TaxTMI 
TaxTMI 
2017 (11) TMI 1374
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....making an addition of Rs. 3,59,92,632 to the total income of the appellant on account of adjustment in the Arm's Length Price (ALP) of the international transactions related to project management services and technical services provided by the appellant to its associated enterprise (referred to as 'outbound international transactions'). 2. In respect of outbound international transactions in the nature of project management services, the AO/Transfer Pricing Officer (TPO') has erred in: (a) Rejecting the Internal Comparable Uncontrolled Price ('CUP') method as the most appropriate method for project management services provided to an associated enterprise by the appellant and instead adopting Transactional Net Margin Method (TNMM) as the most appropriate method. (b) In not appreciating that the transaction with GAIL India Limited (GAIL) a Public Sector Enterprise was considered as CUP by the appellant since the entire amount received from GAIL by the Associated Enterprise was paid to the appellant who did 100% work on back to back basis under a sub-contract. (c) Concluding that appellant has not earned any margin on such project management service....
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.... reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal". 4. The facts in brief of the case are that the assessee company is a wholly-owned subsidiary of 'Suez Tractebel' SA Belgium and was engaged in providing engineering and project management consultancy services for gas projects, laying cross-country pipelines, city gas distribution and thermal and hydropower projects. For the year under consideration, the assessee filed return of income declaring total income of Rs. 1,57,91,260/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short "the Act") was issued and complied with. The Assessing Officer noted the assessee entered into the international transactions with its Associated Enterprises (AEs). He referred the matter to the Ld. Transfer Pricing Officer (TPO) for determination of Arm's Length Price (ALP) of those international transactions. 4.1 During the year under consideration, the assessee earned Revenue of Rs. 30,84,01,107/- from technical/consultancy services provided to the Associated Enterprises (AEs) and to independent third parties (non....
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....,21,67,817 11,21,67,817 Outbound Technical assistance and support received from AE 1,49,94,743 1,49,94,743 Inbound Inbound Reimbursements received 1,49,80,768 4.4 The project management services of Rs. 10,08,47,069/- provided to the AE ('Suez Teactebel SA') was benchmarked by the assessee on Comparable Uncontrolled Price (CUP) method as according to the assessee, the 'AE' had subcontracted the contract to the assessee on back-to-back basis on the price received from the customer i.e. Gas Authority of India Ltd. (GAIL), by the AE, in entirety. The learned TPO was of the view that the assessee did not earn any remuneration for services rendered by the assessee to 'GAIL', and therefore, he rejected the CUP method. 4.5 Regarding the technical services provided to the AEs amounting to Rs. 11,21,67,817/-, the assessee submitted that the services rendered to the 'AE' were comparable to the services provided to other independent parties. For the purpose of benchmarking, the assessee bifurcated the profit and loss account into two segments - 'income earned from AE' and 'income earned from non-AE'. The Ld. TPO has reproduced the se....
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....sed in set of the assessee company. However, margins calculated are different 7 MN Dastur 7.42 Similar functions as that of the assessee company. 8 Rites 24.83 Similar functions as that of the assessee company. 9 Semac Ltd. 25.22 Similar functions as that of the assessee company. 10 T C E Consulting Engineers Ltd. 27.20 Similar functions as that of the assessee company. 11 WAPCOS Ltd 25.57 Also used in set of the assessee company. However, margins calculated are different 12 Zipper Trading Enterprises Ltd. 34.11 Simiiar functions as that of the assessee company. 13. Kitco Limited 1.27 Also used in set of the assessee company. 14. Indo Canadian Consultancy Services Ltd. 6.54 Also used in set of the assessee company. Average 24.06% 4.9 The Ld. TPO considered the total cost of operations after excluding following expense items: - provision for bad and doubtful advances - donation - exchange fluctuation loss - interest expenses and included following expenses as transaction costs: - provision for contingencies Rs. 3, 01, 71, 276/- - ideal manpower and related administration costs Rs. 3, 0....
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....nsidered as reliable for the reason that services rendered to AE and Non-AE's were different, allocation of costs between AE and non-AE were not accurate and non-allocation of idle man hour costs was not correct. Further as regards rejection of CUP method for project management services provided to AE, the DRP concurred with the view of the TPO that since similar services were provided to AE and non-AE's, it was not possible for the TPO and the assessee to allocate costs for services rendered to GAIL and accordingly considered TNMM method as most appropriate. (b) DRP partly upheld the objection of the assessee that a sum of Rs. 3,01,71,276 should not be considered as part of operating cost as they were in the nature of either provision for unascertained liabilities or abnormal costs. As a result, the addition made by the TPO earlier of Rs. 5,28,70,038 was revised to Rs. 3,59,92,632. (c) As regards treating the idle man power costs as part of operating costs by the TPO, the DRP concurred with the views of TPO and held such costs as being directly related to the operations of the Assessee and could not be considered as extra-ordinary in nature. (d) As regards objections rais....
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....round No. 1 of the appeal of the assessee is general in nature therefore we are not required to adjudicate it specifically. 6. The grounds No. 2(a), 2(b) and 2(c) of the appeal of the assessee relate to rejection of internal CUP in relation to project management services amounting to Rs. 10,08,47,069/-. 6.1 The Ld. counsel submitted that transaction between the 'AE' and 'GAIL' is uncontrolled transaction between two independent parties and price charged by the AE is a CUP. Further, he submitted that in same set of facts, the Ld. DRP in its direction for assessment year 2010-11, directed the learned TPO/AO to consider the CUP as most appropriate method and observed that transaction is at arm's length. He further submitted that direction of the Ld. DRP was accepted by the Ld. TPO and the Assessing Officer and no further appeal has been preferred against the order of the Ld. DRP. He further submitted that in assessment year 2011-12, the learned TPO has also accepted the CUP as most appropriate method for benchmarking the transactions of project management services. 6.2 On the other hand, Ld. CIT(DR) relied on the finding of the lower authorities and submitted that selection of CUP ....
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....pendent and uncontrolled transaction and therefore, it is an appropriate CUP for benchmarking of the transaction. Accordingly, we set aside the direction of the Ld. TPO/AO and Ld. DRP on the issue in dispute and direct to accept the transaction between the AE and GAIL as CUP for benchmarking the international transaction of project management services. The grounds of appeal are accordingly allowed. 7. Ground No. 3 of the appeal of the assessee relates to rejection of internal CPM and TNMM for benchmarking project management and technical services provided to the AE and application of external TNMM by the learned TPO. 7.1 The Ld. counsel of the assessee submitted that the technical services provided to the AEs amounting to Rs. 11,21,67,870/- alongwith the project management services provided to the AE amounting to Rs. 10,08,47,069/- were benchmarked by the assessee using internal CPM and TNMM as corroborative method. He submitted that the assessee prepared segmental results of AE and non-AE and stated that the margins on transaction with the AE was higher both in CPM and TNMM. The Ld. counsel further submitted that in subsequent assessment year 2010-11, the approach followed by th....
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....ful; therefore I purpose to reject this segmentation and will use your entity level margin to benchmark with external comparables." However, on receipt of reply to the show cause notice the TPO has made the following observation on Page 11. "5.3. Contention on operation income of the assessee The assessee has submitted that the actual income recognized by the company with AE is Rs. 17,24,09,691 and not the invoicing amount of Rs. 20,83,84,977 as reflected in Form 3CEB and accordingly taken by the TPO in SCN. Tne contention of the assessee is accepted and correction is made in this order accordingly." From this, it is clear that there is no substantial objection on the presentation of the financial bifurcating AE and non AE transaction and making comparison at the net margin level of operation. The presentation of the financial is given on page 3 to 5 of the TPO order. For the sake of brevity, it is not reproduced again. The manner of allocation of cost to the AE and non AE segment is given by the assessee which is as follows: * Assessee has provided segmental analysis, wherein all the expenditure incurred has been identified into different cost centers, which can be ....
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.... learned counsel submitted that principle adopted for bifurcations of the AE and non-AE segment in the year under consideration are identical to the principles followed for bifurcations made in the assessment year 2010-11. The Ld. CIT(DR) could not controvert this fact. 7.7 We find that in subsequent assessment years 2011-12 and 2012- 30, the learned TPO himself has accepted the internal TNMM and bifurcations of the AE and non-AE segment, on line similar to what has been followed by the assessee in the year under consideration. In view of the above facts, we do not find any justification by the Revenue in litigating the issue, when they have accepted the methodology adopted by the assessee in subsequent assessment years. In view of the Rule of Consistency, we set aside the direction of the Ld. DRP in the year under consideration and direct the Assessing Officer to accept the approach of the assessee in benchmarking the project management and technical services rendered to the AE followed in AY 2010-11. The other arguments of the assessee related to selection of external comparables are rendered infrutuous in view of rejection of external TNMM by us. The ground of the appeal is acc....
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....ing either CUP or Cost Plus Method." 8.3 The assessee submitted emails in support of contention of receiving such services from the AE. The learned TPO examined the emails and invoices and found that many of the services are of general nature and not required assistance from the AE or the services are in the nature of the shareholders advice. He has given his remarks on each services claimed to have been availed by the assessee. The learned TPO observed that assessee had not furnished contemporaneous documentary evidence as to the receipt of very services and only furnished general documents. 8.4 The Ld. TPO observed that the assessee failed to provide cost benefit analysis of the services and the services were in the nature of duplicate services. The Ld. TPO referred to various international judicial pronouncement and practice followed internationally. Accordingly, the Ld. TPO applying the CUP, determined the arm's length price of the transaction payment of service fee at nil as against Rs. 1,49,94,743/- determined by the assessee. 8.5 The Ld. DRP observed that the assessee failed to establish cost benefit analysis of the services and in absence of justification by supporting p....
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....y to give a form that will give an impression that a real service is being rendered by one to another. But the necessity to look beyond the veil is recognized across tax jurisdictions. In the above circumstances the payment of service fee is only an arrangement to change tax base without any economic substance in the transaction. This is internationally not accepted as evident from the following judgments: In Saviano VS Commissioner 765F. 2d 643,654 (7th Cir. 1985) it was observed, "the freedom to arrange one's affairs to minimize taxes does not inciude the right to engage in financial fantasies with the expectation that the Internal Revenue service and the Courts will play along." In Frank Lyon Co. Vs US 435, US 561,573(1978) the Hon'ble US Supreme Court observed, "In applying the doctrine of substance over form, the court has looked to the objective economic realities of a transaction rather than to the particular form the parties employs." "In the field of taxation administrators of law and the courts are concerned with substance, relations and formal written documents are not rigidly binding." {Helvery Vs Lazanus & Co. 308 US (252)}. 22.3 The OECD also recog....
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....saction differs from its form and (ii) the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. The OECD guidelines should be taken as a valid input in judging the action of the TPO because, in a different form, they have been recognized in India's tax jurisprudence. It is well settled that the revenue cannot dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur (Eastern Investment Ltd 20 ITR 1 (SC), Walchand & Co 65 ITR 381 (SC) followed). Even Rule 10B(1)(a) does not authorise disallowance of expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same." 8.10 In the instant case, the assessee has failed to establish with documentary evidence as to what amount any independent party would pay towards the kind of services claimed to have been availed by the assessee. According to the learned TPO the services are either of the duplicate nature or....