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2015 (11) TMI 1527

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..... ry evidence the comparability on the issue of quality of the product or service, contractual terms, level of market, geographical market in which the transaction takes place, date of transactions, intangible property associated with the sale, foreign currency receipt, alternatives realistically available with the buyer and the seller. Aggregating the transaction pertaining to sale of metro train sets with other international transaction in the Mainline division and testing the overall margin of the division under the Transactional Net Margin Method - Held that:- 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 assessee’s case. While deciding the comparables Ld. TPO has not taken into consideration .....

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..... e captioned transaction has to be Operating Profit /Operating Cost. Operating Profit Margin by subtracting selling, general and administrative (SG&A), or operating, expenses from a company's gross profit number, we get operating income. Thus, it needs to be looked into and as per the submissions made by Ld. AR, OP/Sales has to be taken into consideration by the revenue as the untainted base of the Profit Level Indicator (PLI). Ld. TPO is directed to consider the same and give finding to that effect. Intra group services - when AEs transact with each other, for the purpose of transfer pricing they must replicate the dynamics of market forces, as there is no concept of free lunch in business dealings. Thus, Ld. DRP rightly held that the benefit test which is well recognized by OECD and other developed countries Tax regime have to be seen for allowing the payment in case of Intra-Group Services. The expected benefit must be sufficiently direct and substantial so that an independent entity in similar circumstances, would be prepared to pay for it. If no benefits have been provided (or was expected to be provided), then the services cannot be charged for. Since the assessee just expl .....

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..... 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 Components and Sub Assemblies TNMM Operating Profit/Operating Revenue ( OP/OR ) 3,106,812,386 6 Import of Capital Goods 1,533,592 7 Availing of Intermediary Services from PGR and BOG Hubs 169,055,034 Reimbursement of Expatriate Salaries and related costs of AEs 464,905,980 8 Sale of Metro trains by PGR Division CUP 4,213,264,526 RCS Division (Supply of signalling equipment) 9 Import of Compone .....

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..... its AEs for factory in Savli (Gujarat) in connection manufacturing of bogies and metro coaches. The total value of the said international transaction was as follows: Associated enterprises Amount (Rs.) Bombardier Transportation Railway Equipment (Qingdao) 836697 Bombardier Transportation GmbH 696895 Total 1533592 iii. Availing of intermediary services 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 Me .....

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..... e show cause notice. Ld. TPO primarily raised three issues i.e. (a) how the assessee justifies the bench marking of transaction relating to sale of metro trains by applying CUP method (b) Texmaco Infrastructure and Hoardings Ltd. and Titagarh Wagons Ltd be included as comparables and (c) other income wrongly included as operating income. 6. Vide order dated 29.01.2014 Ld. Transfer Pricing Officer (TPO) proposed an addition of ₹ 1,42,49,34,50/- and Assessing Officer vide his draft assessment order proposed to assessee the assessee s income at ₹ 1,34,56,92,730/-. Aggrieved by the said action of the Assessing Officer, the assessee company filed the objection before Ld. Dispute Resolution Panel (DRP). Ld. DRP passed order dated 24.12.2014 whereby disposing the objections of the Assessee company with the directions to the Assessing Officer. 7. Aggrieved by the orders of Ld. Transfer Pricing Officer and Ld. Dispute Resolution Panel, the assessee company filed present appeal on the following grounds whereby challenging the said orders: 1. That Honorable (Hon ble) Dispute Resolution Panle-1 ( DRP ) has erred in relying on the order passed by the Ld. Additional Commissi .....

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..... Limited ( BEML ) (Railway customer segment) as a comparable for determination of arm s length margin of the Mainline division of the Appellant, in doing so the Hon ble DRP ignored the fact that BEML (Railway Customer Segment) was the only true comparable which had undertaken activities similar to those under taken by the Appellant in the Mainline division, 3.5 not considering the financial information received from BEML Limited u/s 133(6) of the Act regarding consortium and thereby erroneously concluding that standalone margin of BEML Limited (Railway customer segment) cannot be determined; 3.6 upholding the modification proposed by the Ld. TPO of the economic analysis undertaken by the Appellant in the TP documentation by introducing two new comparable companies namely Titagarh Wagons Limited and Texmaco Limited based on arbitrary accept/reject of comparables and in doing so disregarding the fact that the same are not comparable to the Appellant in terms of functions performed, assets employed and risks assumed ( FAR ) 3.7 by upholding approach of the Ld. TPO of not following consistency in his own approach and rejecting some of the comparables which were of similar .....

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..... n order to benchmark the payment for receipt of each service it is necessary to know as to what are the different services and what is the payment made for each particular service; 5.5 the intra-group services received by the Appellant were in the nature of shareholder services by misinterpreting the concept of shareholder services and other concepts relating to intra group services contained in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations released by the Organization for Economic Cooperation and Development ( OECD Guidelines ) and other country regulations and; 5.6 the Arm s Length Price of the said transaction is not in compliance with the Indian TP Regulations by in appropriate application of CUP method in contravention of the provisions of Rule 10B of the Income Tax Rules, 1962 merely based on presumptions without furnishing details of price charged in any comparable uncontrolled transaction and consequently erred in not considering the benchmarking analysis submitted by the Appellant to justify the arm s length nature of the intra-group services. 5.7 disregarding judicial pronouncements in India in undertaking the TP adjustment .....

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..... n India Private Limited (BTIPL) and Bombardier Transportation Germany, GmbH (BTG) had formed a consortium for the supply of Metro trains to DMRC. During the relevant assessment year, as per the contract between consortium (BTIPL BTG) and DMRC, BTIPL and BTG supplied 22 train sets to DMRC. All train sets were indigenously manufactured at BTIPL s facility in Gujrat. BTIPL had first sold 22 train sets to BTG booking total revenue of ₹ 4,213,264,526 and then these train sets were further supplied by BTG to DMRC at the same sales price per set as charged by BTIPL. The train sets were delivered directly to DMRC site in New Delhi. Ld. Counsel referred to Paper Book VI at page no. 2489 to 2532 which reveals that the sale price invoiced by BTIPL to BTG and BTG to DMRC for train sets is same. Ld. Counsel submitted that this represents third party price and hence conforms to the arm s length standards under the CUP Method as they were identical nature of transactions. 14. Ld. AR further submitted that the assessee s contention of being the CUP method, is an appropriate method, has been considered by the Hon'ble Delhi High Court in the case of Rampgreem Solutions Pvt. Ltd Vs. CI .....

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..... purchase volumes, credit terms, transportation terms, etc.) (iii) Level of market i.e. wholesale, retail, etc. (iv) Geographical market in which the transaction takes place. (v) Date of transaction (vi) Intangible property associated with the sale (vii) Foreign currency receipt (viii) Alternatives realistically available with the buyer and the seller 16. Ld. DR further submitted that the assessee was unable to justify with documentary evidence the comparability on any of the above mentioned parameters from S. No. (ii) to (viii) above before TPO. It can be seen from the data given, the buyer and seller are located not only in different geographical regions, but also have different level of market. Buyer Geographical market Seller Geographical market Bombardier Transportation Germany Germany Bombardier Transportation India Ltd. India Delhi Metro Rail Corporation India Bombardier Transportation Germany Germany 17. Ld. DR further submitted that .....

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..... appears similar, are different because the sales of metro train sets by BTIPL to BTG and BTG to DMRC are on different footing altogether which cannot be equated. Ld. TPO has rightly rejected the internal CUP method on the ground that buyer and seller are not only located in different geographical regions, but also at different levels of market, one is selling to international buyer and one is selling to local market. Thus here, the CUP method cannot be applicable as rightly held by Ld. TPO and Ld. DRP. On the contrary, all the transactions being transactions in MLM Division relating to import of components and sub assemblies import of capital goods, availing of intermediary services, sale of metro trains and reimbursement of ex pact salary are so closely related that they cannot be evaluated adequately on an individual basis. The reliance of the judgment of Hon ble Delhi High Court in case of Ramgreen Solutions Pvt. Ltd. Vs. Commissioner of Income Tax (ITA No. 102/2015) also asserts this point and clearly held in para 44 that: .. While using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to t .....

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..... nsaction in the Mainline division and testing the overall margin of the division under the Transactional Net Margin Method. We find that the discussion held hereinabove asserts that TNMM method for sale of metro train sets is proper and just, because the rules provide that under the TNMM, the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction is taken into account to arrive at an arm s length price in relation to the international transaction. TNMM evaluates whether the amount charged in a controlled transaction is arm s length based on objective measures of profitability (profit level indicators) derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances. 23. In result Ground No. 3.3 is dismissed. 24. Now coming to the second issue, raised in Show Cause Notice regarding comparables which assessee raised in Ground No. 3.4 (3.4.1) and 3.5. The first issue is, regarding exclusion of BEML by Ld. DRP. This comparable was accepted by Ld. TPO subject to certain adjustments. The BEML Ltd. is engaged in three major business verticals viz. 1) Mining and construction, 2) D .....

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..... that the functions, assets and risk of BEML are not the same as that of the assessee s company. Further the assessee s share is 30% in the RS-2 DMRC contract, whereas in the BEML s consortium the Mitsubishi Corporation s share is just 3.40% and they are the consortium leader to incur liabilities and to receive payments on behalf of all the members whereas BEML is having share of just 17.70% in RS-3 contract. All these facts, on cumulative basis establish that the risks, functions and assets involved in the case of assessee and that of the BEML would not be comparable at all, because (unlike in service sector where turnover does not affect the margins of the comparable companies) in the manufacturing industries as a result of the economies of scale, there is a direct correlation between the margins and the turnover. 27. Therefore, Ld. DRP held that even though both the contracts of assessee s consortium and BEML consortium pertains to the supply of Electrical Multiple Units to DMRC but the functions, assets and risk of the assessee and that of the BEML were altogether different, hence BEML is not a valid comparable at all to the taxpayer Ld. TPO was directed to exclude this com .....

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..... commissioning, training and transfer of technology. ii. BEML as per the agreement was responsible for only local manufacturing and supply of rolling stock while the other parts required for manufacture of coach like propulsion equipment, electrical component on rolling stock, design and development of rolling stock was the responsibility of the other consortium agreement. iii. Moreover the revenue in respect of the contract was as per the consortium agreement and cost of items supplied by other members of the consortium. iv The above three facts clearly demonstrate that revenue and cost of the consortium supply was as per pre determined value agreed upon by the consortium members who were bound in the contract and therefore was not a clear cut independent third party transactions. The consortium agreement also included providing services relating to design, training, testing, transfer of technology which is outside the purview of the activities which is carried out by the tested party. The consortium supply value / cost therefore was to be excluded from the railway segment of BEML to ensure comparability with the tested party. v. BEML further submitted sales/cost detail .....

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..... es to Ground No. 3.6, TPO has taken into consideration two comparables after further examination of accept/reject matrix which have similar functional profile. Their details and operating margins was as under:- Company Name Functional Profile Texmaco Infrastructure Holdings Ltd. Manufacturer of Railway Tramway equipment Titagarh Wagons Ltd. Manufacturer of Railway Tramway equipment The above mentioned companies are maintaining segmental accounts. 34. In case of Titagarh Wagons Ltd, the Wagon segment has been taken as a comparable business. 35. Ld. AR submitted that Titagarh receives various material on Free of Cost basis from Indian Railways. These components include wheel sets, cartridge tapered roller bearing and steel etc. With respect to these Free of Cost supplied, the Managing Director of the company in an interview available publically has estimated the provision of free of cost wheel sets to be 30% of sales value. This fact has also been taken into consideration by the Ld. DRP and accordingly, instructed Ld. TPO to re-compute .....

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..... value added assembly on the raw material and components provided by the Indian Railways. The inputs including steel and components were provided free of cost by Indian Railways and other clients to Texmaco and Titagarh, who only carried out some value addition and assembly on these components to develop wagons for supply to Indian Railways as per their specifications. Therefore, these companies were engaged in contract manufacturing of metro coaches. Accordingly, there is virtually no comparison between the sophisticated metro trains supplied by BT for the passengers with the wagons supplied by Texmaco/Titagarh. Both use entirely different technology, hence the produce profile of BTIPL and Texmaco/Titagarh are very different and cannot be compared. 40. Reliance in this regard is placed on the following case laws by the Ld. AR, the said case laws held that the functional similarity should form the basis for comparability analysis: Mentor Graphics (Noida) Private Limited Vs. DCIT in (2007) 109 ITD 101 Philips Software Centre Private Limited (ITA No. 218/Bang/2008. E-Gain Communication (P) Ltd. Vs. ITO, 118 ITD 243 Indo American Jewellery Ltd. Versus DCIT (131 .....

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..... 7% -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% 45. Ld. TPO while rejecting the M/s. Braithwaite Co. Ltd. as comparable as its annual report was not available. For Bharat Wagon Engineering Co. Ltd. the TPO held that the said company is having persistent losses for several years. 46. Ld. AR contended that though the Annual Report is not available yet, the Audited Balance Sheet and Profit Loss Account of Braithwaite Co. Ltd. for FY 2010-2011 are available in the public domain and the same has been submitted before the Ld. DRP. 47. Ld. DR contended that Ld. TPO has rightly rejected Braithwaite Co. Ltd. a .....

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..... 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 operating profit / sales, operating profit / total cost, gross profit / operating expenses, operating profit by capital employed, etc. The choice of the appropriate ratio must be done keeping in mind the characterisation and the nature of business of the tested party, as well as, the nature of comparables selected and the quality of information available. In present case, Ld. TPO after taking into consideration all factors, decided that the Profit level indicator which has to be used for benchmarking the captioned transaction has to be Operating Profit /Operating Cost. Op .....

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..... 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 had not proved the benefits derived from the services purportedly provided by the Expats. The assessee had also not furnished any evidence as to the cost benefit analysis with regard to the independent local employees. No documentation had been produced by the assessee to support its claim for the receipt of services. Therefore, Ld. TPO gave a finding that the benchmarking done by the assessee was not in accordance with the law and held that CUP method is required to be applied in this case. 62. Ld. DRP was of the view that Transfer Pricing legisl .....

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..... 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 ₹ 13,87,84,117/- and invoices amounting to ₹ 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 directed the TPO to examine these invoices and allowability of the same as expense should be decided. 64. Ld. DRP observed that with regard to the remaining services for which the payments have been made to the Associated Enterprises (AE), the assessee had not given the details of the total costs incurred by the Associated Enterprises (AE) on a particular services and how the same or basis of which they have placed the cost upon t .....

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..... l 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 orders of Ld. TPO and Ld. DRP. 69. We have perused all the relevant material placed before this Tribunal at the time of hearing which was produced before Ld. TPO as well as Ld. DRP. We have gone through the said documents as well as the records available before us and the submissions made by both the counsels. As relates to the case laws relied upon by Ld. AR does not apply in the present case for the reason that Ld. DRP and Ld. TPO have given finding to the effect that how the benefit test will be applicable. Though, the Ld. TPO in A.Y 201 .....

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..... e 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 Assessee company by availing the intra-group services. Though, the said Annexure-it show that the Assessee company was benefitted significantly from the intra-group services received from its AEs, it failed to give the supporting evidence such as invoice, confirmation from parties to prove the same. The assessee company has also undertaken a detailed cost benefit analysis in order to demonstrate the cost savings achieved by the Assessee company by availing the said services from the AEs. Therefore, when AEs transact with each other, for .....

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