TaxTMI 
TaxTMI 
2013 (12) TMI 126
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....of appeal are independent and without prejudice to each other. On the facts and circumstances of the case and in law, the AO/Transfer Pricing Officer ('TPO') based on directions of DRP: Rejection of audited segmental results and following an entity level approach 1. erred in making the addition of Rs 24,09,18,616 being transfer pricing adjustment on account of rejection of segmental accounts of the Appellant and in determining the arm's length price of the international transactions pertaining to project/EPC services using entity level approach. Rejection of Comparable 2. Without prejudice to the above, erred in rejecting Nicco Corporation limited as a comparable on account of functional differences. Incorrect Computation of margins 3. Without prejudice to the above, erred in computing the incorrect margins of the following comparables out of the final set of comparables: i. BGR Energy Syste....
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....fter referred to as the Appellant) craves leave to prefer an appeal on the following additional ground against the final order passed by the learned Deputy Commissioner of Income-tax - 9(3) ('AO"), in pursuance of the directions issued by Dispute Resolution Panel- II ('DRP"), Mumbai under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the Act). On the facts and circumstances of the case and in law, the learned AO/DRP: 11. erred in considering Engineers India Ltd as a comparable company to Appellant without appreciating that Engineers India is a government company and has significant related party transactions. The Assessee craves, to consider the above ground of appeal without prejudice to other grounds and craves leave to add, alter, delete or modify the above ground of appeal." 3. Ground No.1 to 7 relate to TP adjustment of Rs.24,09,18,616/- on account of Arm's Length Price (ALP) of international transactions pertaining to project/EPC services. 3.1 Reference under section 92CA of the Act was made by the AO for computation of arm's length price in respe....
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....nish the following information: (i) the basis of allocation of indirect cost to AE and non-AE along with the necessary evidences. (ii) Complete details with evidences of the bidding cost. (iii) Audit notes with complete material on which the independent audit had relied to carry out the segmental audit and also to produce the working papers for the same. 3.4 Ld. TPO further observed that such information was not produced by the assessee and it was tried to explain that the loss of Rs.12.88 crores was mainly incurred at pre-bidding stage of 11 projects. The assessee failed to win those contracts, expenditure resulted into net loss. Ld. TPO observed that assessee has only selectively produced few bills and vouchers which are of no use since the assessee has failed to establish that the payments were made in respect of pre-bidding expenses. It is also observed by him that during the course of proceedings it was stated by the assessee that it worked as a supplier of technically trained manufacturer for various projects and does not manufacture anything for the purpose of executing those projects. It ....
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....amely Nicco Corporation Ltd. is functionally different from the activities of the assessee. He, therefore, excluded the same and he proposed a fresh set of comparables, wherein mean margin was computed at OP/TC at 33.43% and OP/Sales at 23.486%. The details are as under: (In %) OP/TC OP/Sales 1. Engineers India Ltd. 28.9 22.42 2 ILFS Transportation network 62.27 38.37 3 ABG Infralogistics 49.05 32.91 4 Sriram EPC 12.69 11.26 5 Ashoka Buildcon Ltd. 14.24 12.47 Average 33.43 23.486 3.7 In response to the aforementioned proposed action of Ld. TPO the assessee objected to inclusion of ABG Infralogistics Ltd.; (b) Ashoka Buildcon Ltd.; (c) ILFS Transportation network as comparable. Further assessee requested to include one more comparable namely Sriram EPC as suitable comparable and Engineering India Ltd. as common comparable. 3.8 Finally Ld. TPO has determined seven comparables and OP/TC is computed at 13.18429 as below: Company OP/TC Remarks BGR Energy Systems 10.75 Assessee's Engineers India Ltd. 28.9 Assessee's Techno electric and engg company 13.5....
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....ed and Ld. TPO was not justified in taking margin of the assessee at entity level. The objections taken by the assessee before DRP in respect of this adjustment were objections No. 1 to 5 and these objections of the assessee have been rejected by Ld. DRP by holding that it was necessary for the assessee to show accuracy of segmental accounts beyond the shadow of doubts and such accounts should truly reflect and work out a net profit margin in respect of the segments which have been culled out. Any estimation/approximation or allocation which is not based on primary details/facts would lead to approximate working of PLI leading to non reliable bench marking. The assessee did not give the basis of allocation of indirect cost to AE and non-AE along with necessary evidences. The complete details with evidences of the bidding cost has not been submitted before the TPO and the audit note with complete material on which the independent auditor had relied to carry out segmental audit were also not produced before the TPO. Therefore, mainly relying upon the findings recorded by Ld. TPO, Ld. DRT has upheld the addition and did not discuss about the submissions of the assessee according to wh....
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....nce 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 reg3rding 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 pricin....
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....evel 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 submissions made by the learned Departmental Representative and consider it appropriate to o....
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....ll be within the safe harbour of +/-5% and no addition will be called for. He submitted that the relief is allowable to assessee only on this ground and this submission of the assessee is without prejudice to the other grounds which are taken in grounds of appeal and additional grounds, on which also the impugned addition is assailable. 5.3 In view of the aforementioned submissions of Ld. AR it was considered appropriate to hear Ld. DR on this issue. 6. Ld. DR submitted that though the issue that whether the PLI of the assessee has to be taken on the basis of segmental result or at entity level, the issue is covered by the aforementioned order but the segmental results shown by the assessee are not acceptable as assessee did not furnish the required details asked for by Ld. TPO. Ld. DR submitted that segmental results shown by the assessee should not be accepted for want of details to be submitted by the assessee before Ld. TPO. Thus he submitted that this ground of the assessee should not be accepted. It was further submitted by Ld. DR that the allocation submitted by the assessee in annexure-1 along with submissions made before Ld. TPO vide letter dated 19/9/2011, copy of w....
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....urs relating to non bidding activity of EPC Division. Even, if we accept the contention of Ld. DR that this amount of Rs.2,06,65,942/- should not be considered as loss of the assessee on the activity of non-AE bidding of EPC Division then also the margin of the assessee on segmental basis for its AE will be 9.28% for which Ld. AR has submitted a calculation as under: "Without prejudice statement showing revised profitability of AE segment Amount (INR) I. Profit as per statement at Pg. 161 of the paper book 209,902,497 Less : Non-allocable cost allocated to Non-AE bidding 20,665,942 Revised Profit of AE Segment A 189,236,555 II Total operating cost of AE segment as per statement at Pg. 161 of paperbook 2,018,403,555 Add: Non-allocable cost allocated to Non-AE Bidding 20,665,942 Revised total cost of AE Segment B 2,039,069,497 Operating Margin of AE Segment (OP/OC) (A/B) 9.28% ALP Margin on Cost as per TPO set of comparables C 13.18 Arm's Length Profit of AE Segment @ 13.18% D+B*C 268,749.360 Arms Length valu....
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....n from State Bank of India, wherein Bank stated that the rate charged is 2.75% per annum for amount of guarantee between Rs.1.00 crore and Rs.5.00 crore. Relying upon that and adding a mark up 0.25% on the ground that assessee did not take any security from its AE and commission must also take into account the exchange rate risk, the country specific risk and the AE risk, the Ld. TPO applied 3% guarantee commission which was worked out at Rs.8,77,618/-. After reducing the commission shown by the assessee an addition of Rs.5,27,907/- was made. The addition has been upheld by Ld. DRP. The assessee is aggrieved, hence, has filed aforementioned ground. 11. During the course of hearing Ld. AR placed heavy reliance upon the Bank Guarantee given by State Bank of India in which on a Bank guarantee of Rs. 75.00 lacs commission was charged @1.2%. Copy of such Bank Guarantee is filed at pages 402 to 403 of the paper book. It was submitted that on the basis of above guarantee the rate was charged by the assessee and same should be taken as comparable in place of information gathered by Ld. TPO from the bank. It may be mentioned that Ground No.9 was not pressed by Ld. AR. 12. On the other....