TMI Blog2020 (3) TMI 1189X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel has also given the quantification of the risk adjustment which has been placed in the paper book at pages 447 to 449, wherein it has given the difference between the bank rates and SBI base rates and quantification factor as been laid down by the Sony India (P) Ltd. vs. DCIT [ 2008 (9) TMI 420 - ITAT DELHI-H] Accordingly, we direct the TPO to examine the assessee s quantification of risk adjustment specifically where assessee has taken the difference between bank rates and SBI bank rate and the quantification done by the assessee of the risk adjustment on 10.50%, is correct or not. With this direction this issue is remanded back to the TPO/Assessing Officer. - I.T.A. No.7569/DEL/2019 - - - Dated:- 2-3-2020 - Shri Amit Shukla, Judicial Member And Shri Prashant Maharishi, Accountant Member For the Appellant : Shri Rajan Vohra, AR. For the Shri Rajan Vohra, AR. : Shri Sanjay I- Bara, CIT-D.R. ORDER PER AMIT SHUKLA, JM The aforesaid appeal has been filed by the assessee against the final assessment order dated 29.08.2019, passed u/s.143(3) r.w.s. 144C passed in pursuance of direction given by DRP vide order dated 03.07.2019 u/s.144C(5) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in the Appellant s own case for AY 2011-12 and 2012- 13; Levy of interest under section 234B of the Act 8. erred in levy of interest under section 234B of the Act of ₹ 77,07,273; Levy of interest under section 234C of the Act 9. erred in levy of interest under section 234C of the Act of ₹ 2,13,435 2. The facts in brief are that Hyundai Rotem Company is a South Korean Company and is a part of Hyundai Motor Group and it is engaged in producing all kinds of railway vehicles, such as electric multiple unit, high speed trains, light rail vehicles, locomotives and passenger coaches, car manufacturing systems and environment plants. It provides rail business solutions throughout the world, ranging from manufacture of rolling stock to the supply of turnkey rail systems. Its business scope includes not only advanced defence industry products but also production and supply of industrial plants and environment friendly facilities. The Rotem has set up project offices in India which are;- (i) RS1 PO (ii) RS3 PO (iii) BMRCL PO (iv) HM PO (v) RS 10 PO These project offices were set up in India for carrying out liaisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Transport System - Phase II Contract / Tender RS3 for design, manufacture, supply, testing, commissioning, training and transfer of technology of 156 Standard Gauge EMUs or rolling stock; MC, ROTEM, MELCO and BEML formed a consortium and the contract was later awarded to MRMB consortium vide contract agreement dated October 19, 2007. In connection with contract RS3, ROTEM has been chosen as the technical leader of the project and is responsible for detailed design development, manufacture, supply, testing, and commissioning of Mechanical portion of the Rolling Stock; MELCO is responsible for the detail design development, manufacture, supply of the Propulsion Equipments and other possible electrical equipments of the Rolling Stock; and BEML is responsible for the localization works. Further, MC as consortium leader is responsible for project co-ordination, commercial management, contract administration, legal administration, providing bank guarantees and collecting payments from DMRC. For the purpose of coordination and administrative support in connection with RS3 contract, ROTEM has established a project office ( ROTEM - RS3 PO,r) at New Delhi, India with the prio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 cars ( 2RS-DM contract )- ROTEM in consortium with MC, MELCO and BEML (jointly BRMM consortium ) had participated in the pre-qualification bid invited by BMRCL and submitted a tender which was later awarded by BMRCL to the consortium in 2009. Under the contract, BEML has been appointed as the consortium leader and is responsible for supply of EMUs to BMRCL while ROTEM/ MELCO/ MC are responsible for supplying equipments/ materials to BEML. BEML is responsible for corresponding with BMRCL on behalf of the consortium and local manufacturing, T C of rolling stock at BEML factory. ROTEM is responsible for design, development, manufacture, supply T C of its portion of rolling stock, training of personnel, support and supervision of quality of manufacturing, assembly, T C and integration of the metro cars to be produced by BEML. MELCO has assigned its individual scope of work under the 2RS-DM contract of BMRCL to ROTEM. Accordingly, ROTEM assumes the rights and obligations of MELCO under the contract and bears the responsibility for supply of electrical works. 2.4.4 HM PO HM floated a tender for design, manufacture, supply, testing and commissioning of Rolli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has been performed by ROTEM head office and ROTEM - RS 1 PO was responsible for liaisoning and coordinating the process of after sales activities. In light of the above and based on our discussions with ROTEM - RSI PO, summarized below is an analysis of functions performed, the risks assumed, and the assets employed by the transacting entities, in relation to the international transaction - ► Liaisoning and coordination ROTEM - RS 1 PO liaise with DMRC to understand their requirement and defects identified by DMRC in the components supplied by ROTEM. Subsequently, the defects, if any, identified by DMRC are communicated to ROTEM head office. The defects, such as replacement of components of doors of rolling stock, if any, is undertaken by the outsourcing companies identified by ROTEM head office. The procedure for replacement is demonstrated by ROTEM head office to the outsourcing companies and ROTEM - RSI PO's role is restricted to supervision of activities of outsourcing companies. The entire maintenance activities in India in relation to the rolling stock supplied to DMRC is performed under the supervision of Chief Maintenance Engin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Korea. For FY 2014-15, ROTEM is responsible for supplying material to BEML for use in assembling of EMUs in India. The local assembling is undertaken by BEML and ROTEM through ROTEM - RS3 PO supervise the site and depot operations in connection with onsite testing and commissioning work being undertaken by BEML in India. In addition, ROTEM - RS3 PO is responsible for rendering support services in relation to custom clearance of supplies made from outside India and arranging for logistics. ► Testing and commissioning Based on the requirement of DMRC, ROTEM - RS3 PO supervises the onsite testing and commissioning activities being undertaken in relation to Contract RS3. ROTEM - RS3 PO handles routine technical issues occurring on a day to day basis under the technical guidance provided by ROTEM head office. However, the project office undertakes only minor troubleshooting in relation to rolling stock. Any concern in relation to assembling is taken care-off by BEML and design issues are handled by ROTEM head office. ► Liaisoning/interfacing with DMRC ROTEM - RS3 PO is involved in liaisoning and interfacing with the DMRC officials and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain material and supply of same to BEML directly. In relation to the local supplies being made by BMRCL PO to BEML, there is no separate consideration receivable from BMRCL in this regard. The PO is paid by BEML for such local supplies out of the fixed lump-sum consideration received. ► Supervision BMRCL PO is responsible for co-ordinating and interfacing with service providers in connection with handling cargo and other logistics, customs clearance etc. of equipment imported into India and transportation of same to the assembly sites of sub-contractors and further to BEML's factory for local assembling of EMUs. ► Liaisoning / interfacing BMRCL PO is involved in liaisoning and interfacing with BMRCL officials and BEML in connection with the ROTEM s scope of work under the contract. This entails various administrative activities and technical matters to be coordinated for proper execution of the contract. BMRCL PO acts as the communication link between ROTEM as a member to BRMM Consortium and BMRCL representing ROTEM under instructions of ROTEM. The cost incurred by BMRCL PO in relation to such coordination activities, are reimbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are summarized in the table below Type of functions HM PO ROTEM Contract execution Limited Yes Logistics Support Yes Limited Liaisioning with HM Yes Limited RS 10 Contract- The functional role and responsibilities of RS10 PO are largely similar to the other contracts undertaken by ROTEM. The functions performed by RSIO PO have been summarized below - ► Contract execution Under the RS-10 contract, a maximum of 120 cars can be manufactured offshore and the remaining cars need to be manufactured in India. For the purpose of coordination and administrative support in connection with the RSIO contract, Rotem has established a project office i.e. Rotem- RS 10 PO at New Delhi, India. Rotem (head office) has appointed a sub-contractor i.e. BEML Limited for manufacture of balance cars in India on job-work basis . For FY 2014-15, ROTEM (Head Office) is responsible for sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Liaisioning/ Interfacing with DMRC Yes Limited 4.1.3 Risk Analysis 4.1.3.1 Business risk Business risk arises when a firm is subject to adverse sales conditions due to either increased competition in the marketplace, adverse demand conditions within the market, or the inability to develop markets or position products to service targeted consumers. ROTEM - POs only provide administrative support services to ROTEM and do not assume any specific market risk. ROTEM is responsible for generating business and none of business related decisions are made by people in ROTEM - POs. ROTEM is responsible for deciding the business strategy and future growth strategy for the company. Accordingly, business risk is borne by ROTEM. 4.1.3.2 Credit and collection risk When a firm supplies products or services to a customer in advance of customer payment, the firm runs the risk that the customer will fail to make payment. This risk is known as customer credit risk. The revenues of ROTEM - POs are generated from a single entity i.e. ROTEM, which is its Head Office. Accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous operating expenses o behalf of ROTEM and charged back these expenses to ROTEM. The value of the charge back of these expenses is as follows:- Associated enterprise Paid by Description of Services Amount (INR) ROTEM RS 13 Payment to vendor on behalf of ROTEM 21610500 ROTEM RS3 PO Taxes and duties paid on behalf of ROTEM 17802178 ROTEM BMRCL PO Taxes and duties paid on behalf of ROTEM 28603004 Expenses incurred on behalf of ROTEM 164553 ROTEM HM PO Expenses incurred on behalf of ROTEM 3156987 Taxes and duties paid on behalf of ROTEM 1908619 ROTEM RS 10 PO Taxes and duties paid on behalf of ROTEM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rendering of administrative support and coordination services by HM PO 170,522,202 V. Rendering of administrative support and coordination services by RS10 PO 152,994,500 vi. Reimbursement of expenses to AE Other method 906,563,959 vii. Reimbursement of expenses by AE 21,289,017 5. In order to benchmark the administrative support services, the assessee adopted TNMM as most appropriate method and OP/OC was taken as PLI. The assessee selected six comparable companies for its arm s length analysis which was determined from the 35th percentile of the data set and ending on 65th percentile of data set and the median was arrived at 7.74%. The computation was done in the following manner: No. Name of the company Weighted average OP/OC% (i) Concept Public Relations India Ltd 4.24 (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP/OC 2015 WTG. AVG. OP/OC 1 I C R A Management Consulting Services Ltd. 2.36 4.01 11.82 6.13% 2 Keystone Integrated Mktg. Services Pvt. Ltd. 6.89 7.10 9.75 8.13% 3 Mitcon Consultancy Engineering Services Ltd. 34.84 25.06 10.35 22.82% 4 Killick Agencies Mktg. Ltd. 26.73 23.06 23.22 24.32% 5 WAPCOS Ltd (seg) NA 35.55 32.98 34.16% 6 Holtec Consulting Pvt. Ltd. 60.15 60.19 43.82 54.39% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pricing adjustment were made, the TPO has not disputed the functional profile of the assessee for Assessment Year 2007-08, 2008-09, 2009-10, 2010-11 and 2013-14. Thus, when Department itself in all the years has accepted the functional profile of the project office, then TPO in this year cannot take a different stand and change the profile of the assessee. However, he submitted that in the Assessment Year 2011-12, the TPO has not accepted the assessee s functional profile. He further submitted that the assessee is mainly aggrieved for exclusion or inclusion of following comparable companies:- Sr. No Name of the company Margin as per TP study Margins considered by the Ld. TPO Appellant s reason for exclusion/ inclusion from set of comparable Comparables to be excluded 1 Killick Agencies Marketing Limited Not considered comparable in TP Report 24.32% Functionally different Rule of consistency 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Marketing Limited (KILLICK) Operating Margin : 24.32% Functional difference 14. Ld. Counsel submitted that this company acts as an agent for its foreign principals for sale of dredgers, dredging equipment, steerable rudder propellers, maritime and aviation lighting, acoustic communication equipment etc. The company also provides after sales services and is involved in the export of micro switches, engineering items etc. Further, it was observed that the company is engaged in the business of marine equipment like specialized propulsion systems, marine engines, industrial marine gear boxes, ballast water treatment system, special purpose sea going vessels, industrial marine exhaust system, ship lighting navigation lighting systems, dredges and dredge equipment, ship building presses, rescue boats and specialized davits, reverse osmosis water systems arc special acoustic communication equipment for defense. Further, the Ld. TPO in her order has herself stated that this company receives income in the form of commission, which is not comparable to the Appellant which is remunerated on a cost plus mark-up basis. It needs to be appreciated that this company essentially ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 10491 Bang/2016) dated 13 September The Hon ble ITAT has excluded Killick for marketing support service provider and held as under- 8.3.2 Considering the facts of the matter as laid out above and following the aforesaid decision of the co-ordinate bench in the case of Electronics for Imaging India Pvt. Ltd., for asst, year 2010 11 (Supra) we direct the AO/TPO to exclude this company from the list of comparables on grounds of it being functionally different from the assessee in the case on hand who was only providing sales and marketing support services. On a without prejudice basis, he submited that even if it s profile is considered to be that of a technical support service provider, then following judicial precedent Killick cannot be considered comparable to a company engaged in provision of technical services Veolia India Pvt Ltd (ITA No. 6693/DEL/2015) dated 11 October 2019 The Hon ble ITAT has excluded Killick for Consultancy and advisory service provider and held as under- We find that this company markets Marine Equipment like specialized Propulsion Systems, Marine Engines, Ship Lighting Navigation Lighting systems, Dredges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rites Ltd. it is submitted that both these companies have multi-dimensional functionality and mostly serving the related parties, and apart from that the segmental data is not available. On this aspect also Ld. AR submits that these two companies cannot be good comparables. On facts, Ld. DR does not dispute the same. We, therefore, hold that these two companies also cannot be comparables to the assessee company. 23. This order of the Hon'ble ITAT has not been disturbed by the High Court evident from the following excerpt from the order passed by the Hon'ble Delhi High Court: M/s Granite Services International India Pvt. Ltd. ITA 1413/2018 ITA 1438/2018 (HC) 3. The issues sought to be urged by the Revenue in both these appeals concern the legality of the ITAT including and excluding certain comparables and also remanding certain comparables to the TPO for the purpose of determination of Arm's Length Price of international transactions involving the Respondent- Assessee. In the considered view of the Court the above orders of the ITAT do not give rise to any substantial question of law. 24. M/s. STEAG Energy jervices (I) Pvt. Ltd.. vs. ACIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.20 Mahindra Consulting Engineers Ltd.: This Company is engaged in providing infrastructure consulting. In our view, it cannot be regarded as a comparable as the nature of services performed and the industry are entirely different. Functionally different for engineering support service provider Fluor Daniel India (P.) Ltd. (IT Appeal No. 973 (Delhi) of 2016) dated 17 January 2019) The Hon ble ITAT has excluded Mahindra for engineering and design service provider and held as under- We therefore direct to exclude this company, in view of highly technical capabilities of executing infrastructure development projects vis-a-vis that of assessee who is rendering engineering and related services as a sub-contract limited to specific functions as per the requirement of its affiliate. This order of the ITAT has not been disturbed by the High Court in ITA 665 of 2019. Different method of accounting being followed The Delhi Bench of the ITAT has in the case of Ciena India Pvt Ltd vs ITO (ITA No.1453/Del/2014) held that this company should be excluded due to the fact that it follows a different method of accounting. Honeywell Turbo Technologies India Pvt L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmissions and perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. Though mainly three comparables have been challenged for exclusion by the ld. counsel, however one of the issues which have been raised before us is, whether the functional profile of the project offices can be said to be technical in nature, because the head office operates in technical environment. From the detail FAR analysis and the functions carried out by various project offices in India, we find that the project offices have been established by the assessee to execute certain contract work. These contracts have been entered by the head office with 3rd parties and the functioning of the project office are mainly for liaising and coordination maintenance and trouble shooting and in some cases testing and commissioning logistics support supervision etc. has also been done. In so far as liaising and coordination functions are concerned it is mainly to liase with DMRC to understand from them and the defect pointed out by DMRC and is mainly interfacing by the DMRC officials on behalf of Head Office which entails various activities in technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 25. However, on further analysis of the functional profiles of the comparables as highlighted by the ld. Counsel, we find that in the case of Killick Agencies and Marketing Ltd., this company was acting as an agent for its foreign principals for sale of heavy equipments and this company has also provided after sale services. Apart from that, it is also involved in export of engineering Items etc. Further, this company is also engaged in the business of marine equipment and established engine equipment as highlighted by the ld. counsel from its annual report. Moreover, out of the total revenue 89% revenue is from the commission income and therefore a company which is a commission agent cannot be held to be a comparable company who is providing business support services. Further, various coordinating Benches as noted above has excluded this company from the entities engaged the marketing support services. Thus, Killick Agencies and Marketing Ltd. is directed to be excluded. 26.. As far as Mitcon Consultancy Services Ltd., this company is engaged in providing technical consultancy services and operates in providing technical consultancy in field of power energy, textile e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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