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2017 (11) TMI 1374
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....O/Dispute Resolution Panel ('DRP') has erred in 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) Conclu....
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....DRP, Panel-II New Delhi erred in deleting the addition of Rs.l,68,77,406/-(5,28,70,038 - 3,59,92,632) made by the AO u/s 92CA of the Act." 2. The appellant craves for 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 consi....
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.... synopsis is extracted as under: Amount in Rs Transaction Amount Transaction in dispute Nature Purchase of spare parts & software from AEs 4,86,608 Inbound Project Management services provided to AE 10,08,47,069 10,08,47,069 Outbound Technical services provided to AEs 11,21,67,817 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....
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....he assessee company. 3 IBI Chematur 20.66 Similar functions as that of the assessee company. 4 Indus Technical & Financial Consultants Ltd. 6.78 Similar functions as that of the assessee company. 5 L&T Ramboll Construction 41.79 Similar functions as that of the assessee company. 6 Mahindra Consulting Engineers Ltd. 25.75 Also used 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 compa....
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....justment towards rendering project management and technical services to the AE Rs.5,28,17,038/- Adjustment towards management fee considering the arm's length price as nil Rs.1,49,94,743 Total Rs.6,78,11,781 4.14 The assessee filed objections against the draft assessment order before the Ld. DRP. The finding of Ld. DRP vides its order dated 31/10/2013 are summarized as under: "(a) Use of Transactional Net Margin Method as segmental analysis carried out by the assessee cannot be considered 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 ....
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....ransaction 45.09% Addition on account of services to AE 35992632 4.16 Thus the Ld. DRP gave relief of Rs. 1,68,77,406 (Rs.5,28,70,038 - Rs. 3,59,92,632) in respect of adjustment on account of project and technical services but no relief is granted in respect of adjustment on account of management services availed by the assessee. 4.17 Pursuant to the order of the Ld. DRP, the Assessing Officer passed final assessment order on 31/12/2013. Aggrieved with the order of the Assessing Officer, both the assessee and the Revenue are in appeal before the Tribunal, raising respective grounds. 5. The ground 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 20....
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....as been filed against the order of the Ld. DRP. We also find that in assessment year 2011-12, the learned TPO himself has accepted the CUP as the most appropriate method. In our opinion, when in subsequent assessment years, the Revenue itself has accepted, the CUP as the most appropriate method for benchmarking the international transaction of project management services, contesting the same issue in the year under consideration by the Revenue is not justified. In view of the Rule of Consistency, the action of the Ld. TPO/AO and Ld. DRP cannot be sustained. On merit also the transaction between the GAIL and the AE, is an independent 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....
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....as not made any adverse comment on this issue. The assessee had given the breakup of financial in respect of AE and non AE segment. It is important to mention that the entire receipt from the AE for the services rendered to GAIL (India) Ltd. is also included in the internal TNMM purpose. The only challenged to this financial presentation was mentioned in the show cause notice at Para 5 which is quoted below: "5. But in your calculation you have mentioned Rs. 17,24,09,690.88 as your income from AE, whereas you have earned Rs. 20,83,84,977from your AEs for the provision of technical & project management services. Thus your segments are doubtful; 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....
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....there is no justification for making any adjustment in this case. The objections filed by the assessee are accepted and TPO/AO is directed to delete the addition made in TPO order. 7.5 From the finding of the Ld. DRP, it manifests that in assessment year 2010-11 the Ld. TPO has not objected on the presentation of the financial bifurcated between AE and non-AE transaction and comparing of the net margin level of operation. In view of the fact the Ld. DRP observed that once internal TNMM is available, there was no need to go for external TNMM and external comparables. The Ld. DRP further observed that the margins in the AE segment was more than non-AE segment and found no justification for making adjustment in assessment year 2010-11. 7.6 Before us, the 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....
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....ormation required for examining the arm's length price of such services as under: "1. Whether the assessee has actually received intra group services or services received are duplicative in nature or fall in the nature of shareholder's activities? 2. What are the economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enterprise would have paid for the services in comparable circumstances? 5. The cost of intra group services should be benchmarked using 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 clai....
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....pay for such services without any cost benefit analysis. * The assessee has not furnished any evidence as to the cost benefit analysis with regard to the independent suppliers. No third party would like to avail services without any cost benefit analysis with regard to AE vs. independent supplier. * The documentation produced by the assessee to support its claim for the receipt of management services is too generic * The benchmarking done by the assessee is not in accordance with the law and therefore CUP method is required to be applied in this case. 22.2 As per the comments above it can be seen that none of the benefits are tangible or real. A mere facade has been raised to give an impression that some vital benefit has passed to the assessee, which is actually not the case. Related parties are quite likely 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 inter....
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....native and the quality of any other evidence that may be available." 8.9 We find that the assessee has failed to produce any evidences to controvert the finding of the learned TPO, either before the Ld. DRP or before us. The Ld. counsel of the assessee has placed reliance on the decision of the Tribunal in the case of CIT Vs. EKL Appliances Ltd. (supra). The Tribunal observed as under: "Transfer pricing guidelines" laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as It has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction 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 mann....
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....ed in section 92(2) of the Act from perspective of the assessee. The ITAT, Delhi Bench in the case of GE Financial Services Pvt. Ltd., ITA No. 5882/Del/2010, 5816/Del/2011 & 6282/Del/2012 clarified that mere profitability alone could not be criterion for benefit and there are several non-monetary terms other than profitability, like usefulness, enhancement in value, sustainability and enhancement of business interest, which are required to be seen while judging the benefit test. 8.12 In our opinion, the Ld. AO/TPO has not examined the benefit test in this perspective. In the circumstances, we feel it appropriate to restore the matter to the file of the AO/TPO to decide afresh in accordance with law, particularly examine the benefit test from perspective mentioned by the Tribunal in GE Financial Service Pvt. Ltd. (supra). We order accordingly. It is needles to mention that adequate opportunity of being heard shall be provided to the assessee. The ground of the appeal is accordingly allowed from statistical purposes. 9. Other ground raised being general in nature, we are not required to adjudicate specifically and same are dismissed as infructuous. 10. The ground No. 1 of th....