TaxTMI 
TaxTMI 
TaxTMI 
2018 (6) TMI 1752
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....n pursuance of the directions given by the learned DRP erred in confirming the addition of INR 8,88,53,258 being upward adjustment made by the learned Transfer Pricing Officer (TPO) while determining the arm's length price in respect of international transactions with regard to provision of engineering design services. 4. The AO/DRP/TPO erred in rejecting CUP as the most appropriate method (MAM) to determine the arm's length price of the international transactions as applied by the appellant. 5. The AO/DRP/TPO erred in determining the arm's length price of the international transactions by applying Transactional Net Margin Method (TNMM) as MAM. 6. While applying the TNMM, the AO/DRP/TPO erred in the following : a. Did not disclose the search process (if any) carried out in this regard; b. Rejected the scientific search process carried out by the appellant without providing any cogent reason; c. Selected the companies which are not functionally comparable to the business of the appellant; 7. The AO/DRP/TPO erred in not considering the appellant's claim for deduction of extra-ordinary cost in relation to under-utilisation of capacity of manpower and infrastr....
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.... The net margin was worked out on positive side as cost of Rs. 13 crores was left out from calculation in both the segments. In the TP study report, the assessee selected 16 external uncontrolled comparables whose mean margin worked out to 1.82% as compared to adjusted margin of AE segment of 20.1%. In conclusion, it was stated by the assessee that it had earned entity level adjusted margins of 14.02%, adjusted AE segment of 20.14% and adjusted non-AE segment of 1.37% as compared to weighted uncontrolled comparables of 7.25% and single year margin of 1.82% and hence, international transactions were at arm's length price. On 02.05.2012, revised Form No.3CEB audit report was filed before the TPO along with fresh letter of authority. The new 3CEB form contained the following transactions and details thereof, which read as under:- Sr. No. Details of transaction Value of the Transaction Method Adopted 1 Procurement of IT Software 8,02,587 CUP 2 Engineering design Services 11,90,75,156 CUP 3 Other Services 65,77,285 CUP 4 Consultancy charges engineering services for projects and IT services 20,59,547 CUP 5 Microsoft License fees 20,59,548 CUP 6 IT Support (C....
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....r hour rate calculated in the TP audit. The TPO observed that benchmarking of margins earned by segment within business and both being controlled transactions, results in erroneous approach. The TPO also observed that the assessee was charging hourly rates to associated enterprises, but lump sum rates to non-associated enterprises; where non-associated enterprises projects were based on work progress and time schedule and fixed price contracts, whereas AE projects were charged at hourly rates. The TPO thus, concluded by saying that there seems to be no connection between the rates charged and the contracts awarded on the lump sum basis. Further, the TPO held that assertion of assessee that rate represents CUP was not correct and the same was rejected. 5. The assessee then, was asked to submit set of comparables for benchmarking arm's length price on TNMM basis. The assessee identified only one comparable i.e. Cades Digitech Pvt. Ltd. with negative margin of 13.72%. The TPO however, selected final set of comparables including Cades Digitech Pvt. Ltd. selected by the assessee. The other concerns selected to be functionally comparable were KLG Systel Ltd., Cosmic Global Ltd. and ....
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....is, the assessee raised objections against external comparables selected by TPO as being not functionally comparable. The learned Authorized Representative for the assessee also stressed that TPO was not correct in saying that the arrangement was cost plus; on the other hand, the assessee was charging hourly rates which were scientifically worked out. 8. The learned Departmental Representative for the Revenue referred to the changing stands of assessee i.e. in TP study report it had selected TNMM method and before the TPO, revised Form 3CEB was filed advocating application of internal CUP as the most appropriate method, wherein the hourly rates were worked out at 24 Euros. The first question which arises is that where the auditor had originally filed Form No.3CEB, can the same be revised? The learned Departmental Representative for the Revenue here placed reliance on the order of Tribunal in assessee's own case relating to assessment year 2008-09, wherein the Tribunal had sent the issue back to the file of TPO/Assessing Officer because of varying stands of assessee. He then took us to FAR analysis which was referred to by TPO in paras 11 to 11.20, 12 to 12.3 and 13 and the final a....
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....nd found that international transactions undertaken by the assessee were not at arm's length and proposed an adjustment of Rs. 8.88 crores. The Assessing Officer in the draft assessment order passed under section 143(3) r.w.s. 144C of the Act, dated 21.03.2013 noted the observations of TPO and vide para 13 made an adjustment of Rs. 8.88 crores to international transactions relating to provision of ITES services. The DRP rejected the submissions of assessee and the Assessing Officer passed final assessment order making an upward adjustment of Rs. 8.88 crores, against which the assessee is in appeal before us. 11. The year under appeal is the second year of assessment in the case of assessee. In the preceding year i.e. assessment year 2008-09, the issue of transfer pricing provisions arose before the Tribunal as to adoption of most appropriate method for benchmarking international transactions. The assessee in the said year also was changing its stand from stage to stage i.e. in the initial stage of filing the return of income, the assessee had applied CPM method as most appropriate method on the ground that it was having cost plus mark up. The TPO did not agree with the submiss....
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....th regard to the application of most appropriate method from stage to stage i.e. from TP study report to proceedings before Assessing Officer and DRP, even before us and in view of various cross pleadings raised by the assessee, we think it is a fit case to be sent back to the TPO in order to adjudicate the issue of application of the most appropriate method for benchmarking the international transaction undertaken by the assessee. The claim of the assessee before us is that internal CUP method is the most appropriate method irrespective of the fact that the quantum of domestic transactions were very low vis-à-vis the quantum of export sales made to its AEs. In this regard, reliance was placed on the ratio laid down by the Delhi Bench of Tribunal in Lummus Technology Heat Transfer BV Vs. DCIT (supra). Further, the learned Authorized Representative for the assessee has placed reliance on series of decisions, which we have referred to in the arguments of the learned Authorized Representative for the assessee, but are not deciding the applicability of the said decisions to the facts of the present case, in view of our setting aside the matter back to the file of TPO. The applic....
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....erein hourly rates charged to associated enterprises at 24 Euros be applied as against charges levied on non-associated enterprise charges. The TPO on the other hand, had applied TNMM method and had made comparison with external comparables in order to benchmark international transactions of the assessee. We are of the view that in order to benchmark international transactions undertaken by the assessee, the most appropriate method needs to be applied. The question is which is the most appropriate method? The assessee had selected TNMM method and then by way of revised form No.3CEB during TP proceedings has changed its stand to apply internal CUP of man hourly rates. In order to benchmark international transactions undertaken by the assessee, an endeavour should be made to apply the most appropriate method and the same may be what has been applied by the assessee in TP study report or as proposed in TP proceedings. The stand of assessee that it is providing services to its associated enterprises and charging hourly rates, which worked out to 24 Euros per hour as against charges raised against non-associated enterprises and domestic parties. The assessee is providing specialized ser....