OF INDIA IN ASSOCIATION WITH LEA DING INDIAN PUBLIC SECTOR AND PRIVATE SECTOR CONSULTANCY ORGANISATIONS ON THE BASIS OF PUBLIC-PRIVATE PARTNERSHIP MODEL THAT OFFERS COLLEC TIVE INDIAN EXPERIENCE AND EXPERTISE THROUGH THE PROVISION OF A RANGE OF A DVISORY SERVICES WITH PARTICULAR FOCUS ON `PROCUREMENT. THIS COMPANY PR OVIDES TECHNICAL ASSISTANCE IN ENHANCING QUALITY, TRANSPARENCY, EFFI CIENCY AND ITA NO.1716/DEL/2014 12 EFFECTIVENESS OF PROCUREMENT AND IMPLEMENTATION SER VICE TO HELP ATTAIN DESIRED INSTITUTIONAL AND CORPORATE OBJECTIVES. TH E EXPERTISE OF THIS COMPANY IS AVAILABLE TO VARIOUS SECTORS INCLUDING P OWER, WATER RESOURCES, TRANSPORTATION, INDUSTRIES, ETC. FROM T HE SERVICES RENDERED BY THIS COMPANY, AS OUTLINED IN THE ANNUAL REPORT, IT CAN BE NOTICED THAT IT IS CONDUCTING INDEPENDENT PROCUREMENT REVIEW OF MULTIL ATERALLY FUNDED PROJECTS SPREAD ACROSS THE GLOBE. IT ALSO UNDERTAK ES PROCUREMENT AUDITS. THIS COMPANY IS PROVIDING FULL TIME ADVICE ON PROCU REMENT AND CONTRACT RELATED ASPECTS TO SEVERAL AGENCIES ACROSS THE GLOB E. FOR EXAMPLE, IN GEORGIA, IT PROVIDED ADVICE ON PROCUREMENT AND CONT RACT RELATED SERVICES TO MUNICIPAL DEVELOPMENT FUND (MDF), REPUBLIC OF GE ORGIA. IN IRAN, THIS COMPANY PROVIDED PROCUREMENT ADVISORY SERVICES TO INTERNATIONAL FORUMS, SUCH AS, BAM RECONSTRUCTION OFFICE OF MINIS TRY OF HOUSING, TEHRAN. IN GUYANA, THIS COMPANY WAS SELECTED THROU GH AN INTERNATIONAL COMPETITIVE PROCESS IN ASSISTING THE GOVERNMENT OF GUYANA IN STRENGTHENING OF ITS PROCUREMENT ADMINISTRATION U NDER TECHNICAL ASSISTANCE CREDIT FROM THE WORLD BANK. IN INDIA, I T PROVIDED PROCUREMENT ADVISORY SERVICES TO IIT, BARAMATHY, PU NE, INDIA IN THE ITA NO.1716/DEL/2014 13 IMPLEMENTATION OF WORLD BANK ADMINISTERED EMPOWERI NG POOR: A PILOT ICT PROGRAMME FOR RURAL AREAS OF PUNE DISTRICT FUN DED BY JAPAN SOCIAL DEVELOPMENT FUND GRANT. IT HAS ALSO CARRIED OUT REV IEW OF PROCUREMENT SYSTEMS AND ORGANISATION IN THE STATE OF MADHYA PRA DESH, PARTICULARLY, COVERING THE HEALTH, PUBLIC HEALTH, ENGINEERING AND WOMEN AND CHILD DEVELOPMENT DEPARTMENTS. WHEN WE GO THROUGH THE KI ND OF SERVICES PROVIDED BY THIS COMPANY, WHICH BASICALLY AIM AT GI VING ADVICE ON PROCUREMENT AND ALSO CARRYING OUT PROCUREMENT AUDIT S, IT BECOMES VIVID THAT THERE IS AN ABSOLUTE MISMATCH WITH THE KIND SE RVICES RENDERED BY THE ASSESSEE. THE WORK DONE BY GLOBAL PROCUREMENT CONSU LTANTS LTD. IS MILES APART FROM THAT DONE BY THE ASSESSEE, WHICH, IN TURN, IS LARGELY CONFINED TO ASSISTING AES IN IDENTIFYING CUSTOMERS/ SUPPLIERS AND, THEN, FACILITATING SALE/PURCHASE OF GOODS. BY NO STANDAR D, GLOBAL PROCUREMENT CONSULTANTS LTD., CAN BE CONSIDERED AS COMPARABLE T O THE ASSESSEE COMPANY. WE, THEREFORE, ORDER FOR THE ELIMINATION OF THIS COMPANY FROM THE FINAL LIST OF COMPARABLES. (III) NTPC ELECTRIC SUPPLY LTD . ITA NO.1716/DEL/2014 14 12.1. THE TPO INCLUDED THIS COMPANY IN THE LI ST OF COMPARABLES. THERE IS NO DISCUSSION IN HIS ORDER ABOUT ITS FUNCT IONAL PROFILE. THE ASSESSEE CHALLENGED ITS INCLUSION BEFORE THE CIT(A) WHO UPHELD THE ORDER OF THE LOWER AUTHORITY. THE ASSESSEE IS AGGR IEVED AGAINST THE INCLUSION OF THIS COMPANY IN THE FINAL SET OF COMPA RABLES. 12.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE ANNUAL REPORT OF THIS COMPANY, A COPY OF WHICH IS AVAILABLE FROM PAGE 929 ONWARDS OF THE PAPER BOOK. SALES HAVE BEEN SHOWN IN ITS PROFIT & LOSS ACCOUNT AT A FIGURE OF RS.17,95,43,780/-. ON GOING THROUGH THE DETAIL OF THIS AMOUNT AS PER SCHEDULE X, IT EMERGES THAT THE REVENUE AROS E FROM CONSULTANCY PROJECT MANAGEMENT AND SUPERVISION FEES. FROM THE OPERATIONAL REVIEW OF THIS COMPANY AS SET OUT IN THE ANNUAL RE PORT, IT CAN BE SEEN THAT ITS ACTIVITIES AS `ADVISORY-CUM-CONSULTANTS A RE UNDER THE ACCELERATED POWER DEVELOPMENT REFORMS PROGRAMME (AP DRP), WHICH IS AN INITIATIVE TAKEN BY THE MINISTRY OF POWER FOR POWER DEVELOPMENT REFORMS. THIS COMPANY WAS ASSIGNED IMPLEMENTATION OF RURAL ITA NO.1716/DEL/2014 15 ELECTRIFICATION WORK ON TURNKEY BASIS IN FIVE STATE S COVERING APPROXIMATELY 40000 VILLAGES IN 31 DISTRICTS. KERAL A GOVERNMENT, DURING THE YEAR, ENTRUSTED RURAL ELECTRIFICATION WORK TO T HIS COMPANY ON TURNKEY BASIS UNDER RAJIV GANDHI GRAMIN VIDYUTIKARAN YOJANA (RGGVY) COVERING SEVERAL DISTRICTS. IN ADDITION, CONSULTANC Y SERVICES FOR POST AWARD PROJECT MONITORING AND SUPERVISION OF QUALITY OF WORK FOR THE PROJECTS EXECUTED BY THE STATE UTILITIES WAS ALSO G IVEN TO THIS COMPANY. ITS ANNUAL REPORT FURTHER MANIFESTS THAT THIS COMPA NY ASSISTED DISCOMS AND UTILITIES IN THE SECTORAL REFORM PROCES S AND WAS PARTICIPATING IN THE DISTRIBUTION INFRASTRUCTURAL D EVELOPMENT UNDER CONSULTANCY ASSIGNMENTS. IT ALSO CARRIED OUT CONSU LTANCY WORK OF PROJECT MONITORING AND QUALITY ASSURANCE UNDER VARI OUS PROJECTS FOR BHOPAL AND GWALIOR REGIONS. FROM THE ABOVE DESCRIP TION OF THE NATURE OF WORKS CARRIED OUT BY THIS COMPANY, IT CLEARLY EM ERGES THAT IT IS ABSOLUTELY INCOMPARABLE TO THE ASSESSEE, WHICH IS B ASICALLY ENGAGED IN PROVIDING PRE-SALE/PURCHASE AND POST-SALE/PURCHASE SERVICES TO ITS AE THAT INCLUDE COLLECTION OF INFORMATION ABOUT NEW CU STOMERS, REPORTING OF MARKET CONDITIONS, SOURCING OF CUSTOMERS, FACILITAT ING IN SALE AND ITA NO.1716/DEL/2014 16 ASSISTING IN THE FOLLOW UP FOR PAYMENT ETC. THE AC TIVITIES CARRIED OUT BY THE ASSESSEE IN FACILITATING PURCHASE AND SALE OF G OODS FOR ITS AES, CAN BY NO STANDARD, BE COMPARED WITH THE NATURE OF ACTIVIT Y CARRIED OUT BY NTPC ELECTRIC SUPPLY LTD. WE, THEREFORE, ORDER FOR THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 13. NOW, WE TAKE UP THE COMPANIES WHICH WERE NOT IN CLUDED BY THE TPO IN THE LIST OF COMPARABLES AND THE ASSESSEE WAN TS THEIR INCLUSION. (I) ASKME INFO HUBDS LTD . 14.1. THE ASSESSEE TREATED THIS COMPANY AS COMP ARABLE WHICH WAS REJECTED BY THE TPO. THE ASSESSEE INTENDS ITS INCLU SION IN THE FINAL TALLY OF COMPARABLES. 14.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS COMPANY IS SI MPLY ENGAGED IN THE BUSINESS OF INFORMATION VENDING. IT PROVIDES TELEPH ONE RELATED AND OTHER DIRECTORY SERVICES. ESSENCE OF ITS ACTIVITIES ON MA CRO LEVEL IS MERELY TO GIVE INFORMATION ABOUT THE WILLING SELLERS TO THE W ILLING BUYERS. ONCE SUCH INFORMATION ABOUT THE NAME OF THE SELLER AND H IS COMPANY, HIS ITA NO.1716/DEL/2014 17 ADDRESS AND CONTACT NUMBERS ETC. IS GIVEN, ITS JOB COMES TO AN END. IT NEITHER FACILITATES THE ACTUAL SALE NOR ACTS AS A M EDIATOR BETWEEN THE INTENDING BUYER AND SELLER SO AS TO ENSURE THAT TH E DEAL IS FINALIZED. IN CONTRAST, THE ASSESSEE IN QUESTION IS NOT ONLY GIVI NG NAME OF INTENDING BUYERS OR SELLERS TO ITS AE, BUT, IS ALSO PROVIDING INFORMATION FACILITATING COMMUNICATION, ASSISTING IN THE FINALISATION OF SAL E AND, THEREAFTER, IN FOLLOW-UP OF PAYMENT ETC. THUS, IT IS EVIDENT THAT THIS COMPANY HARDLY BEARS ANY SIMILARITY WITH THE ASSESSEE COMPANY. WE , THEREFORE, REJECT THE ASSESSEES CONTENTION FOR INCLUDING THIS COMPAN Y IN THE LIST OF COMPARABLES. (II) CRISIL RESEARCH & INFORMATION SERVICES LTD. 15.1. THE TPO REFUSED INCLUSION OF THIS COMPA NY IN THE LIST OF COMPARABLES ON THE GROUND THAT IT HAS CALENDAR YEAR ENDING AND THE INFORMATION FOR THE RELEVANT FINANCIAL YEAR IS NOT AVAILABLE. THE LD. AR FAIRLY ACCEPTED THAT THE ABOVE COMPANY WAS FOLLOWIN G CALENDAR YEAR FOR MAINTAINING ITS ACCOUNTS, IN CONTRAST TO THE ASSESS EE FOLLOWING FINANCIAL YEAR ENDING 31 ST MARCH. IT WAS, HOWEVER, SUBMITTED THAT THIS COMPA NY ITA NO.1716/DEL/2014 18 OUGHT NOT TO HAVE BEEN EXCLUDED FOR THIS REASON ALO NE WHEN IT IS OTHERWISE FUNCTIONALLY SIMILAR, A FACT WHICH HAS NO T BEEN DISPUTED BY THE TPO. THE LD. DR OPPOSED THIS CONTENTION BY SUBMITT ING THAT THE DATA FOR THE YEAR ENDING OF THIS COMPANY IS NOT SIMILAR TO T HAT OF ASSESSEE COMPANY AND HENCE IT WAS RIGHTLY EXCLUDED. 15.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL, IT IS NOTICED THAT THE ASSESSEE COMPANY I S HAVING FINANCIAL YEAR ENDING COVERING THE PERIOD 1.4.2006 TO 31.3.2007. IN THAT VIEW OF THE MATTER, A VALID COMPARISON CAN BE MADE ONLY IF THE CORRESPONDING FIGURES OF COMPARABLE COMPANY FOR THE SAME FINANCIA L YEAR ARE AVAILABLE. IN THIS REGARD, WE CONSIDER IT APT TO NOTE THE RELE VANT PART OF SUB-RULE (4) OF RULE 10B WHICH PROVIDES THAT: THE DATA TO BE US ED IN ANALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAD BEEN ENTERED INTO . IT IS OBVIOUS FROM THE LANGUAGE OF SUB-RULE (4) THAT THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION CAN BE ANALYZED ONLY WITH THE DATA RELATING TO THE FINANCIAL ITA NO.1716/DEL/2014 19 YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN E NTERED INTO. IN OTHER WORDS, IF THE TESTED PARTY HAS MARCH AS YEAR ENDING, THEN, THE FIGURES OF COMPARABLES RELATING TO THE FINANCIAL YE AR ENDING 31 ST MARCH ITSELF SHOULD BE AVAILABLE. IF SUCH A DATA IS EIT HER NOT AVAILABLE OR IS NOT CAPABLE OF ASCERTAINMENT WITH PRECISION AND WITHOUT DISTORTION, THEN, A COMPANY, ALBEIT FUNCTIONALLY COMPARABLE, DISQUALIFI ES. 15.3. ESPOUSING THE FACTS OF THE EXTANT CASE, WE FIND THAT INSOFAR AS THE FUNCTIONAL COMPARABILITY OF THIS COMPANY IS CONCERN ED, THE TPO HAS NOT TOUCHED THIS ASPECT. THE ONLY REASON GIVEN FOR ITS EXCLUSION IS THE NON- AVAILABILITY OF DATA FOR THE RELEVANT FINANCIAL YEA R. THE LD. AR FAIRLY ADMITTED THAT IT IS NOT POSSIBLE TO DEDUCE OPERATIN G PROFIT MARGIN OF THIS COMPANY FOR THE FINANCIAL YEAR ENDING 31.3.2007 ON THE BASIS OF INFORMATION AS IS AVAILABLE IN PUBLIC DOMAIN. AS S UCH, WE HOLD THAT THE AUTHORITIES WERE JUSTIFIED IN EXCLUDING THIS COMPAN Y FROM THE LIST OF COMPARABLES ON THIS SCORE ALONE. 16.1. GROUND NO. 5 RELATES TO NON-GRANTING OF WOR KING CAPITAL ADJUSTMENT. THE ASSESSEE REQUESTED THE TPO TO ALLO W WORKING CAPITAL ITA NO.1716/DEL/2014 20 ADJUSTMENT, WHICH WAS REFUSED. THE LD. CIT(A) TOO, DID NOT CONCUR WITH THE SUBMISSIONS ADVANCED ON BEHALF OF THE ASSESSEE IN THIS REGARD. 16.2. WE ARE NOT INCLINED TO ACCEPT, IN PRINCIPL E, THE VIEW CANVASSED BY THE AUTHORITIES BELOW THAT THE ASSESSEE CANNOT BE A LLOWED A WORKING CAPITAL ADJUSTMENT. SUCH AN ADJUSTMENT IS RESTRICTE D TO INVENTORY, TRADE RECEIVABLES AND TRADE PAYABLES. IF A COMPANY CARRI ES HIGH TRADE RECEIVABLES, IT WOULD MEAN THAT IT IS ALLOWING ITS CUSTOMERS RELATIVELY LONGER PERIOD TO PAY THEIR AMOUNTS, WHICH WILL RESU LT INTO HIGHER INTEREST COST AND THE RESULTANT LOW NET PROFIT. SIMILARLY, BY CARRYING HIGH TRADE PAYABLES, A COMPANY BENEFITS FROM A RELATIVELY LONG ER PERIOD AVAILABLE TO IT FOR PAYING BACK TO ITS SUPPLIERS, WHICH REDUCES THE INTEREST COST AND INCREASES PROFITS. IN ORDER TO NEUTRALIZE DIFFEREN CES ON ACCOUNT OF INVENTORY, TRADE PAYABLES AND TRADE RECEIVABLES, IT BECOMES ESSENTIAL TO ALLOW WORKING CAPITAL ADJUSTMENT FOR BRINGING THE C ASE OF THE ASSESSEE AT PAR WITH OTHER FUNCTIONALLY COMPARABLE ENTITIES. W E, THEREFORE, AGREE IN PRINCIPLE WITH THE GRANT OF WORKING CAPITAL ADJUSTM ENT. ITA NO.1716/DEL/2014 21 16.3. HOWEVER, WE FIND THAT THERE IS INSUFFICIENT MATERIAL ON RECORD FOR CALCULATING THE WORKING CAPITAL ADJUSTMENT IN RESPE CT OF COMPARABLES VIS- A-VIS THE ASSESSEE. UNDER SUCH CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT IT WOULD BE MORE APPROPRIATE IF THIS I SSUE IS CONSIDERED AND EXAMINED BY THE ORIGINAL AUTHORITY. WE ORDER ACCORD INGLY AND DIRECT THE AO/TPO TO COMPUTE WORKING CAPITAL ADJUSTMENT, IF AN Y, AVAILABLE TO THE ASSESSEE. 17. IN THE FINAL ANALYSIS, WE SET ASIDE THE TRANSFE R PRICING ADDITION SUSTAINED IN THE FIRST APPEAL AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF THE ALP OF THE INTERNA TIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE, IN CONSONANCE WITH THE DISCUSSION MADE AND FINDINGS RENDERED ABOVE. NEEDLESS TO SAY, THE ASSE SSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH DETERMINA TION. 18.1. THE ONLY OTHER GROUND RAISED IN THIS APPE AL IS AGAINST THE CONFIRMATION OF ADDITION OF RS.23,91,810/- TOWARDS THE EXPENDITURE INCURRED ON ACCOUNT OF LEASEHOLD IMPROVEMENTS BY TR EATING THE SAME AS CAPITAL IN NATURE. ITA NO.1716/DEL/2014 22 18.2. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE CLAIMED LEASEHOLD IMPROVEMENT EXPENSES OF RS.23.90 LAC AND ARCHITECT FEE OF RS.33.14 LAC AS REVENUE. THE AO OBSERVED THAT THE ASSESSEE STARTED ITS BUSINESS DURING THIS YEAR ONLY AND CIVIL AND CONSTR UCTION WORK WAS DONE ON THE PREMISES TAKEN ON LEASE. HE TREATED THIS WOR K AS CONSTRUCTION OF A PERMANENT STRUCTURE ON LEASEHOLD PREMISES. AFTER E NTERTAINING OBJECTIONS FROM THE ASSESSEE, HE MADE DISALLOWANCE OF RS.51,34,426/- (CAPITALIZATION OF TWO AMOUNTS OF RS.23.90 LAC AND RS.33.14 LAC AS REDUCED BY DEPRECIATION). THE LD. CIT(A) ALLOWED T HE ASSESSEES CLAIM IN RESPECT OF PAYMENT TO ARCHITECT AMOUNTING TO RS. 33.14 LAC. HOWEVER, THE REMAINING AMOUNT OF RS.23.90 LAC WAS TREATED AS CAPITAL IN NATURE. THE ASSESSEE IS AGGRIEVED AGAINST THE CONFIRMATION OF ADDITION TO THIS EXTENT, WHILE THERE IS NO APPEAL FILED ON BEHALF OF THE REVENUE. 18.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSEE TOOK THE PREMISES ON LEASE AND ALSO STARTED BUSINESS DURING THE YEAR UND ER CONSIDERATION. A SUM OF RS.23.90 LAC WAS INCURRED ON COMPLETE RENOVA TION OF SUCH ITA NO.1716/DEL/2014 23 PREMISES AS IT IS APPARENT FROM THE DETAILS PLACED ON RECORD. THE HONBLE SUPREME COURT IN BALLIMAL NAVAL KISHORE VS. CIT 1997 224 ITR 414 (SC) HAS HELD THAT THE EXPENDITURE INCURRED BY THE ASSES SEE ON TOTAL RENOVATION OF CINEMA THEATRE BY INSTALLING NE W MACHINERY, NEW FURNITURE, NEW SANITARY FITTING AND NEW ELECTRICAL INSTALLATION BESIDES EXTENSIVE REPAIR OF STRUCTURE OF BUILDING, TO BE C APITAL EXPENDITURE AND NOT ALLOWABLE AS CURRENT REPAIRS. THIS JUDGMENT IND ICATES THAT ANY CAPITAL EXPENDITURE ON TOTAL RENOVATION IS LIABLE TO BE CON SIDERED AS CAPITAL EXPENDITURE. THE HONBLE JURISDICTIONAL HIGH COURT IN BIGJOS INDIA LTD. VS. CIT (2007) 293 ITR 170 (DEL) CONSIDERED ALMOST A SIMILAR SITUATION AS IS OBTAINING BEFORE US IN THE PRESENT APPEAL. I N THAT CASE, THE ASSESSEE, A LICENSEE OF THE SHOWROOM, ERECTED NEW COUNTERS AN D BUILT A NEW LIFT SHAFT AT A NEW SITE. IT WAS HELD THAT SUCH AMOUNT W AS NOT IN THE NATURE OF CURRENT REPAIRS BUT A CAPITAL EXPENDITURE NOT DEDUC TIBLE IN FULL. 18.4. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE PRESENT FACTS ARE ON ALL FOURS WITH THOSE CONSIDERED BY THE HONBLE HIGH COURT IN BIGJOS (SUPRA) . IT IS EVIDENT FROM THE DESCRIPTION OF THE ITEMS O N WHICH ITA NO.1716/DEL/2014 24 THE ABOVE REFERRED EXPENDITURE HAS BEEN INCURRED TH AT IT IS A CASE OF RENOVATION OF PREMISES IMMEDIATELY AFTER TAKING IT ON LEASE. AS SUCH, THERE CAN BE NO QUESTION OF REPLACEMENT. WE CANNOT HELP IF THE REVENUE HAS ACCEPTED THE PART DELETION OF DISALLOWANCE BY T HE LD. CIT(A). BE THAT AS IT MAY WE ARE CONCERNED ONLY WITH THE ITEMS OF D ISALLOWANCE RAKED UP IN THE APPEAL BEFORE US AND HOLD THAT THE LD. CIT(A ) HAS TAKEN UNIMPEACHABLE VIEW IN TREATING THE INSTANT AMOUNT A S CAPITAL EXPENDITURE. 18.5. AT THIS STAGE, IT IS RELEVANT TO NOTE THA T THE TAX LAWS (AMENDMENT AND MISCELLANEOUS PROVISIONS) ACT, 1986 INSERTED EXPLANATION 1 TO SECTION 32 W.E.F. 1.4.1988, READI NG AS UNDER : - EXPLANATION-1. WHERE THE BUSINESS OR PROFESS ION OF THE ASSESSEE IS CARRIED ON IN A BUILDING NOT OWNED BY H IM BUT IN RESPECT OF WHICH THE ASSESSEE HOLDS A LEASE OR O THER RIGHT OF OCCUPANCY AND ANY CAPITAL EXPENDITURE IS INCURRE D BY THE ASSESSEE FOR THE PURPOSES OF THE BUSINESS OR PR OFESSION ON THE CONSTRUCTION OF ANY STRUCTURE OR DOING OF AN Y WORK IN OR IN RELATION TO AND BY WAY OF RENOVATION OR EX TENSION ITA NO.1716/DEL/2014 25 OF, OR IMPROVEMENT TO THE BUILDING, THEN, THE PROVI SIONS OF THIS CLAUSE SHALL APPLY AS IF THE SAID STRUCTURE OR WORK IS A BUILDING OWNED BY THE ASSESSEE. 18.6. A CIRCUMSPECTION OF THE ABOVE EXPLANATION R EVEALS THAT WHERE A BUSINESS IS CARRIED ON IN A BUILDING NOT OWNED BY T HE ASSESSEE BUT IN RESPECT OF WHICH IT HOLDS A LEASE OR EITHER OCCUPAN CY RIGHTS, THEN THE EXPENDITURE ON I. THE CONSTRUCTION OF A STRUCTURE OR II. DOING OF ANY WORK IN OR IN RELATION TO AND BY WAY OF RENOVATION OR EX TENSION OF, OR IMPROVEMENT TO THE BUILDING, SHALL BE CONSIDERED A S STRUCTURE OR WORK IN THE NATURE OF BUILDING OWNED BY THE ASSESSEE FOR TH E PURPOSE OF DEPRECIATION. SPIRIT AND TEXT OF EXPLANATION 1 TO S ECTION 32 IS THAT ANY CAPITAL EXPENDITURE BY THE ASSESSEE ON A BUILDING N OT OWNED BY HIM, IN WHICH HE CARRIES ON THE BUSINESS, SHALL BE CONSIDER ED AS BUILDING OWNED BY HIM FOR THE PURPOSES OF SECTION 32, TO THE EXTEN T OF THE AMOUNTS SPENT ON THE CONSTRUCTION OF STRUCTURE OR DOING OF ANY WO RK IN OR IN RELATION TO AND BY WAY OF RENOVATION OR EXTENSION OR IMPROVEMEN T TO THE BUILDING. IT THEREFORE, FOLLOWS THAT IN ORDER TO BRING ANY AMOUN T WITHIN THE AMBIT OF EXPLANATION 1 TO SECTION 32, IT IS PARAMOUNT THAT THE EXPENDITURE ITA NO.1716/DEL/2014 26 INCURRED BY THE ASSESSEE ON THE PREMISES IN THE CAP ACITY OF NON-OWNER SHOULD FIRSTLY BE IN THE NATURE OF CAPITAL EXPENDIT URE AND THEN IT SHOULD FALL WITHIN ANY OR BOTH THE CLAUSES AS DISCUSSED AB OVE. IF THESE CONDITIONS GET SATISFIED, AS IS THE CASE UNDER CONSIDERATION, THEN THE AMOUNT INCURRED FOR SUCH WORKS FALLS FOR CONSIDERATION UNDER EXPLA NATION 1 TO SECTION 32. IN OTHER WORDS, THE AMOUNT SO INCURRED WOULD BE CAP ITALIZED ENTITLING THE ASSESSEE TO DEPRECIATION AS PER THE ELIGIBLE RATE. IN VIEW OF THE FOREGOING DISCUSSION, WE UPHOLD THE IMPUGNED ORDER ON THIS IS SUE SUBJECT TO GRANT OF DEPRECIATION. 19. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 15.02.201 6. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 15 TH FEBRUARY, 2016. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.