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TMI Blog2022 (3) TMI 1480X X X X Extracts X X X X X X X X Extracts X X X X ..... ] (`the Act'), is bad in law and on facts. 1.2. On the facts and in the circumstances of the case and in law, the Ld. Transfer Pricing Officer (`TPO')/ the Ld. AO under the directions issued by the Hon'ble DRP, erred in making an addition to the Appellant's total income of Rs. 496,110,616 and computing the total income of the Appellant for Assessment Year ("AY") 2015-16 at Rs. 1,089,813,036 as against the returned income of Rs. 593,702,420. 1.3. On the facts and in law, the Ld. AO, led. TPO and the Hon'ble DRP erred in modifying the economic analysis and filters applied by the Appellant in the Transfer Pricing ("TP") documentation maintained under section 92D of the Act read with Rule 10D of the Income-Tax Rules, 1962 (`the Rules') and applying new filters for the purpose of identification of companies comparable to the Appellant. In doing so, the Ld. AO, Ld. TPO and the Hon'ble DRP failed to discharge the statutory onus to establish that any of the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have not been satisfied. Transfer Pricing adjustment relating to Purchase of project material, receipt of technical services, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. On the facts and in law, the Ld. AO, Ld. TPO and the Hon'ble DRP violated the provisions of Rule log(2) of the Rules by rejecting all the comparable agreements selected by the Appellant in the TP documentation for the purpose of benchmarking the transaction of payment of Royalty without providing any cogent reason for the same. 7. Without prejudice, on the facts and in law, the Ld. AO, ld TPO and the Hon'ble DRP violated the provisions of Rule 108(2) of the Rules by arbitrarily introducing two additional companies/agreements which are functionally dissimilar to the Appellant for the purpose of determining the arm's length price. Corporate Tax Adjustments 8. The Ld. AO and Hon'ble DRP erred on the facts and in law in disallowing employee's contribution to Provident Fund ("PF") and employee's contribution to Employee State lnsurance ("ESI") amounting to INR 5,100,766. 9. The Ld. AO and Hon'ble DRP erred in disallowing INR 5,100,766 under section 36(1)(va) of the Income-tax Act ("the Act") on account of delayed remittance of the employee's contribution to PF and ESI. 10. The Ld. AO and Hon'ble DRP failed to appreciate that the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards the value of International Transaction & another downward adjustment amount of Rs 7,46,69,816/- towards payment of Technical Royalty. Based on the TPO order dated 31/10/2018, Assessing Officer has passed draft assessment order u/s. 143(3) r.w.s 92CA of the Act on 28/12/2018 and proposed following transfer pricing adjustments. The Assessing Officer has also proposed additions towards corporate tax issues like disallowance u/s. 36(1)(va) of the Act amount of Rs.51,00,766/-. The details of adjustments proposed by the Assessing Officer in draft assessment order are as follows:- TP Adjustment:- Transfer pricing adjustment Rs 59,37,02,420/- Corporate Adjustment:- Disallowance U/s 36(1)(va) Rs 51,00,766/- 4. The assessee has filed its return of income for assessment year 2015- 16 on 30.11.2015 admitting total income of Rs. 59,41,23,930/-. The assessee has filed auditor's report in form 3CEB related to international transactions, as per which during the year under consideration, it has entered into following international transactions with its AEs:- Sl. No Description of Transaction Name of the Associated Enterprises Quantum of International Transaction (Rs. ) Method a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LLC, USA, USA 1,44,55,637 Total 1248,85,65,231 5. The brief fact of the case is that assessee, M/s. Doosan Power Systems India Private Limited is engaged in the business of designing, building, installation and maintaining engineering plants with specialization in thermal and coal power plants. The assessee also renders engineering services to its associate enterprises. The assessee company is a subsidiary of Doosan Heavy Industries & Construction Co. Ltd (DHIC). The details of shares held by shareholders in the company as per the audited balance sheet as on 31.03.2015 is as follows: Name of Shareholder Number of Shares held Percentage Doosan Heavy Industries and Constructions Co. Limited, Korea, the holding company 3,39,08,401 99. 45% Doosan Power Systems Overseas Investment Ltd., UK 1,87,922 0. 55% Total 3,40,96,323 100.00% 5.1 The assessee company has carried out the projects with NTPC and GMR at Kudgi, Lara and Raipur & other plaaces. During the Transfer Pricing proceedings, the assessee has provided segmental P&L account for each of these projects and arrived at NPM of 2.59% for Kudgi project and 7.93% for Lara project. Apart from purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nergy should not be based on the rejecting search and the TPO arbitrarily rejected the search. 6. The assessee has filed objections against draft assessment order passed by Assessing Officer before DRP-2, Bengaluru, and challenged various adjustments proposed by the Assessing Officer, but could not succeed. The learned DRP has upheld adjustments proposed by the Assessing Officer towards downward adjustments on value of international transaction & payment of royalty. The learned Assessing Officer has passed final assessment order on 21/11/2019 in pursuant to directions of DRP and made additions proposed by TPO towards international transactions & payment of royalty. The assessee carried matter in appeal before the ITAT, Chennai Bench for adjudication. The assessee filed paper books in Volume I & II before the Bench which are kept in record. 7. Being aggrieved by final assessment order, assessee filed appeal before us. 8. Ground No.1 of assessee appeal is general in nature and does not require specific adjudication and hence, same is rejected. 9. Ground no 2 is related to working capital adjustment:- 9.1 The Observation of DRP is as follows:- "6.2.5 Before this Panel also no a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t he is going to restrict his arguments only in respect of entity level adjustment proposed by the Ld. TPO and affirmed by the ld. DRP because the issue of adjustment towards international transactions alone is almost settled by the decisions of Hon'ble Supreme Court and other Hon'ble High Courts, where it was categorically held that TP adjustments needs to be made at transactions level with reference to international transactions of the assessee with its AE but not at entity level. The Ld. AR for the assessee further submitted that although the assessee has challenged comparables selected by the AO, but keeping in view of the fact that there is no much variation in the margins of the assessee when compare to margins at comparables selected by the AO, he rest his arguments to the extent of adjustment made at entity level. He further submitted that as regards working capital adjustment although the issue is squarely covered in favour of the assessee by the decision of ITAT, Chennai in assessee's own case, the Ld. TPO as well as DRP has erred in not providing working capital adjustments. Therefore, a suitable direction may be given to the Ld. TPO to recompute working capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of transactions of the assessee being a tested party, with associated enterprises after comparing the transactions made by similarly placed company in uncontrolled transactions with non associated enterprises. The sum and substance of the ratios laid down by Hon'ble Supreme Court and Hon'ble High Courts are that TP adjustment can be made only in respect of transactions of the assessee with its associated enterprises, but not to a third party transactions at entity level. Although the Ld. TPO as well as Ld. DRP have accepted the fact that the issue has been decided in favour of the assessee by various Hon'ble High Courts, but because the SLP filed by the Department has been admitted by the Hon'ble Supreme Court they have proposed adjustment at entity level to keep the issue alive. But fact remains that the SLP filed by the Department has been dismissed by the Hon'ble Supreme Court vide its order dated 31.01.2018 and hence, the issue of TP adjustment at entity level had attain finality dismissal of SLP filed by the Department by the Hon'ble Supreme Court. Therefore, we are of the considered view that the Ld. TPO as well as DRP has erred in making TP adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d accordingly. The three weighted average mean is 7.82 as per the Ld. TPO by the TNMM method. 10.2 The Ld. TPO had made an order and rejected the assessee's claim in the following observations: Name of the Comparable Company TPO contentions Assessee's contentions DRP directions Engineers India Ltd Functionally dissimilar (Company provides engineering consultancy and EPC services on the oil & gas and petrochemical industries) 1. Functionally comparable 2. Satisfying the filters applied by the TPO 3. Considered as a comparable in earlier years as well. This company is a public sector company of Govt. of India and declared "Navratna company". If primarily focuses on consultancy (948 cr. Revenue) and engineering (765 cr revenue). Further its predominant focus is o n petrochemical industry. Hence it is not a proper comparable. Name of the Company Assessee's objections DRP's directions Larsen and Tourbo Ltd a. L&T is a giant compared to the assessee; - Turnover is 16 times DPSI's turnover - Fixed asset base more than 15 times DPSI's fixed asset base b. Functionally dissimilar - engaged in electrical and automation, IT consulting, ship building c. Segmental company t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of TPO. He mentioned that Government Concern should be excluded as they have different procedure of business. 10.4 Considering all the facts, the TPO was wrong to exclude the Engineers India Ltd so, the Engineers India Ltd is included in the TP study. 10.5 During TP study, the TPO had included M/s Larsen and Turbo Limited and the counsel of the assessee made objection that the turnover of L&T is 16 times higher than assessee and the fixed asset is more than 15 times comparable to DPSI's fixed assets. The observations of the DRP was that there is a huge comparable data. The TP study can be done on relation to each and every transaction. So, the DRP accepted the observation of the TPO and rejected the assessee's observation. 10.6 The Counsel of the assessee made his reliance for exclusion of M/s Larsen and Toubro Ltd on the following judgments related to huge difference of turnover in relation to the low turnover company DPSI. The judgments are as follows: (i) Agnity India Technologies vs ITO, ITA No. 3856/Del/2010 dated 04.11.2010 (ii) Deloitte Consulting India Pvt. Ltd in ITA No. 1082& 1084/Hyd/2010 (iii) Egain Communication (P) Ltd vs ITO [2008] 23 SOT 385 (Pune) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the TPO with a direction to calculate OP/OC margin by comparing the entities as mentioned above. The matter is setting aside to AO for further calculation. 12. Ground No. 5 to 7: Transfer Pricing adjustment relating to payment of Technical Royalty: 12.1 During examination, the search was conducted by the TPO. The following observations were made in its order relating to calculation of payment of Technical Royalty to AE, total sum of Rs. 353,288,531/-. The assessee paid Royalty @ 3.17% on net selling price of the license product to its AE and the assessee company has adopted "Other method' as MAM and identified 4 comparable agreements based on search conducted in royalty database. The Ld. TPO has found some observations which are reproduced as under: " 13. Comparable companies after the above filters as follows: Sl.No Comparable Company Rate - Net Sale (%) 1 Amanasu Energy Corp. 2.00% 2 PowerVerde, Inc. 3.00% Average 2.5% 14. ALP Calculation as below: Sl.No Description Amount in Rs. 1 Royalty @ 3.17% 35,32,88,531 2 Royalty @2.5% 27,86,18,715 Downward Adjustment 7,46,69,816 12.2 The assessee challenged the matter befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Durr India Private Ltd in ITA No. 754/2014. We have considered the arguments of the Ld. AR of the assessee. In the light of the reasons given by the AO to separately benchmark royalty payment by adopting CUP method, we find that even if assessee adopted TNMM has most appropriate method on entity level, but there is no restriction under the Act to separately benchmark royalty payment if comparables are available. In this case, the AO has given various reasons to reject the TP study conducted by the assessee for benchmarking royalty payment and thus rejected the arguments of the assessee. Having said so, let us come back to the comparables selected by the TPO. The TPO has selected two comparables M/s Amanasu Energy Corp. & M/s Power verde Inc. According to the ld. Counsel of the assessee both are functionally similar and cannot be compared. He further submitted that in respect of M/s. Power verde Inc., the data relied upon by the TPO pertains to AY 2014- 15, whereas, the issue pertains to AY 2015-16. He further claimed that the TPO has failed to apply proper filter to select the companies. Therefore, considering the facts and circumstances of the case, we are of the considered ..... X X X X Extracts X X X X X X X X Extracts X X X X
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