IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER ITA NOS. 2211 & 2212/MUM/2015, A.Ys 2009-10 TO 2014-15 845/MUM/2016, 561 & 7250/MUM/2017 & 7281/MUM/2018 Prothious Engineering Services vs. DCIT, Circle-8(2)/ Private Limited, DCIT, Range-10(3)(2), Unit 608, A-wing, 6th floor, Mumbai. (Respondent) Atrium 1-MTR, Andheri Kurla Road, Andheri (E), Mumbai 400 069. PAN AADCP5194J (Appellant) Assessee by Shri Arijit Chackravarty & Shri Abhisek Tilak Revenue by Shri Bhupendra Kumar Singh Date of Hearing 19/09/2019 Date of Pronouncement 19/09/2019 ORDER PER MAHAVIR SINGH, JUDICIAL MEMBER These are six appeals filed by assessee for assessment years 2009-10 to 2014-15. Appeals for assessment years 2009-10 and 2010-11 are filed against orders of CIT(A) passed under Section 143(3) r.w.s. 144C(3) of Income Tax Act, 1916 (in short Act ) dated 16.02.2015 and 18.02.2015 respectively while appeals for assessment years 2011-12 to 2014-15 are filed 2 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. against orders of Assessing Officer passed under Section 143(3) r.w.s. 144C(13) of Act dated Nil, 18.03.2016, 29.09.2017 and 10.10.2018 respectively. 2. first issue in all these appeals of assessee is with regard to transfer pricing adjustment made by Transfer Pricing Officer/Assessing Officer not considering Associate Enterprises (AE) as tested party. same was confirmed by CIT(A). Against said confirmation by CIT(A), assessee has raised various grounds in all these years. As facts and circumstances are exactly identical in all these years, hence we take grounds and facts from assessment year 2009-10 in ITA no. 2211/Mum/2015. relevant grounds raised for this issue in assessment year 2009-10 reads as under :- 1. Ground No 1 - Adjustment/Addition of Rs. 10,23,16,590 to Total Income On facts and in circumstances of case and in law, learned Transfer Pricing Officer ('TPO') and learned Assessing Officer ('AO') erred in proposing and Hon'ble Commissioner of Income-tax (Appeals) [CIT(A)] further erred in confirming proposed addition of Rs. 10,23,16,590 to Appellant's total income. 2. Ground No 2 - Transfer pricing adjustment exceeds Appellant Group's combined profit On facts and in circumstances of case and in law, learned TPO / AO erred in and Hon'ble CIT(A) further erred in upholding / confirming action of learned TPO / AO in making transfer pricing adjustment which exceeds profit accruing to Group as whole from end customer and in not appreciating that that it is against natural justice and commercial rationale to expect any one of participating entities in entire supply chain to earn more than combined profits earned by Group. 3. Ground No 3 - Associated Enterprise, being simpler entity to be considered as tested party 3 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. On facts and in circumstances of case and in law, learned TPO / AO and Hon'ble CIT(A) erred in not giving due consideration to function, asset and risk profile of Appellant and its associated enterprise while selecting tested party. Further, learned TPO / AO erred in and Hon'ble CIT(A) further erred in upholding / confirming action of learned TPO / AO in treating associated enterprise of Appellant to be more complex entity than Appellant and considering Appellant as tested party and consequently rejecting Resale Price Method selected by Appellant in its Transfer Pricing Study. 4. Ground No 4 - Incorrect selection of comparables by learned TPO On facts and in circumstances of case and in law, learned TPO / AO erred in and Hon'ble CIT(A) further erred in upholding / confirming action of TPO in selection of companies which are functionally not comparable to Applicant's business. On facts and in circumstances of case and in law, Learned TPO / AO and Hon'ble CIT(A) erred in comparing comparable companies which broadly fall within IT enabled services sector without appreciating fact that Appellant operates in specialized domain of computer based designing / detailing and engineering services. 5. Ground No 5 Idle capacity adjustment not granted learned TPO / AO and Hon'ble CIT(A) erred in not giving due consideration to commercial facts and business conditions of Appellant and consequently not allowing idle capacity adjustment in accordance with provisions of Rule 10B(1)(e)(iii) of Income-tax Rules, 1962 to account for difference between international transactions and alleged comparable uncontrolled transactions selected by learned TPO. 6. Ground No 6 Tax evasion motive not demonstrated On facts and in circumstances of case and in law, learned TPO / AO erred in and Hon'ble CIT(A) further erred in upholding / confirming action of learned TPO / AO in failing to appreciate that Appellant was claiming tax 4 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. exemption under Section 10A of Act and accordingly had no intention to shift profits outside India. 3. Briefly stated, facts are that assessee-company is engaged in business of civil structural, designing and detailing services. During relevant assessment years, i.e., for assessment years from 2009-10 to 2014-15, it carried business operation from its four undertakings located at Mumbai, Nashik, Chennai and Delhi. assessee claimed that it is not having any physical presence in USA and assessee has AE which acted as marketing distributor for assessee s services. assessee before us narrated business carried out and model of business which is explained in assessee s written submissions dated 22.08.2019 as under :- 1.1 AE solicits customers and also enters into contract with ultimate customers under instructions and directions of Appellant. However it passes on risks and obligations to Appellant on back-to- back basis. Thus, AE in effect provides marketing and support services and assumes less risk than appellant viz. Prothious India, which bears entrepreneurial risks of success or failure of enterprise. Appellant wishes to mention that AE does not have capability to perform any of functions that are required for performance of customer contracts. In other words, AE acts as marketing distributor for Appellant's services. 1.2 Modus Operand of Appellant Any building drawings for construction requires Basic Design of building (which includes Architectural & Structural Design). customers of AE are mostly Fabricators who obtain Basic design as part of tender & approach AE for preparation of Detailed Design (which include (i) Shop Drawing, (ii) Beam & Colum Drawing & Connection Drawing. AE, which is only marketing distributor of appellant's services, provides basic drawings to appellant for obtaining quotation for rendering services of preparing Detailed Design of Building. Most often fabricators make basic design available to appellant by putting it on 5 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. their server and providing access to appellant. Fabricators are also aware of work to be done by appellant and are in direct contact with appellant for changes, updates and other technical discussions as well as timeliness within which work would get completed. Once detailed designs are prepared by appellant, same is given to Fabricators directly without any involvement of AE. (A detailed note on modus operandi was given as hand out during course of hearing on 23.04.2019, which is marked and annexed as "Annexure- 1"). 1.3 Operational Capability of appellant as well as its AE It is submitted that during these Assessment years, appellant had employees in excess of 1100 comprising of highly trained engineers and technical staff. In comparison, AE had staff strength of 11 people including CFO, 3 finance people, 2 IT assistants & 5 marketing staff (A hand out of same was given during course of hearing on 23.04.2019, which is marked and annexed as "Annexure - 2"). 1.4 Remuneration Methodology billing to customer is done by AE and payment is made by customer to AE directly. AE is allowed to retain proportion of revenue such that it covers its cost and reasonable mark-up and balance is paid to Assessee. In Assessment Year 2009-10, AE retained 15% of contract amount for period April to June 2008, thereafter i.e. from July 2008 to March 2009, retention percentage was increased to 25%. resultant gross margin of AE worked out to 19.71% and net margin on sales worked out to 3.24% on sales. (Refer page 93 of paper book for financials of AE). Appellant wishes to submit that at time of hearing of appeals, Bench, after seeking agreement between both parties, proceeded to hear only AY 2009 - 10 since fact pattern is similar in rest of years and also lower authorities have followed approach as happened in AY 2009 -10. Therefore, for sake of brevity, we are restricting following submission to AY 2009 -10 only. 6 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. 4. assessee explained that during assessment year 2009-10 it received Rs.43,53,71,922/- from its AE towards services sold to AE for distribution. It was contended that only international transaction entered into by assessee and reported in its Audit report in Form 3CEB was interest transaction. Assessee claimed that it has maintained transfer pricing documents in terms of provisions of Sec. 92D of Act read with Rule 10D of Income Tax Rules, 1962 (in short Rules ). assessee, based on functional analysis, determined that AE has less complex operations, bears less risk and does not own valuable intangible properties or unique assets. He contended that as compared to AE, assessee undertakes significant research and development which constantly researches and develops new and enhanced production techniques to improve efficiency of production customized to client and thus bears risk of failure of business. It was claimed by assessee that it extensively co-ordinates with team and interacts with other specialists involved in customer project like architects, MEP consultants and erection engineers. In view of this, it was claimed that assessee bears market risk, contract risk and idle capacity risk which are borne by AE to very limited extent. Considering aforesaid FAR profile, assessee s counsel argued that AE was determined to be least complex entity and accordingly, was selected as tested party for economic analysis. But Transfer Pricing Officer (TPO) has not selected AE as tested party and also listed certain foreign companies as comparables to AE, which are engaged in providing market support services. TPO vide show cause notice asked assessee as to why assessee shall not be selected as tested party and shall not be compared with companies engaged in ITeS sector for benchmarking transaction under consideration. For this purpose of benchmarking, TPO provided list of 14 Indian comparable companies 7 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. and TPO also made observations that AE is engaged in preparing basic designs and hence is more complex entity without any basis to support his reasoning. TPO disregarded submissions made by assessee and also evidences produced before him and considered assessee as tested party instead of its AE. arm s length price of eight comparable companies was computed at 26.57% and made adjustment of Rs.10,23,16,592/-. Before CIT(A), assessee raised various arguments and filed submissions, but CIT(A) upheld order of TPO/Assessing Officer. Aggrieved, now assessee is in appeal before Tribunal. Before us, learned counsel for assessee, Shri Arijit Chakrabarty only contended that foreign AE should be taken as tested party, and for this, he filed various details before us in following Paper Books :- i) Paper Book in ITA No. 2212/Mum/2015 (pages 1 to 132) ii) Additional evidence filed in ITA No. 2212/Mum/2015 (pages 133 to 313) iii) Paper Book in ITA No. 845/Mum/2016 (pages 1 to 234) iv) Paper Book in ITA No. 561/Mum/2017 (pages 1 to 357) v) Compendium I (for all appeals) (pages 1 to 250) vi) Compendium II (for all appeals) (pages 251 to 799) He stated that details filed before Tribunal were also before CIT(A), but they were not gone into by either CIT(A) or TPO. learned counsel for assessee stated that it is settled position under Indian law regarding selection of foreign AE as tested party, and for this, he relied on following case laws :- i) Landis + Gyr Limited (ITA No. 37/Kol/2012 & 1623/Kol/2012) ii) Ranbaxy Laboratories Ltd. [2016] 68 taxmann.com 322 (Delhi-Trib.) iii) Development Consultants Pvt. Ltd. vs DCIT (115 TTJ 577) 8 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. iv) General Motors India Pvt. Ltd. vs DCIT (ITA Nos. 3096/Ahd/2010 and 3308/Ahd/2011)/[2013] 37 taxmann.com 403 (Ahmedabad-Trib.) v) Royal Canin India Pvt. Ltd., ITA No. 1053/Mum/2015 vi) ITO vs WNS Global Services Pvt. Ltd., ITA No. 2318 & 1886/Mum/2009 dated 04.05.2018 vii) Nivea India Pvt. Ltd. vs DCIT, ITA No. 121/Mum/2013 dated 21.08.2017 Further, he referred to following cases where foreign AE was taken as tested party :- i) Mastek Limited vs Addl. CIT (ITA No. 3120/Ahd/2010) ii) Dy. Commissioner of Income Tax vs ITC Infotech India Ltd., ITA No. 2222 & 2223/Kol/2010, [2015] 53 taxmann.com 253 (Kolkata-Trib.) He also relied on decision of Hon'ble Delhi High Court in case of GE Money Financial Services Pvt. Ltd. (ITA No. 662/2016, CM Nos. 31740- 31741/2016) wherein selection of foreign AE as tested party was remanded back with following observations :- question of law which assessee/appellant argues in this appeal for AY-2009-2010 is regarding appropriateness and correctness of treating Foreign/Associated Enterprises (AEs) as tested party. assessee s transfer pricing analysis and determination of ALP led it to approach to ITAT which by impugned order has remitted matter for consideration of most appropriate method as well as question of appropriate comparables applicable in circumstances of case. assessee has approached this court against observations and findings of ITAT in paras 10 to para 18 to effect that Foreign AE cannot be considered as tested party. Reliance is placed upon Section 92B to contend that there is nothing in provision inhibiting such consideration. This court notices that for re-consideration and determination of appropriate method as well as appropriate comparables and tested party, it would be convenient and appropriate for TPO to consider 9 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. question which assessee urges in present case. TPO is therefore directed to overlook and not feel bound by observations of tribunal and render findings on merit of issue. 5. In view of above, learned counsel for assessee stated that primary data for transfer pricing analysis with foreign AE as tested party is available with assessee and it involves verification of AE's data. He narrated that said data in form of e-mails, customer correspondence has already been submitted in assessee s paper book to substantiate FAR analysis of AE. Further, financial statement of AE has already been submitted and relevant information of AE has already been submitted by assessee before CIT(A). In terms of above, learned counsel requested that matter can be restored back to file of TPO/AO for afresh verification and for considering whether foreign AE can be taken as tested party for benchmarking assessee s arm s length price. 6. When these facts were confronted to Senior DR, he fairly agreed that matter can be restored back to file of TPO/Assessing Officer. 7. After hearing both sides and going through facts of case, we noted that claim of assessee regarding information relating to AE has been submitted and can be verified by TPO/Assessing Officer because voluminous paper books have been filed before us which we cannot verify. In case assessee is able to establish based on FAR that foreign AE is simpler entity, same can be taken as tested party provided details are provided by assessee. In terms of above, we are of view that this issue is to be examined by TPO/Assessing Officer afresh after verifying complete TP study and whether AE can be taken as tested party for 10 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. benchmarking international transaction of assessee. Hence, this issue of assessee s appeal is restored back to file of TPO/Assessing Officer. orders of lower authorities are set aside and this issue of assessee s appeal is allowed for statistical purposes. 8. As facts and circumstances in assessee s appeals bearing ITA Nos. 2212/Mum/2015, 845/Mum/2016, 561/Mum/2017, 7250/Mum/2017 & 7281/Mum/2018 with regard to said issue are similar to that in assessment year 2009-10, our decision therein shall apply mutatis mutandis to said appeals also. 9. next issue in assessment year 2009-10 in ITA No. 2211/Mum/2015 is as regards to erroneous computation of deduction under Section 10A of Act by Assessing Officer and confirmed by CIT(A) in regard to setting off of losses in certain units against profits of its other unit availing tax benefit under Section 10A of Act. For this, assessee has raised following ground no. 7 :- 7. Ground No 7 - Erroneous computation of deduction under Section 10A of Act learned AO and Hon'ble CIT(A) erred in setting off of losses of certain units of Appellant against profits of its other units availing tax benefit under Section 10A of Act and allowing deduction of only residual profit under Section 10A of Act. 10. Briefly stated, facts are that Assessing Officer during course of assessment proceedings noted that during relevant assessment year, assessee-company was having 4 STPI units situated at Nashik, Mumbai, 11 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. Chennai and Delhi. Assessing Officer has gone through relevant details such as location of undertaking, date of initial registration, date of commencement of manufacture, etc. in respect of claim of deduction under Section 10A of Act. According to Assessing Officer, assessee claimed total deduction under Section 10A of Act at Rs.10,71,19,655/- on total profit derived from STPI of Rs.2,69,15,297/-. According to Assessing Officer, assessee computed total income at Rs.8,02,04,358/- and claimed deduction under Section 10A of Act and carried forward loss to subsequent years for set-off. Assessing Officer has worked out entire working of deduction claimed by assessee under Section 10A of Act in respect of four STPI units as under :- Sr. Particulars Nashik Chennai Mumbai New Delhi Total No. 1 Turnover of 238,438,473 76,698,716 102,308,328 17,926,405 437,949,561 Undertaking STPI 2 Total Profit 107,119,655 59,064,317 -7,146,369 -13,993,672 26,915,297 Derived from Undertaking 3 Total Export 238,438,473 76,698,716 102,308,328 17,926,405 437,949,561 Turnover 4 Export Proceeds 238,438,473 76,698,716 102,308,328 17,926,405 437,949,561 Received in Convertible Foreign Exchange 5 Amt. of Ded. u/s 107,119,655 0 0 0 107,119,655 10A 11. According to Assessing Officer, assessee is eligible for claim of deduction under Section 10A of Act after setting off of brought forward loss and accordingly, through show cause notice vide order sheet dated 13.02.2013, assessee was asked as to why deduction under Section 10A of Act claimed at Rs.10,71,19,655/- should not be restricted to total income disclosed. Accordingly, Assessing Officer restricted 12 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. deduction under Section 10A of Act at Rs.2,69,15,297/- and disallowed balance deduction. Aggrieved, assessee preferred appeal before CIT(A) on this issue. CIT(A) also confirmed action of Assessing Officer by observing as under :- viii. To sum up, AO mentioned that total income of assessee is to be computed as per provisions of Act and deduction u/s. 10A is to be allowed up to extent of total income of assessee. Therefore, considering facts and circumstances of case, material available on record, statutory provisions deduction under section 10A was computed by AO as under : Particulars Amt (Rs.) Total Income before den u/s 10A as per assessee s 2,69,15,297 computation of income Less : Deduction under section 10A of Act to 2,69,15,297 extent Taxable Income Nil Aggrieved, now assessee is in appeal before Tribunal. 12. At outset, learned counsel for assessee stated that this issue now stands covered in favour of assessee by decision of Hon ble Supreme Court in case of CIT vs M/s. Yokogawa India Ltd., 391 ITR 274 (SC), wherein Hon ble Supreme Court has held that provisions of Sec. 10A of Act is exemption provision and it is clear that deduction contemplated therein is qua eligible undertaking of assessee standing on its own and without reference to any other eligible or non-eligible units or undertaking of assessee. benefit of deduction is to be given to individual undertaking and resultantly flows to assessee. Hon ble Supreme Court has deliberated this in para 16 to 18 of its order as under :- 13 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. 16. From reading of relevant provisions of Section 10A it is more than clear to us that deductions contemplated therein is qua eligible undertaking of assessee standing on its own and without reference to other eligible or non-eligible units or undertakings of assessee. benefit of deduction is given by Act to individual undertaking and resultantly flows to assessee. This is also more than clear from contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and total turnover for purposes of sections 10A and 10B shall be of undertaking located in specified zones or 100% Export Oriented Undertakings, as case may be, and this shall not have any material relationship with other business of assessee outside these zones or units for purposes of this provision." 17. If specific provisions of Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that unit that is contemplated for grant of benefit of deduction is eligible undertaking and that is also how contemporaneous Circular of department (No. 794 dated 09.08.2000) understood situation, it is only logical and natural that stage of deduction of profits and gains of business of eligible undertaking has to be made independently and, therefore, immediately after stage of determination of its profits and gains. At that stage aggregate of incomes under other heads and provisions for set off and carry forward contained in Sections 70, 72 and 74 of Act would be premature for application. deductions under Section 10A therefore would be prior to commencement of exercise to be undertaken under Chapter VI of Act for arriving at total income of assessee from gross total income. somewhat discordant use of expression "total income of assessee" in Section 10A has already been dealt with earlier and in overall scenario unfolded by provisions of Section 10A aforesaid discord can be reconciled by understanding expression "total income of assessee" in Section 10A as 'total income of undertaking'. 18. For aforesaid reasons we answer appeals and questions arising therein, as formulated at outset of this order, by holding that though Section 10A, as amended, is provision for deduction, stage of 14 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. deduction would be while computing gross total income of eligible undertaking under Chapter IV of Act and not at stage of computation of total income under Chapter VI. All appeals shall stand disposed of accordingly. 13. When this fact was pointed out to learned senior DR, he stated that matter may be restored back to file of Assessing Officer for computing deduction under Section 10A of Act after verification of facts in terms of decision of Hon ble Supreme Court in case of M/s. Yokogawa India Ltd. (supra). 14. After hearing both sides, we direct Assessing Officer to compute deduction in terms of decision of Hon ble Supreme Court in case of M/s. Yokogawa India Ltd. (supra). 15. next issue in appeal of assessee in ITA No. 2211/Mum/2015 is with regard to not granting or not allowing set-off of carried forward losses of assessment year 2008-09. For this, assessee has raised following ground no. 8 :- 8. Ground No 8 Set off of carried forward losses of AY 2008-09 not granted learned AO and Hon'ble CIT(A) erred in not allowing set-off of carried forward losses of AY 2008-09 against taxable income of Appellant for year under consideration as determined by learned AO. 16. At outset, both learned counsel for assessee as well as learned senior DR agreed that let this issue be set aside to file of Assessing Officer for verification of facts and accordingly deciding issue 15 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. whether carried forward losses is to be set-off or not. Hence, this issue is set-aside to file of Assessing Officer. 17. next issue in appeal of assessee in ITA No. 2212/Mum/2015 for assessment year 2010-11 is with regard to credit of Fringe benefit tax paid not provided amounting to Rs.85,000/-. For this issue, assessee has raised ground no. 7 as under :- Ground No. 7 Credit of fringe benefit tax paid not provided learned AO and Hon'ble CIT(A) erred in not providing credit of fringe benefit tax paid amounting to Rs.85,000/- against tax liability of Appellant for year under consideration as determined by learned AO. 18. At outset, learned counsel for assessee submitted that assessee would be satisfied if this issue is set aside to file of Assessing Officer for grant of credit of fringe benefit tax paid after verification of facts from record. learned senior DR did not object to same. Accordingly, Assessing Officer is directed to verify records regarding fringe benefit tax paid and provide credit for same as per law. 19. In result, appeals of assessee are allowed for statistical purposes. Order pronounced in open court on 19th September, 2019. Sd/- Sd/- (SHAMIM YAHYA) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date 19th September, 2019 *SSL* 16 M/s. Prothious Engineering Services Pvt. Ltd. ITA Nos. 2211/Mum/2015 & 5 ors. Copy to 1) Appellant 2) Respondent 3) CIT(A) concerned 4) CIT concerned 5) D.R, J Bench, Mumbai 6) Guard file By Order Dy./Asstt. Registrar I.T.A.T, Mumbai Prothious Engineering Services Private Limited v. DCIT, Circle-8(2)/ DCIT, Range-10(3)(2), Mumbai