The Delhi High Court upheld the order of the Income Tax Appellate Tribunal (ITAT) as the computation of Profit Level Indicator(PLI) was Proper. The Tribunal upheld the calculation of the Transfer Pricing Officer(TPO).
WSP Consultants India Pvt Ltd, the respondent/assessee filed its Return of Income (ROI) declaring a loss amounting to Rs.5,58,25,905/-. The record shows that the respondent/assessee’s case was referred to the Transfer Pricing Officer (TPO) under Section 92CA of the Income Tax Act, 1961 [“the Act”]. The TPO, via order dated 27.01.2016, proposed an upward adjustment amounting to Rs.4,76,89,336/- concerning international transactions about building design services.
The TPO’s order impelled the respondent/assessee to prefer objections before the Dispute Resolution Panel (DRP). On the objections preferred by the respondent/assessee, the DRP rendered a decision dated 22.09.2016. The DRP, via its decision, scaled down the adjustment made by the TPO to Rs.4,26,08,980/-.
Consequentially, the Assessing Officer (AO) passed a final assessment order under Section 143(3) read with Section 144C(1) of the Act on 29.11.2016. The AO thus made an addition amounting to Rs.4,26,08,980/- in line with the directions issued by the DRP.
The respondent/assessee preferred an appeal with the Tribunal. The Tribunal via the impugned order has partly allowed the appeal of the respondent/assessee.
Mr Puneet Rai, senior standing counsel, who appeared on behalf of the appellant/revenue, submitted that since separate segmental accounts were not available, it was difficult to segregate the cost incurred by the respondent/assessee in the deployment of employees concerning AEs and non-AEs.
Further submitted the method adopted by the TPO, whereby costs of salaries were allocated based on turnover was the correct approach. As regards the rejection of the comparable, Mr Rai contends that adequate information was available and that Korus could have been used to benchmark the subject international transaction, contrary to what has been held by the Tribunal.
Mr Ajay Vohra, the senior counsel, who appeared on behalf of the respondent/assessee, on the other hand, submitted that the expenses incurred on account of the deployment of employees were available project-wise.
The Tribunal has returned a finding of fact that the PLI shown by the respondent/assessee was 11.52%, which was more than the average PLI of the comparables furnished by the respondent/assessee, i.e., 9.23%. Based on this, the respondent/assessee had stated that the transaction with the AEs was at arm’s length.
Concededly, what bothered the TPO was the computation of the operating cost, though he was also concerned with some of the comparables furnished by the respondent/assessee. The TPO concluded that expenses incurred on salaries which are part of the operating expenses had to be allocated based on the turnover of the AE and non-AE segments.
It was viewed that the respondent/assessee had maintained segmental accounts, and accounts vis-a-vis salary expenditure were maintained project-wise. In other words, the employees deployed about the transactions entered with AEs were identifiable.
The Tribunal was of the view that the employees deployed with AEs and nonAEs were identifiable as the accounts were maintained project-wise. The respondent/assessee had emphasised that Korus was in the business of providing engineering services to the steel industry, right from the stage of conceptualization to commissioning.
A division bench comprising Justice Rajiv Shakdher and Justice Girish Kathpalia observed that the DRP did not attempt to establish how Korus was functionally comparable with the respondent/assessee. It is for this reason perhaps that the Tribunal stated that the information which was obtained from the website of Korus was “sketchy” and therefore Korus could not be used as comparable to benchmark international transactions entered into between the respondent/assessee and its AEs.
The Court upheld the order of the Tribunal.
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