Conclusion: Assessee was not entitled to claim gifts and presents given to the customers by way of cash as business expenditure as the same was against the provisions contained u/s 40A(3).
Held: AO made addition by disallowing the misc. expenses like Diwali gifts and presents given by the assessee on the ground that from the ledger account of gifts and presents for the respective period, it was found that gifts and presents for the respective period had been done in cash which was against the provisions of section 40A(3). However, it was the case of assessee that these expenses were incurred exclusively for business purposes which was to maintain high morale of the employees which resulted into cost reduction and more profit of the company in the overall operation. It was held undisputedly assessee had incurred these expenses allegedly on gifts and presents by way of cash, the same could not be attributed to Diwali gifts and presents etc. which was also against the provisions contained u/s 40A(3). So, the addition made by AO was confirmed.
FULL TEXT OF THE ITAT JUDGEMENT
The Appellant, M/s. STEAG Energy Services (I) Pvt. Ltd. (hereinafter referred to as ‘the taxpayer’) by filing the present appeal sought to set aside the impugned order dated 31.12.2015 passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) read with section 144C of the Income-tax Act, 1961 (for short ‘the Act’) qua the assessment year 2011-12 on the grounds inter alia that :-
“1. On the facts and circumstances of the case, the order passed by the Ld. Assessing Officer under Section 143(3)/144C of the Income Tax Act, 1961 (“Act”) is bad, both in the eyes of law and on the facts.
2. On the facts and circumstances of the case, the final assessment order passed by the Ld. A.O. is barred by limitation having been passed beyond the time prescribed under Section 144C(13) of the Act.
3. On the facts and circumstances of the case, the Ld. A.O. has erred, both on facts and in law, in assessing the income of the assessee at Rs.9,07,33,200/- as against returned loss of Rs.6,95,65,715/- declared by the assessee.
4. On the facts and circumstances of the case, the Ld. DRP has erred, both on facts and in law, in confirming addition to the extent of Rs.2,09,91,628/-on account of difference in arm’s length price.
5 (i) On the facts and circumstances of the case, the Ld. DRP has erred both on facts and in law, in confirming the inclusion of the following comparables taken by the Ld. TPO:
(i) Mitcon Consultancy & Engineering Services Ltd.
(ii) IBI Chematur (Engineering & Consultancy Ltd)
(iii) Mahindra Consulting Engineers Ltd.
(ii) That the above action of Ld. TPO has been confirmed despite the fact that the assessee brought significant material & evidences on record to demonstrate that the line of activities of these comparables is totally different from that of the activities of the assessee company.
6(i) On the facts and circumstances of the case, the Ld. DRP has erred in not excluding Mitcon Consultancy & Engineering Services Ltd. as a comparable ignoring the contention of the appellant that it has earned income mainly from the services rendered in the nature of vocational training, IT training, laboratory income and is engaged in power generation as is evident from the profit and loss account.
(ii) On the facts and circumstances of the case, the Ld. DRP has erred in ignoring the contention that this Mitcon Consultancy & Engineering Services Ltd. is a government sponsored company as is evident from the Balance Sheet that it has received substantial grants from the government and is carrying out energy audit on behalf of the government.
7. On the facts and circumstances of the case, the Ld. DRP has erred in not excluding IBI Chematur (Engineering and Consultancy) Ltd. as a comparable as this company is engaged in the business of purchase and sale of engineering equipment and the main profit has been earned out of such activity as is evident from its financial statements.
8. On the facts and circumstances of the case, the Ld. DRP has erred in not excluding Mahindra Consulting Engineers Ltd. as a comparable ignoring the contention of the appellant company that this company operates mainly in the infrastructure sector and it recognizes its revenue following Accounting Standards 7 in respect of the construction contracts.
9. On the facts and circumstances of the case, the Ld. DRP has erred on both facts and in law, in ignoring the contention of the assessee that comparability criteria / filters have not been applied by the TPO uniformly.
10. On the facts and circumstances of the case, the Ld. DRP has erred on both facts and in law, in rejecting the contention of the assessee that TPO has not carried out proper FAR analysis while determining the arm’s length price.
11. On the facts and circumstances of the case, the Ld. DRP has erred on both facts and in law, in rejecting the contention of the assessee that TPO has erred in computing PLI of the comparable as well as PLI of the assessee.
12(i) On the facts and circumstances of the case, the Ld. DRP has erred in not excluding the transaction of purchase of fixed assets amounting to Rs.2,11,67,863/- and the reimbursement amounting to Rs.18,17,639/-, which are not part of the revenue, while computing the total value of the international transactions and determining the adjustment to be made consequent to the arm’s length price.
(ii) On the facts and circumstances of the case, the Ld. DRP has erred in not directing the Ld. AO to consider value of the international transaction at Rs.19,88,18,571/- as against Rs.22,18,04,073/- taken by the Ld. TPO.
13. On the facts and circumstances of the case, the Ld. DRP has erred on both facts and in law in confirming the action of TPO in rejecting the calculation of the assessee for making appropriate adjustment to account for varying risk profiles and difference in working capital of the assessee vis-a-vis comparables.
14. On the facts and circumstances of the case, the Id. AO has erred on both facts and in law, in not following the direction of the DRP that the benefit of arm’s length range of +/- 5% be given in view of the proviso to Section 92C(2) of the Act.
15. On the facts and circumstances of the case, the Id. AO has erred in not complying with the directions given by the Id. DRP and making addition beyond the amount determined by the DRP.
16(i) On the facts and circumstances of the case, the Id. AO has erred on both facts and in law, in making the disallowance of Rs.1,75,852 on account of expenses incurred on account of gifts and reward distributed to the employees.
(ii) That the said disallowance has been made despite the fact that the said expenditure has been incurred wholly and exclusively for the purpose of business and allowable under section 37(1) of the Act.”
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : Steag Energy Services (India) Pvt. Ltd., the taxpayer was incorporated in India on January 29, 2001 to provide services in respect of engineering and technical solutions to power generating companies, which is wholly owned subsidiary of Steag Energy Services, Gmbh, Germany. During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises (AEs) as under :
|S. No.||Nature of transaction||Method selected||Value of
|1||Service charges received||TNMM||11,493,037|
|3||Purchase of services||TNMM||20,718,580|
|4||Purchase of fixed assets||TNMM||21,167,863|
|5||Consultancy and professional fees||TNMM||178,099,991|
3. The taxpayer in order to benchmark its international transactions, in its TP study applied Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) at 9.4% as against profit margin of single comparable company selected at 6.00% and held its international transactions at arm’s length.
4. However, on the other hand, ld. TPO selected 9 comparables and computed their PLI by applying TNMM and proposed an addition of 21.62% (without working capital adjustment) and at 9 1% (after working capital adjustment) of Rs.2,82,77,606/-.
5. The taxpayer carried the matter before the ld. DRP by way of filing objections, who has given partial relief to the taxpayer by excluding 5 comparables out of 9 new comparables selected by the Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
7. Ld. TPO in order to benchmark international transaction undertaken by the taxpayer with its AE qua “consultancy and professional fee and other services”, used TNMM as the Most Appropriate Method (MAM) with OP/OC as PLI introduced 9 new comparables after retaining one comparable of the taxpayer. Final set of comparables with their PLI is as under :-
|Comparables||Without WC Adj.||WC Adj.
|Acropetal Technologies Limited (Seg.)||12.56%||4.25%|
|Cades Digitech Pvt. Ltd. (Merged)||5.19%||3.71%|
|H S C C (India) Ltd.||1 7.38%||11.94%|
|IBI Chematur (Engineering & Consultancy) Ltd.||20.61%||21.47%|
|Mahindra Consulting Engineering Ltd.||23.62%||23.19%|
|Mitcon Consultancy & Engg. Services Ltd.||28.67%||30.77%|
|Project and Development India Limited (Seg.)||27.13%||25.15%|
|T C E Consulting Engineers Ltd.||22.66%||20.92%|
8. TPO after computing the PLI of comparables at 19.91% as against 9.40% of the taxpayer computed the adjustment as under:-
|Arm’s length margin (%)||19.91%|
|Arm’s length margin (Rs.)||198506345|
|Arm’s length Price||798,511,964|
|Price charged by the assessee||914,357,697|
|5% of Price charged in international transaction||11090204|
|Difference between ALP and Price charged by assessee||115,845,733|
|Percentage of sales made to AEs to total revenue|
|(Rs.221804073 / Rs.914357697*100)||24.26|
|Proportionate Difference for which adjustment is required to be made||28101754|
9. In order to compress the controversy at hand, ld. AR for the taxpayer sought exclusion of three comparable companies retained by the ld. TPO/DRP, namely, (i) Mitcon Consultancy & Engg. Services Ltd.; (ii) IBI Chemature (Engineering and Consultancy) Ltd.; and (iii) Mahindra Consulting Engineers Ltd.
10. We would examine the suitability of the aforesaid three companies as comparable vis-а-vis the taxpayer one by one as under.
MITCON CONSULTANCY & ENGG.
SERVICES LTD. (MITCON)
11. AR for the taxpayer sought exclusion of Mitcon on grounds inter alia that it is functionally incomparable; that income earned by the taxpayer from consultancy fee during the year under assessment is Rs.28,70,17,235/- out of total revenue of Rs.47,81,96,289/- i.e. 60.02%; that this company fails the service revenue filter of 75%; that Mitcon received various grants from Government of India which has effected its profitability and relied upon the decisions rendered by the Hon’ble High Court and coordinate Bench of the Tribunal in case cited as Pr.CIT vs. WSP Consultants India (P.) Ltd. (2018) 253 taxman 58 and Granite Services International (P.) Ltd. vs. ACIT in ITA No.532/del/2016 dated 12.09.2017.
12. However, on the other hand, ld. DR for the Revenue by relying upon the orders passed by the ld. TPO as well as ld. DRP contended that the major revenue of Mitcon of Rs.20 crores is from consultancy fees and as such, it is a valid comparable.
13. Perusal of the Schedule XIV forming part of the balance sheet and P&L account, available at page 727 of the paper book, shows that Mitcon has income from the facilities at Bio Technology Incubation Centre and income from various schemes as launched by the Government of India which is extracted for ready perusal as under :-
“5.3 Income from the facilities at Bio Technology Incubation Centre is accounted as follows:
a) Revenue from training 10 entrepreneurs is recognised when
b) Revenue from the hand – holding services to incubates and other entrepreneurs is recognized on rendering the related services & completion of job / assignment.
c) Revenue from infrastructure use is recognized on completion of assignment.
d) Revenue from Environment Laboratory is accounted on the basis of completion of the assignment / job.
5.4 The income under Prime Ministers Rojgar Yojana (PMRY), Special Component plan (SCP), Swamjayanti Gram Swarozgar Yojana (SGSY) and Swama Jayanli Shahan Rozgar Yojana (SJSRY) is accounted on gross basis ( Previous year On net off expenditure) based on certificates received from implementing agencies evidencing the completion of the training programme.”
14. When we examine the profit & loss account of Miton for the year ending 31.03.2011, available at page 732 of the paper book, it shows that Miton has incurred expenses on providing vocational training and IT training, which changes its profile. Perusal of P&L account, available at page 733 of the paper book, shows that Miton has earned Rs.91,931,695, Rs.40,436,273 and Rs.13,393,403/- as its income from vocational training programmes, income from IT training and income from laboratories respectively.
15. Furthermore, when we examine Schedule VIII forming part of the balance sheet, available at page 725 of the paper book, it shows that Mitcon has also income from wind power generation to the tune of Rs.5 1,91,068/-. Furthermore, when we examine Schedule II to the balance sheet at page 721 of the paper book, it shows that Mitcon has received grants from Government of India under various schemes which certainly affects its profitability.
16. Hon’ble jurisdictional High Court in case cited as WSP Consultants India (P.) Ltd. (supra) having identical business profile as that of the taxpayer rejected Mitcon on the ground that it is deriving less than 75% revenue from the consultancy services.
17. So, we are of the consider view that Mitcon is not a suitable comparable vis-а-vis the taxpayer, hence ordered to be excluded.
IBI CHEMATUR (ENGINEERING & CONSULTANCY) LTD. (IBI CHEMATUR)
18. The taxpayer sought to exclude “IBI Chematur” on the grounds inter alia that it fails 75% service revenue filter applied by the taxpayer and also accepted by the TPO; that it has various segments but no segmental financials are available; that IBI Chematur is not merely providing engineering services and relied upon the decisions of the coordinate Bench of the Tribunal in Bechtel India (P) Ltd. vs. DCIT in ITA No.1478/Del/2015 dated 21.12.2015 and BG Exploration & Production India Ltd. vs. JCIT in ITA Nos.1170 and 1581/del/2015 dated 24.04.2017.
19. When we examine annual report of IBI Chematur at page 747 of the paper book under the head “Review of Performance”, it shows that its only business is of high end engineering services with the use of specific technologies and huge research and development expenditure along with R&D centre. Relevant portion of ‘Review of Performance’ is extracted as under :-
“During the year your Company has progressed on use of Smart Plant Suite of Software’s. All Engineers are trained about new Software. The Company has undertaken continuously upgrading technologies and also improving competence of Staff. Your Company has employed highly trained Technical staff. Your Company is also marketing these capabilities in the domestic as well as overseas market. Your Company is in a process of using Smart Plant foundation for document management system for managing revision and versions of the documents. Company is planning to bring Technologies of BIOSTIL 2000 Process. These Technologies find synergy with BIOSTlL 2000. The activity in BIOSTIL 2000, takes us to Sugar Industry, which remains as the biggest Biomass Processors in the Country. Your Company continues to carry out Domestic Business activities in” IBIC Engineering (div.of IBI Chematur ( Engg & cony) Ltd) division of the Company as stated in last year.”
20. When we examine P&L account of IBI Chematur at page 754 of the paper book, it shows that it has income of sale of engineering equipment to the tune of Rs.99,275,000/-, whereas segmental financials are not available. Furthermore, it also fails service revenue filter which is 63.47%. Furthermore, IBI Chematur has spent Rs. 113,50,446/- as R&D expenditure which is 3.93% of the turnover as against nil R&D expenditure of the taxpayer which is a captive service provider.
21. Comparability of IBI Chematur has been examined by the coordinate Bench of the Tribunal in Bechtel India (P) Ltd. and BG Exploration & Production India Ltd. (supra) having similar business profile as that of the taxpayer and has ordered to be excluded on ground of non-availability of financial segmental and substantial expenditure on R&D activities. So, we are of the considered view that IBI Chematur is not a suitable comparable vis-а-vis the taxpayer, hence ordered to be excluded.
MAHINDRA CONSULTING & ENGG. SERVICES LTD. (MAHINDRA)
22. The taxpayer sought exclusion of Mahindra on the grounds inter alia that it is engaged in variety of services; that it is providing consultancy in the area of Special Economic Zones, water supply and sewage, solid waste management, urban infrastructure, agri and horti infrastructure, social infrastructure, marine infrastructure, industrial infrastructure, renewable energy, sustainability studies, institutional strategies, industrial plants and systems etc.; that financial segmental are not available; that company recognizes its revenues on percentage completion method and relied upon the decisions of the coordinate Benches of the Tribunal in Alcatel-Lucent India Ltd. vs. ITO in ITA Nos.2154 & 2209/Del/2014 dated 06.04.2018; Alcatel-Lucent India Ltd. vs. DCIT in ITA No.6856/Del/2015 dated 06.11.2017; and Emerson Process Management Power & Water Solutions India (P.) Ltd. vs. ACIT in IA No.5343/Del/2012 dated 13.04.2016.
23. However, on the other hand, ld. DR for the Revenue relied upon the orders of the ld. TPO/DRP.
24. Perusal of para 13.3 of the TP order apparently shows that the TPO has extensively examined function of Mahindra which are comparable to the taxpayer. So far as consultancy services being provided by the taxpayer are concerned, comparability of Mahindra has been duly examined by the coordinate Bench of the Tribunal in BG Exploration and Production India Ltd. vs. JCIT in ITA 1170/Del/2015 order dated 24.04.201 7 and has been held to be a suitable comparable vis-а-vis company providing consultancy services by returning following findings :-
“(ix) Mahindra Consulting Engineers Limited
This company is selected by the Ld. Transfer Pricing Officer and the functional profile of the company is stated to be providing consultancy services in the areas of special economic zones, water supply and 7H, solid waste management, urban infrastructure, agree and for cultural infrastructure, social infrastructure, ports and harbor off shore etc. The 1d. Authorised Representative has stated that the functional profile of the company is not comparable. We have carefully perused annual report of the company submitted by the Assessee at page No. 305 – 323 of the paper book wherein it is clearly demonstrated that the Assessee is engaging the consulting services and it is only a reportable segment of consultancy services. 1ooking at the functional profile of the Assessee as well as the comparable company, it is apparent that both are engaged in the consultancy services area. Merely because they are providing consultancy in a different field, it does not make their functional profile dissimilar, unless there are vast differences in the functions performed. In view of this we do not find any reason to exclude this comparable and therefore we held that the 1d. TPO is correctly included this company for comparability analysis.”
25. So, following the decision rendered by the coordinate Bench of the Tribunal in BG Exploration and Production India 1td. (supra), we are of the considered view that the TPO has rightly retained the Mahindra as a comparable after examining the contentions raised by the assessee. However, we are of the considered view that in view of the settled principle of law, the assessee is entitled for benefit of working capital adjustment in order to benchmark its international transaction.
26. AO made addition of Rs. 1,75,852/- by disallowing the misc. expenses like Diwali gifts and presents given by the taxpayer on the ground that from the ledger account of gifts and presents for the respective period, it is found that gifts and presents for the respective period have been done in cash which is against the provisions of section 40A(3) of the Income-tax Act, 1961. However, it is the case of the taxpayer that these expenses were incurred exclusively for business purposes which is to maintain high morale of the employees which resulted into cost reduction and more profit of the company in the overall operation.
27. We are of the considered view that when undisputedly taxpayer has incurred these expenses allegedly on gifts and presents by way of cash, the same cannot be attributed to Diwali gifts and presents etc. which is also against the provisions contained u/s 40A(3) of the Act. So, we hereby confirm the addition made by the AO and consequently, corporate grounds are decided against the taxpayer.
28. Resultantly, the appeal filed by the taxpayer is partly