TaxTMI 
TaxTMI 
2025 (4) TMI 1026
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.... execution of the same. During the year under appeal, total payments of Rs. 133,40,87,018/- was made to its constituents AE against the execution of the work out of total receipts of Rs. 133,62,54,272/ -. The return of income was filed on 30.09.2014 declaring total income at Rs. 17,27,140/- and the assessment was completed at an income of Rs. 22,01,30,901/- by making adjustments based on the order of TPO with regard to the transactions between the assessee and its AE under Arms Length Price (ALP) under domestic transaction as defined u/s.40A(2) of the Act. Besides AO also estimated the profit of the appellant. In the first appeal, the assessee got part relief, thus, the present appeal is filed before us for the adjustment made in domestic transaction price as made by the AO and uphold by the ld. CIT(A). 3. During the course of hearing the ld. AR of the assessee has relied upon the written submissions filed which reads as under :- WRITTEN SUBMISSION May it please your honour, Brief facts: Appellant is a joint venture entity, being jointly formed by KSS Petron KSSIIPL (formerly known as "Kazstroy service infrastructure India Pvt ltd) and Valecha Engineer....
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....rying out the engineering, procurement and construction work ("EPC" Contract). Thereafter, appellant entered into sub-contract with KSSIIPL for carrying out work related to the ECP Contract. Accordingly, KSSIIPL undertakes all the relevant functions in relation to the execution of the said project and the Appellant only acts as contractor and does not perform any other activity in relation to the said project. Since the appellant does not perform any other function apart from sub- contracting the ECP Project, the appellant was unable to identify that there exist similar third party arrangements due to limited data available in public domain. Hence, due to lack of reliable data, the appellant cannot be selected as tested party for benchmarking the underlying transaction. On the other side, KSSIIPL, which is involved in routine execution of engineering, procurement and construction of the projects and its comparable data is readily available in public domain. Accordingly, KSSIIPL has been taken as tested party and the result of KSSIIPL has been benchmarked taking the comparable companies engaged in execution of engineering projects. However, the Ld. Transfe....
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....evant base . Accordingly, as per transactional net margin method, the tested party can be either the seller/service receiver or the buyer / service provider. In the former case, the tested financial indicator is generally the net profit on costs or the net profit on assets. In the latter case, the tested financial indicator is generally the net profit on sales. Further As explained in para 3.18 of the 2010 OECD Guidelines, the choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. Therefore, it is contended that the tested party is usually the participant in a transaction for which profitability can be ascertained most reliably and for which reliable data on comparable can be found. The tested party will also typically be the party with the least intangibles. In the given case of the appellant, it is submitted that, the appellant performs very l....
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....n para 3.75 to 3.79, provide further clarification / guidance for understanding relating to use of multiple year data. The same are discussed hereunder: Para 3.75 to 3.79 of the OECD Guidelines: "3.75 In practice, examining multiple year data is often useful in a comparability analysis, but it is not a systematic requirement. Multiple year data should be used where they add value to the transfer pricing analysis. It would not be appropriate to set prescriptive guidance as to the number of years to be covered bt) multiple year analyses. 3.76 In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price. 3.77 Multiple year data 'Will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing condit....
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....llant in TP Documentation, the data may have been affected in vary sense from economic or market conditions or any other abnormal factors. Therefore, while selecting comparables it is appropriate to use data of more than one financial year. From the above it is submitted by the appellant that the Ld. TPO as well as Ld . CIT(A) erroneously rejected use multiple year data and wrongly restrict the right given by the act for choosing option for use of multiple year data, wherever appropriate. * Ground No. 4, 5 & 6 - Inappropriate selection of comparable in determining the arm's length price In the order under section 92CA(3), Ld. TPO rejected KSSIIPL (AE of the Appellant) as tested party and treated the Appellant itself as tested party. However, Ld. TPO while taking comparables, considered the comparables as given in the TP Documentation, as submitted by the appellant in the assessment proceedings. With regards, to the same, appellant contend that the comparables given in the TP documentation and further taken by the Ld. TPO, are comparables for KSSIIPL (AE of the Appellant) and not comparables for KSSIIPL VEL JV, which the Ld. TPO treated as tes....
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....g revenue / persistent loss for the period under consideration. Shriram EPC Ltd. The company having diminishing revenue / persistent loss for the period under consideration. Now, the Ld. TPO, in show cause notice proposed to treat above calculated Simple Arithmetical Mean of 7.78% as arm's length margin for comparison of underlying transactions. In response to the notice appellant filed detailed reply on 08.08.2017 and submitted as under: As per Rule 10B(2) of the Income Tax Rules, for the purposes of comparability of an International Transaction or a specified Domestic Transaction with an uncontrolled transaction as method specified in sub-rule 1 of rule 10B, shall be judged with reference to the following points: i). The specific characteristics of the property transferred or services provided in either transaction; ii). The functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; iii). The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the res....
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.... companies suffered loss in the year under comparison. Further the criteria of rejecting comparables as listed out in rule 10B(2) of the Rules, do not discuss/ provide as while selecting comparables, reference shall be made to the profitability or loss factor. Hence, rejecting comparables merely on the basis of the fact that they incurred loss in the year under comparison is unlawfull and should reversed. In addition to above, however, while passing order, Ld. TPO revised his search process and identified additional corn parables that passes through all the filters listed in show cause notice. These are reproduced hereunder: Company PLI (OP/OR) Ashoka Highways (Durg) Ltd. 38.00 OB Infrastructure Ltd. 35.72 Essel Infraprojects Ltd. 25.53 IRB Infrastructure Ltd. 22.39 JKM Infra Projects Ltd. 14.58 J Kumar Infraprojects Ltd. 14.41 GVR Infra Projects Ltd. 14.35 Max Infra India Ltd. 11.67 PBA Infrastructure Ltd. 10.04 (Table - 2) With respect to the above, appellant contend that, once the comparables have been identified in the TP Documentation and also accepted by the TPO in first show cause notice issued,....
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....y appellant. The TPO also rejected the use of multiple year data selection for comparable and held that only contemporaneous financial data could be taken to bench mark the transaction and select the comparable without following the procedure as per Rule 10B(4) of the Act. It was the submission that the TPO has taken seven comparables out of 9 taken by the appellant and no working whatsoever was given to the appellant for adding five new comparables to work out the arms length price. It is, thus, submitted that the action of the TPO in applying pick and choose method for selection of the comparables without any back up should be rejected. 5. It was further submitted that two comparables were rejected by creating filters from outsides the scope of the Act and solely due to the reasons that they had suffered losses. It was also submitted that TPO has revised the search process and identified certain new comparables only to harass the assessee. 6. Regarding the comparables added by the TPO, the ld. AR specially drew our attention to the one company M/s Ashoka Highways (Durg) Ltd. of which the operating margin of 38% was considered for computing the average PLI. According to the ....
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....9;s length price has been provided under Rule 10B (1)( e) of the Income Tax Rules, which reads as under: "Rule 10B. (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: (e) Transactional net margin method, by which, (i) the net profit margin realised 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 to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, o....
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....n to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Ld TPO has rightly observed that application of TNMM by selecting the Associated party as Tested party made by the assessee is flawed. Since, the AB i.e KSSIIPL has significant third-party transactions, the net profit margin computed by the assessee of the AE is not the net profit realised by the AE from specified domestic transactions but is the net profit of its entire business operations which include specified domestic transactions as well as third party transactions. Net profit margin of the AE from specified domestic transactions is not the same as net profit margin of the AE from its entire business activity. Appellant has not submitted as to how the net profit margin of the AE computed by him corresponds to the net profit margin from specified domestic transactions as provided under Rule 10B (1)(e) (i) of the Income Tax Rules. Further, it is now settled position of law that entity having least complex FAR analysis is to be considered as 'Tested party'. OECD TP guidelines 2017 too stipulate that the tested party should be ....
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....ad referred to the decision of the Delhi Tribunal in Ranbaxy Laboratories Limited which was distinguished by observing that the said decision had proceeded on the basis of OECD guidelines. The Tribunal further went on to observe that the determination of least complex party and functions performed by the AE outside the Country are not available on record and it is not known the amount of risk assumed by AE and its capital employed and the complexity of the functions performed by it. It is further observed that in the absence of any such documentation with regard to assumption of risk, complex functions, the capital employed, etc., the decision in Ranbaxy Laboratories Limited cannot be applied in the case of the assessee unless it is established with material evidence that the AE outside the Country performed least complex operation with a minimum risk. The Tribunal further has observed that the assessee miserably failed to establish functional risk assumed by the AE and in the absence of any material on record with regard to the risk assumed by the AE, the assessee has to be taken as tested party for the purpose of transfer pricing adjustment. Thus, the assessee was non-suited on t....
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..... Dy. CIT 92008) SOT 455 (Kol) held; " We agree with the view that in order to determine the most appropriate method for determining the arm's length price, it is first necessary to select the 'tested party' and the tested party will be the least complex of the controlled taxpayer and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables. " Appellant has submitted that the appellant does not perform any other function apart from subcontracting the ECP project, the appellant was unable to identify that there exist similar third-party arrangements due to limited data available in public domain. Hence due to lack of reliable data, the appellant cannot be selected as tested party for benchmarking the underlying transaction. Submissions of the appellant are not correct as the appellant and its AE both are engaged in similar activities. Subcontract services availed by the appellant to its AE are the same as are provided by the appellant to Bhubaneswar Expressway Private Ltd i.e civil construction services. It does not make much difference whether services to Bhubaneswar Expressway Private Ltd h....
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....ransaction shall be the data relating to the financial year in which the international transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared." The appellant has not given any rationale for taking multiple year data for all the comparables. The appellant has merely reiterated the provisions which provide for use of multiple year data. However, use of multiple year data is not automatic but only in certain specified conditions. Since, the appellant has not given any reason for choosing multiple year data, the TPO has rightly rejected multiple year data when cotemporaneous data was very much available and no reasons whatsoever for choosing multiple year data have been specified by the appellant in respect of any of the comparables. Sub Rule 4 to Rule 10 of the Income Tax Rules prescribes for adoption of multiple year data only when such data reveals facts which could have an influence on the determination of transfer price ....
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....ilar activity. On the basis of data available in public domain this can also clear that the function of the company is not similar to the function of tested party; " CCCL,professionalism is a combination of competence, technology, skill and dedication, unified and strengthened by a code of ethics. It is this special professionalism that has won for us many prestigious projects in a variety of market segments and encourages us to aim for greater challenge all the time." Therefore, contention of the appellant that the 2 comparable have been rejected for the reason of diminishing revenue/persistent loss is not correct. Evidently, the comparables have been rejected for functional dissimilarities. Therefore, order of the Ld TPO be upheld on this issue also. It is prayed accordingly. So far as the ground related to the selection of new comparables by TPO is concerned, in the written arguments, the appellant has submitted that once the comparables have been identified in the TP documentation and also accepted by the TPO in the first show cause notice issued, there after revision of search process and identification of new comparables is intended only to create h....
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....So far as allegation of the appellant that no details regarding search process and no backup of the comparables selected by TPO has been provided, is concerned, it is evident that all comparables are coming from the search carried out by the appellant only and back up of the comparables are already with the appellant as appellant could not have rejected them without looking into back up documents. Thus, all the allegations of the appellant are baseless and misleading. It is therefore submitted that addition of fresh comparables to the list of comparables selected by the appellant which have been accepted by the TPO, is very much in accordance with law and has rightly been upheld by the Ld CIT(A). It is therefore submitted that computation of Arm's length PLI at 11.60% which is calculated as under, has been made by the Ld TPO strictly following the statutory provisions of the Income Tax Act and Rules mad thereunder which has rightly been confirmed by the Ld CIT(A). Sr No Comparable PLI (Operating profit/operating cost) 1 C & C Construction Ltd 11.27% 2 Gillanders Arbuthnot & Co Ltd 2.51% 3 Hindustan Construction Company Ltd 13.34% ....
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....mparables including M/s Ashoka Highways (Durg) Ltd. which has very high operating profit of 38% and is in the business which is not comparable with the business of the assessee and submitted that the new comparables as added by the TPO are misleading and should be ignored. 12. On the other hand, ld. CIT-DR submitted that the comparables have been selected out of the TP study report filed by the appellant only and back up of the comparables are already with the appellant since it is based on its own working. Thus, all the allegations of the appellant are baseless and misleading and no fresh comparables were selected by the TPO, therefore, the order of the TPO is liable to be upheld. 13. We have considered the rival submissions and perused the material available on record. At the outset, it is seen that the appellant joint venture formed with primary object of construction of roads, bridges, dams etc. The work was awarded to it by M/s Bhubaneswar Expressway Pvt. Ltd. as EPC contract. The work was sublet to one of the JV partners M/s KSSIIPL, who has been expertise in this field and almost entire receipts from the principals were transferred to the AE for the execution of the wo....
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....er, has erred in selecting KSSIIPL as the tested party who undertakes all functions and assume significant risks ie. entrepreneur profile. It is an accepted law that the 'tested party should be the least complex of the transacting entities, Le., the simpler entity in terms of intensity of functions performed and risks assumed. Accordingly, the tested party would also earn routine but steady return. As a general rule, entity undertaking all functions and related risks should not be considered as tested party since, by virtue of their complex functional and risk profiles, their margins fluctuate heavily with the vagaries of the economy, thus making comparability analysis extremely difficult and unreliable. The assessee has also undertaken a detailed analysis to map owner of the functions and corresponding risks however, has gone astray in selecting the tested party for arm's length analysis. Further, in addition to selection of entity having least complex operation in terms of functional, asset and risks analysis, availability of reliable and authentic data requiring fewest adjustment should also be factored while undertaking arm's length analys....
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....ain other comparables and total 9 comparables were proposed as additional comparables for computing the ALP. After considering the assessee's submission, finally TPO vide para 5 of the order has taken 7 comparables from assessee's working of ALP and further 5 comparables were introduced which are as under :- A. Comparables selected by the assessee and accepted by the TPO Company OP/OC C & C Construction Limited 11.27% Gillanders Arbuthnot & Co. Ltd. 2.51% Hindustan Construction Company Ltd. 13.34% JMC Projects (India) Ltd. 8.50% Punj Lloiyd Ltd. 6.41% U B Engineering Ltd. 3.43% Tata Projects Ltd (segmental) 9.03% Average Margin 7.78% B. Comparables selected by the TPO : Company OP/OR(%) Ashoka Highways (Durg) Ltd. 38.00 JKM Infra Projects Ltd. 14.58 J Kumar Infraprojects Ltd. 14.41 Max Infra India Ltd. 11.67 PBA Infrastructure Ltd. 10.04 Average PLI 17.74% 16. The TPO has worked out the PLI at 11.60% according to which adjustment of Rs. 15,33,16,226/- was proposed by the TPO. From the perusal of the TPO's order and the submission made by the assessee, we ....
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....e Tribunal noted the definition of Enterprise as defined in section 92F(iii) and reading the said provision along with Rule 10B(l)(e) of the Rules, the Tribunal held that the net profit margin of the Enterprise which is in India, has to be determined by applying the Transfer Pricing Regulations. The Tribunal was largely guided by the decision of the Mumbai Tribunal in Aurionpro Solutions Limited, wherein it was held that the tested party for the purpose of determination of ALP is always the assessee and not the AE. 21. The assessee had referred to the decision of the Delhi Tribunal in Ranbaxy Laboratories Limited which was distinguished by observing that the said decision had proceeded on the basis of OECD guidelines. The Tribunal further went on to observe that the determination of least complex party and functions performed by the AE outside the Country are not available on record and it is not known the amount of risk assumed by AE and its capital employed and the complexity of the functions performed by it. It is further observed that in the absence of any such documentation with regard to assumption of risk, complex functions, the capital employed, etc., the decision ....
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.... by the appellant is with regard to the rejection of use of multiple year data for selection of comparables in determining the Arm's length price. In this regard we first refer Rule 10B(4) which provide the data that could be used for making analysis. The Rule 10B(4) reads as under :- Determination of arm's length price under Section 92C. Rule 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be the data relating to the financial year (hereafter in this rule and in rule 10CA referred to as the 'current year') in which the international transaction or the specified domestic transaction has been entered into : Provided that data relating to a period not being more than two years prior to the current year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared: Provided further that the first proviso shall not apply while analysing the comparability of an uncontrolled transaction with an international transactio....