Gs Engineering & Construction Pvt. ... vs Assessee

M/s. GS Engineering & Construction Pvt. Ltd., vs. DCIT, Circle 12 (1), nd 2 Floor, Master Piece Building, SDF, New Delhi. Sector 54, Golf Course Road, Gurgaon.

(PAN : AACCG6057G)

(APPELLANT) (RESPONDENT)

ASSESSEE BY : Shri G.C. Srivastava, Advocate, Shri Nitin Garg, CA & Shri D.S. Bhardwaj REVENUE BY : Shri Judy James, Standing Counsel DR

Date of Hearing : 30.04.2015 Date of Pronouncement : .05.2015

ORDER

PER S.V. MEHROTRA, AM :

This appeal filed by the assessee is directed against the final

assessment order dated 31.08.2012 passed u/s 143(3) read with section

144C of the Income-tax Act, 1961. The relevant assessment year is 2008-

09.

2. The facts of the case are that the assessee, a wholly owned

subsidiary of the GS Engineering & Construction, Korea (in short, GS

Korea) in the relevant assessment year, was engaged in the business of 2 ITA No.5221/Del./2012

Engineering, Procurement and Construction services (in short, EPC) to its

customers globally, especially in oil and gas sector. In relation to EPC

contracts procured by GS Korea, GS India rendered engineering design

support services to GS Korea. Thus, GS India was engaged purely in

engineering design support services. GS India operated through six

departments which are as under :-

"• Process department is engaged in making drawings and specifications for building the plant considering the final product, capacity and operation schematic according to client's requirement;

• Piping department determines the equipment plot plan and piping route in plan;

• Mechanical department designs the equipment such as pumps, compressors, reactor, vessels etc.

• Electrical Department designs the electrical equipment and system;

• Instrument department designs the measuring logic system in the plan such as alarm and shutdown against overflow etc.

• Civil, Architecture and Structure Department designs the ground paving, buildings and steel structures in the plant. The department is fully computerized and is equipped with internationally accepted software packages viz. STAAD, PRO, AUTOCAD, AFES, PDS, PDMS, SP3D etc.) for dealing with structural analysis, design and drafting assignment"

During the year under consideration, the assessee had entered into

following international transaction with its AE :- 3 ITA No.5221/Del./2012

S.No. Nature of transaction Method used by Value (in INR) assessee

1. Engineering design & TNMM OP/OR 18,09,68,411 drawing services

Ld. TPO computed the Arm's Length Price (in short, ALP) at

Rs.21,48,47,139/- and, accordingly directed for upward adjustment of

Rs.3,38,78,728/- as under :-

Arm/s Length Margin (working capital 35.66% adjusted) Total Cost of the assessee A 15,83,71,767/-

ALP at a margin of B = 1.3566*A Rs. 35.66% 21,48,47,138 Price received from AE C Rs. 18,09,68,411 Adjustment u/s 92CA D=B-C Rs.3,38,78,728 Percentage of adjustment E = D/C*100 18.72%

While determining the ALP, the assessee had put its claim of idle capacity

being first year of its operation as to the cost of infrastructure on the

ground that no commensurate revenue was derived by assessee. Further, it

was pointed out that none of the comparables selected by the TPO were in

the first year of their operation. Ld. TPO has accepted the assessee's

contention in principle because this being their first year of operation, the

unabsorbed fixed cost required to be appropriately adjusted. The assessee

had claimed that out of the total operating cost of Rs.16,10,86,767/-, an

amount of Rs.82,59,925/- had to be adjusted under the following heads :-

(i) Rent Rs.54.29 lacs (ii) Electricity Rs. 6.17 lacs (iii) Maintenance charge Rs.22.13 lacs Rs.82.59 lacs 4 ITA No.5221/Del./2012

Ld. TPO did not allow any adjustment in regard to electricity and

maintenance charges on the ground that they were in the nature of variable

cost but allowed 50% adjustment under the head rent and accordingly

allowed idle adjustment capacity of Rs.27.15 lacs. Ld. DRP confirmed the

TPO's action as regards no adjustment being allowed by TPO on

electricity but accepted the assessee's contention as regards the

maintenance on the ground that maintenance is consequent to taking the

building on rent and this being first year 50% of the cost of maintenance

(wrongly mentioned as rent in DRP's order) be allowed as idle capacity.

Accordingly, ld. DRP directed the AO/TPO to allow for 50% of the

maintenance cost in addition to 50% of rent already allowed.

3. The assessee is primarily aggrieved by the quantum of adjustment

made by Assessing Officer and has taken following ground to this effect :-

"2. That on facts and in law, the Hon'ble DRP and learned AO have erred in not reducing entire 100% of unabsorbed fixed costs of the appellant even though it was established that being first year of operation, the appellant had idle capacity. While both the Hon'ble DRP and learned TPO/AO agreed that there is idle capacity, only 50% of unabsorbed costs were reduced while determining the arm's length price."

4. Ld. Counsel submitted that assessee had advanced its claim as

regards idle capacity to the extent of 37% whereas ld. TPO and DRP had

accepted that idle capacity up to 50% is to be allowed. Ld. Counsel filed

the following chart in this regard :-

5 ITA No.5221/Del./2012

Regular Employee (A) Contractual (B) Elect Utilised Month To- Wo- Un- Empls/ Un- Rent Un- Main- Unuti- Elect Un- Work-

/Year Op- Ad- Attri- Total Op Ad- Att- Total tal rk Uti- Work- Uti- Per Utilized tenance Lised Per Utilized Station/ en- di- Tion (Exi-- en di- ri- (Ex- (A+ Sta- Lis- station% lized Month Rent Per Main- Month Electri- Elect ing tion st- ing tion tion ist- B) tion Ed Wo- Month Tenance City For No. ing) No. ing) rk- Expense Avail- Nos. Nos. Sta- Able tion Work- % Station% Apr-07 63 9 3 69 69 131 62 53% 47% 1110126 525403 487901 230914.98 134348 63585 52%

May-07 69 9 6 72 0 0 0 0 72 131 59 55% 45% 1110126 499980 514288 231625.89 125204 56390 44%

Jun-07 72 4 2 74 0 1 0 1 75 211 136 36% 64% 1247338 803971 538515 347099.72 126643 80339 65%

Jul-07 74 23 5 92 1 3 0 4 96 211 115 45% 55% 1247338 679829 510569 278272.20 145011 79034 62%

Aug-07 92 15 2 92 4 2 0 6 111 211 100 53% 47% 1247338 591155 510569 241975.83 145012 68726 54%

Sep-07 105 12 2 105 6 0 0 6 121 211 90 57% 43% 1247338 532040 455758 194399.15 151433 64592 58%

Oct-07 115 13 5 115 6 1 1 6 129 211 82 61% 39% 1247338 484747 455758 177119.22 156942 60992 56%

Nov-07 123 13 2 123 6 0 0 6 140 211 71 66% 34% 1247338 419720 455758 153359.33 131155 44133 43%

Dec-07 134 22 3 134 6 1 0 7 160 211 51 76% 24% 1247338 301489 455758 110159.52 128134 30971 37%

Jan-08 153 5 3 153 7 1 0 8 163 211 48 77% 23% 1247338 283755 566522 128877.04 141540 32199 32%

Feb-08 155 15 2 155 8 2 0 10 178 211 33 84% 16% 1247338 195081 483848 75672.91 147489 23067 36%

Mar-08 168 17 4 168 10 1 0 11 192 211 19 91% 9% 1247338 112320 483848 43569.25 148386 13362 34%

Total 126 198 72 63% 37% 14693632 5429492 5919092 2213045 1679297 617388 48%

With reference to the aforesaid chart, ld. Counsel submitted that the claim

of the assessee as regards adjustment on account of unutilized rent of

Rs.54,29,492/- and unutilized maintenance of Rs.22,13,045/- had to be

allowed. He, therefore, submitted that since the claim of the assessee is

less than 50%, therefore, the entire claim of assessee as regards rent and

maintenance should have been allowed.

5. We have considered the submissions of both the parties. The ld.

TPO had allowed 50% of the adjustment claimed under the head rent, inter

alia, observing that assessee had not given the basis of allocation. He,

however, allowed 50% of the adjustment claim under the head rent without

taking into consideration as to what was the actual idle capacity vis-à-vis 6 ITA No.5221/Del./2012

the claim advanced by assessee. In the aforementioned chart, the assessee

has given specific number of work stations in different months out of

which how many work stations remained unutilized. We have noted

earlier the various departments through which the assessee was rendering

services. Once the assessee has given specific details, there remains no

scope for any estimation. We, therefore, direct the AO/TPO to allow the

adjustment for idle capacity as claimed by assessee in regard to rent and

maintenance charges. Accordingly, this ground is allowed.

6. The next ground which needs adjudication is ground no.3 which

reads as under :-

"3. That the learned TPO/AO have erred in ignoring the other income and transfer pricing adjustment made by the appellant while computing the amount of transfer pricing addition even though the same has been considered while computing the operating margins of the appellant."

7. We have considered the submissions of both the parties. The

assessee had chosen operating profit to operating revenue as the profit

level indicator. As per the TP report, operating profits were defined as

under :-

Operating profits = profit before financial and non-operating expenses

The TPO observed that assessee did not define what constitutes operating

revenue and also non-operating expenses. Ld. TPO considered the

operating profit on operating expenses as the appropriate profit level

indicator. The profit before interest and tax was considered for computing 7 ITA No.5221/Del./2012

the operating margins. Ld. Counsel for the assessee referred to the

computation of adjustment u/s 92CA reproduced earlier and pointed out

that while computing the adjustment, the TPO had determined the price

received from AE at Rs.18,09,68,411/-. He referred to page 10 of the

paper book to demonstrate that this is the income as per profit and loss

account for the year March 31, 2008. Ld. Counsel further submitted that

while furnishing computation of income, the assessee had made a book

adjustment of Rs.14,38,913/- which has not been considered by ld. TPO

while computing the adjustment. He filed before us a copy of the

computation of income to substantiate his plea. The said computation is

reproduced as under :-

GS ENGINEERING AND CONSTRUCTION INDIA PVT. LTD.

COMPUTATION OF INOCME TAX ASSESSMENT YEAR 2008-09 MINIMUM ALTERNATIVE TAX (SECTION 115JB) Net Profit as per the Profit & Loss Account 22003032 Add : Out of Book adjustment 1438913 Less : Provision for Fringe Benefit Tax 1120000 Book Profit subject to MAT 22321945 Rounded Off 22321950 Income Tax on Rs.2,23,21,950 (10% of Book Profit) 2232195 Add : Surcharge @ 10% 223220 2455415 Add : Cess @ 3% 73662 2529077 Less : Tax deducted at source 163362 2365715 Add : Interest u/s 234B on Rs.23,65,700 for 6 month @ 1% p.m. 141942 Interest u/s 234C - Upto 15.6.2007 on Rs.3,54,800 for 3 months @ 1% p.m 10644 - Upto 15.9.2007 on Rs.10,64,500 for 3 months @ 1% p.m 31935 - Upto 15.12.2007 on Rs.17,74,200 for 3 months @ 1% p.m 53226 - Upto 15.3.2008 on Rs.23,65,700 for 1 month @ 1% p.m 23657

Tax Payable 2627119 8 ITA No.5221/Del./2012

Ld. Counsel filed before us a copy of acknowledgement of income-tax

return for assessment year 2008-09 wherein the net tax payable has been

shown at Rs.25,29,077/- in its computation of income. This implies that

tax liability has been computed after taking into account of book

adjustment. We, therefore, find considerable merit in the submission of

the ld. Counsel for the assessee that the adjustment should have been made

by ld. TPO after taking into consideration book adjustment already made

by the assessee in the computation of income. This aspect has not at all

been examined/considered by ld. TPO and, therefore, for the limited

purpose of verification of the assessee's claim as per its return of income,

the matter is restored back to TPO/Assessing Officer. This ground is

accordingly allowed for statistical purposes.

8. Ground No.4 is against the ld. DRP and AO's rejecting the

assessee's claim to use of multiple year data for computing arm's length

price and adhering only to single year updated data. Ld. Counsel for

the assessee fairly conceded that this issue is covered against the assessee.

Accordingly, this ground is dismissed.

9. The next ground of appeal is that the ld. DRP and TPO/AO erred in

using the information through inappropriate use of power u/s 133 (6). Ld.

Counsel for the assessee fairly conceded that this issue is also covered

against the assessee. Accordingly, this ground is dismissed. 9 ITA No.5221/Del./2012

10. Ground no.6 is premature.

11. Ground no.7 is consequential. The AO will recalculate the charging

of interest, if any, while giving effect to appellate order.

12. In the result, the assessee's appeal is partly allowed for statistical

purposes.

Order pronounced in open court on this 8th day of May, 2015.

Sd/- sd/- (ABY T. VARKEY) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUTNANT MEMBER

Dated the 8th day of May, 2015 TS

Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A) 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI.