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2019 (12) TMI 146

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..... tudy, 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 - Held that:- AO observed that, he has played a major role in supervising market research to find out customers, procuring orders, contract negotiations, etc. It has come on record that there is no evidence on record brought forward by the AO to support his contention regarding doing aforesaid work by the Director in India in market research and related jobs. Merely because of the fact that expatriate Director was present in India, no nexus can be held to be established between HO and BO. Aforesaid addition made by the AO/DRP qua attribution of profits 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. Attribution of profit to PE - Held that:- when transaction between the HO and BO has otherwise been held at arm’s length by taking into account the risk bearing function .....

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..... 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 Appellant applying arbitrary' subjective search filters. 6. That on the facts and circumstances of the case and in law, the AO, DRP , TPO erred in arbitrarily rejecting the comparable company namely, Gherzi Eastern Limited, without appreciating that it passed all the search filters adopted by the TPO. 7. That on the facts and circumstances of the case and in law, the AO, DRP, TPO erred in selecting fresh comparable companies, on the basis of arbitrary search filters and incorrect appreciation of the functions, assets and risk ("FAR") profile of Appellant and the comparable companies. 8. That on the facts and circumstances of the case and in law, the AO, DRP, TPO erred in not providing appropriate economic adjustments on account of differences in idle capacity, working capital and risk profile between the Appellant and the comparable .....

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..... d 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 Appellant from the Indian customer. 19. That on the facts and circumstances of the case and in law, the AO has erred in applying tax rate of 10.5575 percent on the royalty / Fee for Technical Services ("FTS") income received by the head office of the Appellant instead of 10 percent tax rate prescribed under the India-Netherlands tax treaty for taxation of such income. 20. That on the facts and in the circumstances of the case and in law, the AO has erred in charging interest under sections 234B of the Act. 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Lummus Technology Heat Transfer BV, the taxpayer is a company incorporated under the laws of Netherland. It has established Liaison Office in India in accordance with approval accorded by Reserve Bank of India (RBI) in June 1997. Thereafte .....

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..... n & 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 objections, who has confirmed the additions/disallowances made by the TPO/AO by dismissing the objections raised by the taxpayer. AO consequently passed assessment order and framed assessment of the taxpayer at ₹ 2,74,96,515/-. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal. 7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. GROUNDS NO.1 & 6 8. Ground No.1 being general in nature needs no specific adjudication. Ground No.6 being premature needs no specific findings. GROUND NO.8 9. The aforesaid ground pertains to adjustment of ₹ 93,62,468/- qua provision of services to its AE. However, the ld. AR for the taxp .....

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..... een 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. The tax auditor in his report also does not mention the requirement of this adjustment. You have also not shown that the comparables have idle cost and if so how it has affected their profitability. 12. Accordingly, the arm's length price of the international transaction related to provision of support services is proposed to be re-cast as below. Operating cost ₹ 11,15,85,601/- ALP at a margin of29.59% ₹ 14,46,03,780/- Price received ₹ 11,64,69,084/- Difference ₹ 2,81,34,696/- The above shortfall of ₹ 2,81,34,696/- is being proposed as an adjustment to the price shown by the taxpayer in its books of account. 13. Similarly, ld. DRP by following its own order in AY 2009-10 also denied the idle capacity adjustment by returning following findings :- 5.3 A similar issue arose in A.Y. 2009-10. In their order dated 26 .....

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..... argin 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 compared with the net profit margin realized by the enterprise ( i.e. the assessee) or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base - of course, subject to comparability adjustments which could affect the amount of net profit margin in uncontrolled conditions. It is not at all necessary, as the authorities below seem to suggest, that such net profit computations, in the case of internal comparables (i.e. assessee s transactions with independent enterprise), are based on the audited books of accounts or the books of accounts regularly maintained by the assessee. In our considered view, all that is necessary for the purpose of computing arm s length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subje .....

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..... l 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 none of these cases, a comparable can be rejected on the basis of its size per se. In this view of the matter, the authorities below were clearly in error in rejecting the internal comparable, i.e. profitability of assessee s transactions with non AEs, on the ground that the volume of business with non AEs was too small vis-à-vis business with AEs. In view of these discussions, as also bearing in mind entirety of the case, the assessee was quite justified in adopting internal TNMM and comparing the profit earned on its transactions with AEs with profit earned with non AEs. Accordingly, the ALP adjustment of ₹ 2,72,42,940 deserves to be deleted. We order so. The assessee gets the relief accordingly. 9. So, respectfully following the aforesaid referred to order dated 21.02.2014 for the assessment year 2008-09 in assessee s own case .....

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..... 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, Hon ble Bombay High Court in CIT vs. Thyssen Krupp Industries India (P.) Ltd. (2016) 68 taxmann.com 248 (Bombay) upholding the decision of coordinate Bench of the Tribunal in (2013) 154 TTJ 689, Genzyme India (P.) Ltd. vs. ACIT (2018) 93 taxmann.com 222 (Delhi-Trib.), Eli Lily & Co. (India) Ltd. vs. ACIT ITA No.6819/Del/2014 (Delhi- Trib.), Boeing International Corporation India (P.) Ltd. vs. DCIT (2019) 101 taxmann.com 349 (Delhi-Trib.) and Bechtel India (P.) Ltd. vs. DCIT (2016) 66 taxmann.com 160 (Delhi-Trib.). 19. Ld. DR for the Revenue, on the other hand, relied upon the orders of the lower Revenue authorities below. 20. When we examine annual report of EIL, available at pages 706 to 865 of the paper book, relevant pages 717 to 724, it is proved on record that EIL is working in diversified areas eg. Petroleum refining, petrochemical p .....

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..... , 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 arose out of executing projects of public sector undertakings. In the circumstances, the impugned order of the Tribunal holds that the Engineers could not be considered to be comparable as contracts between Public Sector undertakings are not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc. Thus, it was not comparable. Moreover, from the annual report, it is clear that the revenue earned in executing turnkey project for other public sector undertakings was much more than the filter of 25 per cent, which has been applied by the TPO in his order under section 92CA(3), while taking TRF Ltd. as a comparable on the ground that its related party transaction was not in excess of 25 per cent of its total turnover. Thus, applying consistent filter of 25 per cent or less of related party tr .....

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..... anagement 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 railway liens projects in J&K; and number of international assignments in export, lease and consultancy services which include supply of train sets, diesel locomotives, machinery & parts, construction of maintenance facilities & training. It is also proved on record that Rites is possessing global and domestic experience in transportation and project management services and has signed biggest ever consultancy contract with Saudi Railway Company for operation and maintenance of railway network for Kingdom of Saudi Arabia. It is also proved on record that Rites is a wholly owned company of Government of India and is having huge asset base of ₹ 163 crores, detailed at page 893 of the paper book, as against ₹ 17 lakhs of the taxpayer. 26. So, bare perusal of functional profile and asset base and the fact that Rites is a wholly .....

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..... 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 having huge asset base and relied upon the decisions of International SOS Service India P. Ltd., Thyssen Krupp Industries (P.) Ltd. (supra), DCIT vs. Anglo-Eastern Ship Management (India) Pvt. Ltd. ITA No.1053/Mum/2017 and DCIT vs. Terex India (P) Ltd. (2019) 71 ITR (T) 259 (Delhi- Trib.). 34. Perusal of business profile of HSCC at page 931 of the annual report of paper book shows that HSCC was awarded the work of rendering consultancy services for design & engineering, project management and procurement of medical equipments, drugs & pharmaceuticals, etc. for various prestigious & challenging projects. Perusal of page 937 of the annual report of paper book shows that HSCC shows that HSCC s major on-going consultancy projects are qua architectural planning, design & project management services, procurement management services, stu .....

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..... astructure, 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 detail of income & expenditure available at page 995 of the paper book and relied upon the decisions of Terex India (P.) Ltd. vs. DCIT in ITA No.4791/Del/2015 for AY 2010-11, DCIT vs. Terex India (P.) Ltd. (2019) 104 taxmann.com 281 (Delhi-Trib.) for AY 2011-12, Rampgreen Solutions (P.) Ltd. vs. CIT (2015) 377 ITR 533 (Delhi) and NCS Pearson India (P.) Ltd. vs. DCIT (2018) 91 taxmann.com 105 (Delhi-Trib.). 39. Coordinate Bench of the Tribunal in the case of DCIT vs. Terex India Pvt. Ltd. (2019) 104 taxmann.com 281 (Delhi-Trib.) ordered to exclude Mahindra as a comparable vis-à-vis a routine engineering design services provider on the ground that it is into variety of services out of which only one is engineering services and segmental information of same is not available. 40. Coordinate Bench of the Tribunal in M/s. Terex India Pvt .....

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..... ribunal 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 turnkey design, supply and installation of engineered equipments, which covers engineering studies and design engineering services, project management consultancy and construction management services and Opex services. Information contained in the website extract also shows that TCEL is also into providing services in infrastructure, energy, process, project management consulting and advanced technologies. 44. Perusal of schedule forming part of the balance sheet at page 1013 shows that TCEL is having huge asset base of ₹ 38 crores as against ₹ 17 lakhs of the taxpayer. Furthermore, when we examine profit & loss account, available at page 1011 of the paper book, there is only single reportable segment i.e. income from engineering consultancy services without any bifurcation of diversified categories of services being provided b .....

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..... 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 above, we are of the considered view that TCEL being into providing entire gamut of project engineering from inception to project engineering and turnkey design, supply and installation of engineered equipment, and is into providing services of engineering studies and design engineering services is having different functional profile vis-à-vis the taxpayer who is a routine engineering design services and moreover TCEL is having a single reportable segment showing income from engineering consultancy services and no bifurcation is available qua variety of services being provided by TCEL, hence not a suitable comparable vis-à-vis the taxpayer. So, we order to exclude the same from the final set of comparables. KITCO LTD. (KITCO) 47. The taxpayer sought exclusion of Kitco on the grounds inter alia that it is a Government of India owned .....

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..... ative 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 Limited ITA No. 6460/MUM/2012. 23. The relevant findings given in the case of ThyssenKrupp Industries India Private Limited and of the coordinate bench in assessee's own case read as under: "We find it as undisputed that Engineers India Limited is a Government company. It has several segments which also include 'Turnkey project' page 700 of the paper book is a copy of annual report of Engineers India Limited on turnkey project. It can be seen that the revenue has arisen from completing paraxylene plant of IOCL and further that company is engaged in execution of other unit of IOCL's Panipat Naphtha cracker project. In our considered opinion' this case should not have been included in the list of final comparables for two reasons. First reason is that profit motive is not a relevant consideration in case of Government under .....

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..... 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 and presence of BO s employees to provide services to HO s clients implying involvement of BO in activities of the HO. 56. Ld. AR for the taxpayer contended that the taxpayer has a BO in India and consequently income earned by it is taxed in India. It is also contended by the ld. AR for the taxpayer that the transactions between HO and BO are subject to transfer pricing provisions and have been already benchmarked and the profit related to that part of the contract, which is directly carried out by the HO, shall only be taxable in Netherland and as such, no further income is liable to be attributable to the BO and also relied upon Article 7 of the Tax Treaty between India and Netherland. 57. The ld. AR for the taxpayer further contended that the AO has proceeded on the basis of assumption that BO performed all the activities detailed at page 1 .....

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..... 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 Officer is, therefore, directed to be deleted. This ground is allowed." 59. It is further contended by the ld. AR for the taxpayer that AO has wrongly relied upon the order of Reserve Bank of India (RBI) dated 13.04.1999 because BO was granted specific approval by the RBI for performing certain activities which was restricted only to permit activities, and the income earned from such permitted activities has already been offered to tax in India. 60. 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 ow .....

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..... d 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. GROUND NO.15 65. AO/DRP have further attributed profits to PE of the taxpayer ignoring the fact that the said transactions have already been considered by the TPO and no further profits could have been attributed. 66. Undisputedly, TPO in its TP analysis has considered all the transactions between BO and HO and after conducting FAR analysis the same has been compensated on arm s level basis. In these circumstances, no further attribution of profit to BO can be made. 67. Hon ble Supreme Court in the case of DIT vs. Morgan Stanley and Co. Inc. (2007) 292 ITR 416 (SC) decided the issue by returning following findings :- As regards attribution of further profits to the PE of MSCo where the transaction between the two are held to be at arm's length, we hold that the ruling is correct in principle provided that an associated enterprise (that also .....

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..... 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 applied additionally to increase the tax rate prescribed in the DTAA i.e. 10%. So, we direct the AO to apply tax rate of 10% in this case on royalty/FTS. Consequently, this issue is decided in favour of the taxpayer. GROUND NO.20 72. AO has charged the interest u/s 234 B, which has been challenged by the taxpayer on the ground that this issue has been decided in favour of the taxpayer in numerous cases and more so, in taxpayer s own case for AY 2006-07, this issue stands covered. Coordinate Bench of the Tribunal in taxpayer s own case for AY 2006-07 decided the issue in controversy in favour of the taxpayer by returning following findings :- "5.2 Having heard the rival submissions and perused the relevant material on record in respect of this additional ground, we find that the issue of charging interest u/s 234B in the present case is ho mor .....

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