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Voith Siemens Hydro P. Ltd. (Now Known as Voith Hydro P. Ltd.) Versus Assistant Commissioner of Income-Tax

2016 (7) TMI 245 - ITAT DELHI

Determination payment of royalty - whether the issue as to the payment on account of other group charges made by the assessee to its associated enterprise for services rendered was to be determined by the Transfer Pricing Officer/Dispute Resolution Panel or it was to be determined by the Assessing Officer under section 37(1) of the Act ? - Held that:- The instant case is squarely covered by the judgment in CIT v. Cushman and Wakefield (India) Pvt. Ltd. [2014 (5) TMI 897 - DELHI HIGH COURT] becau .....

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ted enterprise for services rendered was basically an expenditure incurred for the purposes of business, the same are to be determined under section 37(1) of the Act, if allowable or not and this issue is in the exclusive domain of the Assessing Officer to be determined. - Now, adverting to the assessment order passed by the Assessing Officer which is in consonance with the direction issued by the Transfer Pricing Officer/Dispute Resolution Panel, vide which group charges to the tune of S .....

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cing Officer/ Dispute Resolution Panel. Moreover, when the Transfer Pricing Officer has not disputed that the services were availed of by the assessee from its associated enterprise, the question of determining the arm's length price of group charges to the tune of ₹ 1,89,53,444 does not arise because it was to be done by the Assessing Officer only. - I. T. A. No. 5886/Del/2011 - Dated:- 4-5-2016 - R. S. Syal (Accountant Member) And Kuldip Singh (Judicial Member) For the Petitioner : Salil .....

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e present appeal sought to set aside the impugned order dated October 19, 2011, passed by the Dispute Resolution Panel/Transfer Pricing Officer/Assessing Officer qua the assessment year 2007-08 on the grounds, inter alia, that : "The addition amounting to ₹ 1,89,53,444 undertaken by the learned Assistant Commissioner of Income-tax, Circle 17(1), New Delhi ('the AO'), vide final assessment order dated October 19, 2011 (served on the appellant on November 2, 2011) passed under s .....

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of the Act. The hon'ble Dispute Resolution Panel while issuing directions under section 144C(5) of the Act did not consider the facts and merits of the appellant's objections to the proposed adjustments, and merely relied on the reasons given by the Additional Commissioner of Income-tax, Transfer Pricing ('the TPO'), vide order under section 92CA(3) of the Act dated June 30, 2010 ('TP order'). On the facts and in the circumstances of the case and in law, the learned Tran .....

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appellant filed/adduced during the course of the proceedings to support the 'real benefits' it received in return for 'engineering services' on summary basis. In this regard, the observations made by the Dispute Resolution Panel (in paragraph 3.2 of the Dispute Resolution Panel direction) are perverse on the facts and based on misplaced notions owing to, but not limited to, the following : (a) The Dispute Resolution Panel has misconstrued the facts of the case by drawing an erro .....

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ant pursuant to OTO and OTC agreement (hereinafter referred to as the 'agreement') for availing of the project-specific assistance based on requisitions made by the appellant to fulfil the customer obligations. (b) The Dispute Resolution Panel has failed to appreciate that bulk of the impugned engineering services are availed of in the offer to order ('OTO') stage (i.e., tender filing stage) when no sale is generated and, accordingly, there arises no question of it overlapping wi .....

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ail of 'engineering services' as the appellant is sub-contracting a portion of work to third party vendors on need basis. Benchmarking analysis 1.2 By summarily disregarding/overlooking the evidence in the form of certificate obtained from an independent auditor that certifies the appropriateness of cost allocated to the appellant with respect to engineering services during the relevant period. 1.3 By summarily rejecting the 'cost plus method' identified as the most appropriate m .....

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rroneous conclusion that the appellant's net operating profit was not in sync with the industry standards/ benchmarks. Accordingly, the Dispute Resolution Panel has erred by not giving any consideration to the corroborative analysis placed on record by the appellant to justify the arm's length nature of engineering services on an aggregated basis using transactional net margin method ('TNMM'). Administrative support services-Rs. 43,32,041 1.5 By arriving at a prima facie incorrec .....

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benchmarking engineering services provided by it to its associated enterprises ('outbound engineering services'), in a summary manner, by disregarding the segmental approach adopted by the appellant in accordance with rule 10B(e) of the Income-tax Rules, 1962 ('the Rules'). 1.7 By relying upon the data of the comparables for the financial year 2006-07 only for conducting the arm's length analysis on an entity wide basis contrary to the conditions laid down by the proviso to .....

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l, amend, add and/or otherwise alter/modify any or all the grounds of the appeal stated hereinabove." 3. Briefly stated the facts of this case are : the assessee is into the business of developing, designing, manufacturing, procuring, erecting, installing and maintaining all kind of hydro power projects and has entered into 16 numbers of international transactions during the year under assessment out of which at present transaction referred at Sl. No. (b), i.e., group charges to the tune of .....

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that since the assessee has failed to bring on record the evidence regarding payment of ₹ 1,89,53,444 on account of group charges, the same is ordered to be added to the assessee's income only as against ₹ 2,48,50,136 as directed by the Transfer Pricing Officer. Consequently, addition of ₹ 1,89,53,444 has been made on account of the arm's length price adjustment/difference. 5. The learned Transfer Pricing Officer, during the transfer pricing proceedings, determined the .....

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03-2007 59,042 34,59,861 DR20725038 05-01-2007 11,076 6,49,054 Voith Siemens Hydro Power Generation-provision from January to March, 2007 1,36,000 79,69,600 2,49,910 1,46,21,403 Group charges -Admin Charges DR20625200 24-08-2006 43,600 26,06,495 DR20725037 22-12-2006 16,500 9,72,456 DR20725078 19-02-2007 12,900 7,53,090 Total 73,000 43,32,041 Grand total 1,89,53,444 As per the information furnished in the annual report, it is noticed that the taxpayer has made a provision of ₹ 79,69,600 fo .....

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an-hours spent for each project are given. However, the taxpayer failed to demonstrate as to whether the services claimed to have been rendered by its associated enterprise were actually received. The taxpayer could not furnish any evidence in support of actual receipt of services, and if received, the benefits derived therefrom in terms of profits attributable to such services during the financial year under consideration. Hence, the taxpayer failed the 'benefit test' applied by the Tra .....

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Further, they have described the component of public relations that fall under the common services category (as per annexure XVI of the submissions dated April 19, 2010. In support of the services rendered by its associated enterprise, copies of certain magazines and some literature connecting with the business of the taxpayer are furnished. Similarly, for corporate human resources (annexure XVTII and corporate sourcing (annexure XX), evidence furnished for services received contain certain pape .....

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head of the group provides certain administrative and special services for all the companies of the Voith Siemens Hydro Group including VSID. These services include public relations human resources, corporate sourcing, ProCS and product data management (PDM). Similarly, in respect of engineering charges paid at ₹ 1,46,21,403, the taxpayer has justified the payment in the following manner : VSID, being a new company, has much less experience compared to VSH who had been successfully present .....

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ided all the engineering services and activ ities during system engineering (basic engineering) and component engineering (detailed engineering) for the system as listed below during OTO (offer to order) and OTC (order to cash) stage for the various Hydro power plants which includes- • Turbine and associated accessories • Main inlet valves and associated accessories • Coating system, model testing for turbines • Generator excitation • Co-ordination VSH with VSID During t .....

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rendered by its associated enterprise remained unsubstantiated. It is pertinent to note that the taxpayer has debited an amount of ₹ 15.55 crores under the head administrative and selling expenses for the year under consideration, which translates to 15 per cent. of the operating revenues. Also, an amount of ₹ 6.98 crores was debited on account of personnel expenses. When such a huge expenditure was incurred by taxpayer both on account of adminis trative and employee costs, the paym .....

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d application work. None of the projects mentioned therein in respect of whom OTO-support and application work given are undertaken during the year under reference. The projects under taken by the taxpayer during the year are as follows : (i) Omkareshwar Hydroelectric project of Narmada Hydro Corporation Ltd., Madhya Pradesh (ii) Baglihar Hydroelectric Power Project, Jammu and Kashmir (iii) Hirakud Hydroelectric Project, Orissa Therefore, the projects against whom it is aimed that the engi neeri .....

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e of these types of services. Travel and conveyance expenses debited under the head administra tive and selling expenses were to the tune of ₹ 1.90 crores which is also quite substantial. The taxpayer could not furnish any evidence of any visits by the employees of Voith Germany (AE) in connection with services rendered which entailed payment of group charges by the taxpayer. 4.2.1.2 Provision of engineering and supervisory services by the taxpayer to its associated enterprise (VSHK) Durin .....

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ration of logic diagrams, hardware configuration of local control units (LCUs), finalisation of the electrical control diagrams, etc. (b) Preparation of drawings and designs for the above. Similarly, the taxpayer has provided engineering services to its associated enterprise, Voith Germany in respect of automation project worth ₹ 14,64,625. As per the transfer pricing report, it is mentioned that VSHK has placed the order on VSID (taxpayer) to provide the services of the automation enginee .....

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urces required for the work. The services were charged on a monthly basis by the taxpayer to its associated enterprise. On one hand, the taxpayer has provided engineering and super visory services not only in the country but even outside the country to its associated enterprise, Voith Germany, but on the other hand, the taxpayer claims that certain engineering services were received from its associated enterprise. The taxpayer failed to substantiate as to why the services that are claimed to hav .....

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eration. Therefore, there is no tangible benefit in terms of higher profits during the year as compared to the preceding previous year. In fact, the operating margin has declined from 6.2 per cent. to 5.17 per cent. Further, the taxpayer could not demonstrate as to what is the economic rationale and the commercial expediency that neces sitated group services when the business operations were carried on without any such services during the preceding previous years. Therefore, the arm's length .....

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3,444 on account of group charges on the ground that there is no justification to make these payments because any such type of technical input was not required by the assessee as it performs the same task on its own. Ultimately, the Dispute Resolution Panel came to the conclusion that the assessee has failed to discharge the onus placed on it to prove the payment of ₹ 1,89,53,444 for the services taken by it. 8. In the backdrop of the aforesaid facts and circumstances of the case, the firs .....

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and the orders passed by the Revenue authorities below in the light of the facts and circumstances of the case. 10. Bare perusal of the order passed by the Transfer Pricing Officer goes to prove that the Transfer Pricing Officer has decided the issue as to making the payment of the group charges to the tune of ₹ 1,89,53,444 to its associated enterprise for rendering services, such as, OTO and support and application work in respect of various projects for which tenders were submitted. The .....

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akefield (India) Pvt. Ltd. [2014] 367 ITR 730 (Delhi) and operative part of the judgment is reproduced for ready reference as under : "Section 92CA, read with section 37(1) of the Income-tax Act, 1961 -Transfer pricing-Reference to TPO (Section 37(1) v. section 92CA)-Whether jurisdiction of Assessing Officer under section 37 and TPO under section 92CA is distinct and, therefore, a referral made by Assessing Officer to TPO for limited purpose of determining ALP does not take away power of As .....

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Held, yes-Whether, therefore, TPO cannot determine ALP of payments made by assessee to its AE at nil taking a view that assessee did not derive any benefit from services rendered by AE- Held, yes [Para 34] [Matter remanded]" 12. The instant case is squarely covered by the judgment in CIT v. Cushman and Wakefield (India) Pvt. Ltd. [2014] 367 ITR 730 (Delhi) because in the instant case also, the Transfer Pricing Officer has exceeded his power by determining that the assessee has not received .....

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