TaxTMI 
TaxTMI 
2019 (8) TMI 703
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....ignalling equipment in the Rail Control Systems ("RCS") division and control systems in the Propulsion & Controls ("PPC") division. 2.1 During the captioned AY, the assessee filed its return of income declaring a loss of Rs. 832,507,390/- under the normal provisions of the Income tax Act, 1961 (hereinafter called 'the Act') and loss of Rs. 506,682,596/- under section 115JB of the Act. Subsequently, the assessee filed a revised return of income wherein it had declared a loss of Rs. 751,768,805/- under the normal provisions of the Act and loss of Rs. 506,682,596/-under section 115JB of the Act. 2.2 During the assessment proceedings, the Assessing Officer (AO) made a reference under section 92CA of the Act to the Additional Commissioner of Income Tax, Transfer Pricing Officer - 1(3), New Delhi ("TPO") for determination of the Arm's Length Price ("ALP") of the international transactions entered into by the Assessee with its Associated Enterprises ("AEs") during the captioned AY, which were also duly reported in the Accountant's Report i.e. Form No. 3CEB, filed along with the return of income. 2.3 During the course of the Transfer Pricing (TP) assessment proceedings, th....
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....ble for determining the ALP of the captioned international transaction. However, in addition to accepting BEML, the TPO also selected 5 additional comparables which were based on his own set of quantitative and qualitative filters. 2.6 With respect to the additional comparables, it was submitted that while selecting the additional 5 comparable companies (namely Titagarh Wagons Limited, Texmaco Rail and Engineering Limited, Braithwaite India Limited, Burn Standard Company Limited and Besco Limited), the TPO had made an inappropriate comparison whereby these companies which were into wagon manufacturing were compared to the Assessee which is a manufacturer of metro trains, thus ignoring the fundamental difference between wagons and metro trains business. 2.7 Further, it had been submitted that it had analysed few more comparables and had found 2 more such comparables which were similar to the aforesaid companies proposed by the Ld. TPO. These 2 comparables were Jessop & Co. Limited which was rejected by the TPO on the ground that it failed his quantitative filter of sales turnover of 50% and Bharat Wagon & Engineering Limited which was rejected on the ground that its financial ....
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.... Arm's Length Price ("ALP"), as required under section 92CA(1) of the Act. 3. That on the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the TPO in enhancing the ALP of the international transaction pertaining to sale of metro trains in the Passengers (PGR) and Bogies (BOG) division by INR 1,108,096,654 by rejecting Comparable Uncontrolled Price (CUP) method applied by the appellant and instead applying Transactional net margin method (TNMM) as the most appropriate method. 4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the appellant had supplied metro train to the associated enterprise at the same price at which the same was sold by the associated enterprise to the unrelated party, i.e., Delhi Metro Rail Corporation ["DMRC"], and therefore the said international transaction was appropriately benchmarked applying Comparable Uncontrolled Price method. 4.1 That on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) / Transfer Pricing Officer ["TPO"] erred in not appreciating that CUP m....
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....lant, not appreciating that specific characteristics of the product being different, such companies did not satisfy the test of comparability in terms of clause (i) of rule 10B(2) of the Income-tax Rules. 5.4 Without prejudice that on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not holding that only the metro coach division of BEML Ltd. executing similar contracts for supply of Metro coaches to DMRC satisfied the test of comparability as provided in rule 10B(2) of the Income-tax Rules for undertaking benchmarking analysis of international transaction of sale of metro rails undertaken by the appellant. 5.5 Without prejudice that the Commissioner of Incometax (Appeals) erred on facts and in law in observing that "The TNMM method envisages selection of companies which are similar on the basis of a FAR analysis. This does not mean that companies are manufacturing the same product", which is contrary to the test of comparability as provided in rule 10B(2) of the Income-tax Rules. 5.6 Without prejudice that the Commissioner of Incometax (Appeals) erred on facts and in law in not appreciating that Texmaco....
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....ilter of persistent losses and negative net worth applied by the TPO. 8. Without prejudice that the Commissioner of Incometax (Appeals) erred on facts and in law in not appreciating that at best the "Engineering Products" segment of Bum Standard and Co. Ltd. could only be considered as functionally comparable for the purpose of benchmarking analysis. 9. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) has erred in not adjudicating ground relating to levy of interest u/s 234A, B, C and D of the Act. The Appellant craves leave to add, amend, alter, delete, rescind, forgo or withdraw any of the above grounds of appeal either before or during the hearing before the Hon'ble Tribunal. The aforesaid grounds are mutually exclusive and without prejudice to each other." 3.0 The Ld. Authorised Representative (AR) submitted that ground nos. 1 and 2 are general in nature and do not require a separate adjudication. 3.1 With respect to ground nos. 3, 4, 4.1 and 4.2, the Ld. AR submitted that these grounds challenge the action of the Ld. Commissioner of Income Tax (A) in upholding the action of the TPO in enhancin....
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....be the one relating to a consortium but the initial deliveries were made by the AE directly to DMRC with no involvement of the assessee and, therefore, the amount of loss to be suffered by the assessee was not taken into account while entering into the contract with DMRC, the Ld. AR submitted that all supplies made to DMRC were governed by the contract RS2 (at pages 243 to 308 of the Paper Book) and all terms and conditions relating to all supplies were commercially enforceable by the same contract. The Ld. AR submitted that the key commercial considerations including price, delivery dates, warranties, liquidated damages, mode of payment, insurance etc. were agreed upon on identical lines through the same contract. 3.3 With respect to the observations of the Ld. Commissioner of Income Tax (A) on the level of market and geographic market in which the transaction took place, the Ld. AR submitted that the Ld. Commissioner of Income Tax (A) had placed reliance on the order of the ITAT in assessee's own case for assessment year 2010-11 wherein it had been mentioned that the TPO had rightly rejected the internal CUP method on the ground that buyer and seller are not only located in di....
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.... the Ld. AR submitted that these grounds were alternate grounds on the same issue i.e. the appropriateness of the methodology adopted by the assessee. It was submitted that the remuneration of the assessee from the international transaction cannot be greater than the overall revenue received from a third party. The Ld. AR reiterated that the assessee had sold metro train sets to its AE which were further sold by the AE to DMRC and the comparison of the sale prices (as evident from the copy of invoices on page 478 to 594 of the paper book) would clearly show that the AE had sold metro train sets to DMRC at the same price without any built in mark-up at which the AR had made the purchases from the assessee. It was submitted that, thus, the entire revenue was received by the AE from the third party i.e. DMRC. Reliance was placed on the order of the ITAT Delhi Bench in the case of Global Vantedge vs. DCIT in ITA No.2763 and 2764/Del/2009 wherein the ITAT, Delhi Bench, had held that adjustment on account of ALP of international transaction cannot exceed the maximum ALP i.e. the amount received by the AE from the customer and the actual value of international transactions, i.e. the amoun....
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.... profit making companies. It was submitted that the elimination of companies merely on the ground that they were loss making would tantamount to eliminating one-half of the spectrum of comparable companies which would result in certain higher mark-up. It was further submitted that the Indian transfer pricing provisions provided for the comparability of the arithmetic mean of the profit level indicator of the set of comparables with that of the tested party since an industry represented all kind of companies, new and old, loss and profit making, and such companies should not be rejected from the set of comparables. 3.8 With respect to ground nos. 5.3 to 5.11 and ground no. 6, it was submitted that these grounds challenged the inclusion/exclusion of the comparables. The detailed arguments of the Ld. AR with respect to the comparables challenged are as under:- i) Texmaco Rail and Engineering Limited The Ld. AR submitted that Texmaco was dealing in wagons as against the assessee who is dealing in Metro train coaches and bogies. It was submitted that both use an entirely different technology and, therefore, the product profile of the two companies was very much diff....
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....at in the immediately preceding year, the TPO had taken only wagon segment of the company as a comparable to the assessee whereas during the current year, the company as a whole was taken as a comparable whereas only the wagon segment of the company could be compared to the assessee company. iii) Braithwaite and Co. Limited The Ld. AR submitted that this company was also functionally incomparable because this company deals in manufacturing of wagons, bogies, couplers, steel casting and structural fabrications as against the metro coaches which were being manufactured by the assessee. It was further submitted that the Ld. Commissioner of Income Tax (A), following the order of the ITAT in the immediately previous year, had allowed the FOC supplies adjustment to be made while computing the margins of the comparable companies in the year under consideration but adjustment for FOC has not been given appeal effect although the same was allowed by the Ld. Commissioner of Income Tax (A). It was prayed that suitable directions may be given to the Assessing Officer to give the appeal effect. iv) Besco Limited It was submitted that this company also was not....
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....sions, the assessee was trying to build a new case. It was also submitted that the Ld. Commissioner of Income Tax (A) had duly considered all the arguments of the assessee and it was incorrect to say that the assessee's submissions had not been considered and adjudicated upon. It was also submitted that there was no requirement for the issue to be restored to the file of the Ld. Commissioner of Income Tax (A) as being prayed by the assessee. The Ld. C.I.T. DR also drew our attention to the observations of the TPO as appearing in page 3 of the transfer pricing order and submitted that the TPO had given detailed reasons for rejecting the CUP method of the assessee. It was submitted that the order of the Ld. Commissioner of Income Tax (A) deserves to be upheld on this issue. 4.1 With respect to ground no. 5.2 on incorrect rejection of filters as claimed by the assessee, reliance was placed on the observations and findings of the TPO as well as the Ld. Commissioner of Income Tax (A). 4.2 With respect to the comparables being agitated by the assessee, the Ld. C.I.T. DR submitted that the assessee has been agitating for exclusion of Texmaco Rail & Engineering Ltd. on the ground tha....
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....tand that CUP method was the Most Appropriate Method. This view of the TPO was further upheld by the Ld. Commissioner of Income Tax (A) who has relied on the order of the ITAT in assessee's own case for assessment year 2010-11 wherein the ITAT also has refused to interfere on the rejection of the CUP method by the lower authorities. Undisputedly, the facts in this year are similar to the facts as in assessment year 2010-11 which has been decided against the assessee by the Coordinate Bench of the ITAT in ITA No. 1626/Del/2015 vide order dated 4.11.2015. This issue was raised by the assessee in ground no. 3.2 of assessee's appeal for assessment year 2010-11 and the relevant findings while discussing the CUP method, are contained in Para 18, 19, 20 and 21 of the order of the ITAT for assessment year 2010-11. The same are being reproduced herein for a ready reference:- "18. We have perused all the records and heard the submissions made by Ld. AR and Ld. DR. It is pertinent to note, that the Comparable Uncontrolled Price i.e. CUP method is the most direct method for applying the arm's length principle. But the strict requirements of comparability have traditionally made its us....
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....l difference as those cases were decided on its own factual matrix and whether to apply TNMM or CUP method was depending upon the various factors in those cases. Thus the case laws given by assessee will not be applicable in this context. 20. It is pertinent to note, that Ld. TPO relied upon the two cases namely Merck Limited and Diageo India Pvt. Ltd. Ld. TPO discussed the same and held that the level of comparability required for the analysis is different for different methods. Thus, as a methodology, under the TNMM the standard of comparability is relaxed relative to the other methods and requires similarity of functions. This finds support even in the OECD guidelines which provides that, where exact comparables (in terms of product or price) are not available, TNMM is the most 'preferred' methodology in analyzing transactions (at the net level) as it is more tolerant to differences between the tested party and comparable uncontrolled transactions. The use of TNMM method allows comparability of the functions rather than strictly focusing on product/service comparability as in the case of CPLM, Resale Price Method and CUP. Thus TPO finally held that TNMM method shall be ....
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....the amount charged by the AE from the third party. It has been pleaded that although this ground was vehemently raised before the Ld. CIT (A), the Ld. CIT (A) did not specifically adjudicate this ground and proceeded to dismiss the assessee's challenge to rejection of the CUP method without considering these alternate arguments of the assessee. We have perused the order of the Ld. CIT (A) and we do note that although the Ld. CIT (A) has duly reproduced the submissions of the assessee in this regard, he, however, has not adjudicated this issue specifically. The discussion of the Ld. CIT (A) centers around the rejection of CUP method but does not refer to the submissions of the assessee regarding the issue as aforesaid. Therefore, it is our considered opinion that interest of substantial justice would be served if these grounds are reconsidered by the Ld. CIT (A) and the Ld. CIT (A), after giving due opportunity to the assessee, passes a speaking order on the issue. Accordingly, ground nos. 4.3, 5 and 5.1 are restored to the file of the Ld. CIT (A) to be considered afresh and for the purposes of passing a speaking order after giving due opportunity to the assessee to present its case....
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.... TPO/Assessing Officer for re-adjudication and recomputation of the margin after including only the heavy engineering segment after giving the benefit of adjustment with respect to free of cost supplies. ii) Titagarh Wagons Limited This comparable has been objected to on the ground that this company is dealing in wagons whereas the assessee company is dealing in Metro train coaches and bogies and, thus, they were functionally dissimilar. However, the fact remains that this company was taken as a comparable in the previous assessment year also and the ITAT had held this company functionally comparable after providing for fee of cost supplies adjustment. It is seen that in the immediately preceding year, the TPO had taken only the wagon segment of the company whereas in the current year, the company has been taken as a whole. This, in our considered opinion, needs rectification. Accordingly, while upholding the inclusion of this company as a comparable, we direct the TPO to recompute the margin after providing for fee of cost supplies adjustment and also after taking the results of only wagon segment for the purpose of comparability. iii) ....