GS Engineering & Construction Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 5221/DEL/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 91014 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 30-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 10-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SHRI; G C SRIVASTAVA SHRI NITIN GARG
• Keywords: Transfer pricing; International transaction
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I : NEW DELHI) BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI ABY T. VARKEY, JUDICIAL MEMBER ITA NO.5221/DEL./2012 (ASSESSMENT YEAR : 2008-09) M/S. GS ENGINEERING & CONSTRUCTION PVT. LTD., VS. D CIT, CIRCLE 12 (1), 2 ND FLOOR, MASTER PIECE BUILDING, SDF, NEW DELHI. SECTOR 54, GOLF COURSE ROAD, GURGAON. (PAN : AACCG6057G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI G.C. SRIVASTAVA, ADVOCATE, SHRI NITIN GARG, CA & SHRI D.S. B HARDWAJ REVENUE BY : SHRI JUDY JAMES, STANDING COUNSEL DR DATE OF HEARING : 30.04.2015 DATE OF PRONOUNCEMENT : .05.2015 O R D E R PER S.V. MEHROTRA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE FINAL ASSESSMENT ORDER DATED 31.08.2012 PASSED U/S 143(3) READ WITH SECTION 144C OF THE INCOME-TAX ACT, 1961. THE RELEVANT ASS ESSMENT YEAR IS 2008- 09. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE, A W HOLLY OWNED SUBSIDIARY OF THE GS ENGINEERING & CONSTRUCTION, KO REA (IN SHORT, GS KOREA) IN THE RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF ITA NO.5221/DEL./2012 2 ENGINEERING, PROCUREMENT AND CONSTRUCTION SERVICES (IN SHORT, EPC) TO ITS CUSTOMERS GLOBALLY, ESPECIALLY IN OIL AND GAS SECTO R. IN RELATION TO EPC CONTRACTS PROCURED BY GS KOREA, GS INDIA RENDERED E NGINEERING DESIGN SUPPORT SERVICES TO GS KOREA. THUS, GS INDIA WAS E NGAGED PURELY IN ENGINEERING DESIGN SUPPORT SERVICES. GS INDIA OPER ATED THROUGH SIX DEPARTMENTS WHICH ARE AS UNDER :- PROCESS DEPARTMENT IS ENGAGED IN MAKING DRAWINGS AND SPECIFICATIONS FOR BUILDING THE PLANT CONSIDERING T HE FINAL PRODUCT, CAPACITY AND OPERATION SCHEMATIC ACCORDING TO CLIENT'S REQUIREMENT; PIPING DEPARTMENT DETERMINES THE EQUIPMENT PLOT P LAN AND PIPING ROUTE IN PLAN; MECHANICAL DEPARTMENT DESIGNS THE EQUIPMENT SUCH AS PUMPS, COMPRESSORS, REACTOR, VESSELS ETC. ELECTRICAL DEPARTMENT DESIGNS THE ELECTRICAL EQUIPM ENT AND SYSTEM; INSTRUMENT DEPARTMENT DESIGNS THE MEASURING LOGIC SYSTEM IN THE PLAN SUCH AS ALARM AND SHUTDOWN AGAIN ST OVERFLOW ETC. CIVIL, ARCHITECTURE AND STRUCTURE DEPARTMENT DESIGN S THE GROUND PAVING, BUILDINGS AND STEEL STRUCTURES I N THE PLANT. THE DEPARTMENT IS FULLY COMPUTERIZED AND IS EQUIPPED WITH INTERNATIONALLY ACCEPTED SOFTWARE PACKAGES VIZ. STAAD, PRO, AUTOCAD, AFES, PDS, PDMS, SP3D ETC.) FOR DEALING WITH STRUCTURAL ANALYSIS, DESIGN AND DRAFTING ASSIGNMENT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTION WITH ITS AE :- ITA NO.5221/DEL./2012 3 S.NO. NATURE OF TRANSACTION METHOD USED BY ASSESSEE VALUE (IN INR) 1. ENGINEERING DESIGN & DRAWING SERVICES TNMM OP/OR 18,09,68,411 LD. TPO COMPUTED THE ARMS LENGTH PRICE (IN SHORT, ALP) AT RS.21,48,47,139/- AND, ACCORDINGLY DIRECTED FOR UPW ARD ADJUSTMENT OF RS.3,38,78,728/- AS UNDER :- ARM/S LENGTH MARGIN (WORKING CAPITAL ADJUSTED) 35.66% TOTAL COST OF THE ASSESSEE A 15,83,71,767/- ALP AT A MARGIN OF 35.66% B = 1.3566*A RS. 21,48,47,138 PRICE RECEIVED FROM AE C RS. 18,09,68,411 ADJUSTMENT U/S 92CA D = B C RS.3,38,78,728 PERCENTAGE OF ADJUSTMENT E = D/C*100 18.72% WHILE DETERMINING THE ALP, THE ASSESSEE HAD PUT ITS CLAIM OF IDLE CAPACITY BEING FIRST YEAR OF ITS OPERATION AS TO THE COST OF INFRASTRUCTURE ON THE GROUND THAT NO COMMENSURATE REVENUE WAS DERIVED BY ASSESSEE. FURTHER, IT WAS POINTED OUT THAT NONE OF THE COMPARABLES SELECT ED BY THE TPO WERE IN THE FIRST YEAR OF THEIR OPERATION. LD. TPO HAS ACC EPTED THE ASSESSEES CONTENTION IN PRINCIPLE BECAUSE THIS BEING THEIR FI RST YEAR OF OPERATION, THE UNABSORBED FIXED COST REQUIRED TO BE APPROPRIATELY ADJUSTED. THE ASSESSEE HAD CLAIMED THAT OUT OF THE TOTAL OPERATING COST OF RS.16,10,86,767/-, AN AMOUNT OF RS.82,59,925/- HAD TO BE ADJUSTED UNDER T HE FOLLOWING HEADS :- (I) RENT RS.54.29 LACS (II) ELECTRICITY RS. 6.17 LACS (III) MAINTENANCE CHARGE RS.22.13 LACS RS.82.59 LACS ITA NO.5221/DEL./2012 4 LD. TPO DID NOT ALLOW ANY ADJUSTMENT IN REGARD TO E LECTRICITY AND MAINTENANCE CHARGES ON THE GROUND THAT THEY WERE IN THE NATURE OF VARIABLE COST BUT ALLOWED 50% ADJUSTMENT UNDER THE HEAD RENT AND ACCORDINGLY ALLOWED IDLE ADJUSTMENT CAPACITY OF RS.27.15 LACS. LD. DRP CONFIRMED THE TPOS ACTION AS REGARDS NO ADJUSTMENT BEING ALLOWED BY TPO ON ELECTRICITY BUT ACCEPTED THE ASSESSEES CONTENTION AS REGARDS THE MAINTENANCE ON THE GROUND THAT MAINTENANCE IS CONSE QUENT TO TAKING THE BUILDING ON RENT AND THIS BEING FIRST YEAR 50% OF T HE COST OF MAINTENANCE (WRONGLY MENTIONED AS RENT IN DRPS ORDER) BE ALLOW ED AS IDLE CAPACITY. ACCORDINGLY, LD. DRP DIRECTED THE AO/TPO TO ALLOW F OR 50% OF THE MAINTENANCE COST IN ADDITION TO 50% OF RENT ALREADY ALLOWED. 3. THE ASSESSEE IS PRIMARILY AGGRIEVED BY THE QUANT UM OF ADJUSTMENT MADE BY ASSESSING OFFICER AND HAS TAKEN FOLLOWING G ROUND TO THIS EFFECT :- 2. THAT ON FACTS AND IN LAW, THE HONBLE DRP AND LEARNED AO HAVE ERRED IN NOT REDUCING ENTIRE 100% OF UNABSORBE D FIXED COSTS OF THE APPELLANT EVEN THOUGH IT WAS ESTABLISHED THA T BEING FIRST YEAR OF OPERATION, THE APPELLANT HAD IDLE CAPACITY. WHILE BOTH THE HONBLE DRP AND LEARNED TPO/AO AGREED THAT THERE IS IDLE CAPACITY, ONLY 50% OF UNABSORBED COSTS WERE REDUCED WHILE DETERMINING THE ARMS LENGTH PRICE. 4. LD. COUNSEL SUBMITTED THAT ASSESSEE HAD ADVANCED ITS CLAIM AS REGARDS IDLE CAPACITY TO THE EXTENT OF 37% WHEREAS LD. TPO AND DRP HAD ACCEPTED THAT IDLE CAPACITY UP TO 50% IS TO BE ALLO WED. LD. COUNSEL FILED THE FOLLOWING CHART IN THIS REGARD :- ITA NO.5221/DEL./2012 5 MONTH /YEAR REGULAR EMPLOYEE (A) CONTRACTUAL (B) TO- TAL (A+ B) WO- RK STA- TION UN- UTI- LIS- ED EMPLS/ WORK- STATION% UN- UTI- LIZED WO- RK- STA- TION % RENT PER MONTH UN- UTILIZED RENT MAIN- TENANCE PER MONTH UNUTI- LISED MAIN- TENANCE ELECT PER MONTH UN- UTILIZED ELECTRI- CITY EXPENSE ELECT UTILISED WORK- STATION/ ELECT FOR AVAIL- ABLE WORK- STATION% OP- EN- ING NO. AD- DI- TION ATTRI- TION TOTAL (EXI -- ST- ING) NOS. OP EN ING NO. AD - DI- TION ATT- RI- TION TOTAL (EX- IST- ING) NOS. APR-07 63 9 3 69 69 131 62 53% 47% 1110126 525403 487901 230914.98 134348 63585 52% MAY- 07 69 9 6 72 0 0 0 0 72 131 59 55% 45% 1110126 499980 514288 231625.89 125204 56390 44% JUN-07 72 4 2 74 0 1 0 1 75 211 136 36% 64% 1247338 803971 538515 347099.72 126643 80339 65% JUL-07 74 23 5 92 1 3 0 4 96 211 115 45% 55% 1247338 679829 510569 278272.20 145011 79034 62% AUG- 07 92 15 2 92 4 2 0 6 111 211 100 53% 47% 1247338 591155 510569 241975.83 145012 68726 54% SEP-07 105 12 2 105 6 0 0 6 121 211 90 57% 43% 1247338 532040 455758 194399.15 151433 64592 58% OCT-07 115 13 5 115 6 1 1 6 129 211 82 61% 39% 1247338 484747 455758 177119.22 156942 60992 56% NOV- 07 123 13 2 123 6 0 0 6 140 211 71 66% 34% 1247338 419720 455758 153359.33 131155 44133 43% DEC-07 134 22 3 134 6 1 0 7 160 211 51 76% 24% 1247338 301489 455758 110159.52 128134 30971 37% JAN-08 153 5 3 153 7 1 0 8 163 211 48 77% 23% 1247338 283755 566522 128877.04 141540 32199 32% FEB-08 155 15 2 155 8 2 0 10 178 211 33 84% 16% 1247338 195081 483848 75672.91 147489 23067 36% MAR- 08 168 17 4 168 10 1 0 11 192 211 19 91% 9% 1247338 11 2320 483848 43569.25 148386 13362 34% TOTAL 126 198 72 63% 37% 14693632 5429492 5919092 2213045 1679297 617388 48% WITH REFERENCE TO THE AFORESAID CHART, LD. COUNSEL SUBMITTED THAT THE CLAIM OF THE ASSESSEE AS REGARDS ADJUSTMENT ON ACCOUNT OF UNUTILIZED RENT OF RS.54,29,492/- AND UNUTILIZED MAINTENANCE OF RS.22, 13,045/- HAD TO BE ALLOWED. HE, THEREFORE, SUBMITTED THAT SINCE THE C LAIM OF THE ASSESSEE IS LESS THAN 50%, THEREFORE, THE ENTIRE CLAIM OF ASSES SEE AS REGARDS RENT AND MAINTENANCE SHOULD HAVE BEEN ALLOWED. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES. THE LD. TPO HAD ALLOWED 50% OF THE ADJUSTMENT CLAIMED UNDER THE HEAD RENT, INTER ALIA, OBSERVING THAT ASSESSEE HAD NOT GIVEN THE BAS IS OF ALLOCATION. HE, HOWEVER, ALLOWED 50% OF THE ADJUSTMENT CLAIM UNDER THE HEAD RENT WITHOUT TAKING INTO CONSIDERATION AS TO WHAT WAS THE ACTUAL IDLE CAPACITY VIS--VIS ITA NO.5221/DEL./2012 6 THE CLAIM ADVANCED BY ASSESSEE. IN THE AFOREMENTIO NED CHART, THE ASSESSEE HAS GIVEN SPECIFIC NUMBER OF WORK STATIONS IN DIFFE RENT MONTHS OUT OF WHICH HOW MANY WORK STATIONS REMAINED UNUTILIZED. WE HAVE NOTED EARLIER THE VARIOUS DEPARTMENTS THROUGH WHICH THE A SSESSEE WAS RENDERING SERVICES. ONCE THE ASSESSEE HAS GIVEN SPECIFIC DET AILS, THERE REMAINS NO SCOPE FOR ANY ESTIMATION. WE, THEREFORE, DIRECT TH E AO/TPO TO ALLOW THE ADJUSTMENT FOR IDLE CAPACITY AS CLAIMED BY ASSESSEE IN REGARD TO RENT AND MAINTENANCE CHARGES. ACCORDINGLY, THIS GROUND IS A LLOWED. 6. THE NEXT GROUND WHICH NEEDS ADJUDICATION IS GROU ND NO.3 WHICH READS AS UNDER :- 3. THAT THE LEARNED TPO/AO HAVE ERRED IN IGNORING THE OTHER INCOME AND TRANSFER PRICING ADJUSTMENT MADE BY THE APPELLANT WHILE COMPUTING THE AMOUNT OF TRANSFER PRICING ADDITION E VEN THOUGH THE SAME HAS BEEN CONSIDERED WHILE COMPUTING THE OPERATING M ARGINS OF THE APPELLANT. 7. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES. THE ASSESSEE HAD CHOSEN OPERATING PROFIT TO OPERATING R EVENUE AS THE PROFIT LEVEL INDICATOR. AS PER THE TP REPORT, OPERATING P ROFITS WERE DEFINED AS UNDER :- OPERATING PROFITS = PROFIT BEFORE FINANCIAL AND NON -OPERATING EXPENSES THE TPO OBSERVED THAT ASSESSEE DID NOT DEFINE WHAT CONSTITUTES OPERATING REVENUE AND ALSO NON-OPERATING EXPENSES. LD. TPO C ONSIDERED THE OPERATING PROFIT ON OPERATING EXPENSES AS THE APPRO PRIATE PROFIT LEVEL INDICATOR. THE PROFIT BEFORE INTEREST AND TAX WAS CONSIDERED FOR COMPUTING ITA NO.5221/DEL./2012 7 THE OPERATING MARGINS. LD. COUNSEL FOR THE ASSESSE E REFERRED TO THE COMPUTATION OF ADJUSTMENT U/S 92CA REPRODUCED EARLI ER AND POINTED OUT THAT WHILE COMPUTING THE ADJUSTMENT, THE TPO HAD DE TERMINED THE PRICE RECEIVED FROM AE AT RS.18,09,68,411/-. HE REFERRED TO PAGE 10 OF THE PAPER BOOK TO DEMONSTRATE THAT THIS IS THE INCOME A S PER PROFIT AND LOSS ACCOUNT FOR THE YEAR MARCH 31, 2008. LD. COUNSEL F URTHER SUBMITTED THAT WHILE FURNISHING COMPUTATION OF INCOME, THE ASSESSE E HAD MADE A BOOK ADJUSTMENT OF RS.14,38,913/- WHICH HAS NOT BEEN CON SIDERED BY LD. TPO WHILE COMPUTING THE ADJUSTMENT. HE FILED BEFORE US A COPY OF THE COMPUTATION OF INCOME TO SUBSTANTIATE HIS PLEA. TH E SAID COMPUTATION IS REPRODUCED AS UNDER :- GS ENGINEERING AND CONSTRUCTION INDIA PVT. LTD. COMPUTATION OF INOCME TAX ASSESSMENT YEAR 2008-09 MINIMUM ALTERNATIVE TAX (SECTION 115JB) NET PROFIT AS PER THE PROFIT & LOSS ACCOUNT ADD : OUT OF BOOK ADJUSTMENT LESS : PROVISION FOR FRINGE BENEFIT TAX 22003032 1438913 1120000 BOOK PROFIT SUBJECT TO MAT ROUNDED OFF 22321945 22321950 INCOME TAX ON RS.2,23,21,950 (10% OF BOOK PROFIT) ADD : SURCHARGE @ 10% ADD : CESS @ 3% LESS : TAX DEDUCTED AT SOURCE 2232195 223220 2455415 73662 2529077 163362 2365715 ADD : INTEREST U/S 234B ON RS.23,65,700 FOR 6 MONTH @ 1% P.M. INTEREST U/S 234C - UPTO 15.6.2007 ON RS.3,54,800 FOR 3 MONTHS @ 1% P.M - UPTO 15.9.2007 ON RS.10,64,500 FOR 3 MONTHS @ 1% P. M - UPTO 15.12.2007 ON RS.17,74,200 FOR 3 MONTHS @ 1% P .M - UPTO 15.3.2008 ON RS.23,65,700 FOR 1 MONTH @ 1% P.M 141942 10644 31935 53226 23657 TAX PAYABLE 2627119 ITA NO.5221/DEL./2012 8 LD. COUNSEL FILED BEFORE US A COPY OF ACKNOWLEDGEME NT OF INCOME-TAX RETURN FOR ASSESSMENT YEAR 2008-09 WHEREIN THE NET TAX PAYABLE HAS BEEN SHOWN AT RS.25,29,077/- IN ITS COMPUTATION OF INCOM E. THIS IMPLIES THAT TAX LIABILITY HAS BEEN COMPUTED AFTER TAKING INTO A CCOUNT OF BOOK ADJUSTMENT. WE, THEREFORE, FIND CONSIDERABLE MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE ADJUSTMEN T SHOULD HAVE BEEN MADE BY LD. TPO AFTER TAKING INTO CONSIDERATION BOOK ADJ USTMENT ALREADY MADE BY THE ASSESSEE IN THE COMPUTATION OF INCOME. THIS ASPECT HAS NOT AT ALL BEEN EXAMINED/CONSIDERED BY LD. TPO AND, THEREFORE, FOR THE LIMITED PURPOSE OF VERIFICATION OF THE ASSESSEES CLAIM AS PER ITS RETURN OF INCOME, THE MATTER IS RESTORED BACK TO TPO/ASSESSING OFFICE R. THIS GROUND IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 8. GROUND NO.4 IS AGAINST THE LD. DRP AND AO'S REJE CTING THE ASSESSEES CLAIM TO USE OF MULTIPLE YEAR DATA FOR C OMPUTING ARMS LENGTH PRICE AND ADHERING ONLY TO SINGLE YEAR UPDATED DATA . LD. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THIS ISSUE IS COV ERED AGAINST THE ASSESSEE. ACCORDINGLY, THIS GROUND IS DISMISSED. 9. THE NEXT GROUND OF APPEAL IS THAT THE LD. DRP AN D TPO/AO ERRED IN USING THE INFORMATION THROUGH INAPPROPRIATE USE OF POWER U/S 133 (6). LD. COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THIS ISSUE IS ALSO COVERED AGAINST THE ASSESSEE. ACCORDINGLY, THIS GROUND IS DISMISSED. ITA NO.5221/DEL./2012 9 10. GROUND NO.6 IS PREMATURE. 11. GROUND NO.7 IS CONSEQUENTIAL. THE AO WILL RECA LCULATE THE CHARGING OF INTEREST, IF ANY, WHILE GIVING EFFECT TO APPELLA TE ORDER. 12. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 8 TH DAY OF MAY, 2015. SD/- SD/- (ABY T. VARKEY) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUTNANT MEMBER DATED THE 8 TH DAY OF MAY, 2015 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.