TII BRIEF

Tax to GDP ratio rises; taxes on labour & consumption go up in OECD economies

CASE LAWS

2016-TII-03-SC-TP

CIT Vs CARRIER AIR CONDITIONING AND REFRIGERATION: SUPREME COURT OF INDIA (Dated: November 25, 2016)

Income Tax - Sections 92CA(3), 143(2), 144C & 254(2A).

The assessee a company had furnished its return of income which was selected for scrutiny. Reference was made to the TPO to determine ALP. TPO passed order and determined the TP adjustment. Draft order was passed after making addition on account of TP adjustments. On appeal, the Tribunal granted a stay order on the assessment order. The Tribunal further extended the stay for another period of six months or till the disposal of the appeal relying upon the judgment of the Delhi HC in Pepsi Foods Pvt. Limited vs. ACIT and another. According to the revenue, the decision of the Tribunal was not in accordance with law as it was contrary to the second and third provisos to section 254(2A). The High Court held that if the appeal could not be decided by the Tribunal due to pressure of pendency of cases and the delay in disposal of the appeal is not attributable to the assessee in any manner, the interim protection can continue beyond 365 days in deserving cases.

Having heard the parties, the Supreme Court condones delay and orders issue of notice.

2016-TII-02-SC-TP

CIT Vs RAMPGREEN SOLUTION PVT LTD: SUPREME COURT OF INDIA (Dated: November 28, 2016)

Income tax - The assessee a wholly owned subsidiary of vCustomer, USA, (an AE) is engaged in providing voice-based customer care to the AE's clients. In consideration for the services, the AE remunerates the assessee by payment of all costs incurred by the assessee plus a mark up of 15% of the costs. During TP proceedings, the TPO included certain comparables in domian of BPO & KPO service service range and proposed a TP adjustment. The assessee's plea for exclusion of these comparables were rejected by both DRP and the ITAT by observing that once a service fell within the main category of ITES, then no sub-classification of the segment in terms of KPO and BPO was permissible. When the matter reached High Court, it was held that the opinion of the ITAT was contrary to the fundamental rationale of determining ALP by comparing controlled transactions/entities with similar uncontrolled transactions/entities. The High Court further held that operating margin of those companies cannot be included to arrive at an ALP of controlled transactions, which were materially different in its content and value. The High Court also cleared that it would not be apposite to ignore functional dissimilarity only for the reason that its impact may be reduced on account of using arithmetical mean of the PLI.

Unsatisfied with the verdict of High Court, the Revenue approached to the Apex Court by filing SLP, and the Supreme Court herein admits the case noticing some debatable issues of law, grants leave to the Revenue to defend its case.

2016-TII-578-ITAT-MAD-TP

SAIPEM INDIA PROJECTS LTD Vs DCIT: CHENNAI ITAT (Dated: November 25, 2016)

Income tax: ALP - exports to AE - engineering services - functional dissimilarity & TNMM

Whether material cost is a significant factor to find out if a company was having an independent manufacturing/production segment, requiring a segmental analysis, so as to exclude/include a company in the list of comparables - YES: ITAT

Whether a company engaged in providing most of its engineering and allied services to oil and gas industries, can be outrightly rejected as a comparable to an engineering consultancy service provider - NO: ITAT

The assessee is engaged in providing engineering and allied services. During F.Y 2010-11, the assessee had exported engineering service and paid technical service charge to its AEs belonging to the Saipem Group. Under the Engineering services segment, the main activities of Saipem India could be categorised as Project Management; Engineering; Procurement services and; Site activities. The assessee had for its TP study selected TNMM as the MAM and had made an analysis of the prowess and capital line plus database and selected three companies, which according to it were functionally comparable to it. As per assessee, its own PLI was much more than that of comparables and therefore there was no requirement for any adjustment on the pricing of its international transactions with the AEs. The TPO after considering the comparables selected by the assessee was of the opinion that M/s.Stewarts & Lloyds Ltd was not an appropriate one. According to TPO, M/s.Stewarts & Lloyds Ltd was engaged in a different type of activity and had significant investments in plant and machinery. There were no segmental results and hence M/s.Stewarts & Lloyds Ltd could not be considered as a proper comparable. The TPO thereafter made his own study prowess and capital line plus database and indentified M/s. Mahindra Consulting Engineers Ltd., and M/s. Kirloskar Consultants Ltd as comparable to the assessee. As per TPO, engineering design services performed by the assessee included allied services also and the services performed by M/s. Mahindra Consulting Engineers Ltd. fell into the latter category. The TPO applied average PLI of 11.32% of the comparables on the operative cost of the assessee and worked out an upward adjustment of C8,34,73,835/-. On appeal, the DRP observed that the assessee had failed to produce annual reports of the two comparables from which the profit and loss account of the two comparables proposed by it could have been examined and applicability of filters and functional similarity could have been looked into. So objections of the assessee on this issue were not accepted.

Having heard the parties, the Tribunal held that,

+ as far as M/s. Mahindra Consulting Engineers Ltd is concerned, a reading of the profiles of the assessee clearly show that M/s. Saipem group of which assessee was a part, was not only serving oil and gas but were into diversified industries like environment, infrastructure and marine terminals. Coming to the specific functions performed by the assessee captured above it clearly show that assessee was providing engineering and allied services not to oil and gas industries alone. It was giving support services for plant commissioning start up and performing test run. In such circumstances contention of the assessee that M/s. Mahindra Consulting Engineers Ltd was engaged in consultancy engineering of a totally different variety, which were not comparable to it cannot be accepted. As mentioned by DR, a strict product or service similarity is not required when TNMM is selected as MAM. Apart from the above, M/s. Mahindra Consulting Engineers Ltd was also providing engineering consultancy and services which were functionally similar to what the assessee was doing. In such circumstances, we are of the opinion that lower authorities were justified in considering M/s. Mahindra Consulting Engineers Ltd as a good comparable;

+ as far as M/s. Stewarts & Lloyds Ltd is concerned, we find that TPO had considered the said company as a good comparable in the transfer pricing study for assessment years 2008-09, 2009-2010 and 2010-2011. For the impugned assessment year, the TPO refused to consider it as a good comparable for a reason that it had material cost of 8.02% to the total operating cost. Argument of the assessee is that, cost of material was not significant enough to consider the said company to be engaged in manufacturing/production. In our opinion, this is an acceptable argument. The percentage of cost of materials and total operating cost of M/s. Stewarts & Lloyds Ltd for the relevant previous years was 8.02%. We do find that material cost was not significant enough to come to a conclusion that the said company was having an independent manufacturing /production segment, requiring a segmental analysis. Therefore, we are of the opinion that M/s. Stewarts & Lloyds Ltd was a good comparable. As a result, final list of comparables that are to be considered are Mahindra Consulting Engineers Ltd, M.N. Dastur & Company (P) Ltd, Toyo Engineering India Ltd, Kirloskar Consultants Ltd and M/s. Stewarts & Lloyds Ltd., and the TPO is directed to rework the PLI of the above comparables and recompute the ALP adjustment if any necessary.

Case remanded