IN THE INCOME TAX APPELLATE TRIBUNAL
BEFORE SHRI A.D.JAIN, JUDICIAL MEMBER
AND SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA No: 4187/Del/2010
A.Y.: - 2004-05
Dy.CIT, Circle 17(1)
Room 221, C.R.bldg.
(Appellant)
Vs.
M/s MCI Com
(Now known as Verizon India P.Ltd.)
C-56, Neetibagh
(Respondent)
C.O. 341/Del/2010
(In ITA No: 4187/Del/2010)
A.Y.: - 2004-05
M/s MCI Com
(Appellant)
Vs.
DCIT, Circle 17(1)
(Respondent)
ITA No: 2766/Del/2010
A.Y. : - 2005-06
JCIT, Circle 17(1)
(Appellant)
Vs.
M/s Verizon
(Respondent)
C.O. 218/Del/2011
(In ITA No: 2766/Del/2010)
A.Y.: - 2005-06
M/s Verizon
(Appellant)
vs.
JCIT, Circle 17(1)
(Respondent)
Assessee by: N.Venkatram, Sr.Adv.Ms.Sikha Gupta & Sh.Rohit Tiwari, C.As
Department by: Shri J.S.Ahalwat, Sr.D.R.Shri
O R D E R
PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER
Both these appeals are filed by the Revenue and are directed against separate orders of the CITA)-XX,
2. The facts in brief: The assessee M/sVerizon (
3. The assessee company was established with an objective of rendering marketing support services to the parent company. The services provided are as follows:
(a) market development;
(b) providing information on potential customers;
(c) liaisoning with potential customers for disseminating information regarding the products of the associated enterprises (AE’s) and for obtaining feedback from potential customers; and (d) exploring new service lines/ventures for AEs in India.
The assessee was compensated for all its costs, plus a pre-agreed markup thereon. During the year the assessee entered into the following international transactions with the AE’s.
|
Sl.No. |
Description of International Transaction |
Amount-Rs |
|
1. |
Provision of marketing support |
104,974,351 |
|
2. |
Reimbursement of expenses received |
154,781
|
|
3. |
Reimbursement of expenses paid |
6,549,870
|
.
4. The assessee carried out the Transfer Pricing (TP) analysis and chose Transactional Net Margin Method (TNMM) as the most appropriate method. Operating profit margins (OP/total cost) was used as the profit level indicator (PLI). In the T.P. study the assessee relied upon 11 comparables for the purpose of Bench Marking. It arrived at an Arithmetical Mean of 7.73%. As operating profit margin/total cost of the assessee was 6.59% and as it falls within + 5% range of the Arithmetical Mean of the operating profit margin/total cost of the 11 comparables which was 7.73%, the international transactions of the assessee with its group companies were shown as at arm’s length.
5. The assessee filed its return of income on 11.5.2005 along with the Tax Audit Report and Report u/s 92E in Form No.3CB. The Assessing Officer made a reference to the T.P.O. for determining the “arm’s length” price u/s 92CA(3) in respect of the international transactions entered into by the assessee.
6. The Transfer Pricing Officer (TPO) accepted the submission of the assessee that TNMM method is the most appropriate method. The PLI made by the assessee was also accepted. The assessee has utilized the data of 3 years and computed the PLI by taking Weighted Average of the 3 years.
7. The T.P.O. was of the view that for analyzing comparability of uncontrolled transaction with international transaction data for the year other than the year in which international transactions have been entered into has to be taken into account and the existence of exceptional circumstances as enjoined upon by the Proviso, the comparability does not conform to the provisions and hence a show cause notice was served on the assessee. The assessee filed his reply supporting use of multiple year data. It opposed the using of data of only the F.Y. 2003-04. Without prejudice it submitted that if the data pertaining to 2003-04 only is used, a fresh opportunity must be provided to carry out a fresh search and identify additional comparables. The T.P.O. rejected the contentions of the assessee by holding as follows.
“6.3. The submissions of the assessee have been duly considered. I do not find any merit in the submissions of the assessee for the following reasons:
i) Sub-rule 4 of Rule 10B in unequivocal terms provides for use of data pertaining to the year in which the international transaction has been entered into;
ii) Use of multiple year data is permissible by virtue of Proviso to the said rule;
iii) Proviso is applicable only when the pre-conditions laid down in the Proviso are met;
iv) The facts contained in the prior year’s data which could have an influence on the determination of transfer price in relation to the international transactions have neither been identified nor considered;
v) The facts making it inevitable to take recourse to the Proviso rather than to the main provisions are not discernible in the instant case even after a diligent study of all the aspects and circumstances of the case as are available on record.”
He concluded that in the absence of existence of any exceptional circumstances necessitating recourse to the Proviso to Sub Rule 4(4) having been demonstrated, use of multiple year data has no sanction of law. Thus he considered data for the year 2004 only. The assessee had provided financial data for the Assessment Year 2003-04 in Annexure-I in his alternative submissions, wherever such data was not earlier given.
8. The assessee had filed a list of 18 comparables with stand alone margin computed for the Assessment Year 2003-04. As in the case of 4 comparables i.e. Esquire Engineers and Consultants Ltd; Gilcon Project Services Ltd., Powerplant Performance Improvement Ltd., NIS Sparta Ltd., the T.P.O. found that financial data was not available and hence these comparables were excluded. Similarly in the case of Water & Power Consultancy Services Ltd., as data was not available, the comparable was not considered. Thus 5 comparables were excluded.
9. The T.P.O. also observed that the last included 7 new comparables, as compared to the list of comparables in the original T.P. study. Out of this 7, the TPO found that in the original T.P.study, the assessee had considered 6 of these 7 comparables and rejected the same. The list is extracted for ready reference.
“7.4. A perusal of the except reject matrix filed as Annexure 2 of the TP documents reveals that 6 of these comparables were also considered at that time too and were rejected for the following reasons:
CRISI Limited - Non Comparable services
Educational Consultants - Insufficient descriptive information
ICRA Limited - Non comparable services
KITCO Limited - Experiences persistent operating losses
Mahindra Acres Consulting
Engineers Ltd. - Experiences persistent operating losses
Tata Share Registry - Non comparable services.
At para 7.5 the TPO observed as follows:-
“7.5. A very strange behaviour has been exhibited by the assessee. Does it want to say that the FAR study undertaken by it at the time of preparing the TP documents was non compes mentis or it tantamount to superssio veri. The alter selection of the comparables is not objective. No FAR study has been undertaken. When these comparables were duly not considered by the assessee how they have become comparable all of a sudden. The discernable fact is that the net operating margins of these new comparables are in the negative ranging from -34.60% in the case of Tata Share Registry to 0.01%.in the case of Mahindra Acres. Only one of the comparable namely Educational Consultant has an operating margin of 4.64%. Since the only motive of the assessee in the comparables filed later is to somehow adjust the average PLI to its own level, the same cannot be accepted. In its desperation to adjust the Arm’s Length PLI to its own level the assessee has forgotten the fact that these alleged comparables have already been considered and rejected by it for specific reasons. Thereafter at para 7.6 the TPO concluded as follows.
“7.6. In the circumstances the final set of comparables and consequent arm’s length PLI is computed by taking the comparables which were selected by the assessee in original TP study after undertaking FAR study. The arm’s length PLI is computed in the following.
|
Sl.No. |
Name |
OP/TC margin for the F.Y. 2003-04
|
|
1. |
Basant Raj International Ltd |
28.00% |
|
2. |
Engineers India Ltd. |
37.41% |
|
3. |
Priya International Ltd. |
3.16% |
|
4. |
RITES Limtied |
34.96% |
|
5. |
TCE Consulting Engineers Ltd. |
11.68% |
|
6. |
Ujjwal Ltd. |
4.03% |
|
7. |
Water&Power Consultancy
Services Ltd.
|
20.25%
|
|
|
Average: |
19.92% |
10. Aggrieved the assessee carried the matter in appeal.
11. Before the First appellate authority the assessee did not dispute the exclusion of comparables furnished by it by the TPO. It contended that 4 of the comparables selected by it and accepted by
the TPO have to be excluded for the reason that they are not functionally comparable. These 4 entities are : Engineers India Ltd., RITES Ltd., TCE Consulting Engineers Ltd. And Water & Power Consultancy Services Ltd.
12. The First Appellate Authority framed the following questions from the grounds of appeal filed before her.
(i) Whether the reference made by the Assessing Officer to the T.P.O. mechanically is bad in law making the TPO;s order voidab- initio (ground 4 and 5);
(ii) Whether the mechanical acceptance of TPO;s recommendation by the AO makes the assessment order bad in law (Ground 5 and 6);
(iii) Whether the TPO was justified in considering the current year data(ground 7.1);
(iv) Whether the comparables selected in the order of the TPO are functionally non-comparable to the appellant.”
13. The First Appellate Authority answered the first 3 questions in favour of the Revenue. The 4th question was held in favour of the assessee. The Revenue filed an appeal on the 4th issue on the following grounds.
“The Ld.CIT(A) has erred in facts and in law by granting relief of Rs.54,44,164/- out of addition of Rs.88,83,674/- on account of arm’s length price by:
i. Wrongly holding that out of the seven companies chosen by the TPO as functionally comparable to the assessee company, only three companies were functionally comparable and the remaining four companies were functionally non-comparable.
ii. Ignoring the observation in the order u/s 92(A)(3) that the final set of seven comparables chosen by the TPO were the same comparables selected by the assessee itself in the original FAR/TP report.
iii. By wrongly taking the arm’s length average OP/TC at 11.73% on the basis of only three comparables instead of 19.92% as computed by the TPO on the basis of seven comparables.
iv. Wrongly accepting that the assessee’s operating means margin of 6.59% tell within +/- 5% of the arithmetic means of the comparable price and thereby holding the assessee’s international transactions with the Associated Enterprises to be at arm’s length.
14. The assessee filed Cross Objections on the following grounds.
“1. That the ld.CIT(A)-XV, New Delhi erred in not holding the order passed by the ld.ACIT, Circle 17(1) as being contrary to the facts, law and the principles of natural justice.
2. That the Commissioner of Income Tax (Appeals) erred in law in not holding that the Assessing Officer did not meet the preconditions for making reference to the TPO u/s 92CA(1) of the Income Tax Act, 1961 and in not providing the respondent an opportunity of ‘being heard’ before referring the transfer pricing issues to the TPO.
3. That the Commissioner of Income Tax (Appeals) erred in law and on facts in not accounting for differences in risks assumed by the respondent vis-à-vis comparable companies, while determining the arm’s length price for its international transaction.
4. That the Commissioner of Income Tax (Appeals) erred on facts and in law in upholding the TPO’s approach of using data beyond the due data despite the fact that such data was not available to the respondent at the time of preparing its T.P.documentation and maintaining such documentation by the required due date.
6. That the Commissioner of Income Tax (Appeals) did not adjudicate on whether the TPO has erred in not providing the benefit of the arm’s length range as provided under proviso to s.92C of the Income Tax Act, 1961 for purposes of computing the arm’s length price u/s 92F of the Income Tax Act, 1961.
7. That the Commissioner of Income Tax (Appeals) erred on facts and circumstances of the case in dismissing the ground taken by the respondent that initiating penalty proceedings under explanation 1 and explanation 7 to s.271(1)(c ) of the Income Tax Act, 1961 against the respondent, is not in accordance with applicable law.
8. That the above cross objections are mutually exclusive and without prejudice to each other.
9. That the respondent craves leave to add, alter, amend and/or modify any of the cross objections either before or during the course of the appellate proceedings.”
15. The Ld.Departmental Representative Mr.J.S.Halwat submitted that the parent company MCI WorldCom Asia Pacific Ltd. (MCI) is a high technical company with global eminence. He referred to the profile of the company and submitted that MCI deals with innovative technology and services which primarily include high quality internet data and communication net works and services and submitted that provision of services by the Subsidiary Indian Company includes rendering of high technical engineering consultancy services. Thus he submits that the Commissioner of Income Tax (Appeals) was at error in holding that the 4 comparables selected by the assessee and accepted by the TPO, are not functionally comparable. He emphasized the fact that, it was the company in its T.P.Report, made a functional analysis of the comparables and has come to a conclusion that these 4 companies are comparable. He submitted that the assessee had raised objections before the Commissioner of Income Tax (Appeals) on its own findings and the Commissioner of Income Tax (Appeals) was in error in attempting such grounds and thereafter adjudicating the issue in its favour. He relied on the assessee’s analysis in the T.P. study as well as the order of the TPO and submitted the assessee cannot aprobate and reprobate.
16. Ld.Counsel for the assessee Mr.N.Venkatraman, Sr.Advocate on the other hand submitted that the assessee cannot be estopped from pleading before the First Appellate authority that the comparables chosen were wrong. He relied on the following case laws.
i. Sony
ii. Metagraphs Noida P.Ltd. vs DCIT ITA 1969/Del/2006(2007)-TII- 02-ITAT-Del-TP
17. On merits he relied on the submissions made by the assessee before the Commissioner of Income Tax (Appeals) and the conclusions drawn by the Commissioner of Income Tax (Appeals) and argued that the Revenue nowhere pointed out any infirmity in the findings of the Commissioner of Income Tax (Appeals) that these 4 comparables are functionally different from that of the assesse.
18. Both the parties submitted that for the Assessment Year 2005-06 the T.P.O. as well as the Commissioner of Income Tax (Appeals) relied on their findings for the Assessment Year 2004-05 and hence the arguments are the same.
19. Rival contentions heard. On a careful consideration of the arguments of both parties and on a perusal of the papers on record and the orders of the authorities below as well as the case laws cited, we hold as follows.
20. The sole issue that arises for our adjudication is whether the Commissioner of Income Tax (Appeals) was right in excluding 4 comparables chosen by the assessee in its T.P.study and accepted by the T.P.O in his order, or the ground that there is no functionally comparability between the functions of these comparables and the functions of the assessee company. The first ;aspect is whether the assessee is estopped from pleading before the First Appellate Authority that the comparables taken by it are wrong.
21. In the T.P.study the assessee’s description of business of the comparable companies was as follows. Engineers India Ltd.
Engineers India Ltd. was established in 1965 and is engaged in provision of engineering and related technical services for petroleum refineries and other industrial projects. The company has diversified into other fields such as pipelines, petrochemicals, oil and gas processing, offshore structures and platforms, fertilizers, metallurgy and power. ElL now provides a complete range of project services in these fields and has emerged as
RITES Limited
RITES is an internationally recognized leading consultant with operational experience of over 50 countries in
TCE Consulting Engineers Ltd.
TCE Consulting Engineers Ltd., a Tata Group company is engaged in the provision of engineering services such as operation and design engineering, upgradation and renovation services, survey and filed investigation services etc.
Water and Power Consultancy Services (
WAPCOS provides consulting in the domestic and international water and power sectors. Services offered include market intelligence, feasibility studies, planning/project formulation, field investigations and testing, engineering design, contract management, quality assurance & management and human resource development. Apart from the Indian sub-continent, WAPCOS renders consultancy services in over 30 developing countries.
22. In its contentions before the Commissioner of Income Tax (Appeals) the assessee argued that these 4 comparable companies are not functionally comparable for the following reasons.
Functionally not comparable
Engineers India Ltd.
Engineers India Ltd. was established in 1965 and is engaged in provision of engineering and related technical services for petroleum refineries and other industrial projects. The company has diversified into other fields such as pipelines, petrochemicals, oil and gas processing, offshore structures and platforms, fertilizers, metallurgy and power. ElL now provides a complete range of project services in these fields and has emerged as
In overseas, EIL achieved a major ‘break-through’ by bagging fEED for prestigious Inter Refineries Pipelines (IRP) Project of RAKREER (ADNOC Group Company),
RITES is an internationally recognized leading consultant with operational experience of over 50 countries in
The company provides services such as pre-project planning involving project identification, feasibility studies and project appraisal, project support activities comprising surveys, environmental impact assessment, geo-technical and other investigations, project preparation activities of detailed engineering, design, tender documentation, bid evaluations and economic and financial evaluations.
The Company is primarily a consultancy organisation rendering consultancy services in all facets of transportation. Major areas of operations are:-
Consultancy services
Export of rolling stock, equipment and spares
Leasing of railway rolling stock and equipment
Further, the company renders its services in the fields of engineering design, construction and project management for railway tracks and electrifications together with traffic and software consultancy assignments.
As per the Annual Report for FY 2003-04, RITES has rendered services to
Water and Power Consultancy Services (
The company has identified its business activity into two business segment i. e. Consultancy & Engineering projects and Lump Sum Turnkey projects (As per the Annual Report for financial year 2003-04). WAPCOS has been providing consultancy services in all facets of Water Resources, Power and Infrastructure Sectors in
WAPCOS has also been venturing into newer fields such as Software Development, City Development Plans, Financial Management System, Technical Education, Quality Control and Construction Supervision, Roads & Bridges. "
TCE
TCE is engaged in the provision of engineering services such as operation and design engineering, up gradation & renovation services, survey & field investigation services, etc.
The Annual Report of TCE for the FY 2003-04 highlights the key projects won by the company during the year which includes, The 2 x 20 MW captive co-generation power plant of Chennai Petroleum Corporation Limited, for which TCE provided detailed engineering was commissioned TCE is also providing project management consultancy to Chennai Petroleum Corporation Limited for the expansion of their plant by addition of a new 20 MW gas turbine with associated heat recovery steam generator. ITC is developing a 16 MW coal based co-generation plant for process steam and power, for which TCE is providing detailed engineering services. While the boiler has been commissioned, the erection of the turbine is in progress. Phase I of the 24.5 MW captive power plant of Hindalco Industries Limited was successfully commissioned. Detailed engineering services are being provided for the 1x60 MW unit Phase III expansion.
All these projects are core engineering projects of domestic as well international repute which stress on the fact that TCE is an ;engineering consultancy provider engaged in high end engineering projects. TCE operates under a single reportable business segment, namely:Engineering Consultancy Services.
Your Honour would appreciate that the above mentioned companies are primarily engaged in providing engineering consultancy and undertake turnkey contracts on a regular basis. The inherent factors of this industry i.e. marketing strategies, competitive edge, level of technological
development, operational efficiency, competence and effectiveness of management, cash flow trends and potential, liquidity, financial flexibility, government policies, sensitivity to possible changes in business/economic circumstances affect the functioning of these companies.
As is evident from the description of the engineering consultancy activity, given the complexity of the function coupled with the technical expertise required in providing engineering consultancy, the same activity cannot be considered comparable to function of providing marketing support services due to functional differences, differences in industry and difference in market dynamics. The services provided by the Appellant are functionally different vis-à-vis the business operations of TIL, RITES, WAPCOS and TCE.
High Risk bearers
As supported by OECD guidelines also, functional comparability of the companies will have to be considered in conjunction with the risk and return profile of the companies being selected for determining arm’s length price. Risk and return profile of the companies engaged in similar industry is likely to be same and this provides a good approximation to judge whether or not a company can be considered as comparable.
ElL, RITES, WAPCOS and TCE operate in engineering consultancy industry, the risks and returns vary significantly from those of the marketing support services company operating on a cost plus model. Moreover, engineering consultancy being a high risk activity, the returns from such business shall be comparatively higher to the routine marketing activities of the Appel/ant. The business dynamics of the industry are such that companies engaged in engineering consultancy are prone to high liability in case of any failure to implement, design and complete projects in time. Hence, such companies are by its nature of business exposed to higher risks.
The high risk profiles of ElL, RITES, WAPCOS and TCE, render the company's financial results non-comparable to the margins earned by the Appellant from its marketing support activities. Therefore, ElL, RITES, WAPCOS and TCE cannot be considered as comparable to the Appellant.
A copy of the relevant extracts of the Annual Reports of ElL, RITES, WAPCOS and TCE is enclosed with this.”
23. A perusal of the above demonstrates that the assessee has not conducted a proper T.P.study and has wrongly chosen these 4 comparables. When on facts, we are of the opinion that the T.P.study wherein these 4 comparables taken were wrong as apparently there is no functional comparability, we cannot approve such T.P.study, even if the T.P.O. has accepted it. Wrong facts have to be corrected. There can be no estoppel in such factual situation. The Ld.CIT(A) has the power to accept fresh claim of the assessee. Marketing support services cannot be compared with turn key Engineering services. We agree with the view of the First Appellate Authority that EIL, Rites, Wapsos and TCE are engineering companies and provide end-to-end solutions and whereas the assessee company provides marketing support services to the parent company, which is in the nature of support service and hence not functionally comparable. She rightly concluded that the risk profile is vastly different and hence on this count also they are not comparable. This factual conclusions are not disputed by the Ld.D.R.
24. On these facts we find no infirmity in the Commissioner of Income Tax (Appeals) admitting a ground by the assessee, wherein it argued that the comparables selected by it in theT.P. return are erroneous.
25. Coming to the case laws on the matter, in the case of Quark Systems Rolling (supra) the Chandigarh Special Bench of the Triobunal held that the assessee is not estopped from pointing out a mistake in the assessment, for such mistake is the result of evidence adduced by the tax payer. In this case also the assessee has demonstrated that prima facie there is a mistake in its taking all these comparables. Thus on both counts we uphold the findings of the Commissioner of Income Tax (Appeals).
26. Both the parties have not argued ground no.4 in the Revenue’s appeal. Nevertheless in view of the retrospective amendment to S.92 C, we set aside the issue to the file of the Ld.CIT(A) for fresh adjudication.
27. In the result both the appeals of the Revenue are dismissed.
28. Coming to the C.O. the ld.Sr.Advocate submitted that these are in support of the order of the Commissioner of Income Tax (Appeals) and the assessee does not wish to press the Cross Objections. In view of the above submission, we dismiss both the Cross Objections filed by the
assessee as ‘not pressed’.
29. In the result both the Revenue’s appeals and the Cross Objections filed by the assessee are dismissed.
Order pronounced in the
Sd/- Sd/-
(A.D.JAIN) (J.SUDHAKAR REDDY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated:
*manga
Copy of the Order forwarded to:
1. Appellant;
2. Respondent;
3. CIT;
4. CIT(A);
5. DR;
6. Guard File
By Order
Dy. Registrar
// C O P Y //
1. Date of Dictation:
2. Draft placed before the Author on:
3. Draft proposed and placed before Second Member on:
4. Draft discussed/approved by the Second Member on:
5. Approved draft came to Sr.P.S. on:
6. Date of Pronouncement:
7. File sent to Bench Clerk on:
8. Date on which file given to Head Clerk on:
9. Date of dispatching the Order on:
