M/s. Rolls Royce Energy Systems India Pvt. Ltd, New Delhi V. DCIT, New Delhi

ITA 5638/DEL/2011

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7257 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 26-04-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 15-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: S R DINODIA
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH F, NEW DELHI BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SMT. BEENA A. PILLAI, JUDICIAL MEMBER I.T.A. NO.5638/DEL/2011 (ASSESSMENT YEAR 2007-08) ROLLS ROYCE ENERGY VS. DCIT, CIRCLE 15(1), SYSTEMS INDIA P. LTD., NEW DELHI BIRLA TOWER TRUST, IIND FLOOR, 25, BARAKHAMBA ROAD, NEW DELHI GIR / PAN :AABCR5277Q (APPELLANT) (RESPONDENT) APPELLANT BY :SHRI S. R. DINODIA, CA RESPONDENT BY :SHRI AMRENDRA KUMAR, CIT DR DATE OF HEARING: 26.04.2016 DATE OF PRONOUNCEMENT: 27.06.2016 ORDER PER BEENA A. PILLAI, JM: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAINST THE FINAL ASSESSMENT ORDER PASSED BY LD. DCIT CIRCLE-15 (1), NEW DELHI, FOR ASSESSMENT YEAR 2007- 08. 2. THE ASSESSEE FILED ITS RETURN OF INCOME ON 13/10/2007 DECLARING A TOTAL INCOME OF RS.3,07,46,1 70/-. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICES UNDE R SECTION 142(1) AND 143(2) WERE ISSUED TO THE ASSESS EE. IN RESPONSE TO THE NOTICES THE ASSESSEE FILED DETAILS IN SUPPORT OF THE RETURNS FILED AND SUBMISSIONS ALONG WITH 2 I.T.A.N.5638./DEL/2011 THE NECESSARY DOCUMENTS AS PER THE QUESTIONNAIRE. D URING THE COURSE OF THE SCRUTINY PROCEEDINGS THE LD.AO NO TICED THAT THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS AE. A REFERENCE WAS MADE TO TH E TRANSFER PRICING OFFICER (TPO). ACCORDINGLY THE LD. AO REFERRED THE ASSESSEES CASE TO THE LD. TPO, FOR DETERMINATION OF THE ARMS LENGTH PRICE (ALP) IN RES PECT OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY ASSESSEE WITH ITS AE FOR THE YEAR UNDER CONSIDERATION. ON REFEREN CE BEING MADE TO THE LD.TPO, NOTICE UNDER SECTION 92CA WAS ISSUED TO THE ASSESSEE. IN RESPONSE TO THE SAME THE ASSESSEE FILED DOCUMENTATIONS PRESCRIBED UNDER RULE 10 D OF INCOME TAX RULES. 2.1 DURING THE PROCEEDINGS, THE LD. TPO OBSERVED TH AT ASSESSEE IS 99% SUBSIDIARY OF ROLLS-ROYCE OVERSEAS HOLDINGS LTD., WHICH IN TURN IS A SUBSIDIARY OF ROL LS-ROYCE PLC. ASSESSEE WAS INCORPORATED ON AUGUST 1999 TO INCREASE THE ROLLS-ROYCE GROUPS FOCUS ON THE EXPAND ING POWER GENERATION AND OIL AND GAS MARKETS IN INDIA, WITH A RANGE OF RECIPROCATING ENGINES COVERING GAS ENGINES , HFO ENGINES AND CRUDE OIL ENGINES, IT IS DISTINCTLY PLA CED AS AN INTEGRATED SOLUTION PROVIDER. 2.2 DURING THE YEAR UNDER CONSIDERATION THE ASSESSE E HAS ENTERED INTO INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISES (AE) AS UNDER: 3 I.T.A.N.5638./DEL/2011 S. NO . INTERNATIONAL TRANSACTION METHOD VALUE (IN RS.) 1 PURCHASE OF FINISHED GOODS CUP 12,25,69353/- 2 TECHNICAL SERVICES PROVIDED TO AES CUP 1,41,34,36 5/- 3 PROJECT MANAGEMENT SERVICES TM,, 1,16,99,170/- 4 MARKETING SUPPORT SERVICES TNMM 1,31,98,459/- 5 INTEREST ON LOAN FROM AE CUP 51,11,158/- 6 COMMISSION RECEIVED CUP 97,25,602/- TOTAL 17,64,38,107/- 2.3 IT WAS OBSERVED BY THE LD.TPO THAT THE ASSESSEE HAD APPLIED COMPARABLE UNCONTROLLED PRICE (CUP) AS THE MOST APPROPRIATE METHOD (MAM), FOR BENCHMARKING THE ARMS LENGTH PRICE FOR THE TRANSACTION OF PURCHASE OF FIN ISHED GOODS, TECHNICAL SERVICE PROVIDED TO ITS AES, INTE REST ON LOAN TAKEN FROM AES AND COMMISSIONED RECEIVED FROM AES. FOR PROJECT MANAGEMENT SERVICES AND MARKET SUPPORT SERVICES PROVIDED TO ITS AES, ASSESSEE HAD APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MAM, TAKING OPERATING PROFIT BY OPERATING REVENUE (OP/OR ) ( LD.AR MENTIONED THAT, IT HAS BEEN WRONGLY MENTIONED AS OP/TC IN THE ORDER OF LD.TPO) PROFIT LEVEL INDICATO R (PLI). SEGMENTAL OPERATING RESULTS HAS BEEN PREPARED FOR P ROJECT MANAGEMENT SERVICES AND MARKET SUPPORT SERVICES. TH E ASSESSEE ARRIVED AT SET OF 7 COMPARABLES WITH PLI O F 2.63% USING CURRENT YEAR MARGINS VIS--VIS PLI OF 5.12% WITH ASSESSEE AS THE TESTED PARTY. 4 I.T.A.N.5638./DEL/2011 2.4 THE LD. TPO HAS NOT OBJECTED TO THE MAM FOR BENCHMARKING THE ARMS LENGTH PRICE (ALP) FOR TRANSACTIONS ENTERED INTO BY ASSESSEE WITH ITS AES . THE COMPARABLES SELECTED BY ASSESSEE ARE AS UNDER: S.NO. NAME OF COMPANY OP/TC 1 RAUNAQ 12.42 2 D B CORP LTD., 10.93 3 KHAITAN (INDIA) LTD. 8.58 4 TAK MACHINERY & LEASING LTD 6.11 5 TIMES INNOVATIVE MEDIA LTD. 1.14 6 UBL SALES LTD. 31.32 7 WATER & POWER CO. INDIA LTD. 8.71 AVERAGE 2.36 2.5 THE LD.TPO REJECTED THE FIRST SIX COMPARABLES SELECTED BY THE ASSESSEE BY APPLYING QUANTITATIVE A ND QUALITATIVE FILTER. THE LD.TPO IN TURN SELECTED ADD ITIONAL THREE COMPARABLES SELECTED AS SHE WAS OF THE VIEW T HAT THE MARKETING SUPPORT SERVICES WORE INTRINSICALLY LINKE D WITH THE PROJECT MANAGEMENT SERVICES, WHICH HAS LED TO DEFICIENCY IN FUNCTIONAL COMPARABILITY OF THE COMPA NIES SELECTED BY THE ASSESSEE. THE LD.TPO ARRIVED AT A N EW SET OF COMPARABLES WHICH INCLUDED ONE COMPARABLE SELECT ED BY THE ASSESSEE. THE COMPARABLES SHORTLISTED BY THE LD.TPO ARE AS UNDER: S.NO. NAME OF COMPANY FUNCTIONS OP/TC 5 I.T.A.N.5638./DEL/2011 1 ICRA MGMT CONSULTANCY SERVICES MANAGEMENT CONSULTANCY SERVICES 17.36% 2 IDC (INDIA) LTD BUSINESS SERVICES 16.23% 3 NTPC ELECTRIC SUPPLY CO. LTD. TECHNICAL CONSULTANCY & ENGINEERING SERVICES 22.02% 4 WATER & POWER CO. INDIA LTD. TECHNICAL CONSULTANCY & ENGINEERING SERVICES 12.39% ARITHMETIC MEAN 17% 2.6 THIS LED TO THE PROPOSAL FOR A TRANSFER PRICING ADJUSTMENT IN RESPECT OF PROJECT MANAGEMENT SERVICE S AND MARKETING SUPPORT SERVICES AMOUNTING TO RS. 20,65,6 38/-. 2.7 THEREAFTER THE ASSESSEE CARRIED THE MATTER BEFO RE THE DISPUTE RESOLUTION PANEL (DRP)-II, NEW DELHI. THE D RP UNDER SECTION 144C (5) OF THE IT ACT, 1961 GAVE FOL LOWING TO LD.TPO FOR ARRIVING AT ARMS LENGTH PRICE. 2.8 THE DRP UPHELD THE REJECTION OF THE COMPARABLES BY THE LD.TPO, HOWEVER DIRECTED LD.TPO TO CONSIDER TAK MACHINERY AND LEASING LTD, IF ITS MENTAL INFORMATION/RESULTS ARE AVAILABLE. 2.9 THE DRP ALSO CONFIRMED THE ADDITION MADE BY THE LD.TPO IN RESPECT OF FOREIGN EXCHANGE FLUCTUATION W HILE COMPUTING THE OPERATING MARGINS OF THE COMPARABLE COMPANIES AS WELL AS THE ASSESSEE. ON RECEIPT OF TH E DIRECTIONS PASSED BY THE DRP, THE LD. AO PASSED THE 6 I.T.A.N.5638./DEL/2011 ASSESSMENT ORDER ON 28/10/2011, MAKING THE IMPUGNED ADDITIONS. 3. AGGRIEVED BY THE ORDER OF THE LD. AO THE ASSESSE E IS IN APPEAL BEFORE US IN RESPECT OF THE ADJUSTMENTS M ADE TO ALP ON THE FOLLOWING GROUNDS: 1) THAT THE LEARNED ASSESSING OFFICER HAS ERRED IN LAW AND ON FACTS IN MAKING AN ADDITION OF RS.20,65,G38/- ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENABLE GROUNDS. 2) THE ORDER OF ASSESSMENT IS BAD IN LAW. 3) THAT THE LEARNED AO HAS ERRED IN LAW, ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN MAKING ADDITION ON ACCOUNT OF ARMS' LENGTH PRICE UNDER SECTION 92CA(3) OF THE INCOME-TAX. ACT AMOUNTING TO RS. 20,65,638/- ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENABLE GROUNDS. 4) THE LEARNED AO'S ORDER BASED ON THE FINDINGS OF THE LEARNED TRANSFER PRICING OFFICER AND THE DIRECT IONS OF THE LEARNED DISPUTE RESOLUTION PANEL U/S.144C(5) OF THE INCOME-TAX, IS ERRONEOUS, UNTENABLE IN LAW A ND ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEE'S CA SE FOR VARIOUS REASONS AND NOT LIMITED TO THE FOLLOWIN G: - A) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE A.O. HAVE ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY ADJUSTING THE ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESS EE RELATED TO PROJECT MANAGEMENT SERVICES AND MARKETIN G SUPPORT SERVICES. B) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE A.O. HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUS SELECTION OF COMPARABLES FOR THE COMPUTATION OF ALP. C) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE 7 I.T.A.N.5638./DEL/2011 CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY REJECTING THE COMPARABLE COMPANIES SELECTED UNDER A SEARCH DRIVEN PROCESS FOLLOWED BY A DETAILED FAR ANALYSIS (FUNCTIONS PERFORMED, ASSETS UTILIZED AND RISK ASSUMED) UNDERTAKEN BY THE ASSESSEE. D) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY APPLYING A DEFECTIVE FAR ANALYSIS AND SELECTING AND RETAINING NON-COMPARABLE COMPANIES WHICH RENDER DIFFERENT SERVICES AS COMPARED TO THE ASSESSEE AND THEREBY ARRIVING AT AN INCORRECT ARMS' LENGTH PRICE. E) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY NOT GIVING BENEFIT OF PROVISO TO SECTION 92C(2) OF +/- 5% ADJUSTMENT TO THE ASSESSEE. F) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY NOT GIVING BENEFIT OF RISK ADJUSTMENT TO THE ASSESSEE ON ACCOU NT OF MATERIAL DIFFERENCES IN RISKS WITH REGARD TO THE SERVICES RENDERED BY THE COMPARABLE COMPANIES CHOSEN BY THE TPO AND THE SERVICES RENDERED BY THE ASSESSEE AS MANDATED BY RULE 10B(3) OF THE INCOME TAX RULES, 1962. G) THE TPO AS WELL AS THE DRP AND CONSEQUENTLY THE AO HAS ERRED IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN ERRONEOUSLY MAKING A T P ADJUSTMENTS OF RS.20,65,638/- ON ACCOUNT OF PROJECT MANAGEMENT SERVICE AND MARKETING SUPPORT SERVICE ON WHOLLY ILLEGAL, ERRONEOUS AND UNTENABLE GROUNDS. 4. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE SIDES, PERUSED THE ORDERS PASSED BY THE AUTHORITIES BELOW, THE PAPER BOOKS FILED BY THE ASSESSEE AND THE CASE LAWS RELIED UPON BY BOTH THE SIDES. THE ONLY DISPUTE THA T ARISES 8 I.T.A.N.5638./DEL/2011 IS WITH RESPECT TO SELECTION OF THE COMPARABLES. TO BE PRECISE THE CONTROVERSY ROTATES AROUND THE EXCLUSIO N BY THE LD. TPO/DRP OF THE FOLLOWING COMPANIES IN THE L IST OF COMPARABLES:- 1. KHAITAN INDIA LTD 2. TIMES INNOVATIVE MEDIA LTD 3. UBL SALES LTD 4.1 APART FROM THAT THE ASSESSEE IS INSISTING ON IN CLUSION OF THE FOLLOWING COMPARABLES WHICH WERE NOT INCLUDE D BY THE DRP AS WELL AS THE TPO:- 1. ICRA MANAGEMENT 2. IDC INDIA 3. NTPC ELECTRIC SUPPLY 4.2 WE SHALL TAKE UP THESE COMPANIES ONE BY ONE TO ASCERTAIN THEIR COMPATIBILITY OR OTHERWISE WITH THE ASSESSEE. BEFORE EMBARKING UPON THIS EXERCISE IT IS SINE QUA NON TO PRECISELY CONSIDER THE FUNCTIONAL PROFILE OF TH E ASSESSEE. FUNCTIONAL ANALYSIS OF THE ASSESSEE FROM THE TP STU DY: 4.3 FROM THE TP STUDY IT IS SEEN THAT ASSESSEE WAS PROVIDING OPTIMUM, EFFICIENT AND ENVIRONMENTALLY SO UND PRODUCTS AND SERVICES FOR THE POWER GENERATION AND OIL AND GAS MARKETS. FOR POWER GENERATION, ROLLS-ROYCE GAS ENGINES ARE WIDELY USED FOR INDUSTRIAL COGENERATION AND TRY GENERATION APPLICATIONS. IN THE OIL AND GAS SEC TOR THE ROLLS-ROYCE EQUIPMENT DERIVES LARGE PALMS TO PROPER LY CRUDE OIL AND REFINERY PRODUCTS THROUGH BLACK PIPEL INES 9 I.T.A.N.5638./DEL/2011 AND PROVIDES ELECTRICITY FOR PUMPING STATIONS. ROLL S-ROYCE ADDRESSES TO THE NEEDS OF ITS ENERGY CUSTOMERS IN I NDIA THROUGH A WHOLLY OWNED SUBSIDIARY BEING THE ASSESSE E UNDER CONSIDERATION. ROLLS-ROYCE IS EXPANDING ITS E NERGY CUSTOMER BASE IN INDIA WITH LEADING BUSINESSES SUCH AS GARDEN SILK MILLS,, AND TERRY TOWELS IN GUJARAT AND SALLY EXPORTS, VAIGHAI CHEMICALS, MMS STEEL AND POWER AND KAVERI GAS POWERED IN TAMIL NADU. 4.4 THE ASSESSEE UNDER CONSIDERATION TRANSACTS WITH 3 RELATED ENTITIES: A) IT HAS TAKEN A LOAN FROM ITS ULTIMATE PARENT COMPANY, ROLLS-ROYCE PLC, BASED IN UNITED KINGDOM AND INTEREST ON THE SAME HAS BEEN PROVIDED FOR DURING THE YEAR, 2006 7 B) IT BUYS FINISHED GOODS FROM AND PROVIDES TECHNICAL SERVICES TO ROLLS-ROYCE POWER ENGINEERING PLC ALSO BASED IN UNITED KINGDOM C) IT BUYS FINISHED GOODS FRUM, PROVIDES TECHNICAL, PROJECT MANAGEMENT AND MARKETING SUPPORT SERVICES TO AND RECEIVES COMMISSION FROM ROLLS-ROYCE MARINE AS BASED IN NORWAY. 4.5 THE ASSESSEE MARKETS ITSELF PRIMARILY IN THE PO WER GENERATION AND OIL AND GAS MARKETS, WITH A RANGE OF RECIPROCATING ENGINES COVERING GAS ENGINES, HFO ENG INES AND CRUDE OIL ENGINES, IT IS DISTINCTLY PLACED AS A N INTEGRATED SOLUTION PROVIDED FOR PROJECT MANAGEMENT 10 I.T.A.N.5638./DEL/2011 SERVICE (PMS) AND MARKETING SUPPORT SERVICE MARKETS (MSA) WITHIN THE TERRITORY OF INDIA AND BANGLADESH. ASSESSEE HAS A LITTLE COMPETITION IN THE OIL AND GA S MARKETS DUE TO ITS SUPERIOR TECHNICAL ENTERPRISE. 4.6 THE LD.AR HAS PLACED RELIANCE ON PAGES 222 TO 2 64 OF THE PAPER BOOK WHEREIN THE AGREEMENTS BETWEEN ROLLS - ROYCE MARINE A-S AND ASSESSEE FOR THE PROVISION OF MARKETING SUPPORT SERVICES AND PROJECT MANAGEMENT SERVICES ARE CONTAINED. HE HAS REFERRED TO PAGES 22 9 AND 233 FOR SERVICES RENDERED BY THE ASSESSEE IN RELATI ON TO MARKET SUPPORT SERVICES TO ROLLS-ROYCE MARINE AS IN INDIA AND BANGLADESH ARE AS UNDER: MAINTAIN CLOSE BUSINESS AND MARKETING RELATIONSHIPS WITH THE THIRD-PARTY ADVISER OF ROLLS-ROYCE MARINE AS IN BANGLADESH AND INDIA TO PROVIDE SUPPORT AS NECESSARY; TO DEVELOP AND MAINTAIN CLOSE RELATIONSHIP WITH PROSPECTIVE CUSTOMERS IN BANGLADESH AND INDIA SUPPLEMENTING LOCAL ADVISERS ACTIVITIES AND DRAW THEIR ATTENTION SUITABLE PRODUCTS OF ROLLS-ROYCE MARINE AS AND ASCERTAIN WHAT ROLLS-ROYCE MARINE AS COMPETITORS ARE OFFERING; HELP THE LOCAL ADVISOR TO CREATE AND NURTURE AN INTEREST IN THE PRODUCTS IN THE MINDS OF END CUSTOMERS; 11 I.T.A.N.5638./DEL/2011 ASSISTANCE IN THE IDENTIFICATION OF NEW BUSINESS PROSPECTS OR ROLLS-ROYCE MARINE AS IN BANGLADESH AND INDIA; TO ENSURE THAT ROLLS-ROYCE MARINE AS IS MADE AWARE OF ANY CRITICISM OF THE PRODUCTS AND HAS THE OPPORTUNITY OF COUNTERING THE TECHNICAL AND COMMERCIAL PROPOSALS OF THE COMPETITION; TO MAKE ROLLS-ROYCE MARINE AS AVAIL OF THE MOST EFFECTIVE STRATEGIES TO BE USED WITH ALL EXTERNAL PARTIES INSIDE THE TERRITORY AND ASSIST WITH ITS PREPARATION AND IMPLEMENTATION AS REQUESTED; TO MAKE ROLLS-ROYCE MARINE AS AVAIL OF ALL MATTERS RELATING TO COMPETITION, POTENTIAL COMPETITION AND OTHER BUSINESS HAZARDS FACING ROLLS-ROYCE MARINE AS WITHIN THE TERRITORY OF INDIA AND BANGLADESH IN A TIMELY MANNER SO AS TO PERMIT ROLLS-ROYCE MARINE AS TO DEVELOP AND IMPLEMENT AND IS A STRATEGY TO OVERCOME SUCH MATTERS; ATTEND MEETINGS UPON THE INSTRUCTIONS OF ROLLS-ROYC E MARINE AS, TO ASSIST IN PROVIDING APPROPRIATE FOLLO W- UP SERVICES TO THE ADVISOR; MAINTAIN CONSTANT LIES IN WITH THE THIRD-PARTY ADVI SER OF ROLLS-ROYCE MARINE AS IN INDIA AND BANGLADESH AND WITH OPERATORS OF THE PRODUCTS IN INDIA AND BANGLADESH IN ORDER TO OBTAIN EARLY WARNING OF ALL TECHNICAL AND COMMERCIAL PROBLEMS; 12 I.T.A.N.5638./DEL/2011 TO INFORM ROLLS-ROYCE MARINE AS AS EARLY AS POSSIBL E OF ALL PROSPECTIVE SALES AND OTHER BUSINESS OPPORTUNITIES WITH OR CONCERNING THE TERRITORY; PROVIDE NECESSARY INPUTS TO ENABLE THE ADVISOR AND ROLLS-ROYCE MARINE AS TO SUBMIT REQUISITE TENDERS I N THE TERRITORY; ACCESS ROLLS-ROYCE MARINE AS WITH ITS PROMOTIONAL ACTIVITIES IN BANGLADESH AND INDIA; TO ASSIST ROLLS-ROYCE MARINE AS WITH ITS PROMOTIONA L ACTIVITIES IN INDIA AND BANGLADESH; TO MAKE ROLLS-ROYCE MARINE AS AWARE OF THE DEVELOPMENT OF THE MARKET FOR PRODUCTS AND ON THE ACTIVITIES OF ROLLS-ROYCE MARINES COMPETITORS WITH IN INDIA AND THEREBY ASSISTING DEVELOPMENT OF ROLLS- ROYCE MARINE ES MARKETING AND BUSINESS STRATEGY TO UNDERTAKE INVESTIGATION ENQUIRIES AND OTHER DUTI ES AND PROVIDE GENERAL ADVICE AND ASSISTANCE AS NECESSARY AND AT THE REQUEST OF ROLLS-ROYCE MARINE AS; TO ESTABLISH AND MAINTAIN CONTACT AS REQUIRED AND B Y AGREEMENT WITH ROLLS-ROYCE MARINE AS WITH ACTUAL AND PROSPECTIVE SUPPLIERS AND PARTNERS AND WITH RELEVANT ORGANISATIONS, INSTITUTIONS AND GOVERNMENTAL AGENCIES WITHIN INDIA. 13 I.T.A.N.5638./DEL/2011 4.7 REFERENCE HAS BEEN MADE ON PAGES 240 AND 252 FO R SERVICES RENDERED IN RESPECT OF PROJECT MANAGEMENT WHICH ARE AS UNDER: TO REVIEW IN ACCORDANCE WITH THE GOOD PRACTICE FRAMEWORK; TO COORDINATE THE PURCHASE OF BALANCE OF PLANT AND EXPEDITING OF SUPPLIERS; TO CONTROL AND REVIEW EXPENDITURE ON THE PROJECT AN D IDENTIFYING AND CLAIMING ADDITIONAL COSTS FROM CLIENTS; COORDINATING WITH SUPPLIERS IN RELATION TO SUPPLY O F DRAWINGS AND SPECIFICATIONS; ENSURING THE CORRECT RESOURCES AVAILABLE AT THE CORRECT TIME FOR MANAGEMENT OF THE PROJECTS UNDERTAKEN; COORDINATING WAY BETWEEN ROLLS-ROYCE AND MARINE AS/ROLLS-ROYCE PLC AND CUSTOMERS FOR RAISING BANK GUARANTEES REQUIRED BY THE PROJECT AND RETRAINING GUARANTEES AFTER EXPIRY; MANAGING/COORDINATING THE LOGISTICS OF ROLLS-ROYCE MARINE AS SCOPE OF SUPPLY TO BE DELIVERED TO THE CORRECT PLACE, WITH CORRECT DOCUMENTATION; 14 I.T.A.N.5638./DEL/2011 ARRANGING FOR ATTENDANCE AT FACTORY WITNESS TEST AN D ACCOMPANYING THE CUSTOMERS REPRESENTATIVES WERE REQUIRED; COORDINATION OF APPROVAL OF DRAWINGS BY CUSTOMER AND PROVIDING QUALITY DOCUMENTATION; MAINTAINING CUSTOMER SATISFACTION TO PROTECT THE COMPANYS COMMERCIAL INTERESTS; MAINTAINING THE RISK REGISTER ON LARGE PROJECTS IDENTIFYING RISKS AND MANAGING THEM. 4.8 THE AGREEMENTS ENTERED INTO BY ASSESSEE WITH ROLLS-ROYCE MARINE A-S IN RESPECT OF MARKETING SUPP ORT SERVICE AND PROJECT MANAGEMENT SUPPORT SERVICE HAS CLEARLY MENTIONED THAT THE REIMBURSEMENT WILL BE ON THE BASIS OF ACTUAL COSTS 6.52% MARKUP, WHICH REPRESENTS THE MARKUP APPROPRIATE FOR A NON-RISK BEARING SERVICE PROVIDER. (CLAUSE 5 AT PAGES 223, 2 34, 246 AND 257) WITH REFERENCE TO THESE CLAUSE THE LEA RN ADR DEMONSTRATED THAT ASSESSEE IS ESSENTIALLY A NON - RISK BEARING SERVICE PROVIDER. 4.9 WITH THIS BACKGROUND WE SHALL TAKE UP THE COMPATIBILITY OF THE COMPANY EXCLUDED BY LD.TPO ONE BY ONE. 1. KHAITAN (INDIA) LTD. 4.9.1 THE LD.TPO REJECTED THIS COMPANY AS IT IS ENGAGED IN TRADING OF FANS, SUGAR ETC AND WAS NOT 15 I.T.A.N.5638./DEL/2011 COMPARABLE TO MARKETING AND CONSULTANCY OR PROJECT CONSULTANCY ACTIVITIES OF THE ASSESSEE. IT HAS BEEN SUBMITTED BY THE LD.AR THAT THIS COMPANY HAS A SEPARATE MARKETING DIVISION WHICH IS ANCILLARY TO I TS MAIN TRADING ACTIVITIES IN FANS, SUGAR ETC. THE LD. AR SUBMITTED THAT THE MARKETING SEGMENT IS FUNCTIONALL Y COMPARABLE TO ASSESSEE EVEN THOUGH THE PRODUCT MARKETED BY THIS COMPANY MAY BE DIFFERENT. HE FURTH ER SUBMITTED THAT ASSESSEE HAS USED ONLY THE MARKETING SEGMENT FOR THE PURPOSES OF COMPUTATION OF ALP. THE LD.AR PLACED RELIANCE AT PAGE 172 OF THE PAPER BOOK WHEREIN THE SEGMENTAL INFORMATION RELATING TO MARKETING DIVISION, CARRIED ON BY THIS COMPANY HAS BEEN PLACED. 4.9.2 ON THE CONTRARY THE LD.DR PLACES RELIANCE ON THE FINDINGS OF LD. TPO/DRP. HE SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT WITH THAT OF ASSE SSEE AND ALSO HAS A VERY SMALL PORTION OF REVENUE EARNED FROM MARKETING SERVICES. 4.9.3 WE HAVE PERUSED THE RELEVANT MATERIAL ON RECORD FILED IN THE PAPER BOOK AS WELL AS THE ORDER S PASSED BY THE AUTHORITIES BELOW. IT IS OBSERVED THA T THE ASSESSEE HAS COMPARED ONLY THE MARKETING SEGMENT OF THIS COMPANY WITH THAT OF ASSESSEE. THIS SEGMENT OF THE COMPANY IS ENGAGED IN SALES PROMOTION AND MARKETING OF FANS. THE LD.AR DEMONSTRATED THAT THIS COMPANY H AS A MARKETING SEGMENT LIKE ASSESSEE. IN THE PRESENT C ASE 16 I.T.A.N.5638./DEL/2011 THE LD.TPO HAS REJECTED ITS INCLUSION ON THE GROUND THAT THIS COMPANY IS TRADING IN FANS, SUGAR ETC. HOWEVER IT IS OBSERVED FROM THE TP STUDY THAT THE ASSESSEE HAS CONSIDERED THE REVENUE FROM MARKETING DIVISION OF T HIS COMPANY. THERE HAS BEEN NO FUNCTIONAL DISSIMILARITY IN THE MARKETING SEGMENT PERFORMED BY THIS COMPANY THA T HAS BEEN BROUGHT OUT BY THE LD.TPO OR DRP. 5.9.4 THERE IS NO QUARREL THAT FUNCTIONAL TEST PLAY S A PARAMOUNT ROLE IN THE SELECTION OF COMPARABLES. IT IS A SETTLED LAW THAT FUNCTIONALITY TESTED TO BE APPLIED HAVING REGARD TO THE SEGMENTAL DETAILS. IF A PARTIC ULAR SEGMENT IS PERFORMING SPECIFIC FUNCTION, THEN FOR DETERMINING FUNCTIONAL SIMILARITY, THOSE COMPARABLE S SHOULD BE SELECTED WHICH HAVE CLOSE SIMILARITY WITH THE FUNCTIONAL SEGMENT UNDER CONSIDERATION. 4.9.5 IT HAS BEEN SUBMITTED THAT THIS COMPANY PAYS THE RISKS ASSOCIATED WITH CARRYING OUT THE FUNCTION S OF MARKETING WHEREAS ASSESSEE IS A NO RISK, IN RELATIO N TO THE FUNCTIONS PERFORMED IN RESPECT OF MARKETING, SI NCE THESE ARE BORNE BY THE AE. WE THEREFORE DIRECT THE LD.TPO TO PROVIDE ADJUSTMENTS IN TERMS OF RISK. 4.9.6 WE THEREFORE DIRECT THE LD.TPO TO INCLUDE THI S COMPANY IN THE LIST OF COMPARABLES. 2. TIMES INNOVATIVE MEDIA LTD 17 I.T.A.N.5638./DEL/2011 4.10 THE LD.TPO HAS REJECTED THIS COMPANY AS IT IS ENGAGED IN EVENT MANAGEMENT AND THIS ACTIVITY WILL BE CLASSIFIED AS ENTERTAINMENT AND MEDIA RELATED SERVI CES. THE LD.AR HOWEVER SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY COMPARABLE TO ASSESSEE IN TERMS OF ITS MARKETING AND PROJECT MANAGEMENT ACTIVITIES. 4.10.1 ON THE CONTRARY LD.DR PLACES RELIANCE UPON T HE FINDINGS OF LD. TPO AND DRP. HE SUBMITTED THAT THE FUNCTIONS PERFORMED BY THIS COMPANY RELATES TO THE EVENT MANAGEMENT AND THEREFORE IS NOT SIMILAR WITH THE FUNCTIONS PERFORMED BY THE ASSESSEE. 4.10.2 WE HAVE PERUSED THE RELEVANT MATERIAL ON RECORD FILED IN THE PAPER BOOK AS WELL AS THE ORDER S PASSED BY THE AUTHORITIES BELOW. 4.10.3 IT IS OBSERVED FROM THE SEGMENTAL INFORMATIO N OF THIS COMPANY PLACED AT PAGE 175 OF THE PAPER BOOK T HAT THE MAIN REVENUE IS GENERATED FROM EVENTS. THE ASSESSEE DOES NOT HAVE EVENT MANAGEMENT UNDER THE SEGMENT OF MARKETING AND PROJECT MANAGEMENT SERVICES. WE THEREFORE REJECT THIS COMPANY AS A COMPARABLE DUE TO THE FUNCTIONAL DISSIMILARITY WITH ASSESSEE. 3. UBL SALES LTD . 4.11 THE LD.TPO REJECTED THIS COMPANY AS 100% REVENUE BY THIS COMPANY IS FROM COMMISSION ON 18 I.T.A.N.5638./DEL/2011 MARKETING OF FINANCIAL PRODUCTS FROM UTI BANK. HE THEREFORE OPINED THAT THE ACTIVITIES CARRIED ON BY THIS COMPANY ARE NOT COMPARABLE TO THE MARKETING AND CONSULTANCY OR PROJECT CONSULTANCY ACTIVITIES CARRI ED ON BY THE ASSESSEE. THE LD. AR SUBMITTED THAT EVEN THOUGH THE PRODUCTS TRADED BY THIS COMPANY ARE DIFFERENT FROM THAT OF THE ASSESSEE, IT HAS A SEPAR ATE MARKETING SEGMENT. RELIANCE HAS BEEN PLACED AT THE SEGMENTAL INFORMATION OF THIS COMPANY AT PAGE 176 O F THE PAPER BOOK. RELIANCE HAS BEEN PLACED ON THE DECISION OF MUMBAI TRIBUNAL IN THE CASE OF ACIT VER SUS M/S NGC NETWORK (INDIA) PRIVATE LIMITED IN ITA NUMB ER 5307/M/2008, WHEREIN THE PRINCIPLE OF CLOSE COMPATIBILITY WAS UPHELD AND THE TAX PAYERS CONTENTION THAT COMPANY IS ENGAGED IN SIMILAR ACTIV ITY CAN BE COMPARED WAS SUSTAINED. 4.11.1 ON THE CONTRARY THE LD. DR PLACES RELIANCE O N THE FINDINGS OF LD. TPO/DRP. WE HAVE PERUSED THE RELEVANT MATERIAL ON RECORD FIL ED IN THE PAPER BOOK AS WELL AS THE ORDERS PASSED BY T HE AUTHORITIES BELOW. 4.11.2 IT IS OBSERVED THAT THE ASSESSEE HAS COMPARE D ONLY THE MARKETING SEGMENT OF THIS COMPANY WITH THA T OF ASSESSEE. THIS SEGMENT OF THE COMPANY IS ENGAGED IN SALES PROMOTION AND MARKETING FUNCTIONAL PRODUCTS FROM UTI BANK. THE LD. AR DEMONSTRATED THAT THIS 19 I.T.A.N.5638./DEL/2011 COMPANY HAS A MARKETING SEGMENT LIKE THAT OF ASSESSEE. IN THE PRESENT CASE THE LD.TPO HAS REJECT ED ITS INCLUSION ON THE GROUND THAT THIS COMPANY IS EARNIN GS COMMISSION FROM MARKETING THE FINANCIAL PRODUCTS OF UTI. IT IS OBSERVED FROM THE TP STUDY THAT THE AS SESSEE HAS CONSIDERED THE REVENUE FROM MARKETING DIVISION OF THIS COMPANY. THERE HAS BEEN NO FUNCTIONAL DISSIMILARITY IN THE MARKETING SEGMENT PERFORMED BY THIS COMPANY THAT HAS BEEN BROUGHT OUT BY THE LD.TP O OR DRP. 4.11.3 IT HAS BEEN SUBMITTED THAT THIS COMPANY PAYS THE RISKS ASSOCIATED WITH CARRYING OUT THE FUNCTION S OF MARKETING WHEREAS ASSESSEE IS A NO RISK, IN RELATIO N TO THE FUNCTIONS PERFORMED IN RESPECT OF MARKETING, SI NCE THESE ARE BORNE BY THE AE. WE THEREFORE DIRECT THE LD.TPO TO PROVIDE ADJUSTMENTS IN TERMS OF RISK. 4.11.4 WE THEREFORE DIRECT THE LD.TPO TO INCLUDE TH IS COMPANY IN THE LIST OF COMPARABLES. 4.12 AS REGARDS THE EXCLUSION OF ICRA MANAGEMENT, IDC INDIA AND NTPC ELECTRIC SUPPLY, THE LD.AR HAS N OT RAISED ANY GROUND. THEREFORE WE DO NOT GO INTO THIS ASPECT. 4.12.1 ACCORDINGLY GROUNDS RAISED BY THE ASSESSEE STAND ALLOWED. 5. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE S TANDS ALLOWED. 20 I.T.A.N.5638./DEL/2011 ORDER PRONOUNCED IN OPEN COURT ON 27 TH JUNE, 2016. SD./- SD./- (PRAMOD KUMAR) (BEENA A. PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATE: 27.06.2016 SP. COPY FORWARDED TO:- 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT (A)-, NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY. BY ORDER (ITAT, NEW DELHI) S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 20/6 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 27/6/16 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 27/6 SR. PS/PS 7 FILE SENT TO BENCH CLERK 28/6 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER