TEEKAY SHIPPING INDIA P.LTD, MUMBAI V. DCIT 3(3), MUMBAI

ITA 4037/MUM/2017

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 2495 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: J
• Assessment Year: 2011-2012
• Appeal Filed On: 02-06-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANISH KUMAR SINGH
• Assessee Lawyers: SUSHIL LAKHANI
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction
• Section: 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI M ANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER ITA NO. 4037 / MUM/2017 ( ASSESSMENT YEAR : 20 11 12 ) TEEKAY SHIPPING INDIA PVT. LTD. 4 TH FLOOR, METRO HOUSE MAHATMA GANDHI MARG METRO HOUSE, MUMBAI 400 020 PAN AAACS9808H . APPELLANT V/S DY. COMMISSIONER OF INCOME TAX WARD 3 ( 3 ), MUMBAI . RESPONDENT ASSESSEE BY : SHRI SUSHIL LAKHANI REVENUE BY : SHRI MANISH KUMAR SINGH DATE OF HEARING 1 7 . 12 .2018 DATE OF ORDER 08.03.2019 O R D E R PER SAKTIJIT DEY, J.M. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE CHALLENGING THE ORDER DATED 20 TH MARC H 2017, PASSED BY THE LEARNED COMMISSIONER (APPEALS) 58, MUMBAI, FOR THE ASSESSMENT YEAR 2011 12. 2 . GROUND NO.1, IS NOT PRESSED, HENCE, DISMISSED. 2 TEEKAY SHIPPING INDIA PVT. LTD. 3 . GROUND NO.3, BEING GENE RAL IN NATURE, DOES NOT REQUIRE ADJUDICATION. 4 . THE ONLY SURVIVING GROUND IS GROUND NO.2, WHEREIN THE ASSESSEE HAS DISPUTED SELECTION OF CERTAIN COMPARABLES. 5 . BRIEF FACTS ARE, THE ASSESSEE IS AN INDIAN COMPANY . FOR THE ASSESSMENT YEAR UNDER DISPUTE THE ASSESSEE FILED ITS RETURN OF INCOME ON 28 TH NOVEMBER 2011, DECLARING TOTAL INCOME OF ` 54,59,480, UNDER THE NORMAL PROVISIONS AND BOOK PROFIT OF ` 33,02,759, UNDER SECTION 115JB OF THE INCOME TAX ACT, 1961 (FOR SHORT THE ACT ). DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER ON EXAMINING THE FUNCTIONAL PROFILE OF THE ASSESSEE NOTIC ED THAT IT PROVIDES MANNING SERVICES TO ITS HOLDING COMPANY, TEEKAY SHIPPING LTD., BAHAMAS, AND OTHER COMPANIES IN THE GROUP. FROM THE TRANSFER PRICING STUDY REPORT, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS AGGREGATED ALL INTERNATIONAL TRANSACTION S AND BENCH MARKED THEM BY APPLYING COST PLUS METHOD (CPM) AS THE MOST APPROPRIATE METHOD WITH OPERATIVE PROFIT / OPERATING INCOME (OP/OI) AS THE PROFIT LEVEL INDICATOR (PLI) FOR COMPUTING THE MARGIN. HE OBSERVED , THE ASSESSEE HAS SEL ECTED TWO COMPANIES VIZ . IDEA CELLULAR SERVICES LTD. AND HEATHWAY KRISHNA CABLE PVT. LTD. AS COMPARABLES WITH AVERAGE WEIGHTED MARGIN OF ( ) 12.44%. SINCE, THE MARGIN SHOWN BY THE ASSESSEE AT 2.50% IS MORE THAN THE 3 TEEKAY SHIPPING INDIA PVT. LTD. MARGIN OF THE COMPARABLES SELECTED, THE INTERNATIONAL TRANSACTION WAS CLAIMED TO BE AT ARM'S LENGTH. THE ASSESSING OFFICER, HOWEVER, NEITHER ACCEPTE D THE MOST APPROPRIATE METHOD SELECTED BY THE ASSESSEE NOR COMPARABLES. HE OBSERVED , FOR BENCH MARKING THE INTERNATIONAL TRANSACTION S ENTERED INTO BY THE ASSESSEE , TRANSACTIONAL NET MARGIN METHOD (TNMM) IS THE MOST APPROPRIATE METHOD WITH OPERATING PROFIT / OPERATING COST ( OP/OC ) AS THE PLI. HAVING HELD SO, THE ASSESSING OFFICER SELECTED FOLLOWING SIX COMPANIES AS COMPARABLE S WITH ARITHMETIC MEAN OF 15.57%. SR. NO. COMPARABLE NAME OP/OC F.Y. 2010 11 (%) 1 . CYBER MEDIA RESEARCH LTD. 10.33 2 . EMPIRE INDUSTRIES LTD. 22.36 3 . HCCA BUSINESS SERVICES PVT. LTD. 17.32 4 . HSCC INDIA LTD. 16.99 5 . ICRA MANAGEMENT CONSULTING LTD. 15.90 6 . SPECTRUM BUSINESS SOLUTIONS LTD. 10.25 ARITHMETIC MEAN 15.57 6 . APPLYING THE AFORESAID ARITHMETIC MEAN OF THE COMPARABLE S , THE ASSESSING OFFICER DETERMINED THE ARM'S LENGTH PR OFIT AT ` 90,86,413, WHICH RESULTED IN AN UPWARD ADJUSTMENT OF ` 75,90,042. THIS ADJUSTMENT MADE TO THE ARM'S LENGTH PRICE WAS ADDED BACK TO THE INCOME OF THE ASSESSEE. 4 TEEKAY SHIPPING INDIA PVT. LTD. 7 . IN COURSE OF THE APPEAL PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY, THE ASSESSEE FURNISHED A FRESH LIST OF COMPARABLES BY APPLYING CERTAIN FILT ERS. L EARNED COMMISSIONER (APPEALS), AFTER VERIFYING THE FRESH LIST OF COMPARABLES FURNISHED BY THE ASSESSEE, SELECTED NINE COMPANIES AS COMPARABLE S WITH ARITHMETIC MEAN OF 13.22%. ACCORDINGLY, HE DIRECTED THE ASSESSING OFFICER TO ADOPT THE MARGIN OF 13.22 % FOR COMPUTING THE ADJUSTMENT. OF COURSE, HE ISSUED FURTHER DIRECTIONS TO THE ASSESSING OFFICER TO ADOPT CORRECT OPERATING EXPENSES , WITH WHICH WE ARE NOT CONCERNED IN THE PRESENT APPEAL. 8 . THE LEARNED AUTHORISED REPRESENTATIVE, AT THE OUTSET, SUBMITTED , O UT OF THE COMPARABLES SELECTED BY THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE IS DISP UTING THREE COMPARABLES. HEREIN AFTER WE WILL DEAL WITH THE COMPARABLES DISPUTED BY THE ASSESSEE BEFORE US. I) MERCER INDIA PVT. LTD. 9 . OBJECTING TO THE SELECTION OF THIS COMPANY, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , RELATED PARTY TRANSACTION (RPT) OF THIS COMPANY IS MORE THAN 75%, THEREFORE, IT CANNOT BE TREATED AS COMPARABLE. HE SUBMITTED , EVEN OTHERWISE ALSO THE COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE WHICH IS EVIDENT FROM THE FUNCTIONAL PROFILE OF THE COMPANY APPEARING IN THE FUNCTIONAL ANALYSIS DONE BY THE FIRST APPELLATE AUTHORITY. TO SUPPORT HIS CONTENTION, THE 5 TEEKAY SHIPPING INDIA PVT. LTD. LEARNED AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO THE FINANCIAL REPORT OF THE COMPANY ENCLOSED IN THE PAPER BOOK. 10 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELYING UPON THE OBSERVATIONS OF LEARNED COMMISSIONER (APPEALS) SUBMITTED , SO ME OF THE OTHER COMPANIES SELECTED BY LEARNED COMMISSIONER (APPEALS) AND NOT DISPUTED BY THE ASSESSEE ARE ALSO NOT PURELY INTO PROVIDING HUMAN RESOURCE SERVICES. THEREFORE, ASSESSEES OBJECTIONS WITH REGARD TO FUNCTIONAL DISSIMILARITY OF THIS COMPANY CANNOT BE ACCEPTED. 11 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. THE MAJO R GROUND ON WHICH THE ASSESSEE HAS SOUGHT EXCLUSION OF THIS COMPANY IS , THE RPT OF THE COMPANY IS MORE THAN 75%. ON A PERUSAL OF THE ANNUAL REPORT OF THE COMPANY SUBMITTED IN THE PAPER BOOK IT IS OBSERVED THAT OUT OF THE TOTAL TURNOVER OF ` 203.303 CRORE, TRANSACTIONS WITH GROUP COMPANIES CONSTITUTES ` 164.78 CRORE. THEREFORE, PRIMA FACIE, THIS COMPANY FAILS THE RPT FILTER OF MORE THAN 25%. IN FACT, LEARNED COMMISSIONER (APPEALS) HIMSELF HAS REJECTED IDEA CELLULAR SERVICES LTD. SELECTED BY THE ASSESSEE SINC E IT IS PROVIDING 100% RELATED PARTY TRANSACTION. A PPLYING THE SAME LOGIC, MERCER INDIA PVT. LTD. CANNOT BE SELECTED AS A COMPARABLE. THEREFORE, WE DIRECT THE ASSESSING OFFICER TO EXAMINE THIS ASPECT AND IF IT IS FOUND THAT RPT OF THIS COMPANY IS MORE THAN 25%, IT SHOULD BE EXCLUDED 6 TEEKAY SHIPPING INDIA PVT. LTD. FROM THE LIST OF COMPARABLE. THE ASSESSING OFFICER IS ALSO DIRECTED TO EXAMINE ASSESSEES CONTENTION REGARDING FUNCTIONAL DISSIMILARITY OF THIS COMPANY. II) CHARAN GUPTA CONSULTANTS PVT. LTD. 12 . OBJECTING TO THE SELECTION OF THIS COMPANY, LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , WHILE THE ASSESSEE IS BASICALLY PROVIDING MANNING/ RECRUITMENT SERVICES, THIS COMPARABLE PROVIDES TECHNICAL CONSULTANCY. IN THIS CONTEXT, HE DREW OUR ATTENTION TO THE BUSINESS PROFILE OF THE COMPANY AT PAGE 13 OF LEARNED COMMISSIONER (APPEALS)S ORDER. FURTHER, LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , OECD GUIDELINES MAKE IT CLEAR THAT MANNING SERVICES COMES IN THE CATEGORY OF LOW VALUE ADDED SERVICES, HENCE, CANNOT BE COMPARABLE TO TECHNICAL CON SULTANCY SERVICES. THUS, HE SUBMITTED , THIS COMP ANY CANNOT BE TREATED AS COMPARABLE. . 13 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE LEARNED COMMISSIONER (APPEALS). FURTHER, HE SUBMITTED THAT MANY OTHER COMPARABLES HAVING DIF FERENT FUNCTIONAL PROFILE HAVE NOT BEEN OBJECTED TO BY THE ASSESSEE. 14 . IN REJOINDER, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE COMPARABLES NOT OBJECTED TO BY THE ASSESSEE THOUGH MAY NOT BE IN 7 TEEKAY SHIPPING INDIA PVT. LTD. SHIPPING BUSINESS BUT THEY ARE IN THE BUSINESS OF HUM AN RESOURCE (RECRUITMENT). 15 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS COULD BE SEEN FROM THE FUNCTIONAL PROFILE OF THIS COMPARABLE, AS MENTIONED IN PAGE 13 OF THE LEARNED COMMISSIONER (APPEALS), IT PROVIDES SERVICES OF ADVISIN G OF DESIGNING AND RE STRUCTURING EMPLOYEES BENEFIT SCHEME, MANAGEMENT OF TRUST FUNDS, PAY ROLL MANAGEMENT AND ARRANGING VALUATION OF EMPLOYEE BENEFIT SCHEMES STARTED IN 1972. W HEREAS, THE FUNCTIONAL PROFILE OF THE ASSESSEE AS REPRODUCED IN PARA 6.8 OF THE LEARNED COMMISSIONER (APPEALS)S ORDER IS BASICALLY CONFINED TO MARINE H.R. SERVICES RELATING TO ARRANGING AND MANAGING SEA GOING PERSONNEL REQUIREMENT FOR ALL THE TEEKAY GROUP VESSELS. THUS, BASICALLY, HE ASSESSEE PROVIDES MANNING SERVICES RELATING TO RE CRUITMENT OF EMPLOYEES FOR SEA GO ING VESSELS OF THE GROUP COMPANIES. THEREFORE , THE FUNCTIONAL PROFILE OF THE AFORESAID COMPARABLE IS DIFFERENT FROM THE ASSESSEE, AS THE ASSESSEE DOES NOT UNDERTAKE ANY SUCH SERVICES WHICH THE AFORESAID COMPA NY PROVIDE S . TH EREFORE, WE DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES . I I ) EMPLOYMENT MANAGEMENT INDIA LTD. 16 . OBJECTING TO THE SELECTION OF THIS COMPANY LEARNED AUTHORISED REPRESENTATIVE SUBMITTED , THE COMPANY PROVIDES SERVICES RELATING TO 8 TEEKAY SHIPPING INDIA PVT. LTD. TECHNICAL ADMINISTRATION, MARKETING, SECRETARIAL AND OTHER SERVICES AND PROVIDING SERVICE OF TECHNICIANS. THUS, HE SUBMITTED THAT THE COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. 17 . THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF LEARNED COMMISSIONER (APPEALS). 18 . WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. THE FUNCTIONAL PROFILE OF THIS COMPANY, AS MENTIONED IN PAGE 14 OF LEARNED COMMISSIONER (APPEALS)S ORDER IS AS UNDER: EMPLOYMENT MANAGEMENT (INDIA) LTD., CARRY ON THE BUSINESS AND PROFESSION SERVICES INCLUDING TECHNICAL ADMINISTRATION, MARKETING, SECRETARIAL AND OTHER SERVICES AND PROVIDING SERVICE OF TECHNICIANS. 19 . FROM THE FUNCTIONAL PROFILE OF THE AFORE SAID COMPARABLE REPRODUCED HEREIN ABOVE, THOUGH, IT APPEARS THAT IT IS IN DIVERSIFIED ACTIVITIES, HOWEVER, IT ALSO PROVIDES SECRETARIAL AND OTHER SERVICES AND SERVICE OF TECHNICIAN S. THEREFORE , IF THIS COMPANY IS ALSO ENGAGED IN PROVIDING H.R. SERVICES AND SEGMENTAL DETAILS IN RESPECT OF H.R. SEGMENT ARE SEPARATELY MAINTAINED AND AVAILABLE , THEN COMPARABILITY OF THIS COMPANY CAN BE CONSIDERED. HOWEVER, THE AFORESAID ASPECT REQUIRES FACTUAL VERIFICATION FOR COMING TO A DEFINITE CONCLUSION THAT THE COMPANY IS COMPARABLE TO THE ASSESSEE. SINCE , THE AFORESAID COMPARABLE WAS NOT IN THE LIST OF COMPARABLE SELECTED BY THE ASSESSING 9 TEEKAY SHIPPING INDIA PVT. LTD. OFFICER AND WAS SELECTED BY LEARNED COMMISSIONER (APPEALS), AND SINCE IT APPEARS FROM LEARNED COMMISSIONER (APPEALS)S ORDER THAT THE F UNCTIONAL PROFILE OF THIS COMPANY WAS NOT PROPERLY EXAMINED QUA AUDITED FINANCIAL STATEMENTS , WE ARE INCLINED TO RESTORE THE ISSUE RELATING TO THE COMPARABILITY OF THIS COMPANY TO THE ASSESSING OFFICER FOR FRESH ADJUDICATION KEEPING IN VIEW OUR OBSERVATION S HEREIN ABOVE AND ONLY AFTER DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 20 . SINCE , THE ASSE SSEE HAS NOT DISPUTED SELECTION/ REJECTION OF ANY OTHER COMPARABLE EXCEPT THE AFORESAID THREE COMPARABLE S , WE RESTRICT OUR FINDING TO THE COMPARABLES SPECIFICALLY DISPUTED BEFORE US. 21 . IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 08.03.2019 SD/ - MANOJ KUMAR AGGARWAL ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 08.03.2019 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