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TMI Blog2011 (2) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... gmental results - sections 92 to 94 - TPO has not at all considered the segmental results and, therefore - matter remanded back to AO - the Assessing Officer will consider the segmental results and determine the arm’s length price in accordance with law. Rejection of loss making comparables - The TPO had excluded loss making companies for arriving at arithmetic means of comparable companies. However, DRP has not accepted these findings of TPO and has held that U.B. Engineering Ltd., which was a loss making company required to be included as comparable - AO directed to comply with the directions of DRP. Variation/rejection of 5 per cent from arithmetic mean - this issue is covered by the decision in Sony India (P.) Ltd.’s case (2008 -TMI - 65530 - ITAT DELHI-H) wherein it was held that: Option is given to the assessee as in some cases, variation not exceeding 5 per cent of arithmetic mean might not suit the assessee and, therefore, assessee in such cases should not be put to a prejudice. Otherwise, there is no difference between the first and the second limb of the provision as far as right of the assessee to challenge the determined price is concerned. The second limb only allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent equity and company was re-christened as Tecnimount ICB Pvt. Ltd. The assessee-company is engaged in the activities like EPC lump sum turnkey contracts, engineering design services, supervision services, translation services and feasibility studies. It also renders onshore/offshore design and engineering services and field construction supervision services. The assessee-company primarily renders engineering design services and field construction supervision services to various entities within the Tecnimount Group. The trained technical personnel available with the assessee-company are utilised by the Tecnimount Group for execution of assignments across the globe. The services are rendered either from India or by deputation of personnel of the Tecnimont offices or at the field construction sites. The assessee-company is compensated on an hourly basis on actual man-hours spent, as captured by time sheets. Hourly rates vary for different activities such as piping design, civil design, instrumentation design, electrical design, machinery design, etc., and the experience and skill set of the personnel involved in performing the services. The assessee-company is the preferred ven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He further noted the assessee s contentions that while the profit margin on costs of the comparable comes to 4.78 per cent. it had earned a margin of 33.32 per cent on cost in respect of income from A.Es, which is better than that earned by the comparables and, therefore, the transactions were at arm s length. 4. The TPO issued show-cause notice dated 26-10-2009, which has been reproduced in Para-5.1 of TPO s order. In the show-cause notice issued by the TPO, it was, inter alia, pointed out that the basis of allocation of expenditure had not been provided and no documents had been submitted to substantiate the same. It was further pointed out that it is not clear whether the working tallies with the Profit Loss account or not. Therefore, the basis of working out the margin in respect of sales to A.Es could not be relied upon. It was further pointed out that on an entity level, the assessee had earned a net loss @ 0.97 per cent. TPO referred to section 92C and pointed out that multiple year data could be used only if the facts and circumstances so warrant. He, therefore, separately computed average net margin as a percentage of operating cost by using March 2006 data and averag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the genuineness of split Profit Loss a/c. The segmental accounts were not part of the audited accounts submitted by the assessee. He, therefore, held that the split Profit Loss account could not be relied on and, accordingly, entity level margin comparison vis-a-vis the comparable companies had to be done. 7. As regards margin of comparable companies considering the segmental data wherever applicable, he accepted the assessee s contention and, accordingly, the margin as provided by the assessee were considered to be the arm s length benchmarks. However, loss making companies were rejected. He also considered the data for financial year 2005-06 only as against for the three years considered by the assessee and computed the arithmetic means at 6.57 per cent in regard to operating profit to operating cost as given in Para 5.29 of his order and computed the adjustments to be made for arriving at arm s length price at Rs. 8,94,37,237. The working given in Para 5.2.11 is as under : "5.2.11 As regards margins of assessee are lower than the margins of comparable companies, an adjustment to the arm s length price of the sales/services to A.Es is warranted. The working of the adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited); and (e) Adjustment to the total cost rather than cost attributable to AE." 10. The DPR confirmed the findings of the TPO as regards rejection of segmental account, inter alia, observing that although the assessee had filed audited account before it, the same was not considered as the same should have been filed before the TPO. The DRP also confirmed the findings of the TPO as regards adopting single year data observing that this approach was in conformity with the transfer pricing regulation in India. The DRP further pointed out that multiple year data can only be applied if the assessee had applied multiple data in its price setting mechanism. DRP further held that the data relating to U.B. Engineering Ltd., is comparable and, therefore, required to be included as comparable and, hence, to this extent, DRP did not agree with the findings of the TPO in excluding the comparables which were loss making. Insofar as action of TPO in making adjustment to the total cost rather than the cost attributable to A.Es was concerned, DRP confirmed the same after taking into consideration the fact that the decision of Mumbai Bench of this Tribunal in ACIT v. T. Two International (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consequently, this ground of appeal is also dismissed as not pressed. 17. The issue arising out of ground Nos. 5, 6, 7 and 8, relate to rejection of segmental analysis made by the assessee. 18. Before us, learned Counsel for the assessee referred to Pages-168 to 170 of the paper book wherein the petition for permitting to file additional evidence before the DRP-II is contained and submitted that the assessee furnished audited segmental results to substantiate the genuineness of segmental profitability. He referred to section 144C(6)(c) to point out that the DRP is required to issue the directions in regard to the objections filed by the assessee on the evidence furnished before it. He further referred to rules framed by the board in pursuance to section 144C(14) titled "Income-tax (Disputes Resolution Penal) Rules, 2009", and referred to Rule-4(3)(b) read with proviso and pointed out that the DRP should have taken into consideration the additional evidence filed by the assessee particularly when there was no variation in the figures and only the procedural requirement of getting the segmental results audited was fulfilled. Learned Counsel for the assessee further submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total turnover, and not to the total turnover of the assessee. After considering the facts of the case, we do not find any difficulty in accepting this contention of the assessee that at best only 45.51 per cent of the operating profit can be attributed to imported raw material acquired from assessee s associate concerns. In the present case, the Assessing Officer has calculated the operating profit on the entire sales of the assessee, which in our considered opinion, is not justified, when it is admitted position that only 45.51 per cent of raw material has been acquired by the assessee from its associate concerns for the purpose of manufacturing items. The assessee has stated that the operating profit if applied to 45.51 per cent of the turnover would come to Rs. 35,52,573 as against operating profit of Rs. 24,35,175 booked by the assessee, and the difference thereof would only be called for to be made as addition to the profit shown by the assessee. We, therefore, direct the Assessing Officer to modify the assessment and make the adjustment only to the extent of difference in the arm s length operating profit with adjusted profit with reference to the 45.51 per cent of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal then the matter needs to be restored back to the file of Assessing Officer as he has not considered the segmental results. Further, she pointed out that there is a vide variation between profit margin of A.Es and non-A.Es transactions which needs to be examined. She referred to Page-16 of paper book wherein the details of international transactions are given and further referred to Page-20 of the paper book wherein the nature of these international transactions has been given. She submitted that supply of equipment, instrumentation of construction contract, field construction, supervision activity for projects executed by A.Es, project management activities in connection with projects executed by A.Es, engineering design services, software services are entirely different nature of transactions and, therefore, the profit margin is also different in respect of all these transactions. She submitted that all the international transactions comprised in different activities have to be taken into consideration if the segmental figures are to be taken as benchmark for determining the profitability. In this regard, learned Departmental Representative referred to Rule-10A(d) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s additional evidence observing that the same was not filed before the DRP. Therefore, the first issue which arises for our consideration is regarding scope of powers of DRP regarding entertaining additional evidence. In this regard, we may refer to legal provisions which have to be taken into consideration when additional evidence is filed before the DRP. Section 144C, deals with reference to DRP and sub-sections 5, 6 and 14, read as under : "5. The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. 6. The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely - (a) draft order; (b) objections filed by the assessee; (c) report, if any, of the Assessing Officer, valuation officer or transfer pricing officer or any other authority; (d) records relating to the draft order; (e) evidence collected by, or caused to be collected by, it; and (f) result of any enquiry made by, or caused to be made by, it 14. The Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment Representative that with reference to segmental results, each and every international transaction has to be considered separately because all the activities are separate and profit margin will be different. Learned Counsel objected to these submissions pointing out that it is not the appeal filed by the Revenue but by the assessee. He also submitted that the Tribunal has no power of enhancement and only segmental results have to be considered. On this count, we find that TPO has not at all considered the segmental results and, therefore, we refrain from making any observations with reference to the submissions made by the learned Departmental Representative and consider it appropriate to only observe that the Assessing Officer will consider the segmental results and determine the arm s length price in accordance with law. Consequently, these grounds of appeal are allowed for statistical purposes in terms of our above observations. 25. Ground No. 8, reads as under : "8. Rejection of loss making comparables. On the facts and in the circumstances of the case and in law, the learned Assessing Officer/TPO erred in rejecting the margins of loss making companies while computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as is clear from the language is to take ALP which is not in excess of 5 per cent of the said mean. The word "option" as per The Law Lexicon is synonymous with "choice" or "preference". Therefore, it is the choice of the assessee to take ALP with a marginal benefit and not the arithmetical mean determined by the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The ALP determined on application of most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the Legislature thought it proper to allow marginal benefit to cases who opt for such benefit. Both in the first as also in the second limb, implications of determined ALP are the same except for the marginal benefit allowed to the assessee under the second limb. Hence, second limb is applicable even to cases where the taxpayer intends to challenge ALP taken as arithmetic mean and determined through the most appropriate method. Option is given to the assessee as in some cases, variation not exceeding 5 per cent of arithmetic mean mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D(4). (vi) The TPO erred in disregarding the most appropriate method adopted by the assessee in the TP study, and also in using the Prowess database. The TPO did not provide any reason for deviating from the TP study in respect of these matters. (vii) The TP study cannot be ignored by the TPO, in the absence of any deficiency or insufficiency. Further, the order passed by the TPO appears to have been passed with the intention of making a higher transfer pricing adjustment. (viii) For the purpose of comparability, companies with even a single rupee of transactions with AE cannot be considered as comparables. (ix) Adjustment needs to be made to the margins of the comparables to eliminate differences on account of different functions, assets and risks. More specifically, adjustment needs to be made for : (a) Differences in risk profile. (b) Difference in working capital position. (c) Differences in accounting policies. (x) The TPO has grossly erred in normalising the profits of super profit companies. Such companies should have been excluded from the list of comparables." 32. Learned Department Representative referred to Circular dated 23-8-2001, which was issued prior to the inse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee under the second limb. Hence, second limb is applicable even to cases where the taxpayer intends to challenge ALP taken as arithmetic mean and determined through the most appropriate method. Option is given to the assessee as in some cases, variation not exceeding 5 per cent of arithmetic mean might not suit the assessee and, therefore, assessee in such cases should not be put to a prejudice. Otherwise, there is no difference between the first and the second limb of the provision as far as right of the assessee to challenge the determined price is concerned. The second limb only allows marginal relief to the assessee at his option to take ALP not exceeding 5 per cent of the arithmetic mean. Therefore, benefit of the second limb of the proviso to section 92C(2) is available to all assessees irrespective of the fact that price of international transaction disclosed by them exceeds the margin provided in the proviso. Development Consultants (P.) Ltd. v. Dy. CIT [2008] 115 TTJ (Kol.) 577 relied on." 34. Respectfully following the aforesaid decision, these grounds of appeal are allowed. However, in the arm s length price, to be determined by the Assessing Officer, an a ..... 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