2017-TII-INSTANT-ALL-499
01 November 2017   

NOTIFICATION

CBDT notifies India-Slovenia Protocol

CASE LAW

2017-TII-411-ITAT-MUM-TP

ROLLS ROYCE MARINE INDIA PVT LTD Vs DCIT: MUMBAI ITAT (Dated: October 18, 2017)

Income tax - ALP - provision of engineering services - corporate fees - impact on margin - exclusion of comparable - TNMM

The Assessee company, engaged in the business of sales support of marine equipment for group companies, servicing of marine equipment,sale of marine spares and assembly of marine electrical system/ switchboards for group companies, had filed its return declaring total income at Rs. 5.56 crores. Since the AO found that Assessee had international transactions with its AEs, he made a reference to the TPO, who found that Assessee had adopted TNMM as MAM using OP/OC as PLI, that it had selected for comparable companies having a margin of 7.07%, that it had earned margin of 5.60%, that it was claimed that margin earned by it fell within 5% safe harbour as per the proviso to section 92C(2), that the assessee claimed that IT.s entered into it with its AE's were at ALP. The TPO selected three additional comparables namely, Acropetal Technologies Ltd; Holtech Consulting Private Ltd; and Cather Consulting Engineers Ltd., having margin of 18.92%, 47.36% and 54.5% respectively, and directed the assessee to explain as to why the abovementioned comparable should not be considered for deciding the ALP. After considering the submission of Assessee, the TPO selected seven companies in the final set of comparables and arrived at arithmetic mean of 20.51 for benchmarking the IT.s entered into by the assessee. He held that margin earned by the assessee fell beyond the range of (+/-) 5%, and that the transactions were not at arm's length. He therefore proposed an addition of Rs. 78.71 lakhs. On appeal, the DRP held that TPO had not resorted to cherry picking, that he had merely added a few comparables to make the comparability analysis more accurate, scientific and logical. Referring to provisions of section 92C(3)(c), the DRP held that determination of ALP by Assessee would be disturbed if the information or data used by it in computation of ALP was not reliable. It was further observed that categorisation of Assessee company was a mere administrative service provider was incorrect, that the comparables introduced by the TPO were performing broadly similar function as were rendered by the assessee to its AE's, that broadly similar comparables could be used for benchmarking the ALP under TNMM. With regard to ATL, the DRP observed that Assessee had raised objection about inclusion of said comparable stating that there were extraordinary events, that it could not justify as to how those events had impacted the margin of engineering design segment, that CCEL was providing consultancy services for power, oil and gas sectors, that HCPL was also into provision of engineering consulting services, that all the functions performed by the comparable companies were similar to that of the assessee. Finally, the DRP upheld the order of TPO. On appeal, the ITAT held that,Whether company engaged in oil engineering consultancy services, can be compared to those engaged in the business of sales support of marine equipment for group companies - NO: ITAT + we find that the assessee had selected four comparables to prove that IT.s entered into with AE.s were at arm's length, that it had adopted TNMM as MAM, that as per the TPS the profit margin of the assessee was within the permissible limits, that the TPO added three more comparables and proposed upward adjustments of Rs.78.71 lakhs under the head AES, that the DRP rejected the objection raised by the assessee about three comparables-namely ATL, HPCL and CCEL, that DRP had held that companies selected by the TPO were performing functions similar to the function s of the assessee, it was argued that there was no functional comparability between the assessee and the comparables selected by the TPO. So, it would be useful to take up the justification of inclusions of above referred three comparables in the final list of companies selected for benchmarking the ALP. In the case of CCEL, it is found that it is involved in providing comprehensive consultancy services in the fields of Power, Oil and Gas sectors in India and overseas. As per the report of the Director, during the year under consideration, it had received orders for project management services for a thermal power plant and order for preparation of thermal power plant. In our opinion, there is no functional comparability between Assessee and CCEL. One is in field of engineering consultancy services-specially in the areas of power/oil/gas, whereas the other is engaged in the business of sales support of marine equipment for group companies, servicing of marine equipment, sale of marine Spares and assembly of marine electrical system/switchboards for group companies. Secondly, segmental results of basic and detailed engineering services of CCEL are not available for the year under appeal. Thus, the DRP was not justified in holding that CCEL was a valid comparable and that the assessee and CCEL were performing similar functions;Whether companies went through extra ordinary events, can be adopted as comparables, without first considering impact of mergers/acquisitions in financial functions of company - NO: ITAT + as far as ATL is concerned, it is found that extra ordinary events had taken place and the impact of mergers/acquisitions were not considered in the financial functions of the company. So,it cannot be taken as a valid comparable. As far as HPCL is concerned, we find that it is engaged in providing consulting services in the areas of power, highway, bridges, engineering support services for bulk material handling and structural steel detailing. Its portfolio of services include all discipline of engineering, business consulting, geology and mining, project and construction-management, environment-management and performance-management. Clearly, HPCL is engaged in providing comprehensive services from concept to commissioning for green field, modernization/expansion of cement as well as captive power plant, that the assessee unlike HPCL is not providing engineering support services for bulk material handling and structural steel detailing. Besides segmental data of HPCL are not available that could be compared. It is also a fact the HPCL is having plant and machinery as part of its fixed assets and inventory in its books of accounts. Sub-contracting is a large portion of cost of HPCL. In our opinion, there is no similarity between the functions of the assessee and HPCL. In short, all the three comparables, selected by the TPO and approved by the DRP, have to be rejected for arriving at the ALP of the IT.s of the assessee. If these comparables are not considered for benchmarking the margin of profit for the year under appeal, as compared to other comparables, is within the prescribed limits i.e.(+/- 5%).

Assessee's appeal partly allowed

 

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