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Judgment
PER SATBEER SINGH GODARA, JM
This assessee’s appeal for assessment year 2009-10, arises against the Commissioner of Income Tax (Appeals) [in short, the “CIT(A)-1”], Gurgaon’s order dated 24.03.2015 passed in case no. 159/2013-14, involving proceedings under section 143(3) r.w.s. 144 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). Heard both the parties at length. Case file perused.
This assessee’s appeal canvasses the follow substantive grounds:
“1.That on the facts and in the circumstances of the case and in law, the order passed by the learned Assessing Officer ("Ld. AO") is bad in law and void ab-initio.
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 the 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 ("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. Commissioner of Income Tax (Appeals) ("CIT-A") erred in making an addition of INR 21,233,986 to the returned income of the Appellant by re-computing, the arm's length price of the international transactions under section 92 of the Income Tax Act, 1961 ("Act").
4.The Ld. AO/Ld. TPO/Ld. CIT(A) erred on facts and in law in determining the arm's length price of the Appellant's international transactions with its associated enterprises in the Administrative/market support segment in the following manner:
4.1By not accepting the quantitative filters selected by the Appellant in its transfer pricing documentation/fresh search and has instead applied his own additional/ quantitative filters which lacked valid and sufficient reasoning to arrive at the set of companies used for redetermination of arm's length margin.
4.2By selecting companies which were functionally not comparable to the Appellant and also erred by rejecting certain companies which functionally comparable to the Appellant.
4.3By incorrectly computing margins of several comparable companies selected in the final comparable set.
4.4By including several companies as comparable companies despite the fact that such companies had witnessed abnormal margin/growth during the year under consideration.
4.5By including companies, as comparable companies, with very high turnover as compared to the Appellant.
5.The Ld. AO/Ld. TPO/Ld. CIT(A) erred on facts and in law in determining the arm's length price. of the Appellant's international transactions with its associated enterprises in the IT enabled kate Lim segment in the following manner:
5.1By not accepting the quantitative filters selected by the Appellant in its transfer pricing documentation and has instead applied his own additional/ quantitative filters which lacked valid and sufficient reasoning to arrive at the set of companies used for redetermination of arm's length margin.
5.2By selecting companies which were functionally not comparable to the Appellant and also erred by rejecting certain companies which functionally comparable to the Appellant.
5.3By incorrectly computing margins of several comparable companies selected in the final comparable set.
5.4By including several companies as comparable companies despite the fact that such companies had witnessed abnormal margin/growth during the year under consideration.
5.5By including companies, as comparable companies, with very high turnover as compared to the Appellant.
6.The Ld. AO/Ld. TPO/Ld. CIT(A) erred in not providing the benefit of economic adjustment on account of difference in risk profile of Appellant and comparable companies in arriving at the arm's length mean margin.
7.The Ld. AO/Ld. TPO/Ld. CIT(A) erred in disregarding the multiple year data selected by the Appellant in the TP Documentation and in selecting the current year (i.e. financial year 2008-09) data for comparability despite the fact that at the time of comparison done by the Appellant, the complete data for financial year 2008-09 was not available within the public domain.
8.That the Ld. AO erred in facts and in law in charging interest under section 234A, 234B and 234 C of the Act.
9.That on the facts and circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 271(1)(c) of the Act mechanically and without recording any adequate satisfaction for such initiation.
That the above grounds are mutually exclusive and without prejudice to each other.
The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of objection either before or during the course of proceedings in the interest of the natural justice.
Learned counsel representing the assessee/appellant states very fairly that its 1st and 3rd substantive grounds hereinabove are general in nature. And that it also does not press for 7th, 8th and 9th substantive grounds as consequential and premature; respectively. Rejected in very terms.
We now advert to the assessee’s 4.1 to 4.5 substantive grounds regarding the alleged improper inclusion/exclusion of various comparables. The first and foremost entity herein is M/s. L & T Ramboll Consulting Engineers Ltd. in the assessee’s former segment of international transactions involving its administrative/marketing support services with its overseas enterprises. That being the case, we notice from a perusal of M/s. L & T Ramboll Consulting Engineers Ltd.’s director’s report at page 3 that although it claims itself as earning revenue from consultancy and engineering services for the financial year 2008-09, the facts however remains that the corresponding activities undertaken inter alia are repair of some bridges, six lane roads, project reports, over-bridges and road designs etc. than in administrative and marketing support services. We thus reject the Revenue’s stand and direct exclusion of this first and foremost entity from the assessee’s array of comparables in very terms.
The second entity in issue herein is M/s. Apitco Ltd. Learned counsel invites our attention to this entity’s Schedule II forming part of its P & L Account that it had not derived any income nor carried out such an activity of administrative and marketing support services. We thus direct exclusion of M/s. Apitco Ltd. from the assessee’s list of comparables in very terms.
The factual position is hardly any different regarding third entity herein M/s. Zipper Trading Enterprises Ltd. since it appears to have derived income from sales and services without making available the corresponding segmental details as evident from its P & L account at pages 335 of the assessee’s paper-book. We accordingly reject the Revenue’s vehement submissions supporting it as a comparable and direct its exclusion in very terms.
Next comes the 4th comparable herein M/s. Mahindra Consulting Engineers Ltd. We notice from a perusal of the case records that this tribunal in ITA No.2209/Del/2014 Alcatel-Lucent India Ltd. Vs. ITO, decided on 06.04.2018 involving AY 2008-09 had already directed its exclusion for the reason that it is not functionally comparable since not carrying out consultancy services as is the issue before us. We thus direct the learned TPO to exclude M/s. Mahindra Consulting Engineers Ltd. from the assessee’s list of comparable.
The 5th entity in issue herein between the parties is M/s. Global Procurement Consultancy Ltd. Learned counsel invites our attention to this tribunal’s decision in ITA No.827/Del/2014, M/s. Philip Morris Services India SA Vs. DDIT, dated 21.06.2018 that the entity in issue herein has a different business model. And that it had not carried out market support services i.e. the segment in hand. We thus hold this 5th entity between the parties M/s. Global Procurement Consultants Ltd. as not a functionally similar comparables which is hereby directed to be excluded in very terms.
Next comes the 6th entity between the parties i.e. M/s. Archohm Consultants Pvt. Ltd. The assessee invites our attention to the tribunal’s order in ITA No.1882/Del/2014 (AY: 2009-10), M/s. Terex Equipment Pvt. Ltd. Vs. ACIT, dated 14.11.2018 at page 30 thereof that this entity is providing architect services than marketing support activities. We thus order for exclusion of M/s. Archohm Consultants Pvt. Ltd. from the assessee’s list of comparables in very terms.
The 7th entity in issue between the parties is M/s. IBI Chematur (Engineering & Consultancy) Ltd. Learned counsel takes us to the assessee’s paper-book at pages 139 i.e. its P & L account declaring income from engineering service charges than in administrative and marketing services segment. The Revenue could hardly dispute that its segmental details are also not found available. We thus direct exclusion of M/s. IBI Chematur (Engineering & Consultancy) Ltd. in the assessee’s segment of administrative and marketing support services in very terms.
The 8th entity in issue between the parties is M/s. Semac Ltd. Learned counsel invites our attention to the tribunal’s order in Alcatel-Lucent India Ltd. (supra) at pages 13 to 14 in para 19 that this entity is engaged in providing “engineering consultancy for industrial projects” than administrative and marketing support services. We thus direct exclusion of M/s. Semac Ltd. from the assessee’s array of comparables.
The 9th comparable entity in question between the parties herein is M/s. Orient Engineering & Commercial Co. Ltd. The Revenue could hardly dispute that this tribunal in Polycom (United Kingdon) Ltd. Vs. DCIT, ITA No. 1293/Del/2014 (Del) has already treated the instant comparable entity as engaged in commission agent and technical services thereby failing “FAR” analysis. We thus direct exclusion of M/s. Orient Engineering & Commercial Co. Ltd. from the assessee’s list of comparables.
Now comes M/s. Killick Agencies & Marketing Ltd. which happens to be 10th entity in dispute between the parties. And that the 11th entity herein is M/s. TSR Darashaw Ltd. We note from a perusal of the case records that this tribunal in CIT Vs. Phillip Morris Services India, ITA No. 1468/2018 (Del) AY 2009-10 decided on 21.06.2018 has inter alia held that the above former entity is not engaged in marketing support services and that the latter entity’s segmental details are not available. We accordingly reject the Revenue’s vehement contentions supporting both these entities as comparables and direct their exclusion in very terms.
Learned counsel at this stage has filed the assessee’s chart, inter alia, seeking to include five entities i.e. Ma Foi Management Consultants Ltd., M/s. Sporting & Outdoor Ad-Agency Pvt. Ltd., Colosceum Medial Pvt. Ltd., M/s. Social Media India Ltd. and M/s. Crystal Hues Ltd. and M/s. Indus Technical & Financial Consultants Ltd. in the array of comparables.
The Revenue seeks to buttress the point that the learned TPO’s order at page 82 para 3 holds that M/s. Ma Foi Management Consultants Ltd. has been rejected on account of different financial year ending. That being the case, we quote CIT Vs. Mercer Consulting (India) Pvt. Ltd. (2017) 390 ITR 615 (P&H) that suitable adjustment(s) could indeed be made in such an instance wherein the comparable could not be outrightly rejected on account of different financial year ending. We thus direct the learned TPO to finalize his afresh computation after including M/s. Ma Foi Management Consultants Ltd. in the assessee’s array of comparables. The outcome of the assessee’s remaining five entities (supra) does not go in its favour as per our considered opinion as it has been found in light of the learned TPO’s discussion at page 84 they are not functionally comparable. And also their segmental details are not on record. Rejected accordingly.
Learned counsel at this stage, submits that the assessee further seeks to exclude and include some of the entities in the latter “ITes” segment. The three entities herein which are sought to be excluded are M/s. Vishal Information Technologies Ltd, M/s. Cosmic Global Ltd. and M/s. Crossdomain Solutions Pvt. Ltd. Hon’ble Bombay high court in PCIT Vs. PTC Software India Pvt. Ltd. (2019) 101 taxmann.com 117 (Bom.) appears to have upheld the tribunal’s order, inter alia, holding that the former twin entities herein inter alia are engaged in outsourcing activities. And that their segmental details are not available. The outcome regarding M/s. Crossdomain Solutions Pvt. Ltd. is hardly any different as hon’ble Delhi high court in BNY Mellon International Operations, ITA No. 1226/Bom/2016 (Delhi) has concluded that the same is carrying out “KPO” activities. We thus direct exclusion of all these three entities to be followed by the learned TPO’s necessary computation as per law.
Learned counsel’s next endeavour to include three entities at the assessee’s behest in the array of comparables, namely, M/s. R System International Ltd., M/s. Motif India Infotech Pvt. Ltd. and M/s. Datamatics Financial Services Ltd. It emerges from the assessee’s paper-book at page 251 that M/s. R System International Ltd. is engaged in sale of software products and software development services whose segmental details are not available. Faced with this situation, learned counsel submits that the said entity already stands accepted as the comparables in the assessee’s case itself in the preceding assessment year 2008-09. We are of the considered view in this factual backdrop that the assessee shall itself plead and prove all the segmental details of M/s. R System International Ltd. in consequential proceedings at its own risk and responsibility within three effective opportunities before the TPO.
So far as M/s. Motif India Infotech Pvt. Ltd. is concerned, learned TPO observes at page 124 in para 5 that its financials are not available. The assessee’s case before us is that the same are very much available now at pages 347 to 368 before us. We thus accept its case in principle and direct the learned TPO to finalize its case in preceding terms.
Learned TPO at page 124 also appears to have rejected the third entity herein M/s. Datamatics Financial Services Ltd. for the reason that it fails to qualify service income filter of 75%. Learned counsel has filed a chart of service income/sales ratio stating the same to be @ 99.96%. We thus restore the instant third comparable back to the learned TPO for his afresh appropriate computation as per law in preceding terms. The assessee’s ground nos. 4 to 5.5 (except ground no.4.3 & 5.3) are partly allowed in the foregoing terms.
Learned counsel next submits in light of the assessee’s 4.3 and 5.3 substantive grounds is that the lower authorities also need to correct the corresponding margins involving Cosmic Global, Microgenetic System in the latter segment of “ITes” and Quadrant Communications and Icra Management Consultants Ltd. regarding the support services segment. We are of the considered view that the learned TPO shall ensure the necessary factual verification and reconciliation in his consequential computation as per law subject to a rider that the assessee shall plead and prove the impugned margin correction at its own risk and responsibility within three effect opportunities of hearing.
Lastly comes the assessee’s 10th substantive ground regarding economic adjustment on account of risk(s) undertaken in light of Rule 10B(2) of the Income Tax Rules. We are of the considered view that the learned TPO’s consequential proceedings shall adjudicate the same afresh in light of our preceding rider at the assessee’s risks and responsibility.
No other ground or argument has been pressed before us.
This assessee’s appeal is partly allowed in above terms.