Wp/2195/2019 Of Jacob Engineering India Pvt Ltd v. The Income Tax Appellate Tribunal And 2 Ors

Digitallysigned byGAURIGAURI AMITGAEKWADAMITDate:GAEKWAD2021.10.2017:35:56+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL (L) NO.1757 OF 2019 WITH NOTICE OF MOTION NO.735 OF 2019 IN INCOME TAX APPEAL (L) NO.1757 OF 2019 Jacob Engineering India Pvt. Ltd. ….Appellant V/s. Asst. Commissioner of Income Tax, 10(2)(1) ….Respondent WITHWRIT PETITION NO.2195 OF 2019 Jacob Engineering India Pvt. Ltd. ….Petitioner V/s. Income Tax Appellate Tribunal & Ors. ….Respondents ---- Mr. Percy J. Pardiwalla, Senior Advocate a/w. Mr. Niraj Sheth i/b. Mint andConfreres for appellant/petitioner.Mr. Akhileshwar Sharma for respondent/respondents-Revenue. ---- CORAM : K.R.SHRIRAM, & AMIT B. BORKAR, JJ. DATED : 11[th] OCTOBER 2021 P.C.: NOTICE OF MOTION NO.735 OF 2019 1Heard the counsel and also considered the pleadings before us. The delay is condoned. 2Notice of motion accordingly stands disposed. INCOME TAX APPEAL (L) NO.1757 OF 2019 3 The appeal pertains to Assessment Year 2010-2011. Appellant carries on business, inter alia, of engineering design consultancy, processengineering, supervision services and project services in the filed ofchemicals, petrochemicals, fertilizers, cement, pharmaceuticals etc.Appellant’s case was referred to Deputy Commissioner of Income Tax 8 (1)for assessment under Section 92CA(1) of the Income Tax Act, 1961 (thesaid Act). During the course of the transfer pricing assessment proceedings,the Transfer Pricing Officer (TPO) challenged the comparables adopted byappellant and in the process rejected some comparables identified byappellant as well as proposed addition of new companies in the comparableset. The TPO passed an order under Section 92CA(3) of the Act proposingan adjustment of Rs.24,27,65,921/- to the income of the assessee. A finalassessment order dated 16[th] April 2014 came to be passed whereby a sum ofRs.24,27,65,921/- was finally added to the income of appellant. 4Appellant filed an appeal against this assessment order beforeCommissioner of Income Tax (CIT) raising various grounds. For ease of reference, the grounds are reproduced hereinbelow : Ground 1 – The learned Assessing Officer (AO)/TransferPricing Officer (TPO) erred in assessing the total income ofthe Appellant at Rs.52,31,19,87/- as against income ofRs.28,03,01,078/- computed by the Appellant. Ground 2 – The learned Assessing Officer (AO)/TransferPricing Officer (TPO) erred in making transfer pricingadjustment of Rs.24,27,65,921/- to the total income of theAppellant. Ground 3 – The learned AO/TPO erred in rejecting/disregarding the comparability analysis of the Appellantpresented in its transfer pricing document. Ground 4 – The learned AO/TPO has erred in rejecting/disregarding audited segmentals maintained by theappellant. Ground 5 – The learned AO/TPO has erred in observing thatthe computerized timesheet maintained and submitted byappellant cannot be relied on. Ground 6 – The learned AO/TPO erred in rejecting theInternal Transactional Net Margin Method (Internal TNMM)and adopting the External TNMM method as the mostappropriate method for benchmarking the internationaltransactions undertaken by the Appellant. Ground 7 – The learned AO has erred in computing theprofitability of Appellant at entity level. Ground 8 – The learned AO/TPO has erred in rejectingAccuspeed Engineering Design Service limited and CadesDigital Private limited and M N Dastur Company Limited ascomparable companies without cogent reasons. Ground 9 – The learned AO/TPO has erred in consideringfollowing companies as comparable Engineers India Limited Rites Limited - Wapcos Limited The CIT (A) passed an order dated 29[th] February 2016 by which ground nos.1 and 2 were disposed as general in nature, ground no.3 wasdecided in favour of Revenue and ground nos.4 to 7 were considered asacademic in nature and dismissed. Ground nos.8 and 9 were decided infavour of appellant. Ground 7 – The learned AO has erred in computing theprofitability of Appellant at entity level. Ground 8 – The learned AO/TPO has erred in rejectingAccuspeed Engineering Design Service limited and CadesDigital Private limited and M N Dastur Company Limited ascomparable companies without cogent reasons. Ground 9 – The learned AO/TPO has erred in consideringfollowing companies as comparable Engineers India Limited Rites Limited - Wapcos Limited The CIT (A) passed an order dated 29[th] February 2016 by which ground nos.1 and 2 were disposed as general in nature, ground no.3 wasdecided in favour of Revenue and ground nos.4 to 7 were considered asacademic in nature and dismissed. Ground nos.8 and 9 were decided infavour of appellant. 5Ground nos.8 and 9, which were held in favour of appellant,are relevant to this appeal. To provide with the background, the AO/TPOhad proposed rejection of 1)M N Dastur company Limited 2) AccuspeedEngineering Design Service Limited and 3) Cades Digital Private Limited,i.e., comparable companies selected by appellant. Further the AO/TPO also proposed inclusion of high margin Government companies in the Gauri Gaekwad comparable set such as 1) Engineers India Limited 2) Rites Limited and3) Wapcos Limited. As both Ground Nos.8 and 9 were ruled in favour ofappellant and according, a clean order was passed with NIL adjustment, infavour of appellant. 6Given the above, respondent filed an appeal against the aboveCIT (A) order with ITAT on the following grounds including against groundnumbers 8 and 9 of appellant referred to above. Ground nos.2 to 5 ofrespondent’s appeal are reproduced below : a) Ground 2 – On the facts and in the circumstances of thecase, the CIT (A) has erred in accepting the comparable M/s.Accuspeed Engineering Design Services Limited ignoring thefact that its turnover was 125 times lower than that theassessee company and its operational parameters would,therefore, be not comparable to that of the assessee company. b) Ground 3 – On the facts and in the circumstances of thecase, the CIT (A) has erred in accepting M/s. Cades DigitechPrivate Limited as a comparable by relying on the subsequentyear information, even though, the assessee had negative networth in the relevant year and it was, therefore, notcomparable to the assessee company. c) Ground 5 – In the facts and circumstances of the case andwhether the CIT (A) had erred in directing to include M.N.Dastur and Company as a comparable without appreciatingthe TPO’s Findings that the said comparable was inmultifarious activities including taking premises on rent andgiving it for rent, but at the same time segmentals for eachactivity was not available? 7In response to the same, appellant filed the following cross objections with ITAT stating that the AO/TPO erred in objecting to the orderof the CIT (A) on the ground that : Gauri Gaekwad 1. the Hon’ble CIT (A) accepted M/s. Cades Digitech PrivateLimited (Cades Digitech) as a comparable company byallegedly relying on subsequent year information, eventhough the net worth of the Company for AY 2010-11 wasnegative. 2. the Hon’ble CIT (A) accepted M/s. Accuspeed EngineeringDesign Services Limited (Accuspeed) as a comparablecompany even though the turnover of Accuspeed is allegedly125 times lower than that of the Assessee and its operationalparameteres hence is not comparable to the Assessee. 3. the Hon’ble CIT (A) accepted M/s. M.N. Dastur andCompany (P) Limited (MNDC) as a comparable companyeven though MNDC was allegedly engaged in multifariousactivities, including taking and giving of premises on rent andthat the segmental accounts were not available for MNDC. Rejection of companies considered as comparables by theAO/TPO 4. the Hon’ble CIT (A) rejected M/s. Engineers India Limited(EIL), M/s. Rites Limited (Rites) and M/s. WAPCOS Limited(WAPCOS), considered as comparable by the AO/TPO, on themere contention that the said were Government Companies. 3. the Hon’ble CIT (A) accepted M/s. M.N. Dastur andCompany (P) Limited (MNDC) as a comparable companyeven though MNDC was allegedly engaged in multifariousactivities, including taking and giving of premises on rent andthat the segmental accounts were not available for MNDC. Rejection of companies considered as comparables by theAO/TPO 4. the Hon’ble CIT (A) rejected M/s. Engineers India Limited(EIL), M/s. Rites Limited (Rites) and M/s. WAPCOS Limited(WAPCOS), considered as comparable by the AO/TPO, on themere contention that the said were Government Companies. 5. Without prejudice to point 4 above, erred in notappreciating that the Assessee is engaged in providing lowend basic and detailed engineering services to its AE, whilethe nature of services rendered by the aforesaid companiesare high end/non comparable services, with significant R&Dactivities in case of EIL. 8 as under : The ITAT by an order dated 10[th] January 2018 held, inter alia, “We heard the parties on this issue. We noticed that thequestion whether the government companies can be taken ascomparables or not was considered by the Co-ordinate benchin assessee’s own case in AY 2008-09 and the tribunal hasheld the government companies cannot be taken ascomparables. For the sake of convenience we extract belowrelevant portion of the order passed by the Co-ordinateBench in assessee’s own case : 11. The first contention of the assessee (sic. is) that theGovernment Companies should not have been taken ascomparable as per the following decisions : (a) CIT Vs. Thyssen krupp Industries India Pvt. Ltd. (2016)(68 taxmann.com 248) (Bom) (b) ACIT Vs. Chemtex Global Engineers P Ltd. (2013) (35taxmann.com 351) (Mum ITAT) (c) International SOS Services India P Ltd. Vs. DCIT (2016)(67 taxmann.com 73) (Delhi ITAT) (d) Bechtel India Pvt. Ltd. Vs. DCIT (ITA No.1478/Del/2015) In the case of Thyssen krupp Industries India Pvt. Ltd., theTPO had included M/s. Engineers India Ltd. a Governmentcompany. The Tribunal excluded the same with theobservation that the Engineers India Ltd. could not beconsidered to be comparable for the reason that the contractsbetween Public Sector undertakings are not driven by profitmotive along but other consideration also weight in such asdischarge of social obligations etc. Identical view has beenexpressed in other cases also. The view taken by the Tribunalwas not found fault with by the Hon’ble Bombay High Court. 12. In the instance case, the comparables viz., EngineersIndia Ltd. and Water and Power Consultancy Ltd. areGovernment Companies. Accordingly, consistent with theview taken in the cases referred to preceding paragraph, wehold that the Government Companies cannot be taken ascomparable. We notice that the view taken by Ld. CIT (A) is in accordancewith the view taken by the Tribunal in the assessee’s owncase. Accordingly, we do not find any reason to interfere withhis order passed on this issue and accordingly we uphold thesame. 7. With regard to remaining grounds urged by the revenuethe learned AR submitted that even if other grounds of therevenue are decided in favour of revenue the same would notresult in making any addition since the adjustment would fallwithin tolerance range of 5%. 8. We heard learned Department Representative. From thesubmissions made by learned AR, we notice that theadjudication of other grounds would be academic in nature,since according to learned AR even if those grounds aredecided in favour of the Revenue, the same would not resultin any addition. In the view of the same, without deliberatingon those grounds we decide them in favour of Revenue.” 9Mr. Pardiwalla submitted that during the hearing, with regard to Department’s grounds of appeal, the Tribunal inadvertently ruledgrounds 2, 3 and 5 in favour of the Department without evaluating the 8. We heard learned Department Representative. From thesubmissions made by learned AR, we notice that theadjudication of other grounds would be academic in nature,since according to learned AR even if those grounds aredecided in favour of the Revenue, the same would not resultin any addition. In the view of the same, without deliberatingon those grounds we decide them in favour of Revenue.” 9Mr. Pardiwalla submitted that during the hearing, with regard to Department’s grounds of appeal, the Tribunal inadvertently ruledgrounds 2, 3 and 5 in favour of the Department without evaluating the merits of the case or giving an opportunity to the assessee to argue thesame, despite the fact that it was clearly represented by the assessee thatthe said grounds were academic in nature in light of the earlier proceedings.Mr. Pardiwalla further submitted that during the course of hearing,appellant’s representative argued that government companies should beexcluded from the set of comparable companies, mentioning that identicalissue was considered in appellant’s own case for Assessment Year2008-2009 wherein the issue was decided in appellant’s favour. Accordingly,for Assessment Year under consideration, viz., Assessment Year 2010-2011also government companies should be held to be excluded from thecomparable set. Mr. Pardiwalla submitted that during the hearing, appellantalso stated that if government companies were excluded, i.e., ground no.4and 5 of the cross objection granted in favour of the assessee, the othergrounds, i.e., ground nos.1, 2 and 3 of the cross objection, would be of noconsequence given that the said grounds were already held in favour of theassessee by the CIT. The five grounds are reproduced in paragraph 7 above. 10Mr. Pardiwalla further submitted that during the hearing, theDepartment representative did not press its own grounds of appeal, i.e.,Accuspeed Engineering Design Service Limited, Cades Digital PrivateLimited and M.N. Dastur Company, which are subject matters of groundnos.2, 3 and 5 mentioned above in paragraph 6 and appellant accordinglywas not given an opportunity to counter argue them. Mr. PardiwallaGauri Gaekwad submitted that the Tribunal, however, in its order inadvertently hasrecorded “From the submissions made by learned AR, we notice that theadjudication of other grounds would be academic in nature, since accordingto learned AR even if those grounds are decided in favour of the Revenue,the same would not result in any addition. In the view of same, withoutdeliberating on those grounds we decided them in favour of Revenue”. 11Mr. Pardiwalla submitted that during hearing appellant hadmerely mentioned that the other grounds are of no consequence since thesaid grounds were already held in favour of the assessee by the CIT (A) andthe Department representative, during the hearing, did not press on its ownground of appeal on Accuspeed Engineering Design Service Limited, CadesDigital Private Limited and M.N. Dastur Company and appellant accordinglywas not given an opportunity to counter argue them. Mr. Pardiwallasubmitted that even if the grounds were to be decided in favour of theDepartment, a reasonable opportunity of hearing appellant should begranted to them. Mr. Sharma submitted that the order of the ITAT is veryclear and there is no merit on what Mr. Pardiwalla submitted. 12Having heard both the counsel and having considered the writpetition as well as the appeal, which are listed together, in our view, theinterest of justice will be met and no prejudice will be caused to any party ifthe order impugned in this appeal is quashed and set aside and the ITAT is directed to hear the parties to the extent of considering ground nos.1, 2 and3 of the cross objections filed by appellant against Department’s groundsand also ground nos.2, 3 and 5 of the Department’s appeals which are alsoquoted above and pass such order on merits as the ITAT may deem fit. 13 We clarify we have not made any observation on the merits of the matter. 14Appeal and writ petition both disposed. 12Having heard both the counsel and having considered the writpetition as well as the appeal, which are listed together, in our view, theinterest of justice will be met and no prejudice will be caused to any party ifthe order impugned in this appeal is quashed and set aside and the ITAT is directed to hear the parties to the extent of considering ground nos.1, 2 and3 of the cross objections filed by appellant against Department’s groundsand also ground nos.2, 3 and 5 of the Department’s appeals which are alsoquoted above and pass such order on merits as the ITAT may deem fit. 13 We clarify we have not made any observation on the merits of the matter. 14Appeal and writ petition both disposed. (AMIT B. BORKAR, J.) (K.R. SHRIRAM, J.)