IN INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.6486/Del./2012 (ASSESSMENT YEAR : 2008-09) BG India Energy Private Limited, vs. ACIT, Circle 1, th 7 Floor, World Trade Tower, Gurgaon. Barakhamba Lane, Connaught Place, New Delhi. (PAN : AAACB7268C) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/Shri Vishal Kalra & Vivek Bansal, Advocates and Ms. Sahiba Tandon, CA REVENUE BY : Shri Amrendra Kumar, CIT DR Date of Hearing : 20.09.2016 Date of Order : 04.10.2016 ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. BG India Energy Private Limited (for short assessee company ), by filing present appeal sought to set aside impugned orders dated 29.10.2012, 06.09.2011 and 03.09.2012 passed by AO/TPO/DRP under section 143 (3) read with section 144C of Income-tax Act, 1961 (for short Act ) qua assessment year 2008-09 on grounds inter alia that :- 2 ITA No.6486/Del./2012 1. That on facts and circumstances of case and in law Ld AO erred in assessing income of Appellant under normal provisions of Act at Rs.65,356,841 against income of Rs.29,003,875 declared in return, based on directions received from Hon'ble Dispute Resolution Panel ("DRP"). 2. That on facts and circumstances of case and in law, AO/DRP has erred, in upholding adjustment made by learned Transfer Pricing Officer ("TPO") of Rs.36,352,966 on account of business support services rendered by Appellant to its Associated Enterprises ("AE") alleging that transactions between Appellant and its AE were not at arm's length in terms of section 92F(ii) of Act. 3. That on facts and circumstances of case and in law, AO/DRP/TPO has erred in rejecting economic analysis undertaken by Appellant which was in accordance with provisions of Act read with Income-Tax Rules, 1962 ("Rules") for establishing arm length's price of international transactions. 4. That on facts and circumstances of case and in law, AO/DRP/TPO has failed to place any material or documents on record to reject economic analysis conducted by Appellant and has thereof failed to comply with provisions laid down in section 92C(3) of Act. 5. That on facts and circumstances of case and in law, AO/DRP/TPO has erred in considering 'reimbursements', as part of operating cost, while computing operating margin of Appellant. 6. That on facts and circumstances of case and in law, AO/DRP/TPO has erred in computing operating margin of Appellant by not including 'provisions for liabilities no longer required written back' as operating income. 7. That on facts and circumstances of case and in law, AO/DRP/TPO has erred by not appreciating and correctly interpreting functions performed, assets utilized and risks assumed by Appellant and undertaken fresh search to modify set of comparable companies selected by Appellant. In doing so, AO/DRP/TPO has erred in :- rejecting eleven comparable companies selected by Appellant, without appreciating and understanding analysis undertaken by Appellant adding six additional comparable companies to set of comparable companies selected by Appellant, that are not functionally comparable to Appellant. 3 ITA No.6486/Del./2012 8. That on facts and circumstances of case and in law, AO/DRP/TPO has erroneously considered segment of 'Consultancy and Engineering projects' in case of Water and Power Consultancy Services (I) Private Limited as comparable to Appellant instead of taking company as whole. 9. That on facts and circumstances of case and in law, AOI TPO has erred in rejecting companies that were held comparable by DRP in case of Appellant for AY 2007-08 and DRP has further erred in upholding rejection of such comparables for AY 2008-09. 9.1 That on facts and circumstances of case and in law, DRP has erred, in passing non-speaking and laconic order under section 144C of Act for rejecting such comparables. 10. That on facts and circumstances of the. case and in law, AO/DRP/TPO has erred in rejecting claim of Appellant with regard to appropriate Risk Adjustments while re-computing operating margins of comparable companies. 11. That on facts and circumstances of case and in law, AO/DRP/TPO has adopted flawed approach by using single year data as against multiple year data used by Appellant in its transfer pricing analysis, thereby ignoring provisions of Rule 10B(4) of Rules which allows use of multiple year data of comparable companies for purpose of determination of arm's length price as defined under section 92F of Act. 12. That on facts and circumstances of case and in law, AO/DRP/TPO has erred in not allowing appellant benefit of 5 percent range as provided in Proviso to Section 92C of Act. 13. That on facts and circumstances of case and in law, AO/DRP/TPO has erred, in law and on facts, in charging interest under section 2348, 234C and 234D of Act. 2. Briefly stated facts of this case are : assessee company BG India Energy Pvt. Ltd. (BGIEPL) was incorporated on 24.04.1998 as 99.98% subsidiary of British Gas Asia Pacific Holdings Pte. Ltd. (BGAPH), Singapore, engaged in provision of project support services to various projects promoted by BG Group 4 ITA No.6486/Del./2012 in India. Assessee company is providing services to British Gas Asia Pacific Holding Pte. Limited (BGAPH) and British Gas Exploration and Production India Limited (BGEPIL). primary business of Group is discovery, extraction, transmission, distribution and supply of natural gas to existing and developing markets around world. assessee, BGIEPL, is providing support services to BG Group in India in course of its operation and is compensated at cost plus 8% basis for services rendered to BG Group entities. 3. assessee company entered into international transaction during year under assessment as under :- No. Description of Method PLI Value (in transaction Rs.) 1. Project Support TNMM Net 315,842,932 Services Operating Profit Margin 2. Purchase of asset NA NA 1,537,197 3. Reimbursement made NA NA 87,932,398 to AEs 4. Reimbursements NA NA 94,701,444 received from AEs 4. For providing projects support services, assessee has benchmarked same by using Transactional Net Margin Method (TNMM) and Profit Level Indicator (PLI) used as Operating Profit/ Operating Cost (OP/OC) and arrived at net profit ratio basis on cost at 11.30%. 5 ITA No.6486/Del./2012 5. Assessee company in its TP Report chosen 15 comparables. TPO noticed from working of margins attached to TP Report that no working capital or risk adjustment has been made to margin nor transaction relating to reimbursement of expenses have been benchmarked by assessee. Assessee on basis of its TP Study concluded that since operating margin earned by assessee company on total cost is 11.30% as compared to 6.96% of comparables its international transactions with its Associated Enterprises (AEs) are at arm s length. 6. TPO also noticed that from Form 3CEB and TP Report that from receipt of project support services, another transaction has also taken place between assessee and its AEs, described as reimbursement received by assessee from its AEs which is as under :- Name of AE s Description of Total amount transaction British Gas Asia Pacific Recovery of Expat 48,196,554 Holdings Pvt. Ltd. Income Tax payment Recovery of salary, 37,770,554 relocation and other expenses British Gas Exploration & Recovery of salary 8,734,336 Production India Ltd. and other expenses Total Rs.94,701,444 6 ITA No.6486/Del./2012 7. TPO further noticed that to expedite their activities in India, AEs have seconded their employees to India whose tax payments are made by assessee. Assessee has also incurred expenses in nature of salary, relocation, travel and other expense son behalf of AEs which has been reimbursed by AEs to assessee without any markup. TPO has not accepted provision contained in Agreement between assessee and its AEs for not charging markup on alleged reimbursement expenditure. TPO noticed that in such situation, no independent party would provide any services to any third party without any markup. 8. Assessee company furnished updated margin of comparables at instance of TPO at 2.86% as against unadjusted margin at 7.78%. 9. On basis of filters adopted by TPO, assessee selected 15 comparables, out of which only 3 comparables have been kept in final set of comparables chosen by TPO. So, TPO proposed 15 comparables having average margin of 22.24% to work out TP adjustment. After entertaining detailed objections raised by assessee company, TPO proceeded to consider 11 comparables having average margin of 20.38%. For working capital adjustment, margin of comparables came to be 18.32% and thereby made adjustment of Rs.3,72,95,703/-. 7 ITA No.6486/Del./2012 10. Assessee company carried matter by filing objections u/s 144C (5) of Act before Dispute Resolution Panel (DRP) which has disposed off objections and directed to pass necessary assessment order. Feeling aggrieved, assessee has come up before Tribunal by challenging impugned order passed by AO/TPO/DRP by way of present appeal. 11. We have heard ld. Authorized Representatives of parties to appeal, gone through documents relied upon and orders passed by revenue authorities below in light of facts and circumstances of case. GROUNDS NO.1, 2, 3 & 4 12. Grounds No.1, 2, 3 & 4 are general in nature to be covered and discussed under subsequent grounds, hence need no specific adjudication. GROUNDS NO.7, 8 & 9 13. Undisputedly, assessee company is cost plus entity to be reimbursed at cost plus 8% for rendering services to BG Group entities (AEs). There is no dispute as to use of TNMM as most appropriate method and PLI used as OP/OC. assessee company on basis of independent Agreement with its AEs is rendering business support service. Assessee company entered into 8 ITA No.6486/Del./2012 international transaction with its AEs during year under assessment as under :- Name of AE s Description of Total amount transaction British Gas Asia Pacific Recovery of Expat 48,196,554 Holdings Pvt. Ltd. Income Tax payment Recovery of salary, 37,770,554 relocation and other expenses British Gas Exploration & Recovery of salary 8,734,336 Production India Ltd. and other expenses Total Rs.94,701,444 14. Assessee company has benchmarked its international transaction by using TNMM and PLI used as OP/OC and calculated its operating profit at entity level as net profit ratio based on cost at 11.30%. Assessee company chosen 15 comparables out of which ld. TPO rejected 11 comparables and included 7comparables. TPO to benchmark international transaction had chosen 11 companies as final set of comparables. TPO on basis of TP analysis worked out arithmetic mean of margins of comparables at 18.32% as against assessee s operating margin of 11.30% and thereby made TP adjustment of Rs.3,72,95,703/- 15. ld. AR for assessee contended that TPO has erred in rejecting 11 comparables chosen by assessee company for benchmarking international transactions on 9 ITA No.6486/Del./2012 ground that comparable company is engaged in high end consultancy services/engineering services whereas assessee company is into providing low end services to its AEs. 16. Assessee company provided detail of functions performed, available at page 271 of Paper book, which are as under :- Assistance in obtaining information regarding industrial and commercial matters and technological developments which interest BG Group Plc, especially in connection with upcoming projects in oil, gas and energy sector and telecom projects; Provision of information concerning Indian Government policies regarding trade and industry along with expert technical assessment and evaluation of such developments; Assistance in monitoring of Group's existing assets / investments and ongoing projects in India and identifying and developing suitable business opportunities in India; Evaluation of prospective customers especially in connection with upcoming upstream projects in India; Allowing BG Group's employees engaged in various project development / allied activities in India to use its facilities during their stay in India; Provision of coordination and support services in relation to contracts with Indian customers, legal matters, regulatory matters and public relations; Sharing resources and facilities with BG Group Plc's affiliated operational and project companies in India (including secondment of its personnel); and Arranging to disburse payments in India on behalf of BG Group Plc inter alia in connection with development of various projects (including tax payments of BG expatriate employees in India). 10 ITA No.6486/Del./2012 17. Ld. TPO noticed from Form 3CEB and TP Report that apart from receipt of project support services, assessee company has also received reimbursement from its AEs without charging any markup on alleged reimbursement which are as under :- Name of AE s Description of Total amount transaction British Gas Asia Pacific Recovery of Expat 48,196,554 Holdings Pvt. Ltd. Income Tax payment Recovery of salary, 37,770,554 relocation and other expenses British Gas Exploration & Recovery of salary 8,734,336 Production India Ltd. and other expenses Total Rs.94,701,444 18. TPO observed that assessee company was rendering several services to AEs but expenses seemed to have been split into heads of cost and reimbursement expenses which seems to be inextricably linked to mandate it has been given by its AEs. So, bifurcation seems to be artificial as no independent party would have agreed to such terms where it incurs expenses on behalf of other without any return on same. 19. Ld. AR for assessee company contended that ld. TPO has erroneously made two fold adjustment - one : taken Rs.94.70 crores as cost and two : also taken Rs.94.70 crores as income which cannot be taken for both purposes. Ld. AR for assessee 11 ITA No.6486/Del./2012 further contended that employees cost shown by assessee does not include Rs.94.70 crores and it should be excluded from expenditure as well as income. 20. As per Business Support Agreement available at page 240 of Paper Book, assessee company is to provide services on non-exclusive basis to BGIEPL to following effect :- 1.1 Evaluating prospective customers of BGEPIL especially in connection with upcoming upstream projects in India. 1.2 Allowing BGEPIL s employees engaged in various project development / allied activities in India to use its facilities during their stay in India. 1.3 Providing services to BGEPIL, which would be in nature of coordination and support services in relation to BGEPIL's contracts with Indian customers. 1.4 Sharing facilities with BGEIPL's affiliated operational & project companies in India. 1.5 Providing support services to BGElPL in relation to legal matters. 1.6 Assist BGEPIL in regulatory matters and public affairs/ relations. 21. So far as international transaction relating to Business Support Service is concerned, it covers under clause 1.3 of Agreement (supra) i.e. Providing services to BGEPIL, which would be in nature of coordination and support services in relation to BGEPIL's contracts with Indian customers . 22. Ld. AR for assessee while arguing on Grounds No.7, 8 & 9 restricted his arguments to issue of erroneous selection of 12 ITA No.6486/Del./2012 comparables by TPO. Assessee company sought to exclude 4 comparables viz. Rites Limited (RITES), Water & Power Consultancy Services (India) Ltd. (WAPCOS), Choksi Laboratories Limited (CHOKSI) and Apitco Limited (APITCO), which are discussed as under. APITCO LIMITED (APITCO) 23. TPO included this comparable in final set of comparables for benchmarking international transactions by observing that assessee company involved in project development, sharing of resources and facilities and other related matters including public relations which are similar to function carried out by APITCO. 24. However, ld. AR for assessee by relying upon pages 3 to 18 of annual report of APITCO contended that comparable company is providing services into turnkey implementation of various projects, project related services and infrastructure planning, entrepreneurial and skill development and services related to bid process management and NPA solutions whereas assessee company is providing low end business support services to its AEs, such as, assistance in obtaining information regarding industrial matters and technology development and does not provide turnkey solutions, entrepreneurial skill development 13 ITA No.6486/Del./2012 services nor it is exposed to market forces as it is merely providing support to its AEs only. 25. Bare perusal of functional profile of APITCO goes to prove that same is into turnkey implementation preparing reports and is directly into core activities, etc. i.e. end to end service provider whereas assessee is captive service provider and is not into any core activities. Hence, we find APITCO not as valid comparable and same is ordered to be excluded. CHOKSI LABORATORIES LTD. (CHOKSI) 26. TPO included this comparable in final set of comparables for benchmarking on ground that this comparable provides analysis, calibration, pollution control and consultancy services to broad spectrum of industries, which amounts to support services to its clients to help them conducting their business. Whereas assessee company is providing low end support services, such as, assistance in obtaining information regarding industrial and commercial matters and technological developments, evaluation of prospective customers, etc. However, assessee company have opposed this comparable on ground that since this comparable is into providing testing services for various projects and also renders services in field of Pollution Control, this is 14 ITA No.6486/Del./2012 functionally different and relied upon decision rendered by ITAT, Delhi Bench I in case of Ciena India (P.) Ltd. vs. DCIT (2015) 57 taxmann.com 329 (Delhi Trib). Coordinate Bench while deciding issue of comparability CHOKSI with Ciena India (P.) Ltd. (supra), business support service provider, observed as under :- 15. TPO visited website of this company and noticed that it was engaged in providing analysis, calibrations, pollution control and consultancy services to broad spectrum of industries. By considering such nature of services provided by this company, TPO held that these were similar to services provided by assessee to its AE. We have gone through Annual report of this company, which is available on pages 2370 onwards of paper book. Note no. 8 to Part B - 'Notes forming part of accounts' - provides that this company is commercial testing house engaged in testing of various products and also offers services in field of pollution control as allied activity. Para 2 of Annexure to auditor's report also clarifies that this is company engaged in rendering services 'for testing purposes.' From above description of nature of services carried on by this company, it is evident that it is basically engaged in providing testing services for various products and also offers services in field of pollution control. As against this, services provided by assessee are purely in nature of identifying customers for its AEs and providing technical support services to their customers. We fail to appreciate as to how marketing support services can be equated with testing services. When we peruse Schedule of fixed assets of this company, it can be seen that major asset is 'Instruments.' It is with help of these instruments that company is providing services in nature of testing of various products. By no standard, this company can be considered as comparable with assessee company. We, therefore, direct exclusion of this company from list of comparables. 27. So, keeping in view functional profile of CHOKSI vis- -vis assessee company, same are functionally dissimilar, CHOKSI being into providing services in nature of testing of various products whereas assessee company is into providing 15 ITA No.6486/Del./2012 purely business support services. So, we hereby order for exclusion of this company from list of comparables. RITES LIMITED (RITES) 28. TPO chosen this comparable for benchmarking international transactions by observing that this entity is involved in business of consultancy and has used this segment only. However, functional profile of this company, available at page 75 of paper book, shows that it is engaged in consultancy, export and licence of railway equipment and running railway systems on concession and is providing high end engineering/consultancy services mainly in infrastructure sector and it is Government of India undertaking engaged in providing end to to end solutions to turnkey projects. 29. Ld. AR contended that assessee company is not into high end consultancy services and monitoring of ongoing projects for its AEs, hence not comparable with RITES. 30. Assessee company relied upon decision rendered by ITAT, Delhi Bench H in case of DCIT vs. MCI Com India (P.) Ltd. (2012) 25 taxmann.com 520 (Delhi). Coordinate Bench on basis of functional profile of RITES vis- -vis appellant in that case who was into providing marketing support services held 16 ITA No.6486/Del./2012 same to be functionally different by making following observations :- As is evident from description of engineering consultancy activity, given complexity of function coupled with technical expertise required in providing engineering consultancy, 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. services provided by Appellant are functionally different vis- - vis business operations of TIL, RITES, WAPCOS and TCE. 31. So, in view of divergent functional profile of assessee company vis- -vis comparable company (RITES) and in view of findings returned by coordinate Bench cited as MCI Com India (P.) Ltd. (supra), we are of considered view that RITES cannot be valid comparable for benchmarking international transaction for assessee company, so same is ordered to be excluded. WATER & POWER CONSULTANCY SERVICES (INDIA) LTD. (WAPCOS) 32. Assessee company sought to exclude this comparable for benchmarking of its international transaction on grounds inter alia that WAPCOS IS Government undertaking involved in turnkey projects, providing end to end engineering services for various domestic and international projects whereas assessee company is providing low end support services, such as, assistance in obtaining information regarding industrial and commercial 17 ITA No.6486/Del./2012 matters and technological developments, evaluation of prospective customers, etc. 33. However, we are of considered view that TPO has chosen this comparable merely on ground that this comparable was proposed by assessee also and segmental data was discussed in note regarding comparables chosen by assessee company which will be used for purpose of comparison only without applying his mind. Rather cryptic observation has been made by TPO while selecting this comparable, so we direct re- examination of this comparable by TPO after providing opportunity of being heard to assessee. 34. So, we are of considered view that matter is required to be remitted to TPO for fresh benchmarking by excluding APTICO, CHOKSI and RITES and by re-examining WAPCOS by providing opportunity of being heard to assessee. So grounds no.7, 8 & 9 are determined in favour of assessee company. GROUND NO.5 35. Ld. AR for assessee contended that TPO have erred in including reimbursement to tune of Rs.9,47,01,444/- received by assessee from its AEs for computing operating margin (OP/TC) of assessee company. Undisputedly, assessee 18 ITA No.6486/Del./2012 company received following expenses allegedly recovered being actual cost incurred by assessee :- Name of AE s Description of Total amount transaction British Gas Asia Pacific Recovery of Expat 48,196,554 Holdings Pvt. Ltd. Income Tax payment Recovery of salary, 37,770,554 relocation and other expenses British Gas Exploration & Recovery of salary 8,734,336 Production India Ltd. and other expenses Total Rs.94,701,444 36. Ld. AR for assessee contended that so far as recovery of salary and related expenses from AEs is concerned, assessee company has settled its employees to different BG Group entities worldwide, who worked under supervision and control of BG Group entities but they remained on payroll of assessee company, and their salary and relocation expenses were paid by assessee company, subsequently required form AEs on cost to cost basis. ld. AR for assessee further contended that so far as recovery of expat income-tax payment from BGAPH is concerned, assessee company has paid income-tax payment of employees of BGAPH working in India amounting to Rs.4,81,96,554/- as BGAPH has no presence in India and this amount was recovered by assessee company from BGAPH. 19 ITA No.6486/Del./2012 37. TPO while computing OP/TC for benchmarking international transaction added amount of reimbursement/ recoveries received by assessee company form its AE to both cost and revenue resulting into lowering margin of assessee company from 11.30% to 8.24% which is also upheld by ld. DRP. 38. Perusal of P&L account statement, available at page 405 of Paper Book-1, shows that expenditure of assessee company under head on account of employee cost, general and administrative expenses and depreciation amounting to Rs.26,19,84,014/- does not include amount of Rs.9,47,01,444/- being recovery of actual cost incurred by assessee company. TPO made two fold adjustment - one : taken amount of Rs.94.70 crores as cost and two : taking amount of Rs.94.70 crores as income also which cannot be taken for both purposes. When we peruse business support agreement, available at page 240 of Paper Book-1, entered into between assessee company and BGEPIL, it is apparent on record that services to BGEPIL would also in nature of coordinate and support services in relation to BGEPIL contract with Indian customer. 39. Identical issue has already been dealt with in assessee s own case cited as M/s. British Gas India Pvt. Ltd. vs. DCIT (ITA 20 ITA No.6486/Del./2012 No.2240/Del/2006 & ITA No.2041/Del/2009 qua AY 2002-03 & AY 2003-04 respectively), order available at page 426 of paper book 1, wherein matter was restored to AO for further examination and verification to ascertain and determine real nature of transaction. During year under assessment also, AO has failed to examine and verify nature and purpose of these expenses vis- -vis nature of services rendered by assessee to work out as to whether these services are directly relatable to services rendered by assessee company to its group company in which 8% markup was receivable. 40. Moreover, when no services were rendered by assessee company to AEs, no markup was required to be charged on such reimbursement. Service agreement remained same in both AYs viz. 2004-05 and 2008-09. So, following decision rendered by aforesaid coordinate Bench, we determine ground no.5 in favour of assessee and restore matter back to AO to decide afresh after providing opportunity of being heard to assessee. GROUND NO.6 41. Ld. AR for assessee after arguing for sometime on this ground stated at bar that he does not want to press this ground and as such, same is determined against assessee. 21 ITA No.6486/Del./2012 GROUND NO.7 42. Ground No.7 is not pressed by ld. AR for assessee, consequently, ground no.7 is dismissed having not been pressed by assessee company. GROUNDS NO.10, 11 & 12 43. Ld. AR for assessee company fairly conceded that he does not want to press grounds no.10, 11 & 12 and consequently, grounds no.10,11 & 12 are dismissed having not been pressed by assessee company GROUND NO.13 44. Ground No.13 needs no adjudication as same is consequential in nature. However, TPO shall provide benefit of -/+ 5% as per provision contained u/s 92C of Act, if any. 45. In view of what has been discussed above, we hereby partly allow present appeal for statistical purposes. Order pronounced in open court on this day 4th of October, 2016. Sd/- sd/- (R.S.S SYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated 4th day of October, 2016 TS 22 ITA No.6486/Del./2012 Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT (A) 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI. BG India Energy Private Limited v. ACIT, Circle 1, Gurgaon