TaxTMI 
TaxTMI 
2011 (2) TMI 107
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....ng 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 offices or at the field construction sites. The....
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....ernal 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 @ 0.97 per cent. TPO referred to section 92C and pointed out that multiple year data could be used only if the facts and....
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....pect 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 Rs. 8,94,37,237. The working given in Para 5.2.11 is as under :- "5.2.11 As regards margins of assessee are lower than ....
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.... 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 attributable to A.Es was concerned, DRP confirmed the same after taking into consideration the fact that the decision of Mumbai Bench of this Tribunal in ACIT v. T. Two International (P.) Ltd. [IT Appeal Nos. 5644 to 5646 (Mum.) of 2008, dated 23-2-2010] and appeal had bee....
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....f 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 particularly when there was no variation in the figures and only the procedural requirement of getting the segmental results audited was fulfilled. Learned Counsel for the assessee further submitted that the DRP segmental results had to be taken into consideration and not the results at entity levels. ....
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....tal 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 addition to the profit shown by the assessee. We, therefore, direct the Assessing Officer to modify the assessment and make the adjustment only to the extent of difference in the arm's length operating profit with adjusted profit with reference to the 45.51 per cent of the turnover, and not to the total turnove....
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....ring 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 projects executed by A.Es, engineering design services, software services are entirely different nature of transactions and, therefore, the profit margin is also different in respect of all these transactions. She submitted that all the international transactions comprised in different activities have to be taken into consideration if the segmental ....
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....mental 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 Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely - (a) draft order; (b) objections filed by the assessee; (c) report, if any, of the Assessing Officer, valuation officer or transfer pricing officer or any other authority; (d)&nb....
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....ns 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 submissions made by the learned Departmental Representative and consider it appropriate to only observe that the Assessing Officer will consider the segmental results and determine the arm's length price in accordance with law. Consequently, these grounds of appeal are allowed for statistical purposes in terms of our above observations. 25. Ground No. 8, reads as under :- "8. Re....
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....an 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 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....
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....icing 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 comparables. (ix) Adjustment needs to be made to the margins of the comparables to eliminate differences on account of different functions, assets and risks. More specifically, adjustment needs to be made for : (a) Differences in risk profile. (b) Difference in working capital position. (c) Differences in accounting policies. (x) The TPO has grossly erred in 'normalising' the profits of super pro....
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....per 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 allows marginal relief to the assessee at his option to take ALP not exceeding 5 per cent of the arithmetic mean. Therefore, benefit of the second limb of the proviso to section 92C(2) is available to all assessees irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the proviso.-Development Consultants (P.) Ltd. v. Dy. CIT [2008] 115 TTJ (....