2017 (9) TMI 239 - AT - Income Tax

TPA - selection of comparables - benchmarking technique - TNMM as most appropriate method (MAM) - Composite contract - Held that - As per the contract between assessee and BALCO we find that entire contract of executing Turnkey projects is a composite contract and the assessee is required to deleiver both supply of equipment and rendering of services. Also assessee has applied same ratio of % of contract work executed for computing revenue from both the activities. While deciding the issue for benchmarking the aggregate approach, we have observed that 60% of the revenue of the assessee is earned from supplying equipments, spares etc and 40% of the revenue is earned from rendering services. therefore assessee cannot be considered as engaged in providing engineering services. Thus, we direct the TPO to characterize the assessee s function as EPC contractor engaged in providing turnkey solutions. Since the TPO has characterized, the function of the assessee as engaged in the engineering services and the comparable have also been chosen keeping in mind the function of the assessee as engineering services, the comparables also need a relook. On perusal of the documents submitted in respect of TCE and Holtec, we agree with the contention of the Ld. counsel that the comparables TCE and Holtec were engaged in services of engineering consultancy only. Therefore, in our opinion, the transfer pricing officer, need to carry out a fresh search of comparables engaged in execution of the turnkey projects. Accordingly, in the interest of Justice, we restore the issue of searching comparables and computation of arm s length of the international transactions to the file of the TPO/AO for adjudicating afresh. It is needless to mention that the assessee shall be afforded sufficient opportunity of hearing on the issue in dispute. The ground of appeal is accordingly allowed for statistical purposes. Additional claim on account of salary expenses of expatriates- Held that - Salary of the few expatriates was computed incorrectly at the time of filing of return of income and subsequently higher amount was found to be payable to them. He also referred the TDS certificates issued to those employees and return of income filed by them. In our opinion, if the assessee has actually incurred higher salary expenses and same are found to be as expenditure wholly and exclusively incurred for the purpose of the business of the assessee in terms of section 37(1) of the Act, then same should be allowed to the assessee. In view of above facts and in the interest of Justice, we feel it appropriate to restore the matter to the file of the AO for verification of the claim of the salary expenses of ₹ 34,86,766/- and allow the claim in accordance with law. It is needless to mention that the assessee shall be afforded reasonable opportunity of being heard. Accordingly, the ground of the appeal is allowed for statistical purpose.

Summary

Issues Involved:
1. Computation of Income
2. Transfer Pricing Matters
3. Corporate Tax Matters

Detailed Analysis:

1. Computation of Income:
The appellant challenged the computation of income by the Assessing Officer (AO) at INR 2,59,01,220/- against the declared income of INR 1,91,09,481/- for the assessment year 2011-12. The AO's computation was based on directions from the Dispute Resolution Panel (DRP).

2. Transfer Pricing Matters:
2.1 Aggregated vs. Transaction-by-Transaction Approach:
The appellant contended that the DRP and Transfer Pricing Officer (TPO) erred by using an aggregated approach for determining the arm's length price (ALP) instead of a transaction-by-transaction approach. The appellant maintained separate records for onshore services and supply of equipment and argued for separate benchmarking. The DRP upheld the TPO's aggregated approach, considering the contract as a composite turnkey project.

2.2 Rejection of Appellant’s Benchmarking Process:
The DRP and TPO disregarded the appellant's TP documentation and multiple-year data, insisting on current year data for comparables. The appellant argued that for long-term turnkey contracts, it is imperative to analyze profitability over time.

2.3 Selection of Comparables:
The TPO rejected the appellant's comparability analysis and conducted a fresh analysis with revised filters, which included cherry-picking comparable companies. The appellant objected to the inclusion of functionally dissimilar companies.

2.4 Economic Adjustments:
The TPO did not allow appropriate economic adjustments for differences in risk assumed between the appellant and selected comparables.

2.5 Pass-Through Costs:
The TPO did not allow the benefit of pass-through and sub-contractor costs incurred by the appellant.

2.6 Characterization and Function of the Appellant:
The TPO characterized the appellant primarily as a service provider, despite 60% of its revenue coming from equipment supply. The Tribunal directed the TPO to re-characterize the appellant as an EPC contractor and to conduct a fresh search for comparables engaged in turnkey projects.

3. Corporate Tax Matters:
3.1 Additional Salary Expenses Claim:
The appellant claimed additional salary expenses of INR 34,86,766/- during the assessment proceedings, which was rejected by the AO based on the Supreme Court decision in Goetze India Ltd. The Tribunal, referencing the Bombay High Court decision in CIT vs. Pruthvi Brokers and Shareholders Private Limited, restored the matter to the AO for verification and allowance of the claim if found legitimate.

3.2 Interest under Section 234B:
The appellant contested the levy of interest under Section 234B for default in payment of advance tax, arguing that as a non-resident, it was not liable for advance tax under Section 209(i)(d). This ground was not specifically adjudicated in the Tribunal's decision.

3.3 Penalty Proceedings:
The appellant objected to the initiation of penalty proceedings under Section 271(1)(c). This ground was also not specifically addressed in the Tribunal's decision.

Conclusion:
The Tribunal upheld the aggregated approach for benchmarking the international transactions but directed the TPO to re-characterize the appellant's functions and conduct a fresh search for comparables. The issue of additional salary expenses was remanded to the AO for verification. Other grounds not argued were dismissed as infructuous. The appeal was partly allowed for statistical purposes.