TMI Blog2019 (7) TMI 1317X X X X Extracts X X X X X X X X Extracts X X X X ..... te inclusion of Keddy India Limited as comparable for computing ALP. Nitin Fire Protections Limited - So far as Nitin Fire Protections Limited is concerned, perusal of audited financial statements for the year ended 31.03.2010 will reveal that apart from providing turnkey solutions including procurement, designing, system integration, commissioning and installation of safety and security solutions, is also in manufacturing and trading activities. As submitted before us that in these turnkey projects, the project cycle is of 2-3 years and comparable profits for last three years should be taken, as assessee is into executing turnkey project which take two to three years to execute/complete. It is also claimed that assessee has incurred extraordinary expenses due to delay in DIAL project and these extraordinary expenses incurred should be excluded while computing PLI of the assessee. New comparables namely New Fire Engineers Pvt. Ltd. and Logicon Building Systems Pvt. Ltd. - These were not accepted by learned DRP as comparables mainly on the grounds that these comparables were not selected by assessee while conducting its TPSR through Prowess. The learned counsel has praye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO, which were disposed off by learned DRP by issuing directions dated 19.12.2014 u/s 144C(5) of the 1961 Act. 2. The grounds of appeals raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called the tribunal ) in ITA no. 1889/Mum/2015 for AY 2010-11, read as under:- In the facts and circumstances of the case and in Law:- 1. The Hon'ble DRP failed to not appreciate that no proper show cause notice was served by the TPO complying with the mandatory requirement of section 92CA(3) read with section 92C(3) of the Act and accordingly TP adjustment made by learned TPO/AO suffers from legal infirmity and was void abinitio. 2. The Hon'ble DRP has failed to appreciate that the AE M/s. Minimax PO is a PE in India and regularly assessed in India also as a Foreign company which is assessable at a higher rate of tax then the assessee. Thus there is no possibility of shifting profit outside India or erosion of country's tax base. Accordingly no transfer pricing adjustment were called for in respect of transactions entered wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble DRP are erroneous which deserves to be set aside. 12. The appellant reserves the right to add, withdraw, amend or alter any of the grounds of anneal at any time prior to or during the course of proceedings before the Hon ble Tribunal. ITA no. 1889/Mum/2015-MX Systems International Private Limited 3. This appeal has arisen from assessment framed by the AO u/s. 143(3) r.w.s. 144C(13) of the 1961 Act vide assessment order dated 29.12.2014 passed by the AO in pursuance to directions given by learned DRP, wherein transfer pricing additions to the tune of ₹ 19,43,77,501/- were made while computing Arms Length Price in relations to international transactions entered into by assessee with its AE. 3.2 The background of the case is that the assessee is engaged in the business of developer, integrator and consultant of all types of electronic, electrical mechanical, engineering systems related to fire protection and telecommunication. The assessee is a joint venture between Mr. Harish Salot and Minimax International GmbH Co. KG. The 74% equity is held by Minimax. The assessee is a complete service pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.4 In TP study report(TPSR), the assessee was selected as tested party and Operating profit/Operating Cost was taken as PLI. The international transactions were benchmarked at entity level by applying TNMM. In TPSR, it is mentioned that the above transactions of purchase and sale are undertaken for completing the ongoing projects in India. Further, the provision and receipt of services are also ancillary to the completion of these projects. Therefore, these transactions are closely linked and hence are to be evaluated collectively. 3.5 The working of the assessee s PLI were as under:- Particulars Amount in Rs Sales 74,40,88,809 Operating Expenses 76,92,97,738 Operating Profit (-) 2,52,08,929 Operating Margin (-)3.28 3.6 The assessee selected two comparables after undertaking search process in Prowess. The margins of the compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 169,168,572.99 Arm s Length operating income(E)=D+B 938,466,310.59 Adjustment =E-A 194,377,501.59 3.9 The AO framed draft assessment order dated 14.03.2014 u/s. 143(3) r.w.s. 144C(1) of the 1961 Act accepting TP additions as were made by TPO in its order passed u/s 92CA(3) of the 1961 Act. In its draft assessment order, the AO had also disallowed an amount of ₹ 17,61,702/- towards foreseeable loss on the ground that the same is contingent in nature. 3.10 The assessee filed objection against draft assessment order with learned DRP-IV, Mumbai which were dismissed by learned DRP by issuing its direction dated 19.12.2014 u/s. 144C(5) of the Act, as under: Directions of DRP 8.6. As regards the argument that three year data should be considered, while it is correct that multi year data is allowed by the transfer pricing provisions, however, the same is allowed subject to fulfilment of the condition that such data reveals facts which could have an influen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has not been able to offer, for reasons beyond its control, the underutilized capacity to its AE. There is no finding on this aspect of the matter. As the assessee does not have the liberty to work for any other customer, and is wholly dependent on its AE for productive, use of its capacity to work, the AE should normally make good any losses to the captive unit caused by its not being able to make use of the available capacity. In the case before this, the AE has indeed given some financial support to the assessee which has been reduced from the ALP adjustment figure, and the business rationale of AE's extending financial support to the assessee is thus not in doubt, However, there is nothing on record to show how this financial support has been computed and is on what ground, and on what basis this financial support is given. The reason for underutilized capacity and the facts regarding financial support extended to the assessee are not clear from the material on record. The CIT(A) has granted the impugned relief merely by making capacity underutilization adjustments to the profits achieved bv the tested party, but then such an approach, as we have noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computing the taxable income, but for transfer pricing it claims that this is an estimate and extraordinary. This is clearly an inconsistent stand. The assessee has modified its argument as it suits it. The PLI computed by assessee reported in TSPR and accepted by TPO warrants no interference. 8.11. It has been argued that transfer pricing provisions should not be made applicable as the transactions are with the Minimax PO which is a PE and therefore treated as domestic / resident tax payer and non discrimination clause of DTAA will apply. This is not acceptable. it is noted that. - the transactions are reported as International Transactions by the assessee itself in report in Form 3CEB - the transactions therein are reported not merely with Minimax PO but also with Minimax GMBH from whom purchases/imports, sale of cylinders, import purchase of capital goods, receipt of services and other transactions are reported,. -the return of income is filed in respect of Minimax GMBH in the status as Foreign Limited Liability Partnership Firm with rate of tax applicable to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a transaction between two or more associated enterprises, either or both of whom are non-residents. Associated enterprise is an enterprise which participates in management or control of capital or other gains. The provision for computing ALP has been applied to income arising from international transactions. The statute is, thus, applicable to well defined class which meets the test of intelligible differentia. It also meets the test of rational relationship to the object i.e. to determine the real income. The income arising from international transaction is to be computed having regard to ALP as per guidelines laid down in s. 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority. Mere fact that the assessee has chosen one of the said methods, does not take away the discretion to select any other method which may be considered to be more appropriate for the purpose of determining the true income. Proviso to s. 92C(3) of the Act provides for an opportunity to the assessee as to why ALP should not be determined as proposed. Under s. 92CA of the Act, the AO can make a reference on the issue of computation of ALP to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternal page 19). it is therefore held that the transfer pricing provisions are applicable in this case. 8.12. It has been argued that there is no motive to shift profit outside India. This argument is not accepted as the application of Transfer Pricing provisions is not contingent on establishing the motive of shifting profits as was held in Aztec case by ITAT. 8.13. It has been argued that two new comparables should be included viz. New Fire Engineers Pvt. Ltd. and Logicon Building Systems Pvt. Ltd. whose PLI as per assessee is 7.29% and 6.26% respectively. At the outset, it is noted that cherry picking, whether by TPO or the assessee, is not acceptable in transfer pricing analysis. The TPSR has listed out the search undertaken on the public databases by the assessee and the results of the search are reported giving the companies thrown up by objective parameters and the corresponding companies rejected by assessee. These two companies do not figure in this accept-reject matrix. Thus, a transparent and fair search process has been vitiated in this selective picking up of two companies. The search methodol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustries Ltd. and Kidde India Ltd as comparable with data of FY 2009-10 alone to be taken and similar accounting treatment to be followed in computation of PLI. 8.17. It has been argued that the adjustment should be computed only in respect of the transactions with the AE and not on entity level. There is no quarrels with this proposition. However, when the controlled transaction with AE is revenue received, the appropriate PLI is OP/OC. Thus, the PLI has to be applied to the relevant OC in respect of the controlled transaction. The TPO is directed to compute the adjustment keeping this direction in mind for which the assessee will furnish the necessary details. 8.18. It has been argued that for same transaction, two arms length price cannot be determined by two TPOs examining the two entities to the transaction. The contention is correct. Since the objections have been filed in respect of Minimax PO also which is also before this panel, the same will be considered for appropriate directions in that case. II. Other Direct Tax Grounds: 9.1. The objection no. II(i) is in respect of disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the assessee. 4 Now aggrieved with the additions as were made to the income of the assessee by authorities below, the assessee has filed an appeal with tribunal. The learned counsel for the assesssee has submitted before the Bench that the assessee is engaged in providing fire safety to various buildings in different sectors of economy. It was explained that 74% of equity is held by its foreign parent namely Minimax GmbH Co. KG. Our attention was drawn to the directions issued by DRP. It was explained that fire safety contract was awarded by DIAL in favour of L T, who in turn sub-contracted work to Minimax GmbH who further in turn awarded work to the assessee. The assessee has in its TPSR submitted had included Nitin Fire Protection Industries Limited and Kidde India Limited as comparable. The TPO accepted Nitin Fire Protection Industries Limited while rejected Kidde India Limited as comparable. The contention of the assessee before the tribunal is against exclusion of Kidde India Ltd. as comparable, which as per assessee could not be rejected as the said comparable was accepted by TPO in immediately preceding year also. Secondly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justice if there are co-ordinating among both the AO/TPO of both these assessee s to have co-ordinated assessment so that conclusions do not differ on similar facts. 5. We have considered rival contentions and perused the material on record. After hearing both the parties, we dismiss ground no. 1, 2, 3, 9 and 12 raised by assessee in its appeal in memo of appeal filed with tribunal as not being pressed by the assessee. We order accordingly. 5.2 With respect to other grounds of appeal namely ground number 4-8,10 and 11 raised by the assessee in memo of appeal filed with the tribunal, we have considered rival contentions and perused the material on record. We have observed that the assessee is engaged in the business of developer, integrator and consultant of all types of electronic, electrical mechanical, engineering systems related to fire protection and telecommunication. The assessee is a joint venture between Mr. Harish Salot and Minimax International GmbH Co. KG. The 74% equity is held by Minimax. The said Minimax International GmbH Co, KG is a foreign company, which is approved by RBI as Project office assessable to tax in India as PE. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cost 5.4 In TP study report, the assessee was selected as tested party and Operating profit/Operating Cost was taken as PLI. The international transactions were benchmark at entity level by apply TNMM. In TPSR, it is mentioned that the above transactions of purchase and sale are undertaken for completing the ongoing projects in India. Further, the provision and receipt of services are also ancillary to the completion of these projects. Therefore, these transactions are closely linked and hence are to be evaluated collectively were the contentions of the assessee before the authorities below. 5.5 The working of the assessee PLI was as under:- Particulars Amount in Rs Sales 74,40,88,809 Operating Expenses 76,92,97,738 Operating Profit (-) 2,52,08,929 Operating Margin (-)3.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arm s Length OP/OC 21.99% Arm s Length operating profit(D)=B X 21.99% 169,168,572.99 Arm s Length operating income(E)=D+B 938,466,310.59 Adjustment =E-A 194,377,501.59 5.9 The said adjustments to ALP were approved by learned DRP and objections filed by the assessee were dismissed. The AO has also made additions to the income of the assessee towards provisions for losses made to the tune of ₹ 17,61,702/- being contingent in nature. Sr. No. stature of transaction Amount (Rs.) Method Adopted 1 Purchase of Raw material 2,77,41,929 Transaction Net Margin Method ('TNMM ) 2 Sale of Cylinders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n income-tax proceedings. The onus is on the assessee to bring on record cogent material to substantiate inclusion of Keddy India Limited as comparable for computing ALP. 5.11 So far as Nitin Fire Protections Limited is concerned, perusal of audited financial statements for the year ended 31.03.2010 will reveal that apart from providing turnkey solutions including procurement, designing, system integration, commissioning and installation of safety and security solutions, is also in manufacturing and trading activities. 5.12 It was submitted before us that in these turnkey projects, the project cycle is of 2-3 years and comparable profits for last three years should be taken, as assessee is into executing turnkey project which take two to three years to execute/complete. It is also claimed that assessee has incurred extraordinary expenses due to delay in DIAL project and these extraordinary expenses incurred should be excluded while computing PLI of the assessee. The assessee apart from comparables as selected in TPSR through searches in Prowess, has also introduced new comparables namely New Fire Engineers Pvt. Ltd. and Logicon Bui ..... X X X X Extracts X X X X X X X X Extracts X X X X
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