9911796707
TMI Blog2015 (11) TMI 1527X X X X Extracts X X X X X X X X Extracts X X X X ..... in transformers and gear case. In the RCS division, the company is engaged in the supply of installation of advance signaling systems and equipments. Under the main line and metros (MLM), the Bombardier Transportation Ltd. is manufacturing Metro Trains for supply to Delhi Metro Corporation (DMRC), wherein Bombardier India is engaged in ascending and supply of coaches for metro trains. The PGR division of the company is engaged in ascending and supply of coaches for metro trains and in the BOG division. The assessee company is engaged in manufacturing and supply of bogies for metro trains. 3. During the year, the assessee company entered into international transactions as mentioned in Form 3CEB. The details are herein below: S.No. Name of Transaction Method PLI Transaction Value in (INR) PPC Division (Propulsion controls business) 1 Import of Raw materials, components and Finished Goods TNMM Operating Profit/Operating Revenue ("OP/OR") 7,47,636,409 2 Import of Capital Goods 1,292,236 3 Export of Finished Goods 18,526,086 4 Availing of Intermediary Services from Propulsion Hub in BT Switzerland 98,698,657 MLN Division (PGR & BOG Business) 5 Import of Compon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices During FY 2009-10, the PGR and BOG division of Bombardier India availed centralized support services from Hub entities in Germany and Singapore in relation to DMRC project. The total cost allocated to Bombardier India by PGR and BOG hubs for intermediary services provided to respective division in Bombardier India was as follows: Associated enterprise Amount (Rs.) Bombardier Transportation GmbH 91872407 Bombardier Transportation (Singapore)Pte. Ltd. 77182897 Total 169055034 iv Sale of Metro trains During FY 2009-10, the PGR and BOG division of Bombardier India has supplied few metro trains to Bombardier Transportation GmbH for further supply to DMRC. The total value of the said international transaction was as follows: Associated enterprises Amount (Rs.) Bombardier Transportation GmbH, Germany 4213264526 v Reimbursement of Expat Salary During FY 2009-10, certain employees to overseas Bombardier group companies were seconded to Bombardier India to support in new business divisions- PGR & BOG. The salary and other related costs of these employees were initially paid by overseas Bombardier group entities to respective employees and we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. Additional Commissioner of Income Tax, Transfer Pricing_1 (1), New Delhi ("Ld. TPO")/Ld. AO holding that the international transactions of the Appellant do not satisfy the arm's length principle and upholding the adjustment made by the Ld. TPO/AO for the captioned A.Y. 2. The Hon'ble DRP erred in facts and in law by not adjudicating on several ground raised by the appellant during the proceedings and not providing an opportunity of being heard while disregarding BEML limited as an appropriate comparable, thereby, rendering its directions as incomplete which are subject matter of rectification u/s154 of the Act. 3. The Hon'ble DRP erred both on facts and in law in confirming the action of the Ld. TPO/Ld. AO of making an adjustment of Rs. 79,92,45,330/- to the income of the appellant by holding that its international transactions in the Passengers and Bogies segment (collectively known as Mainline division) do not satisfy the arm's length principle envisaged under the Act. In doing so, the Hon'ble DRP has grossly erred in: 3.1 disregarding multiple year/prior years' data used by the appellant in its contemporaneous Transfer Pricing ("TP") documentation and holding that current ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AR profile as that of companies proposed as comparables by the Ld. TPO himself; (a) on arbitrary/frivolous grounds such as diminishing revenues/persistent losses, company not in accept/reject matrix; and (b) by rejecting one of the comparable company namely Braithwaite & Co. Ltd. ('Braithwaite') by stating that the Annual Report of the company was not available in public domain even though the financial information is available in the public domain; 3.8 modifying the Profit Level Indicator ("PLI") i.e. Operating Profit/Operating Revenue ('OP/OR') used by the Appellant for benchmarking the captioned transaction and substituting the same with OP/Operating Cost ('OP/OC'); 3.9 committing an apparent error in computing the amount of TP adjustment on the entire sale and cost of the Mainline division which included third party sale and cost as well and not just restricting to the AE sales and cost; 4. The Ld. TPO erred in facts and in law by not giving effect to the instructions of the Hon'ble DRP wherein the Ld. TPO had been specifically instructed by the Hon'ble DRP to re-compute the margin of Titagarh Wagons Limited taking 30% additional cost base to account "free of cost" supplie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral in nature. Ground No. 2 and Ground No. 3.1 are not pressed by Ld. Assessee's Representative (AR) at the time of the submissions, therefore, same are dismissed. 9. First of all we will consider the issue relating to most appropriate method to be applied for bench marking the transaction relating to sale of metro trains as raised vide Ground No. 3.2. 10. The Assessee submitted before Ld. TPO that during the relevant assessment year, Bombardier Transportation Indian Ltd. (BTIL) had delivered set of 22 train to Bombardier Transportation Germany (BTG), thereby booking total revenue of Rs. 421.32 Cr. These train sets were then further supplied by BTG to DMRC at the same sale price per set, and were delivered directly to DMRC. The assessee further submitted that the sale price invoiced by BTIL to BTG represents third party price and hence conforms to the arm's length standards under the CUP method. 11. Ld. TPO held that under the CUP method the properties of a product and accompanying circumstances and conditions has to be evaluated for comparison. Even a minor change in the properties of the products, circumstances of trade such as billing period, amount of credit therein, etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt observed that in so far as identifying comparable transactions entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words the comparable transactions/entities must be selected in the basis of similarity. Comparability of control and uncontrolled transaction has to be judged inter alia, with reference to comparability factors, as indicated under Rule 10B (2) of the Income Tax Rules, 1962. Comparability analysis by TNMM method may be less sensitive to seeking its similarities between the tested party and the comparables however, that cannot be the consideration for diluting the standards of selecting comparable transactions/entities. The Ld. AR submitted that sales of metro train sets by BTIPL to BTG and by BTG to DMRC fulfills all the parameters specified under Rule 10(B)(1) and Rule 10(B)(2) for the application of CUP such as contractual terms, characteristics of property transferred, functions performed and conditions prevailing in the market. Thus Ld. AR submitted that the said transaction pertaining to sale of metro trains should be benchmarked using CUP method to be determine arms' length price. 15. Ld. DR relied u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Bombardier Transportation India Ltd. This method of benchmarking as per CUP is, therefore, not found to be satisfactory, as it is not as per the intent of provisions of Rule 10B(1)(a). Ld. DR further relied upon the order of Ld. Dispute Resolution Panel (DRP), wherein Ld. DRP gave finding that for CUP method, the TP regulations and standards of comparability are strict ones. It has been decided in number of cases that CUP can be applied correctly, only when all the conditions of controlled and uncontrolled environment are identical. Thus the Ld. DRP held that Ld. TPO's action in using TNMM as the most appropriate method to benchmark the international transaction was held to be correct approach. Ld. DRP further observed that RS2 and RS3 contracts cannot be equated with each other with regard to the scope of work, as the specifications for the product, the cost centre, the timelines etc. have a profound impact on the profitability etc. Ld. DR further submitted that the assessee has sold its coaches to Associated Enterprises only and thus the same is on different footing altogether. 18. We have perused all the records and heard the submissions made by Ld. AR and Ld. DR. It is pert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts offered has no material bearing on the profitabililty." 19. The case laws which are referred by the assessee at the time of argument are not applicable in the present case first because of the factual difference as those cases were decided on its own factual matrix and whether to apply TNMM or CUP method was depending upon the various factors in those cases. Thus the case laws given by assessee will not be applicable in this context. 20. It is pertinent to note, that Ld. TPO relied upon the two cases namely Merck Limited and Diageo India Pvt. Ltd. Ld. TPO discussed the same and held that the level of comparability required for the analysis is different for different methods. Thus, as a methodology, under the TNMM the standard of comparability is relaxed relative to the other methods and requires similarity of functions. This finds support even in the OECD guidelines which provides that, where exact comparables (in terms of product or price) are not available, TNMM is the most 'preferred' methodology in analyzing transactions (at the net level) as it is more tolerant to differences between the tested party and comparable uncontrolled transactions. The use of TNMM method allows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied India's first indigenous Standard Gauge Metro Car to DMRC. The Company is engaged in manufacture of coaches for metro projects in Delhi and Bangalore and is in the process of obtaining order to meet the requirement of upcoming metro projects in Chennai and Hyderabad. "Rail and Metro" business segment of BEML is functionally comparable to the Assessee and had therefore been selected for determination of the arm's length margin of the PGR and BOG segment of the Assessee. Ld. TPO therefore, excluding the consortium supply value/cost, the revised segmental of BEML has allowed the comparable BEML. 25. Ld. DRP held that from the perusal of various clauses of consortium agreement among BEML and its 3 members of RS-3 contract and the assessee company with its AE for carrying out RS- 2 contract, it is found by Ld. DRP that the functions and risk of BEML (per se) and that of the tax payer were altogether different. For instance, (i) the taxpayer and its Associated Enterprises (AE) had defined work scope and they were paid separately by DMRC for their individual scope of work, whereas in the case of BEML's consortium, Mitsubishi Corp. (MC) was leader who authorized to incur liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... study in activities in the PGR & BOG division for benchmarking the international transactions of the assessee in the PGR & BOG division, as the functional profile of BEML in the said segment is very similar to that of the assessee. BEML is the only Indian company which had executed an identical contract with the same customer (i.e. DMRC) in the first phase of DMRC (RS 1). Further, "Railway Customers segment" of BEML earned majority of its revenue from manufacture and supply of metro coaches which was similar to the business activity as that of the assessee in the PGR & BOG division. The assessee and Bombardier Transportation Germany, GmbH (BTG) had formed a consortium for the supply of metro coaches and bogies to DMRC. Similarly, BEML along with three other independent entities namely Mitsubishi Corporation (MC), Hyundai Rotem Company (HRC) and Mitsubishi Electric Corporation (MELCO) had formed a consortium (MRMB consortium) for the supply of metro coaches to DMRC as part of the RS3 contract. 29. Ld. DR submitted that Ld. DRP has rightly rejected the BEML as comparable. In fact in point 10 at page 12 of Ld. DRP's order, the extracts of consortium agreement, has given the percenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtium share/RS3 sales (Refer A) 71,789.21 Total Segmental Revenue 30,295.04 Total Segmental Cost 48,515.44 Less: RS3 contract cost (Refer B) 18,683.50 Total Cost (TC) 29,831.93 Operating Profit (OP) 463.11 OP/TC 1.55% OP/SR 1.53% A. Details of Consortium share / RS3 sales (Rs. In Lakhs) Particulars Mar-10 Consortium share 58,302.41 Excise Duty 1,430.62 RS3 sale 12,056.18 Total Consortium share/RS3 sales 71,789.21 B. Details of RS3 contract cost (Rs. In Lakhs) Particulars Mar-10 RS3 Cost 18,558.24 Deration RS3 1,430.27 Total RS3 contract cost 18,683.50 31. Thus Ld. TPO has rightly excluded the consortium supply value/cost, revised segmental of BEML. The consortium agreement clearly reveals that both are similar and the consortium formed by the assessee with AE is functionally comparable with MRMB consortium. The activities undertaken by the assessee in the PGR & BOG division with respect to RS2 contract was similar those carried out by BEML in its "Railway Customer Segment" with respect to RS3 contract. Therefore, Ld. DRP's finding is set aside herewith and BEML is allowed as comparable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imated the provision of free of cost wheel sets to be 30% of sales value (pages 2981 to 2984 of paper book VI). The same is also taken into consideration by Ld. DRP and had accordingly, instructed Ld. TPO to re-compute the margin of Titagarh. Thus Ld. AR submitted that there is incorrect margin computation of Titagarh. Ld. AR further submitted that Titagarh is not comparable to the assessee company and if the same is included as a comparable for determining the arm's length margin, the value of free of cost materials/supplies should be included in its cost and the revised OP/TC margin of 13.65% should be considered for determining arm's length margin. 39. Ld. AR further submitted that there is no similarity between the assessee company and Texmaco and Titagarh. The assessee manufacturers world class metro coaches with latest Bombardier Technology whereas Texmaco was engaged in the manufacture of general purpose and commodity specific special wagons catering to the India Railways and Titagarh was primarily engaged in the business of manufacturing Railway Wagons, Heavy Earth Moving and Mining Equipment, etc. Texmaco and Titagarh were only engaged in the value added assembly on the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies are having the major role in supplying coaches to the Indian Railway and these are proper comparables if all the aspects are taken into consideration including the free of cost material value. Therefore, Ld. TPO is directed to take into account 30% additional cost base to account "free of cost" material and revised the OP/TC margin of 13.65% for determining the arm's length margin as claimed by the Assessee. 43. In result, this Ground No. 3.6 is partly allowed for statistical purpose. 44. Now coming to Ground No. 3.7 (a), (b) of the appeal. The final set of comparables in case of wagon manufactures considered as comparable to the assessee, provided below by the TPO: S.No. Company Name Average OP/TC Average OP/Sales 1 Titagarh Wagons Ltd. (Wagon Segment) 13.66 % 12.01% 2 Texmaco Rail & Engg. Ltd. (Heavy Engineering Segment) 9.76% 8.89% 3 Jessop & Co. Ltd. (EMU Segment) -22.67% -29.30% 4 Jessop & Co. Ltd. (Wagon Segment) 9.74% 8.87% 5 BEML Limited (Railway Customer Segment) -7.34% -7.92% 6 Braithwaite -0.30% -0.30% 7 Hindustan Engg. & Industries Ltd. (Engineering Segment) -3.17% -3.27% Average -0.05% -1.57% &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered income from Scrap Sales as non-operating in nature. 51. In this regard, Ld. AR submitted that the sale of Metro trains is considered to be at arm's length applying CUP method and substantial related party transactions remain on the cost side. Accordingly, Ld. AR submitted that OP/Sales, taking the revenue as the untainted base of the Profit Level Indicator ('PLI'), should be considered as the relevant Profit Level Indicator (PLI) for benchmarking the remaining cost side related party transactions. As the aforementioned ground has not been adjudicated by the Ld. DRP in its directions, accordingly the assessee submitted that the same should be taken into consideration. 52. Ld. DR relied upon the orders of the TPO. 53. We have perused the proceedings and the records as well as the submissions made by the AR and DR. While considering the Profit Level Indicator (PLI) by Ld. TPO as well as by Ld. DRP, both the authorities based their findings on the footing that under the globally accepted transfer pricing fundamentals, one may use any profitability ratio that allows comparison of the profit resulting from the intercompany transactions. Popularly used ratios include operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iated Enterprises' (AEs) who have developed a level wise organizational structure so as to develop group synergies through centralized locations that possess specialized divisional knowledge and experience. For providing the said intra-group services to the assessee company, the Associated Enterprises' (AEs) have charged their cost of providing these services without any mark up. 60. In the Transfer Pricing documentation, the assessee company had substantiated the arm's length nature of these services by selecting TNMM as the most appropriate method. Under TNMM the assessee company had aggregated the service cost of these intragroup services in their respective division for determining the arm's length nature of these transactions. 61. During the Transfer Pricing assessment proceedings, the Ld. TPO however, rejected the aggregated approach applied by the Assessee company under TNMM and instead resorted to a transactional level analysis. Based on the said approach, the Ld. TPO determined the arm's length price for such services to be Nil. Ld. TPO held that such services were either duplicative in nature and /or were shareholder services. Ld. TPO observed that the assessee company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering each type of services purportedly received by the taxpayer company. Thus Ld. DRP held that the assessee failed to show that the above mentioned criteria was duly fulfilled by them as well as the assessee did not prove whether the services were actually needed and subsequently received by it by producing contemporaneous documentary evidence. Ld. DRP further held that payment for Intra Group Services to Associated Enterprises is a separate international transaction independent of financial results and capable of verifiable separately, therefore TPO was right in his action to determine the arm's length price separately, rather than aggregating it with other transactions under TNMM. 63. Ld. DRP also observed that the email and other documents filed before the Panel did not show any specifics except in few cases of IS/IT services and the documents field before the Panel shows that the assessee company have received hardware/software from third parties directly and the billing was also raised by those third parties on the assessee. Only the said transaction was routed through the AE, those invoices were to the tune of Rs. 13,87,84,117/- and invoices amounting to Rs. 97,99,091/- w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in any of the subsequent years. The AR further placed reliance on the ruling of the Delhi Tribunal in case of McCann Ericsson [TS-391-ITAT-2012 (Del)]('McCann') and Mumbai Tribunal in case of Dresser-Rand India Pvt. Ltd. Vs. ACIT [ITA No. 8753/Mum/2010] wherein the Tribunals supported the fact that it is for a businessman to judge the legitimacy of the commercial needs of a business and assign value to benefits derived from services received from other group entities. Reliance is also placed on another recent ruling pronounced by the Delhi Tribunal in case of Danisco (India) Pvt. Ltd. (ITA No. 2444/Del/2012) wherein the Bench provided relief in following the rulings in the case of McCann and Hive Communication Pvt. Ltd (ITA No. 306/2011) 67. Ld. AR pointed out that the Ld. TPO in AY 2011-12, has himself accepted the charges paid by the assessee company to its Associated Enterprises' (AEs) for availing similar intra-group services to be at arm's length under TNMM. Since the fact pattern of the said services has not undergone a significant change, accordingly AR submitted that the same should be accepted to be at arm's length in the current year as well. 68. Ld. DR relied upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,87,84,117/- and invoices amounting to Rs. 97,99,091/- which was raised by the third parties on the AE for the services rendered by them to the assessee. Thus, the Ld. DRP rightly directed the TPO to examine these invoices and allowabaility of the same as expense to be decided. From the review of the services and benefit report and the supporting documents submitted by the Assessee company, it can be seen that the assessee company is benefited from the supervision and guidance of the group's functional experts which help the Assessee company in efficiently carrying its business operations by leveraging on group synergies. In this regard, the Assessee company has attached as Annexure-2 to the synopsis submitted at the time of hearing, brief overview on the various intra-group services received by it during the year from the various Hub divisions and from the Group entitles which were substantiated and validated by the intercompany service agreements entered into by the assessee company with its Associated Enterprises' (AEs) along with various documentary evidences submitted before the Ld. TPO and the Ld. DRP. The said Annexure also provides the resultant benefits derived by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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