TaxTMI 
TaxTMI 
TaxTMI 
2024 (4) TMI 132
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.... products and services viz., infrastructure and environmental facilities for commercial and private power generation facilities; renewable power generation and substation facilities for hydraulic, solar, geothermal and other forms of energy, various types of industrial plants and installations, water supply and sewage facilities, communication facilities; Airports, Roads and Railways. TPSC India is engaged in providing engineering, consulting, designing, construction management, site work, operations & maintenance, local supplies and other construction related activities in the field of power generation, transmission & distribution etc. TPSC India conducts its operations in India and neighboring regions of Asia. 3. For the assessment year under consideration, the assessee filed its return of income on 29/11/2017, declaring loss of Rs. 41,93,38,198/-. In view of the international transactions entered into by the assessee during the financial year 2016-17, reference under section 92CA of the Act was made to the learned Transfer Pricing Officer (learned TPO) . Learned TPO proposed the adjustments for the transactions of provision of engineering services and receipt of services, reimb....
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....ncome Tax Rules, 1962 ("the Rules"), for computing the net margin from the international transaction, all the incomes and the expenses which have relationship with the international transaction alone should be considered, and the computation of net margin at entity level by the authorities is contrary to the provisions of Rule 10B of the Rules. He placed reliance on the decisions reported in Adecco India (P.) Ltd vs. DCIT 148 taxmann.com 374, CIT vs. Thyssen Krupp Industries India (P.) Ltd., 70 taxmann.com 329, CIT vs. Tara Jewels Exports (P.) Ltd., 80 taxmann.com 117 and other decisions, in support of his argument that the adjustment which is mandated by Rule 10B is only in respect of international transaction and not transactions entered into by the assessee with independent unrelated third parties. Learned AR further submitted that the assessee computed the operating margin at transaction level, by taking the revenue from AEs and costs in relation to the revenue earned for computing the operating margin, and the details regarding the apportionment of expenses were submitted by the assessee before the learned TPO and the learned DRP, and such details now form part of the paper bo....
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....ted by the assessee for each of the transaction and instead adopt TNMM as the MAM for all the transactions entered into with AEs by the assessee. 19. This is a fundamentally faulty way of assessing the Arms' Length Price ("ALP") of the international transactions undertaken by the assessee with AEs since the Revenue transactions with AE constitute only 0.75% of the total "Revenue from Operations" earned by the assessee and expenditure transactions with AE constitute only 0.62% of total expenses incurred. Hence, to apply TNMM on an overall basis at the entity level is against the basic canons of transfer pricing law. 20. The assessee had already furnished to the TPO that the net operating margin analysis of the AE and non-AE segment in the TP documentation. As can be seen from therein, the net operating margins of the AE segment is 20.20%. The assessee requested the TPO to consider this instead of looking at the overall margins of the company which includes negligible transactions with AEs. 21. In page 3 of the order, the TPO has computed the net operating margins of the assessee stating that it is "segmental financials of the taxpayer as computed by the TPO". However, the ....
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.... that reads as under: i. [10B. Determination of arm's length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: ii. (a)............. iii. (e) transactional net margin method, by which - (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard of any other relevant base; iv. Clause (i) of Rule 10B(1)(e) of the Rules specifically provides that net profit margin realized by an enterprise from an international transaction is to be computed as the law mandates that whenever TNMM is applied or sought to be applied, as a 1st step the profit margin realized from the international transaction is to be computed. Accordingly, undertaking a companywide analysis of the profitability is not in compliance the provisions of the Income-tax Act, 1961 (the Act).....
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.... the Act." 30. Likewise, the Hon'ble Co-ordinate Bench, Bangalore, in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang. - Trib.) and several other judgements have also explicitly held that while determining the ALP, transfer pricing adjustments should be restricted to only international transactions between AEs, and observed as under: vii. "...... Chapter-X of IT Act relates to special provisions relating to avoidance of tax and sec. 92 therein relates to computation of income from international transactions having regard to ALP. Thus, it can be seen that only international transactions between the associated enterprises either or both of whom are non-resident are to be computed having regard to ALP. This issue is also covered by the decisions relied upon by the learned counsel for the assessee. Accordingly, the AO is directed to make the transfer pricing adjustments by restricting the adjustments to the transactions of the AE only by adopting the operating revenue and operating costs of these transactions only." 31. Similar views have been expressed by: The Hon'ble Bombay High Court in the case of CIT v....
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.... of the learned Assessing Officer/learned TPO, who will consider the same and take a fresh look on this issue, after affording an opportunity to the assessee. Ground No. 5 is accordingly treated as allowed for statistical purpose. 12. Ground No. 6 of the appeal relates to the adjustment of Rs. 11,53,67,386/- towards reimbursement of expatriates' salary, bonus and the provident fund costs. According to the assessee, assessee incurred these expenses towards reimbursement inasmuch as the expenses which were to be incurred by the assessee, were incurred by the AE on behalf of the assessee for administrative convenience, but as a matter of fact, the expatriates directly working under the control of the assessee and the expenses of salary, bonus and the provident fund are to be incurred by the assessee alone. 13. Learned TPO recorded that when requested to furnish the complete details of the employees, their place of work, years of service they have put in and terminal benefits availed by them, and also the copies of appointment letters of all the employees, attendance register for the relevant period under consideration along with the latest salary details at the time of expatriation,....
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....he paper book from page Nos. 838 to 848 of the paper book, such an expenditure relates to the current year only. Learned DR relied upon the orders of the authorities only. 18. On a perusal of the invoices, the copies of which are to be found at page Nos. 838 to 848, we find force in the argument of the learned AR and since this matter requires verification at the end of the learned AO/learned TPO, this issue is also restored to the file of the learned AO/learned TPO to verify the invoices and take a view as to the nature of this expenditure. Grounds No. 8 and 9 are also accordingly treated as allowed for statistical purpose. 19. Now coming to the last aspect of provision for loss on projects, covered by ground No. 10, case of the assessee is that assessee debited Rs. 19,46,890/- in Profit and Loss Account (P&L Account) in Accounting Standard 7-Construction Contract, and claimed the same as a provision for loss on a project under the head miscellaneous expenditure. When the learned Assessing Officer proposed to disallow the same, the assessee submitted that it is following the Accounting Standard-7-Construction Contract describes and lays out the accounting treatment in respect of....