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TMI Blog2025 (5) TMI 1392X X X X Extracts X X X X X X X X Extracts X X X X ..... of provisions of the Act, devoid of merits, without appreciating the facts involved, without appreciating the documents submitted in proper light, without conducting adequate inquiries and as such is without jurisdiction. 2. Transfer Pricing 2.1. The Lower authorities have finalized their order with improper adjustments, as a result of misapplying the law pertaining to TP and by adopting faulty processes/ methodologies to finalize the adjustment, such as but not limited to, applying filters, functional analysis selection of comparable companies, computation of profit margin of Appellant and comparable companies and undertaking economic adjustment. 2.2. The lower authorities have erred in disregarding the FAR analysis submitted by the Appellant and erroneously characterized the Appellant's transaction as a highend service. 2.3. Without prejudice to the above, the lower authorities have erred in selecting companies that are not comparable to the Appellant's business. 2.4. The Lower authorities have failed to take cognizance of the fact that the fees was paid at the rate of 5 percent on the basis of an agreement between the parties. 2.5. The lower authorities erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with its agreement valid for the current period and erred in considering the prior agreement of the Appellant with its AEs for determining arm's length price without bringing on record any benchmarking exercise using third party comparable prices. 5. The lower authorities have, in facts and circumstances of the case and in law, erred in disallowing the 2 percent of fees for technical services arbitrarily, without appreciating rationale and evidences provided to substantiate the additional services availed, and has erred in concluding that no tangible/direct benefits accrued to the Appellant from such services. 6. The lower authorities erred in law and in facts by ignoring the provisions of rule 10B while determining the arm's length price for receipt of technical services. III. TP Adjustment in relation to income received from deputation of personnel 7. The lower authorities have, in facts and circumstances of the case and in law, erred in disregarding the functional and risk analysis submitted by the Appellant and erroneously characterized the Appellant's transaction as a high-end service. 8. The lower authorities have, in facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15-16: 1. The lower authorities have erred in finalizing an order of assessment which suffers from legal defects such as being passed in violation of principles of natural justice and the provisions of the Act and is devoid of merits and are contrary to facts on record and applicable law, and has been completed without adequate inquiries and as such is liable to be quashed. 2. The lower authorities have finalized their order with improper adjustments to the reported income of the Appellant, as a result of misapplying the provisions of the Act, by adopting faulty assessment procedure to finalize the adjustment, such as but not limited to, rejection of transfer pricing study, analysis of the functions carried out by the Appellant and those of the comparable companies, selection of comparable companies, computation of profit margins of the comparable companies, as well as usage of appropriate adjustments. 11. TP Adjustment in relation to the payment for availing technical services 3. The lower authorities have, in facts and circumstances of the case and in law, failed to appreciate that the rate of technical service fees paid to turnover was lower than the arm's length ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) made certain adjustments / disallowances to the assessee's income. Against draft assessment order of the AO, the Appellant filed its objections before the Dispute Resolution Panel ('DRP' in short) for AY 2013-14 and 2014-15. The DRP deleted the transfer pricing adjustment towards lease rental payments for AY 2013-14 and upheld the other adjustments and disallowances for AY 2013-14. 1. Further for the AY 2014-15, the DRP allowed the exclusion of certain comparable companies for computation of the upward adjustment made towards income received from deputation of personnel, while upholding the other adjustments made by the TPO and AO. 2. For the AY 2015-16, the Appellant filed an appeal against the final assessment order before the CIT(A), who upheld the order of the AO and TΡΟ. The adjustments made during the AYs 2013-14 to 2015-16 are as under:- (Amount in INR crores) Nature of Adjustment AY 2013-14 AY 2014-15 AY 2015-16 Downward adjustment for payment of royalty to AEs for availing technical services 2.80 6.39 3.89 Upward adjustment towards income received from deputation of personnel 0.30 0.28 -- Disallowance of reimbursement of expenses u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14-15 dated 29.01.2019. 4. With regard to deputation to AEs aids recovery of idle time employee cost, the Appellant also highlighted the fact that employees deputed to AEs perform only operational activity and moreover, since only idle item of the employees are utilized, the amount recovered from AEs results in recovery of employee cost which otherwise would have been incurred by the Company resulting in lower profits. TPO's stand in the light of similar facts in earlier and subsequent assessment years, the Appellant refers to the transfer pricing assessment concluded during the earlier AYs 2011-12 and 2012-13 in the Appellant's own case and subsequent AY 2015-16. It may also be noted that for the AY 2009-10, the TPO had rejected the Appellant's benchmarking under TNMM and proceeded to do an entity-level TNMM, wherein this Hon'ble Tribunal had upheld the transaction wise benchmarking adopted by the Appellant, thereby deleting the adjustment proposed by the TPO. Further, it would also be relevant to note that a show-cause notice dated September 26, 2018 (Referred Pg 371 of Paper Book dated 29.01.2019), wherein the TPO averred that the services are being provided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies. Therefore, it is prayed by the assessee that the transfer pricing adjustment towards income received from deputation of personnel may be deleted. 5. The submissions of the appellant on Adjustment of royalty payment to AEs for availing technical services for AY 2013-14 ( Grounds 2.4 to 2.7), AY 2014-15 (Grounds 3 to 6) and AY 2015-16 (Grounds 3 to 6): 6. Facts of the issue are that the Appellant had entered into an agreement with Tideway BV ("TBV") for receipt of technical services. As per the agreement, the Appellant was required to pay a fee (hereinafter referred to as FTS) amounting to 3% of its turnover. From FY 2012-13, the appellant received additional services from its TBV in the nature of contractual assistance for project tendering, maintenance of quality and health safety measures, etc., this warranted the additional payment of FTS. Accordingly, vide addendum to the FTS Agreement, the rate of FTS was increased from 3% to 5% with effect from July 2012. The above payment was established to be at arm's length as it is lower than the arm's length rate of 5.63% as per the comparable agreements identified in the benchmarking analysis of the TP documentation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to note that the loss incurred by the Appellant amounting to INR 19.5 crores during the financial year 2012-13 which considerably constitutes of the impairment loss on Kaveri dredger owned by the Appellant. Without prejudice to the above, the Appellant also wishes to submit that the ALP of a transaction does not depend on whether a transaction results in profit or loss to the Appellant. The Hon'ble Punjab & Haryana High Court had in the case of Knorr-Bremse India (P) Ltd. (63 taxmann.com 186):(2016) 380 ITR 307 (P&H) has held that "whether a transaction is at an ALP or not is not dependent on whether transaction results in an increase in assessee's profit. Mere failure to establish that transactions resulted in a profit does not indicate they were not at an ALP and even if profit is established, it does not necessarily follow that transaction was at an ALP." Further, the TPO cannot question the commercial expediency of a business decision as that falls beyond his scope of determining the ALP. In this regard, the appellant relied on the following judicial precedents: (a) Decision of Delhi High Court in the case of EKL Appliances (TS-206-HC- 2012(Del)-TP) (b) Decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent AY. In light of the above, the Appellant submits that the said disallowance during the Impugned AY would result in double-taxation of the same amount that has already been duly offered to tax in the subsequent AY, at the same rates of tax. The said disallowance would therefore unfairly prejudice the Appellant. Hence, the assessee pleaded that the only dispute is regarding the year of allowability of expenditure and given that the rate of tax applicable for the said years is uniform, the entire exercise of seeking to disturb year of allowability of expenditure would, in any case, be revenue neutral. The Appellant relies on the following decisions in this regard: Bilahari Investment Private Limited (299 ITR 1-Supreme Court) Excel Industries Limited (358 ITR 295-Supreme Court) Triveni Engg & Industries Ltd4 (336 ITR 374-Delhi High Court) Amec Foster Wheeler India Pvt. Ltd. (ITA 680/CHNY/2020-Chennai ITAT) The Appellant also submits that the aforesaid issue has been covered in Appellant's own case for AY 2016-17 in ITA No. 1284/CHNY/2023, where after considering and appreciating that the provision is an ascertained liability that has been created based on the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eputed are operational level employees. These employees are involved in the execution of projects and providing operational assistance including support functions such as finance. These employees are not supposed to do the action or process of making important decisions. We also note that there is/was no adjustment made during the previous and subsequent Assessment Years [see TPO's order u/s 92CA, paper book page 358, 364, 379 for AY 2014-15 dated 29.01.2019]. Therefore, in the light of above factual matrix, we direct the AO to follow the judicial consistency and accept the detailed benchmarking based on the comparable set of companies engaged in providing administrative support services as submitted by the assessee in appeals for AYs 2013-14 & 2014-15 [refer paper book page 144 for AY 2013-14 dated 07.06.2018 and paper book page 125 for AY 2014-15 dated 29.01.2019]. Hence, this ground of appeal is allowed for statistical purposes. B. Our adjudication on the 'Downward adjustment for payment of royalty to AEs for availing technical services: The agreement between Appellant and Tideway BV ("TBV" in short) for receipt of technical services, the Appellant was required to pay a fee (h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held in the case of Cabot India Ltd. (12 taxmann.com 70 that "where no data was available in respect of uncontrolled transactions which were similar to transactions of assessee with its foreign associated enterprise, CUP method could not be considered as most appropriate method to determine arm's length price (ALP) of royalty paid by assesse to its AE for technology collaboration". Similarly, the Chennai Bench of the Tribunal has held in the case of Flakt (India) Ltd. 70 taxmann.com 342 that "Without identifying comparable uncontrolled transactions, TPO could not simply come to conclusion that quality and volume of services received by assesse were not commensurate with payment made by assessee". Hence, in the light of above discussion and orders of the Tribunal, we are of the considered view that the reasoning given by the TPO is not sound. Commercial expediency of the assessee cannot be questioned by the TPO. Further, we also note that the Hon'ble Punjab & Haryana High Court had in the case of Knorr-Bremse India (P) Ltd. (63 taxmann.com 186):(2016) 380 ITR 307 (P&H) has held that "whether a transaction is at an ALP or not is not dependent on whether transaction results ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the extent of 43.09% during this year, the assessee booked additional revenue of Rs.46.99 Crores during this year. Further, out of total expected loss of Rs.19.98 Crores, the assessee has already recorded actual loss Rs.8.61 Crores and made provision for the balance expected loss of Rs.11.37 Crores. Hence, the provision has been created as per mandate of AS- 7 and the same could not be held to be unascertained / contingent liability for the assessee. It is the submission that both revenue and expenditure as recorded by the assessee has been recognized as per percentage of completion method. The Ld. AR further submitted that the income computation and disclosure standards (ICDS) as notified by the Central Government vide Section 145(2) are applicable only from AY 2017-18 onwards and accordingly, the same would not have an impact on AY 2016- 17. Reliance has been placed on the decision of Hon'ble Delhi High Court in the case of Triveni Engg & Industries Ltd [336 ITR 374] and the ruling of Pune Bench of the Hon'ble Tribunal in the case of Ashoka Buildcon Ltd. [170 TT J 19] for the submissions that the provision for contract losses would be an allowable deduction. Lastly, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra-28, it is clear that in that case the assessee could not explain as to how the total contract costs would exceed total contract revenue despite being specifically asked to explain. The assessee merely relied on AS-7. However, in the present case, the assessee has recognized the revenue as well as expenses on same methodology. The claim is supported by computations / workings. The provision has been reversed in subsequent years as per estimation made in subsequent year. Therefore, this case law would not render any assistance to the case of the revenue. The case law of Hon'ble Delhi High Court in Triveni Engg & Industries Ltd [336 ITR 374] is on similar facts. The assessee recognized the income from the projects and also made provision for expenses to be incurred up-to the stage of completion. The Ld. AO termed the provision as contingent liability and accordingly, disallowed the same. However, Hon'ble Court confirmed the order of Tribunal allowing such deduction. Therefore, on the facts and circumstances of the case, we would hold that the impugned provision would be an allowable deduction. The question of adding the same to Book-Profit do not arise. 7. The appeal stand a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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