TaxTMI 
TaxTMI 
2017 (9) TMI 239
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..../Ld. TPO has erred both on facts and in law, by re-determining the arm's length price ("ALP") of the international transactions of the Appellant by rejecting the transaction-bytransaction approach followed in the Transfer Pricing ("TP") documentation and instead following an aggregated approach. 3. That the Hon'ble DRP grossly erred, on the facts and circumstances of the case and in law, in agreeing with the Ld. TPO's action of: 3.1. disregarding the arm's length price and the benchmarking process carried out by the Appellant in the TP documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ("the Rules"). 3.2. disregarding multiple year/ prior years data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2011-12) data for comparable companies should be used considering the fact that the Appellant is engaged in the execution of long term turnkey contract and it is imperative to analyse the profitability of such contracts over a period of time, in line with the applicable Accounting Standards. 3.3. rejecting the comparability analysis in the TP documentation and in conducting a....
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....7i(i)(c) of the Act." 2. The facts in brief of the case as culled out from the orders of lower authorities are that: (i) M/s RTA Alesa AG, Switzerland is a subsidiary of Rio Tinto Plc and engaged in the business of providing customers with material handling technologies and service including turnkey projects, harbour facilities, conveying systems, storage equipment, vehicle loading and unloading, training and technical assistance. Its expertise covers material handling, Anode plant technology, reduction technologies and automation. (ii) M/s RTA Alesa AG, Switzerland, was awarded a 'EPC' contract by M/s Bharat Aluminium Company Limited ( BALCO) for 55 TPH bath processing plant for carbon plant of BALCO smelter expansion project at Corba, Chattisgarh ( India). Accordingly, it set up a project office (PO) in India for executing EPC project with BALCO on a general permission from the Reserve Bank of India (RBI). This project office constituted permanent establishment (PE) of RTA Alesa, Switzerland India i.e. an entity in India for tax purposes (Assessee). (iii) The 'BALCO' project comprised of four parts namely onshore services, onshore supply, offshore services and offshore sup....
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....tic 7,53,86,570 5,12,31,796 Less:- Non-operating income - - Total Income 7,53,86,570 5,12,31,796 Total Operating Revenue 7,53,86,570 5,12,31,796 Expenditure Other Contract Costs - 3,62,39,107 Material 6,85,19,996 - Provision of Warranty 51,15,650 - Depreciation - 34,53,206 Other expenses 467235 1,33,93,474 Provision for expected loss 1,94,040 1,31,868 Total Expenditure 7,42,96,921 5,32,17,655 Less:- Non-operating expenses - - Total Operating Cost 7,42,96,921 5,32,17,655 Profit before Tax 10,89,649 (19,85,858) Adjustments Expenses related to offshore contract debited in P&L 99,87,037 Adjusted Operating Profit 10,89,649 80,01,179 Operating Costs 7,42,96,921 4,32,30,618 Operating Revenue 7,53,86,570 5,12,31,796 OP/OC 1.47%. 18.51% (ix) The assessee benchmarked the transaction of rendering of service and service charges paid using the TNMM as the most appropriate method with OP/OC as PLI. The margin of the tested party i.e. the assessee, was computed at 18.51%. The asses....
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....s Ltd. 15.34% Average 24.04% (xii) Based on the average PLI of comparables at 24.04%, the TPO computed the arm's length price as under: Total Operating Revenues (A) 12,66,18,367 Total Operating Cost (B) 12,75,14,576 Arm's Length Profit (C=24.04% of B) 3,06,54,504 Arm's Length Price (D= B+C) 15,81,69,080 Difference (E= D-A) 3,15,50,713 (xiii) In the draft assessment order passed under section 143(3)/144C(1) of the Act on 03/03/2016, the Ld. Assessing Officer proposed transfer pricing addition of Rs. 3, 15, 50, 713/- under section 92CA(4) of the Act. The Assessing Officer also proposed disallowance of Rs. 34,86,766/- towards salary expenses claimed during assessment proceedings, on the ground that claim was neither made in the original return nor in the revised return of income and therefore it was not allowable in view of the decision of the Hon'ble Supreme Court in the case of Goetze India Ltd. Vs. CIT, (2006) 284 ITR 323 (SC). (xiv) The Ld. DRP confirmed the approach of aggregating both the transaction of rendering of service and supply of equipments for benchmarking and rejected the contention of the assessee for determining the arm's length price o....
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....r referred to page 122 of the paper book and submitted that payment terms were separately agreed in the contract for supply of equipments and rendering of services. He also referred to page 167 of the paper book and submitted that separate invoices were raised in respect of supply of equipment and services rendered. In view of the above, the Ld. counsel submitted that both transactions of supply of equipments and services are separate and accordingly, should have been benchmarked separately following the transaction by transaction approach. 4.2 Ld. CIT(DR), on the other hand, submitted that the assessee company was awarded a composite contract of commissioning of the plant which included onshore and offshore supply of equipments, spare parts as well as onshore and offshore services of erection and commissioning etc. It was a turnkey project and for executing the onshore supply and services, the assessee set up a project office in India. According to the Ld. CIT(DR) the supply of equipments was integral part of the whole contract of commissioning of the plant and it was awarded as a whole to the assessee. He further referred to the contract agreement between BALCO and the project o....
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....if the transaction meet the common portfolio or packet parameter. 4.3.2 In the instant case, the Ld. counsel referred to page 517 of the paper book and submitted that the expenditure incurred was identifiable towards supply of equivalent and rendering of services. The Ld. counsel submitted that wherever the expenses were not identifiable to the transaction, same have been allocated on the basis of the revenue recognized. The Ld. counsel submitted that following this principle material cost, provision for warranty etc. was fully allocated towards supply of equipments whereas the other contract cost was allocated fully towards rendering of services. The payment to auditors, printing stationary etc. was allocated on the basis of the revenue. But when the attention of the Ld. counsel was brought towards depreciation expenses debited fully towards rendering of services, he failed to explain as why the entire depreciation expenses of Rs. 34,53,206/- was allocated only toward rendering of services, though the fixed assets of the assessee included office equipments, building, furniture and fixtures etc. and use of which towards transaction of supply of equipments cannot be ignored. 4.3.3....
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....ight cause liquidated damages payable by the contractor and (v) security which is to be given by the contractor to the project company to ensure compliance of obligations prescribed under the EPC contract. The EPC sector performance is primarily interlinked with infrastructure investment. Contractors for EPC projects are selected on the basis of a tender process for large hightech project which are executed in the public private partnership mode." 4.3.4 On perusal of various terms of the agreement between the BALCO and the assessee, which is available on page 106 to 164, we find that the entire contract is a composite contract and the assessee was required to deliver complete facility to the BALCO. The clause 3.3 of the agreement makes it evident, which is reproduced as under: "3.3 COMPLETENESS Any scope of Work, which is not specifically mentioned in this Contract, but is required for the completion and safe, trouble free, normal operation of the Facility shall, unless specifically excluded in this Contract, be considered as included in the scope of work and shall be supplied and/or rendered free of cost to the Owner, at the earliest but latest by the Taking over of a Equipm....
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....at it was engaged in providing service to entire needs of the global cement industry and offered comprehensive services in the areas of power, highways and bridges, engineering support services for bulk material handling, structural steel detailing etc. According to the Ld. counsel, the comparable was engaged in service segment of rendering engineering consultancy services and, therefore, cannot be compared with the assessee. 5.4 The Ld. CIT-DR, on the other hand, supported the order of the TPO. 5.5 We have heard the rival submission on the issue in dispute and perused the relevant material on record. We find that the Ld. TPO in para-7.2.4 of the transfer pricing order, has characterized the assessee as engaged in providing engineering services. While deciding the issue for benchmarking the aggregate approach, we have observed that 60% of the revenue of the assessee is earned from supplying equipments, spares etc and 40% of the revenue is earned from rendering services. In such circumstances the assessee cannot be considered as engaged in providing engineering services. The assessee was engaged in executing turnkey projects involving both of supply of material/equipments as well ....