TaxTMI 
TaxTMI 
2024 (12) TMI 628
X X X X Extracts X X X X
X X X X Extracts X X X X
....atisfied in the present case. 3. On the facts and in the circumstances of the case and in law, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in disregarding the arm's Length Price ('ALP') for international transactions as determined by Appellant in the TP documentation maintained by it in terms of Section 92D of the Act read with Rule 10D of the Income- tax Rules. 1962 ('Rules'). 4. On the facts and in the circumstances of the case and in law, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in substituting CUP Method with TNMM. 5. Without prejudice to above grounds, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in including Jai Hind Projects Limited as comparable despite the fact that the above mentioned company is engaged in projects related to oil, gas, water pipeline, petrochemical complex and associated facilities and is functionally different from the Appellant which is engaged in construction of small to medium sized factories and industrial buildings on design/ cum build basis. 6. Without prejudice to above grounds, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in not including the comparab....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for exclusion of certain comparables. But he retained M/s. Jai Hind Projects Ltd. despite the objection of assessee that the comparable operate in different field and could not have been taken as a valid comparable. 4. Aggrieved against this, the assessee preferred appeal before this Tribunal. 5. Apropos to Grounds of appeal No.1 to 7 related to Transfer Pricing issue, the Ld. Counsel for the assessee submitted that the AO was not justified in making the impugned additions. He submitted that the AO grossly erred in applying the Transactional Net Margin Method ("TNMM") instead of Comparable Uncontrolled Price ("CUP") method for computation of ALP. Further, he contended that the AO has accepted CUP method for Assessment Year ("AY") 2011-12 and also in AY 2020-21. He contended that there is no change into facts and circumstances of the case. Further, he submitted that even on merit, the comparables as relied by the assessee, were not accepted and he re-iterated the contents of composite Synopsis. He urged even otherwise issue qua the adoption of CUP method is squarely covered in favour of the assessee by the decision of Hon'ble Co-ordinate Bench and cited in the written Synopsis....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Grade/level of service Services received are graded by the category of staff (for example staff level, manager, senior manager, etc). Hourly rates for the same category of staff (for example staff level, manager, senior manager, etc) have been considered while applying CUP Method 3. Geographical Location Technical services received from Japan Hourly Rates for Japanese engineers only have been considered 4. Time period FY 2011-12 Hourly rates published by Japanese Government for same year i.e. FY 2011-12 v. Case Law accepting use of CUP Method for Technical/Engineering Services ADIT vs. ABB Lummus Heat Transfer BV (ITA No.2763/Del/2013) (Refer to Page No. 50-51 of the Case Law Compendium) Hughes Systique India Pvt. Ltd. vs. ACIT (2013(25) ITR (Trib)556(Delhi)) (Refer to Page No. 15 of the Case Law Compendium) DCIT vs. Calance Software Pvt. Ltd. (ITA 5023/Del/2012) (Refer to Page No. 4 of the Case Law Compendium) Income-tax Officer-9(2)(1), Mumbai vs. Intertoll ICS India (P.) Ltd [2016] 71 taxmann.com 353 (Mumbai - Trib.) vi. Under similar facts and circumstances CUP method was accepted by TPO for the previous FY ie FY 2010-11. Pri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....26,31,664 Manager Level 6,363 6,363 375 33,39,275 Staff Level (A) 3,300 4,863 614 11,56,039 Total 1,48,11,955 FY 2010-11 (AY 2011-12) Particulars Takenaka Japan Rate per hour (Yen) Standard Rates from Japanese Govt (Yen) Hours Spent by Japanese Employees Value (in INR) General manager 6,875 6,875 77 7,44,716 Senior Manager Level 6,875 6,875 1,498 1,44,31,881 Assistant manager Level 5,600 5,600 2,104 1,65,07,031 Staff Level (A) 3,800 4,813 6 31,950 Staff Level (c) 3,213 3,213 1,143 51,33,142 Total 4,01,98,995 II. Rebuttal of TPO's contentions in TP Order S.NO. TPO'S CONTENTION REBUTTAL I. Rejection of CUP method due to variation in hourly rates charged by third parties (Refer Para 3.2.5 of the TP Order on page No.18 of the Paperbook) As assessee has paid its AE at a rate that is lower than or equal to the lowest rate, the variation in the third-party rates becomes irrelevant. CUP method does not require an identity in rates/prices ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s etc. On the other hand, the Assessee specializes in designing and building small to medium-sized factories and industrial buildings for Indian subsidiaries of Japanese companies. Table - Comparables Relied Upon by TPO in TP Order S. No Company Name Business Description OP/OR 1. ATV Projects India Ltd Turnkey projects, construction of power plants, petrochemical, manufacturing equipment for industries such as sugar, fertilizer, etc. -0.66% 2. Bridge & Roof Co. Ltd. EPC Turnkey projects, infrastructure projects such as roads, bridges etc., manufacture of railway wagons, freight containers etc. 6.42% 3. Engineers India Ltd EPC services to oil & gas and petrochemical industries; infrastructure, water and waste management, solar & nuclear power and fertilizers. 19.55% 4. Gannon Dunkerley & Co.Ltd. Construction of power plants, petrochemical plants and refineries; infrastructure projects such as roads etc.; mechanical works such as steel fabrication, piping work etc. 7.58% 5. VKS Projects Ltd. Turnkey piping, firefighting projects, manufacturing of chemical equipment and commissioning of chemical plants for o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....; as: "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Rule 10D(3) (c) of the Rules states: " The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following: ....price publications including stock exchange and commodity market quotations; Therefore, it is clear from above that arm's length price can be the actual price and also a bona-fide quotation/ price proposed to be applied between third parties. Supporting Case Laws Courts have held that CUP Method allows use of quotations provided the quotation furnished is contemporaneous and reliable or authentic (i) PCIT v. Toll Global Forwarding India (P.) [(2016) 66 taxman.com 53 (Del-HC)] (ii) Toll Global Forwarding India (P.) Ltd. v. DCIT Circle-2(1), New Delhi [2014] 51 taxmann.com 342 (Delhi - Trib.) (iii) Louis Dreyfus Commodities India (P.) Ltd v. Deputy Commissioner of Income Tax, Circle-4 (1), New Delhi (iv) Deputy Commissioner of Income-tax, Circle-13(1), New Delhi v. Noble Resources & Trading India (P.) Ltd ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... raised several contentions against the approach followed by the TPO by rejecting CUP & applying TNMM. The same are discussed in detail in the following paragraphs: 1. At the outset, the assessee has contended that related party transaction to the cost base with respect to technical services is only 3.91% which constitutes a very small proportion of the total cost base and hence it is meaningless to benchmark the international transaction at entity level using TNMM. It is pertinent to note that the Indian Transfer Pricing Provisions do not prohibit the benchmarking of international transaction at entity level on the basis of its amount or percentage with respect to the total cost. Indian Transfer Pricing regulations have prescribed the applicability of Most Appropriate Method (MAM) which has to be chosen after considering all the facts and circumstances of the case. Hence the plea taken by the assessee that quantum of international transaction is negligible with respect to total cost is not maintainable. The assessee himself has mentioned that the selection of the MAM involves a test of relative merit. 1. Assessee has further contended that the CUP is the most dir....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A.Y.2011-12 and A.Y.2020-21 as MAM. 3. To provide clarification that whether there is any material change in facts of the case/nature of transactions for change in MAM chosen by the TPO in A.Y.2020-21 as compared to AY2012-13. A letter in this regard was written to TPO-3(2)(1), New Delhi to provide his comments/information on the clarification sought by the ITAT. The TPO has submitted his response to the above queries which is reproduced as under: "With reference to your office letter dated 14.03.2024, the desired information in respect of above- mentioned case as below: AY International Transaction (in INR) International transaction in the nature of Fee for Technical Service Total Expenses (in INR) 2011-12 280625917/- 1,42,43,570/- 97158333/- 2012-13 147103426/- 4,01,98,995/- 1025905729/- 2020-21 214970898/- 1,50,73,477/- 4867991403/- With regard to the material changes in the facts of the case, the following points are submitted for your due consideration: 2. In AY 2012-13, the assessee has benchmarked the transaction related to Fee from Technical Services using the CUP method. T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....esign Supervision. Whereas, the services provided by Non-AEs are as under: - "Scope of work shall include the construction drawings work for our Project, as described here in below: Civil Works The other related works required by Engineer-in-Charge" Thus, from the above it can be seen that there is a huge variation in the scope of services provided by the AE and that by Non-AE and the agreements do not completely satisfy the benchmarking analysis required for CUP. Further, the time sheets furnished by the assessee are of AE and it is not a running sheet bearing no day to day entries and signatures etc. such a document cannot prove the justification of CUP. The Ld. CIT(A) has also observed that the TPO has largely rejected the TP documentation because the services were rendered in India while the appellant applied the rates prevalent in Japan. Hence, in view of the facts mentioned above, CUP method is not applicable in this case. 2. Principle of Consistency The assessee has contended in his argument that since CUP method was accepted last year, the same should be accepted this year too. In this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....benchmarking by applying TNNM method. The above arguments are in addition to the facts marshalled in TPO Order and CIT (A) Order in favour of revenue which are submitted for kind perusal of the Hon'ble ITAT." 7. We have heard Ld. Authorized Representatives of the parties and perused the material available on record. The Revenue has not disputed that in the AYs 2011-12 & 2021-22, the method for computation of ALP by the assessee has been accepted by it. The Revenue tried to justify its action by stating that CUP method is applicable on actual transactions but such method cannot be applied on the quotation furnished by the assessee. It is further stated that each year is an independent year. Therefore, principle of res-judicata would not be applicable. Further, it is stated that Rule of Consistency can be deviated if the facts are not identical in the Assessment year under consideration. We have given our thoughtful consideration to the submissions of the parties. Undisputedly, the Revenue accepted the method adopted by the assessee in AYs 2011-12 & 2020-21. Ld.CIT(A) excluded certain comparable as included by the TPO on the ground that the comparable could not have b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression ' price which would have been charged on paid" is used in rule 10BA, dealing with this method, in this method the place of "price charged or paid", as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm's length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm's length price determination under rule 10BA as well." 9. We therefore, respectfully following the binding precedents (supra), find merit in submissions of the assessee that under th....