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TMI Blog2022 (5) TMI 1409X X X X Extracts X X X X X X X X Extracts X X X X ..... ome on 30.09.2007 declaring income of Rs. 6,41,35,888/-. Following the order of Transfer Pricing Officer, Hyderabad ("TPO") dated 30.06.2010 an addition of Rs. 5,42,39,943/- was proposed as an adjustment/ difference in the arm's length price ("ALP") vide the draft order dated 16.12.2010 by the Ld. AO after the case was transferred to him under section 127 of the Income Tax Act, 1961 ("the Act"). The addition comprised of two variables which are as under:- 1. In respect of payments made towards intra-group services Rs. 2,48,50,136/- 2. In respect of payments made towards royalty Rs. 2,73,89,807/- 3.1 The assessee filed objections before the Hon'ble Dispute Resolution Panel - 1, New Delhi ("DRP"). Vide order dated 28.09.2011 the Hon'ble DRP directed the Ld. AO that he shall not make an addition of Rs. 2,93,89,807/- as the payment of royalty was at ALP. In respect of payment of intra-group services the Hon'ble DRP directed that the income of the assessee be enhanced by Rs. 1,89,53,444/- as the assessee has not been able to discharge the onus placed upon it. Accordingly, the Ld. AO made an addition of Rs. 1,89,53,444/- as against Rs. 2,48,50,136/- proposed by the Ld. TPO and com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of other group charges made by the assessee to its AE for services rendered was to be determined by the TPO/DRP or it was to be determined by the AO under section 37(1) of the Act." Since the ITAT did not decide the issue on merits and remanded the matter to the file of the AO, the Hon'ble Delhi High Court restored the matter to the file of the ITAT for decision on merits. 3.4 This is how the matter came up before us. We heard the Ld. Representative of the parties, carefully considered their arguments and perused the material on records. 4. The impugned addition of Rs. 1,89,53,444/- to the income of the assessee is made on the basis of observations of the Hon'ble DRP that the assessee has not been able to discharge the onus placed upon it in respect of the payment of intra-group services rendered by the AE to the assessee. 4.1 The group charges comprised of Rs. 1,46,21,403/- for Engineering services rendered by the AE and Rs. 43,32,041/- for Administrative Support services aggregating to Rs. 1,89,53,444/-. The relevant observations of the Hon'ble DRP are as follows :- "...The DRP has noticed that the kind of support that the assessee claims to have received is simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in passing reference, on page 6 of its directions that there is no need to avail "Engineering services" as the assessee is sub-contracting a portion of work to third party vendors on need basis. vi) The Hon'ble DRP disregarded/overlooked the evidence in the form of Certificate of an Auditor who certified the appropriateness of cost allocated to the assessee with respect to Engineering services during the relevant period. vii) The Hon'ble DRP summarily rejected the "Cost Plus Method" identified as the Most Appropriate Method under section 92C(1) of the Act by the assessee to test the Arms length nature of charges paid in connection to Engineering services availed under the agreement. viii) The Hon'ble DRP misconstrued the business model of the assessee and functional characterisation as an Engineering service provider and disregarded the fact that the assessee is an EPC contractor. Accordingly the Hon'ble DRP upheld incorrect set of comparables to arrive at an erroneous conclusion that the assessees net operating profit was not in sinc with the industry standards/benchmarks. ix) The Hon'ble DRP did not give any consideration to the corroborative analysis placed on record by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal; it should not have remanded the matter to Assessing Officer. 5.2 In CIT vs. Fotroc Chemicals India (P) Ltd. (2016) 290 CTR 221 (KAR) the Hon'ble Karnataka High Court observed that where TPO opined that the assessee had not received any services from its AE while Tribunal after examining material on record, opined that services rendered were concerning with assessee's business and no addition could be made in determining ALP, it was not required to remand matter back by keeping said question once again open for consideration by TPO. 5.3 The Hon'ble Supreme Court held in the case of Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 118 ITR 261 (SC) that it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. 5.4 Hon'ble Calcutta High Court held in the case of Ashok Surana vs. CIT (2016) 384 ITR 267 (Cal.) that for allowing expenditure, the question always shall be whether the assessee has been able to prove that the expenditure has been incurred by him for the purpose of his business. So long as there is a reasonable nexus between the expenditure and the business the expenditure will be regarded as having been incurred f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further noticed that in support of each invoice, certain names of employees of the AE alongwith man-hours spent for each project are given. These observations of the Ld. TPO support the contention of the assessee that all the engineering services availed by the assessee from the AE were required in the OTO-stage when the bids were placed for the project and before the projects are won. 6.3 It has been explained by the assessee that it is a start-up company with little experience in the hydro power industry whereas the AE has been in international hydro power business for many decades having vast experience in all types of hydro projects. To have an edge over the cutthroat competition in hydra power industry in India, it is indispensable for the assessee to take services of its AE for engineering, primarily at tender filling stage i.e. order to offer stage (OTO stage) as well as at project execution stage i.e. order to cash stage (OTC stage). 6.4 The nature of services rendered by the AE included sales support, product engineering, product development etc. It may also include feasibility studies and studies of cavitations performance. It has also been explained that the technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s carried out by the assessee were much broader than the services performed by an Engineering Service Provider. In the subsequent assessment years (AY 2009-10, 2010-11, 2011-12 & 2012-13) the Ld. TPO has accepted the characterization of the assessee and has not disputed the benchmarking analysis concluded on the basis of the comparable companies engaged in EPC business. Since the nature of business carried out by the assessee in the subsequent assessment years is exactly similar to the business carried out in the assessment year 2007-08 following the rule of consistency the assessee should be characterised as an EPC contractor and comparables of such nature should be used to benchmark the results of the assessee. The assessee before the Hon'ble DRP has submitted a detailed search process carried out by it to identify the independent companies engaged as EPC contractor and comparable to the assessee. The search resulted in six comparables companies earning an average net profit margin (NPM) of 6.87%. This shows that the international transactions entered into by the assessee during the AY 2007-08 corresponds to the arm's length standard. 6.7 The assessee submitted that the Ld. TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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