TaxTMI 
TaxTMI 
2011 (2) TMI 107
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt Edison Group is an Italy based engineering and construction group with worldwide operations. The group is the market leader in the polyolefin sector with strong capability in polymers, oil and gas and petrochemicals. It is one of the leading EPC company in India. The assessee-company was initially set-up by Shri Narendra Kapadia. In the year 1996, Tecnimount SpA, one of the leading EPA companies in Europe, acquired 50 per cent equity and company was re-christened as Tecnimount ICB Pvt. Ltd. The assessee-company is engaged in the activities like EPC lump sum turnkey contracts, engineering design services, supervision services, translation services and feasibility studies. It also renders onshore/offshore design and engineering services and field construction supervision services. The assessee-company primarily renders engineering design services and field construction supervision services to various entities within the Tecnimount Group. The trained technical personnel available with the assessee-company are utilised by the Tecnimount Group for execution of assignments across the globe. The services are rendered either from India or by deputation of personnel of the Tecnimont offi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....Es using TNMM using PLI as operating profit to operating cost. He further pointed out that the assessee used external comparables available for benchmarking using data for the years 2004, 2005 and 2006. Arithmetic mean of these comparables comes to 4.78 per cent. He further noted the assessee's contentions that while the profit margin on costs of the comparable comes to 4.78 per cent. it had earned a margin of 33.32 per cent on cost in respect of income from A.Es, which is better than that earned by the comparables and, therefore, the transactions were at arm's length. 4. The TPO issued show-cause notice dated 26-10-2009, which has been reproduced in Para-5.1 of TPO's order. In the show-cause notice issued by the TPO, it was, inter alia, pointed out that the basis of allocation of expenditure had not been provided and no documents had been submitted to substantiate the same. It was further pointed out that it is not clear whether the working tallies with the Profit & Loss account or not. Therefore, the basis of working out the margin in respect of sales to A.Es could not be relied upon. It was further pointed out that on an entity level, the assessee had earned a net loss @ 0.9....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t, etc. He pointed out that there could be instances where income in respect of A.Es' contract is booked but not in respect of non-A.Es' contract due to difference in stages of completion. He further pointed out that no authenticated documents were produced to prove the genuineness of split Profit & Loss a/c. The segmental accounts were not part of the audited accounts submitted by the assessee. He, therefore, held that the split Profit & Loss account could not be relied on and, accordingly, entity level margin comparison vis-a-vis the comparable companies had to be done. 7. As regards margin of comparable companies considering the segmental data wherever applicable, he accepted the assessee's contention and, accordingly, the margin as provided by the assessee were considered to be the arm's length benchmarks. However, loss making companies were rejected. He also considered the data for financial year 2005-06 only as against for the three years considered by the assessee and computed the arithmetic means at 6.57 per cent in regard to operating profit to operating cost as given in Para 5.29 of his order and computed the adjustments to be made for arriving at arm's length price at....
X X X X Extracts X X X X
X X X X Extracts X X X X
....) Use of single year data; (c) Excluding other income from operative income; (d) Rejection of loss making company (UB Engineering Limited); and (e) Adjustment to the total cost rather than cost attributable to AE." 10. The DPR confirmed the findings of the TPO as regards rejection of segmental account, inter alia, observing that although the assessee had filed audited account before it, the same was not considered as the same should have been filed before the TPO. The DRP also confirmed the findings of the TPO as regards adopting single year data observing that this approach was in conformity with the transfer pricing regulation in India. The DRP further pointed out that multiple year data can only be applied if the assessee had applied multiple data in its price setting mechanism. DRP further held that the data relating to U.B. Engineering Ltd., is comparable and, therefore, required to be included as comparable and, hence, to this extent, DRP did not agree with the findings of the TPO in excluding the comparables which were loss making. Insofar as action of TPO in making adjustment to the total cost rather than the cost attr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bursement of expenses received by the appellant from its AEs." 16. Learned Counsel for the assessee did not wish to press this ground of appeal before us due to smallness of the tax effect. Consequently, this ground of appeal is also dismissed as not pressed. 17. The issue arising out of ground Nos. 5, 6, 7 and 8, relate to rejection of segmental analysis made by the assessee. 18. Before us, learned Counsel for the assessee referred to Pages-168 to 170 of the paper book wherein the petition for permitting to file additional evidence before the DRP-II is contained and submitted that the assessee furnished audited segmental results to substantiate the genuineness of segmental profitability. He referred to section 144C(6)(c) to point out that the DRP is required to issue the directions in regard to the objections filed by the assessee on the evidence furnished before it. He further referred to rules framed by the board in pursuance to section 144C(14) titled "Income-tax (Disputes Resolution Penal) Rules, 2009", and referred to Rule-4(3)(b) read with proviso and pointed out that the DRP should have taken into consideration the additional evidence filed by the assessee particul....
X X X X Extracts X X X X
X X X X Extracts X X X X
....raw materials consumed by the assessee for manufacturing print circuit boards, only 45.51 per cent of the total raw materials were imported through assessee's associate concerns, and, therefore, any adjustment, if any called for, can only be made to the 45.51 per cent of the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee's associate concerns. In the present case, the Assessing Officer has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as add....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l results and, therefore, the TPO observed that the authenticated documents were not produced to prove the genuineness of split Profit & Loss account and further observed that the segmental accounts were not part of the audited account submitted by the assessee. She, therefore, submitted that DRP rightly rejected assessee's request for considering additional evidence. However, she submitted that even if the audited statement filed before the DRP as additional evidence are to be admitted by the Tribunal then the matter needs to be restored back to the file of Assessing Officer as he has not considered the segmental results. Further, she pointed out that there is a vide variation between profit margin of A.Es and non-A.Es' transactions which needs to be examined. She referred to Page-16 of paper book wherein the details of international transactions are given and further referred to Page-20 of the paper book wherein the nature of these international transactions has been given. She submitted that supply of equipment, instrumentation of construction contract, field construction, supervision activity for projects executed by A.Es, project management activities in connection with projec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... as contained at Page-62 of paper book on the ground that the same were not authenticated and also did not form part of audited financial statement of accounts. Learned Counsel, during the course of hearing, submitted before us that this objection was not brought to the notice of assessee. However, when it received the order, then it got the segmental results duly audited and filed the same before the DRP as additional evidence vide its petition dated 4-5-2010. The DRP has summarily rejected the assessee's additional evidence observing that the same was not filed before the DRP. Therefore, the first issue which arises for our consideration is regarding scope of powers of DRP regarding entertaining additional evidence. In this regard, we may refer to legal provisions which have to be taken into consideration when additional evidence is filed before the DRP. Section 144C, deals with reference to DRP and sub-sections 5, 6 and 14, read as under :- "5. The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. 6. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... segmental results are to be taken into consideration or profit margin at entity level is to be considered, we find that Chapter-X incorporates special provisions relating to avoiding of tax in regard to international transactions and income from international transactions has to be determined at arm's length price. Therefore, as per the provisions contained under sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level. As regards the submissions of learned Department Representative that with reference to segmental results, each and every international transaction has to be considered separately because all the activities are separate and profit margin will be different. Learned Counsel objected to these submissions pointing out that it is not the appeal filed by the Revenue but by the assessee. He also submitted that the Tribunal has no power of enhancement and only segmental results have to be considered. On this count, we find that TPO has not at all considered the segmental results and, therefore, we refrain from making any observations with reference to the submission....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ressed. Only in cases of ambiguity, it is permitted to go beyond the language and consider the intention of the legislation. As far as the first limb of proviso is concerned, the same has general application. The controversy is relating to the second limb/portion of the proviso to section 92C(2) where "an option" is given to the taxpayer to take ALP which may vary from the arithmetic mean by an amount not exceeding 5 per cent of such arithmetic mean. Here again, there is no controversy that taxpayer can take ALP which is not exceeding 5 per cent of the arithmetic mean. The "option", as is clear from the language is to take ALP which is not in excess of 5 per cent of the said mean. The word "option" as per The Law Lexicon is synonymous with "choice" or "preference". Therefore, it is the choice of the assessee to take ALP with a marginal benefit and not the arithmetical mean determined by the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The ALP determined on application of most appropriate method is only an approxima....
X X X X Extracts X X X X
X X X X Extracts X X X X
....computing framing the assessment and making the transfer pricing adjustment. (iv) The TPO or the Assessing Officer needs to satisfy and communicate to the taxpayer the relevant clause under section 92C(3) which has been triggered by the assessee, which has necessitated the application of the TP provisions. In the instant case, since this was not demonstrated to the assessee, the transfer pricing order is void. (v) The TPO erred in conducting a fresh study for the purpose of passing his order. The study conducted by the TPO is not in conformity with the provisions of Rules 10B(4) and 10D(4). (vi) The TPO erred in disregarding the most appropriate method adopted by the assessee in the TP study, and also in using the Prowess database. The TPO did not provide any reason for deviating from the TP study in respect of these matters. (vii) The TP study cannot be ignored by the TPO, in the absence of any deficiency or insufficiency. Further, the order passed by the TPO appears to have been passed with the intention of making a higher transfer pricing adjustment. (viii) For the purpose of comparability, companies with even a single rupee of transactions with AE cannot be considered as compar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mean determined by the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The ALP determined on application of most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the Legislature thought it proper to allow marginal benefit to cases who opt for such benefit. Both in the first as also in the second limb, implications of determined ALP are the same except for the marginal benefit allowed to the assessee under the second limb. Hence, second limb is applicable even to cases where the taxpayer intends to challenge ALP taken as arithmetic mean and determined through the most appropriate method. Option is given to the assessee as in some cases, variation not exceeding 5 per cent of arithmetic mean might not suit the assessee and, therefore, assessee in such cases should not be put to a prejudice. Otherwise, there is no difference between the first and the second limb of the provision as far as right of the assessee to challenge the determined price is concerned. The second limb only al....