TaxTMI 
TaxTMI 
2026 (5) TMI 552
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....by time limitation and thus, liable to be quashed. Transfer Pricing adjustment on account of technical fees paid to Boeing Aerospace Operations ('BAO') 2. On the facts and circumstances of the case and in law, the Ld. TPO/ Ld. AO erred in enhancing the income of the Appellant by INR 38,20,29.442 by holding that the international transaction pertaining to availing of technical/training services from its Associated Enterprise ('AE') does not satisfy the arm's length principle envisaged under the Act. In doing so, the Ld. AO / Ld. TPO erred in: 2.1. not accepting the economic analysis undertaken by the Appellant and undertaking a fresh economic analysis for computation of arm's length price ('ALP') of the aforesaid transaction; 2.2. rejecting the functional characterization determined basis the detailed functional, assets and risk ("FAR") analysis conducted by the Appellant and recharacterizing the Appellant as full risk service provided instead of low risk service provider; 2.3. not appreciating the detailed documentary evidences submitted by the Appellant to support its low risk characterization; 2.4. ....
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....r the international transaction pertaining to receipt of training services from BAO. Pursuant thereof, Transfer Pricing Order dated 31 October 2023 was passed where the following additions were made: a. Technical Fees paid to BAO: Rs. 38,02,15,980 b. Interest on outstanding receivables: Rs. 3,61,072 5. Aggrieved, objections were filed before the Dispute Resolution Panel (DRP) on January 18, 2024. Ld DRP granted relief on the TP adjustment on account of notional interest on outstanding receivables. 6. In relation to benchmarking undertaken by the Ld. TPO for the transaction of technical fees paid to BAO, the Ld DRP directed the Ld. TPO: A. to re-consider Assessee's characterization in light of additional evidence submitted having details of employees of BIDPL for C-17 and BBJ, extracts of agreement between AE and MDS and sample e-mail communications for technical services between AE, BIDPL and customer; B. to not hold BIDPL's inability to file confidential defense contracts with the MOD to its disadvantage; and C. to re-consider Assessee's contentions in relation to expired and functionally different agreements. 7. Pursuant to th....
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....n that BIDPL possesses neither the technical capability nor the assets needed to fulfill the service, and consequently, its role was mainly coordination, and it subcontracted a substantial portion of the training services to BAO. In other words, while BIDPL remains the prime contractor, it performs limited coordination functions and operates as a limited-risk service provider, with BAO assuming all the risks. BIDPL is compensated on a cost-plus basis, covering value-added expenses excluding cost pertaining to outsourced services. e. The flow of the transactions is detailed below: Step I - AE undertakes marketing efforts and sells aircraft to IAF. Part A Step II - Pursuant to above sale of aircraft, IAF requires training services for their pilots for which know-how and related technology is owned by AEs only. (refer Clause D of the Addendum No. 1 to Amend C17 Services Agreement Among Boeing India Defense Private Limited & Boeing Aerospace Operations Inc. at Page no 244 of the Paper Book) It is reiterated that given the need for day-to-day communication, IAF had a preference to enter into the contract with a local Indian entity fo....
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....e Appellant earns a cost plus 20% return on value-added costs. ii. The flow of the transactions is detailed below: Step I - AE undertakes marketing efforts and sells aircraft to IAF. Step II - AEs entered into an Aircraft Support Agreement (ASA) with IAF for provision of technical services. AE agreed with IAF to assign part of this contract to BIDPL. Pursuant to above sale of aircraft, IAF requires technical and training services for which proprietary information and technical material is owned by AEs only. IAF had a preference to enter into the contract with a local Indian entity for better coordination and support. Step III - BIDPL entered into an agreement with IAF for provision of these services. BIDPL uses the manuals/bulletins and other material (IP lies with the AE)to provide support services to IAF. The ownership of this information would always vest in the AE and is never transferred to the Appellant. i. This contractual arrangement is depicted below for the Hon'ble Bench's ready reference: Remuneration model j. For the limited functions being performed by the Appellant, it is being remunerate....
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....ricing order of AY 2020-21). p. In view of the above, it is submitted before the Hon'ble Bench that there being no change in the factual matrix from the previous year, the addition made by the Ld. TPO/DRP in the instant case on account of technical fees paid to BAO is liable to be deleted as the Ld. TPO has nowhere indicated the reasons for departing from the accepted position in the immediately preceding year. q. Reliance is placed on the following observations of the Hon'ble Supreme Court in the case of Bharat Sanchar Nigam Ltd. vs. UOI (Writ Petition (civil) 183 of 2003): "Where facts and law in a subsequent assessment year are the same, no authority whether quasi judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a bench of superior strength or in some cases to a bench of superior jurisdiction." r. S....
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....nsive support by addressing issues in real-time and within the same time zone. d. Accordingly, BIDPL entered into a services agreement with it AE and sub-contracted the substantial part of the services to AE. The Appellant submits that its role is limited to coordination and liaison between AEs and the customer. e. The majority of the functions required to fulfil the obligations under the contract with customer are being performed by the AEs. Also, all the relevant risks pertaining to the functions being performed by the AEs are also assumed by them. f. It is important to note that, the decision to sell aircraft and engage in subsequent provision of services is taken by AE. Further, AE agreed with the customer that the contract may be subcontracted to a group entity. Hence, decision making power for provision of these services lies with the AE. (The relevant extracts of the agreement between the AE and IAF are enclosed at Page No. 19 of Convenience Compilation (CC)) g. AEs have the financial capacity to assume the risk as it has access to sufficient capital to take on the risk or to lay off the risk, to pay for the risk mitigation functi....
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....mulator or the premises being used for provision of such training services. o. The Appellant employs only one person whose role with respect to provision of such training services is limited to coordinating and managing the training being imparted by AE through MDS. BBJ training and technical services p. In relation to BBJ contract, the Appellant employed 3 FSRs. The FSRs are stationed directly with the customer at the aircraft hangar, serving as the primary point of contact for all daily communications. q. The Appellant does not have any proprietary knowledge or technical know-how for rendering technical services for aircrafts on a standalone basis. Such proprietary knowledge or technical know-how are owned by AEs. The AEs are also responsible for rolling out e-mails in the form of technical bulletins, maintenance procedures, troubleshooting guidance, updates on other technical aspects of BBJ aircrafts etc. on a regular basis to customer. r. When customers raise specific technical queries, the FSRs, as the initial point of contact, engage with the customer to understand the technical issues. If the problem can be resolved using standard....
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....oprietary technologies. The disclosure of such contracts would entail a significant risk of unauthorized dissemination of confidential data, thereby potentially compromising national interests and violating statutory and regulatory provisions governing the handling of classified materials. 15. Furthermore, the contract as can be seen from the clause extracted above, strictly prohibits its circulation beyond designated government agencies or authorized personnel. In light of the foregoing, it is submitted that the production or submission of defense contracts before any authority is impermissible, as it would constitute a breach of confidentiality obligations and contravene applicable laws designed to safeguard sensitive government information. 16. The Hon'ble DRP took cognizance of this limitation and directed the Ld. TPO to not hold its inability to file back to back contracts with the MOD to its disadvantage. (refer para 7.11.1 at Page no 56 of the Appeal Set for the DRP Directions) 17. The Ld. TPO however relied on the lack of evidence to conclude that the Appellant may have a higher risk exposure and hence added back INR 38,20,29,442 (out of the total payment of INR....
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.... adopted by the Ld. TPO, the Appellant submits that for the limited functions being performed by the Appellant, it is being remunerated on a cost plus basis for the provision of training services and technical services rendered to IAF. This is in line with the less complex functional profile of the Appellant. BIDPL's role is limited to coordination and liaison between AEs and IAF. The Appellant has not done any business development and not undertaken any market risk. Hence, it operates as a limited risk service provider and retains a fixed mark-up of 20% on its value-added expenses ('VAE'), and BAO is entitled to residual return. 24. It is imperative to measure value adding expenses (costs associated with the Appellant's own functions) separately since the value of the functions performed by a service provider can be measured by the adequacy of the margin earned over value adding expenses. The return on value adding expenses is an appropriate measure for companies where little or no value is added by the company in respect of the controlled transaction. A variation in value-adding expenses reflects different types of functions being performed by the company. 25. T....
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....royalty/license agreements as comparables is misplaced, as the underlying facts and contractual arrangements in the Appellant's case are fundamentally different. The Appellant is not engaged in the exploitation of any licensed intangible property, nor does it derive revenue from the use of such intangibles. Instead, the Appellant's role is limited to providing coordination and support services, for which it is compensated on a cost-plus basis. The use of unrelated royalty/license agreements as benchmarks fails to reflect the economic realities of the Appellant's business model and the actual nature of the intercompany transactions. 33. Without prejudice to above, the Appellant would like to submit that the comparable agreements selected by the Ld. TPO for benchmarking the international transaction pertaining to payment of technical fees to AE cannot be considered as comparable due to below mentioned reasons. In this regard, summary of the Appellant's objections against the comparables is tabulated below: Licensor Licensee Effective year Tenure Scope of services Assessee's remarks Axion Power International, Inc. (refer Page No. 509-518 of the Paperbook) ....
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.... (refer Page No. 520- 521 of the Paperbook) • The agreement contemplates ongoing, work-in-progress development activities for the purpose of creating intellectual property. As part of the impugned arrangement, Appellant is not engaged in development of any intellectual properties. (refer Page No. 522 - 523 of the Paperbook) 34. On the other hand, Ld DR brought to our notice page 6 of the TPO order wherein the various international transactions reported by the assessee and the relevant financial information considered by the TPO. He also brought to our notice that gap of 4 crores in the segmental revenue and there is no explanation offered by the assessee. Further brought to our notice the revenue sharing mechanism adopted by the assessee and its AE. He submitted that the fees paid by the assessee to its AE is equal to 72.2% of the total contractual revenue from IAF. He supported the findings of TPO since there is huge difference between the technical fees paid and the ALP of technical fees determined by the TPO. In this regard he heavily relied on the detailed findings of TPO and further submitted that the TPO had rightly followed the directions of DRP. ....
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....eed formula as indicated in the mutual service agreement, the agreement to include the addendum to it. As per the above, contract revenue is being shared between them, the assessee retains the cost exclusively incurred against the contract revenue or for the period and agreed Arm's length return, the rest are passed on to the TBC or BAO. This is the exact fact on record and the financials clearly reflect the above aspects. We noticed that the TPO had rejected the above submissions and proceeded to treat the assessee as the main provider of training and technical services. There is no doubt the assessee has entered service agreement directly with the IAF and provides services thru BAO, the assessee agrees to share the relevant cost of providing training and technical services to the BAO/TBC. 37. Further we observed that the TPO had rejected the submissions and claim of the assessee that it only functions with limited risk factor and all the required risk to provide the training and rendering the technical services are taken over by the TBC/BAO. On careful consideration of various materials available on record, we noticed that the assessee invested neither in the stimulator or any....
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....he assessee. 38. In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on this 6th day of May, 2026. ============= Document 1 AEs of BIDPL Sale of C17 Simulator and subcontract provision of training services (4) Retain cost of local functions plus a mark up of 20% and pay residual consideration Subcontract provision of training services Sale of C17 Aircraft (1) (while coordination function performed by BIDPL itself) (3) BIDPL Mahindra Payment of consideration for training services Operation and maintenance of C17 Simulator ca leased premises Provision of trainers for training services (5) Contract for training services (2) TAF Document 2 Annexure A The consideration from BIDPL to Seller towards services availed under this Agreement will be computed in accordance with the following: Sr. No. Particulars Amount 1 Contract Revenue XXX 2 Less: Cost incurred by BIDPL# XXX 3 Less: Arm's length return" on costs for the activities of BIDPL XXX Consideration payable to the Seller towards provision of services xxx Consideration payable to the Seller towards provision of services #....
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....ary of The Boeing Company; and Document 6 BOEING INDIA DEFENSE PRIVATE LIMITED BALANCE SHEET AS AT 31 MARCH, 2821 Notes As at 31.03.2021 As at 31.03.2020 ASSETS Non-current assets (a) Property, plant and equpment 250.42 292.80 (b) Goodall on acquisition 34 5,026.15 5,026.15 IO Intangible assets 0.97 1.02 [4] Financial assets 0) Other financial assets 3.73 16.31 , 395.55 398.92 (1) Deferred tax assets (net) 23.4 295.32 219.40 (a) Other non-current assets - Total non-current assets 1.988.10 Current assets (a) Financial assets 0) Trade receivables 1,969.41 4,353.45 00) Cash and cash equivalents .... 11.424.05 12.335.00 [it] Other financial assets 4,278.85 3.513.47 (a) Other current assets $10.39 786.54 Total current assets 18,282.70 21,026.86 Total assets 24,262.80 26,983.49 ASSETS Non-current assets Document 7 BOEING INDIA DEFENSE PRIVATE LIMITED NOTES TO THE Ind AS FINANCIAL STATEMENTS Rs./laca A. at 31.03.2021 31.03.2020 4 Property, plant and equipment Carrying amounts of : Leasehoid improvements Computers-Finance Lease 43.42 45.45 Computers-Owned 71.24 61.80 Furniture and fixtu....
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....y. Document 10 2. In this regard, Panel appreciates constrains of the assessee and directs TPO not to use this issue to the disadvantage of the assessee. Relevant parts of the contract have been provided by the assessee as additional evidence. TPO is directed to take additional evidence and rejoinder into consideration at the time of passing final order. Document 11 9.1 BIDPL has entered into the C17 Training contract with the IAF to provide simulator and training services. For the avoidance of doubt, all risk and reward in relation to the contract between BIDPL and IAF are borne by BAO, to the extent functions are performed by BAO under the contract between BIDPL and BAO. 9.2 As a result - the following clauses in the contract between BIDPL and IAF have also been entered into between BIDPL and BAO on a back-to-back basis: (a) Part III - Clause 8 - Liquidated damages. 1. For the avoidance of doubt, liquidated damages apply to the extent that functions are performed by BAO. (b) Part III - Clause 11 - Transfer and sub-letting 1. For the avoidance of doubt, this clause is not intended to limit BAO's ability to sub-let or transfer within Boeing group companies. ....