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2019 (12) TMI 146

..... ng capital and risk profile between the Appellant and the comparable companies - foreign exchange gain - benefit of 5 percent range - Held that:- idle capacity from the total expenditure incurred by the taxpayer while determining ALP is required to be excluded - TPO directed to decide afresh after due verifications of the details given by the taxpayer qua idle capacity adjustments in the light of the decisions rendered by the coordinate Bench of the Tribunal in taxpayer’s own case Accrual of income - functions performed by the fixed place Permanent Establishment (PE)/Service PE/ Supervisory PE - transactions between HO and BO - Held that:- No activities have been performed by the BO on behalf of the HO as presumed by the AO. Moreover, the taxpayer has specifically explained the functions performed and risk undertaken by the HO and BO in its TP study, relevant pages 558 to 590 of the paper book, showing activities of the BO being restricted to basic design and engineering services. Furthermore, HO was otherwise responsible for its own market development research and negotiation for contract. Nature of activities carried out by the expatriate Director stationed at Gurgaon - Hel .....

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..... ces of the case and in law, the AO / Transfer Pricing Officer (TPO") / DRP have erred in making an upward TP adjustment of INR 93,62,468, in respect of the transaction relating to provision of design and engineering, and supervision services to associated enterprises CAE"), alleging that the same were not at arm's length. 3. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules") for determination of the arm's length price ("ALP") of provision of design and engineering, and supervision services. 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in rejecting / arbitrarily modifying the search process and filters adopted by the Appellant for the purpose of benchmarking its international transactions of provision of design and engineering, and supervision services to AEs. 5. That on the facts and circumstances of the case and in law, the AO, DRP , TPO erred in arbitrarily rejecting the comparable companies selected by the App .....

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..... erred in applying an ad-hoc and arbitrary rate of 25 percent to determine gross profit from the direct sales / services in India by the head office and further erred in estimating, on an ad-hoc basis, 50 percent thereof, as attributable to the PE of the Appellant, on conjectures and surmises. 15. That on the facts and circumstances of the case and in law, the AO / DRP have erred in attributing further profits to the PE of the Appellant without appreciating that the subject transactions have been scrutinized by the TPO and no further profits could have been attributed. 16. That on the facts and circumstances of the case and in law, the AO / DRP have erred by completely misinterpreting the facts of the case and making assumptions in attributing further profits to the PE of the Appellant, being the branch office in India. 17. That on the facts and circumstances of the case and in law, the AO has erred in not giving credit of taxes amounting to INR 4,73,055, while computing the alleged tax payable by the Appellant. 18. Without prejudice to the above grounds, the AO has also erred in not giving credit of taxes amounting to INR 7,27,883 withheld on payments received by head office of the .....

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..... or (PLI) as Most Appropriate Method (MAM) and computed its margin at 46.54% on cost after claiming idle capacity adjustment whereas the average margin of comparable is 21.12% by using multiple year data and found its international transactions at arm s length. 5. Ld. Transfer Pricing Officer (TPO) denied the idle capacity adjustment of ₹ 2,50,63,818/- i.e. 21.90% of the total cost of ₹ 11,44,23,546/- claimed by the taxpayer on the ground that the taxpayer has failed to provide documentary evidence in respect of basis of cost allocation under each head i.e. personnel expenses, operating & other expenses, financial expenses and depreciation, finally selected 10 comparables with margin of 25.21% and proposed adjustment of ₹ 93,62,468/- to Arm s Length Price (ALP) of international transactions pertaining to provision of design & engineering services. Assessing Officer (AO)/DRP have confirmed the additions made by the TPO in draft orders and further made additions amounting to ₹ 76,33,390/- by attributing profits of HO to BO from HO s direct transactions with Indian customers. 6. The taxpayer carried the matter before the ld. DRP by way of filing objectio .....

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..... T (2015) 69 SOT 571 (Delhi), Bechtel India (P) Ltd. vs. DCIT (2016) 66 taxmann.com 160 (Delhi), Ariston Thermo India Ltd. vs. DCIT (2014) 147 ITD 388 (Pune) and DCIT vs. Genesis Integrating Systems (India) (P) Ltd. (2016) 66 taxmann.com 20 (Bangalore). 10. However, on the other hand, ld. DR for the Revenue relied upon the orders of the lower Revenue authorities. 11. When we examine page 36 of the paper book, it shows that the taxpayer has given the complete calculation as to how the idle hours are calculated. Perusal of project-wise break-up of the actual hours at page 490 of the paper book shows that the taxpayer has explained as to how the working hours of the employees have been calculated. 12. However, ld. TPO denied the idle capacity adjustment claimed by the taxpayer by returning following findings :- 11. As per the details filed it is seen that you have claimed idle capacity adjustment of ₹ 2,50,63,818, which has lead to OP/OC of 46.54%. However this claim cannot be allowed to you. It is not evident from notes on account filed along with audited P&L ale and balance sheet of the assessee and Form 3CD report of tax auditor that idle capacity adjustment is required. T .....

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..... eding year have been set aside by the coordinate Bench of the Tribunal in AY 2009-10 in ITA No.1047/Del/2014 by returning following findings :- 8. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is noticed that an identical issue having similar facts was a subject matter of adjudication in the preceding assessment year 2008-09 in ITA No. 6227/Del/2012 wherein vide order dated 21.02.2014, the issue has been decided in favour of the assessee and the relevant findings have been given in paras 4 & 5 which read as under: 4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case in the light of the applicable legal position. 5. Rule 10B(1)(e) of the Income Tax Rules, which deals with the Transactional Net Margin Method, provides requires that the net profit margin realized by the enterprise (i.e. the assessee) from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base is .....

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..... no specific defects were pointed out by the TPO. Taking into account all these factors, as also entirety of the case, we are of the considered view that the TPO indeed erred in rejecting the segmental accounts and thus declining to accept the internal comparable. We are also of the view that the size of the uncontrolled transaction or transactions being smaller, by itself, does not make these transactions incomparable with the transactions in controlled conditions. Size of the comparable does matter in entity level comparison because scale of operations substantially vary and so does the underlying profitability factor, but in a transaction level comparison within the same entity, mere difference in size of the uncontrolled transactions does not render the transaction incomparable. If the size of uncontrolled transaction is too big, it may call for an adjustment for volume business. If the size of the uncontrolled transaction is too small, it may provoke an inquiry by the TPO to ensure that it is not a contrived transaction outside the normal course of business or with regard to other significant factors surrounding smallness of such transaction. However, in our considered view, in .....

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..... ndra Consulting Engineers Ltd., Tata Consulting Engineers Ltd. and Kitco Ltd. to benchmark the international transactions qua provision of design and engineering services along with supervisory support services and supply of equipment & material to AE. So, we would examine the suitability of all the aforesaid comparables vis-à-vis the taxpayer one by one as under. ENGINEERS INDIA LTD. (EIL) 18. The taxpayer sought exclusion of EIL on the grounds inter alia that it is a Government of India owned company having 90.40% of total shareholding; that EIL is engaged in the business of consultancy and engineering products and turnkey projects with diversified area of production; that EIL is into extensive Research and Development (R&D) activities; that EIL has huge assets; that turnover of EIL is 150 times of the taxpayer and relied upon the decisions of PCIT vs. International SOS Services India (P.) Ltd. - SLP (Civil) Diary No.18255/2018 (SC) upholding the decision of Hon ble Delhi High Court in ITA 454 of 2016, Hon ble Delhi High Court in PCIT vs. Bechtel India Pvt. Ltd. in ITA 655/2016 upholding the decision of the coordinate Bench of the Tribunal in ITA No.6779/Del/2015, .....

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..... .com 73 (Delhi-Trib.) on the grounds inter alia that a 100% Government company cannot be selected as comparable and that company having no intangible assets cannot be a valid comparable vis-à-vis a company owning intangible assets in the form of technical know-how. Order of the coordinate Bench of the Tribunal has been upheld by the Hon ble Delhi High Court vide order dated 30.05.2017 passed in ITA 454/2016 and SLP filed by the Revenue in the Hon ble Supreme Court has also been dismissed. 22. EIL as a comparable has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Thyssen Krupp Industries (P.) Ltd. vs. ACIT (2013) 25 ITR (T) 243 (Mumbai- Trib.) on the grounds that EIL is a Government company and most of its customers of the Turnkey Project division are related parties, being other public sector undertakings, which is more than the filter of 25%. The decision of the Tribunal has been upheld by the Hon ble Bombay High Court by returning following findings :- Tribunal records the fact that the Engineering India is a Government company and its annual report indicates that a substantial part of revenue of a comparable in execution of turnkey projects .....

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..... Bench of the Tribunal in (2013) 154 TTJ 689, Rolls Royce India (P) Ltd. vs. DCIT (2016) 176 TTJ 1 (Del - Trib.), M/s. Terex India Pvt. Ltd. vs. DCIT in ITA No.4791/Del/2015 order dated 30.05.2019 and Eli Lily & Co. (India) Ltd. vs. ACIT ITA No.6819/Del/2014 (Delhi-Trib.). 25. When we examine profit & loss account of Rites, available at page 890 of the paper book, it shows that Rites has income from various activities like consultancy fee, construction projects, export sales, inspection fees, lease services etc. Furthermore, perusal of annual report, available at pages 855 & 856 of the annual report paper book, shows that during the year under assessment, Rites was engaged in turnkey project of enhancement of coach production facilities for Rail Coach Factory, Kapurthala; General consultancy for DMRC, Airport Express Link; project management consultancy for laying water transmission line for Kolkata Municipal Corporation; Engineering and construction management for railway infrastructure, project report for diversion of railway, road transmission lines and water pipelines from fire and subsidence affected area; bridge/tunnel design and Geo-Tech investigations for new rai .....

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..... n the fields of transport, infrastructure and related technologies. It provides a comprehensive array of services under a single roof and believes in transfer of technology to client organizations. In overseas projects, it actively pursues and develops cooperative links with local consultants/firms, as means of maximum utilization of local resources and as an effective instrument of sharing its expertise. Thus, it is evident that RITES Ltd. is a primarily imparting high end technical services, which cannot be compared with low end marketing business support services rendered by assessee. [Para 32] 30. So, in view of the matter, we are of the considered view that Rites being a wholly owned Government of India company into diverse activities having huge asset base and is into providing high end technical services and diverse nature of activities is not a suitable comparable vis-à-vis the taxpayer. HSCC (INDIA) LTD. (HSCC) 33. The taxpayer sought inclusion of HSCC as a comparable on the grounds inter alia that it is into different nature of activities; that it is operating in single segment with no availability of segmental data; that it is a wholly owned Government company hav .....

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..... view of the matter, we are of the considered view that HSCC being a wholly owned Government of India company drawing most of its project from Government and its public sector undertakings and is into diversified nature of activities having asset base of ₹ 6.32 crores as against ₹ 17 lakhs of the taxpayer, it cannot be a suitable comparable vis-à-vis the taxpayer, hence ordered to exclude the same from the final set of comparables. MAHINDRA CONSULTING ENGINEERS LTD. (MAHINDRA) 38. The taxpayer sought exclusion of Mahindra on the grounds inter alia that it is into diversified nature of activities of providing consultancy services in the area of infrastructure viz. special economic zones, water supply & sewerage, solid waste management, urban infrastructure, agri and horti infrastructure, social infrastructure, marine infrastructure, industrial infrastructure, renewable energy, sustainable studies, etc., as detailed in the annual report at page 979 of the paper book; that Mahindra has a single reportable segment i.e. income from consultancy services whereas no segmental financials are available qua diversified categories of services being performed by it as per .....

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..... t has been discussed above, we are of the considered view that Mahindra being into diversified consultancy services with no segmental financials available to explain the diversified categories of its services is not a suitable comparable vis-à-vis the taxpayer who is a routine engineering design service provider, hence ordered to be excluded. TATA CONSULTING ENGINEERS LTD. (TCEL) 42. The taxpayer sought to exclude TCEL as a comparable on the grounds inter alia that it is functionally dissimilar having huge asset base; that TCEL is having a single reportable segment i.e. income from engineering consultancy services with no bifurcation of diversified categories of services and relied upon the decision of Hon ble Delhi High Court in PCIT vs. Bechtel India Pvt. Ltd. ITA 655/2019 (Delhi HC) upholding the decision of coordinate Bench of the Tribunal in ITA No.6779/Del/2015 and decision of coordinate Bench of the Tribunal in DCIT vs. Terex India (P.) Ltd. (2019) 71 ITR (T) 259 (Delhi-Trib.). 43. Perusal of information contained in website extract, available at page 13, shows that TCEL is into providing entire gamut of project engineering from inception to project commissioning and .....

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..... el India Pvt. Ltd. vs. DCIT - 2015 (12) TMI 1560 - ITAT Delhi for AY 2010-11 has ordered to exclude TCE Consulting as a comparable vis-à-vis routine engineering design service provider by returning following findings :- 12.6 The Comparable Company is involved in activities beyond engineering design. It is engaged in activities that extend from concept to commissioning. Whereas the assessee provides services as a captive unit to its overseas AEs. The diversified functions of this comparable company include pre-project activities, procurement assistance, project management, commissioning and coordination, inspection, construction and supervision. Further, there is no segmental accounting in the annual report of the Company which provides profitability, for the engineering design segment. Hence the same cannot be accepted as a comparable. 44. In view of what has been discussed above, we are of the considered view that TCE Consulting having a big brand value and being into high end engineering consulting services with no financial segmental available is not a suitable comparable vis-àvis taxpayer, hence ordered to be excluded. 46. So, in view of what has been discussed ab .....

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..... ue in the Hon ble Supreme Court has also been dismissed. 51. Coordinate Bench of the Tribunal in PCIT vs. Bechtel India Pvt. Ltd. (supra) excluded Kitco by relying upon the decision of Thyssen Krupp Industries India Pvt. Ltd. in ITA No.6460/Mum/2012 by returning following findings :- 22. The profile of this company shows that it is a 100% Government owned undertaking rendering services primarily to Central/State Government undertaking and PSUs. Most of the clients or projects undertaken by this company are either for state government or government run institutions. Therefore, the majority revenue of this company comes from government /state or centre run projects and the company derives benefit out of its parental relation with the Government in getting contract and because of this, the profit margins of this company cannot be said to be indicative of a free market economy where the appellant company and others operate. For these reasons, this company was excluded by the Tribunal in assessee's own case in assessment year 2010-11 in ITA No. 1478/DEL/2015 wherein the Tribunal relied upon the findings of the coordinate bench in the case of ThyssenKrupp Industries India Private Lim .....

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..... diversified activities of business qua which segmental financials are not available, is not a suitable comparable vis-à-vis the taxpayer which is a routine provider of design engineering services along with supervisory support services to its AE, hence ordered to be excluded. GROUNDS NO.9 & 10 53. Grounds No.9 & 10 are dismissed having not been pressed during the course of arguments. GROUND NO.11 54. Ground No.11 being consequential in nature needs no specific findings. GROUNDS NO.12, 13, 14 & 16 55. AO/DRP following the earlier assessment year estimated the gross profit of such sales made by HO at 25% which comes to ₹ 1,52,66,780/-. After considering the functions performed by the fixed place Permanent Establishment (PE)/Service PE/ Supervisory PE, 50% of the aforesaid profit is attributed to PE which comes to ₹ 76,33,390/- on the grounds inter alia that BO was set up in India for the business activities of HO as the BO was involved in negotiations and other activities of HO and that expenses of BO did not commensurate with the scale of its turnover showing more work done than contended by the taxpayer and that the customers of BO and HO were common .....

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..... ion. The learned DR was required to invite our attention towards any material indicating the assessee's involvement in the direct transactions between the head office and Indian customers. In the name of reply, he took us through certain portions of the draft assessment order in which there is a Lummus Technology Heat Transfer BV reference to certain invoices of the HO indicating the role of the assessee in such direct transactions. On a careful scrutiny of the dates of such invoices, it can be seen that they relate to the financial year 2004- 05 relevant to the preceding assessment year 2005-06. A copy of the assessment order for the A.Y. 2005-06 has been placid on record. It can be seen from such order dated 17.12.2007, that no addition was made in respect of such presumptions of the Assessing Officer. It is further relevant to note that the assessee's accounts were examined by the TPO, who has not pointed out even a single rupee expense attributable to the direct transactions between HO and Indian customers. When this is the position obtaining in this case, we fail to comprehend as to how an income can be estimated in this regard. Such addition made by the Assessing Offi .....

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..... crores and the cost so incurred is not commensurate with the business turnover and as such, BO proved to have performed more than what has been claimed by it. 63. We are of the considered view that account detail of any such specific expense or revenue item, otherwise unreasonable or under-stated, has not been pointed out, and the entire decision has been made on the basis of assumptions. Moreover, even otherwise, reasonableness of the expenditure has to be considered with businessman s stand point and revenue officer cannot decide such issue while sitting on the businessman s arm chair. This proposition has been laid down by Hon ble Supreme Court in CIT vs. Walchand and Co. (P) Ltd. (1967) 65 ITR 381 (SC) and Aluminium Corporation of India vs. CIT (1972) 86 ITR 1 (SC). 64. In view of what has been discussed above and following the order passed by the Tribunal in taxpayer s own case in 2006-07, 2008-09 & 2009-10, we are of the considered view that aforesaid addition made by the AO/DRP qua attribution of profits amounting to ₹ 76,33,390/- to HO from direct supplies and services to customers in India to PE in India i.e. BO is not sustainable, hence ordered to be deleted. GR .....

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..... (b) in India: - the income-tax including any surcharge thereon, - the surtax, - the wealth-tax. (hereinafter referred to as "Indian tax'? 4. The Convention shall apply also to any identical or substantially similar taxes which are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes. The competent authorities of the States shall notify to each other any substantial changes which have been made in their respective taxation laws. 71. Under Article 2(3) of the DTAA, tax includes Income-tax and surcharge thereon and as such, surcharge is included in the income-tax and the tax rate of 10% for fee for technical services as prescribed in Article 12 is deemed to be included surcharge as cess is nothing but an additional surcharge, so only tax rate of 10% under DTAA is applicable. Ld. AR for the taxpayer relied upon the decision rendered by the coordinate Bench of the Tribunal in Soregam SA vs. DCIT (2019) 101 taxmann.com 94 (Delhi-Trib.) wherein the identical issue has been decided in favour of the taxpayer by holding that since education cess is a form of additional surcharge, education cess or any other surcharge cannot be appl .....

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