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2015 (11) TMI 186 - ITAT KOLKATA

2015 (11) TMI 186 - ITAT KOLKATA - TMI - Transfer pricing adjustment - whether the Comparable Uncontrolled Price (CUP) method is the most appropriate method as compared to Transactional Net Margin Method (TNMM) - Held that:- The assessee bears lesser business risk than independent comparable enterprises due to the nature of its revenue model. It is beyond any doubt that the project receipts are from KMRCL which is a Government body and hence the margins earned by the assessee is bound to be comp .....

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m it fit and appropriate to set aside this issue to the file of the Learned TPO / AO with a direction to adopt CUP method as the Most Appropriate Method for determination of ALP for international transactions. The assessee is also directed to furnish the comparables based on independent TP study for adoption of CUP method and produce such other evidences and documents before the Learned TPO / AO to ensure quick disposal of this set aside proceedings. We also direct the Learned TPO / AO to permit .....

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IT, Sr.DR. ORDER Per Shri M.Balaganesh, AM 1. This appeal of the assessee arises out of the proceedings for the Asst Year 2010-11 of the Learned Dispute Resolution Panel (DRP) dated 29.12.2014 in which directions are given to the Learned AO u/s 144C(5) read with section 144C(8) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. Shri.J.P.Khaitan, Senior Advocate & Sri Pratyush Jhunjunwala, Advocate, the Learned ARs argued on behalf of the assessee and Shri. Sk. Z.H. Tanweer .....

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ith a consortium of members consisting of (i) M/s Maunsell Consultants Asia Ltd., a company incorporated under the laws of Hong Kong and having its registered office at 8/F, Grand Central Plaza, Tower 2, 138, Shatin Rural Committee Rd, Shatin, New Territories, Hong Kong, (ii) Consulting Engineering Services (India) Private Limited, a company incorporated under the Companies Act, 1956 and having its registered office at 57, Nehru Place, 5th Floor, New Delhi - 110019 , (iii) Yachiyo Engineering Co .....

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he Government of India and the Government of West Bengal and having its registered office at HRBC Bhawanm 4 & 5th Floor, Munshi Prem Chand Sarani, Kilkata -700021 ( KMRCL ) to undertake the Kolkata East West Metro Rail Project (Partly underground and Partly Elevated) extending from Howrah to Salt Lake Sector V, Kolkata covering a total length of 13.7 Kilometres , to provide additional transport infrastructure to Kolkata. For this purpose, LHPA USA had set up a project office in Kolkata durin .....

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International Transactions of the Indian Project Office with the AE in USA. The Indian Project office contemplates to provide the following services to its AE in relation to general consultancy for Kolkata Metro Rail Projects: a) Provision of key and support personnel b) Lead transportation planning c) Lead spatial planning of the underground stations, entrances and associated surface works d) Provide inputs for Chief Quality Surveyor and Cost Estimator, Chief Safety Engineer and Transport Orie .....

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n Form No.3CEB filed along with the assessee s return of income :- (a) Labour expenses (b) Overhead expenses (c) Sustainable EMS (Consultancy charges paid on behalf of LHPA India) (d) Kolkata Metro Rail Corporation (Consultancy income received on behalf of LHPA India) LHPA provides both onshore and offshore services under the General Consultancy Agreement. Offshore services are the main services for which LHPA was contracted for the project. These include primarily architectural design, safety p .....

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of its employees to supervise the same. 4.3. For the purpose of computing the Arm s Length Price (ALP) of the above mentioned international transactions, the assessee had adopted CUP method in its Form 3CEB filed along with the return of income. The assessee had stated in Notes to Form 3CEB in Point No. 6 as below:- The Company has determined Comparable Uncontrolled Price Method (CUP) as the most appropriate method u/s 92C of the Act. The CUP method evaluates the price charged in a controlled tr .....

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mpany having regard to the ALP is the amount received / receivable as per its books of account. For reimbursement of expenses, in consideration of the OECD guidelines, no mark -up is required to be charged for the expenses incurred by Lee Harris Pomeroy Architects P.C. on behalf of its associated enterprises. The transactions are therefore in compliance with the Arm s Length Principle. 4.4. The assessee adopted CUP method in Form 3CEB filed along with the return of income in respect of the follo .....

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.03% and whereas the PLI of comparables chosen by the assessee based on multiple year data was 2.95%. When assessee was asked to submit the comparative analysis based on single year data instead of multiple year data, the assessee vide submission dated 9.7.2013 stated before the TPO that arithmetic mean of the margin of the comparable companies using data for single year (i.e for FY 2009-10) is 2.51% on operating cost. 4.5. The TPO determined the ALP using TNMM by rejecting the two comparables a .....

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2014 . Against this draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP) who upheld the order of the Learned TPO & draft order of the Learned AO vide proceedings dated 29.12.2014. Later the Learned AO passed the final assessment order u/s 143(3) read with section 144C(13) of the Act on 10.2.2015 pursuant to the directions of the DRP. Aggrieved, the assessee is in appeal before us on various grounds. The assessee also filed additional grounds of appe .....

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se of hearing. He argued that though the assessee had adopted CUP method as the most appropriate method (MAM) in Form 3CEB filed along with the return of income for determination of ALP for its international transactions, it sought to shift to TNMM as the MAM during the course of assessment proceedings pursuant to TP study conducted by it. He further argued that the additional ground raised by the assessee may kindly be admitted wherein the assessee is insisting for adoption of CUP method to be .....

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eimbursement of labour expenses, overhead expenses and consultancy charges are made by Head office to LHPA India (assessee herein) on cost to cost basis without any profit element. He further argued that under TNMM, profits of comparables are compared to determine the ALP. Hence in the absence of profit on an international transaction, TNMM cannot be adopted as the MAM and hence requested for adoption of CUP as MAM as pleaded in the additional grounds of appeal. He argued that the assessee is in .....

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omparable at all. 6. The Learned DR filed written submissions and argued that assessee only adopted TNMM during the course of TPO proceedings based on independent TP study conducted by it through the help of external consultants and hence request of assessee to adopt CUP method in the facts of the case is not warranted. He further argued that no details were filed by the assessee for verification of cost incurred by the assessee which were reimbursed. He vehemently objected for admission of addi .....

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of ₹ 11,93,43,919/- , considering the functional and risk profile of these transactions and examining the available comparable data, had adopted TNMM as the most appropriate method for determination of its ALP using operating profit (OP) based on Income, as the profit level indicator (PLI) :- Labour expenses During the financial year 2009-10, LHPA India has to pay labour related cost of ₹ 9,84,14,467/- for the offshore services rendered by the personnel of associated enterprise in re .....

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charges payable to its associated enterprise towards the consultants hired by the associated enterprise for assistance in carrying out the Kolkata Metro Rail Project in India. 7.1. During the appellate proceedings before us, the Learned AR pleaded that the additional grounds raised by the assessee be admitted wherein it had sought for adoption of CUP method as the MAM as originally adopted in Form 3CEB along with the return. We find that the Learned DR had duly objected for admission of additio .....

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of the Hon ble Apex Court in the case of NTPC Ltd vs CIT reported in 229 ITR 383 (SC), we admit the additional ground raised before us as they go into the root of the matter for deciding the issue before us. 7.2. The reasons adduced by the Learned AR for adoption of CUP method has lot of force as the assessee is only seeking reimbursement of labour expenses, overhead expenses and consultancy charges paid by it from its Head office (AE) on cost to cost basis without any profit element and hence i .....

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e in agreement with the arguments of the Learned AR that the 11 comparables chosen by the Learned TPO are highly experienced companies and are in existence for a period of 22 years on an average and would have a lower fixed cost base, whereas the assessee had to incur lot of expenses in the initial year and the revenue for the same would flow to assessee subsequently. Moreover, the comparables are engaged in various fields that are functionally different from that of assessee. Reliance in this r .....

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erial in the cases of the comparables selected by the revenue authorities. The import content of raw material in these cases ranged from 26 per cent to 56.83 per cent [Hindustan Motors - 31 per cent; Honda Siel - 48.2 per cent; Hyundai Motors - 25.29 per cent; General Motors 56.83 per cent and Maruti Udyog - 26 per cent]. This variation is particularly important since the business model of a car maker having 98.5 per cent import content in raw material normally cannot be the same as of a car mak .....

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a huge import content was a conscious decision taking into consideration all commercial considerations including the obvious benefits of a better quality which is bound to reflect or translate into higher seller product. No doubt, a higher import content of raw material by itself does not warrant, an adjustment in operating margins, as was held in Sony India Ltd. s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances .....

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t duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the Transfer Pricing Officer has adopted in this case. The adjustments th .....

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the onus is an the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e., when information available in public domain is not sufficient to make these comparisons possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of ass .....

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What was argued before the Assessing Officer was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a coordinate bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it wi .....

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anufacturing facilities, and vendor development, was not complete, as also dealing with the contention that the business model in this year of operation was fundamentally different from the business model of the comparable concerns. The Transfer Pricing Officer will also consider whether the import content of the raw material have substantially come down in the succeeding years and will take into account the conclusions that can be drawn from such a decline or consistency, as the case may be, of .....

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ally borne by the assessee. The Transfer Pricing Officer has to consider the same, and other options which can be put into service to neutralize the impact of such higher costs. While so deciding the matter afresh, the Transfer Pricing Officer shall also give a due and fair opportunity of hearing to the assessee, shall deal with the contentions of the assessee in a fair and objective manner by way of a speaking order, and in accordance with the law and judicial precedents as may be available at .....

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g Officer in the first place. Similarly, the issues regarding product cycles and impact of these product cycles on operating profit margins was never before the Assessing Officer. The relevance of multiple year data hinges on acceptance of this theory about relevance of product cycle. The CRISIL report which has been repeatedly referred before us was apparently not available to the Transfer Pricing Officer. In these circumstances and bearing in mind the fact the year before us was only second ye .....

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hese issues are somewhat academic at this stage which will be relevant only when the assessee s plea regarding adjustment on account of higher import duties being warranted by peculiarities of operations in this year, we refrain from making any observations on the merits of the case. With the above observations, we hereby remit the matter to the file of the Transfer Pricing Officer so far as question of determination of Arms Length Price under the TNMM method is concerned. 7.4. Now coming to the .....

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IT reported in (2013) 34 taxmann.com 203 (Mumbai-Trib) , wherein it was held that :- 41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In our opinion, such a contention cannot be upheld because if it is found on the facts of the case that a particular method will not result into proper determination of the ALP, th .....

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proper determination of ALP and some other method should be resorted. The ultimate aim of the transfer pricing is to examine whether the price or the margin arising from an international transactions with the related party is at ALP or not. The determination of approximate ALP is the key factor for which most appropriate method is to be followed. Therefore, if at any stage of the proceedings, it is found that by adopting one of the prescribed methods other than chosen earlier, the most appropri .....

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od instead of TNMM. 7.5. As far as the reimbursement of labour expenses, overhead expenses and consultancy charges expended by the assessee are concerned, which are reimbursed by the AE to the assessee herein, we feel that the CUP method would be the most appropriate method as no mark up is involved in the same and TNMM would not be the appropriate method in such circumstances. Reliance in this regard is placed on the decision of Bangalore Tribunal in the case of Fosroc Chemicals India P Ltd vs .....

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is not possible. Hence, adopting TNMM at the entity level was justified and had to be accepted. 29. The learned DR reiterated the stand of the revenue as contained in the order of the DRP and the TPO. 30. We have given a very careful consideration to the rival submissions. At the outset we observe In the case of Dresser Rand India (P.) Ltd. v. Addl. CIT [2011] 47 SOT 423/13 taxmann.com 82 (Mum.), the Hon ble Mumbai Tribunal had an occasion to examine as to what is the approach that has to be ado .....

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the assessee and the arrangement was not genuine. On further appeal by the Assessee, the Tribunal held as follows: 8. We find that the basic reason of the Transfer Pricing Officer s determination of ALP of the services received under cost contribution arrangement as NIL is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enough to do this work. For example, the Transfer Pricing Officer had pointed out that .....

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it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee s wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee s decision .....

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received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm s length price of that service. When evaluating the arm s length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent ent .....

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ll contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. .. 31. The Hon ble High Court of Delhi in the case of CIT v. EKL Appliances Ltd. [2012] 209 Taxman 200/24 taxmann.com 199/345 ITR 241 as well ell as CIT v. Cushman & Wakefield India (P.) Ltd. [2014] 367 ITR 730/46 taxmann.com 317 (Delhi) rendered similar ruling as was rendered in the case of Dresser Rand In .....

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at the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, a .....

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In a case where expenses are actually reimbursed with no mark-up, than as observed by the Hon ble Delhi High Court, the transaction being an expense transaction, the tax base erosion can happen only if the costs said to have been reimbursed are inflated. In such a situation the question would be to determine as to whether the costs claimed to have been apportioned between the various group companies has not been inflated or whether they are allocated on a proper basis. As a first step the TPO ge .....

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