M/s. Terex Equipment Private Limited, Noida V. ACIT, New Delhi

ITA 1882/DEL/2014

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2447 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-11-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 05-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 31-03-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAMANJANEYULU
• Keywords: Transfer pricing; Business expenditure; International transaction; Commercial expediency
• Section: 143(3); 234B; 37(1); 15

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I - 1 BENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA , ACCOUNTANT MEMBER, AND MS. SUCHITRA KAMBLE , JUDICIAL MEMBER ITA NO. 1882 /DEL/201 4 [A.Y 20 09 - 10 ] TEREX EQUIPMENT PVT. LTD VS. THE A. C.I.T [FORMERLY TEREX VECTRA EQUIPMENT COMPANY CIRCLE 18)(1) PRIVATE LIMITED] NEW DELHI PLOT NO. 22, UDYOG VIHAR GREATER NOIDA, PO SURAJPUR. PAN : A ABCT 8105 H [APPELLANT] [RESPONDENT] DATE OF HEARING : 2 5 . 1 0 .201 8 DATE OF PRONOUNCEMENT : 1 4 . 1 1 .2018 ASSESSEE BY : SHRI VED JAIN, ADV SHRI RISHABH JAIN, CA SHRI ASHISH CHADHA, CA REVENUE BY : SHRI RAMANJANEYULU, SR. DR ORDER PER N.K. BILLAIYA , ACCOUNTANT MEMBER, THIS APPEAL BY THE ASSESSEE IS PREFERRED AGAINST THE ORDER DATED 2 7 .0 1 . 201 4 FRAMED U/S 143(3) R.W.S 144C OF THE INCOME - TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT'] PERTAINING TO A.Y 2009 - 10 . 2 2. THE FIRST GRIEVANCE OF THE ASSESSEE RELATES TO THE DISALLOWANCE OF PAYMENT OF CORPORATE MANAGEMENT CHARGES [CMC]. 3. THE TPO HAS CONSIDERED THIS ISSUE AT PAR A 16 PAGE 59 OF HIS ORDER. THE TPO FOUND THAT THE ASSESSEE HAS MADE A PAYMENT OF RS. 1,10,22,586/ - TO ITS ASSOCIATED ENTERPRISE [AE] FOR AVAILING OF SERVICES. THE TPO ASKED THE ASSESSEE TO FURNISH DETAILS OF PAYMENT OF CORPORATE MANAGEMENT CHARGES. THE ASSESSEE FILED A DETAILED REPLY FURNISHING RELEVANT DOCUMENTARY EVIDENCES WHICH WERE CONSIDERED BY THE TPO. THE TPO WAS OF THE OPINION THAT IN ORDER TO EXAMINE THE ARMS LENGTH PRICE [ALP] OF INTRA - GROUP SERVICES RECEIVED BY ONE OF THE AE, FOLLOWING ESSEN TIAL INFORMATION SHOULD BE AVAILABLE: 1. WHETHER THE ASSESSEE HAS ACTUALLY RECEIVED INTRA GROUP SERVICES? 2 . WHAT ARE THE: ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY THE RECIPIENT OF INTRA GROUP SERVICES? 3 . IN ORDER TO IDENTIFY THE CHARGES RELATING TO SERVICES, THERE SHOULD BE A MECHANISM IN PLACE WHICH CAN IDENTIFY (I) THE COST INCURRED BY THE AE IN PROVIDING THE INTRA GROUP SERVICES AND (II) THE BASIS OF ALLOCATION OF COST TO VARIOUS AES. 3 4 . WHETHER A COMPAR ABLE INDEPENDENT ENTERPRISE WOULD HAVE PAID FOR THE SERVICES IN COMPARABLE CIRCUMSTANCES? 5 . THE COST OF INTRA GROUP SERVICES SHOULD BE BENCHMARKED USING EITHER CUP OR COST PLUS METHOD. 4. THE TPO WAS OF THE OPINION THAT THE ASSESSEE HAS NOT IDENTIFIED THE SERVICES BY ITS AE FOR WHICH COSTS WERE REIMBURSED TO ITS AE. THE TPO WAS OF THE FURTHER OPINION THAT THE ASSESSEE HAS NOT BEEN ABLE TO SPECIFY THE SERVICES RECEIVED FROM ITS AE AND FAILE D TO FURNISH CONTEMPORANEOUS EVIDENCE TO SUBSTANTIATE ITS CLAIM. 5. THE TPO FURTHER PROCEEDED BY EXAMINING THE COST BENEFIT ANALYSIS AND FORMED A BELIEF THAT THE ASSESSEE HAS NOT FURNISHED ANY COST BENEFIT ANALYSIS WITH REFERENCE TO THE COST OF THE SERVIC ES AND BENEFIT RECEIVED FROM AES , VIS A VIS INDEPENDENT PARTIES. THE TPO FINALLY CONCLUDED BY HOLDING THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THE BENEFIT THAT IT HAD DERIVED FROM THE SERVICES PURPORTEDLY PROVIDED BY THE AE. NO INDEPENDENT ENTITY WOU LD PAY FOR SUCH SERVICES WITHOUT ANY COST BENEFIT ANALYSIS. THE TPO FURTHER OPINED THAT DOCUMENTATION PRODUCED BY THE ASSESSEE TO SUPPORT ITS CLAIM FOR THE 4 RECEIPT OF MANAGEMENT SERVICES IS TOO GENERIC. THEREFORE, THE BENCH MARKING DONE BY THE ASSESSEE IS NOT IN ACCORDANCE WITH LAW AND THEREFORE, CUP METHOD IS REQUIRED TO BE APPLIED AND ACCORDINGLY, DETERMINED THE CUP FOR THIS TRANSACTION OF PAYMENT OF MANAGEMENT CHARGES AT NIL AS AGAINST RS. 1,10,22,586/ - DETERMINED BY THE ASSESSEE. THE INCOME OF THE ASS ESSEE WAS ENHANCED BY RS. 1,10,22,586/ - . 6. THE ASSESSEE RAISED OBJECTION BEFORE THE DRP BUT THE DRP SUSTAINED THE ACTION OF THE TPO. 7. BEFORE US, THE LD. DR STRONGLY SUPPORTED THE FINDINGS OF THE AO. T HE LD. AR STATED THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF ASSEMBLY, MARKETING AND SERVICING OF VARIOUS TYPES OF EARTHMOVING AND CONSTRUCTION EQUIPMENT. IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAS RECEIVED SERVIC ES FROM ITS AE AND AS A CONSIDERATION FOR THE SERVICES RECEIVED, THE ASSESSEE HAS PAID A SUM OF RS. 1,10,22,586/ - TO ITS AE. IT WAS EXPLAINED THAT THE NATURE OF SERVICES ARE: 5 I ) FINANCIAL REPORTING, CONSOLIDATIONS AND INTERCO ACCOUNTING II ) INFORMATION TECHNOLOGY III ) CORPORATE DEVELOPMENT IV ) TEREX BUSINESS SYSTEM V ) PRODUCT DEVELOPMENT VI ) HR PLANNING AND COMPENSATION & BENEFIT VII ) TALENT DEVELOPMENT AND TALENT ACQUISITION VIII ) MARKETING IX ) TAX AND TREASURY 8. IT WAS FURTHER EXPLAINED THAT TEREX US HAS CHARGE D MANAGEMENT FEES TO TEREX INDIA I.E. ASSESSEE AS AN ALLOCATION OF COMMON COST INCURRED IN PROVIDING THE ABOVE SERVICES TO ITS GROUP ENTITIES. IT IS THE SAY OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE AE IN THE CAPACITY OF CENTRALIZED SERVICE PROVIDER, PROVIDES ELEMENT OF COST SAVING TO THE GROUP AS A WHOLE OF WHICH THE ASSESSEE IS ALSO AN INTEGRAL PART. 9. THE LD. AR FURTHER EXPLAINED THAT THE RELEVANT INFORMATION/ DOCUMENTS WERE PROVIDED TO THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS TO S UBSTANTIATE THAT THE ASSESSEE HAS INDEED OBTAINED THE SERVICES OF AE. THE LD. AR CONCLUDED BY STATING TH A T THE TPO/DRP ERRED IN MAKING ADJUSTMENT IN RESPECT OF PAYMENT OF CORPORATE MANAGEMENT CHARGES TO THE AE. 6 10. PER CONTRA, THE LD. DR STRONGLY SUPPORTED THE FINDINGS OF THE LOWER AUTHORITIES. IT IS THE SAY OF THE LD. DR THAT THE ASSESSEE HAS GROSSLY FAILED IN SUBSTANTIATING SERVICES ACTUALLY RECEIVED FROM THE AE. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE GIVEN THOUGHTFUL CONSIDERATION TO THE ORDERS OF THE AUTHORITIES BELOW QUA THE ISSUE. THE FACTS ON RECORD SHOW THAT TO SUBSTANTIATE THAT THE ASSESSEE HAS ACTUALLY OBTAINED SERVICES OF AE, THE ASSESSEE HAS FURNISHED DETAILED DESCRIPTION OF INTRA GROUP SERVICES RENDERED BY THE AE, COPY OF LEDGER ACCOUNT OF CORPORATE MANAGEMENT CHARGES, MONTH - WISE CHART OF CORPORATE MANAGEMENT CHARGES AND ALLOCATION CHART FOR THE ASSESSMENT YEAR 2008 - 09. IN OUR CONSIDERED OPINION, IT IS REASONABLE TO VIEW THAT THE PAYMENT MADE TOWARDS CORPO RATE MANAGEMENT CHARGES IS AS PER INTERNATIONALLY ACCEPTED TRANSFER PRICING PRINCIPLES AND, ACCORDINGLY, REFLECTIVE OF AN ARMS LENGTH CHARGE. 11. IN SO FAR A S THE OBSERVATION OF THE TPO THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW AS TO WHAT COST BENEFI T ANALYSIS HAS BEEN DONE BY THE ASSESSEE, THE HON'BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES 345 ITR 241 HAS HELD AS UNDER: 7 14. ON THE SUBMISSIONS MADE BY BOTH THE SIDES, THE FOLLOWING SUBSTANTIAL QUESTIONS OF LAW ARE FRAMED: - ASSESSMENT YEAR 200 3 - 04 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND ON A PROPER INTERPRETATION OF SECTION 92CA OF THE ACT AND RULE 10B( 1)(A) OF THE INCOME TAX RULES, 1962, THE TRIBUNAL WAS RIGHT IN CONFIRMING THE ORDER OF THE CIT (APPEALS) DELETING THE DISALLOWANCE OF THE BRAND FEE/ ROYALTY PAYMENT OF ` 3,42,97,940/ - MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE, WHILE DETERMINING THE ARM S LENGTH PRICE'? ASSESSMENT YEAR 2002 - 03 'WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND ON A PROPER INTERPRETATION OF SECTION 92CA OF THE ACT AND RULE 10B(1)(A) OF THE INCOME TAX RULES , 1962, THE TRIBUNAL WAS RIGHT IN CONFIRMING THE ORDER OF THE CIT (APPEALS) DELETING THE DISALLOWANCE OF THE BRAND FEE/ ROYALTY PAYMENT OF ` 3,99,51,000/ - MADE BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISE, WHILE DETERMINING THE ARM S LENGTH PRICE'? 15. IT SEEMS TO US THAT THE DECISION TAKEN BY THE TRIBUNAL IS THE RIGHT DECISION. THE TPO APPLIED THE CUP METHOD WHILE EXAMINING THE PAYMENT OF BRAND FEE/ ROYALTY. THE CUP METHOD WHICH IN ITS EXPANDED FORM IS KNOWN AS 'COMPARABLE UNCONTROLLED PRICE' METHOD IS PRO VIDED FOR IN RULE 10B(1)(A) OF THE INCOME TAX RULES, 1962. IT IS ONE OF THE METHODS RECOGNIZED FOR DETERMINING THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION. RULE 10B(1) SAYS THAT FOR THE PURPOSES OF SECTION 92C(2) , THE ALP SHALL BE DETERMINED BY ANY 8 ONE OF THE FIVE METHODS, WHICH IS FOUND TO BE THE MOST APPROPRIATE METHOD, AND GOES ON TO LAY DOWN THE MANNER OF DETERMINATION OF THE ALP UNDER EACH METHOD. THE FIVE METHODS RECOGNIZED BY THE RULE ARE (I) COMPARABLE UNCONTROLLED PRICE METHOD (CUP), (II) RE - SALE PRICE METHOD, (III) COST PLUS METHOD, (IV) PROFIT SPLIT METHOD AND (V) TRANSACTIONAL NET MARGINAL METHOD (TNMM). THE MANNER BY WHICH THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION IS DETERMINED UNDER CUP IS PRESCRIBED IN CLAUSE (A) OF THE SUB - RULE (1) OF RULE 10B. THE FOLLOWING THREE STEPS HAVE BEEN PRESCRIBED: - '(A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRI SES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN MARKET; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB - CLAUSE (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION;' 16. THE ORGANIZATION FOR ECONOMIC CO - OPERATION AND DEVELOPMENT (OECD , FOR SHORT) HAS LAID DOWN 'TRANSFER PRICING GUIDELINES' FOR 9 MULTI - NATIONAL ENTERPRISES AND TAX ADMINISTRATIONS. THESE GUIDELINES GIVE AN INTRODUCTION TO THE ARM S LENGTH PRICE PRINCIPLE AND EXPLAINS ARTICLE 9 OF THE OECD MODEL TAX CONVENTION. THIS ARTICLE PROVIDES THAT WHEN CONDITIONS ARE MADE OR IMPOSED BETWEEN TWO ASSOCIATED ENTERPRISES IN THEIR COMMERCI AL OR FINANCIAL RELATIONS WHICH DIFFER FROM THOSE WHICH WOULD BE MADE BETWEEN INDEPENDENT ENTERPRISES THEN ANY PROFIT WHICH WOULD, BUT FOR THOSE CONDITIONS, HAVE ACCRUED TO ONE OF THE ENTERPRISES, BUT, BY REASON OF THOSE CONDITIONS, IF NOT SO ACCRUED, MAY BE INCLUDED IN THE PROFITS OF THAT ENTERPRISE AND TAXED ACCORDINGLY. BY SEEKING TO ADJUST THE PROFITS IN THE ABOVE MANNER, THE ARM S LENGTH PRINCIPLE OF PRICING FOLLOWS THE APPROACH OF TREATING THE MEMBERS OF A MULTI - NATIONAL ENTERPRISE GROUP AS OPERATING AS SEPARATE ENTITIES RATHER THAN AS INSEPARABLE PARTS OF A SINGLE UNIFIED BUSINESS. AFTER REFERRING TO ARTICLE 9 OF THE MODEL CONVENTION AND STATING THE ARM S LENGTH PRINCIPLE, THE GUIDELINES PROVIDE FOR 'RECOGNITION OF THE ACTUAL TRANSACTIONS UNDERTAKEN' IN PARAGRAPHS 1.36 TO 1.41. PARAGRAPHS 1.36 TO 1.38 ARE IMPORTANT AND ARE RELEVANT TO OUR PURPOSE. THESE PARAGRAPHS ARE RE - PRODUCED BELOW: - '1.36 A TAX ADMINISTRATION'S EXAMINATION OF A CONTROLLED TRANSA CTION ORDINARILY SHOULD BE BASED ON THE TRANSACTION ACTUALLY UNDERTAKEN BY THE ASSOCIATED ENTERPRISES AS IT HAS BEEN STRUCTURED BY THEM, USING THE METHODS APPLIED BY THE TAXPAYER INSOFAR AS THESE ARE CONSISTENT WITH THE METHODS DESCRIBED IN CHAPTERS II AND III. IN OTHER THAN EXCEPTIONAL CASES, THE TAX ADMINISTRATION SHOULD NOT 10 DISREGARD THE ACTUAL TRANSACTIONS OR SUBSTITUTE OTHER TRANSACTIONS FOR THEM. RESTRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS WOULD BE A WHOLLY ARBITRARY EXERCISE THE INEQUITY OF WHI CH COULD BE COMPOUNDED BY DOUBLE TAXATION CREATED WHERE THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAME VIEWS AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED. 1.37 HOWEVER, THERE ARE TWO PARTICULAR CIRCUMSTANCES IN WHICH IT MAY, EXCEPTIONALLY, BE BOTH APPROPRIATE AND LEGITIMATE FOR A TAX ADMINISTRATION TO CONSIDER DISREGARDING THE STRUCTURE ADOPTED BY A TAXPAYER IN ENTERING INTO A CONTROLLED TRANSACTION. THE FIRST CIRCUMSTANCE ARISES WHERE THE ECONOMIC SUBSTANCE OF A TRANSACTION DIFFERS FROM ITS FORM. I N SUCH A CASE THE TAX ADMINISTRATION MAY DISREGARD THE PARTIES' CHARACTERIZATION OF THE TRANSACTION AND RE - CHARACTERISE IT IN ACCORDANCE WITH ITS SUBSTANCE. AN EXAMPLE OF THIS CIRCUMSTANCE WOULD BE AN INVESTMENT IN AN ASSOCIATED ENTERPRISE IN THE FORM OF I NTEREST - BEARING DEBT WHEN, AT ARM'S LENGTH, HAVING REGARD TO THE ECONOMIC CIRCUMSTANCES OF THE BORROWING COMPANY, THE INVESTMENT WOULD NOT BE EXPECTED TO BE STRUCTURED IN THIS WAY. IN THIS CASE IT MIGHT BE APPROPRIATE FOR A TAX ADMINISTRATION TO CHARACTERI ZE THE INVESTMENT IN ACCORDANCE WITH ITS ECONOMIC SUBSTANCE WITH THE RESULT THAT THE LOAN MAY BE TREATED AS A SUBSCRIPTION OF CAPITAL. THE SECOND CIRCUMSTANCE ARISES WHERE, WHILE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME, THE ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAVING IN A COMMERCIALLY RATIONAL MANNER AND THE ACTUAL STRUCTURE PRACTICALLY 11 IMPEDES THE TAX ADMINISTRATION FROM DETERM INING AN APPROPRIATE TRANSFER PRICE. AN EXAMPLE OF THIS CIRCUMSTANCE WOULD BE A SALE UNDER A LONG - TERM CONTRACT, FOR A LUMP SUM PAYMENT, OF UNLIMITED ENTITLEMENT TO THE INTELLECTUAL PROPERTY RIGHTS ARISING AS A RESULT OF FUTURE RESEARCH FOR THE TERM OF THE CONTRACT (AS PREVIOUSLY INDICATED IN PARAGRAPH 1.10). WHILE IN THIS CASE IT MAY BE PROPER TO RESPECT THE TRANSACTION AS A TRANSFER OF COMMERCIAL PROPERTY, IT WOULD NEVERTHELESS BE APPROPRIATE FOR A TAX ADMINISTRATION TO CONFORM THE TERMS OF THAT TRANSFER IN THEIR ENTIRETY (AND NOT SIMPLY BY REFERENCE TO PRICING) TO THOSE THAT MIGHT REASONABLY HAVE BEEN EXPECTED HAD THE TRANSFER OF PROPERTY BEEN THE SUBJECT OF A TRANSACTION INVOLVING INDEPENDENT ENTERPRISES. THUS, IN THE CASE DESCRIBED ABOVE IT MIGHT BE APP ROPRIATE FOR THE TAX ADMINISTRATION, FOR EXAMPLE, TO ADJUST THE CONDITIONS OF THE AGREEMENT IN A COMMERCIALLY RATIONAL MANNER AS A CONTINUING RESEARCH AGREEMENT. 1.38 IN BOTH SETS OF CIRCUMSTANCES DESCRIBED ABOVE, THE CHARACTER OF THE TRANSACTION MAY DERIV E FROM THE RELATIONSHIP BETWEEN THE PARTIES RATHER THAN BE DETERMINED BY NORMAL COMMERCIAL CONDITIONS AS MAY HAVE BEEN STRUCTURED BY THE TAXPAYER TO AVOID OR MINIMIZE TAX. IN SUCH CASES, THE TOTALITY OF ITS TERMS WOULD BE THE RESULT OF A CONDITION THAT WOU LD NOT HAVE BEEN MADE IF THE PARTIES HAD BEEN ENGAGED IN ARM'S LENGTH DEALINGS. ARTICLE 9 WOULD THUS ALLOW AN ADJUSTMENT OF CONDITIONS TO REFLECT THOSE WHICH THE PARTIES WOULD HAVE ATTAINED HAD THE TRANSAC TION BEEN STRUCTURED IN ACCORDANCE 12 WITH THE ECONOMIC AND COMMERCIAL REALITY OF PARTIES DEALING AT ARM'S LENGTH.' 17. THE SIGNIFICANCE OF THE AFORESAID GUIDELINES LIES IN THE FACT THAT THEY RECOGNISE THAT BARRING EXCEPTIONAL CASES, THE TAX ADMINISTRATION SH OULD NOT DISREGARD THE ACTUAL TRANSACTION OR SUBSTITUTE OTHER TRANSACTIONS FOR THEM AND THE EXAMINATION OF A CONTROLLED TRANSACTION SHOULD ORDINARILY BE BASED ON THE TRANSACTION AS IT HAS BEEN ACTUALLY UNDERTAKEN AND STRUCTURED BY THE ASSOCIATED ENTERPRISE S. IT IS OF FURTHER SIGNIFICANCE THAT THE GUIDELINES DISCOURAGE RE - STRUCTURING OF LEGITIMATE BUSINESS TRANSACTIONS. THE REASON FOR CHARACTERISATION OF SUCH RE - STRUCTURING AS AN ARBITRARY EXERCISE, AS GIVEN IN THE GUIDELINES, IS THAT IT HAS THE POTENTIAL TO CREATE DOUBLE TAXATION IF THE OTHER TAX ADMINISTRATION DOES NOT SHARE THE SAME VIEW AS TO HOW THE TRANSACTION SHOULD BE STRUCTURED. 18. TWO EXCEPTIONS HAVE BEEN ALLOWED TO THE AFORESAID PRINCIPLE AND THEY ARE (I) WHERE THE ECONOMIC SUBSTANCE OF A TRANSACT ION DIFFERS FROM ITS FORM AND (II) WHERE THE FORM AND SUBSTANCE OF THE TRANSACTION ARE THE SAME BUT ARRANGEMENTS MADE IN RELATION TO THE TRANSACTION, VIEWED IN THEIR TOTALITY, DIFFER FROM THOSE WHICH WOULD HAVE BEEN ADOPTED BY INDEPENDENT ENTERPRISES BEHAV ING IN A COMMERCIALLY RATIONAL MANNER. 19. THERE IS NO REASON WHY THE OECD GUIDELINES SHOULD NOT BE TAKEN AS A VALID INPUT IN THE PRESENT CASE IN JUDGING THE ACTION OF THE TPO. IN FACT, THE CIT (APPEALS) HAS REFERRED TO AND APPLIED THEM AND HIS 13 DECISION HA S BEEN AFFIRMED BY THE TRIBUNAL. THESE GUIDELINES, IN A DIFFERENT FORM, HAVE BEEN RECOGNIZED IN THE TAX JURISPRUDENCE OF OUR COUNTRY EARLIER. IT HAS BEEN HELD BY OUR COURTS THAT IT IS NOT FOR THE REVENUE AUTHORITIES TO DICTATE TO THE ASSESSEE AS TO HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSEE AS TO WHAT EXPENDITURE THE ASSESSEE CAN INCUR. WE MAY REFER TO A FEW OF THESE AUTHORITIES TO ELUCIDATE THE POINT. IN EASTERN INVESTM ENT LTD. V. CIT , (1951) 20 ITR 1, IT WAS HELD BY THE SUPREME COURT THAT 'THERE ARE USUALLY MANY WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABOUT IN BUSINESS CIRCLES BUT IT IS NOT FOR THE COURT TO DECIDE WHICH OF THEM SHOULD HAVE BEEN EMPLOYED WHEN THE COUR T IS DECIDING A QUESTION UNDER SECTION 12(2) OF THE INCOME TAX ACT'. IT WAS FURTHER HELD IN THIS CASE THAT 'IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED'. IN CIT V. WALCHAND & CO . ETC., (1967) 65 ITR 381, IT WAS HELD BY THE SUPREME COURT THAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EX CLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. IT WAS FURTHER OBSERVED THAT THE RULE THAT EXPENDITURE CAN ONLY BE JUSTIFIED IF THERE IS CO RRESPONDING INCREASE IN THE PROFITS WAS ERRONEOUS. IT HAS BEEN CLASSICALLY OBSERVED BY LORD THANKERTON IN HUGHES V. BANK OF NEW ZEALAND, (1938) 6 ITR 636 THAT 'EXPENDITURE IN THE COURSE OF THE TRADE WHICH IS UNREMUNERATIVE IS NONE THE LESS A PROPER DEDUCTI ON IF WHOLLY AND EXCLUSIVELY MADE FOR THE PURPOSES OF TRADE. 14 IT DOES NOT REQUIRE THE PRESENCE OF A RECEIPT ON THE CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPENSE'. THE QUESTION WHETHER AN EXPENDITURE CAN BE ALLOWED AS A DEDUCTION ONLY IF IT HAS RESULTED IN ANY INCOME OR PROFITS CAME TO BE CONSIDERED BY THE SUPREME COURT AGAIN IN CIT V. RAJENDRA PRASAD MOODY , (1978) 115 ITR 519, AND IT WAS OBSERVED AS UNDER: - 'WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTHERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BECAUSE THERE IS NO RECEIPT OF INCOME. WHATEVER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMEN T OF PROPER ACCOUNTING AND THE INTERPRETATION OF SECTION 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOME.' IT IS NOTEWORTHY THAT THE ABOVE OBSERVATIONS WERE MADE IN THE CONTEXT OF SECTION 57(III) OF THE ACT WHERE THE LANGUAGE IS SOMEWHAT NARROWER THAN THE LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT. THIS FACT IS RECOGNISED IN THE JUDGMENT ITSELF. THE FACT THAT THE LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT IS BROADER THAN SECTION 57(III) OF THE ACT MAKES THE POSITION STRONGER. 20. IN THE CASE OF SASSOON J. DAVID & CO. PVT. LTD. V. CIT , (1979) 118 ITR 261 (SC), THE SUPREME CO URT REFERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT WHEN THE INCOME TAX BILL OF 1961 WAS 15 INTRODUCED, SECTION 37(1) REQUIRED THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY, NECESSARILY AND EXCLUS IVELY' FOR THE PURPOSES OF BUSINESS IN ORDER TO MERIT DEDUCTION. PURSUANT TO PUBLIC PROTEST, THE WORD 'NECESSARILY' WAS OMITTED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EI THER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN TH E OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 1 0B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS 16 PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALLOW THE E NTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DO NE IN THE PRESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRAND FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 12. RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT OF DELHI [SUPRA], WE ARE OF THE CONSIDERED OPINION THAT CORPORATE MANAGEMENT CHARGES SHOULD BE ALLOWED AS SUCH. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETED THE ADJUSTMENT OF RS. 1 , 10 , 22 ,586/ - . 17 13. FOR THE SAKE OF COMPLETENESS, IT WOULD NOT BE OUT OF PLACE TO POINT OUT THAT FOR ASSESSMENT YEAR 2012 - 13, THE TPO HIMSELF ALLOWED FOLLOWING SERVICES THAT ARE PART OF CORPORATE MANAGEMENT SERVICES AT ARMS LENGTH: - INFORMATION TECHNOLOGY SERVICES - HR RE LATED SERVICES 14. THE SAME IS THE POSITION IN ASSESSMENT YEAR 2013 - 14. 15. GROUND NOS. 2.2 TO 2.6 ARE ALLOWED. 16. THE NEXT DISPUTE RELATES TO DESIGNING SERVICES AND MARKETING SUPPORT SERVICE SEGMENTS. 17. THE APPELLANT COMPANY IS ENGAGED IN MANUFACTURE, MARKETING AND SERVICING OF CONSTRUCTION, EARTH MOVING AND OTHER ALLIED EQUIPMENTS. AS PER THE TP DOCUMENT, THE ASSESSEE ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES: 18 S L NO O. NO . NATURE OF TRANSACTION METHOD USED BY ASSESSEE AMOUNT {IN CRORES) 1. PURCHASE OF RAW MATERIAL AND COMPONENTS AND SPARE PARTS CUP 2,84,01,145 2. PURCHASE OF SPARE PARTS CUP 35,25,858 3. ROYALTY PAYMENT 2,51,96,680 4, PROVISION OFISOURCING SERVICES TNMM 58,F5,965 5. PROVISION OF DESIGNING SERVICES TNMM 2,66,23,479 6 . REPAYMENT BF LOAN 2,60,16,000 7. CORPORATE MANAGEMENT CHARGES 1,10,22,586 8. REIMBURSEMENT OF CONSULTANCY CUP 21,92,171 9, REIMBURSEMENT OF EXPENSES CUP 30,87,040 1G. RECOVERY OFJ EXPENSES CUP 84,07,138 11. ISSUE OF SHARE CAPITAL 1 R 15,99,19,610 18. IN ITS BUSINESS SUPPORT SERVICES SEGMENT, THE ASSESSEE HAS SHOWN MARGIN OF 7% ON COST FOR PROVISION OF BUSINESS SOURCING SERVICES PROVIDED TO ITS AES. THE TPO EXAMINED THE FILTER USED BY THE ASSESSEE, WHICH CAN BE UNDERSTOOD FROM THE FOLLOWING CHART: N O DESCRIPTION I OF FITTER REMARKS OF THIS OFFICE 1 . REJECT COMPANIES HAV ING FINANCIAL DATA AVAILABLE ONL Y UP TO FEBRUARY 201)7, ALSO REJECT COMPANIES FOR WHICH NO FINANCIAL DATA WAS AVAILABLE. THIS IS AN APPROPRIATE FILTER. HOWEVER, THE DATA IS TO BE SEEN WITH REFERENCE TO CURRENT FINANCIAL YEAR I. E. FY 2008 - 09. 2, REJ ECT COMPANIES THAT HAVE NIL SALE S/ SALES LESS THAN INR1 1 CRORE, THIS FILTER IS INAPPROPRIATE APPLIED BECAUSE WHERE THE TURNOVER AND COST BASE IS VERY SMALL, IT IS MORE THAN LIKELY THAT THE MARGINS WILL BE ERRATIC. THAI APART, A COMPANY THAT IS VERY SMALL IN SIZE DOES NOT HAVE SUFFICIENT ECONOMIC SIGNIFICANCE THAT IT BE USED AS A BENCHMARK. 19 3. SAL ES GREATER 500 CRORES T H A N I N R THIS IS AN INAPPROPRIATE FILTER. IF THE FILTER OF SELECTING COMPANIES WITH RATIO OF SERVICE INCOME TO TOTAL INCOME GREATER THAN 75% IS APPLIED CORRECTLY, THIS FILTER WILL NOT BE REQUIRED. THAT APART, HIGH TURNOVER DOES NOT CHANGE THE FUNCTIONAL PROFILE OF A COMPANY, IF IT IS PRIMARILY A SUPPORT SERVICE PROVIDER, IT REMAINS SO. THEREFORE, THIS FILTER HAS NO RELEVANCE. 4. MANUFACTURING ! SALES GREATER THAN 25 PERCENT OF SALES TUR NOVER I. I THIS FILTER IS INAPPROPRIATE. THE CORRECT FILTER WOULD HAVE BEEN TO SELECT COMPANIES THAT HAVE RATIO OF SERVICE INCOME TO TOTAL INCOME OF 75% OR MORE IN THE CURRENT FINANCIAL YEAR. THIS WILL OR MORE IN THE CURRENT FINANCIAL YEAR. THIS WILL ENSURE THAT ONLY SER VICE COMPANIES ARE SELECTED. 5. TRADING SALES GREATER THAN 25 PERCENT OF SALES TURNOVER I THIS FILTER IS INAPPROPRIATE. THE CORRECT FILTER WOULD HAVE BEEN TO SELECT COMPANIES THAT HAVE RATIO OF SERVICE INCOME TO TOTAL INCOME OF 75% OR MORE IN THE CURRENT FINANCIAL YEAR. THIS WILL OR MORE IN THE CURRENT FINANCIAL YEAR. THIS WIFI ENSURE THAT ONLY SERVICE COMPANIES ARE SELECTED. 6. R AND D GREATER THAN SALES TURNOVE R [ E X P E N S E S | P E R C E N T O F THIS IS AN INAPPROPRIATE FILTER. IF THE FILTER OF SELECTING COMPANIES WITH RATIO OF SERVICE INCOME TO TOTAL INCOME GREATER THEN 75% IS APPLIED CORRECTLY, THIS FILTER WILT NOT BE REQUIRED. THAT APART, R & D EXPENSES DOES NOT CHANGE THE FUNCTIONAL PROFILE OF A COMPANY, IF IT IS PRIMARILY A SUPPORT SERVICE PROVIDER, IT REMAINS SO. THEREFORE, THIS FITTER HAS NO RELEVANCE. 7. OPERATES IN SERVICE/INDUSTRY INDICATING DIF FERENCES THE FUNCTIONAL D I S S I M I L A R Y S R E N C E S I N P R O F I L E THE FILTER IS AN APPROPRIATE FILTER HOWEVER THE SAME HAS NOT BEEN CORRECTLY APPLIED AS THE FUNCTIONS OF COMPARABLES HAVE NOT BEEN CORRECTLY ANALYZED IN THE TP REPORT . 8. CONTROLLED PARTY TRANSACTION THIS IS AN APPROPRIATE FILTER. 9. INSUFFICIENT INFORMATION THIS IS AN APPROPRIATE FILTER. 10 RESTRUCTURING/ FINANCIALS/S ICK CO. ETC A B N O R M A L K C O . E T C . T HIS IS AN APPROPRIATE FITTER. HOWEVER, THE CORRECT CRITERIA FOR REJECTION OF COMPANIES WOULD BE NEGATIVE NET WORTH AND NOT PERSISTENT NEGATIVE NET WORTH AS THE COMPANY HAVING NEGATIVE NET WORTH WOULD ALSO BE INCURRING LOSSES IN THE PAST SO AS TO ERODE ITS POSITIVE NET WORTH WHICH IS THE NORM FOR COMPANIES IN IT INDUSTRY AS DISCUSSED IN DETAIL IN THE FILTER FOR PERSISTENT OPERATING TOSSES. 20 19. BASED ON THE ABOVE, THE TPO EXAMINED THE COMPARABLES USED BY THE ASSESSEE WITH HIS REMARKS AS UNDER: NO. COMPANY NAM E REMARKS OF TPO 1 CYBER MEDIA INDIA ONLINE LIMITED THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE AS IT IS PROVIDING SOFTWARE SUPPORT AND MAINTENANCE TO THE CLIENTS 2 INDIACOM LIMITED THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE AND CURRENT YEAR DATA NOT AVAILABLE IN FUNCTION DOMAIN. 3 MCS L IMITED FAILS EMPLOYEE COST FILTER. EMPLOYEE COST IS 15% TO TOTAL COST. 4 TSR D ARASHAW LIMITED . - IT IS A GOOD COMPARABLE. 5 IDC (I ) LTD NEW NAME OF THIS COMPANY IS CYBER MEDIA RESEARCH LTD . IT IS A GOOD COMPARABLE. 6 TIMES INNOVATIVE MEDIA LTD 5 FAILS EMPLOYEE COST FILTER. EMPLOYEE COST IS 6.35% TO TOTAL COST. ----- ------------------- -- _ ---- 20. THREE NEW COMPARABLES WERE USED WHICH ARE AS UNDER: NO. COMPANY NAME I D L E REMARKS OF TPO 1 BASIZ FUND SET PVT. LTD, V I C E ] I 5 : THIS COMPANY HAS BEEN REJECTED BY STATING THAT THE COMPANY PROVIDES KPO SERVICES IN THE FIELDS OF ACCOUNTING AND OTHER FINANCIAL SEGMENTS. HOWEVER, WEBSITE/ ANNUAL REPORT (AR) OF THE COMPANY CLEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE. 21 2 GLOBAL PROCUREMENT CONSULTANTS LTD. THIS COMPANY HAS BEEN REJECTED BY STATING THAT INSUFFICIENT FINANCIAL DATA WHEREAS DATA IS AVAILABLE IN PUBLIC DOMAIN AND THE COMPANY IS PROVIDING PROCUREMENT SERVICES. SINCE > TNMM IS BEING USED, DIFFERENT VERTICALS OF BUSINESS SERVICES AND SMALI FUNCTIONAL DIFFERENCE ARE NOT BEING IGNORED WHILE SELECTING COMPARABLES. 3 K JLLICK AGENCIES & MKTG. LTD. THE COMPANY HAS BEEN REJECTED STATING THAT THE COMPANY IS ENGAGED IN THE BUSINESS OF CONSTRUCTION AND EARTH MOVING MACHINERY AND EQUIPMENT. HOWEVER, WEBSITE/ ANNUAL REPORT (AR) OF THE COMPANY CLEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE - AGENT FOR VARIOUS FOREIGN PRINCIPALS FOR SALE AND AFTER SALES SERVICES. IN FACT, IT CLOSEST TO FUNCTIONS PERFORMED BY YOU FOR YOUR AE. 21. FINALLY, FOR BUSINESS /MARKET SUPPORT SERVICES SEGMENT, THE FOLLOWING COMPARABLES WERE USED: N O . COMPANY NAME SALES NW LNT / TC% SERVICE% EMP% RPT% OP/OC OP/OC (W/O FX) 1 BASIZ FUND SERVICE PVT. LTD 3.74 4.30 0.32 84.62 35.50 2.94% 46.75 39.17 CYBER MEDIA RESEARCH LTD. 16.85 4.90 1.39 99.65 26.96 12.34% 10.44 10,89 GLOBAL PROCUREMENT CONSULT. LTD. 3.41 4.03 0.00 90.69 34.73 UN/A 35.89 30 . 37 KILLICK AGENCIES & MKTG. LTD. 1,39 0.48 0.83 99.29 38.66 UN/A 29.48 29. 48 TSR DARASHAW 18.71 19.67 0.45 100.00 50.80 0.00 26.98 26.98 29.90 2738 22 22. IN SO FAR AS PROVISION OF DESIGNING SERVICES IS CONCERNED, THE FOLLOWING COMPARABLES WHICH WERE USED BY THE ASSESSEE WERE REJECTED BY THE TPO: NO. COMPANY NAME REMARKS OF TPO 1 AKSHAY SOFTWARE TECHNOLOGY LTD. THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 2 AUTOLINE DIMENSION SOFTWARE PVT. LTD. THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 3 CSS TECHNER G Y LTD. THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 4 KLG SYSTEI LTD. THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 5 MAHINDRA CONSULTING ENGINEERS LTD THIS COMPANY IS FUNCTIONALLY COMPARABLE. 6 NEIL SOFT LTD. THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 7 TATA ELXI UCL LTD THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 8 VARNA INDUSTRIES LTD. THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 23. SOME NEW COMPARABLES FOR TECHNICAL SUPPORT SERVICES WERE USED WHICH ARE AS UNDER: NO. COMPANY NA V E REMARKS OF TPO 1 ARCHOHMCONS U L T A * THIS COMPANY WAS NOT AVAILABLE IN YOUR SEARCH MATRIX. THE COMPANY QUALIFIES ALL QUANTITATIVE FILTERS AND IS FUNCTIONALLY COMPARABLE. 23 2 ENGINEERS INDIA A THIS COMPANY HAS BEEN REJECTED BY STATING THAT IT HAS IDENTIFIED ITS BUSINESS ACTIVITY INTO TWO BUSINESS SEGMENTS I.E. CONSULTANCY & ENGINEERING PROJECTS AND LUMP SUM TURNKEY PROJECTS. HOWEVER, THE COMPANY HAS GIVEN SEGMENTAL RESULTS. IN CONSULTANCY & ENGINEERING PROJECTS SEGMENT, THE COMPANY MAINLY PROVIDES CONSULTANCY. HENCE, THIS SEGMENT HAS B EEN CONSIDERED AS COMPARABLE FOR TECHNICAL SUPPORT FUNCTION. 3 IB1 CHEMATUR THIS COMPANY WAS NOT AVAILABLE IN YOUR SEARCH MATRIX. THE COMPANY QUALIFIES ALL QUANTITATIVE FILTERS AND IS FUNCTIONALLY COMPARABLE. 4 INDUS TECHNI CAL & FINANCIAL CONSULTANTS L TD F I & : ' % THIS COMPANY HAS BEEN REJECTED BY STATING THAT THERE IS NO RELEVANT DATA AVAILABLE IN NT A/ DR FOR THE YEAR 2007. THE MDA IS NOT AVAILABLE FOR ANY OF THE YEARS. THE COMPANY HAS BEEN REJECTED STATING THAT THERE IS INSUFFICIENT INFORMATION ABOUT THEIR OPERATIONS AND PRODUCTS. HOWEVER, WEBSITE/ANNUAL REPORT (AR) OF THE COMPANY DEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE. 5 L&T RAMBOIL CONS O N S THIS COMPANY WAS NOT AVAILABLE IN YOUR SEARCH MATRIX. THE COMPANY QUALIFIES AIL QUANTITATIVE FILTERS AND IS FUNCTIONALLY COMPARABLE. 6 MAHINDRA COM ENGINEERS LTD. R U T T I N G THIS COMPANY HAS BEEN REJECTED BY STATING - 'THE NTA/DR/AR IS NOT AVAILABLE FOR THE YEAR 2008 & 2007 AND MDA IS NOT AVAILABLE FOR ANY OF THE YEARS IN PROWESS. THE DATA IS AVAILABLE TILL 2005. THE COMPANY DOES NOT EXIST IN CAPITALINE,' THE COMPANY HAS BEEN REJECTED STATING THAT THERE IS INSUFFI C IENT INFORMATION ABOUT THEIR OPERATIONS AND PRODUCTS. HO WEVER, WEBSITE/ANNUAL REPORT (AR) OF THE COMPANY DEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE. 24 7 MAHINDRA ENG G THIS COMPANY HAS BEEN REJECTED BY STATING - *THE NTA/MDA/DR IS NOT AVAILABLE FOR ANY OF THE YEARS IN CAPITALINE. THE FP IS AVAILABLE TILL THE YEAR 2006. THE NTA/DR/AR IS AVAILABLE TILL 2005 IN PROWESS AND THE MDA IS NOT AVAILABLE FOR ANY OF THE YEARS. THE LATEST FINANCIALS IS AVAILABLE FOR THE YEAR 2006. AS PER THE PRODUCT DETAILS, THE COMPANY GENERATES ITS REVENUES FROM INCOME FROM OPERATIONS. THE COMPANY HAS BEEN REJECTED STATING THAT THERE IS INSUFFICIENT INFORMATION ABOUT THEIR OPERATIONS AND PRODUCTS. HOWEVER, WEBSITE/ ANNUAL REPORT (AR) OF THE COMPANY DEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE. 8 MN DASTUR THIS COMPANY WAS NOT AVAILABLE IN YOUR SEARCH MATRIX. THE COMPANY QUALIFIES ALL QUANTITATIVE FILTERS AND IS FUNCTIONALLY COMPARABLE. 9 RITES THIS COMPANY HAS BEEN REJECTED BY STATING - *'AS PER THE FINISHED PRODUCTS/PRODUCT DETAILS SECTION, THE DETAILS ARE AS GIVEN BELOW: THE COMPANY IS GENERATING REVENUE FROM - CONSULTANCY CHARGES, COACHES, LOCOMOTIVES, INSPECTION FEES, LEASE INCOME, TRACTION MOTORS(AC/DC. SYS.) AND OTHERS THE NTA/MDA/DR/AR ARE NOT AVAILABLE FOR ANY OF THE YEARS IN PROWESS. (THE LATEST AVAILABLE NTA/DR/AR ARE FOR THE YEAR 2036) THE NTA/MDA/DR/AR ARE NOT AVAILABLE FOR ANY OF THE YEARS IN CAPITALINE. (THE LATEST AVAILABLE NTA/DR/AR ARE FOR THE YEAR 2004) THE COMPANY HAS BEEN REJECTED STATING THAT THERE IS INSUFFICIENT INFORMAT ION ABOUT THEIR OPERATIONS AND PRODUCTS. HOWEVER, WEBSITE/ ANNUAL REPORT (AR) OF THE COMPANY CLEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE. RELEVANT SEGMENT HAS BEEN CONSIDERED AS COMPARABLE TO TECHNICAL SUPPORT FUNCTION. 25 10 SEMAC LTD THIS COMPANY WAS NOT AVAILABLE IN YOUR SEARCH MATRIX. THE COMPANY QUALIFIES ALL QUANTITATIVE FILTERS AND IS FUNCTIONALLY COMPARABLE. 11 TCE CONSULTING ENGINEERS LTD.. THE COMPANY HAS BEEN REJECTED STATING THAT THERE IS INSUFFICIENT INFORMATION ABOUT THEIR OPERATIONS AND PRODUCTS. HOWEVER, WEBSITE/ANNUAL REPORT (AR) OF THE COMPANY CLEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE. 12 WAPCOS LTD THIS COMPANY HAS BEEN REJECTED BY STATING - THE NTA/MDA/DR IS NOT AVAILABLE FOR THE YEARS 2008/2007 THE COMPANY HAS BEEN REJECTED STATING THAT THERE IS INSUFFICIENT INFORMATION ABOUT THEIR OPERATIONS AND PRODUCTS. HOWEVER, WEBSITE/ANNUAL REPORT (AR) OF THE COMPANY CLEARLY SHOWED THAT THE COMPANY IS PROVIDING BUSINESS SERVICE. 13 ZIPP ER TRADING ENTERPRISES LTD THIS COMPANY WAS NOT AVAILABLE IN YOUR SEARCH MATRIX. THE COMPANY QUALIFIES ALL QUANTITATIVE FILTERS AND IS FUNCTIONALLY COMPARABLE. --------------------------------------------------------------------------------------- 24. FINALLY, THE FOLLOWING COMPARABLES WERE USED: NO COMPANY NAME SALES NW LNT/ TC% SERVICE % EMP% RPT% OP/ OC OP/ O C (W/O FX) N 1 ARCHOHM CONSULT S 1.94 0.64 3.33 100.00 28.67 0.00 29.79 29.79 2 ENGINEERS INDIA 1532.46 1375.34 0.17 100.00 31.29 0.32 59.16 59.16 3 IB! CHEMATUR .... 13,54 7.39 0.00 100.00 43.94 0.00 20.99 20.66 5 L& T RAMBOLI CONS 24,46 16.94 0.39 100.00 51,52 0.00 41.79 41,79 6 MAHINDRA CONSULTING ENGINEERS LTD, 8,45 3.50 0.00 99.07 38.62 0.08 25.67 25.75 7 MAHINDRA ENGG 155.47 63.14 2.53 100.00 56.47 0.00 21,56 39.72 9 RITES 582.84 609,75 0.19 100.00 40.37 6.12 24.83 24.83 10 SEMAC LTD. 34.68 14.60 0.22 97.31 43.22 N/ A 25.22 25.22 11 TCE CONSULTING ENGINEERS LTD. E R S 319.05 116.47 0.66 98,29 50,10 0.05 27.20 27.20 26 12 WAPCOS LTD 223.92 75.21 0,41 100.00 27.92 0.00 25.57 25.57 13 ZIPPER TRADING ENTERPRISES LTD. > E S 1.02 1.04 1.16 93.58 62.35 N/A 34.11 34.11 30.53 32.16 25. QUAR REL IS THE INCLUSION OF NEW COMPARABLES IN THE BUSINESS SERVICES SUPPORT SEGMENT. 26. TWO COMPARABLES ARE UNDER DISPUTE : (1) GLOBAL PROCUREMENT CONSULT. LTD (2) KELLICK AGENCIES & MARKETING LTD GLOBAL PROCUREMENT CONSULT. LTD 27. THIS COMPARABLE HAS BEEN INCLUDED ON THE GROUND THAT IT IS ENGAGED IN PROVIDING PROCUREMENT SUPPORT SERVICES. SINCE PROCUREMENT SUPPORT SERVICES ARE IN THE NATURE OF BUSINESS SERVICES, IT IS A CORRECT COMPARABLE. 28. THE NATURE OF BUSINESS IN THE ANNUAL REPORT FOR THE YEAR E NDED 31.03.2008 CLEARLY SHOWS THAT THE BUSINESS DESCRIPTION OF THE COMPANY IS THE COMPANY IS PRIMARILY INTO REVIEW OF PROCUREMENT ACTIVITIES FOR 27 THE TWO LARGE BANK FINANCED PROJECTS IN INDONESIA WHEREAS THE ASSESSEE HAS A SOURCING TEAM WHICH PROVIDES MARK ET SUPPORT SERVICES TO BENFORD LIMITED, UK IN RELATION TO SOURCING THE COMPONENTS FROM VENDORS/ SUPPLIERS IN INDIA. IN OUR CONSIDERED OPINION, THIS COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN PROVIDING FULL FLEDGED PROCUREMENT AND FINANCIAL MANAGEMENT SUPPORT SERVICES. MOREOVER, THIS COMPANY WAS TAKEN AS COMPARABLE IN ASSESSMENT YEAR 2011 - 12 BY THE TPO BUT HAS BEEN REJECTED BY THE DRP AS COMPARABLE. CONSIDERING THESE FACTS, WE DIRECT FOR EXCLUSION OF THIS COMPARABLE. KELLICK AGENCIES & MAR KETING LTD 29. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT IT IS ACTING AS AGENT FOR VARIOUS FOREIGN PRINCIPALS FOR S A LE OF DREDGERS, DREDGING EQUIPMENT , STEERABLE RUDDER, PROPULSIONS , MARITIME AND AVIATION LIGHTING, ACOUSTIC COMMUNICATION. IN FACT, THIS COMPANY IS A COMMISSION AGENT WHICH IS EVIDENT FROM THE PROFIT AND LOSS ACCOUNT WHERE IT CAN BE SEEN THAT THIS COMPANY HAS RECEIVED COMMISSION INCOME FOR PROVIDING AGENCY SERVICES. MOREOVER, THE TPO HAS APPLIED A REVENUE SERVICE FILTER OF 7%% AND REJECTED THE COMPANIES WHOSE INCOME FROM COMPARABLE ACTIVITY DOES NOT CONSTITUTE AT LEAST 75% OF THE TOTAL REVENUE. 28 30. THIS COMPANYS COMPARABLE REVENUE COMES TO 27.7% ONLY. THUS, FAILS THE FILTER APPLIED BY THE TPO HIMSELF. FURTHER, AS MENTIONED ELSEWHERE, THI S COMPANYS BUSINESS PROFILE IS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE COMPANY. WE, THEREFORE, DIRECT FOR EXCLUSION OF THIS COMPANY. 31. THE LD. COUNSEL FOR THE ASSESSEE FURTHER PLEADED FOR EXCLUSION OF TSR DARASHAW LTD WHICH WAS EARLIER TAKEN IN TP STUDY. 32. FACTS SHOW THAT THIS COMPANY IS ENGAGED IN PROVIDING SHARE REGISTRY, RECORD MANAGEMENT, FUND MANAGEMENT AND PAYROLL PROCESSING SERVICES WHICH IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE BUSINESS. CONSIDERING THE FUNCTIONAL PROFILE OF THIS COMPANY, IT DESERVES TO BE EXCLUDED AND WE DIRECT ACCORDINGLY. 33. NEXT QUARREL IS IN RESPECT OF COMPARABLES EXCLUDED BY THE TPO AND CONFIRMED BY THE DRP. 29 34. THIS DISPUTE RELATES TO THE FOLLOWING COMPARABLES: I) MCS LIMITED II) TIMES INNOVATIVE INDIA LTD. 35. THE TPO HAS EXCLUDED THESE TWO COMPAR ABLES BY HOLDING THAT THEY FAIL EMPLOYEE COST TO TOTAL COST FILER LESS THAN 25%. 36. IN OUR CONSIDERED OPINION, SINCE THESE TWO COMPANIES DO NOT PASS FILTER TEST ADOPTED BY THE TPO AND ACCEPTED BY THE ASSESSEE, WE DO NOT FIND ANY MERITS IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE AND THESE COMPANIES WILL REMAIN E XC LU DED FAILING FILTER TEST. 37. COMING TO THE COMPARABLE RELATING TO DESIGNING SERVICE SEGMENT, THE DISPUTE IS IN RELATION TO INCLU SION OF NEW COMPARABLES BY THE TPO, NAMELY, ARCHOHM CONSULTS PVT LTD AND ZIPPER TRADING ENTERPRISES. THE TPO HAS INCLUDED THESE TWO COMPARABLES BY HOLDING THAT THEY ARE IN SIMILAR LINE OF BUSINESS AS THAT OF THE ASSESSEE. 30 ARCHOHM CONSULTS PVT LTD 38. THE ANNUAL REPORT OF THIS COMPANY SHOWS THAT THIS COMPANY IS PROVIDING ARCHITECT SERVICES. WHEREAS THE ASSESSEE IS ENGAGED IN DESIGNING, DEVELOPMENT OF NEW PRODUCT AND COMPUTER AIDED DESIGNING, A BUSINESS SUPPORT SERVICES WHICH IS TOTALLY DIFFERENT FROM TH E FUNCTIONS PERFORMED BY COMPARABLE COMPANY. WE ARE OF THE OPINION THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AND THEREFORE, CANNOT BE A GOOD COMPARABLE. WE DIRECT FOR EXCLUSION OF THIS COMPANY. ZIPPER TRADING ENTERPRISES 39. THE TPO HA S INCLUDED THIS COMPARABLE ON THE G R OUND THAT IT IS ENGAGED IN PROVIDING ENGINEERING SERVICES WHICH IS FUNCTIONALLY SIMILAR TO THE ASSESSEE. 40. SURPRISINGLY, THE ANNUAL REPORT OF THIS COMPANY DOES NOT PROVIDE ANY DETAIL OF THE NATURE OF BUSINESS OF ZIPPER AND THE ANNUAL REPORT FOR THE YEAR ENDED 31.03.2009 SHOWS THAT THE COMPANY IS INTO TRADING AND RECEIVED COMMISSION INCOME AS AN AGENT FROM TRADING. THIS IN ITSELF 31 SHOWS THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT COMPANY AND DESERVES T O BE EXCLUDED. WE DIRECT ACCORDINGLY. 41. NEXT QUARREL IS IN RESPECT OF EXCLUSION OF COMPARABLE SELECTED BY THE ASSESSEE IN DESIGNING SEGMENT. 42. THE FOLLOWING COMPARABLES WERE EXCLUDED BY THE TPO: 1. CSS TECHNERGY LTD. 2. KLG SYSTEL LTD. 3. NEILSOFT LTD. 4. TATA ELXSI LTD. 5. VARNA INDUSTRIES 43. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS ARGUED IN RESPECT OF N EILSOFT LTD, TATA ELXSI LTD AND VAMA INDUSTRIES. NEILSOFT LTD 44. T HE ANNUAL REPORT OF THIS COMPANY SHOWS THAT THE COMPANY IS ENGAGED IN SOFTWARE ENGINEERING SERVICES WHICH IS SIMILAR TO THE ASSESSEES DESIGNING SERVICES. THEREFORE, IT IS INCORRECT TO SAY THAT THIS 32 COMPANY IS FUNCTIONALLY DIFFERENT FROM THE APPELLANT COMPANY LOOKING TO THE FUNCTIONAL PROFILE OF THIS COMPANY, IN OUR CONSIDERED OPINION, THIS COMPANY DESERVES TO BE INCLUDED IN THE FINAL LIST OF COMPARABLES. WE, ACCORDINGLY, DIRECT FOR INCLUSION OF THIS COMPANY. TATA ELXSI LTD. 45. THIS COMPANY HAS 2 BUSINESS SEGMENTS 1) SOFTWARE DEVELOPMENT AND SERVICES AND 2) SYSTEM INTEGRATION AND SOFTWARE DEVELOPMENT . THE ASSESSEE HAS CONSIDERED THE SOFTWARE DEVELOPMENT AND SERVICES FOR THE PURPOSE OF COMPARABILITY WHICH INCLUDES SERVICES AS UNDER: 1 ) PRODUCT DESIGN SERVICES 2 ) INNOVATIVE DESIGN ENGINEERING 3 ) VISUAL COMPUTING LABS THE SE SERVICES ARE SIMILAR TO THE NATURE OF SERVICES PROVIDED BY THE ASSESSEE . THEREFORE, WE DIRECT THE ASSESSING OFFICER/TPO TO INCLUDE THIS COMPARABLE AFTER CONSIDERING THIS PARTICULAR SEGMENT FOR COMPARABILITY. 33 VARNA INDUSTRIES 46. THIS COMPANY ALSO HAS 2 BUSINESS SEGMENTS 1) SOFTWARE DEVELOPMENT AND SERVICES AND 2) PRODUCT HARDWARE SALES AND SERVICES SOFTWARE DEVELOPMENT AND SERVICES SEGMENT IS SIMILAR TO THE SERVICES PROVIDED BY THE ASSESSEE. THEREFORE, THIS SEGMENT SHOULD BE CONSIDERED A GOOD COMPARABLE ON THE BASIS OF SEGMENTAL REPORTING. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER/TPO TO CONSIDER THE SOFT WARE DEVELOPMENT AND SERVICES FOR THE PURPOSE OF COMPARABILITY. GROUND NOS. 2.7 TO 2.13 ARE PARTLY ALLOWED. 47. LAST DISPUTE IS IN RELATION TO CHARGING OF INTEREST U/S 234A, 234B AND 234C OF THE ACT. 48. WE DIRECT THE ASSESSING OFFICER TO CHARGE INTEREST AS PER THE PROVISIONS OF LAW. 34 49. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN ITA NO. 1882 /DEL/201 4 IS PARTLY ALLOWED. THE ORDER IS PRON OUNCED IN THE OPEN COURT ON 1 4 . 1 1 .2018. S D / - S D / - [ SUCHITRA KAMBLE ] [ N.K. BILLAIYA ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 4 T H NOVEMBER , 2018 VL/ COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR ASST. REGISTRAR, ITAT, NEW DELHI 35 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER