TaxTMI 
TaxTMI 
2020 (3) TMI 1189
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....pellant with its Associated Enterprise ("AE"); Consistent approach not followed 2. erred in not taking cognizance of the provisions of the India Korea Double Taxation Avoidance Agreement thereby not adopting a consistent approach as also upheld by the Hon'ble ITAT in Appellant's own case in AY 2010-11 and AY 2012-13; Characterization of functional profile 3. erred in misunderstanding the appellant's business model and functional and risk profile thereby not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Rules, and modifying the economic analysis for the determination of Arm's Length Price ("ALP") of the appellant's international transactions; Comparable companies 4. erred in considering companies functionally different as comparable, to benchmark the international transaction of support services provided by the Appellant to its AE that is. 1) Mitcon Consultancy & Engineering Services Limited, 2) Killick Agencies & marketing Limited and 3) Mahindra Consulting Engineers Limited; 5. erred in rejecting the comparables which were selected by the appellant in the transfer pricing study after a detaile....
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.... the objective of coordination and supervision of onsite portion of the DMRC Contract. However, the onsite activities were neither performed by ROTEM nor by ROTEM - RSI PO since, it was subcontracted to BEML. ROTEM - RSI PO was in charge of getting the onsite portion of work done by BEML and other sub-contractors. For this purpose, ROTEM - RSI PO was coordinating with BEML and DMRC to ensure that assembly of trains is as per quality standards and within agreed timeframe. In this connection, ROTEM - RSI PO does not employ any significant assets to enable it to carry out the assembly of trains on its own. Accordingly, the entire assembly was sub-contracted to third parties such as BEML, which have requisite assets, expertise to perform the necessary functions. However, during FY 2014-15, the activities of ROTEM were restricted to maintenance and trouble-shooting services under DLP. The DLP services have been rendered by ROTEM through ROTEM - RSI PO. The Project office for this purpose has employed engineers and fitters, in addition to administrative staff. Further, the ROTEM head office has engaged outsourcing companies to carry out minor modifications, such as replacement of compo....
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....sible for onshore activities, being a member to the contract of MRMB Consortium with DMRC and supplier of components to BEML, ROTEM has a vested interest in the developments of the discussions of BEML with DMRC. ROTEM - RS3 PO under the instructions of ROTEM participates in the discussions between the MRMB Consortium and DMRC. ROTEM - RS3 PO merely acts as a communication channel between ROTEM (in the role of member to MRMB Consortium) and DMRC even though the meetings may pertain to the onsite portion of the Contract RS3. Being a representative of the member of MRMB Consortium, ROTEM - RS3 PO enables ROTEM to acquire first hand information of communication between DMRC and BEML and developments in this regard. It therefore facilitates coordination between the activities undertaken by BEML and DMRC officials. In addition to administrative staff, ROTEM - RS3 PO has employed managerial staff and engineers. The role of managers is primarily to undertake liaisoning and coordination activities, whereas, engineering staff is required to overview the testing and commissioning activities. Further, the administrative team based at New Delhi also coordinates the process of logistics i.e.....
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....e, supply, testing, commissioning and training of 486 standard gauge cars for phase-ill of Mass Rapid Transport System project. Linder the aforesaid contract a maximum of 120 cars can be manufactured efffshore and the remaining cars would need to be manufactured in India. For the purpose of coordination and administrative support in connection with the RS-10 at New Delhi, India." 3. Thus, as per details contain in TP study report, the functional profile of the POs were treated to be administrative and coordinative function without implying significant risks such as market risk, contractual risk, credit and collection risk and foreign exchange risk and were highlighted to be low services. Functions performed by the project offices under various project offices performing various contracts have disclosed following functions in the TP study report and the risk undertaken: 4.1.2 Functions performed The purpose of this section is to identify economically important activities performed by each of the related parties and to explain the significance that each function has in creating value for business. This section provides a broad overview of the various functions performed by ROTE....
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....head office; obtain budgetary sanctions from head office for spares/consumables; and supervision of the activities being undertaken by outsourcing companies engaged by ROTEM head office. The functions performed by ROTEM - RSI PO and its AE, are summarized in the table below - Type of functions ROTEM - RS1 PO ROTEM Liaisoning and coordination Yes No Maintenance and trouble shooting Yes Limited During FY 2014-15, in relation to RS3 project, ROTEM - RS3 PO has a few other personnel who have been engaged under a manpower supply arrangement from an outsourced agency to handle minor issues. ROTEM does not receive any separate remuneration for the services rendered during DLP. The functions performed by ROTEM and ROTEM - RS3 PO in relation to the international transaction pertaining to administrative support and coordination services have been summarized below - ► Contract execution All the activities related to onsite portion of the contract are to be performed by BEML. In relation to contract RS3, ROTEM has been appointed as technical leader and is required to undertake detailed design and development of the mechanical portion. Further, it is also responsi....
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....o international transaction pertaining to administrative support and coordination services have been summarized below - ► Contract execution In relation to the 2RS-DM contract awarded by BMRCL to the consortium, ROTEM is responsible for coordinating and providing logistics support in connection with offshore supplies made by ROTEM to BEML in relation to MELCO's assigned scope of work. ROTEM continues to be the technical leader of the project and is responsible for detailed design development, manufacture, supply, testing, and commissioning of mechanical portion. The local manufacturing such as car body manufacturing and assembly, and bogie assembly is to be done by BEML. BMRCL PO is responsible for liaising with local service providers in connection with logistics support and undertakes routine administrative compliances in relation to payment of custom duties etc. on behalf of head office. In addition, BMRCL PO is responsible for local procurement of certain material and supply of same to BEML directly. In relation to the local supplies being made by BMRCL PO to BEML, there is no separate consideration receivable from BMRCL in this regard. The PO is paid by BEM....
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....ck manufactured by ROTEM is directly delivered to HM by ROTEM-HO. HM PO's role is restricted to only coordination and logistic support. ► Liasioning HM PO is involved in liaising and interfacing with HM officials in connection with the ROTEM's scope of work under the contract. This entails various administrative activities to be coordinated for proper execution of the contract. It is also responsible for liasing with Government representatives. The cost incurred by HM PO in relation to such coordination activities, are reimbursed by ROTEM with an appropriate mark-up thereon. The functions performed by HM PO and ROTEM, are summarized in the table below - Type of functions HM PO ROTEM Contract execution Limited Yes Logistics Support Yes Limited Liaisioning with HM Yes Limited RS 10 Contract- The functional role and responsibilities of RS10 PO are largely similar to the other contracts undertaken by ROTEM. The functions performed by RSIO PO have been summarized below - ► Contract execution Under the RS-10 contract, a maximum of 120 cars can be manufactured offshore and the remaining cars need to be manufactured in India. For the ....
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....ummarized in the table below - Type of functions RS 10 PO ROTEM Contract execution Limited Yes Logistics Support Yes Limited Liaisioning/ Interfacing with DMRC Yes Limited 4.1.3 Risk Analysis 4.1.3.1 Business risk Business risk arises when a firm is subject to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to service targeted consumers. ROTEM - POs only provide administrative support services to ROTEM and do not assume any specific market risk. ROTEM is responsible for generating business and none of business related decisions are made by people in ROTEM - POs. ROTEM is responsible for deciding the business strategy and future growth strategy for the company. Accordingly, business risk is borne by ROTEM. 4.1.3.2 Credit and collection risk When a firm supplies products or services to a customer in advance of customer payment, the firm runs the risk that the customer will fail to make payment. This risk is known as customer credit risk. The revenues of ROTEM - POs are generated from a single entity i.e. ROTEM, which ....
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.... behalf of ROTEM 1040750 Payment to vendor on behalf of Head office 832240005 Total 906563959 4.4 Assets employed The written down value of assets employed by ROTEM - Pos after depreciation as on March, 31 2015 are as follows - Type of asset Amount ROTEM RS1 PO ROTEM RS3 PO BMRCL PO HM PO ROTEM RS 10 PO Leasehold improvements - - - - - Furniture and Fixtures - - - 978212 155332 Office Equipment - - - 16225 243959 Computer - - - 182858 376229 Vehicles - - - - - Software - - - 1190311 1097408 4. In the TP study report, following international transaction with its AE were reported:- No. Nature of transaction Method Value of transaction (in Rs.) i. Rendering of administrative support and coordination services by ROTEM - RSI PO TNMM 4,987,110 ii. Rendering of administrative support and coordination services by ROTEM - RS3 PO 118,342,532 iii. Rendering of administrative support and coordination services by BMRCL PO 74,233,139 iv. Rendering of administrative support and coordination services by HM PO 170,522,202 V. Rendering of administrative support and coordination se....
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....69.59% 8. Accordingly, the TPO made adjustment of Rs. 6,26,99,255/- in respect of provision of administrative support services. 9. As highlighted by the ld. counsel before us that, the ld. TPO in his order has taken note of business activities of the head office and arrived at a presumption that the activities of the project office are technical in nature, since the head office operates in technical environment. Ld. Counsel for the assessee submitted that the TPO has misunderstood the fact, though while the contract was entered into by the head office with third parties, pursuant to which projects office have been set up, can be said to be technical contracts, but the functions performed by the project office were merely restricted to liaising and coordination. Later on, the proposed TP adjustment was reduced to Rs. 6,20,41,837/- by the TPO vide order dated 28th December, 2018 passed u/s.154 r.w.s. 92CA(3) after an application for rectification was filed by the assessee. 10. Being aggrieved by the adjustment and addition proposed in the draft assessment order, the assessee filed objection before the DRP. The ld. DRP vide its direction dated 3rd July, 2019 excluded government com....
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....ement (India) Limited 5.33% Company excluded by TPO and accepted by DRP Functionally similar 12. Ld. counsel for the assessee submitted that here in this case rule of consistency needs to be followed for the reason that, in AY 2013-14 and AY 2012-13, the Appellant had rejected Killick Agencies & Marketing ""Limited, Mitcon Consultancy & Engineering Services Limited and Mahindra Consulting Engineers Limited as a comparable and the Ld. TPO has accepted the stand of the Appellant and rejected them as comparable. Therefore, based on the rule of consistency, which has been upheld by the ITAT also in Appellant's own case pertaining to AY 2010-11, AY 2011-12 and AY 2012-13, wherein it was held that without any change in functionality and financial data, inclusion/exclusion of comparable cannot be done, as TPO had to bring some material on record to show that why these comparables are to be excluded/ included in the year under consideration. This finding was given while adjudicating for some other comparable i.e. ICRA Management Consultancy Limited for AY 2010-11; and therefore by this logic, all the three comparable should not be included in the final list of comparable companies. ....
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....as excluded Killick for Sales and support service provider and held as under- "Further we note that this company is acting as an agent for various foreign principals for sale of dredgers, dredging equipments and machineries. Accordingly, we do not find any error or illegality in the findings of the DRP and direct the AO to exclude this company from the comparables" ITO v Alcon Laboratories Pvt Ltd (IT(TP)A No 391/Bang/2015) dated 21 November 2017. The Hon'ble ITAT has excluded Killick for Sales marketing support service provider and held as under- "9. In respect of remaining two comparables i.e. 1) HCCA Business Services Pvt. Ltd. and 2) Killick Agencies & Mktg. Ltd., we find that as per the tribunal order rendered in the case of DCIT vs. Electronics for imaging India Pvt. Ltd. (Supra), it was held that these two are not good comparables because these are functionally different. We have already noted that this tribunal order is applicable in the present case. Hence, Hence, we respectfully follow this tribunal order and hold that in the present case also, these two comparables i.e. 1) HCCA Business Services Pvt. Ltd. and 2) Killick Agencies & Mktg. Ltd., are rightly exclud....
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....as received government grants unlike the Appellant which affects its profitability and hence cannot be taken as a comparable for the Appellant. Further, Mitcon was also engaged in providing vocational training and IT courses of MH CIT and generates approx. 26% of the total revenue. The Ld. TPO has characterized the functional profile of the assessee as an Engineering Support service provider and hence, proposed Mitcon as a comparable considering its functional profile. However, without prejudice he submitted that it's profile is that of a business support service provider, it would like to submit that even if the Assessee is considered an engineering/technical support service provider, Mitcon should not be considered as a comparable. Reliance has been placed in this regard on the following judgments wherein Mitcon has been rejected as a comparable for the taxpayer having a profile of an engineering consultancy service provider: Granite services International (P) Ltd v ACIT dated 12 September 2017 (ITA 532/Del/2016) The Hon'ble ITAT has excluded Mitcon for technical support service provider and held as under:- Similarly, in respect of Mitcon Consultancy and Engineering Servic....
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....for the coordination and liaising activities undertaken by the Appellant. Mahindra Consulting Engineers Ltd. - Margin 22.80%; Rectified Margin -9.67% 17. The company is engaged in providing engineering consultancy services which cannot be compared to the liaising, administrative and coordination functions performed by the Appellant. Further, unlike the Appellant's mercantile system for recognizing revenue, Mahindra recognizes revenue as per Accounting Standard ('AS') - 7 i.e. Accounting for Construction contracts under percentage completion method which involves technical estimates with respect to cost to completion of each contract/activity . Hence, this system of accounting can be clearly distinguished from the Appellant's system of accounting which recognizes revenue from its HO on the basis of cost-plus an arm's length mark-up. In support he relied upon following cases:- Functionally different for Business Support Service Provider 1. CISCO Systems TS-246-ITAT-2014(Bang) dated 14 August 2014 The ITAT has excluded Mahindra for marketing, sales support and management service provider and held as under: "53.20 Mahindra Consulting Engineers Ltd.: This Company is engag....
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....echnical, and therefore, the contention of the assessee that it is dealing with activities and technical services, and therefore, it is routine administrative services provider cannot be accepted. Regarding Killick Agencies and Marketing Limited, he submitted that this provides principal and best sales services for equipment to its principals and installation of equipment on behalf of its principals were especial technical engineers which required therefore FRA is similar. We drew our attention to profile of the said company from the annual report which is placed at paper book at pages 754 and 756. 21. Regarding Mitcons Consultancy Services Limited, he submitted that the said company is also providing technical services and hence it is functional comparable with the assessee and has rightly been included by the DRP. 22. Lastly, with regard to Mahindra Consulting Engineering Ltd. He submitted that as per the annual report this company is providing technical services and therefore, it is the functions of other profiles are same. 23. We have heard the rival submissions and perused the relevant findings given in the impugned orders as well as material referred to before us at the ti....
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....has accepted the similar functional profile in the Assessment Year 2010-11. Thus, in this year without there being any change of functions or in material facts, functional profile cannot be changed. Accordingly, we accepted the contention of the ld. counsel that the TPO/DRP have erred on facts in treating the functional profile of the head office as the functions of project office. 24. Now coming to the above three comparables for exclusion, we find that first of all, these three comparable companies in the Assessment Years 2012-13 and 2013-14 have been rejected by the assessee as comparable and the ld. TPO has accepted the stand of the assessee. Further, the Tribunal in assessee's own case for the Assessment Year 2010-11 and 2011-12 and 2012-13 has held that without there being any change any in functionality and change in financial data, the TPO cannot take a different stand either in the exclusion or for inclusion of comparables in the year under consideration. Thus, prima facie in view of 'rule of consistency' these three comparables are liable to be excluded. 25. However, on further analysis of the functional profiles of the comparables as highlighted by the ld. Counsel, we ....