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Rolls-Royce India Pvt. Ltd. Versus DCIT, New Delhi

2015 (12) TMI 516 - ITAT DELHI

Transfer pricing adjustment - selection of comparable - Held that:- RITES Ltd., Apitco Ltd. and Kitco Ltd be excluded from the list of comoarable as not comparable to the functions performed by different service segments of assessee - Decided in favour of assessee.

Exclusion of foreign exchange gains/ loss and provision for bad debts, by calculating the PLI, treating the same as non-operating item by TPO - Held that:- We find considerable force in the submission of ld. counsel for the .....

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account. This issue is squarely covered by the decision of the Hon’ble Supreme Court in the case of Woodward Governor’s (2009 (4) TMI 4 - SUPREME COURT ), wherein it has been held that forex gain/ loss in the revenue account is a trading receipt, or, as the case may be, business expenditure, allowable u/s 37(1) of the Act. We, accordingly, direct that the forex gain/ loss be treated as operating income/ loss both in the case of tested party as well as comparable and the PLI should be determined .....

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ence. We, accordingly, direct that this provision be treated as part of operating expenditure and treatment be made accordingly, because, in any view of the matter, the safe harbor rule is not applicable for the current year under consideration. - Decided in favour of assessee. - ITA no. 1310/Del/2015 - Dated:- 3-12-2015 - SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER For the Petitioner : Sh. Pradeep Dinodia FCA & Shri R.K. Kapoor CA. & Shri Anubhav Jaggi CA .....

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der section 92CA(3) of the Income-tax Act amounting to ₹ 3,71,14,107/- on wholly illegal, erroneous and untenable grounds. 2. The order of assessment is bad in law. 3. The learned AO's order based on the findings of the learned Transfer Pricing Officer and the directions of the learned Dispute Resolution Panel u/s.144C(5) of the Incometax, is erroneous, untenable in law and on facts for the various reasons and not limited to the following: - 3.1. The TPO as well as the DRP and conseque .....

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ng the ALP of the international transactions of the assessee related to project management services (PMS) and marketing support services (MSS) that are support services in nature by treating and comparing them to high end technical services. 3.2.2. Ignoring the fact that the AE service segment of the assessee constitutes of more than 90% of support services and therefore comparable companies which provided similar support services and bear similar risks to the support service segment of the asse .....

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the material effects of differences. 3.3. The TPO as well as the DRP and consequently the AO have erred in law and on facts and in the circumstances in determination of the PLI of the assessee and the comparable companies by: 3.3.1. In applying the safe harbor rules (SAR) notified by CBDT to the assessee which have no retrospective application to A Y 2010-11 3.3.2. In treating the foreign exchange gain/loss as nonoperating nature. 3.3.3. In treating the provision of doubtful debts as nonoperati .....

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terest charged u/s See 234B and 234C of the Act is on wholly illegal and untenable grounds and is prayed not to be upheld. 3. Brief facts of the case are that assessee, a subsidiary of Rolls Royce Overseas Holding Limited, filed its return of income declaring taxable income of ₹ 20,15,61,520. The business profile of the assessee as discussed by ld. TPO in paras 2.1 to 2.4 of his order is as under: 2.1 Rolls Royce group Plc is a company operating in the civil aerospace, defense, marine and .....

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such as provision of commercial information and co-ordinates service support operations. 2.3 The Assessee Company (RRIPL) undertakes trading of Rolls Royce engines and has a presence primarily in the power generation and oil and gas markets, supporting a range of reciprocating engines covering gas engines, HFO engines and crude oil engines. It also functions as an integrated solution provider for the afore-mentioned two markets. In the oil and gas sector, Rolls-Royce engines are used for runnin .....

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d parties as well as performing services such as repair and maintenance work and other field support. 4. During the year under consideration the assessee company had entered into various transactions with its AEs and, therefore, in order to determine the ALP of the said transactions u/s 92CA(3) of the Income-tax Act, reference was made to the TPO by the AO. The main dispute in the present appeal is in regard to addition made on account of the ALP determined by ld. TPO in regard to provision of t .....

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cess Provision written back 3,11,387 Total Income 32,24,42,643 Total expenses 29,25,59,385 Net Operating profit 2,98,83,258 Net operating profit ratio based on cost% 10.21% 5. As per the bench marking analysis done in the TP study, following comparables had been taken: S. No. Company name Weighted Average NCP (Percent) 1. BVG India Ltd. 22.77 ii. Educational Consultants (India) Ltd. 15.03 iii. Entertainment Network (India) Ltd. 0.17 iv. HSCC (India) Ltd. 12.84 v. Kitco Ltd. 8.22 vi. M.N. Dastur .....

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entered into various agreements with its associated enterprises for rendering various support services which facilitates the Rolls-Royce Group to conduct business ill India. Such services are in the nature of technical support, project management and market support services. In this regard, the functions performed by RRIPL have been enumerated below: Provision of technical services During the year under consideration, RRIPL rendered technical services to Rolls- Royce Power Engineering Pic, Bedfo .....

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ices - In addition to the above, RRTPL also rendered project management services to RRMAS, Norway. The nature of services rendered includes the following: - Review of the internal operations of the firm with the good practice framework - Co-ordination for procurement of equipments and supplies and expediting the process with suppliers - Co-ordination with Indian suppliers ill relation to supply of drawings and specifications - Controlling and reviewing the expenditure all a project and identifyi .....

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services to RRMAS Norway and Rolls-Royce International Ltd; UK ( includes the following. - Maintenance of business and market relation and provision of necessary support - Identification a/new business opportunities and prospective customers fat he Rolls Royce products - Assistance in formulations of effective market and business strategies - Co-ordination with respect to customer complaints and provision of necessary inputs." 7. In course of proceedings before ld. TPO, the assessee submitt .....

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O&M services segment, where the assessee was rendering technical services, was 59.32%, whereas for other three services, which were low end services, the profit margin was 6.5%. The assessee s contention was that only those comparables should be taken which were performing non-technical services as the assessee s major chunk of services was non technical in nature. However, ld. TPO did not accept the assessee s contention pointing out that the filter of ratio of service income to total incom .....

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ell as market support services to its AEs. He further observed that it could be seen from TP report that the services provided by the assessee to the AE were in the nature of marketing support services, managerial services and some amount of technical support also. He observed that while using TNMM method, companies providing approximately similar services can be taken as comparable and, therefore, functional or service line was the type of functions being performed whether low or high end. He, .....

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not be rejected simply on the ground of high end activity. Thus, in sum and substance, ld. TPO did not agree with assessee s contention of not clubbing the high end and low end services. The AO, accordingly, determined the PLI at 20.98% as under: No. Name of the company OP/OC(%) i. Aptico Ltd. 40.09 ii. BVG India Ltd. 22.77 iii. Crystal Hues Ltd. 9.10 iv. Cyber Media Research Ltd. 14.85 v. HSC (India) Ltd. 18.32 vi. Kitco Ltd. 14.01 vii. M.N. Dastur & Company Pvt. Ltd. 7.17 viii. Quadrant C .....

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e assessee reiterated its submissions and pointed out that share of support service rendered to the AE vis a vis the total service rendered to the AE was 90% and technical services were only 10%. It was submitted that the comparables selected, disregarding the assessee s contention, was not justified as the characteristic and functions rendered and assumed in relation to the services rendered by the comparables were in star contrast to the assessee and, thus, not comparable. The assessee had als .....

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nder: S. No. Company Name Adjusted OP/OC (%) 1. Apitco Ltd. 40.09 2. Crystal Hues Ltd. 9.10 3. Cyber Media Research Ltd. 14.85 4. HSCC(India) Ltd. 18.32 5. Kitco Ltd. 14.01 6. Quadrant Communication Ltd. 13.11 7. RITES Ltd. 49.43 Average 22.70 12. The AO, accordingly, determined the ALP as under: Operating Cost 29,25,59,385/- Arm s Length Margin 22.70% Arm s length price (ALP) 35,89,70,365/- Price shown in the international Transaction s 32,18,56,258/- Shortfall 3,71,14,107/- Percentage differen .....

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ice segment was in regard to project management service, market support service and corporate support service. All the three together constituted the business support service segment and only 10% was in regard to operation and maintenance (technical) services constituting only 10% of the service segment. 15. Ld. counsel referred to page 127 of the PB, wherein the agreement between Rolls Roce Marine AS and Rolls Royce Energy Systems India Pvt. Ltd., for the provision of service is contained and r .....

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its performance of the services is to the standard required by PRMAS, then, except as otherwise provided in clause 8.4, all risk of shortfall in performance, and any liability to third parties arising from such shortfall in performance or from defective or non-performance of its obligations to provide the services, shall be and remain with PRMAS and PRMAS shall hold PRESIPL harmless from any such liability to third parties howsoever caused regardless of fault. 17. With reference to this clause, .....

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o various service segments: Schedule 10: Director Service cost Operation and maintenance and project cost Personnel costs 35,220,913 16,337,585 Administrative and other Expenses 13,708,174 6,402,467 Material costs 61,550,179 28,205,075 Other costs 24,657,425 135,136,691 54,389,080 105,334,207 Project Management cost Personnel costs 1,339,459 2,926,398 Administrative and other exp 1,352,810 3,332,423 Material costs 562,099 1,642,222 Other costs 243,493 3,497,861 145,211 8,046,254 Marketing Suppor .....

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ing in view the nature of services rendered by assessee being non-risk bearing and non-technical, the comparables should have been selected accordingly, even if for bench marking the TNMM method was to be applied in respect of technical as well as business support services. 20. Ld. counsel further referred to the decision in 121 ITR 1 to submit that dominant objective test has to be applied in such circumstances. 21. In support of his contention ld. counsel relied on the decision of Hon ble Delh .....

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nd Denave India ld. counsel pointed out that the services rendered by the assessee are comparable either to a sales agent or corporate agency wherein gross remuneration range from 2 to 4% as was found out in the case of ICRA Management and Denave India Ltd. He submitted that as against this the assessee has got 6.52% assured return on its total cost. However, he did not seriously pressed for exclusion of these two comparables. Therefore, we do not go into this aspect. 23. Ld. counsel further sub .....

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mparable and, therefore, cannot be excluded. 25. Ld. CIT(DR) filed before us a copy of MAP agreement in the case of Rolls Royce India Pvt. Ltd. for A.Y. 2008-09 and 2009-10, which is also a subsidiary of Rolls Royce International Ltd. He pointed out that for both the years the PLI has been taken at 12.5% and the same should be taken in assessee s case also. 26. Ld. counsel for the assessee submitted that this agreement cannot be applied in assessee s case because as far as assessee is concerned, .....

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assessee, is for a different assessee altogether. 28. At this juncture we may point out that the name of the assessee, as given in the order of MAP agreement, is same as that of assessee, but it appears that the name of present assessee before us formerly was Rolls Royce Energy Systems India Pvt. Ltd., which has now been changed to Rolls Royce India Pvt. Ltd. 29. Thus, there is some confusion in regard to the names of the assessee but, be that as it may, since the MAP agreement, in any view of .....

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specific function, then for determining the ALP those comparables should be selected which have close similarity with the functional segment under consideration. We are in agreement with ld. counsel for the assessee that such comparables should be selected which are providing non-risk bearing business support service because as per the segmental details, the PLI of technical segment is more than 59% and for other segments, the assessee had been reimbursed at cost plus 6.52%. 32. Having regard t .....

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. In overseas projects, RITES actively pursues and develops cooperative links with local consultants/ firms, as means of maximum utilization of local resources and as an effective instrument of sharing its expertise. This business profile of RITES Ltd., as given in the synopsis of assessee, has not been disputed. Therefore, it is evident that RITES Ltd. is a primarily imparting high end technical services, which cannot be compared with low end marketing business support services rendered by asse .....

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naling etc. Of late the unit has started a new business offering shunting locomotive on wet lease including operation and maintenance to various non-railway clients Locomotive on wet lease are working at Bandel Thermal Power Station, Bandel and NTPC, SAIL Power Co. Ltd., Bhilai. Recently, the unit has given two locomotives to Dharma Port Co. Ltd. and one locomotive to Lloyds Steel Industries, Wardha. The unit has also secured orders for supplying and commissioning DLW manufactured DG Sets Id dom .....

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-TP]; - Chemtex Global Engineers Pvt. Ltd. [TS-161-ITAT-2013(Mum)- TP]; Yum Restaurants (India) Pvt. Ltd. [TS-166-ITAT-2014 (Del)- TP] and Nortel Networks India Pvt. Ltd. TS-65-ITAT- 2014(DEL)-TP]. 35. We, therefore, in view of above discussion, direct the AO to exclude RITES Ltd. from the list of comparables. 36. The second comparable, inclusion of which is disputed by the assessee, is Apitco Ltd. In the synopsis filed by the assessee it is mentioned that the services provided include but not l .....

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nd commercial banks (Andhra Bank, Indian Bank, State Bank of India, Syndicate Bank), 37. From a bare perusal of the services rendered by Apitco Ltd. it is clear that it is imparting consultancy in entirely different field and is not comparable to the functions performed by different service segments of assessee. We, therefore, direction for exclusion of this comparable from the list of comparables. KITCOLTD. 38. The functional profile of this company, as given in the synopsis filed by the assess .....

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blessing of Govt. of India and the Reserve Bank of India, was to provide professional technical consultancy assistance to banks by appraisal of projects for priority sector lending and to entrepreneurs in the 5MB Sector by way of preparation of Project Reports & Market Studies and conducting training programmes for entrepreneurship development. Subsequently similar TCOs were set up in almost all the states with one of the National Financial Institutions (IDBI, IFCI or ICICI) as the prime sh .....

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a, which was considered to be the forte of European Consultants. The prestigious overseas assignments KITCO so far has completed include the technical evaluation of electrical power distribution network at King Abdul Aziz International Airport, Jeddah. 4. All its clients are either central government, state government, PSU etc. Snapshot enclosed. 5. It is working In divisions like infrastructure, tourism, aviation, IT services, HRD, financial services etc. which are dissimilar to the functional .....

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loss and provision for bad debts, by calculating the PLI, treating the same as non-operating item. 41. Before we consider these issues, we may point out that assessee has not challenged the treatment of bank charges as non-operative income in grounds of appeal and, therefore, we refrain from considering the same. 42. The learned TPO has given the explanation for the exclusion of items of foreign exchange gain/loss while calculating the OP/OC treating the same as non operating item. 43. Main cont .....

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contract for sale/purchase of Forex to hedge itself from the fluctuation in exchange rates. 44. He observed that the amount of forex loss/ gain and hedging cost/premium in each case would depend upon the risk management policy of each company and, therefore, the profit margin at the end of the year may vary substantially from the expected profit margin at the time of entering into project because of fluctuation in the exchange rate and its risk management policy i.e. the extent of which its For .....

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t. Ltd vs. ACIT [2010-TII-44-ITAT-BANG-TP] wherein it was held that: "The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. The Courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company" 46. Ld. counsel pointed o .....

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8 The ld. AR relied on Rule 10T(j) to contend that loss arising on account of foreign currency fluctuations cannot be included in the operating expense. We are not persuaded to give any mileage to the ld. AR on this count for the simple reason that Rule 10T is a part of Safe harbour rules notified on 18.09.2013 which are not applicable to the assessment year under consideration. " "Para 4.10 In contrast to the above, we find that there is a plethora of decisions rendered by various ben .....

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change gain should be added to the operating revenue. The Mumbai bench of the tribunal in Rushabh Diamonds, Mumbai vs. ACIT in I.T.A. No. 7217 vide its order dated 26.4.2013 (to which the AM is party) has also held foreign exchange gain as a part of operating profit. " "Para 4.11- In view of the foregoing discussion, we hold that the ld. CIT(A) has taken an unimpeachable view by considering the forex loss of' 50.04 lac as a part of operating cost. The same is, therefore, countenanc .....

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essee that ld. DRP wrongly invoked Safe Harbour Rule for coming to the conclusion that forex gain/ loss was not to be treated as operating income/ loss for current assessment year because the Safe Harbour Rules, in any case, were applicable from 18-9-2013 and prior to that the said Rules could not be applied. That apart, it is not disputed that in the case of assessee forex gain/ loss was related to sale price of export, which was in US dollar. Therefore, the entire receipts were on revenue acco .....

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ovision for doubtful debts, ld. counsel submitted that provision for doubtful debts are a part of the operating activities of a business. The accounting standards issued by the ICAI require that accounting policies must be governed by the principles of "prudence". Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. Para 6 of Accounting Stan .....

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