TMI Blog2022 (7) TMI 1259X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. - Ground of assessee s appeal are allowed for statistical purpose. Adjustment in respect of international transaction of Payment of Corporate IT Support Services - HELD THAT:- From the perusal of invoices, it is evident that same also describe the services provided under the head IT services by the third-party. To prove the rendition of service, the assessee has also filed sample extracts of email communication between the employees of the assessee and the associated enterprise as well as screenshots and IT tickets raised mentioning the description of various IT services received. From careful perusal of all the details filed by the assessee, we are of the considered view that lower autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Ld. AO, read with the order of the Hon'ble DRP, Mumbai, the assessee begs to prefer the present appeal on the following grounds: 1. The lower authorities erred both in facts and in law, in proposing an adjustment of Rs.6,69,18,234/- 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 fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Annual charges towards software licensing 28,34,920 4. Reimbursement of expenses 12,35,633 5. Recovery of expenses 1,92,90,168 5. In respect of international transaction pertaining to Rendering of Tendering, Design Engineering services and IT services , assessee provide specialisation based tendering and engineering services to its associated enterprises. 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 Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmit further submissions if any and the assessee except for the submissions made along with Objections, write-ups thereto has not brought anything else on record. The TPO in his order has clearly given the reason for rejection of Desein Pvt. Ltd., as a comparable based on his analysis at para 4.1 of the order. It was found that Desein Pvt Ltd has significantly lower margin as compared to other companies selected by assessee. It was found that this company has been actively associated with Central Government statutory 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 r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the company has earned revenue from consultancy fees as well as Operation and Maintenance receipts. The learned DRP also upheld the aforesaid findings of the TPO and rejected the objections raised by the assessee. From the perusal of extracts from the website of Desein Pvt. Ltd., it is evident that Desein Pvt. Ltd. serves not only to the public sector clients but also to the private sector clients as well as the international clients. Therefore, it would be completely incorrect to assume that Desein Pvt. 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- -vis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Related Engineering ( ORE ). Work performed for PDC: The work outsourced from PDC consists of creation of drawings for new product development, creating catalogues for bought out items, revision of old drawings, conversion of drawings not available in soft form to soft format etc. To enable the am at Salze Tech to perform the job, the scope of work is defined and reference drawings or drawing layouts and other reference documents are provided 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 Sulze ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to the assessee. As noted above, Desein Pvt. Ltd. also earns income from consultancy fees and same has been declared separately in its financials at Note No. 18 to Accounts. However, in the present case, lower authorities didn t examine whether functions performed, assets employed and risks assumed for earning the income from consultancy fees is comparable to the assessee. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate IT Support Services. Since, the assessee has paid for the aforesaid services to its associated enterprises with a markup of 5%, which is within the range of markup earned by the comparable companies, the international transaction pertaining to Payment of Corporate IT Support Services was considered to be at arm s length. 18. The TPO, vide order passed under section 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ules, 1962, which provides as under: 10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific. and limited le. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules. The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT (A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X
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