JACOBS ENGINEERING INDIA P. LTD, MUMBAI V. ASST CIT RG 10(2)(1), MUMBAI

ITA 1964/MUM/2016

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3620 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2011-2012
• Appeal Filed On: 29-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI M. BALAGANESH , ACCOUNTANT MEMBER IT (TP) A NO.1964/MUM./2016 ( ASSESSMENT YEAR : 20 11 12 ) M/S. JACOBS ENGINEERING INDIA P. LTD. JACOBS HOUSE, RAMKRISHNA MANDIR ROAD KONDIVITA, ANDHERI (EAST) MUMBAI 400 059 PAN AAACH0456J . APPELLANT V/S DY. COMMISSIONER OF INCOME TAX (I.T) CIRCLE 2(1)(1), MUMBAI . RESPONDENT IT (TP) A NO.1858/MUM./2016 ( ASSESSMENT YEAR : 20 11 12 ) ASSTT . COMMISSIONER OF INCOME TAX CIRCLE 2(1)(1), MUMBAI . APPELLANT V/S M/S. JACOBS ENGINEERING INDIA P. LTD. JACOBS HOUSE, RAMKRISHNA MANDIR ROAD KONDIVITA, ANDHERI (EAST) MUMBAI 400 059 PAN AAACH0456J . RESPONDENT ASSESSEE BY : SHRI NIRAJ SHETH REVENUE BY : SHRI ANAND MOHAN DATE OF HEARING 11 .0 2 .201 9 DATE OF ORDER 22.02.2019 2 M/S. JACOBS ENGINEERING INDIA P. LTD. O R D E R PER SAKTIJIT DEY, J.M. AFORESAID CROSS APPEAL S HAVE BEEN FILED BY THE ASSESSEE AND THE REVENUE CHALLENGING ASSESSMENT ORDER DATED 29 TH JANUARY 2016, PASSED UNDER SECTION 143(3) R/W SECTION 144C (13) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ), IN PURSUANCE TO THE DIRECTIONS OF THE DISPUTE RESOLUT ION PANEL 1 (DRP), MUMBAI,FOR THE ASSESSMENT YEAR 20 11 12 . ITA NO.1964/MUM./2016 ASSESSEES APPEAL 2 . GROUND NO.1 BEING GENERAL IN NATURE DOES NOT REQUIRE SPECIFIC ADJUDICATION. 3 . IN GROUNDS NO.2 TO 10, THE ASSESSEE HAS CHALLENGED THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 4 . THE LEARNED AUTHORISED REPRESENTATIVE, AT THE OUTSET, SUBMITTED THAT IF GROUND NO.8, CHALLENG ING SELECTION OF CERTAIN COMPARABLES IS DECIDED IN FAVOUR OF THE ASSESSEE , THE OTHER GROUNDS RAISED IN RELATION TO TRANSFE R PRICING AD JUSTMENT WOULD BE OF ACADEMIC NATURE. 5 . BRIEF FACTS ARE, THE ASSESSEE , AN INDIAN COMPANY , IS ENGAGED IN THE BUSINESS OF RENDERING ENGINEERING CONSULTANCY SERVICES WHICH 3 M/S. JACOBS ENGINEERING INDIA P. LTD. INCLUDE FEASIBILITY STUDIES, PROCESS ENGINEERING, DETAILED ENGINEERING, PROJ ECT MANAGEMEN T AND PROJECT SERVICES, DESIGN AND CONSTRUCTION SERVICE. FOR THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE FILED ITS RETURN OF INCOME ON 30 TH NOVEMBER 2011, DECLARING TOTAL INCOME OF ` 30,38,38,415. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER NOTICING THAT IN THE RELEVANT PREVIOUS YEAR THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS OVE RSEAS ASSOCIATED ENTERPRISES (A E), MADE A REFERENCE TO THE TRANSFER PRICING OFFICER FOR DETERMINING ARMS LENGTH PRICE OF THE IN TERNATIONAL TRANSACTION. IN THE COURSE OF PROCEEDINGS BEFORE HIM, THE TRANSFER PRICING OFFICER NOTICED THAT THE ASSESSEE IN THE RELEVANT PREVIOUS YEAR HAS ENTERED INTO VARIOUS INTERNATIONAL TRANSACTION S WITH ITS A ES IN U.K. AND U.S.A. ON VERIFYING THE TRA NSFER PRICING STUDY REPORT OF THE ASS ESSEE HE NOTICED THAT PROVISION OF ENGINEERING DESIGN AND CONSULTING SERVICES RE NDERED BY THE ASSESSEE TO THE AE AND ENGINEERING S ERVICES AVAILED HAVE BEEN BENCH MARKED BY APPLYING TRANSACTION AL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT TO OPERATING COST (OP/OC) AS THE PROFI T LEVEL INDICATOR (PLI). HE NOTICED THAT AS PER THE TRANSFER PRICING STUDY REPORT, THE ASSESSEE HAS BENCHMARKED THE I NTERNATIONAL TRANSACTI ON WITH A ES THROUGH INTERNA L AS WELL AS EXTERNAL TNMM. HE NOTED THAT THE ASSESSEE HAS SUPPORTED THE INTERNAL TNMM BY UNDERTAKING ANALYSIS APPLYING EXTERNAL TNMM WHEREIN IT HAD 4 M/S. JACOBS ENGINEERING INDIA P. LTD. SELECTED SIX COMPANIES AS COMPARABLE S WITH AVERAGE MEAN MARGIN OF 11.00%. SINCE , THE ASSESSEE H AD SHOWN MARGIN OF 16.87% IN CASE OF AE TRANSACTION AND PROFIT MARGIN OF 3.90% IN THE CASE OF NON A.E. TRANSACTION , IT CLAIMED THAT TH E PRICE CHARGED / PAID TO THE A ES TO BE AT ARMS LENGTH. AFTER EXAMINING THE TRANSFER PRICING STUDY REPORT AND SUBMISSIONS OF THE ASSESSEE, THE TRANS FER PRICING OFFICER REJECTED INTERNAL TNMM BY STATING THAT SEGMENTAL DETAILS ARE NOT AVAILABLE. AS REGARDS THE COMPARABLES SELECTED UNDER EXTERNAL TNMM, THE TRANSFER PRICING OFFICER REJECTED SOME OF THE COMPARABLES SELECTED BY THE ASSESSEE INCLUDI NG M.N. DASTUR & CO. PVT. LTD. H AVING DONE SO , THE TRANSFER PRICING OFFICER INDEPENDENTLY SELECTED SOME MORE COMPARABLES. THUS, THE FINAL SET OF COMPARABLES SELECTED BY THE TRANSFER PRICING OFFICER WITH THEIR PROFIT MARGIN ARE AS UNDER: S.NO. NAME OF THE COMPANY OPERATING MARGIN ON OPERATING COSTS 1 . CHEMTEX GLOBAL ENGINEERS PVT. LTD. 14.96% 2 . ENGINEERS INDIA LTD. (CONSULTANCY & ENGINEERING PROJECTS SEGMENT) 72.32% 3 . RITES LT. (CONSULTANCY SERVICES SEGMENT) 69.58% 4 . SIMON INDIA LTD. 24.59% 5 . TCE CONSULTING ENGINEERS LTD. 44.62% 6 . WAPCOS LTD. (CONSULTANCY & ENGINEERING PROJECTS SEGMENT) 37.32% 6 . SINCE , THE ARITHMETIC MEAN MARGIN OF THE COMPARABLES SELECTED BY THE TRANSFER PRICING OFFICER WAS 37.35%, AS AGAINST ENTITY LEVEL 5 M/S. JACOBS ENGINEERING INDIA P. LTD. MARGIN OF 9.35% OF THE ASSESSEE AS COMPUTED BY THE TRANSFER PRICING OFFICER , AN ADJUSTMENT OF ` 31,15,17,429, WAS MADE TO THE ARMS LENGTH PRICE. ON THE BASIS OF THE ORDER PASSED BY THE TRANSFER PRICING OFFICER, THE ASSESSING OFFICER PASS ED THE DRAFT ASSES SMENT ORDER ADDING THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TRANSFER PRICING OFFICER. THOUGH, THE ASSESSEE CHALLENGED THE AFORESAID ADJUSTMENT ON VARIOUS GROUNDS RAISED BEFORE THE DRP, HOWEVER, THE DRP GRANTED PARTIAL REL IE F TO THE ASSESSEE BY ACCE PTING M.N. DASTUR & CO. PVT. LTD., AS A COMPARABLE. 7 . THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THREE OF THE COMPANIES SELECTED BY THE TRANSFER PRICING OFFICER VIZ., ENGINEERS INDIA LTD., RITES LTD. AND WAPCOS LTD. , BEING GOVERNMENT COMPANIES, THEY CANNOT BE TREATED AS COMPARABLE , SINCE THE DYNAMICS OF THESE COMPANIES ARE DIFFERENT CONSIDERING THE FACT THAT T HEY HAVE NOT BEEN DRIVEN BY PROFIT MOTIVE. HE SUBMITTED , WHILE DECIDING THE COMPARABILITY OF GOVERNMENT COMPANIES IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2008 09 AND 2010 11, THE T RIBUNAL HAS HELD THAT GOVERNMENT COMPANIES CANNOT BE TREATED AS COMPARABLE. HE SUBMITTED , THE SAME VIEW WAS EXPRESSED BY THE TRIBUNAL WHILE DECIDING ASSESSEES APPEAL IN ASSESSMENT YEAR 2010 11 IN RESPECT OF THE VERY SAME COMPARABLES WHICH HAVE BEEN CONSIDERED IN THE IMPUGNED ASSESSMENT YEAR. THUS, HE SUBMITTED , THE ISSUE IS OTHERWISE COVERED IN FAVOUR OF THE ASSESSEE 6 M/S. JACOBS ENGINEERING INDIA P. LTD. BY VIRTUE OF THE DECISIONS OF THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEAR S . 8 . THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED , SINCE THE EXTENT OF GOVERNMENT OWNERSHIP OF COMPANIES ARE NOT KNOWN, LET THE ISSUE BE VERIFIED BY THE ASSESSING OFFICER AND IF THE COMPANIES ARE FOUND TO BE FULLY OWNED BY THE GOVERNMENT THEY CANNOT BE TREATED AS COMPARABLE. 9 . WE HAVE CONSIDERED RIVAL S UBMISSIONS AND PERUSED MATERIAL ON RECORD. THE ONLY REASON ON WHICH THE ASSESSEE SEEKS EXCLUSION OF THE AFORESAID THREE COMPANIES IS, T HEY ARE GOVERNMENT COMPANIES , HENCE, CANNOT BE TREATED AS COMPARABLE T O THE ASSESSEE. NOTABLY, WHILE DECIDING ASSESSEES APPEAL FOR THE ASSESSMENT YEAR 2008 09 IN ITA NO.7194/MUM./2012, DATED 17 TH MAY 2017, THE TRIBUNAL RELYING UPON CERTAIN JUDICIAL PRECEDENTS HAS HELD THAT ENGINEERS INDIA LTD. BEING A GOVERNMENT COMPANY CAN NOT BE TREATED AS COMPARABLE SINCE THE CONTRACTS BETWEEN THE PSU AND OTHERS ARE NOT DRIVEN BY PROFIT MOTIVE ALONE BUT OTHER CONSIDERATIONS ALSO WEIGH IN , SUCH AS , DISCHARGE OF SOCIAL OBLIGATION, ETC. IT IS OBSERVED , THE COMPARABILITY OF ENGINEERS INDIA LTD ., RITES LTD. AND WAPCOS LTD., AGAIN CAME UP FOR CONSIDERATION IN ASSESSEES OWN CASE FOR THE A.Y. 2010 11. 7 M/S. JACOBS ENGINEERING INDIA P. LTD. 10 . WHILE DECIDING THE ISSUE IN ITA NO.3700/MUM./2016 , DATED 10 TH JANUARY 2018, THE TRIBUNAL UPHELD THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLES ON THE REASONING THAT THEY ARE GOVERNMENT COMPANIES. SINCE , THE TRIBUNAL HAS ALREADY DECIDED THE ISSUE I N RESPECT OF THE VERY SAME COMPARABLES IN ASSESSEES OWN CASE IN THE PRECEDING ASSESSMENT YEAR S , RESPECTFULLY FOLLOWING THE AFORESAID DECISION S OF THE TRIBUNAL, WE EXCLUDE ENGINEERS INDIA LTD., RITES LTD. AND WAPCOS LTD. FROM THE LIST OF COMPARABLES AND DI RECT THE ASSESSING OFFICER TO COMPUTE THE ARMS LENGTH PRICE ACCORDINGLY. CONSIDERING THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE THAT UPON EXCLUSION OF THESE THREE COMPARABLES, THE MARGIN SHOWN BY THE ASSESSEE WOULD FALL WITHIN 5% OF THE AVE RAGE MARGIN OF THE REMAINING COMPARABLES, HENCE, NO ADJUSTMENT IS REQUIRED TO BE MADE TO THE ARMS LENGTH PRICE, WE REFRAIN FROM DECIDING THE OTHER GROUNDS RAISED BY THE ASSESSEE ON THE TRANSFER PRICING ADJUSTMENT SINCE THEY ARE OF MERE ACADEMIC IMPORTANCE . GROUND NO.8 IS ALLOWED AND GROUNDS NO.2, 3, 4, 5, 6, 7, 9 AND 10 ARE DISMISSED AS NOT PRESSED. 11 . IN GROUND NO.11, THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF ` 600, UNDER SECTION 14A OF THE ACT. 8 M/S. JACOBS ENGINEERING INDIA P. LTD. 12 . THE PRIMARY REASON ON WHICH THE ASSESSEE SEEKS DELETION OF THE AFORESAID DISALLOWANCE IS, IN THE RELEVANT ASSESSMENT YEAR THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME, THEREFORE, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT COULD BE MADE. HOWEVER, AT THE TIME OF HEARING, THE LEARNED AUTHORISED REPRESENTATIV E DID NOT WANT TO PRESS THE GROUND DUE TO SMALLNESS OF THE ADDITION. THOUGH, IN PRINCIPLE, WE AGREE WITH THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE THAT IN THE ABSENCE OF ANY EXEMPT INCOME EARNED DURI NG THE RELEVANT ASSESSMENT YEAR NO DISALLO WANCE UNDER SECTION 14A OF THE ACT CAN BE MADE, HOWEVER, CONSIDERING THE SUBMISSIONS OF THE LEARNED AUTHORISED REPRESENTATIVE THAT D UE TO SMALLNESS OF THE ADDITION HE WOULD NOT LIKE TO PRESS THE GROUND, WE DISMISS THE GROUND AS NOT PRESSED. 13 . GROUND NO.12 BEING CONSEQUENTIAL IN NATURE DOES NOT REQUIRE ADJUDICATION. 14 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. ITA NO.1858/MUM./2016 REVENUES APPEAL 15 . IN THIS APPEAL, THE REVENUE HAS CHALLENGED THE DECISION OF THE DRP IN ACCEPTING M.N. DASTUR & CO. PVT. LTD., AS A COMPARABLE. 9 M/S. JACOBS ENGINEERING INDIA P. LTD. 16 . AS DISCUSSED IN THE EARLIER PART OF THE ORDER, WHILE BENCH MARKING THE INTERNATIONAL TRANSACTION UNDER TNMM, THE ASSESSEE HAD SELECTED SIX COMPARABLES ONE OF THEM BEING M.N. DASTUR & CO. PVT. LTD. HOWEVER, THE TRANSFER PRICING O FFICER REJECTED THIS COMPANY ON THE REASONING THAT BESIDES ENGINEERING SERVICES IT IS INVOLVED IN OTHER ACTIVITIES LIKE T AKING PREMISES ON RENT AND GIVING IT ON RENT , WHEREAS , THE SEGMENTAL ACCOUNTS ARE NOT AVAILABLE. WHILE CONSIDERING THE OB JECTIONS RAISE D BY THE ASSESSEE THE DRP OBSERVED THAT AS PER FUNCTIONAL PROFILE PROVIDED IN THE ANNUAL REPORT, THIS COMPANY IS FUNCTIONALLY SIMILAR TO THE ASSESSEE. THEY ALSO OBSERVED THAT AS PER THE ANNUAL REPORT, 91% OF THE REVENUE ARISES OUT OF ENGINEERING CONSULTANC Y SERVICES. THUS, THE DRP ACCEPTED M.N. DASTUR & CO. PVT. LTD. AS A COMPARABLE. 17 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATION OF THE TRANSFER PRICING OFFICER. 18 . THE LEARNED AUTHORISED REPRESENTATIVE STRONGLY RELYING UPON THE OBSERVATI ONS OF THE DRP, SUBMITTED THAT THE MAJOR ACTIVITY OF THIS COMPANY IS PROVISION OF ENGINEERING SERVICE AND THE REVENUE EAR NED FROM ENGINEERING SERVICE CONSTITUTE 91.79% OF THE GROSS REVENUE EARNED BY THE COMPANY. HE SUBMITTED , THE INCOME EARNED BY THE ASSES SEE FROM PROVISION OF ENGINEERING SERVICES CONSTITUTES ABOUT 99% 10 M/S. JACOBS ENGINEERING INDIA P. LTD. OF THE GROSS REVENUE, THEREFORE, THERE IS NOT MUCH DIFFERENCE IN THE FUNCTIONALITY AND THE COMPARABLE. THUS, HE SUBMITTED THAT THE DRP WAS JUSTIFIED IN INCLUDING THE COMPANY AS A COMPARABLE. 19 . WE HAVE CONSIDERED R IVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. IT IS EVIDENT , THE TRANSFER PRICING OFFICER HAS REJECTED THIS COMPANY AS A COMPARABLE SIMPLY ON THE REASONING THAT IT IS INVOLVED IN OTHER ACTIVITIES. HOWEVER, THE DRP AFTER VERIFYING TH E ANNUAL REPORT OF THE COMPANY HAS GIVEN A FACTUAL FINDING THAT NOT ONLY THE COMPANY IS FUNCTIONALLY SIMILAR BUT ALMOST 92% OF ITS INCOME IS EARNED FROM ENGINEERING SERVICE. THE AFORESAID FACTUAL FINDING OF THE DRP COULD NOT BE CONTROVERTED BY THE DEPARTME NT THROUGH PROPER EVIDENCE. IN VIEW OF THE AFORESAID , WE UPHOLD THE DECISION OF THE DRP ON THE ISSUE OF COMPARABILITY OF M.N. DASTUR & CO. PVT. LTD. GROUND RAISED IS DISMISSED. 20 . IN THE RESULT, ASSESSEE S APPEAL IS PARTLY ALLOWED. 21 . TO SUM UP, ASSESSEES APPEAL IS PARTLY ALLOWED AND REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22.02.2019 SD/ - M. BALAGANESH ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 22.02.2019 11 M/S. JACOBS ENGINEERING INDIA P. LTD. COPY OF THE ORDER FORWARDED TO : ( 1 ) THE ASSESSEE; ( 2 ) THE REVENUE; ( 3 ) THE CIT(A); ( 4 ) THE CIT, MUMBAI CITY CONCERNED; ( 5 ) THE DR, ITAT, MUMBAI; ( 6 ) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (SR. PRIVATE SECRETARY) ITAT, MUMBAI