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TMI Blog2022 (7) TMI 1259X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated enterprises for rendering of engineering, tendering and IT support services. 1.1. The lower authorities erred in excluding Desein Pvt. Ltd. from the set of comparables which were adopted by the assessee in benchmarking its international transaction, on the sole ground that the said comparable had earned a lower profit as compared to other comparable companies. 1.2. Without prejudice, the Ld. TPO/ AO erred in not giving effect to the directions of the DRP and in not revising the computation of adjustment to the income earned by the assessee on account of providing engineering, tendering, and IT support services. 2. The lower authorities erred both in facts and in law, in proposing an adjustment of Rs. 2,52,49,650/- to the payment made by the assessee to its associated enterprise for the receipt of IT support service. 2.1. The lower authorities erred in facts and in law, in rejecting the transfer pricing documentation and the economic analysis undertaken by the assessee vis-à-vis the transaction of availing of IT support services without any reasons, and consequentially erred in determining the arm's length price at 'Nil' and in disregarding the ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he requisite training by the associated enterprises and given access to the relevant database. For benchmarking this transaction, the assessee used Transactional Net Margin Method ('TNMM") as the most appropriate method with Profit Level Indicator ('PLI") of operating profit to total expenses. By considering itself as the tested party, assessee identified following 4 companies as comparable:- i) Mahindra Consulting Engineers Ltd.; ii) Tata Consulting Engineers Ltd.; iii) Desein Pvt. Ltd.; and iv) DRA Consultants Pvt. Ltd. 6. The weighted average net cost plus margin (3-years) of the aforesaid comparables was 13.67% as against 7.28% of the assessee. Since, as per its own transfer pricing study, the aforesaid international transaction was not at arm's length price, the assessee had suo-moto made transfer pricing adjustment and offered the amount of Rs. 1,43,16,761 (i.e. the difference between transactions price and the arm's length price) in its return of income. 7. The Assessing Officer made reference to TPO for the determination of arm's length price of the aforesaid international transaction. During the transfer pricing assessment proceedings, the TPO observed that Desei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngineering. The government projects are based on the tender/ competitive bidding where the company which has lowest bidding is accorded the project. This was the reason for this company to have lower margin as compared to other companies selected by assessee. Before the panel the assessee submitted its financials, financials of Desein Pvt. Ltd., and financials of DRA Consultants Pvt. Ltd and also extracts of the clientele of other two comparables. It is observed from the assessee's financials, its revenues constitute receipts from Engineering and Tendering Services and SAP training services which are in the nature of professional receipts. Similarly in the case of DRA Consultants Pvt. Ltd, the revenue is only from one stream i.e. professional Services, Whereas, in case of Desein Pvt. Ltd, the revenue comprises of consultancy fees, Operation & Maintenance receipts in the ratio of 43:57. This entity has huge employee cost as compared to assessee and the other accepted comparables leading to low profitability. These are the material differences in the functional profile of this company and thus not comparable. Though the assessee claims that the other comparables accepted also hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in only considering Central Government entities clientele of Desein Pvt. Ltd. 12. The learned DRP also held that Desein Pvt. Ltd. has huge employee cost as compared to the assessee, which resulted in low profitability. From perusal of financials of Desein Pvt. Ltd., we find that employee benefits expenses are Rs.17,85,08,908, while in the case of assessee, such expenses are Rs. 11,92,74,939. Thus, we are of the considered view that such expenses cannot be considered as huge vis-à-vis the assessee. 13. Further, the learned DRP has also treated Desein Pvt. Ltd. as functionally not comparable to the assessee by referring to its revenue from operations. In the present case, functional profile of the assessee is not in dispute. The details of functions performed by the assessee, as provided in its transfer pricing study, are as under: - "4.3.2 Functions performed by Sulzer Tech and A.Es * Tendering Services Tendering is an important activity in the sales process of pumps. This involves the preparation an offer document or proposal that provides technical as well as cost specifications to the This service is executed by engineering professionals who work in close ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s use them as ales tools. Also, the order related manufacturing drawings for various components is outsourced by the AEs to Sulzer Tech. Here also, the scope of the work is defined and reference drawings or drawing layouts and other reference documents are provided by the A.Es. Further the seam requires continuous assistance from its AEs while rendering these services. * Rendering IT Services During the year, Sulzer Tech rendered IT services to Sulzer Pumps which are in the nature of SAP support services. Sulzer Tech provides routine IT services as per the specifications and requirements of Sulzer Pumps Limited. The services provided by Sulzer Tech primarily include: Management of SAP technical environment including Basis, Advance Business Application Programming ("ABAP"), Business Warehouse (BW), Portals, reports & data migration, and Provide second level support to key users and assists the Sulzer Pump Global Team (SPOT) rollout." 14. From the above, it is evident that assessee's services are confined to Tendering, Engineering and IT services, which can be broadly characterised as consultancy in nature. On the other hand, in case of Desein Pvt. Ltd., we find from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary examination of all the data. Further, the assessee is directed to file all the information regarding functions performed, assets employed and risks assumed by Desein Pvt. Ltd. for earning the income from consultancy fees before the TPO for the purpose of examination of comparability of relevant segment of Desein Pvt. Ltd. with the assessee. The assessee is also directed to file relevant segmental information of Desein Pvt. Ltd. before the TPO. We further direct that if upon examination of relevant segmental data and other information as directed above, it is found that the consultancy services provided by the Desein Pvt. Ltd. is comparable segment to the assessee, then arm's length price in respect of international transaction pertaining to 'Rendering of Tendering, Design & Engineering services and IT services' be computed, accordingly. We further direct the TPO to comply with the directions rendered by the learned DRP in para 18.3 of its directions dated 18/03/2021. Before concluding, it is relevant to note that Hon'ble Delhi High Court in Chrys Capital Investment Advisors India Pvt. Ltd. Vs. DCIT: [2015] 376 ITR 183 held that if the company is functionally comparable the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions issued under section 144C(5) of the Act rejected the objections filed by the assessee. Being aggrieved, assessee is in appeal before us. 19. During the course of hearing, learned AR referred to the agreement under which the aforesaid services were received by the assessee as well as copy of extracts of email communication between the employees of the assessee and the associated enterprise to justify the rendition of service. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities. 20. We have considered the rival submissions and perused the material available on record. As per the assessee, the associated enterprise of the assessee provides various IT support services in the nature of IT infrastructure services, centralised IT management services and other IT services, which are basic for the international communication between the group entities including the assessee. In this regard, assessee also entered into an agreement dated 01/01/2015 with its associated enterprise, which is duly signed and forms part of the paper book. The agreement enlists the various IT services to be provided by the associated enterprise. The agreement furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -associated enterprises. However, in the present case, the lower authorities without searching for similar uncontrolled transaction between non-associated enterprises, straightaway treated the value of the international transaction to be at NIL. In this regard, it is relevant to note following observations of Hon'ble Delhi High Court in Cushman and Wakefield (India) Pvt. Ltd., [2014] 367 ITR 730 (Del.): "35. The TPO's Report is, subsequent to the Finance Act 2007. binding on the AO. Thus, it becomes all the more important to clarify the extent of the TPO's authority in this case, which is to determining the ALP for international transactions referred to him or her by the AO, rather than determining whether such services exist or benefits have accrued. That exercise of factual verification is retained by the AO under Section 37 in this case. Indeed, this is not to say that the TPO cannot-after a consideration of the facts-state that the ALP is 'nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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