TaxTMI 
TaxTMI 
2020 (3) TMI 1189
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....ransaction pertaining to support services entered into by the Appellant 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 re....
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....omplete manufacture of 15 corridor trains and supply to DMRC Onsite work consists of local manufacture/assembly of 45 trains. Accordingly, ROTEM - RSI PO was set up in the year 2001 with 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 th....
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....y BEML as an independent member to MRMB Consortium. However, being the technical leader, DMRC has entrusted ROTEM with responsibility of supervision of onsite testing and commissioning work being undertaken by BEML in India. Though ROTEM is not responsible 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 m....
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...., supply, testing and commissioning of Rolling Stock, supply of equipments and materials. Under HM contract, the project office is responsible for rendering coordination and support services to its head office. 2.4.5 ROTEM - RS10 PO During the year 2013, Rotem entered into a contract with DMRC for design, manufacture, 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 stu....
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....aintenance activities are procured by the overseas purchase department of ROTEM head office. The purchase department directly place orders with vendors for any spares/consumables, as may be required, and such material is delivered by the vendors directly to the outsourcing companies engaged for carrying out the requisite modifications. The role of ROTEM - RSI PO in this regard is restricted to communication of the defects to ROTEM 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....
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....ed at a cost plus mark up basis to the Head Office. The functions performed by ROTEM - PO and its AE, are summarized in the table below - Type of functions ROTEM - RS3 PO ROTEM Contract execution No Yes Testing and commissioning Limited to supervision No Liaisioning/interfacing with DMRC Yes Limited BMRCL Contract - The functional role and responsibilities of BMRCL PO are largely similar to those under DMRC's RS3 contract. The functions performed by ROTEM and BMRCL PO in relation to 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 s....
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....ices is related to oversight and coordination, including integrated testing and commissioning and trial runs, providing information on rectification of defects, clearing, forwarding, handling, transportation to site, receipt and unloading/ handling of the trains at site. The project office mainly acts as an interface between Rotem (Head office) and the end customer. ► Logistic support HM PO is responsible for coordinating and providing logistics support in connection with offshore supplies made by ROTEM. It liaises with local service providers in connection with logistics support and also undertakes routine administrative compliances on a day-to-day basis. The rolling stock 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 co....
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.... ROTEM. The cost incurred by ROTEM - RSIO PO in relation to such coordination activities, are reimbursed by ROTEM Head Office with an appropriate mark-up thereon. All the activities performed by ROTEM - RSIO PO are support activities which further are charged at a cost plus mark-up basis to the Head Office. ► RSIO PO is involved in liaising and interfacing with RSIO 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 liasioning with Government representatives. The cost incurred by RSIO PO in relation to such coordination activities, are reimbursed by ROTEM with an appropriate mark-up thereon. The functions performed by RSIO PO and ROTEM, are summarized 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 incre....
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....lf of PO 2,792,901 ROTEM BMRCL Expenses incurred by ROTEM on behalf of PO 7600198 ROTEM HM PO Expenses incurred by ROTEM on behalf of PO 3006724 ROTEM RS 10 Reimbursement of salaries 7889194 4.3 Reimbursement of expenses by AE ROTEM - Pos incurred miscellaneous operating expenses o behalf of ROTEM and charged back these expenses to ROTEM. The value of the charge back of these expenses is as follows:- Associated enterprise Paid by Description of Services Amount (INR) ROTEM RS 13 Payment to vendor on behalf of ROTEM 21610500 ROTEM RS3 PO Taxes and duties paid on behalf of ROTEM 17802178 ROTEM BMRCL PO Taxes and duties paid on behalf of ROTEM 28603004 Expenses incurred on behalf of ROTEM 164553 ROTEM HM PO Expenses incurred on behalf of ROTEM 3156987 Taxes and duties paid on behalf of ROTEM 1908619 ROTEM RS 10 PO Taxes and duties paid on behalf of ROTEM 37363 Expenses incurred on behalf of ROTEM 1040750 Payment to vendor on behalf of Head office 832240005 Total 906563959 4.4 Assets employed The written down val....
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....ncome 49,87,110 11,83,42,532 7,42,41,851 17,05,22,202 15,29,94,500 52,10,88,195 Operating Cost 45,75,330 10,24,09,499 6,80,28,801 15,64,01,003 13,81,69,867 46,95,84,500 Operating Profit 4,11,780 1,59,33,033 62,13,050 1,41,21,199 1,48,24,633 5,15,03,695 OP/OC 9.00% 15.56% 9.13% 9.03% 10.73% 10.97% 7. The TPO accepted two of the comparables of the assessee, namely, ICRA Management Consulting Services Ltd. and Keystone Integrated Mktg. Services Pvt. Ltd. and other fours were rejected. Thereafter, the ld. TPO had selected 5 more comparables whose weighted averages OP/OC were as under: S. No. Company Name OP/OC 2013 OP/OC 2014 OP/OC 2015 WTG. AVG. OP/OC 1 I C R A Management Consulting Services Ltd. 2.36 4.01 11.82 6.13% 2 Keystone Integrated Mktg. Services Pvt. Ltd. 6.89 7.10 9.75 8.13% 3 Mitcon Consultancy & Engineering Services Ltd. 34.84 25.06 10.35 22.82% 4 Killick Agencies & Mktg. Ltd. 26.73 23.06 23.22 24.32% 5 WAPCOS Ltd (seg) NA 35.55 32.98 34.16% 6 Holtec Consulting Pvt. Ltd. 60.1....
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....Assessment Year 2007-08, 2008-09, 2009-10, 2010-11 and 2013-14. Thus, when Department itself in all the years has accepted the functional profile of the project office, then TPO in this year cannot take a different stand and change the profile of the assessee. However, he submitted that in the Assessment Year 2011-12, the TPO has not accepted the assessee's functional profile. He further submitted that the assessee is mainly aggrieved for exclusion or inclusion of following comparable companies:- Sr. No Name of the company Margin as per TP study Margins considered by the Ld. TPO Appellant's reason for exclusion/ inclusion from set of comparable Comparables to be excluded 1 Killick Agencies & Marketing Limited Not considered comparable in TP Report 24.32% Functionally different Rule of consistency 2 Mitcon Consultancy & Engineering Services Limited ("Mitcon") Not considered comparable in TP Report 22.82% Functionally different Rule of consistency 3 Mahindra Consulting Engineers Ltd. 22.80% Functionally Different Rule of consistency Incorrect margin computation Comparables to be included 4....
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.... lighting & navigation lighting systems, dredges and dredge equipment, ship building presses, rescue boats and specialized davits, reverse osmosis water systems arc special acoustic communication equipment for defense. Further, the Ld. TPO in her order has herself stated that this company receives income in the form of commission, which is not comparable to the Appellant which is remunerated on a cost plus mark-up basis. It needs to be appreciated that this company essentially operates as a commission agent, the functional profile of which is very different from a routine support service provider. Revenue from operations of Killick is mainly commission income which is approximately 89 percent of the total revenue. Particulars Amount in Rs Total income 4,09,76,853 Commission income 3,64,52,724 % of Commission income to Total income 89% Thus, this company would functionally be not comparable to the project offices of the assessee which are merely engaged in providing business support/liaising and coordination services. He further submitted that in following cases the Tribunal has found that Killick Agencies and Marketing Ltd. to be non comparable with the e....
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....o. 6693/DEL/2015) dated 11 October 2019 The Hon'ble ITAT has excluded Killick for Consultancy and advisory service provider and held as under- "We find that this company markets Marine Equipment like specialized Propulsion Systems, Marine Engines, Ship Lighting & Navigation Lighting systems, Dredges and dredge equipment, Ship Building Presses, Rescue Boats and Specialized Davits, Reverse Osmosis Water Systems and Special Acoustic Communication Equipment for defense. This company is involved in exports of micro switches, engineering items, acoustics items & head-sets. The Annual Report of this company suggests that this company boasts of its role in promotion of the Dredgers and Dredging equipment by leading manufacturers. There is no doubt that this company is engaged in marketing services and on this count alone, cannot be considered as a good comparable vis a vis the assessee. We, accordingly, direct the TPO to exclude the same from the final set of comparables. " Mitcon Consultancy & Engineering Services Limited (Mitcon) Margin: 22.82% 15. Ld. Counsel submitted that the company has a technical consulting team and is engaged in providing technical....
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....es to the TPO for the purpose of determination of Arm's Length Price of international transactions involving the Respondent- Assessee. In the considered view of the Court the above orders of the ITAT do not give rise to any substantial question of law." 24. M/s. STEAG Energy jervices (I) Pvt. Ltd.. vs. ACIT, Circle (ITA No.835/Del/2016) 26 April 2019 (Page 926 of Legal paperbook) 25. The Hon'ble ITAT has excluded Mitcon for engineering and technical solution service provider on account of receipt of government grants and functional difference and held as under- " 15. Furthermore, when we examine Schedule VIII forming part of the balance sheet, available at page 725 of the paper book, it shows that Mitcon has also income from wind power generation to the tune of Rs. 51,91,068/-. Furthermore, when we examine Schedule II to the balance sheet at page 721 of the paper book, it shows that Mitcon has received grants from Government of India under various schemes which certainly affects its profitability. 16. Hon'ble jurisdictional High Court in the case cited as WSP Consultants India (P.) Ltd. (supra) having identical business profile as that of the....
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....ferent method of accounting being followed The Delhi Bench of the ITAT has in the case of Ciena India Pvt Ltd vs ITO (ITA No.1453/Del/2014) held that this company should be excluded due to the fact that it follows a different method of accounting. Honeywell Turbo Technologies India Pvt Ltd vs. DCIT (ITA No. 377/PUN/2014) 18. Accordingly, based on the above, Mahindra Consulting Engineers Limited should not be considered as a comparable to the Appellant for the coordination and liaising activities undertaken by the Appellant Incorrect Margin Computation 19. Without prejudice to the contention that the functional profile of Mahindra Consulting Engineers Limited is functionally dissimilar to the functional profile of the Appellant, it is submitted that the Ld. TPO has considered incorrect margins of this company for the purpose of proposing TP adjustment. The Appellant had raised this issue before the Ld. TPO by way of a rectification application. However, this was dismissed by the Ld. TPO without providing any cogent reasons for the same. Further, the Appellant also took an additional ground for rectification of margin of Mahindra which was not adjudicated by the Hon....
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....e. In so far as liaising and coordination functions are concerned it is mainly to liase with DMRC to understand from them and the defect pointed out by DMRC and is mainly interfacing by the DMRC officials on behalf of Head Office which entails various activities in technical matters before coordinating for proper execution of the contract. Maintenance and troubleshooting are in the nature, whether any material equipment is required in the course of maintenance activities which are to be procured by overseas purchase department of head office and to place order with vendors etc. Testing and commissioning has been stated to be routine technical issue which occurs on day to day basis under the technical guidance of Rotem Head Office. The major testing and commissioning is done by the head office only. The nature of international transaction here in this case are rendering of administrative support and coordinating services by the project offices. Here it is not a case that any transaction undertaken by the head office vis-àvis the other AEs are subject matter of TP analysis, therefore, the functional profile of the project office needs to be seen while testing the FAR and the c....
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....es. Thus, Killick Agencies and Marketing Ltd. is directed to be excluded. 26.. As far as Mitcon Consultancy Services Ltd., this company is engaged in providing technical consultancy services and operates in providing technical consultancy in field of power energy, textile etc. Since we have already held that the ld. TPO has wrongly categorized the functional profile of the project office of the assessee as an engineering support service provider, therefore, Mitcon Consultancy Engineering Services cannot be held to be comparable, because project offices have been providing liaising and business support services. Thus, this comparable is directed to be excluded. 27. Lastly, as regards Mahindra Consultancy Engineering Ltd., again this company is providing engineering consultancy services which is incomparable to liaising, administrative and coordination function performed by the POs of the assessee. The nature of services of Mahindra consultancy Engineering Ltd. includes providing infrastructure consultancy and infrastructure development projects, therefore, this company cannot be held to be comparable. Without prejudice the ld. counsel has argued that the TPO has wrongly com....