M/s WSP Consultants India Pvt. Ltd., New Delhi V. DCIT,

ITA 569/DEL/2017

AI Insights

The case involves WSP Consultants India Pvt. Ltd., which appealed against the final assessment order for the assessment year 2012-13, concerning transfer pricing adjustments made by the Deputy Commissioner of Income Tax. The primary issues revolved around the rejection of the segmental profitability analysis provided by the assessee and the inclusion of certain comparables in the transfer pricing study. The Tribunal found that the assessee had maintained detailed and separate accounts for its Associated Enterprises (AEs) and non-AE segments, which justified the PLI computed by the assessee. The Tribunal also addressed the inclusion of certain comparables and the application of filters such as export turnover and RPT in selecting comparables for transfer pricing analysis.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 300747 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 1 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I
• Next Hearing Date: 14-03-2023
• Assessment Year: 2012-2013
• Appeal Filed On: 31-01-2017
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Related party transaction; Transfer pricing
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘I’ NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.569/Del/2017 Assessment Year: 2012-13 WSP Consultants India Pvt. Ltd., Office Number 249, 2F, Regus Elegance Tower, Old Mathura Road, Jasola District Centre, New Delhi Vs. Deputy Commissioner of Income Tax, Circle-27(2), New Delhi PAN :AAACW5220F (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JM: The present appeal has been filed by the assessee assailing the final assessment order dated 29.11.2016 passed under section 144C(1) read with section 143(3) of the Income-tax Act, 1961 for the assessment year 2012-13, in pursuance to the directions of learned Dispute Resolution Panel (DRP). 2. Ground no. 1, being general in nature, is not pressed, hence, dismissed. Appellant by Sh. Ajit Jain, Advocate Respondent by Sh. Rajesh Kumar, CIT(DR) Date of hearing 15.03.2023 Date of pronouncement 24.03.2023 ITA No.569/Del/2017 AY: 2012-13 2 | P a g e 3. In ground no. 2, the assessee has raised the issue of rejection of segmental profitability furnished by the assessee. 3.1 Briefly the facts are, the assessee is a resident corporate entity and is a subsidiary of WSP GRP Cyprus Holding Ltd. As stated by Transfer Pricing Officer (TPO), the assessee is engaged in providing design and engineering services to property, environment, transport and infrastructure sectors. In the year under consideration, the assessee has provided engineering drawing and design services to its Associated Enterprises (AEs). In Form 3CEB report furnished for the year under dispute, the assessee has reported the following transactions: Sl. No. Nature of transaction Method Value of transaction 1. Rendering of building design services TNMM 12,79,00,494 2. Receipt of engineering services CPM 23,48,872 3. Reimbursement of expenses paid CUP 13,54,956 3.2 As far as the transactions reported at item nos. 2 and 3 above, there is no disputed between the parties. Insofar as the transaction relating to provision of building design services reported at item no. 1 above, in the TP study report (TPSR), the assessee benchmarked the transaction by adopting the Transactional Net Margin Method (TNMM) as the most ITA No.569/Del/2017 AY: 2012-13 3 | P a g e appropriate method with Operating Profit to Total Cost (OP/TC) ratio as the Profit Level Indicator (PLI). Conducting Function, Assets and Risk (FAR) analysis, the assessee selected certain companies as comparables. PLI shown by the assessee at 11.52% being more than the average PLI of the comparables worked out at 9.23%, the transaction with the AE was claimed to be at arm’s length. After examining the TP analysis of the assessee, the TPO accepted TNMM as most appropriate method as well as PLI adopted by the assessee. However, he was not happy with some of the comparables selected by the assessee. Hence, he introduced fresh comparables. However, the major area of difference between the assessee and the TPO was with regard to computation of operating cost. The TPO was of the view that the operating cost has to be allocated to AE and non-AE segments based on ratio of the turnover of the respective segments qua the total turnover. By adopting the aforesaid approach, he proceeded to compute the margin of the assessee by allocating operating cost to AE and non-AE segments. In the process, he determined the PLI of the assessee at (-)15.41%. Due to the computation of PLI, as aforesaid, and change in comparables, and upward adjustment of Rs.4,76,89,336/- to the ALP of the transaction with AE was ITA No.569/Del/2017 AY: 2012-13 4 | P a g e worked out. In the draft assessment order, the Assessing Officer incorporated the TP adjustment. Challenging the TP adjustment, the assessee raised objections before learned DRP. However, learned DRP upheld the adjustment proposed in the draft assessment order. 3.3 Before us, learned counsel appearing for the assessee submitted that there is no valid reason for allocating the operating expenses, that too, only the salary expenses to AE and non-AE segments on the basis of turnover, when, such expenditure is separately identifiable on the basis of accounts maintained by the assessee. He submitted, as per the business model of the assessee, the services are rendered to the AE on cost plus markup basis wherein the assessee recovers all costs with a markup of 8% from the AE. 3.4 Drawing our attention to the documents placed on record, learned counsel submitted, the assessee has maintained segmental accounts and insofar as the salary expenditure is concerned, the assessee has maintained project-wise account with regard to the transactions with the AEs. He submitted, not only the persons working on a particular project but the salary paid to them is separately identifiable. Thus, he submitted, there ITA No.569/Del/2017 AY: 2012-13 5 | P a g e is no reason to allocate the salary expenses to AE and non-AE segments, as such expenditure was specifically incurred in the AE segment. He submitted, in case, assessee’s segmental analysis is accepted, the PLI will be 11.52% only. 3.5 Learned Departmental Representative strongly relied upon the observations of learned DRP. 3.6 We have considered rival submissions and perused the materials on record. Undisputedly, the assessee follows the cost plus model for rendering services to AE. There is not dispute between the parties with regard to the most appropriate method to be followed for benchmarking the transaction, nor with regard to the PLI. The dispute is only with regard to computation of operating cost. It is observed from the facts on record that the TPO, though, has accepted the segmental analysis of the assessee in part while accepting that certain indirect expenses are allocable only to non-AE segment, however, with regard to employee cost, TPO has not accepted assessee’s claim and allocated to both the AE and non-AE segments on the basis of the turnover of the respective segments. Through materials placed in the paper- books, learned counsel for the assessee has demonstrated before us that the assessee has maintained separate accounts with ITA No.569/Del/2017 AY: 2012-13 6 | P a g e regard to AE and non-AE segments. Even, the details of employees working in AE segment with salary paid to them has been maintained project-wise. Therefore, when the employees of AE and non-AE segments are separately identifiable based on books of accounts maintained by the assessee, we do not find any valid reason why an aggregate approach has to be adopted and the employee cost has to be apportioned between the AE and non- AE segments based on turnover. It is evident, neither the TPO, nor learned DRP have disputed the fact that the assessee has maintained separate accounts for employee cost. Basically, learned DRP has rejected assessee’s claim for two reasons, firstly, on what basis the common employees were allocated is not clear and, secondly, hourly work-sheet of employees was not made available. We do not find the aforesaid reasoning of learned DRP acceptable. Firstly, as discussed earlier, the assessee has maintained project-wise list of employees working in AE segment. Therefore, the allegation of learned DRP that on what basis the common employees were allocated is not known does not seem to be borne out from record. Insofar as, the non-maintenance of hourly work-sheet of employees, we are of the view that there is no valid reason for the assessee to maintain such hourly work- ITA No.569/Del/2017 AY: 2012-13 7 | P a g e sheet, when it is not raising its invoices on hourly basis. In view of the aforesaid, we do not approve the decision of the TPO and learned DRP in allocating employees cost between the AE and non-AE segments. Therefore, the PLI computed by the assessee has to be accepted. This ground is allowed. 3.7 In ground no. 3, the assessee has challenged inclusion of certain comparables. The comparables under challenge are as under: Korus Engineering Solutions Pvt. Ltd. 4. Objecting to selection of this comparable, learned counsel for the assessee submitted that this company is functionally dissimilar as it is engaged in wide range of activities in respect of steel industries and sufficient information with regard to the business profile of the company is not available in public domain. In this regard, learned counsel drew our attention to the annual report of the company. Proceeding further, he submitted, the foreign exchange receipt of the company is below 6%. Hence, it fails export turnover filter. Whereas, the assessee has substantially high foreign exchange revenue. Thus, he submitted, the company, being functionally different, cannot be treated as comparable. ITA No.569/Del/2017 AY: 2012-13 8 | P a g e 4.1 Strongly relying upon the observations of the TPO and learned DRP, learned Departmental Representative submitted, as per the information contained in the website of the company, it is engaged in engineering consultancy services, hence, comparable to the assessee. 4.2 We have considered rival submissions and perused the materials on record. Though, the TPO, referring to the information contained in the website of this comparable has stated that it is engaged in the business of engineering consultancy services, however, on perusal of the annual report of the company placed in the paper-book, it is observed that the information regarding the business profile of the company is sketchy and lacks necessary details. Further, the balance-sheet and profit and loss account do not give the break-up of the source of revenue earned. Therefore, due to lack of information regarding the functional profile of the company available in the public domain, it cannot be ascertained, whether it is functionally similar to the assessee. Simply based on certain information in the website of the company functional similarity cannot be adjudged. Therefore, for this reason, the company, in our view cannot be selected as a comparable. ITA No.569/Del/2017 AY: 2012-13 9 | P a g e 4.3 Insofar as the other contention of the assessee regarding substantially less export turnover compared to the assessee, we are unable to accept assessee’s claim as neither the assessee, nor TPO have applied the export turnover filter. However, for the reasons discussed above, we direct the Assessing Officer to exclude this company as a comparable. TCE Consulting Engineers Ltd. 5. The only ground on which the assessee seeks exclusion of the aforesaid company is due to substantially low export sales turnover, which works out to 6.21% of the total turnover as compared to 100% exports of the assessee. 5.1 We have heard the parties and perused the materials on record. On a specific query, learned counsel appearing for the assessee fairly submitted that neither the assessee has applied the export turnover filter in its TPSR, nor the TPO has applied the said filter. Therefore, in our view, at this stage, we cannot introduce a fresh filter to select/reject comparables as it will disturb the entire TP analysis of the assessee and the TPO. Therefore, we are inclined to uphold the selection of this comparable. Onward Technologies Ltd. ITA No.569/Del/2017 AY: 2012-13 10 | P a g e 6. The only ground on which the assessee seeks exclusion of this company is due to failure of Related Party Transaction (RPT) of more than 25%. 6.1 Before us, learned counsel for the assessee submitted that RPT as a ratio of sales works out to 25.78%. However, he fairly submitted, this issue was neither raised before the TPO, nor before the DRP. 6.2 Learned Departmental Representative submitted, since, the assessee is raising this issue for the first time, it may be restored to the AO/TPO. 6.3 Having considered rival submissions, we find, both the TPO and learned DRP have applied RPT filter of more than 25%. Therefore, any company having RPT of more than 25% has to be excluded. However, considering the fact that the assessee is raising the issue of RPT for the first time before the Tribunal, we are inclined to restore the issue to the Assessing Officer for examining assessee’s claim and excluding the comparable in case RPT is found to be more than 25%. Ground is partly allowed. 7. In ground no. 4, the assessee has raised the issue of working capital adjustment. ITA No.569/Del/2017 AY: 2012-13 11 | P a g e 7.1 Having considered rival submissions, we direct the Assessing Officer to examine assessee’s claim, keeping in view the relevant statutory provisions and judicial precedents applicable to the assessee. Needless to mention, the assessee must be afforded reasonable opportunity of being heard to the assessee before deciding the issue. This ground is allowed for statistical purposes. 8. In ground no. 5, the assessee has raised the issue of computational error in computing the operating profit margins of the comparables. 8.1 Having considered rival submission, we direct the Assessing Officer to examine assessee’s claim with reference to the facts and materials on record and rectify the computational error, if any, in computing the profit margin of the comparables. The assessee must be afforded reasonable opportunity of being heard before deciding the issue. 9. Ground no. 6 is not pressed, hence, dismissed and ground no. 7, being premature, is dismissed. 10. In the result, the appeal is partly allowed. Order pronounced in the open court on 24 th March, 2023 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER ITA No.569/Del/2017 AY: 2012-13 12 | P a g e Dated: 24 th March, 2023. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi