ACIT, New Delhi V. M/s K.S.Hotels Pvt. Ltd, New Delhi

ITA 6858/DEL/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3529 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 30-12-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VRINDA TU LSHAN
• Assessee Lawyers: AMRENDER KUMAR
• Keywords: Transfer pricing; International transaction; Retrospective amendment
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A .NO. 6856/DEL/2 015 (A.Y 2011-12) ALCATEL - LUCENT INDIA LTD. DLF CYBER GREENS, 14 AND 15 TH FLOOR, TOWER C, PHASE-III, DLF CITY, GURGAON AACCA8667N (APPELLANT) VS DCIT CIRCLE 2(1) NEW DELHI (RESPONDENT) APPELLANT BY SH. HIMANSHU SINHA ADV & MS. VRINDA TULSHAN, ADV. RESPONDENT BY SH. AMRENDER KUMAR, CIT DR ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 RE AD WITH DIRECTIONS ISSUED BY THE DRP-1, NEW DELHI IN ASSESSMENT YEAR 2011-12. 2. THE LD. AR SUBMITTED THAT THE HONBLE JURISDICTI ONAL HIGH COURT VIDE ORDER DATED 8 TH MAY 2017 HAS GIVEN FOLLOWING DIRECTIONS:- 16. CONSEQUENTLY, THE FOLLOWING DIRECTIONS ARE ISSUED: (I) THE IMPUGNED ORDER OF THE ITAT DATED 24 TH AUGUST 2016 IS MODIFIED BY DIRECTING THE FOLLOWING ISSUES WILL NOT BE REMANDED TO THE TPO DATE OF HEARING 07.08.2017 DATE OF PRONOUNCEMENT 06.11.2017 BUT WILL BE DECIDED BY THE ITAT ITSELF ON MERITS AF TER HEARING BOTH THE PARTIES. (A) ISSUE CONCERNING EXCLUSION OF WAPCOS AND MAHIND RA AND INCLUSION OF KIRLOSKAR AS COMPARABLES FOR THE TSS SEGMENT B) ISSUE REGARDING EXCLUSION OF SASKEN AS COMPARAB LE FOR THE CDS SEGMENT C) ISSUE OF DENIAL OF WORKING CAPITAL AND RISK AD JUSTMENT IN BOTH THE SEGMENTS, I.E., TSS AND CDS; AND D) ISSUE OF PROPORTIONATE ADJUSTMENT IN THE TSS SE GMENT (II) THE APPEAL OF THE ASSESSEE ITA NO. 6856/DEL/2 015 BEFORE THE ITAT IS RESTORED TO ITS FILE. THE SAID APPEAL WILL BE LIST ED BEFORE THE ITAT ON 29 TH MAY 2017 FOR DIRECTIONS. 3. THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE INDIAN COMPANIES ACT, 1956 AND WAS INCORPORATED IN 1992 AND IS ENGAG ED IN THE BUSINESS OF DISTRIBUTION AND SALE OF DIGITAL SWITCHING EQUIPMEN T, CELLULAR EXCHANGE EQUIPMENT AND OTHER TELECOMMUNICATION EQUIPMENT AND ALSO PROVIDES RELATED SERVICES. THE ASSESSEE ALSO PROVIDES CONTRACT SOFTW ARE DEVELOPMENT (CSD) SERVICES AND TECHNICAL SUPPORT SERVICES (TSS) TO IT S ASSOCIATED ENTERPRISES (AES). VIDE HIGH COURT ORDER ISSUED IN NOVEMBER, 20 08 ALCATEL LUCENT TECHNOLOGIES INDIA PRIVATE LIMITED (FORMERLY LUCENT TECHNOLOGIES INDIA PRIVATE LIMITED), LUCENT TECHNOLOGIES HINDUSTAN PRIVATE LIM ITED AND ALCATEL DEVELOPMENT INDIA PRIVATE LIMITED WERE MARGED WITH ALIL. THE MERGER WAS EFFECTIVE WITH RETROSPECTIVE EFFECT FROM APRIL 1, 2 007. THE INTERNATIONAL TRANSACTIONS ENTERED INTO, BY THE ASSESSEE ARE TABU LATED BELOW. THE TABLE ALSO PROVIDES THE TRANSFER PRICING APPROACH OF THE ASSES SEE FOLLOWED BY THE ASSESSEE IN BENCHMARKING ITS INTERNATIONAL TRANSACTIONS. THE TABLE PROVIDES THE VALUES OF THE INTERNATIONAL TRANSACTIONS, THE MOST APPROPR IATE METHOD (MAM) ADOPTED BY THE ASSESSEE, THE PROFIT LEVEL INDICATORS (PLI) USED BY THE ASSESSEE- S.NO. NATURE OF TRANSACTION AMOUNT (IN INR) 1. PURCHASE OF TELECOM 3,695,339.350 2. PURCHASE OF CAPITAL GOODS 442,124,800 3. RECEIPT OF TECHNICAL SERVICES 493,803,543 4. RECEIPT OF TRAINING SERVICES 28,581,092 5. SERVICE REVENUE 389,604,691 6. PROVISION OF CONTRACT SOFTWARE DEVELOPMENT 7,274,905,626 7. PAYMENT FOR DEPUTED EMPLOYEES 112,961,710 8. REIMBURSEMENT OF EXPENSES (RECEIVED) 44,455,170 9. REIMBURSEMENT OF EXPENSES (PAID) 9,782,132 10. INTEREST ON LOAN 5,379,000 DURING THE RELEVANT ASSESSMENT YEAR, THE ASSESSEE H AD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AES PARTICULARS MOST PROFIT LEVEL INDICATOR (PLI) MARGIN EARNED BY THE APPELLANT NO. OF COMPARABLES CONSIDERED AVERAGE MARGIN CSD SERVICES TRANSACTIONAL NET MARGIN METHOD OPERATING PROFIT/TOTAL COST (OP/TC) 77.7.71%.71% 13 12.18% 7.68% 4 7.28% DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PR OCEEDINGS, THE TRANSFER PRICING OFFICER (TPO) WHILE ACCEPTING ALL OTHER INTERNATIONAL TRANSACTIONS TO BE AT ARMS LENGTH, REJECTED THE EC ONOMIC ANALYSIS UNDERTAKEN BY THE ASSESSEE FOR ITS CSD SERVICES SEGMENT AND TS S SEGMENT. THE TPO PROCEEDED TO UNDERTAKE A FRESH ANALYSIS, WHEREIN HE APPLIED CERTAIN NEW QUANTITATIVE FILTERS TO EXCLUDE CERTAIN COMPANIES S ELECTED BY THE ASSESSEE AND INCLUDED CERTAIN ADDITIONAL COMPANIES. THE TPO ALSO REJECTED THE ASSESSEES CLAIM FOR WORKING CAPITAL AND RISK ADJUSTMENT. IN RESPECT OF CSD SERVICES THE TP ADJUSTMENT PROPOS ED BY THE TPO AMOUNTED TO RS. 1,28,51,47,579/- . THE TPO INCLUDED 14 COMPANIES IN THE CSD SERVICES SEGMENT WHICH ARE AS PER THE FOLLOWING CHART: S.NO. COMPANY NAME OP/TC 1. ACROPETAL TECHNOLOGIES LIMITED (IT SEGMENT) 36.69% 2. AKSHAY SOFTWARE TECHNOLOGIES LIMITED 0.16% 3. E - INFOCHIPS LIMITED 56.44% 4. INFOSYS LIMITED 43.53% 5. LARSEN & TOUBRO INFOTECH LIMITED 18.40% 6. MINDTREE LIMITED (SEGMENT) 10.74% 7. PERSISTENT SYSTEMS AND SOLUTIONS LTD. (MERGED) 22.12% 8. PERSISTENT SYSTEMS LTD. 23.08% 9. R S SOFTWARE (INDIA) LTD. 16.20% 10. SANKHYA INFOTECH LIMITED (SEGMENTAL) 26.20% 11. SASKEN COMMUNICATION TECHNOLOGIES LTD. 24.36% 12. TATA ELXSI LGTD. (SEGMENT) 13.00% 13. WIPRO TECHNOLOGIES LIMITED 54.42% 14. ZYLOG SYSTEMS LTD. 28.74% AVERAGE 26.72% 3. THE LD. AR SUBMITTED THAT THE ISSUE MENTIONED IN THE DIRECTIONS BY THE HON'BLE HIGH COURT IN B & C CATEGORY ARE NOT PRESSE D BY THE ASSESSEE AS THE DRP HAS GIVEN SAID RELIEF. AS RELATED TO ISSUE REL ATED TO A & D THE ASSESSEE IS AGITATING THE SAME AND THEREFORE, THE SAME ARE TAKE N FOR HEARING. 4. ON THE GROUND RELATING TO THE ISSUE OF TRANSFER PRICING ADJUSTMENTS MADE IN RESPECT OF TECHNICAL SUPPORT SERVICES (TSS) SEGM ENT, IT WAS THE SUBMISSION OF THE LD. AR THAT UNDER THIS SEGMENT THE ASSESSEE PROVIDED TECHNICAL SUPPORT SERVICE WITH RESPECT TO TELECOM EQUIPMENT SOLD TO C USTOMERS IN INDIA. THESE SERVICES PRIMARILY INCLUDE REPAIRS AND MAINTENANCE SERVICES, AFTER SALES SUPPORT SERVICES, INSTALLATION AND COMMISSIONING SE RVICES, TROUBLE REPORT HANDLING SERVICES, ETC. THE LD. AR SUBMITTED THAT T HE ASSESSEE PRIMARILY FUNCTIONED AS A SUPPORT SERVICE PROVIDER AND EARNED AN OP/TC MARGIN OF 7.68%. HOWEVER, THE TPO ARRIVED AT AN AVERAGE OF 19 .49% (OP/TC) AND MADE ADJUSTMENT OF RS. 951,65,037/- TO THE TSS SEGMENT B Y USING THE FOLLOWING FOUR COMPARABLES:- S.NO. COMPANY NAME OP/TC 1 CONSULTING ENGINEERS LIMITED 13.75 2 TELECOMMUNICATION CONSULTANTS INDIA LIMITED (CONSULTANCY AND SERVICE CONTRACT SEGMENT) 10.87 3 WAPCOS LIMITED 30.55 4 MAHINDRA CONSULTING ENGINEERS LIMITED 22.79 AVERAGE 19.49% 5. THE LD. AR SUBMITTED THAT IN RESPECT OF KIRLOSKA R CONSULTANTS LIMITED WHICH WAS SELECTED BY THE ASSESSEE AS A COMPARABLE IN THE TSS SEGMENT WAS INCORRECTLY REJECTED BY THE TPO ON THE GROUND THAT IT FAILED THE RPT FILTER OF 25%. THE LD. AR SUBMITTED THAT THE TOTAL RPT BY SAL ES RATIO IS ONLY 11.79% WHICH IS BELOW THE RPT THRESHOLD OF 25% AND HENCE, THIS COMPARABLE OUGHT TO BE INCLUDED. THE LD. AR FURTHER SUBMITTED THAT KIRL OSKAR WAS SELECTED AS COMPARABLE BY THE DRP IN AY 2010-11. 6. THE LD. AR ALSO RAISED THE OBJECTIONS TO TWO COM PARABLE WHICH WERE SELECTED BY THE TPO BUT ARE NOT BEING ACCEPTED BY T HE ASSESSEE. THE LD. AR SUBMITTED THAT SO FAR AS WAPCOS IS CONCERNED, THE T PO HELD THAT UNDER THE APPLICATION OF TNMM AS THE MOST APPROPRIATE METHOD, THE DIFFERENCE IN FUNCTIONAL PROFILE GETS EVENED OUT AND AS SUCH THE COMPANY CAN BE CONSIDERED AS A COMPARABLE. THE LD. AR SUBMITTED THAT THIS COM PANY IS FUNCTIONALLY DISSIMILAR AS IT IS ENGAGED IN RENDERING CONSULTANC Y SERVICES IN WATER RESOURCES, POWER AND INFRASTRUCTURE AND INCLUDES PR ELIMINARY INVESTIGATIONS, FEASIBILITY STUDIES, FIELD STUDIES, ENGINEERING DES IGN, DRAWINGS AND TENDERING PROCESS, PROJECT MANAGEMENT OPERATIONS AND MAINTENA NCE AND INSTITUTIONAL/HUMAN RESOURCE DEVELOPMENT. THE LD. A R ALSO SUBMITTED WAPCOS IS A GOVERNMENT OF INDIA UNDERTAKING WITH AN ABNORMALLY HIGH MARGIN OF 30.55%. THE LD. AR SUBMITTED THAT WAPCOS HAS BEEN REJECTED AS COMPARABLE IN THE FOLLOWING CASES- NORTEL NETWORKS INDIA PVT. LTD. VS. ACIT (ITA NO. 4765/DEL/2011 & 427/DEL/2012), MCI COM INDIA PV T. LTD. (NOW KNOWN AS VERIZON INDIA P. LTD.) (ITA NO. 4187/DEL/2010), YUM ! RESTAURANTS (INDIA) LTD. VS. ITO (ITA NO. 6168/DEL/2012), ACTIS ADVISERS P. LTD. VS. ACIT (ITA NO. 6390/DEL/2012), SHELL INDIA MARKETS PVT. LTD. (ITA NO. 193/MUM/2013). THE LD. AR FURTHER SUBMITTED THAT A GOVERNMENT COMPANY CANNOT BE TAKEN AS A COMPARABLE TO A COMPANY HAVING A PROFIT MOTIVE AND HE RELIED ON THE FOLLOWING DECISIONS IN SUPPORT OF HIS SUBMISSION M/S THYSSE NKRUPP INDUSTRIES INDIA P. LTD. (ITA NO. 6460/MUM/2012), M/S. AVAYA INDIA P. L IMITED (ITA NO. 5150/DEL/2010). THE LD. AR ALSO RELIED ON THE DECIS ION OF RAMPGREEN SOLUTIONS P. LTD. IN ITA NO. 102/2015, WHEREIN THE HONBLE DELHI HIGH COURT HAS HELD THAT FUNCTIONALLY DIFFERENT COMPANY CANNOT BE CONSIDERED AS COMPARABLE COMPANY. 7. AS RELATES TO MAHINDRA CONSULTING ENGINEERS LIMI TED, THE LD. AR SUBMITTED THAT THE TPO HELD THAT UNDER THE APPLICAT ION OF TNMM AS THE MOST APPROPRIATE METHOD, THE DIFFERENCE IN FUNCTIONAL PR OFILE GETS EVENED OUT AND AS SUCH THE COMPANY CAN BE CONSIDERED AS A COMPARABLE. HE FURTHER SUBMITTED THAT HIS COMPANY IS ENGAGED IN THE PROVISION OF TEC HNICAL CONSULTANCY IN MULTI DISCIPLINARY PROJECTS WHICH INCLUDES DESIGNING, ENG INEERING, PROCUREMENT, CONSTRUCTION, MONITORING AND SUPERVISION, INFRASTRU CTURE CONSULTING SERVICES AND INTEGRATED PROJECT MANAGEMENT SERVICES. HE ALSO SUBMITTED THAT THIS COMPANY HAS BEEN REJECTED AS A COMPARABLE BY THE DR P IN ASSESSEES OWN CASE FOR AY 2010-11 AGAINST WHICH THE DEPARTMENT HAS NOT PREFERRED ANY APPEAL. THE LD. AR ALSO SUBMITTED THAT MAHINDRA CONSULTING HAS BEEN REJECTED AS A COMPARABLE IN ROLLS ROYCE INDIA P. LTD. IN ITA NO. 6636/DEL/2015. THE LD. AR ALSO RELIED ON THE DECISION OF RAMPGREEN SOLUTIONS P. LTD. IN ITA NO. 102/2015, WHEREIN THE HONBLE DELHI HIGH COURT HELD THAT FUNC TIONALLY DIFFERENT COMPANY CANNOT BE CONSIDERED AS COMPARABLE COMPANY. 8. THE LD. DR SUBMITTED THAT FOR KIRLOSKAR THE TPO HAS NOT VERIFIED THE RPT MARGIN WHETHER 25% OR NOT. FOR EXCLUSION OF WAPSCO, THE LD. DR SUBMITTED THAT TECHNICAL AND CONSULTATION SERVICES RUN PARALL EL TO EACH OTHER AND IT IS THE MARGIN WHICH HAS TO BE LOOKED INTO AND NOT THE PROF IT TO BE ONLY DECIDING FACTOR FOR CHOOSING COMPARABLE. FOR MAHINDRA CONSULTANCY, THE LD. DR RELIED UPON THE ORDER OF THE TPO AND DRP. 9. AS RELATES TO WORKING CAPITAL ADJUSTMENT GROUND, THE LD. AR SUBMITTED THAT THE TPO SHOULD HAVE VERIFIED THE SAME WHICH WA S NOT DONE. THE LD. DR SUBMITS THAT THE TPO HAS ALREADY DECIDED. THE LD. A R SUBMITTED THAT THE DRP IN PRECEDING ASSESSMENT YEAR HAS ALLOWED SUCH ADJUS TMENT. HOWEVER, IN THIS YEAR THERE WAS NO SPEAKING ORDER. 10. AS RELATES TO POINT (D) OF THE HONBLE HIGH COU RT DIRECTIONS, THE LD. AR SUBMITTED THAT PROPORTIONATE ADJUSTMENT SHOULD NOT BE CONFINED TO VALUE OF INTERNATIONAL TRANSACTIONS. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE HONBLE HIGH COURT DIRECTIONS DATED 08.05.2017 ALONG WITH RECORDS PLAC ED BEFORE US BY BOTH THE PARTIES. FIRSTLY WE TAKE UP THE ISSUE OF EXCLUSION OF THE COMPARABLES THAT OF WAPSCO AND MAHINDRA CONSULTING ENGINEERS LTD. AS SE T OUT BY THE LD. AR AND AFTER GOING THROUGH THE RECORDS, ITS CLEAR THA T BOTH THESE COMPANIES ARE FUNCTIONALLY DIFFERENT. THE HONBLE DELHI HIGH COUR T IN CASE OF RAMPGREEN (SUPRA)HAS SET OUT THE RATIO THAT FUNCTIONALLY DIFF ERENT COMPARABLES CANNOT BE TAKEN BY THE REVENUE AUTHORITIES OR BY THE ASSESSEE FOR TP STUDY. THEREFORE, THESE TWO COMPARABLES HAVE TO BE EXCLUDED. SECONDLY ABOUT THE INCLUSION OF KIRLOSKAR CONSULTANTS LIMITED, THIS COMPANY WAS EAR LIER TAKEN UP AS COMPARABLE IN A.Y. 2010-11 WHICH IS IMMEDIATELY PRE CEDING YEAR. THE REVENUE CANNOT TAKE A DIFFERENT STAND IN ONE YEAR AND ANOTH ER IN VERY NEXT YEAR WITHOUT ANY PROPER REASON ASSIGNED TO THE SAME. THE RPT THR ESHOLD OF BELOW 25% IS APPLICABLE IN THE PRESENT COMPARABLE. THEREFORE, TH E TPO SHOULD HAVE INCLUDED THIS COMPARABLE. 12. AS RELATES TO WORKING CAPITAL THE ORDER OF THE DRP IS NON SPEAKING AND THE SUBMISSIONS OF THE LD. AR ARE ACCEPTED. AS RELA TES TO POINT (D) OF THE HONBLE HIGH COURT DIRECTIONS, THE SAME HAS TO BE T AKEN INTO PROPORTIONATE ADJUSTMENT. 13. IN RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 06TH NOVEMB ER, 2017 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 06/11/2017 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 11/08/2017 PS 2. DRAFT PLACED BEFORE AUTHOR 14/08/2017 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS .11.2017 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK .11.2017 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.