TaxTMI 
TaxTMI 
TaxTMI 
2019 (5) TMI 1706
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....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 not providing the details of the search process in respect of the EDS segment. ....
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....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 taxpayer in order to benchmark its international transactions qua business support services segment provided to its AE undertaken TP analysis by applying Transactional Net Margin Method (TNMM) as the Most Appropriat....
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.... 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 28.20 12. Consequently, the ld. TPO proposed the ALP for engineering design services segment as under :- Operating Cost 5,12,95,776 Arm's Length Margin OP/OC % 28.20% Arm's Length Price (ALP) 6,57,61,185 Price shown in the international transactions 5,95,03,423 Shortfall being adjustment u/s 92CA 62,57,762 13. The ld. DRP accepted the final set....
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....sis. 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 consideration also weigh in such as discharge of social obligation etc. by returning following findings :- "10 The Court on perusing the aforementioned judgment of the Bombay High Court finds that in para 4(a) and 4(b) of the said order the Bombay High Court has held that the view taken by the Mumbai Bench of the ITAT "is a reasonable and plausible view." It noted that the ITAT, Mumbai Bench had held....
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.... 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 up gradation and additions, modification and troubleshooting of plants for our own as well as clients plants, New division has started Research & Development activities during the year. The research and development activities carried out in Division, has resulted in improvement in process and productive capacity, better quality and marketability of technology. 25. Profit and loss account, available at page 371 of the ....
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....ed 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 software services. It is further submitted that company has earned a high profit margin of 52.66% during the FY 2009-10. It was further stated that there is an existence of significant research and development cost to sales ratio for the FY 2009-10 is 5.41%. He further placed reliance on the decision of Delhi ITAT in case of iQor India Services Private Ltd. Vs ITO where in the Hon'ble ITAT held that the high end services involving special ....
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....2.04.2016. 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. Coordinate Bench of the Tribunal examined the comparability of Mahindra vis-à-vis the taxpayer in taxpayer's own case for AY 2011-12 (supra) (though a different year but business model has not undergone any change), found the same to be not a suitable comparable on ground of non-availability of segmental information about engineering design services and on the ground that the company has recognised its revenue on percentage completion method. No....
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....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 aforementioned judgment of the Bombay High Court finds that in para 4(a) and 4(b) of the said order the Bombay High Court has held that the view taken by the Mumbai Bench of the ITAT "is a reasonable and plausible view." It noted that the ITAT, Mumbai Bench had held that the Engineers India Ltd. could not be considered to be comparable for the reason "that contracts between Public Sector Undertakings are not driven by profit motive alone but other consideration also weigh ....
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....or 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 the engineering design segment. Hence the same cannot be accepted as a comparable." 44. In view of what has been discussed above, we are of the considered view that TCE Consulting having a big brand value and being into high end engineering consulting services with no financial segmental available is not a suitable comparable vis-à-vis taxpayer, hence ordered to be excluded. KIRLOSKAR CONSULTANTS LTD. (KIRLOSKAR) 45. The taxpayer sought exclusion of Kirloskar on the groun....
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....s 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 filter has passed but during the year itself the Assessee has entered into all these transactions, which were not there in the past year. However, in view of the absence of complete information about the business profile of the company as well as the nature of the services rendered by the company, this comparable cannot be accepted. Hence, we reject this comparable due to inadequate information available before us." 49. In view of what has been discussed above, we are of the considered view that Ki....
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....refore, 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 taxpayer sought inclusion of two comparables, viz., Neilsoft Limited and Vama Industries Ltd. INCLUSION SOUGHT FOR BY THE TAXPAYER NEILSOFT LIMITED 55. The taxpayer sought inclusion of Neilsoft Ltd. in the final set of comparables on the grounds inter alia that the nature of business of Neilsoft Ltd. is similar to the taxpayer and this comparable has already been ordered to be included by the Tribunal in taxpayer's own case for AY 2009-10 dated 14.12.2018 in the final set of comparables. The TPO rejected Neilsoft Ltd. as comp....
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....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 cannot be followed being of different assessment year and that time complete financials of Vama might not be brought before the Bench. So, when segmental financials are not available on record Vama cannot be a valid comparable, hence rightly been not included by the TPO. GROUND NO.7 58. The taxpayer challenged the order passed by the TPO as well as DRP for not providing working capital adjustment and risk adjustment. While carrying out the comparability analysis under Rules 10B(1)(e) and 10B(3), the difference between controlled and u....
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....s 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 the comparable analysis carried in India, the latter type of risk are not being taken into consideration although these can lead to major difference in Market Value of transactions." 60. So, we are of the considered view that TPO/DRP are required to provide working capital adjustment and risk adjustment to the taxpayer as well as comparable company to bring them at par with each other. So, ground no.7 is determined in favour of the taxpayer. GROUNDS NO.8 & 9 61. Grounds NO.8 & 9 being general in nature need no adjustment. GROUND NO.10 62. The taxpayer has sought adjus....
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....t 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 own case, TPO is directed to identify all the fixed expenses including depreciation and to adjust the same in capacity utilized by exercising his powers available under the Act by calling information qua the capacity utilization by comparable companies. So, this issue is remanded back to the TPO to decide afresh in view of the direction given in taxpayer's own case for AY 2011-12 (supra) by the Tribunal. So, ground no.10 is determined in favour of the taxpayer for statistical purposes. 66. So far as customs duty adjustment as sought for by the taxpayer is concerned, this issue has also been decided in favour of the ....