TaxTMI 
TaxTMI 
2019 (5) TMI 1706
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....nal Director of Income Tax (Transfer Pricing Officer) - II (4), New Delhi (Transfer Pricing Officer' or TPO') and the directions issued by the Hon'ble Dispute Resolution Panel (the 'DRP'), to the extent prejudice to the Appellant, is erroneous, bad in law and contrary to the facts and circumstances of the case. 2. That on the facts and in the circumstances of the case the AO, TPO and DRP erred in making an adjustment of INR 9,87,50,638/- in the Arm's Length Price (,ALP') of the Appellant's international transactions with Associated Enterprises ('AEs'). Grounds in relation to Engineering Design Services COEDS') segment 3. The TPO, AO and DRP have erred, in law and in facts, by not accepting the economic analysis in respect of EDS segment undertaken by the Assessee in accordance with the provisions of the Act read with the Rules, and conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Assessee's international transaction is not at arm's length. 4. The TPO, AO and DRP have erred, in law and in facts, by....
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....nts. 13. The TPO, AO and DRP have erred, in not allowing the benefit under the proviso to section 92C(2) of the Income-tax Act ('the Act')." 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : The taxpayer, M/s. Terex India Private Limited, being an Indian company engaged in the manufacturing of material processing equipments like crushers, screeners etc and is also into providing sales and post-sales business support and engineering design services to its Associated Enterprises (AE). During the year under assessment, the taxpayer entered into international transactions with its AE as under :- Nature of International Transaction Method Amount (In INR) Purchase of raw material TNMM 160,782,287 Purchase of spare TNMM 3,502,093 Purchase of services TNMM 69,705,032 Receipt of services TNMM 34,491,124 Interest of ECB CUP 8,155,970 Corporate Chargers NA 16,313,777 Receipt of interest on overdue TNMM 989,789 Payment of interest on overdue TNMM 43,565 Reimbursements NA 9,992,070 Receipt of share application money NA 63,093,299 3. The ....
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....ties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 & 2 9. Grounds No.1 & 2 are general in nature and do not require any adjudication. GROUNDS NO.3 TO 5 10. Grounds No.3 to 5 are also general in nature relating to engineering design segment and do not require any adjudication. ENGINEERING DESIGN SEGMENT GROUND NO.6 11. The ld. TPO in order to benchmark the international transactions qua engineering design segment services provided by the taxpayer to its AE rejected all the 8 comparables chosen by the taxpayer and selected 10 new comparables with average OP/OC at 28.20% which are as under :- S. No. Company Name OP/OC (%) 1. Cades Digitech Pvt. Ltd. 9.02 2. Dalkia Energy Services Ltd. 20.81 3. Engineers India 62.94 4. IBI Chematur 52.66 5. I-Design Engg. 11.88 6. Kirloskar Consultants Ltd. 15.64 7. Kitco Ltd. 14.01 8. Mahindra Consulting Engineers Ltd. 23.50 9. Rites Ltd. 45.71 10. T C E Consulting Engineers Ltd. 25.88 Average ....
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....as, terminals & storages, mining & metallurgy; and infrastructure. EIL is also executing turnkey projects of Lump Sum Turn Key (LSTK) mode or on the recently introduced concept of Open Book Estimate. EIL is also having Government contracts in its hand pertaining to High-Density Polyethylene (HDPE)/ Linear Low-Density Polyethylene (LLDPE) Swing Unit of IOCL at their Panipat Naphtha Complex on LSTK basis. 18.1 On the other hand, the taxpayer being a captive entity is engaged in providing engineering design services to its AE as against high end and full-fledged engineering and technical services being provided by EIL for petroleum refineries and other industrial projects. EIL has incurred huge R&D expenditure to the tune of Rs. 11.40 crores which is 0.53% of the turnover which makes it not a suitable comparable. 19. Hon'ble Delhi High Court in case of Pr.CIT vs. International SOS Services India P. Ltd. - 2017 (5) TMI 1588 while examining the comparability of Government company vis-àvis private company held that EIL could not be considered to be a comparable for the reason that the contracts between public sector undertaking are not driven by profit motive alone but other....
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....page 371 of the paper book. 23. When we examine annual report under the head "Review of Performance" at page 361 of the paper book, it shows that IBI Chematur has progressed on use of Summary Plant Suite of Software. All engineers are trained about new software and the company has undertaken continuously upgrading technologies and also improving competence of staff which has employed highly trained technical staff. The company is planning to bring Technologies of BIOSTIL, 2000 Process. These technologies find synergy with BIOSTIL, 2000. The activity in BIOSTIL 2000 takes us to Sugar Industry, which remains as the biggest Biomass Processors in the country. The company continues to carry out Domestic Business activities in "IBIC Engineering (Div. of IBI Chematur (Eng. & Cons.) Ltd.) division of the company as stated in the year. 24. Furthermore, IBI Chematur has started its new division in the name and style as "IBIC Research and Technology Centre" wherein all in house engineering research and development activities undertaken relating to the Business activities of your company. Such in-house R&D centre will be providing its services in the areas of modernization, technological....
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....that this company is not a good comparable with that of the assessee company and, accordingly, we direct the AO to exclude this comparable." 28. Coordinate Bench of the Tribunal in case cited as BG Exploration and Production India Ltd. vs. JCIT, International Taxation, Dehradun for AY 2010-11 (supra) also ordered to exclude IBI Chematur in identical set of facts by returning following findings :- "This comparable has been selected by the Ld. Transfer Pricing Officer which is a joint venture company promoted in association with Swedish company to render basic engineering, detailed engineering and consultancy services in the field of petrochemicals, fine chemicals and chemicals, cosmetics, pharmaceuticals, industrial explosive and west acid recovery. The Ld. Authorised Representative submitted that The company generates income from provision of engineering services like designing and drawing, 3D modeling, piping and instrumentation diagram, smart plant instrumentation, process simulation, inspection services and erection supervision services, which are not similar to services provided by the Assessee. The company generates income from provision of engineering services and....
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....formation, it cannot be considered as a valid comparable; that Mahindra recognizes its revenue on percentage completion method which is not in the case of taxpayer; and relied upon the decisions rendered by the coordinate Benches of the Tribunal in taxpayer's own case for AY 2011-12 (supra), Alcatel Lucent India Ltd. vs. ITO in ITA Nos.2154 7 2209/Del/2014 dated 06.04.2018 and Rolls Royce India (P.) Ltd. vs. DCIT in ITA No.6636/Del/2015 dated 22.04.2016. 31. To counter the arguments addressed by the ld. AR for the taxpayer, ld. DR for the Revenue contended that a company cannot be excluded on the basis of use of percentage completion method as it is one of the recognised method. 32. Perusal of functions of Mahindra, available at page 444 of the paper book, shows that it is engaged in providing consulting services in infrastructure sector in the area of Special Economic Zones, Water supply & sewerage, solid waste management, urban infrastructure, agri & horti infrastructure, social infrastructure, marine infrastructure, industrial infrastructure, renewable energy, sustainability studies, institutional strategies / planning studies, industrial plants and systems etc.. 33. Co....
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....tives, coaches, spare parts and modernization of workshop. It is also getting into business of captive railway systems in India having a preferential treatment in business avenue being a Government company. 36. Similarly, Kitco Ltd. is also a 100% Government owned company. Profile of Kitco Ltd., available at the website of this company, shows that its technical services include services like asset valuation, energy audits, revival study, etc. Kitco Ltd. is also a permanent player in energy studies, skill certification and placement services. It is having multi-functional, multidisciplinary organization and infrastructure sector having wide range of clientele. 37. Hon'ble Delhi High Court in case of Pr.CIT vs. International SOS Services India P. Ltd. - 2017 (5) TMI 1588 while examining the comparability of Government company vis-àvis private company held that EIL could not be considered to be a comparable for the reason that the contracts between public sector undertaking are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligation etc. by returning following findings :- "10 The Court on perusing the aforeme....
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..... However, we are of the considered view that it is not a valid comparable on account of functional dissimilarity and nonavailability 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 annual report of the Company which provides profitability, for....
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....s required for any large integrated project. According to the Ld. Authorised Representative, this company is engaged in the high-end service provider segment and it was also stated that he does not have the segmental information pertaining to the segment in which the Assessee operates, and therefore, this cannot be accepted as a comparable. We have carefully considered the rival contention and also perused the annual report of the company available in paper book at page No. 246 - 304. No information is available with respect to the provision of the services of consultancy, its nature, and its volume. It is simply mentioned that this company is engaged in the business of consultancy services at the consultancy revenue shown in the profit and loss account as a single item. There are no specific bifurcations given of various services provided by the Assessee as well as the nature of such services or the segmental information. Further, it is also noted that during the year the Assessee has entered into transactions for receipt of the consultancy fee from the related parties to the tune of Rs. 89.59 lakhs out of the total consultancy fee receipt of Rs. 586 Lacs. Though the related party....
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.... client, the scope and complexity of the service is expanded to multitier product package. The Ld. Authorised Representative objected to the inclusion of the above company as comparable for the simple reason that it did not have the financial available in the public domain. Neither the Ld. Transfer Pricing Officer nor the Ld. DRP has considered this aspect that when the financial of the comparable is not available how the assets employed by that company vis-a-vis's risk assumed and functions performed can be compared. Therefore, in absence of any financial information available of this company, either in the order of the Ld. Transfer Pricing Officer or available with the Assessee, we reject this comparable at the threshold itself." 53. So, following the order passed by the coordinate Bench of the Tribunal in BG Exploration and Production India Ltd. for AY 2010-11 (supra), we are of the considered view that Dalkia being into more projects approached with complexity of service of which complete information is not available in the public domain, it cannot be a valid comparable vis-à-vis taxpayer, hence ordered to be excluded from the final set of comparables. 54. The taxp....
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....es. 57.1 Perusal of the annual report of Vama particularly its financial highlights at page 8 shows that out of the total turnover of Rs. 903.17 lakhs, Vama has earned income from software development and ITES to the tune of Rs. 561.86 lakhs. The ld. AR for the assessee contended that in its TP analysis the taxpayer has considered software development and service segment for the purpose of comparability. However, when we examine profit & loss account of Vama, available at page 33 of the paper book, it has shown income under the head Domestic Rs. 50,387,389/-, Export Rs. 39,929,771/- and other income Rs. 329,272/-, but no segmental information is available so as to compute actual profitability of Vama. Moreover, in the financial highlights, available at page 8, it is categorically mentioned that it has earned income from product/hardware sales and services, but again segmental financials are not available in the profit & loss account. 57.2 No doubt, comparability of Vama was examined by the coordinate Bench of the Tribunal in assessee's own case for AY 2009-10 and directed the AO/TPO to consider the software development and service for the purpose of comparability but the same....
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....rn (compensation). If there are material and significant differences in the risk involved, then the comparable identified are not correct as appropriated adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered. However, it can always be shown on the given facts of the case that comparable found are similar or almost similar to the controlled transaction and no adjustments are needed. It is useful to see the level of intangible assets in comparable to an appropriate base. Depending on facts of the case, final set of comparables may need to eliminate differences by making adjustments for the following: (a) working capital (b) adjustment for risk and growth (c) adjustment of R&D expenses. 27.1 The risk not only due to human resources, infrastructure and quality which are normally taken into account yet more significant risks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property are being ignored here. In most of th....
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....ization. There are variable expenditures which are in direct proportion to the production i.e. the capacity utilized. The net margin of an entity will vary with that of another entity in case there is a difference in the capacity utilization. If there is higher capacity utilization, then the fixed overheads get spread over such higher capacity utilization with the result that the net margin of such entity will be much higher as compared to the another entity where the capacity utilization is low and as such there is a higher proportion of fixed overheads which get allocated to such lower capacity/production. Thus, the right method is to identify all the fixed expenses including depreciation and to adjust the same in the ratio of the capacity utilized. In view of the above analysis, we direct the TPO to exercise his powers under section 133(6) of the Act and to call for the information on capacity utilization of comparable companies. After obtaining the information, he will share the details so obtained with the assessee and give an opportunity to the assessee and grant adjustment for capacity underutilized." 65. So, the issue being covered in favour of the taxpayer in taxpayer's....
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.... 32.22% 68. Following the order passed by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2011-12 (supra), we direct the TPO to examine if non-cenvat-able customs duty of import paid by the taxpayer is materially affecting the PLI of taxpayer company as per mandate of Rule 10B(3) then suitable adjustment be provided to the taxpayer. GROUND NO.11 69. TPO/DRP have not restricted transfer pricing adjustment in respect of import of raw material transaction to the value of consumption of material of the taxpayer, which is challenged by the taxpayer before the Tribunal. The ld. AR for the taxpayer contended that this issue has already been decided in favour of the taxpayer in AY 2011-12 (supra). 70. Coordinate Bench of the tribunal decided the issue in controversy by returning following findings as under :- "3.10.3 We have considered the rival contentions. It is undisputed fact that the assessee has made purchases of Rs. 105,55,16,000/- during the year out of which material worth Rs. 41,34,29,000/- was not consumed during the year and, therefore, the impact on the margin, if any, in respect of such purchases during the year is only of the material....