TaxTMI 
TaxTMI 
2019 (4) TMI 1305
X X X X Extracts X X X X
X X X X Extracts X X X X
....en by the Appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm's length price of the international transactions. 2. Erred in law and in facts in making an adjustment of INR 10,36,034 to the transactions related to "Contract revenue from projects". In doing so, the Ld. TPO/Hon'ble DRP erred in: a) Inappropriately rejecting the Transaction Net Margin Method (TNMM) as most appropriate method and using Cost Plus Method (CPM) without providing any cogent reasons. b) Not considering the internal CPM analysis submitted by the Appellant, which was in accordance with the provisions of the Act read with the Rules and the internationally accepted principles. c) Applying CPM on a project-by-project basis, despite agreeing to various functional and risk differences between individual project, which would lead to unreliable results when compared on project-by-project basis. d) Not taking cognizance of the fact that same international transaction of Appellant has been accepted by Revenue/Appellate authorities to be at arm's length in earlier years. e) Ld. TPO/DRP have erred in not al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ities below. Ld. CIT(DR) submitted that there is no illegality in the direction of Ld. DRP. Therefore, prayed that addition made may be sustained. 5. We have heard the rival submissions, perused the materials available on records and gone through the orders of the authorities below. The Ld. DRP decided the issue by observing as under: "7.1 The present DRP has noted that a similar issue had come up for consideration of the DRP in the preceding assessment years i.e. AY 2011-12 & AY 2010-11. The DRP has vide its directions dated 23.12.2014 for AY 2010-11 has held as under:- "There is no dispute between the assessee and the TPO as regards the method which is CPM and benchmarking which is based on internal comparable. The only dispute is that while the assessee has aggregated all the projects with AE's (the AE's are different) and compared the mean CPM of the projects of related party transactions with the mean of the unrelated party transactions. In contrast, demonstrated to be the MAM in this case by the Assessee. The order of the Hon'ble ITAT has not examined CPM application for benchmarking as this was not the issue in that year. Objections no.2 is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e's own case in TPA No.157/Ind/2015 & TPA 316/Ind/2015, wherein it has been held that CPM analysis as done by the assessee comparing the average gross profit margins from A.E projects with the average gross profit margins from the non A.E. projects. Further, it is stated that the assessee had conducted the TP analysis using TNMM or it has other international transactions, which serves as a corroborative analysis for the international transactions related to contract revenue earned from projects with AEs. He submitted that in undertaking the TNMM analysis, the appellant chose itself as tested party and operating profit as ratio of operating revenues as a profit level indicator. This contention was accepted. Further, it is submitted that this Tribunal vide order dated 27.2.2017 pertaining to the assessment year 2010-11 & 2011-12 in TPA No.157/Ind/2015 and TPA 316/Ind/2015 upheld the CPM analysis as done by the appellant i.e. comparing the average gross profit margins from the A.E projects with the average gross profit margins from the non AE projects. We find that these submissions were also made before the Ld. DRP and the Ld. DRP in its order has just brushed aside the submissions o....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."On the facts and circumstances of the case and in law, the Ld. TPO/Ld A.O. based on directions of Dispute Resolution Panel (Hon'ble DRP): 1. Erred on the facts and circumstances of the case and in law, by not accepting the economic analysis undertaken by the appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm's length price of the international transactions. 2. Erred in law and in facts in making an adjustment of INR 22,14,516 to the transactions related to "contract revenue from projects". In doing so, the Ld. TPO/Hon'ble DRP erred in : a) Inappropriately rejecting the Transaction Net Margin Method (TNMM) as most appropriate method and using Cost Plus Method (CPM) without providing any cogent reasons. b) Not considering the internal CPM analysis submitted by the appellant, which was in accordance with the provisions of the Act read with the Rules and the internationally accepted principles. c) Applying CPM on a project-by-project basis, despite agreeing to various functional and risk differences between individual project, which would lead to unreliable results when comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d b. Warranty expenses disallowed 5,39,51,778 5,39,51,778 Total 8,47,96,719 8,37,60,685 10,36,034 4. It is against the additions confirmed by the DRP that the Appellant is in appeal before the Hon'ble ITAT for necessary relief.. Document 3 B. ADDITIONS ON ACCOUNT OF ALP ADJUSTMENT TO RECEIPTS OF CONTRACT 5. REVENUE FROM PROJECTS FOR THE YEARS UNDER APPEAL The DRP grossly erred in confirming the addition made by the Ld. TPO and the same is liable to be deleted on the following grounds: a) During the year under appeal, the Appellant applying Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM) with Operating Profit (OP) over Operating Revenue (OR) as the appropriate Profit Level Indicator (PLI). Based on such analysis, the average net margin earned by the Appellant from sales to AEs is higher i.e. 7.97% whereas comparable companies engaged in similar business earned a net margin of 7.71%, accordingly, no addition on account of adjustment of Arms Length Price (ALP) is warranted. b) Cost Plus Method (CPM) is not MAM in the Appellant's case as the scope of work under each project are distinct and vary f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ss margins of all unrelated transactions which has been done by the Appellant. It is not possible to find a project w.r.t its AE which is completely with similar functionalities to a project which has been undertaken by the Appellant for a Non- AE enterprise as each project (whether done for AES or Non-AEs) operates in a different life cycle. With projects operating in different life cycles with different levels of completions, the margins need to be compared on an aggregate basis as project wise one-on-one comparison is not possible. Moreover, in view of the nature of business of the Appellant, the overall profitability of the projects depends upon various factors such as nature of work, bidding process, location etc. The Appellant had accordingly compared the gross margins earned from the aggregate transactions entered with AE with the gross margins earned from the aggregate transactions with Non-AE's. The Ld. TPO/DRP however grossly erred in comparing individual project margins of transactions with AE with aggregate margins earned from transactions with Non-AE's which is improper as individual margins are being compared with aggregate....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he fact that in the case of unrelated party transactions, the Appellant performs additional functions since it is also responsible for installation and commissioning of equipment supplied, whereas in case of related parties, the role of the Appellant is restricted to only supply of equipments. Thus, given the different functions performed, the Appellant is anyways likely to earn different gross margins in unrelated party transactions than related party transactions, which is also evident from the fact that the gross margins earned by the Appellant from transactions with unrelated parties varies from (-) 240.29% to 4549.07%. The Ld. TPO further grossly erred in not appreciating the fact that the Appellant is a risk bearing entity. The Appellant is a full risk bearing manufactures and supplier of power generation equipment and as such the Appellant is likely to earn low gross margins in certain transactions based on the quotient of risk involved. The same is also evident from the fact that the Appellant has earned lower than mean gross margins in unrelated party transactions also. The case laws cited by the Ld. TPO in fact support the view....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 7. JUDICIAL PRECEDENT IN APPELLANTS OWN CASE FOR EARLIER YEARS (AY 2010-11 & AY 2011-12) During the AY 2010-11 & AY 2011-12, the appellant had applied the Cost Plus Method (CPM) for benchmarking the contract revenue earned from projects with AEs by comparing the average gross profit margins from the AE projects with the average gross profit margins from the non-AE projects. Further, the Appellant, in the alternate had also performed the TP Analysis using Transactional Net Margin Method (TNMM) for its other international transactions, which serves as a corroborative analysis for the international transaction related to contract revenue earned from projects with the AEs. In undertaking the TNMM analysis, the Document 8 8. 9. Appellant chose itself as 'tested party' and operating profit as a ratio of operating revenue as a profit level indicator. This contention was also accepted by Hon'ble ITAT, Indore in appellant's own case for earlier years (i.e. AY 2006-07, 2007-08 and 2009-10) vide its order dt. 3.7.2014. However, the Ld. TPO/ DRP, continuing their previously adopted position from earlier years, accepting and applied the CPM....