TaxTMI 
TaxTMI 
2019 (12) TMI 146
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....inst returned income of INR 92,81,393. Transfer Pricing ("TP") Adjustment 2. That on the facts and circumstances of the case and in law, the AO / Transfer Pricing Officer (TPO") / DRP have erred in making an upward TP adjustment of INR 93,62,468, in respect of the transaction relating to provision of design and engineering, and supervision services to associated enterprises CAE"), alleging that the same were not at arm's length. 3. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules") for determination of the arm's length price ("ALP") of provision of design and engineering, and supervision services. 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in rejecting / arbitrarily modifying the search process and filters adopted by the Appellant for the purpose of benchmarking its international transactions of provision of design and engineering, and supervision services to AEs. 5. That on the facts and circums....
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....he Indian customers in relation to the direct supplies" services made by such head office. 14. That on the facts and in the circumstances of the case and in law, the AO / DRP have erred in applying an ad-hoc and arbitrary rate of 25 percent to determine gross profit from the direct sales / services in India by the head office and further erred in estimating, on an ad-hoc basis, 50 percent thereof, as attributable to the PE of the Appellant, on conjectures and surmises. 15. That on the facts and circumstances of the case and in law, the AO / DRP have erred in attributing further profits to the PE of the Appellant without appreciating that the subject transactions have been scrutinized by the TPO and no further profits could have been attributed. 16. That on the facts and circumstances of the case and in law, the AO / DRP have erred by completely misinterpreting the facts of the case and making assumptions in attributing further profits to the PE of the Appellant, being the branch office in India. 17. That on the facts and circumstances of the case and in law, the AO has erred in not giving credit of taxes amounting to INR 4,73,055, while computing....
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....saction approach on the ground that provision of supervisory support services and supply of equipment is interlinked with the primary transaction of provision of design and engineering services. The taxpayer applied Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI) as Most Appropriate Method (MAM) and computed its margin at 46.54% on cost after claiming idle capacity adjustment whereas the average margin of comparable is 21.12% by using multiple year data and found its international transactions at arm's length. 5. Ld. Transfer Pricing Officer (TPO) denied the idle capacity adjustment of Rs. 2,50,63,818/- i.e. 21.90% of the total cost of Rs. 11,44,23,546/- claimed by the taxpayer on the ground that the taxpayer has failed to provide documentary evidence in respect of basis of cost allocation under each head i.e. personnel expenses, operating & other expenses, financial expenses and depreciation, finally selected 10 comparables with margin of 25.21% and proposed adjustment of Rs. 93,62,468/- to Arm's Length Price (ALP) of international transactions pertaining to provision of design & engineering services. Assessing....
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....d 2009-10 and also relied upon the decision rendered by the Tribunal in Transwitch India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151 (Delhi), SITEL India (P) Ltd. vs. ACIT (2013) 55 SOT 541 (Mumbai), DCIT vs. Panasonic AVC Network India Co. Ltd. (2014) 63 SOT 121 (Delhi), HCL Technologies BPO Services Ltd. vs. ACIT (2015) 69 SOT 571 (Delhi), Bechtel India (P) Ltd. vs. DCIT (2016) 66 taxmann.com 160 (Delhi), Ariston Thermo India Ltd. vs. DCIT (2014) 147 ITD 388 (Pune) and DCIT vs. Genesis Integrating Systems (India) (P) Ltd. (2016) 66 taxmann.com 20 (Bangalore). 10. However, on the other hand, ld. DR for the Revenue relied upon the orders of the lower Revenue authorities. 11. When we examine page 36 of the paper book, it shows that the taxpayer has given the complete calculation as to how the idle hours are calculated. Perusal of project-wise break-up of the actual hours at page 490 of the paper book shows that the taxpayer has explained as to how the working hours of the employees have been calculated. 12. However, ld. TPO denied the idle capacity adjustment claimed by the taxpayer by returning following findings :- "11. As per the details filed it is seen that you have ....
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....n the various judicial decisions on the issue of adjustments and even OECD guidelines, impresses upon time and again that the adjustment should be "reasonable accurate adjustment". Hence in view of the above, the TPO is right in not entertaining the claim of adjustment of idle capacity." 14. Undisputedly, findings returned by the ld. TPO/DRP/AO in taxpayer's own case for preceding year have been set aside by the coordinate Bench of the Tribunal in AY 2009-10 in ITA No.1047/Del/2014 by returning following findings :- "8. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that an identical issue having similar facts was a subject matter of adjudication in the preceding assessment year 2008-09 in ITA No. 6227/Del/2012 wherein vide order dated 21.02.2014, the issue has been decided in favour of the assessee and the relevant findings have been given in paras 4 & 5 which read as under: "4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 5. Rule 10B(1....
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....unsel for the assessee has painstakingly taken us through the segmental accounts, pointed out the basis of allocation of the expenses. We have noted that the allocation of expense is on the man hour basis, which is quite fair and reasonable, and that every person has to punch in hours on a specific project. We have also noted that all these details and expense allocation basis were also before the TPO and even then, no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the tran....
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.... the decision rendered by the coordinate Bench of the Tribunal in Transwitch India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151 (Delhi) and SITEL India (P) Ltd. vs. ACIT (2013) 55 SOT 541 (Mumbai). So, ground no.8 is decided in favour of the taxpayer for statistical purposes. GROUNDS NO.2, 3, 4, 5 & 7 17. Without prejudice, the taxpayer sought exclusion of six comparable companies viz. Engineers India Ltd., Rites Ltd., HSCC (India) Ltd., Mahindra Consulting Engineers Ltd., Tata Consulting Engineers Ltd. and Kitco Ltd. to benchmark the international transactions qua provision of design and engineering services along with supervisory support services and supply of equipment & material to AE. So, we would examine the suitability of all the aforesaid comparables vis-à-vis the taxpayer one by one as under. ENGINEERS INDIA LTD. (EIL) 18. The taxpayer sought exclusion of EIL on the grounds inter alia that it is a Government of India owned company having 90.40% of total shareholding; that EIL is engaged in the business of consultancy and engineering products and turnkey projects with diversified area of production; that EIL is into extensive Research and Development (R&D) act....
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....c. Perusal of profit & loss account of EIL, available at page 743 of the annual report paper book, shows that EIL is having turnover of Rs. 1993.80 crores as against Rs. 13 crores turnover of the taxpayer. 21. Coordinate Bench of the Tribunal excluded EIL as a comparable vis-à-vis routine engineering design services provider in case of International SOS Service India P. Ltd. vs. DCIT (2016) 67 taxmann.com 73 (Delhi-Trib.) on the grounds inter alia that a 100% Government company cannot be selected as comparable and that company having no intangible assets cannot be a valid comparable vis-à-vis a company owning intangible assets in the form of technical know-how. Order of the coordinate Bench of the Tribunal has been upheld by the Hon'ble Delhi High Court vide order dated 30.05.2017 passed in ITA 454/2016 and SLP filed by the Revenue in the Hon'ble Supreme Court has also been dismissed. 22. EIL as a comparable has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Thyssen Krupp Industries (P.) Ltd. vs. ACIT (2013) 25 ITR (T) 243 (Mumbai- Trib.) on the grounds that EIL is a Government company and most of its customers of the 'Turnkey Pro....
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....(Civil) Diary No.18255/2018 (SC) upholding the decision of Hon'ble Delhi High Court in ITA 454 of 2016, Hon'ble Delhi High Court in PCIT vs. Bechtel India Pvt. Ltd. in ITA 655/2016 upholding the decision of the coordinate Bench of the Tribunal in ITA No.6779/Del/2015, Hon'ble Bombay High Court in CIT vs. Thyssen Krupp Industries India (P.) Ltd. (2016) 68 taxmann.com 248 (Bombay) upholding the decision of coordinate Bench of the Tribunal in (2013) 154 TTJ 689, Rolls Royce India (P) Ltd. vs. DCIT (2016) 176 TTJ 1 (Del - Trib.), M/s. Terex India Pvt. Ltd. vs. DCIT in ITA No.4791/Del/2015 order dated 30.05.2019 and Eli Lily & Co. (India) Ltd. vs. ACIT ITA No.6819/Del/2014 (Delhi-Trib.). 25. When we examine profit & loss account of Rites, available at page 890 of the paper book, it shows that Rites has income from various activities like consultancy fee, construction projects, export sales, inspection fees, lease services etc. Furthermore, perusal of annual report, available at pages 855 & 856 of the annual report paper book, shows that during the year under assessment, Rites was engaged in turnkey project of enhancement of coach production facilities for Rail Coach Factory, Kapurtha....
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....Project division' are related parties, being other public sector undertakings. 29. Coordinate Bench of the Tribunal in the case of Rolls Royce India (P) Ltd. (supra) ordered to exclude Rites as a comparable vis-à-vis routine engineering design services by returning following findings :- "The said company is a Government of India enterprise and is a multidisciplinary consultancy organization in the fields of transport, infrastructure and related technologies. It provides a comprehensive array of services under a single roof and believes in transfer of technology to client organizations. In overseas projects, it actively pursues and develops cooperative links with local consultants/firms, as means of maximum utilization of local resources and as an effective instrument of sharing its expertise. Thus, it is evident that RITES Ltd. is a primarily imparting high end technical services, which cannot be compared with low end marketing business support services rendered by assessee. [Para 32]" 30. So, in view of the matter, we are of the considered view that Rites being a wholly owned Government of India company into diverse activities having huge asset base ....
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....e Hon'ble Supreme Court has also been dismissed. 36. Coordinate Bench of the Tribunal in the case of DCIT vs. Terex India (P.) Ltd. (supra) examined suitability of a Government company as a comparable vis-à-vis routine engineering design services provider and ordered to exclude the same on the ground that it is a Government of India enterprises and major part of its business is from Government itself. 37. In view of the matter, we are of the considered view that HSCC being a wholly owned Government of India company drawing most of its project from Government and its public sector undertakings and is into diversified nature of activities having asset base of Rs. 6.32 crores as against Rs. 17 lakhs of the taxpayer, it cannot be a suitable comparable vis-à-vis the taxpayer, hence ordered to exclude the same from the final set of comparables. MAHINDRA CONSULTING ENGINEERS LTD. (MAHINDRA) 38. The taxpayer sought exclusion of Mahindra on the grounds inter alia that it is into diversified nature of activities of providing consultancy services in the area of infrastructure viz. special economic zones, water supply & sewerage, solid waste management, urban infrastr....
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....ot be excluded merely on the basis of different revenue accounting method which is recognised one but non-available of segmental information in the face of the fact that it is into diversified services as discussed above, we find it not a suitable comparable vis-à-vis taxpayer which is into providing routine low end engineering design services. Hence, we order to exclude Mahindra as a valid comparable." 41. In view of what has been discussed above, we are of the considered view that Mahindra being into diversified consultancy services with no segmental financials available to explain the diversified categories of its services is not a suitable comparable vis-à-vis the taxpayer who is a routine engineering design service provider, hence ordered to be excluded. TATA CONSULTING ENGINEERS LTD. (TCEL) 42. The taxpayer sought to exclude TCEL as a comparable on the grounds inter alia that it is functionally dissimilar having huge asset base; that TCEL is having a single reportable segment i.e. income from engineering consultancy services with no bifurcation of diversified categories of services and relied upon the decision of Hon'ble Delhi High Court in PCIT vs. Bec....
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....well as TPO during the year under assessment. However, we are of the considered view that it is not a valid comparable on account of functional dissimilarity and non-availability of its segmental financials. Moreover, in 2009- 10, TPO himself excluded TCE Consulting from final set of comparables on raising objections by the taxpayer and since then, taxpayer's business profile has not undergone any change. 43. Coordinate Bench of the Tribunal in case of Bechtel India Pvt. Ltd. vs. DCIT - 2015 (12) TMI 1560 - ITAT Delhi for AY 2010-11 has ordered to exclude TCE Consulting as a comparable vis-à-vis routine engineering design service provider by returning following findings :- "12.6 The Comparable Company is involved in activities beyond engineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the a....
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.... in case of International SOS Service India P. Ltd. vs. DCIT (2016) 67 taxmann.com 73 (Delhi-Trib.) on the grounds inter alia that a 100% Government company cannot be selected as comparable and that company having no intangible assets cannot be a valid comparable vis-à-vis a company owning intangible assets in the form of technical know-how. Order of the coordinate Bench of the Tribunal has been upheld by the Hon'ble Delhi High Court vide order dated 30.05.2017 passed in ITA 454/2016 and SLP filed by the Revenue in the Hon'ble Supreme Court has also been dismissed. 51. Coordinate Bench of the Tribunal in PCIT vs. Bechtel India Pvt. Ltd. (supra) excluded Kitco by relying upon the decision of Thyssen Krupp Industries India Pvt. Ltd. in ITA No.6460/Mum/2012 by returning following findings :- "22. The profile of this company shows that it is a 100% Government owned undertaking rendering services primarily to Central/State Government undertaking and PSUs. Most of the clients or projects undertaken by this company are either for state government or government run institutions. Therefore, the majority revenue of this company comes from government /state or centre run pr....
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....ndia Private Limited (supra), we hold that Kitco Ltd., cannot be accepted as a comparable company. Hence the same is directed to be eliminated." 24. Respectfully following the findings of the coordinate bench [supra], we direct to exclude KITCO from the final set of comparables." 52. So, in view of the matter, we are of the considered view that Kitco firstly being a Government of India undertaking rendering services to Central and State undertakings and PSUs and as such, substantial revenue of this company is from Government/State or centre run projects and it is into diversified activities of business qua which segmental financials are not available, is not a suitable comparable vis-à-vis the taxpayer which is a routine provider of design engineering services along with supervisory support services to its AE, hence ordered to be excluded. GROUNDS NO.9 & 10 53. Grounds No.9 & 10 are dismissed having not been pressed during the course of arguments. GROUND NO.11 54. Ground No.11 being consequential in nature needs no specific findings. GROUNDS NO.12, 13, 14 & 16 55. AO/DRP following the earlier assessment year estimated the gross profit of such sa....
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....the assessee must have received a sum equal to its declared receipts in respect of direct transactions between the HO and its Indian customers and the further presumption is that it is in nature of fees for technical services. We are unable to appreciate the logic of the AO in drawing inferences, one after me other and the conclusions reached in this regard. There is no material worth the name to suggest, even remotely, that the assessee was rendering services to its head office or the Indian clients in respect of direct transactions between them. There is absolutely no bedrock for such presumption. The learned DR was required to invite our attention towards any material indicating the assessee's involvement in the direct transactions between the head office and Indian customers. In the name of reply, he took us through certain portions of the draft assessment order in which there is a Lummus Technology Heat Transfer BV reference to certain invoices of the HO indicating the role of the assessee in such direct transactions. On a careful scrutiny of the dates of such invoices, it can be seen that they relate to the financial year 2004- 05 relevant to the preceding assessment year....
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....mployee is involved in negotiations or marketing. The name of Mr. Guido Herberghs of the HO, Netherland is mentioned in most of the work orders entered into by the HO with Indian clients who considers, discusses, negotiates and enters into contracts with the Indian clients only on behalf of the HO and there is no evidence whatsoever on the file to prove that there was nexus between HO and BO. Furthermore, AO proceeded to make an addition on this account also on the ground that BO has debited expenses amounting to Rs. 11.44 crores to its profit & loss account as against revenue of Rs. 13.08 crores and the cost so incurred is not commensurate with the business turnover and as such, BO proved to have performed more than what has been claimed by it. 63. We are of the considered view that account detail of any such specific expense or revenue item, otherwise unreasonable or under-stated, has not been pointed out, and the entire decision has been made on the basis of assumptions. Moreover, even otherwise, reasonableness of the expenditure has to be considered with businessman's stand point and revenue officer cannot decide such issue while sitting on the businessman's arm chair. This ....
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.... taxpayer claimed that they are entitled for credit of taxes, the matter is required to be set aside to the AO to verify if such taxes have been deposited by deducting the TDS and to provide the credit to the taxpayer under Rules. GROUND NO.19 70. The ld. AR for the taxpayer contended that the AO has incorrectly applied surcharge and cess over the tax rate of 10% as per Double Tax Avoidance Agreement (DTAA) applied on the amount of income of HO and relied upon Article 2 of DTAA which is extracted for ready perusal as under :- "3. The existing taxes to which the Convention shall apply are in particular: (b) in India: - the income-tax including any surcharge thereon, - the surtax, - the wealth-tax. (hereinafter referred to as "Indian tax'? 4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the States shall notify to each other any substantial changes which have been made in their respective taxation laws." 71. Under Article 2(3) of the....