TaxTMI 
TaxTMI 
2022 (7) TMI 1259
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....18,234/- to the income earned by the assessee from its associated enterprises for rendering of engineering, tendering and IT support services. 1.1. The lower authorities erred in excluding Desein Pvt. Ltd. from the set of comparables which were adopted by the assessee in benchmarking its international transaction, on the sole ground that the said comparable had earned a lower profit as compared to other comparable companies. 1.2. Without prejudice, the Ld. TPO/ AO erred in not giving effect to the directions of the DRP and in not revising the computation of adjustment to the income earned by the assessee on account of providing engineering, tendering, and IT support services. 2. The lower authorities erred both in facts and in law, in proposing an adjustment of Rs. 2,52,49,650/- to the payment made by the assessee to its associated enterprise for the receipt of IT support service. 2.1. The lower authorities erred in facts and in law, in rejecting the transfer pricing documentation and the economic analysis undertaken by the assessee vis-à-vis the transaction of availing of IT support services without any reasons, and consequentially erred ....
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....terprises. The assessee has deployed personnel for undertaking the tendering and engineering related work. These personnel are provided the requisite training by the associated enterprises and given access to the relevant database. For benchmarking this transaction, the assessee used Transactional Net Margin Method ('TNMM") as the most appropriate method with Profit Level Indicator ('PLI") of operating profit to total expenses. By considering itself as the tested party, assessee identified following 4 companies as comparable:- i) Mahindra Consulting Engineers Ltd.; ii) Tata Consulting Engineers Ltd.; iii) Desein Pvt. Ltd.; and iv) DRA Consultants Pvt. Ltd. 6. The weighted average net cost plus margin (3-years) of the aforesaid comparables was 13.67% as against 7.28% of the assessee. Since, as per its own transfer pricing study, the aforesaid international transaction was not at arm's length price, the assessee had suo-moto made transfer pricing adjustment and offered the amount of Rs. 1,43,16,761 (i.e. the difference between transactions price and the arm's length price) in its return of income. 7. The Assessing Officer made reference to TP....
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....tatutory bodies such as Central Board of Irrigation & Power (CBIP), Central Electricity Authority (CEA), etc. for standardization & modemization of thermal power plant design & engineering. The government projects are based on the tender/ competitive bidding where the company which has lowest bidding is accorded the project. This was the reason for this company to have lower margin as compared to other companies selected by assessee. Before the panel the assessee submitted its financials, financials of Desein Pvt. Ltd., and financials of DRA Consultants Pvt. Ltd and also extracts of the clientele of other two comparables. It is observed from the assessee's financials, its revenues constitute receipts from Engineering and Tendering Services and SAP training services which are in the nature of professional receipts. Similarly in the case of DRA Consultants Pvt. Ltd, the revenue is only from one stream i.e. professional Services, Whereas, in case of Desein Pvt. Ltd, the revenue comprises of consultancy fees, Operation & Maintenance receipts in the ratio of 43:57. This entity has huge employee cost as compared to assessee and the other accepted comparables leading to low profitabil....
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..... Ltd. has only earned its revenue from Central Government statutory bodies. Thus, in view of the above, we are of the considered opinion that the TPO as well as learned DRP were not justified in only considering Central Government entities clientele of Desein Pvt. Ltd. 12. The learned DRP also held that Desein Pvt. Ltd. has huge employee cost as compared to the assessee, which resulted in low profitability. From perusal of financials of Desein Pvt. Ltd., we find that employee benefits expenses are Rs.17,85,08,908, while in the case of assessee, such expenses are Rs. 11,92,74,939. Thus, we are of the considered view that such expenses cannot be considered as huge vis-à-vis the assessee. 13. Further, the learned DRP has also treated Desein Pvt. Ltd. as functionally not comparable to the assessee by referring to its revenue from operations. In the present case, functional profile of the assessee is not in dispute. The details of functions performed by the assessee, as provided in its transfer pricing study, are as under: - "4.3.2 Functions performed by Sulzer Tech and A.Es • Tendering Services Tendering is an important activity in the sales....
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....ided by its A.Es. Work performed for ORE: The work from ORE consists of preparation of order related drawings of various types such as outline, sectional, piping and base frame drawings in 3D Format which enable Sulzer Tech's AEs to carry out feasibility studies as well as use them as ales tools. Also, the order related manufacturing drawings for various components is outsourced by the AEs to Sulzer Tech. Here also, the scope of the work is defined and reference drawings or drawing layouts and other reference documents are provided by the A.Es. Further the seam requires continuous assistance from its AEs while rendering these services. • Rendering IT Services During the year, Sulzer Tech rendered IT services to Sulzer Pumps which are in the nature of SAP support services. Sulzer Tech provides routine IT services as per the specifications and requirements of Sulzer Pumps Limited. The services provided by Sulzer Tech primarily include: Management of SAP technical environment including Basis, Advance Business Application Programming ("ABAP"), Business Warehouse (BW), Portals, reports & data migration, and Provide s....
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....ssee. Further, the segmental information regarding the income from consultancy fees was also not examined by any of the lower authorities and the company was excluded on one or the other reason as mentioned above. Therefore, we deem to appropriate to remand the issue of comparability of relevant segment of Desein Pvt. Ltd. with assessee to the file of TPO for de novo adjudication after necessary examination of all the data. Further, the assessee is directed to file all the information regarding functions performed, assets employed and risks assumed by Desein Pvt. Ltd. for earning the income from consultancy fees before the TPO for the purpose of examination of comparability of relevant segment of Desein Pvt. Ltd. with the assessee. The assessee is also directed to file relevant segmental information of Desein Pvt. Ltd. before the TPO. We further direct that if upon examination of relevant segmental data and other information as directed above, it is found that the consultancy services provided by the Desein Pvt. Ltd. is comparable segment to the assessee, then arm's length price in respect of international transaction pertaining to 'Rendering of Tendering, Design & Engineering serv....
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....tion 92CA(3) of the Act, by applying need - evidence - benefit test determined arm's length price of the aforesaid international transaction to be NIL holding that in any third party case, assessee would not have paid any amount toward services which are not availed by it or which has not benefited its business. Accordingly, TPO made an adjustment of Rs. 2,52,49,650. The learned DRP vide directions issued under section 144C(5) of the Act rejected the objections filed by the assessee. Being aggrieved, assessee is in appeal before us. 19. During the course of hearing, learned AR referred to the agreement under which the aforesaid services were received by the assessee as well as copy of extracts of email communication between the employees of the assessee and the associated enterprise to justify the rendition of service. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities. 20. We have considered the rival submissions and perused the material available on record. As per the assessee, the associated enterprise of the assessee provides various IT support services in the nature of IT infrastructure services, centralised IT management serv....
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....ged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts." 22. Thus, as per the provisions of aforesaid Rule, the 'other method' shall be the method which takes into account the price which has been or would have been charged or paid for the same or similar uncontrolled transaction between non-associated enterprises. However, in the present case, the lower authorities without searching for similar uncontrolled transaction between non-associated enterprises, straightaway treated the value of the international transaction to be at NIL. In this regard, it is relevant to note following observations of Hon'ble Delhi High Court in Cushman and Wakefield (India) Pvt. Ltd., [2014] 367 ITR 730 (Del.): "35. The TPO's Report is, subsequent to the Finance Act 2007. binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exerc....