Organica Water Private ltd. , Haryana V. ITO WARD 19(1), DELHI, Delhi

ITA 577/DEL/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 2596 (ITAT-DELHI)
• Duration Of Justice: 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 27-09-2022
• Assessment Year: 2017-2018
• Appeal Filed On: 03-04-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHESH SHAH
• Assessee Lawyers: ANKIT ARORA
• Keywords: Transfer pricing; Principle of natural justice; International transaction
• Section: 143(3); 92; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘I’ : NEW DELHI) BEFORE DR. B.R.R.KUMAR, ACCOUNTANT MEMBER AND SH. ANUBHAV SHARMA, JUDICIAL MEMBER ITA No.577/Del/2022 (Assessment Year : 2017-18) Organica Water Private Limited, Haryana Regus Business Centre, Tower B, 10 th Floor, Unitech Cyber Park, Sector-39, Gurugram 122001 PAN : AABCO3984B Vs. Income Tax Officer National Faceless Assessment Centre. Appellant Respondent Assessee by Sh. S.P.Singh, AR and Sh. Ankit Arora, CA Revenue by Shri Mahesh Shah, CIT(DR) Date of hearing: 28.09.2022 Date of Pronouncement: 4 th .10.2022 ORDER Per Anubhav Sharma, JM; The assessee has come to this Tribunal challenging the orders of Ld. Tax Authorities in the form of assessment order dated 02.03.2022 u/s 143(3) r.w.s. 144C(13) read with section 144B of the Income Tax Act (hereinafter ITA No.577/Del/2022 Organica Water P. Ltd. 2 referred to as ‘the Act’) passed by National Faceless Assessment Centre, Delhi (hereinafter referred to as ‘the AO or Assessing officer’) which was passed on the transfer pricing order dated 20.01.2021 and the DRP-2, New Delhi directions dated 10.01.2022 u/s 144C(5) of the Act. 2. The facts in brief are assessee/appellant Organica Water Private Limited ("Organica India") was incorporated on 29th December, 2010 as a wholly owned subsidiary of Organica Technologies Zrt, Hungary. The Company is engaged in the business of providing services in respect of wastewater treatment plant in India and abroad and also providing design related engineering services to its AEs and exploring business opportunity in the field of water treatment to/ for its holding company. Organica Zrt is provider of ecologically engineered wastewater treatment solutions, consisting of capital equipment, proprietary technology, ancillary engineering services, and applications expertise for the treatment of municipal and commercial sanitary wastewater and industrial effluent for disposal or possible re-use. The company has set up Organica India in the form of a subsidiary that shall provide Organica Zrt engineering services required for the execution of water and wastewater treatment design. Transfer Pricing approach of Assessee For the purpose of determination of arm's length price, the Assessee has relied on the provisions of Indian transfer pricing regulations, accordingly the Assessee selected Transactional Net Margin Method ("TNMM") as the most appropriate transfer pricing method, with operating profit/operating cost ("OP/OC") as the profit level indicator ("PLI"). ITA No.577/Del/2022 Organica Water P. Ltd. 3 Based on the analysis, international transactions undertaken by the Assessee were considered to be at arm's length. Approach adopted by Ld. TPO in the draft order The Ld. TPO, while re-determining, arm's length price of international transaction has: ■ Rejected segmental determination of AE and Non-AE profits • Rejected some of the quantitative filters applied by the Assessee; ■ Introduced certain new/additional quantitative filters. ■ Rejected 3 out of 7 comparable selected by the Assessee. ■ Introduced certain additional comparable companies. Based on the above, Ld. TPO arrived at a set of 13 comparable companies with arm’s length margin (represented by median of data set) 9 of 19.80%. The Ld. TPO admitted that the Assessee has AE and Non-AE transactions, and that TP is to be applied only on the AE transactions, and he did not accept segmental level profitability provided by the Assessee and instead calculated margins on entity level basis wherein, the Ld. TPO included margin arising out of non-AE transactions as well. The Ld. TPO further computed proportionate adjustment on the basis of revenue. The Ld. AO passed the draft assessment order dated 1 st April 2021 enhancing the income of the Assessee on account of the adjustments made by the Ld. TPO by Rs. 3,14,00,113. ITA No.577/Del/2022 Organica Water P. Ltd. 4 Aggrieved by the approach adopted by the Ld. AO / the Ld. TPO, the Assessee approached the Ld. Dispute Resolution Panel (Ld. DRP"). Vide their Directions dated 10 th January 2022 the Ld. DRP upheld the actions by the Ld: TPO. Their observations, inter alia, held as follows: 1. Regarding the comparable companies, out of the comparable companies selected by the LD. TPO, some were retained, and. some were rejected. Resulting in further enhancement of adjustment. 2. Regarding the issue of segmental accounts, they observed as follows: "The TPO has stated that the AEs have contributed more than 98% of the operating revenue. The TPO has pointed out that the assessee has allocated its expenses on the basis of entire income instead of operating income. The assessee, on the other hand has stated that there was a significant decline in percentage of revenue earned form nonrelated parties from previous two financial years. The assessee has submitted that while the revenue from the non-related parties declined, the employee costs (being significant component of total cost) increased due to the fact that the company enhanced efforts to secure non-AE business. In view of the above the TPO has rejected the segmental accounts of the assessee as the taxpayer earns almost its entire income from its AEs. The AO has given clear and cogent reasons for rejecting the segmental accounts of the assessee. The DRP agrees with the findings of the TPO." 3. The assessee has raised following grounds of appeal :- “1. That on the facts and in the circumstances of the case, the order passed by the Ld. Assessing Officer ("Ld. AO") is bad in law and void ab-initio. ITA No.577/Del/2022 Organica Water P. Ltd. 5 2. That on facts and circumstances of the case and in law, the reference made by the Ld. AO suffers from jurisdictional error as the Ld. AO did not record any reasons in assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("Ld. TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act"). 3. That on facts and circumstances of the case and in law, the Ld. AO/Ld. TPO/Ld. Dispute Resolution Panel ("Ld. DRP") erred in making an addition of Rs.3,26,67,008/- to the returned income of the Appellant by re-computing the arm's length price of the international transactions under section 92 of the Act. 4. The Ld. AO/ Ld. TPO/ Ld. DRP erred in law and in facts by violation the principal of natural justice by: -Not serving copy of DRP direction despite several requests made by the Appellant; -Not giving and opportunity of being heard to the Appellantbefore enhancing transfer pricing adjustment. 5. The Ld. AO/ Ld. TPO/ Ld. DRP erred in law and in facts in rejecting segmental allocation done by the Appellant between AE and Non AE segment and computing margin of the Appellant on entity wide basis. 6. The Ld. AO/ Ld. TPO/ Ld. DRP erred in law and in considering revenue as the basis for calculation of proportionate transfer pricing adjustment. 7. The Ld. AO/ Ld. TPO/ Ld. DRP erred in law and in facts in accepting companies which were not comparable to the Appellant in terms of Functions, Assets and Risk profile. That the above grounds are independent and without prejudice to each other. 4. Heard and perused the record. ITA No.577/Del/2022 Organica Water P. Ltd. 6 5. Primarily the Ld. Counsel for the assessee restricted arguments on ground no. 5 to 7 and the remaining grounds 1 to 4 being not pressed with any substantial arguments. 6. Ground no. 5 and 6; In regard to these grounds it was submitted by Ld AR that Ld. Tax Authorities below i.e. Ld. Assessing Officer , TPO and DRP failed to take into notice the fact that while providing services to AEs and non AEs there was great difference in past years and present AY as the non-AE business which contributed 54.94% and 74.23% in F.Y. 2014-15 and 2015-16 respectively had declined to nearly 1.58% in the present F.Y. 2016-17. However, the assessee did not scale down its operation in terms of employees size or other over heads as it was optimistic of getting non-AE business in future. It was pointed out during the year under consideration the employees were engaged for development activities. Ld. AR referred to the list of employees and submitted that most of the employees were dealing with marketing functions and which were primarily in regard to the non-AE business only. It was submitted that Ld. AO had fallen in error in taking into consideration the revenue from both the segments respectively for computing adjustments. It was submitted that when the assessee had not derived revenue from non-AE segment and had incurred significant cost then revenue could not be the basis for computing proportionate adjustments. It was submitted that TPO rejected segmental allocation on the ground that same was not audited and did not form part of audited segmental finances. It was submitted that before the DRP audited segmental accounts as verified and certified by independent chartered were available, same should have been taken into consideration. ITA No.577/Del/2022 Organica Water P. Ltd. 7 Ld. Sr. DR, however defendand the application of TNMM at the entity level. 7. Giving thoughtful consideration to the matter on record the Bench is of considered opinion that the Ld. Tax Authorities below have fallen in error by failing to take realistic view of the fact that there was substantial decline in proportion of non-AE business but the employee cost and other cost were similar or increased. Thus by not taking into consideration the segmental level profitability and calculating margins on entity level basis led to adjustments on the basis of profit allocation instead of segmental costing. More so inspite of availability of audited segmental accounts the DRP failed to take same into consideration. Thus, the TPO / AO is directed to take into consideration, the audited segmental accounts and thereby make fresh adjustments. Accordingly these grounds are decided in favour of the assessee for statistical purposes. 8. Ground no. 7; In regard to this ground it can be observed that Ld. DRP has taken into consideration the FAR to include and exclude the comparables as follows :- S. No. Name of company Contention of Assessee Directions of DRP 1. Mitcon Consultancy & Engg. Services Ltd. To be excluded FAR similar. To be included. 2. Tata Consulting Engineers Ltd. To be excluded. FAR not similar. To be excluded 3. Ridings Consulting Engineers India Limited. To be excluded. FAR not similar. To be excluded. ITA No.577/Del/2022 Organica Water P. Ltd. 8 4. L & T Technology Services Ltd. To be excluded. FAR not similar. To be excluded. 5. Aakar Abhinav Consultants Pvt. Ltd. To be excluded. FAR similar. To be included. 6. Feedback Infra Pvt. Ltd. To be excluded. FAR similar. To be included. 7. Mahindra Consulting Engineers Limited. To be excluded. FAR similar. To be included. 8. Holtec consulting Pvt. Ltd. To be excluded. FAR not similar. To be excluded. 9. DRA Consultants Limited. To be excluded. FAR not similar. To be included. 9. On behalf of the assessee it was submitted that assessee provides design related engineering services but Ld. TPO and DRP have selected companies which are not comparable to the assessee as most of them are in actual implementation of large turnkey projects and even finances. Making submissions the Ld. AR brought on record following distinguishing factors :- S. No. Comparable Assessee’s objection 1. Mitcon consultancy and engineering services limited. a. Functionally not comparable Mitcon consultancy is a consulting organization providing services in the ITA No.577/Del/2022 Organica Water P. Ltd. 9 nature of Marketing, Financial & Technical. The company provides services in the field of : • Green power and energy conservation. • Environment management and engineering services. • Financial advisory services. • Textiles clusters- infra projects and market research. • Infra consulting. b. Some of the major projects undertaken by the company include • Pre-investment & engineering services established in upcoming distillery / ITA No.577/Del/2022 Organica Water P. Ltd. 10 ethanol sector. Pre- investment services including DPR & loan syndication • Successful commissioning of cogen power plants at Sahakar Shiromani Vasantrao Kale Sahakari Sakhar Karkhana Ltd. • Successful commissioning of new 7000 TCD capacity sugerfactory at Sahakar Maharshi Bhausaheb Thorat SSKL and 2500 TCD at Kisanveer Khandala SSKU (Completion of erection). 2. Aakar Abhinav Consultants Pvt. Ltd. a. Functionally not comparable: The company, Aakar ITA No.577/Del/2022 Organica Water P. Ltd. 11 Abhinav is an engineering consulting firm serving clients in sectors such as transportation planning, traffic engineering, architecture, urban infrastructure and project management. 3. Feedback infra private limited. a. Functionally not comparable Feedback infra is a leading infrastructure services company, with over 9,500 employees and associates. The company provides high end advisory and consulting services in the field of transportation, energy and urban infrastructure. 4. Mahindra Consulting Engineers Limited. a. Functionally not comparable: • The range of services and consulting ITA No.577/Del/2022 Organica Water P. Ltd. 12 competency of Mahindra Consulting Engineers Limited is very vast and cannot be confined to a single business description. Services provided by company includes construction and project management, market demand assessments and strategy and evaluation studies. 5. DRA Consultants Limited. • Project Management Consultancy Services for Water Supply and Sewerage Improvement Works including SCADA & otherworks for Indore Municipal Corporation under Amrut Yojana Consultancy expenses in the nature of Sub-contracting charges. ITA No.577/Del/2022 Organica Water P. Ltd. 13 10. Ld. DR, however, defended the finding of Ld. Tax Authorities. He submitted that in fact DRA Consultants Limited was included by assessee itself as comparable. 11. It can be observed that assessee is dealing exclusively in domain of wastewater treatment facilities while companies included except DRA Consultants Ltd. have varied business interests. Since the assessee has the claim on segmental accounts the functionality test is a vital consequence. As assessee is operating in a very limited sphere of providing ecologically engineer wastewater treatment solutions the companies having diversified areas of interest and with nominal interest in wastewater treatment solutions cannot be said to passing the functionally test. Thus, the AO/ TPO are directed to remove Mitcon consultancy and engineering services, Aakar Abhinav Consultants Pvt. Ltd., Feedback Infra Pvt. Ltd. and Mahindra Consulting Engineers Limited from the comparables and make a fresh adjustments. Accordingly, the ground is decided in favour of the assessee. The appeal of assessee is accordingly allowed with consequential effects to be given as per directions in ground no 5 & 6. Order pronounced in the open court on 4 th October, 2022. Sd/- Sd/- (DR. B.R.R.KUMAR) (ANUBHAV SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Date:-04.10.2022 *Binita, SR.P.S* Copy forwarded to: 1. Appellant 2. Respondent ITA No.577/Del/2022 Organica Water P. Ltd. 14 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI