Haldor Topsoe India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 985/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7100 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 26-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction; Wholly owned subsidiary; Set aside
• Section: 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.985/DEL./2016 (ASSESSMENT YEAR : 2011-12) M/S. HALDOR TOPSOE INDIA PVT. LTD., VS. DCIT, CIRCL E 11 (1), ELEGANCE TOWER, 2 ND FLOOR, NEW DELHI. JASOLA DISTRICT CENTRE, NEW DELHI 110 025. (PAN : AABCH7781F) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI H.P. AGARWAL, FCA SHRI ASHISH GUPTA, FCA MS. PRASHUKA JAIN, FCA REVENUE BY : SHRI SURENDER PAL, CIT DR DATE OF HEARING : 08.01.2020 DATE OF ORDER : 31.01.2020 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : APPELLANT, M/S. HALDOR TOPSOE INDIA PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILING THE PRESEN T APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 29.12.2015 PASSE D BY THE AO IN CONSONANCE WITH THE ORDERS PASSED BY THE LD. DRP/TP O UNDER SECTION 143 (3) READ WITH SECTION 144C(13) OF THE I NCOME-TAX ACT, ITA NO.985/DEL./2016 2 1961 (FOR SHORT THE ACT) QUA THE ASSESSMENT YEAR 2011-12 ON THE GROUNDS INTER ALIA THAT :- L(A) THE LEARNED DCIT (AFTER INCORPORATING LD. DR P'S ORDER) HAS ERRED ON FACTS AND IN LAW IN MAKING ADDITION OF RS.3,25,52,475 ON ACCOUNT OF ADJUSTMENT IN VALUE OF INTERNATIONAL TRANSACTION (BY INCREASING THE MARGIN OF COMPARABLE COMPANIES TO 24.90% AS AGAINST ACTUAL MA RGIN OF 12.28% OF THE ASSESSEE), ON ACCOUNT OF THE FOLLOWIN G: 1) SELECTING 6 NEW COMPARABLE COMPANIES WHICH WERE NOT SELECTED BY THE ASSESSEE 2) REJECTING 4 COMPARABLE COMPANIES SELECTED BY THE ASSESSEE L(B) THE LEARNED DCIT (AFTER INCORPORATING LD. DRP 'S ORDER) HAS ERRED ON FACTS AND IN LAW IN REJECTING ADJUSTME NT IN MARGIN DUE TO DIFFERENT RISK PROFILE OF COMPARABLE COMPANI ES. 2. THE LEARNED DCIT (AFTER INCORPORATING LD. DRP'S ORDER) HAS ERRED ON FACTS AND IN LAW IN NOT GRANTING 100% OF THE ELIGIBLE PROFIT AS DEDUCTION U/S 10A(LA). THE LEARNED DCIT H AS RESTRICTED THE DEDUCTION AT 90% INSTEAD OF 100% AS PROVIDED IN SECTION 10A(LA). 3. THE LEARNED DCIT (AFTER INCORPORATING LD. DRP'S ORDER) HAS ERRED ON FACTS AND IN LAW IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C). ' 3. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : M/S. HALDOR TOPSOE INDIA PVT. LTD. (HTIPL), THE TAXPAYER IS FULLY OWNED SUBSIDIARY OF THE TOPSOE GROUP (WITH 99.9% SHARES BEING HELD BY HALDOR TOPSO E INTERNATIONAL A/S (HTIAS), WHICH IS ULTIMATE ACTIVE HOLDING COMPANY OF THE TAXPAYER, AND 1 SHARE BEING HELD BY ANOTHER GROUP COMPANY, SUBCONCINENT AMMONIA INVESTMENT COMPANY AP S). THE TAXPAYER PROVIDES ENGINEERING SERVICES (INCLUDI NG PREPARATION ITA NO.985/DEL./2016 3 OF ENGINEERING PACKAGES, EQUIPMENT DESIGNS, ETC.) A ND TECHNICAL ASSISTANCE SERVICES (INCLUDING PROVIDING ENGINEERS FOR SUPERVISION) TO HTAS FOR THEIR GLOBAL PROJECTS (INCLUDING PROJEC TS IN INDIA). THE KEY EFFORTS OF THE TAXPAYER ARE IN DEVELOPING BASIC ENGINEERING DESIGN PACKAGES BASED ON TOPSOE TECHNOLOGIES FOR AM MONIA, METHANOL, HYDROGEN, HYDROGEN + CARBON-MONOXIDE, SNG , DME, HYDRO-PROCESSING TECHNOLOGIES INCLUDING NAPHTA TREA TERS, VGO/DIESEL HYDRO-TREATERS, HYDROCRACKERS, ENVIRONME NTAL TECHNOLOGIES FOR ABATEMENT OF NOX, SOX ETC. FOR TOP SOES GLOBAL MARKET. 4. DURING THE YEAR UNDER TRANSACTIONS, THE TAXPAYER ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE AS UNDER :- S. NO. INTERNATIONAL TRANSACTIONS AMOUNT (IN RS.) 1 ENGINEERING & TECHNICAL ASSISTANCE SERVICE RENDERED 28,92,94,708 2 REIMBURSEMENT OF EXPENSES (RECEIVED) 98,798 3 REIMBURSEMENT OF EXPENSES (PAID) 36,345 5. THE TAXPAYER IS ENGAGED IN ACTIVITY DEFINED AS T ECHNICAL CONSULTANCY OF ENGINEERING SERVICES, WHICH CAN BE C LASSIFIED AS TECHNICAL ENGINEERING SERVICE PROVIDER. THE TAXPAY ER IN ORDER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS QUA TECHNI CAL SUPPORT SERVICES PROVIDED TO THE ASSOCIATED ENTERPRISES (AE ) APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) WITH OPERATI NG PROFIT/ ITA NO.985/DEL./2016 4 TOTAL COST (OP/TC) AS PROFIT LEVEL INDICATOR (PLI) AS THE MOST APPROPRIATE METHOD (MAM), ARRIVED AT ITS OWN MARGIN AT 12.28% ON COST. THE TAXPAYER IN ITS TP STUDY SELECTED 9 C OMPARABLES WITH MARGIN OF 11.42% AND FOUND ITS INTERNATIONAL TRANSA CTIONS AT ARMS LENGTH. 6. LD. TPO AFTER APPLYING VARIOUS FILTERS DISCUSSED IN PARA 3.1 & 4 OF THE TP ORDER REJECTED 6 COMPARABLES CHOSEN B Y THE TAXPAYER OUT OF 9 COMPARABLES AND INTRODUCED 6 NEW COMPARABL ES AND COMPUTED THEIR MARGIN AT 27.06% AND PROCEEDED TO CO MPUTE THE ARMS LENGTH PRICE (ALP) OF INTERNATIONAL TRANSACTI ONS AS UNDER :- COMPUTATION OF ARMS LENGTH PRICE OPERATING COST 258,062,524 ARMS LENGTH PRICE AT A MARGIN O 27.06% 327,894,243 PRICE RECEIVED 2 89,761,617 105% OF INTERNATIONAL TRANSACTION 304,249,698 PROPOSED ADJUSTMENT U/S 92CA 38,132,626 THUS THE ABOVE DIFFERENCE OF RS.3,81,32,626/- IS T REATED AS TRANSFER PRICING ADJUSTMENT FOR THE FY 2010-11. 7. ASSESSEE CARRIED THE MATTER BEFORE THE LD. DRP B Y FILING OBJECTIONS WHO HAS GIVEN PARTIAL RELIEF AND THE MAR GIN OF THE COMPARABLES HAS BEEN REDUCED FROM 27.06% TO 24.90%. THEREAFTER TPO HAS GIVEN EFFECT TO THE ORDER PASSED BY THE LD. DRP AND RECOMPUTED THE ALP OF INTERNATIONAL TRANSACTIONS AT ITA NO.985/DEL./2016 5 RS.3,25,52,475/-. FEELING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT AP PEAL. 8. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. 9. UNDISPUTEDLY, THERE IS NO CHANGE IN THE BUSINESS MODEL OF THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT. THE TAXPAYER IS A WHOLLY OWNED SUBSIDIARY OF HTIAS, A DANISH COMPANY. THE LD. TPO HAS NOT DISPUTED THE MARGIN OF THE TAXPAYER AT 12.28% NOR HAS DISPUTED THE TNMM AS OP/OC AS PLI AS MAM APPLIED BY THE TAXPAYER TO BENCHMARK THE INTERNATIONAL TRANSACTION S. 10. IT IS THE CASE OF THE TAXPAYER THAT IT HAS REND ERED SERVICES TO INDUSTRY OPERATING IN FERTILIZER, PETRO-CHEMICAL AN D REFINERY AND OIL & GAS SECTOR AND ACCORDINGLY SELECTED ENGINEERING C OMPANIES AS COMPARABLES WHICH WERE ALSO RENDERING SERVICES TO T HE INDUSTRY IN FERTILIZER, PETRO-CHEMICAL, REFINERY AND OIL & GAS SECTOR. IT IS ALSO NOT IN DISPUTE THAT THE TAXPAYER IS A 100% CAPTIVE UNIT OF HTIAS. 11. BY FILING THE PRESENT APPEAL, THE TAXPAYER HAS ONLY CHALLENGED EXCLUSION AND INCLUSION OF CERTAIN COMPA RABLES BY THE LD. TPO FOR BENCHMARKING THE INTERNATIONAL TRANSACT IONS, WHICH WE WOULD DISCUSS GROUND-WISE AS UNDER. ITA NO.985/DEL./2016 6 GROUND NO.1(A) 12. THE TAXPAYER BY FILING THE PRESENT APPEAL SOUGH T EXCLUSION OF 6 COMPARABLES CHOSEN BY THE LD. TPO TO BENCHMARK TH E INTERNATIONAL TRANSACTIONS QUA PROVISION OF TECHNIC AL SUPPORT SERVICES RENDERED VIZ. (I) M/S. ASHOK LEYLAND PROJECT SERVICES LTD., (II) M/S. MITCON CONSULTANCY & ENGG. SERVICES LTD., (III) M/S. MAHINDRA CONSULTING ENGINEERS LTD., (IV) M/S. HSCC (INDIA) LTD., (V) M/S. BENGAL SREI INFRASTRUCTU RE DEVELOPMENT LIMITED, AND (VI) M/S. CERTIFICATION EN GINEERS INTERNATIONAL LTD. , SUITABILITY THEREOF VIS--VIS THE TAXPAYER IS BEING EXAMINE ONE BY ONE AS UNDER. M/S. ASHOK LEYLAND PROJECT SERVICES LTD. 13. THE EXCLUSION OF ITS COMPARABLE BY THE LD. AR F OR THE TAXPAYER HAS NOT BEEN PRESSED DURING THE COURSE OF ARGUMENTS. M/S. MITCON CONSULTANCY & ENGINEERING SERVICES LTD. (MITCON) 14. THE TAXPAYER CHALLENGED MITCON BEFORE THE LD. T PO ON THE GROUND THAT MITCON IS ENGAGED IN RENDERING CONSULTA NCY SERVICES IN THE AREA OF POWER PLANT, BANKING, FINANCE & MARKET RESEARCH, ISO/QUALITY ASSURANCE, ENERGY & CARBON SECURITIZATI ON & FINANCIAL RESTRUCTURING, BIOTECHNOLOGY & PHARMACEUTICAL, IT T RAINING, ENVIRONMENT MANAGEMENT ETC. AND AS SUCH FUNCTIONALL Y DISSIMILAR. ITA NO.985/DEL./2016 7 HOWEVER, TPO/DRP HAVE RETAINED THIS COMPARABLE WITH OUT DISPOSING OF THE OBJECTIONS RAISED BY THE LD. CIT ( A) BY RECORDING OBSERVATIONS THAT, MITCON IS ENGAGED IN VARIOUS TECHNICAL CONSULTANCY WHICH ARE IN THE NATURE OF TECHNICAL SE RVICES. 15. LD. AR FOR THE TAXPAYER CHALLENGING THE INCLUSI ON OF MITCON IN THE FINAL SET OF COMPARABLES CONTENDED THAT IN TAXPAYERS OWN CASE FOR AY 2012-13 VIDE ORDER DATED 19.11.2019 , MITCON WAS EXCLUDED BY THE TRIBUNAL. 16. PERUSAL OF THE ORDER (SUPRA) PASSED BY THE TRIB UNAL SHOWS THAT MITCON HAS BEEN EXCLUDED BY THE TRIBUNAL FROM THE FINAL SET OF COMPARABLES ON GROUND OF FUNCTIONAL DISSIMILARITY A ND TO EXCLUDE THE COMPANY WHOSE REVENUE FROM THE SERVICES IS LESS THAN 75% OF THE TOTAL INCOME BY RETURNING FOLLOWING FINDINGS :- 19. WHEN WE EXAMINE PARA 4.5 AT PAGE 5 AND 6 OF T HE TPO ORDER. THE LD. TPO HIMSELF APPLIED THE FILTERS TO E XCLUDE COMPANIES FROM THE FINAL LIST OF COMPARABLES WHOSE REVENUE IS LESS THAN 75% OF THE TOTAL INCOME. HOWEVER, WHEN WE EXAMINE PROFIT AND LOSS ACCOUNT OF THE MITCON AVAILABLE AT PAGE 44 OF THE PAPER BOOK REVENUE EARNED BY THE MITCON FROM CONSUL TANCY FEE DURING THE YEAR UNDER ASSESSMENT COMES TO 55.65%, W HICH IS LESS THAN THE FILTER OF 75% APPLIED BY THE TPO. 20. CO-ORDINATE BENCH OF TRIBUNAL EXAMINED THE SUI TABILITY OF MITCON IN GRANITE SERVICES INTERNATIONAL (P.) LTD. (SUPRA) VIS-- VIS A ROUTINE ENGINEERING AND TECHNICAL ASSISTANT S ERVICE PROVIDER AND ORDER TO EXCLUDE THE SAME BY RETURNING FOLLOWIN G FINDINGS :- 20. SO FAR AS MITCON CONSULTANCY AND ENGINEERING SERVICES LTD., IS CONCERNED WE FIND THIS COMPANY PR OVIDES SERVICES TO THE BANKING DIVISION, ENTREPRENEURSHIP AND VOCATIONAL TRAINING DIVISION, E-SCHOOLS AND BT AND PHARMA SECTOR. REVENUE EARNED BY THE COMPANY FROM SERVICES OTHER THAN CONSULTANCY IS APPROX. 43% OF T HE ITA NO.985/DEL./2016 8 TOTAL REVENUE. MILTON ALSO OWNS FIXED ASSETS SUCH A S WIND TURBINE GENERATORS AND THEREFORE, HAS A HIGH FIXED ASSET TO SALES RATIO OF 34.09%. WE FIND THIS COMPANY WAS REJ ECTED BY THE TRIBUNAL IN ASSESSEES OWN CASE GRANITE SERV ICES INTERNATIONAL (P) LTD. V. ASSTT. CIT [2017] 87 TAXMANN.COM 24 (DELHI-TRIB) BY OBSERVING AS UNDER : - 7. SIMILARITY, IN RESPECT OF MITCON CONSULTANCY AND ENGINEERING SERVICES LIMITED AND RITES LTD. IT IS SUBMITTED THAT BOTH THESE COMPANIES HAVE MULTI DIMENSIONAL FUNCTIONALITY AND MOSTLY SERVING THE RELATED PARTIES, AND APART FROM THAT THE SEGMENTAL DATA IS NOT AVAILABLE. ON FACTS, LD. DR DOES NOT DISPUTE THE SAME. WE, THEREFORE, HOLD THAT THESE TWO COMPANIES ALSO CANNOT BE COMPARABLES TO THE ASSESSEE COMPANY. 21. IN VIEW OF THE MATTER, WE ARE OF THE CONSIDERE D VIEW THAT MITCON IS NOT A SUITABLE COMPARABLE VIS--VIS TAXPA YER ON ACCOUNT OF FUNCTIONAL DISSIMILARITY AS IT IS PROVID ING SOLUTION IN POWER, ENERGY EFFICIENCY, RENEWABLE ENERGY, CLIMATE CHANGE AND ENVIRONMENTAL MANAGEMENT SECTORS BESIDES TRAINING C OURSES & SKILL BASED TRAINING PROGRAMMES. AND ON THE GROUND THAT IT FAILS TPOS FILTERS OF 75% REVENUE EARNING FROM SERVICES WHEREAS MITCON IS HAVING REVENUE FROM CONSULTANCY FEE IS ON LY 55.65%, HENCE, WE ORDER TO EXCLUDE MITCON FROM THE FINAL SE T OF COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANS ACTION. 17. WHEN TPO HIMSELF HAS ADOPTED THE FILTER TO EXCL UDE COMPANY WHOSE REVENUE IS LESS THAN 75% OF THE TOTAL OPERATING REVENUE, MITCON FAILS THIS FILTER BECAUSE AS PER PR OFIT & LOSS ACCOUNT, REVENUE OF MITCON FROM SERVICES IS ONLY 60 % WHICH IS BELOW THE FILTER OF 75% ADOPTED BY THE TPO/DRP. 18. MORE-SO, MITCON IS FUNCTIONALLY DISSIMILAR TO T HE TAXPAYER AS IT IS PROVIDING SOLUTION IN POWER, ENERGY EFFICIENC Y, RENEWABLE ENERGY, CLIMATE CHANGE AND ENVIRONMENTAL MANAGEMENT SECTOR ETC.. SINCE THERE IS NO CHANGE IN THE BUSINESS MODEL OF T HE TAXPAYER THAN AY 2012-13, FOLLOWING THE ORDER PASSED BY THE COORD INATE BENCH ITA NO.985/DEL./2016 9 OF THE TRIBUNAL IN AY 2012-13, MITCON IS NOT A SUIT ABLE COMPARABLES, HENCE ORDERED TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. M/S. MAHINDRA CONSULTING ENGINEERS LTD. (MAHINDRA) 19. LD. TPO/DRP INCLUDED MAHINDRA AS A COMPARABLE V IS--VIS TAXPAYER DESPITE RAISING OBJECTION BY THE TAXPAYER THAT IT IS FUNCTIONALLY DISSIMILAR. LD. AR FOR THE TAXPAYER C ONTENDED THAT MAHINDRA HAS BEEN EXCLUDED AS A COMPARABLE VIS--VI S THE TAXPAYER IN TAXPAYERS OWN CASE IN AYS 2009-10 & 2010-11 . PERUSAL OF THE ORDER PASSED BY THE COORDINATE BENCH OF THE TRIBUNA L IN TAXPAYERS OWN CASE FOR AY 2009-10 , AVAILABLE AT PAGE 126 OF THE PAPER BOOK, SHOWS THAT MAHINDRA HAS BEEN EXCLUDED AS A COMPARAB LE ON THE GROUNDS THAT THERE IS SUBSTANTIAL OUTSOURCING OF WO RK IN CASE OF MAHINDRA WHICH MAKES ITS BUSINESS MODEL DISSIMILAR TO THE TAXPAYER. 20. IN AY 2010-11, MAHINDRA HAS BEEN EXCLUDED AS A COMPARABLE ON THE GROUND THAT MOST OF THE WORK CARR IED OUT BY THE MAHINDRA WAS OUTSOURCED WHEREAS TAXPAYER HAS NOT OU TSOURCED ITS WORK. MOREOVER, MAHINDRA HAS A DIFFERENT PROFIT RE COGNITION METHOD VIS--VIS THE TAXPAYER WHO IS A 100% CAPTIVE SERVICE PROVIDER. ITA NO.985/DEL./2016 10 21. COORDINATE BENCH OF THE TRIBUNAL IN CASE OF DCIT VS. TEREX INDIA (P.) LTD. (2019) 104 TAXMANN.COM 281 (DELHI-T RIB.) , A TECHNICAL SERVICE PROVIDER EXCLUDED MAHINDRA ON ACC OUNT OF DIFFERENT METHOD OF REVENUE RECOGNITION VIS--VIS T HE TAXPAYER BY RETURNING FOLLOWING FINDINGS :- D) MAHINDRA CONSULTING & ENGG. SERVICES LTD.: WE HAVE PERUSED THE FINANCIAL STATEMENTS OF THE COM PANY PLACED AT PAPER BOOK PAGES 491 509. ON GOING THROUGH THE SAME, WE NOTE THAT THIS COMPANY IS ENGAGED IN PROVIDING A VA RIETY OF SERVICES, ONLY ONE OF WHICH IS ENGINEERING SERVICES AND SEGMENTAL INFORMATION ABOUT THE ENGINEERING SERVICES IS NOT A VAILABLE. FURTHER, THIS COMPANY RECOGNIZES ITS REVENUE ON PER CENTAGE COMPLETION METHOD, AS STATED IN THE NOTES TO ACCOUN TS WHICH IS DIFFERENT THAN THE METHOD OF REVENUE RECOGNITION BE ING FOLLOWED BY THE ASSESSEE COMPANY. THE REVENUE RECOGNITION ME THOD IMPACTS THE PROFIT OF AN ENTERPRISE AND AS SUCH A C OMPANY CANNOT BE COMPARED WITH ANOTHER COMPANY IN CASE WHERE METH ODS OF REVENUE RECOGNITION ARE DIFFERENT. FURTHER, THIS CO MPANY HAS BEEN HELD TO BE NOT A GOOD COMPARABLE BY THE ITAT D ELHI BENCH IN THE CASE OF ALCATEL-LUCENT INDIA LTD. V. ITO IN ITA NOS. 2154 & 2209/DEL/2014 DATED 06.04.2018 AND IN THE CASE OF ALCATEL- LUCENT INDIA LTD. V. DCIT IN ITA NO. 6856/DEL/2015 DATED 06.11.2017. TAKING INTO CONSIDERATION ALL THE ABOVE FACTS, WE ARE OF THE VIEW THAT THIS COMPANY IS NOT A GOOD COMPARA BLE WITH THAT OF THE ASSESSEE COMPANY AND, ACCORDINGLY, WE DIRECT THE AO TO EXCLUDE THIS COMPARABLE. 22. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, MAHIN DRA IS NOT A SUITABLE COMPARABLE ON ACCOUNT OF SUBSTANTIAL OUTSO URCING OF ITS WORK; HAVING DIFFERENT PROFIT RECOGNITION METHOD VI S--VIS THE TAXPAYER, WHO IS A 100% CAPTIVE SERVICE PROVIDER, H ENCE ORDERED TO BE EXCLUDED SUBJECT TO VERIFICATION OF FACTS AS TO THE PERCENTAGE OF OUTSOURCING OF WORK BY MAHINDRA BY THE AO/TPO. ITA NO.985/DEL./2016 11 HSCC (INDIA) LTD. (HSCC) 23. HSCC HAS BEEN RETAINED AS A COMPARABLE BY THE T PO/DRP DESPITE OBJECTIONS RAISED BY THE TAXPAYER ON THE GR OUND THAT HSCC IS PROVIDING CONSULTANCY SERVICES IN THE FIELD OF H EALTHCARE AND SOCIAL SECTOR. HOWEVER, SUITABILITY OF HSCC HAS AL READY BEEN EXAMINED BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2012-13 (SUPRA) AND ORDERED TO BE EXCLUDED ON THE GROUNDS INTER ALIA THAT IT IS A MINI RATNA, A G OVERNMENT OF INDIA CATEGORY-1 COMPANY AND A SUBSIDIARY OF NBCC (INDIA) LTD.; THAT IT HAS EARNED UNUSUALLY HIGH MARGIN OF 48.91%; AND THA T IT IS FUNCTIONALLY DISSIMILAR BY RETURNING FOLLOWING FIND INGS :- 23.1 SUITABILITY OF HSCC AS A COMPARABLE VIS--VI S A ROUTINE ENGINEERING AND CONSULTANCY PROVIDER HAS BEEN EXAMI NED BY THE COORDINATE BENCH OF TRIBUNAL IN CASE OF TEREX INDIA (P) LTD. (SUPRA) AVAILABLE AT PAGE 16 TO 44 OF THE PAPER BOO K WHEREIN IT HAS BEEN ORDERED TO BE EXCLUDED BEING A GOVERNMENT OF INDIA ENTERPRISE AS MAJOR PART OF ITS BUSINESS IS FROM TH E GOVERNMENT ITSELF. 24. EVEN FUNCTIONAL PROFILE OF HSCC IS DISSIMILAR TO TAXPAYER AS IT IS ALSO INTO PROVIDING HEALTH SERVICES BEING A MULTI DISCIPLINARY ORGANIZATION WITH EXPERIENCED PROFESSI ONALS LIKE HEALTH PLANNERS AND ECONOMISTS, DOCTORS, BIOMEDICAL ENGINEERS, COMPUTER EXPERTS PHARMACISTS, ARCHITECTS AND PUBLIC HEALTH ENGINEERS ETC. SO THE FUNCTION OF HSCC ARE DISSIMIL AR TO TAXPAYER WHO IS A ROUTINE ENGINEERING CONSULTANCY SERVICE PR OVIDER, HENCE WE ORDER TO EXCLUDE THE SAME FROM FINAL LIST OF COM PARABLE TO THE BENCHMARK OF INTERNATIONAL TRANSACTIONS. ITA NO.985/DEL./2016 12 24. SO, FOLLOWING THE DECISION OF THE COORDINATE BE NCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE IN AY 2012-13 (SUPRA) AND ON THE GROUNDS INTER ALIA THAT IT IS A MINI RATNA, CATEGOR Y-1 OF GOVERNMENT OF INDIA COMPANY AND SUBSIDIARY OF NBCC (INDIA) LTD.; AND THAT IT IS FUNCTIONALLY DISSIMILAR BEING INTO HEALTHCARE AND SOCIAL SECTOR AS AGAINST THE TAXPAYER WHO IS PROVID ING TECHNICAL SERVICES TO COMPANIES IN FERTILIZER, PETRO-CHEMICAL , REFINERY AND OIL & GAS INDUSTRIES, ETC.; THAT HSCC FAILS SERVICE FIL TER OF 75% APPLIED BY THE TPO TO EXCLUDE THE COMPANY WHOSE REVENUE FRO M SERVICES IS LESS THAN 75% OF THE TOTAL OPERATING COST. SINC E HSCCS TOTAL REVENUE FROM SERVICES IS 69.08% IT FAILS SERVICE FI LTER APPLIED BY THE TAXPAYER AND IS LIABLE TO EXCLUDED ON THIS SCORE AL SO. CONSEQUENTLY, WE ORDER TO EXCLUDE HSCC AS A COMPARABLE FROM THE F INAL LIST OF COMPARABLES. M/S. BENGAL SREI INFRASTRUCTURE DEVELOPMENT LTD. (BENGAL SREI) 25. THE TAXPAYER SOUGHT EXCLUSION OF BENGAL SREI ON THE GROUND THAT IT IS A JOINT VENTURE BETWEEN WEST BENG AL INDUSTRIAL DEVELOPMENT CORPORATION LTD., AN UNDERTAKING OF GOV ERNMENT OF WEST BENGAL HAVING SHAREHOLDING OF 49% AND BENGAL S REI HAVING 51%, HAVING SUBSTANTIAL TRANSACTIONS WITH AE AND HA S EARNED HIGH MARGIN OF 37.57% IN THE CURRENT YEAR; THAT IT IS FU NCTIONALLY ITA NO.985/DEL./2016 13 DISSIMILAR TO THE TAXPAYER BEING INTO PROJECT ADVIS ORY AND TRANSACTION ADVISORY; THAT IT HAS DIFFERENT BUSINES S MODEL AS THE EXPENSES INCURRED BY THE TAXPAYER ON EMPLOYEE AND A MOUNT PAID TO VENDORS/SERVICE PROVIDERS IS 0.97% AS AGAINST 36.26 % OF BENGAL SREI, MEANING THEREBY 36.26% OF THE ACTIVITIES CARR IED OUT BY THE BENGAL SREI HAS BEEN OUTSOURCED. IN TAXPAYERS OWN CASE IN AYS 2009-10 & 2010-11 (SUPRA), MAHINDRA HAS BEEN EXCLUD ED ON ACCOUNT OF SUBSTANTIAL OUTSOURCING OF ITS WORK AND THE SAME PROPOSITION APPLIES TO BENGAL SREI ALSO. SO, KEEPIN G IN VIEW THE FUNCTIONAL DISSIMILARITY AND THE FACT THAT IT IS A JOINT VENTURE OF WEST BENGAL GOVERNMENT HAVING SUBSTANTIAL TRANSACTI ON WITH ITS AE EARNING HIGH MARGIN OF 37.57% AND HAS OUTSOURCED ITS SUBSTANTIAL FUNCTION, IT IS NOT A SUITABLE COMPARAB LE VIS--VIS THE TAXPAYER, HENCE ORDERED TO BE EXCLUDED. M/S. CERTIFICATION ENGINEERS INTERNATIONAL LTD. (CERTIFICATION) 26. THE TAXPAYER SOUGHT EXCLUSION OF CERTIFICATION AGAIN ON THE SAME GROUND THAT IT IS A GOVERNMENT ENTITY HAVING A BNORMAL MARGIN WHICH IS RENDERING SERVICES PREDOMINANTLY TO THE GOVERNMENT COMPANIES THUS HAVING LARGE NUMBER OF RE LATED PARTY TRANSACTIONS WITH GOVERNMENT ENTITIES. LD. AR FOR T HE TAXPAYER BROUGHT ON RECORD THE FACT THAT CONSULTING AND ENGI NEERING INDUSTRY ITA NO.985/DEL./2016 14 FOR AY 2010-11 HAS SHOWN AVERAGE MARGIN OF 11.21% A S PER PROWESS SOFTWARE WHEREAS MARGIN OF CERTIFICATION IS 72.37% WHICH IS ABNORMALLY HIGH MARGIN COMPARED TO AVERAGE INDUSTRY MARGIN. THIS FACT HAS NOT BEEN CONTROVERTED BY THE LD. DR FOR THE REVENUE. ON ACCOUNT OF RELATED PARTY TRANSACTIONS, HONBLE BOMBAY HIGH COURT IN CASE OF THYSSENKRUPP INDUSTRIES INDIA (P.) LTD. VS. ADDL. CIT (2013) 33 TAXMANN.COM 107 (MUMBA I-TRIB.) HAS EXCLUDED ENGINEERS INDIA LTD., A PUBLIC SECTOR UNDERTAKING ON ACCOUNT OF RELATED PARTY TRANSACTIONS WHICH WERE MO RE THAN 25% WHEREAS IN CASE OF CERTIFICATION, IT IS RENDERING S ERVICES PREDOMINANTLY TO GOVERNMENT COMPANIES THUS HAVING L ARGE NUMBER OF RELATED PARTY TRANSACTIONS LEADING TO EARNING OF ABNORMALLY HIGH MARGIN OF 72.37% AS AGAINST AVERAGE MARGIN OF CONSU LTING AND ENGINEERING INDUSTRY AT 11.21%. 27. FURTHERMORE, WHEN WE EXAMINE THE FUNCTIONAL PRO FILE OF CERTIFICATION, AVAILABLE AT PAGE 182 OF THE PAPER B OOK, IT SHOWS THAT ITS ACTIVITIES ARE CONFINED TO RECERTIFICATION, SAF ETY AUDIT AND HSE MANAGEMENT SYSTEMS FOR OFFSHORE AND ONSHORE OIL & G AS FACILITIES AND IT ALSO UNDERTAKES THIRD PARTY INSPECTION OF EQ UIPMENTS AND INSTALLATIONS IN THE HYDROCARBON AND OTHER QUALITY SENSITIVE SECTORS OF THE INDUSTRY WHICH IS DISSIMILAR TO TAXPAYERS P ROFILE WHO IS ITA NO.985/DEL./2016 15 PROVIDING TECHNICAL CONSULTANCY SERVICES IN THE FIE LD OF FERTILIZER, PETRO-CHEMICAL, REFINERY AND OIL & GAS INDUSTRIES E TC. 28. IN VIEW OF THE LAW LAID DOWN BY HONBLE DELHI H IGH COURT IN THE CASE OF RAMPGREEN SOLUTION VS. CIT 60 TAXMANN.COM 355 (DELHI), COMPARABLE NEEDS TO BE FUNCTIONALLY SIMILAR WITH TH E CONTROLLED COMPARABLE TRANSACTIONS OR ENTITIES AND MERE BROAD SIMILARITY IS NOT SUFFICIENT. 29. FURTHERMORE, BUSINESS MODEL OF CERTIFICATION VI S--VIS TAXPAYER IS DIFFERENT BECAUSE CERTIFICATION OUTSOUR CED 35% OF ITS ACTIVITIES DURING THE YEAR UNDER ASSESSMENT AS COMP ARED TO 0.97% BY THE TAXPAYER. IN TAXPAYERS OWN CASE FOR AYS 2009-10 & 2010-11 (SUPRA), THIS COMPARABLE HAS BEEN REJECTED ON ACCO UNT OF SUBSTANTIAL OUTSOURCING OF ITS ACTIVITIES BY A COMP ANY, HENCE ORDERED TO BE EXCLUDED FROM THE FINAL SET OF COMPAR ABLES. COMPARABLE SOUGHT TO BE INCLUDED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS QUA PROVION OF TECHNICAL SUPPORT SERVCIES 30. INITIALLY, THE TAXPAYER SOUGHT TO INCLUDE 4 COM PARABLES SELECTED IN ITS TP STUDY VIZ. (I) CENTRAL MINE PLAN NING & DESIGN INSTITUTE LTD., (II) TOYO ENGINEERING LTD., (III) P ETRON ENGINEERING CONSTRUCTION LTD., AND (IV) CHEMTEX GLOBAL ENGINEER S PVT. LTD. HOWEVER, DURING THE COURSE OF ARGUMENTS, LD. AR FOR THE TAXPAYER ITA NO.985/DEL./2016 16 HAS NOT PRESSED INCLUSION OF CENTRAL MINE PLANNING & DESIGN INSTITUTE LTD. AND TOYO ENGINEERING LTD. AND LEFT W ITH ONLY TWO COMPARABLES VIZ. PETRON ENGINEERING CONSTRUCTION LTD. AND CHEMTEX GLOBAL ENGINEERS PVT. LTD. FOR INCLUSION IN THE FINAL SET OF COMPARABLES. PETRON ENGINEERING CONSTRUCTION LTD. (PETRON) 31. LD. TPO REJECTED PETRON CHOSEN BY THE TAXPAYER AS COMPARABLE ON ACCOUNT OF FUNCTIONAL DISSIMILARITY. LD. DRP CONFIRMED THE REJECTION OF PETRON BY THE TPO. 32. HOWEVER, LD. AR FOR THE TAXPAYER BROUGHT TO THE NOTICE OF THE BENCH THAT PETRON HAS BEEN INCLUDED AS A COMPARABLE IN TAXPAYERS OWN CASE FOR AY 2009-10, 2010-11 & 2011-12 (SUPRA) AND PURSUANT TO THE TRIBUNALS ORDER, TPO HAS INCLUDED PETRON IN THE FINAL SET OF COMPARABLES IN AY 2009-10. IN AY 2009- 10, COMPARABILITY OF PETRON VIS--VIS TAXPAYER WAS EXAM INED BY THE COORDINATE BENCH OF THE TRIBUNAL BY RETURNING FOLLO WING FINDINGS :- WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO FUNCTIONAL DISSIMILARITY BETWEEN THE TESTED PARTY AND THE COMP ARABLE AS BOTH OF THEM ARE PROVIDING SIMILAR SERVICES ALTHOUGH THE SECTORS MIGHT BE A LITTLE DIFFERENT AND THE LD. TPO WAS WRONG IN EXCLUDING IT. WE DIRECT THE INCLUSION OF THIS COMPARABLE IN THE F INAL SET OF COMPARABLES. 33. SIMILARLY, IN AY 2010-11, PETRON HAS BEEN ACCEP TED AS SUITABLE COMPARABLE VIS--VIS TAXPAYER IN ITS OWN C ASE, COPY ITA NO.985/DEL./2016 17 AVAILABLE AT PAGES 196 TO 306 OF THE PAPER BOOK. S O, FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AYS 2009-10, 2010-11 & 2012-13 (SUPRA), WE ARE OF THE CONSIDERED VIEW THAT SINCE THERE IS NO CHANGE IN TH E BUSINESS MODEL DURING THE YEAR UNDER ASSESSMENT, PETRO IS A SUITAB LE COMPARABLE VIS--VIS THE TAXPAYER ON GROUND OF FUNCTIONAL SIMI LARITY, HENCE WE ORDER TO INCLUDE PETRON BY THE TPO/AO IN THE FINAL SET OF COMPARABLES FOR BENCHMARKING THE INTERNATIONAL TRAN SACTIONS. M/S. CHEMTEX GLOBAL ENGINEERS PVT. LTD. (CHEMTEX) 34. THIS IS TAXPAYERS COMPARABLE REJECTED BY THE T PO ON THE GROUND THAT IT FAILS SERVICE FILTER AND RPT FILTER AND ON THE GROUND THAT ANNUAL REPOT OF THIS COMPARABLE IS NOT AVAILAB LE IN THE PUBLIC DOMAIN. LD. AR FOR THE TAXPAYER CONTENDED THAT NOW FINANCIALS OF CHEMTEX ARE AVAILABLE IN THE PUBLIC DOMAIN AND REQU ESTED FOR RESTORING THE MATTER TO TPO. SINCE ANNUAL REPORTS/ FINANCIALS OF CHEMTEX ARE NOW AVAILABLE IN THE PUBLIC DOMAIN, THI S ISSUE IS RESTORED TO TPO/AO FOR RECONSIDERATION AFTER PROVID ING OPPORTUNITY OF BEING HEARD TO THE TAXPAYER. GROUND NO.1(B) 35. TPO/DRP HAVE MADE ADDITION OF RS.3,25,52,475/- ON ACCOUNT OF ADJUSTMENT IN THE VALUE OF INTERNATIONAL TRANSACTION ITA NO.985/DEL./2016 18 (WHILE INCREASING THE MARGIN OF COMPARABLE COMPANIE S TO 24.90% AS AGAINST ACTUAL MARGIN OF 12.28% OF THE TAXPAYER BY REJECTING THE ADJUSTMENT IN MARGIN DUE TO DIFFERENT RISK PROFILE OF THE COMPARABLE COMPANIES). SO, IT IS CONTENDED BY THE LD. AR FOR THE TAXPAYER THAT SINCE THE TAXPAYER IS A CAPTIVE SERVICE PROVIDER OF ITS AE IT OPERATES IN RISK-INSULATED ENVIRONMENT ON COST PLUS MODEL AN D IS COMPENSATED FOR ALL THE COSTS INCURRED BY IT WHEREA S RISK BORNE BY THE THIRD PARTY COMPARABLES ARE MUCH MORE THAN THOS E OF THE TAXPAYER. THE TAXPAYER CLAIMED THE RISK ADJUSTMENT OF 5.25% AND SOUGHT ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE R ISK PROFILE BY SUBSTRACTING THE RISK FREE BANK RATE FROM THE PRIME LENDING RATE DURING THE PREVIOUS YEAR RELEVANT TO AY 2010-11 WHI CH IS 5.25%. 36. IT IS BROUGHT TO THE NOTICE OF THE BENCH BY THE LD. AR FOR THE TAXPAYER THAT THIS ISSUE IS COVERED IN FAVOUR OF TH E TAXPAYER BY THE ORDER PASSED IN ITS OWN CASE FOR AYS 2009-10, 2010- 11 & 2012-13 (SUPRA). PERUSAL OF THE ORDERS PASSED BY THE COORDINATE BENCH OF THE TRIBUNAL IN AYS 2009-10, 2010-11 & 2012-13 (SUPRA) IN TAXPAYERS OWN CASE SHOWS THAT THIS HAS BEEN RESTORED TO TPO/AO TO DECIDE AFRESH IN VIEW OF THE CONTENTIONS RAISED BY THE TAXPAYER WHICH IS PENDING ADJUDICATION. SO, FOLLOWING THE D ECISIONS RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL, W E ARE OF THE CONSIDERED VIEW THAT THIS IDENTICAL ISSUE OF THIS Y EAR IS ALSO REQUIRED ITA NO.985/DEL./2016 19 TO BE RESTORED TO TPO/AO TO DECIDE AFRESH AFTER PRO VIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER AS THERE IS NO CHANGE IN THE BUSINESS MODEL OF THE TAXPAYER DURING THE YEAR UNDER ASSESSMENT. THE TAXPAYER IS DIRECTED TO BRING ON R ECORD EVIDENCE TO PROVE THE RISK ADJUSTMENT VIS--VIS COMPARABLES IN THE LIGHT OF THE DECISIONS OF THE COORDINATE BENCH OF THE TRIBUN AL IN CASES OF MENTOR GRAPHICS (NOIDA) PVT. LTD. VS. DCIT ORDER DA TED 02.11.2007 AND DCIT VS. HELLOSOFT INDIA PVT. LTD. ORDER DATED 15.01.2013 . CONSEQUENTLY, GROUND NO.1(B) IS DETERMINED IN FA VOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.2 37. THE TAXPAYER CHALLENGED THE IMPUGNED ORDER PASS ED BY AO/TPO/DRP RESTRICTING THE DEDUCTION AT 90% INSTEAD OF 100% AS PROVIDED IN SECTION 10A(1A) OF THE ACT ON THE GROUN D THAT THE TAXPAYER HAS INADVERTENTLY CLAIMED DEDUCTION AT 90% OF THE ELIGIBLE PROFIT OF THE UNDERTAKING INSTEAD OF 100% OF THE EL IGIBLE PROFIT. IN AY 2010-11, IDENTICAL ISSUE WAS ALSO RAISED BY THE TAXPAYER AS ADDITIONAL GROUND WHICH WAS ALLOWED AS PER ORDER DA TED 26.12.2018 AND RESTORED THE ISSUE BACK TO THE AO FO R PASSING ORDER AFRESH IN ACCORDANCE WITH LAW. 38. SINCE THIS IS A MISTAKE APPARENT ON RECORD ON T HE PART OF THE TAXPAYER, THIS ISSUE IS REQUIRED TO BE RESTORED BAC K TO THE AO TO ITA NO.985/DEL./2016 20 DECIDE AFRESH KEEPING IN VIEW THE PROVISIONS CONTAI NED U/S 10A(1A) OF THE ACT. CONSEQUENTLY, THE AO IS DIRECT ED TO DECIDE THE ISSUE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE TAXPAYER. SO, GROUND NO.2 IS DETERMINED IN FAVOUR OF THE TAXPAYER FOR STATISTICAL PURPOSES. GROUND NO.3 39. GROUND NO.3 BEING PREMATURE NEEDS NO SPECIFIC F INDINGS. 40. RESULTANTLY, THE APPEAL FILED BY THE TAXPAYER I S ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 31 ST DAY OF JANUARY, 2020. SD/- SD/- (R.K. PANDA) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 31 ST DAY OF JANUARY, 2020. TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A). 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.