TMI Blog2017 (11) TMI 1374X X X X Extracts X X X X X X X X Extracts X X X X ..... project management and technical services provided to the AE and application of external TNMM by the learned TPO - Held that:- We find that in subsequent assessment years 2011-12 and 2012- 30, the learned TPO himself has accepted the internal TNMM and bifurcations of the AE and non-AE segment, on line similar to what has been followed by the assessee in the year under consideration. In view of the above facts, we do not find any justification by the Revenue in litigating the issue, when they have accepted the methodology adopted by the assessee in subsequent assessment years. In view of the Rule of Consistency, we set aside the direction of the Ld. DRP in the year under consideration and direct the Assessing Officer to accept the approach of the assessee in benchmarking the project management and technical services rendered to the AE followed in AY 2010-11 Fee paid to the AEs against technical and managerial services claimed to have been availed by the assessee - benefit test applicability - Held that:- TPO, the assessee has not substantiated the Cost Benefit Test. According to the section 92(2) of the Act, the Arm’s Length Price of the transaction in the nature of cost or expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The grounds raised in the appeal of the assessee having ITA No. 1078/Del/2014 are reproduced as under: That, on the facts and circumstances of the case and in law, 1. The Assessing Officer OAOO/Dispute Resolution Panel ('DRP') has erred in making an addition of ₹ 3,59,92,632 to the total income of the appellant on account of adjustment in the Arm's Length Price (ALP) of the international transactions related to project management services and technical services provided by the appellant to its associated enterprise (referred to as 'outbound international transactions'). 2. In respect of outbound international transactions in the nature of project management services, the AO/Transfer Pricing Officer (TPO') has erred in: ( a) Rejecting the Internal Comparable Uncontrolled Price ('CUP') method as the most appropriate method for project management services provided to an associated enterprise by the appellant and instead adopting Transactional Net Margin Method (TNMM) as the most appropriate method. ( b) In not appreciating that the transaction with GAIL India Limited (GAIL) a Public Sector Enterprise was consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The grounds raised in the appeal of the Revenue having ITA No. 456/Del/2014 are reproduced as under: 1. On the facts and in the circumstances of the case and in law, Ld. DRP, Panel-II New Delhi erred in deleting the addition of Rs.l,68,77,406/-(5,28,70,038 - 3,59,92,632) made by the AO u/s 92CA of the Act. 2. The appellant craves for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of appeal . 4. The facts in brief of the case are that the assessee company is a wholly-owned subsidiary of Suez Tractebel SA Belgium and was engaged in providing engineering and project management consultancy services for gas projects, laying cross-country pipelines, city gas distribution and thermal and hydropower projects. For the year under consideration, the assessee filed return of income declaring total income of ₹ 1,57,91,260/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short the Act ) was issued and complied with. The Assessing Officer noted the assessee entered into the international transactions with its Associated Enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of TE India by the associated enterprise 4,779,536 Coyne ET Bellier Provision of technical services and charges for office space and support 3,091,593.77 Expenses incurred on behalf of the associated enterprise by TE India 482,798 Fabricom GTI Major Projects Provision of technical services 59,381,458 Expenses incurred on behalf of the associated enterprise by TE India 2,285,156 Tractebel Al Khaleej Provision of technical services and charges for office space and support 3,669,795 Tractebel Engineering Provision of technical services 44,547,639 Expenses incurred on behalf of the associated enterprise by TE India 1,462,670 Suez-University Expenses incurred on behalf of the associated enterprise by TE India 715,469 4.3 The transaction-wise summary of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE was more than the margin earned from the non-AE and thus, the assessee concluded that the transaction with AE was at arm s length. 4.6 The Ld. TPO disregarded the segmentation carried out by the assessee. According to the Ld. TPO, the services performed in AE and non-AE segment were dissimilar. According to him, the CPM bases its analysis upon a strict comparability of transaction involved and therefore, it was difficult to benchmark transaction between AE and non-AE on application of CPM . 4.7 The assessee company alternatively submitted segmental accounts for AE and non-AE and applying TNMM submitted that in the non-AE segment, the margin earned was 3.28%, while the margin earned in AE segment was 17.14% , therefore the transactions of the AE were prima-facie at arm s length. The learned TPO rejected this alternative benchmarking by the assessee also on the ground that segmental accounts drawn between AE and non-AE were not found based upon actual cost incurred for the two sets of transaction and allocation of the cost was also not based on any scientific method having defined criteria. The Ld. TPO noted that allocation of man-hours based in the two segments was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee company. 13. Kitco Limited 1.27 Also used in set of the assessee company. 14. Indo Canadian Consultancy Services Ltd. 6.54 Also used in set of the assessee company. Average 24.06% 4.9 The Ld. TPO considered the total cost of operations after excluding following expense items: - provision for bad and doubtful advances - donation - exchange fluctuation loss - interest expenses and included following expenses as transaction costs: - provision for contingencies ₹ 3, 01, 71, 276/- - ideal manpower and related administration costs ₹ 3, 01, 99, 201/- - provision for doubtful debts ₹ 1, 58, 40, 181/- 4.10 Based upon the average margin of the comparables and operating cost of ₹ 34,42,19,042/- at entity level, the arm s length price of the technical and project management services was computed as under: Operating Cost shown by the assessee ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,781 4.14 The assessee filed objections against the draft assessment order before the Ld. DRP. The finding of Ld. DRP vides its order dated 31/10/2013 are summarized as under: (a) Use of Transactional Net Margin Method as segmental analysis carried out by the assessee cannot be considered as reliable for the reason that services rendered to AE and Non-AE s were different, allocation of costs between AE and non-AE were not accurate and non-allocation of idle man hour costs was not correct. Further as regards rejection of CUP method for project management services provided to AE, the DRP concurred with the view of the TPO that since similar services were provided to AE and non-AE s, it was not possible for the TPO and the assessee to allocate costs for services rendered to GAIL and accordingly considered TNMM method as most appropriate. ( b) DRP partly upheld the objection of the assessee that a sum of ₹ 3,01,71,276 should not be considered as part of operating cost as they were in the nature of either provision for unascertained liabilities or abnormal costs. As a result, the addition made by the TPO earlier of ₹ 5,28,70,038 was re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating cost(A) 314127766 Arm's Length Margin(B) 24.06% Arm s Length Profit(C=A*B) 75579140 Revised Arm's Length Price(D=A+C) 389706906 Actual Service Revenue(E) 309882927 Variation(D-E) 79823979 % of AE transaction 45.09% Addition on account of services to AE 35992632 4.16 Thus the Ld. DRP gave relief of ₹ 1,68,77,406 (Rs.5,28,70,038 ₹ 3,59,92,632) in respect of adjustment on account of project and technical services but no relief is granted in respect of adjustment on account of management services availed by the assessee. 4.17 Pursuant to the order of the Ld. DRP, the Assessing Officer passed final assessment order on 31/12/2013. Aggrieved with the order of the Assessing Officer, both the assessee and the Revenue are in appeal before the Tribunal, raising respective grounds. 5. The ground No. 1 of the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t does not retain on what it receives from GAIL (India) Ltd. The invoices received from the assessee are passed on to GAIL (India) Ltd. The transaction between GAIL (India) Ltd. and Suez Tractebel S.A. are independent uncontrolled transactions. Therefore, DRP is of the view that an independent CUP is available for comparison and therefore, this being the direct method for comparison, CUP should be used as the most appropriate method. This covers approximately 75% of the transaction. 6.4 The Ld. CIT(DR) has not disputed the fact that no appeal has been filed against the order of the Ld. DRP. We also find that in assessment year 2011-12, the learned TPO himself has accepted the CUP as the most appropriate method. In our opinion, when in subsequent assessment years, the Revenue itself has accepted, the CUP as the most appropriate method for benchmarking the international transaction of project management services, contesting the same issue in the year under consideration by the Revenue is not justified. In view of the Rule of Consistency, the action of the Ld. TPO/AO and Ld. DRP cannot be sustained. On merit also the transaction between the GAIL and the AE, is an independent an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, assessee has used internal CPM which is nothing but internal TNMM since all costs and all receipts are included in arriving at the margin. The assessee has rendered services to non-AEs also which constitutes 55% of its revenue. The income earned from the AE is to the extent of 41% of the total revenue. The nature of services rendered to the AE as well as to the non AE are comparable services. The client-wise details of the bills are provided to show that the nature of services rendered to related parties and unrelated parties are similar. The TPO has not made any adverse comment on this issue. The assessee had given the breakup of financial in respect of AE and non AE segment. It is important to mention that the entire receipt from the AE for the services rendered to GAIL (India) Ltd. is also included in the internal TNMM purpose. The only challenged to this financial presentation was mentioned in the show cause notice at Para 5 which is quoted below: 5. But in your calculation you have mentioned ₹ 17,24,09,690.88 as your income from AE, whereas you have earned ₹ 20,83,84,977from your AEs for the provision of technical project management services. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cable Wireless (India) Ltd. [ITA No.822/Mum/2013] Birlasoft (India) Ltd. Vs DCIT [2011, 44 SOT 664 (Delhi)] Destination of the World (Subcontinent) P. Ltd. Vs. ACIT [2011, 47 SOT 1, Delhi DCIT vs. T, Two International P. Ltd. [ITA No.7331/Mum/2011] In view of this, DRP is of the view that internal TNMM is available in this case and therefore there is no need to go for external comparables and external TNMM. Since the margin earned in the AE and non AE segment are 15.02% and 15.05% respectively there is no justification for making any adjustment in this case. The objections filed by the assessee are accepted and TPO/AO is directed to delete the addition made in TPO order. 7.5 From the finding of the Ld. DRP, it manifests that in assessment year 2010-11 the Ld. TPO has not objected on the presentation of the financial bifurcated between AE and non-AE transaction and comparing of the net margin level of operation. In view of the fact the Ld. DRP observed that once internal TNMM is available, there was no need to go for external TNMM and external comparables. The Ld. DRP further observed that the margins in the AE segment was more than non-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2004 w.e.f. 01/01/2004 specifying the hourly rates for various categories of persons involved in providing services to the company and the said agreement was revised w.e.f. 01/01/2008 and which was in force during the year under consideration. The assessee also submitted that AE being a global giant and word leader in engineering services sector, the assessee got benefit of the expertise professionals employed by the AE. 8.2 The learned TPO referred OECD guidelines in respect of intragroup services and summarized that the essential information required for examining the arm s length price of such services as under: 1. Whether the assessee has actually received intra group services or services received are duplicative in nature or fall in the nature of shareholder's activities? 2. What are the economic and commercial benefits derived by the recipient of intra group services? 3. In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. 4. Whether a comparable independent enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te or shareholders activity. 8.8 We have considered the rival submission and perused the relevant material on record. We find that the Assessing Officer has discussed the issue of the intragroup services availed at length and summarized finding in para-22 of his order, which are extracted as under: 22.1 On the basis of the above following points are noticed: * The assessee has not been able to prove the benefits that it had derived from the services purportedly provided by the AE. No independent entity would pay for such services without any cost benefit analysis. * The assessee has not furnished any evidence as to the cost benefit analysis with regard to the independent suppliers. No third party would like to avail services without any cost benefit analysis with regard to AE vs. independent supplier. * The documentation produced by the assessee to support its claim for the receipt of management services is too generic * The benchmarking done by the assessee is not in accordance with the law and therefore CUP method is required to be applied in this case. 22.2 As per the comments above it can be seen that none of the benefits are tangible or rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, tax administrations may find it useful to refer to alternatively structured transactions between independent enterprises to determine whether the controlled transaction as structured satisfies the arm's length principle. Whether evidence from a particular alternative can be considered will depend on the facts and circumstances of the particular case, including the number and accuracy of the adjustments necessary to account for differences between the controlled transaction and the alternative and the quality of any other evidence that may be available. 8.9 We find that the assessee has failed to produce any evidences to controvert the finding of the learned TPO, either before the Ld. DRP or before us. The Ld. counsel of the assessee has placed reliance on the decision of the Tribunal in the case of CIT Vs. EKL Appliances Ltd. (supra). The Tribunal observed as under: Transfer pricing guidelines laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... art of determining the Arm s Length Price of the transaction of any intra group services. In the instant case, the ld. TPO has determined the ALP at NIL keeping in view of the factual position that whether in a comparable case, similar payment would have been made or not in terms of the agreement. The ratio of the decision in the case of EKL Appliances Ltd. (surpa) is thus, not applicable over the facts of the instance case. The ld. Transfer Pricing Officer is empowered only to view the benefit mentioned in section 92(2) of the Act from perspective of the assessee. The ITAT, Delhi Bench in the case of GE Financial Services Pvt. Ltd., ITA No. 5882/Del/2010, 5816/Del/2011 6282/Del/2012 clarified that mere profitability alone could not be criterion for benefit and there are several non-monetary terms other than profitability, like usefulness, enhancement in value, sustainability and enhancement of business interest, which are required to be seen while judging the benefit test. 8.12 In our opinion, the Ld. AO/TPO has not examined the benefit test in this perspective. In the circumstances, we feel it appropriate to restore the matter to the file of the AO/TPO to decide afresh in ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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