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TMI Blog2014 (3) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment in India - merely because the risk passed in India, it cannot be said that the sale took place in India - no income can be said to have arisen in India the title to goods shall be considered to have passed outside India when delivery was made on high sea and the payment was also received outside India thus, the title of goods in respect of said offshore supply of equipment was transferred outside India. Whether sale price includes any consideration for services rendered or to be rendered in India - Held that:- The assessee undertook to incur some expenses towards test and inspection at site that is in India, conduct repair during defect liability period again in India etc. -These expenses are to be borne by the assessee - The possibility of compensation for such things being included in foreign supervision charges cannot be ruled out without verification - It is palpable that if the charges for such things are not included in any other component of price, then these have to be considered as part and parcel of the sale price, which would require its splitting up to determine the amount attributable to such testing charges etc. in India - thus, the sale price of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chargeable to tax in India - As it has been accepted by the assessee that such amount is chargeable to tax in the correct year the amount is correctly chargeable to tax in the correct year - The assessee agrees that `Foreign supervision charges' are for the services rendered in India - The word `Foreign' has been used qua the assessee, being a non-resident - As it has been accepted by the assessee that such amount is chargeable to tax in the correct year thus, in principle the amount is chargeable to tax in the correct year. Income from design & engineering services Held that:- It is totally incorrect to say that such Drawings and designs for which consideration of Euro 150900 was received be considered as offshore supply of equipments and hence exempted from taxation The decision in Director of Income Tax Vs Rio Tinto Technical Services (2012)340 ITR 507 - in the absence of any bifurcation, an estimated allocation has to be made for tax purposes - The 'fees for technical services' shall be deemed to accrue or arise in India and shall be included in the total income of the non- resident, whether or not the non-resident has rendered services in India - With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer u/s 144C(1) r.w.s. 143(3) of the Income Tax Act, 1961 (hereinafter also called the Act ) on 27.9.2013 in relation to the assessment year 2008-09. 2. The first two grounds are general which were neither specifically argued nor require any adjudication. The ld. AR submitted that there were basically two issues in the present appeal viz., A. Income from contract with Steel Authority of India Ltd.; B. Transfer Pricing Adjustment. 3. The factual scenario is that the assessee originally filed two returns separately for its Project office and Liaison office with different Permanent Account Numbers. Such returns were revised for a number of times. The assessee admitted that it was earlier under a bona fide belief that separate returns were required to be filed in respect of Liaison office and Project office. The assessee gave its nod to common assessment in respect of both the segments. A draft assessment order u/s 144C(1) was passed on 30.11.2012. The assessee filed its objection before the Dispute Resolution Panel (DRP). Upon the receipt of Directions from the DRP, the Assessing Officer passed the final confirmatory order which is impugned in the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38,00,033 as mobilization advance towards offshore supply of equipments portion, for which the title of goods was transferred from the origin of supply of goods, that is, high sea. Not only that, the amount was also received outside India. Apart from that, import duty on such goods was directly paid by SAIL to Customs Authorities and marine freight as well as inland freight for movement of such equipments from foreign ports to the site of SAIL was also paid by SAIL through NCC. Insurance policy against transit risk was also taken by SAIL through NCC. In the light of the above facts, it was claimed that no income from offshore supply of equipments was at all chargeable to tax in India in any year. As regards the receipt on account of Design Engineering services, the assessee stated that the said amount was also not chargeable to tax in any year because such designs were also supplied offshore which were part and parcel of the offshore supply of equipments. The assessee accepted before the A.O that it has a Supervisory P.E in India as per Article 5(3) of the Double Taxation Avoidance Agreement between India and Korea (hereinafter called `the DTAA'). The assessee claimed that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; within the meaning of Sec. 9(1)(vii) of the Act (as per para 9 of the assessment order). However, while computing the total income, he included 90% of this amount as attributable to the P.E. By applying profit margin of 30.65%, he clubbed this amount along with that of offshore supply and made total addition on these two counts at Rs. 6,76,37,014/-. That is how the AO computed total income of the assessee as under: - Sl No. Particulars Amount (Rs) Amount (Rs) 1. Loss as per revised return dated 21.05.2009 (-) Rs. 84,04,207.00 2. Additions on account of adjustment made by TPO 2,15,27,090 3. Additions on account of 5% receipt against 1 st Milestone (onshore activities) 15,03,47,944 4. Additions on account of Foreign Supervision Charges 1,37,77,320 5. Additions on account of offshore Design Engineeri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Item at Sr. no. 3 of Table 1B is consideration for `Supply of Plant (Imp)' for which consideration has been given as Euro 61161860. Serial no. 5 of Table 1B is `Supply of Refectory (Imp)' with consideration of Euro 14599951. At serial no. 7 of Table 1B is `Supply of Commissioning Spares (Imp)' whose consideration is Euro 238860. In the like manner, item at serial no. 12 of Table 1B is `Foreign Supervision Charges', whose consideration is Euro 440000. The above description of the detail of the price for various components shows that albeit a composite price has been given as per Article 2 of the Contract Agreement as Contract Price, but it is a sum total of the clearly demarcated prices for onshore supplies and services and offshore supplies and Designs. In our considered opinion, the Assessing Officer was initially not correct in holding that the contract was a composite one devoid of any bifurcation towards onshore and offshore supplies and services, which stand was subsequently altered to the correct position. We, therefore, hold that it is wide off the mark to categorize the present contract agreement as a composite one since all its major four components are dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a composite contract was entered into between the assessee together with NCC and SAIL. There is a separate mention of consideration for supply of equipments and for rendition of services. Simply because the supply of equipment and the rendition of services is to one party and for a common purpose, we are unable to find any logic in treating the entire amount as one composite payment attributable commonly both to the supply of equipment and rendering of services, more so when there is a specific identifiable amount relatable to these segments. There is no qualitative difference between two situations, viz., first, when one contract is made for two or more works specifying the consideration for each work separately; and second, when two or more contracts are made for each such work. Be that as it may, it is observed that the AO has ultimately completed the assessment by separately including the above referred four components in the total income of the assessee. It shows that he impliedly accepted the break-up of the contract price into four broad divisions as correct. 4.6. Apart from the assessee's contention that the amount received during the year was in the nature of advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of offshore equipments supply from foreign ports to the site of SAIL was also paid by SAIL through NCC. The insurance policy against the transit risk of said offshore equipment supply was taken by SAIL through NCC. The position as enumerated above has not been controverted by the Assessing Officer. Further, when the assessee challenged the addition proposed by the A.O on this issue before the Dispute Resolution Panel (DRP), it was reiterated that the title of goods passed outside India. The DRP accepted this argument vide para 4.2.5 of its Direction u/s 144C(5). However, it was observed that even though the title of goods passed outside India, but it was the performance guarantee which was important and decisive of the taxability of income. That is how the assessee's contention came to be rejected by the DRP. 1.b. In the oppugnation, the ld. DR forcefully argued that the permanent establishment of the assessee played an active role in the supply of offshore equipment. On a specific query to indicate the precise role of the PE in the offshore supply of equipments, the ld. DR failed to substantiate his point of view. He kept on harping on the general submissions that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... milar to the one now raised by the ld. DR before us, was earlier also attempted before the Special Bench tribunal in Motorola Inc. VS. DCIT (2005) 95 ITD 269 (Del)(SB). It can be seen from para 231 of the special bench order that the ld. DR therein also pressed into service the applicability of sections 19 and 21 of the Sale of Goods Act to canvass view that the title of goods passed in India. Such contention met with the fate of dismissal. The special bench, after considering sections 26 and 40 of the aforesaid Act, noticed that : `S. 40 further says that it is open to the parties to agree that even where the property in the goods has passed, the seller may undertake the risk of deterioration in the goods necessarily incident to the course of transit. This is what the parties in the present case have undertaken in the sense that though the title to the GSM equipment passed in USA, the risk continued to remain with the assessee (seller) and the risk passed to the cellular operator only on delivery in India. Therefore, the result is that merely because the risk passed in India, it cannot be said that the sale took place in India. Therefore, no income can be said to have arisen in In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges has been given in Table 13B, a copy of which is available on page 1036 of the paper book. When we turn to such Table, the description of `Foreign supervision charges' is found as : Foreign supervision charges in India during Erection, Start up, Commissioning and Performance Guarantee tests. Getting a separate charge for foreign supervision charges for the setting up of plant makes it clear that such supervision charges are not part and parcel of the price of equipment as referred to in columns 3, 5 and 7 of Table 1B. It implies that there was distinct charge for foreign supervision charges which has been construed by the assessee itself as onshore services chargeable to tax in the relevant year. To this extent, it is manifested that foreign supervision charges do not form part of sale consideration of the equipment supplied offshore. 2.c. However, we find from Summary of Prices on Table 1B, as was rightly pointed out by the ld. DR, that Training charges have been separately set out at Sr. No. 13 and under the Price column, it has been mentioned as `Not Quoted'. Then there is reference of Table 14B to give the portrayal of `Training' on page 1037 of the pap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only other charge as per the Summary of Price for the onshore services is `Foreign supervision charges'. When we consider the detail of such charges on page 1036 of the paper book, it transpires that there is no ad hoc consideration. In fact, it has been calculated by estimating 7400 man days for rendering such foreign supervision and there is a specific rate per man day, culminating into the calculation of total charge on this account at Euro 4440000. On having a glance at the detail of `training charges' on page 1037, it comes out that against the column `Estimated Man days for Employer's Personnel for Training in India', it has been mentioned as `Included'. Similarly against the next column of `Price for Training in India', again it has been mentioned as `Included'. Once the foreign supervision is found to have been exclusively charged and our attention has not been drawn towards any material to indicate that the charge for training was embedded in any other component of price charged, the natural corollary which follows is that the Training charges are `Included' in the sale price of equipments. It is simple and plain that if a seller has to incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contract. 2.g. There are certain other clauses also which show that the assessee has undertaken to bear expenses in connection with the supply of goods. 2.h. The above discussed clauses indicate that the assessee undertook to incur some expenses towards test and inspection at site that is in India; conduct repair during defect liability period again in India etc. These expenses are to be borne by the assessee. Though the mention of words 'at its own expense' for test and inspection in Clause 23.1 and the words 'at its cost' for defect liability prima facie indicate that compensation for such liability is included in the sale price of the offshore supply of equipment, but it cannot be so concluded outrightly. The possibility of compensation for such things being included in Foreign supervision charges cannot be ruled out without verification. In fact, our attention has not been drawn towards the further break-up of total Man days under `Foreign supervision charges' for reaching a positive conclusion as to whether or not the compensation for such charges is included therein. With this truncated information, we cannot reach a sure conclusion. It is palp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration for some services rendered in India (Point 2 above). 3.b. Now comes the question of taxability of price for offshore supply of equipment simplicitor and compensation for services rendered in India. The assessee is a non-resident. Sec. 4 of the Act, which is a charging section, provides that where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of this Act in respect of the total income of the previous year of every person. Sec. 5(2) of the Act deals with the scope of total income of non-residents and provides that subject to the provisions of the Act, the total income of non-resident includes income from whatever sources which is received or is deemed to be received in India or accrues or arises or is deemed to accrue or arise in India during such year. Clause (a) of this sub-section talks of the income which 'is received or is deemed to be received in India'. It is not the case of the Revenue that the income from offshore supply was received by the assessee in India. The expression 'i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deemed to have accrued in India. 3.d. At this juncture, it is relevant to mention that the general provision bringing income from any business connection in India within the sweep of section 9(1)(i) further explains by way of Explanation 1 (a) that : `in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India '. The crux of the above provision, in so far as it is relevant for our purpose, is that a non-resident is liable to tax if he earns business income from the operations carried out in India. 3.e. As both the sides have extensively argued on the position of the assessee qua the `Business profits' under the DTAA, it would be apposite to appreciate such position as well. Article 5 discusses about the existence of a Permanent Establishment (PE). Then Article 7 of the DTAA deals with the Business profits. It would be in order to note down the prescription of paras 1 and 2 of Article 7 of the DTAA as under : - ARTICLE 7 Business profits 1. The profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t also forms an integral part of both section 9(1) of the Act read with Explanation (1)(a) as well as Article 7 of the DTAA. If a particular income is not attributable to the operations carried out in India and thus has no territorial nexus with India, then a non-resident cannot be charged to tax for that income. Per contra, if a particular income is attributable to the operations carried out in India and thus has territorial nexus with India, then there can be no escape from charge of such income to tax. In case of a composite income, which is partly relatable to the operations carried out in India and partly to outside India, a proportionate part of income which is so relatable to the operations carried out in India, has to be charged to tax. This position has been accepted by the Hon'ble Summit Court in Ishikawajma -Harima (supra) when it summed up its conclusion on offshore supply in para 73 of the judgment, the relevant part of which is as under : - 73. We, therefore, hold as under : Re : Offshore supply : (1) That only such part of the income, as is attributable to the operations carried out in India can be taxed in India. (2) Since all parts of the transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Article 7(1) of the DTAA. To this extent, the amount is chargeable to tax in India. 4.b. Now comes the question of determination of such income or the attribution of income from sale price of offshore equipment to services rendered in India. The ld. DR argued that 35% of the total profit from offshore supply should be attributed to such services rendered in India. For this proposition, he drew strength from the judgment of the Hon'ble Delhi High Court in Rolls Royce PLC Vs DIT (IT) (2011) 339 ITR 147 (Del) in which it has been held that 35% of the profit should be attributed to activities carried out in India. Sounding a contra note, it was stated on behalf of the assessee that even though some operations were carried out in India, still no part of the sale price of offshore equipments could be attributed to such operations. The ld. AR relied on the judgment of the Hon'ble Uttarakhand High Court in the case of Samsung Heavy Industries Ltd. vs. Director of Income-tax (IT), a copy of which has been placed on page 490 onwards of the case law paper book. It was submitted that in this judgment, the Hon'ble High Court has held that no profits out of the sale proceeds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price. Further no such taxability was held to be arising : as there was no allegation made by the department that the price at which billing was done for the supplies included any element of services rendered by the P.E . When we turn to the facts of the extant case, it can be easily deduced that the Revenue has proved beyond doubt that the price charged by the assessee for supply of offshore equipment also includes consideration for certain services rendered in India. This makes it clear that the price for such services is liable to be considered for taxation as per Sec. 9(1)(i) of the Act and also Article 7(1) of the DTAA. 4.e. Reverting to the issue of apportionment of profit to the services rendered in India, we find that such attribution cannot be done in an arbitrary manner. It is a question of fact which varies from case to case. In a given case, the nature of services to be rendered may be quite cost or labour intensive, while in another case, it may not be so. There cannot be any straitjacket sacrosanct formula for such attribution. As we have restored a part of this issue to the file of the AO as per point 2 above for determining as to whether the testing charges in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra. The assessee contends that the amount has been received as advance in this year and the income will be offered for taxation in the correct year. The Revenue has taxed the amount received in the year in question. As it has been accepted by the assessee that such amount is chargeable to tax in the correct year, which is otherwise also a settled legal position as per the judgment of the Hon'ble Supreme Court in Ishikawajma -Harima (supra), we hold in principle that this amount is chargeable to tax in the correct year. The determination of the correct year will be discussed infra. IV. INCOME FROM DESIGN ENGINEERING SERVICES 7.1. The facts concerning this issue are that the assessee received Euro 150900 towards Design and engineering which were claimed to be in the nature of advance. The amount was stated to be not at all chargeable to tax on the ground that the Design and engineering was to be done outside India and then imported into India without any role of the P.E in this transaction. It was also claimed that the offshore design and engineering was inextricably linked to the offshore supplies and hence would cease to be chargeable to tax in India. The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in Director of Income Tax Vs Rio Tinto Technical Services (2012)340 ITR 507 which reversed the finding given by the Tribunal that the consideration received was for a composite contract and hence could not be bifurcated. It has been held that in the absence of any bifurcation, an estimated allocation has to be made for tax purposes. From the above judgment, it is manifest that the contention of the ld. AR that the fees for design and drawing should be considered as part of supply of offshore equipment, is not sustainable. 7.4. The ld. AR then argued that such consideration should alternatively be considered as Royalty. In support of this contention, he relied on clause 15 of the General Conditions of Contract on page no. 1103 of the paper book by which it has been provided that the copyright in all drawings, documents and other materials shall remain with the contractor. This contention in our considered opinion is again bereft of any force. Second para of the same clause 15 makes it unequivocal that SAIL shall have right to use these drawings, documents and other material, data and information for execution of Contract and operation and maintenance of the facilities. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical services' as defined u/s 9(1)(vii) of the Act. Such definition is contained in Explanation 2 which reads as under:- Explanation [2].--For the purposes of this clause, fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries .] 7.7. A bare perusal of this Explanation defining the term 'fees for technical services' makes it clear that it refers to rendering of any of technical services apart from managerial or consultancy. It also includes the provision of services of technical or other personnel. As the nature of afore-discussed drawings and designs customized to the assessee's requirements are result of the rendering of technical services, we are of the considered opinion that the consideration for the same qualifies to be categorized as 'Fees for technical services' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under:- [Explanation.--For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non- resident, whether or not,-- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.] 7.10. This substitution has been done by the Finance Act, 2010 w.r.e.f 1.6.1976. The above Explanation makes it clear that, inter alia, the 'fees for technical services' shall be deemed to accrue or arise in India and shall be included in the total income of the non- resident, whether or not the non-resident has rendered services in India. Thus it is manifest that the legislature has nullified the effect of the judgment of the Hon'ble Supreme Court in Ishikawajma - Harima (supra) to the extent it provided that technical services must be rendered in India so as to qualify for taxation. With this retrospective substitution of the Explanation, also covering the year under consideration, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue has held that the amount received during the year designated as advance is for the rendering of actual services or supply of goods and hence it is chargeable to tax to the extent as indicated above. On the other hand, the assessee claimed that neither any goods were supplied nor any services were rendered during the year and hence no income chargeable to tax has arisen. 8.2. On a specific query, the ld. AR submitted that the assessee had not taken up any contract which required it to follow either the projection completion method or percentage completion method. He submitted that the assessee was following Accounting Standard - 9 to show the income on the actual rendering of services or actual supply of equipment. As the AO has no where held that the income of the assessee should be computed as per the percentage completion or project completion method, we refrain from considering this aspect of the matter. Accordingly, we are proceeding with the contention of the ld. AR that the assessee was offering income on the actual rendering of services or supplying the equipment, offshore or onshore. 8.3. The assessee argued before the Assessing Officer that the amounts rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bon, mullite bricks, etc. k) BF all types of stave cooling plate like Cu, C.I S. G. Iron cooling plates. 2.1.3. Seventy Seven and a half percent (77.5%) of the Total Contract Price specified in the Appendix - 1, excluding taxes, duties and training charges shall be released towards progress payments and 100% of the taxes and duties on submission of documentary evidence along with release of progress payment of 77.5% as per Sub-Clause 2.3. 2.1.4 to 2.1.8........................ 8.4. Before we proceed to evaluate the rival contentions in this regard, it needs to be highlighted that one of the parties to this Contract agreement is SAIL, which is a Government of India undertaking. As such, the terms of the contract cannot be considered as smokescreen or not reflecting the true intention of the parties. In the absence of anything to the contrary brought out by the Assessing Officer or the ld. DR, we shall proceed with the presumption that there is no fa ade or cover-up in the terms of the Contract agreement. 8.5. Coming back to our context, it can be seen that there is an apparent conflict between the language of clause 12 of the `General Conditions of Contract' on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoice for this first 5% on 6.3.2008 for which the payment was received a few days later. The second installment of 5% was to be released on submission of approval/approved drawings/data and also un-priced copy of Purchase order/Factory indents by the assessee of the items listed in sub-clauses a) to k). The invoice for the second 5% installment was raised in the next year. This shows that by the end of the financial year namely, 31.3.2008, the assessee definitely submitted drawings/documents/data of items listed in sub-clauses a) to f) of clause 2.1.1. and also started doing the activities making it eligible for the receipt of second 5% installment, which required it to submit approval/approved drawings/data and also un-priced copy of Purchase order/Factory indents of the items listed in sub-clauses a) to k) as per clause 2.1.2. It explains that till the invoicing for the release of second 5% installment, the assessee was to simply procure copies of purchase orders to be placed by it for the purpose of submission of equipment to SAIL after approval of the drawings and documents as mentioned above. This goes to prove that no supply of equipments was contemplated till the invoice f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd get 77.5% of the total contract price on the submission of documentary evidence as per sub-clause 2.3. The actual supply of equipments was to necessarily start much before this milestone of release of 77.5% of contract price. It is of importance to note that the assessee entered into contract with SAIL in 2007 and also set up its project office. Not only that, it also received two installment of 5% of the contract price. It is not possible that after doing so, it sat idle till the raising of invoice for 77.5% in the year 2009. On a specific query, it was admitted by the ld. AR that the supply of offshore and onshore equipments was to be made over the period of contract and it was not a case of entire supply of equipments having been effected on the date of raising invoice in the year 2009. He admitted of not readily having the dates of actual supply of equipments for which the invoice was raised in 2009. We want to make it clear that as no income can be charged to tax simply on the receipt of advance, similarly the taxability cannot be postponed to the `release' of the amount for which invoice is made much after the supply of goods. The relevant point of taxation is the actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise chargeable to tax in India. Erection and commissioning may be of building structure or plant. It has been noticed above that no supply of plant commenced up to 31.3.2008. Thus no income can be charged to tax in respect of erection commissioning etc. of plant and machinery. However, the Assessing Officer is directed to verify if the assessee was involved in erection of building structure also. If the answer is found to be in affirmative, then he will value such services, if any, actually rendered during the year. The value so determined will be included in the total income for the current year. IV. Income from Design Engineering services Such amount is chargeable to tax as fees for technical services as per section 9(1)(vii) of the Act. The assessee definitely rendered some technical services during the year for becoming entitled to receipt of 5% of the total contract price. The A.O. is directed to examine the actual services rendered during the year and value them for the purposes of inclusion in the total income for the year in question. It should be kept in mind that if the value of such services so rendered in India breaches 5% of total consideration of such ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 4 of his order that certain expenses like Power and fuel, Raw material, Personnel, etc., were required be excluded and only Manufacturing expenses were eligible for inclusion in the cost base. Without disturbing the selection of comparable cases and moving with such limited expenses, he recomputed the mean OP/OC of such comparables at 26.74%. By applying this percentage of comparable cases, he initially proposed TP adjustment of Rs.4,46,82,666/- for comments to the assessee. The assessee raised certain objections before the TPO as regards the exclusion of expenses from the cost base. The Officer got partly satisfied and came to hold that `Salaries' could also be treated as Operating expense of the comparables, but did not move from his earlier stand as regards other expenses like Depreciation, Power and fuel, Travelling expenses and conveyance. By the inclusion of the amount of Salaries, the TPO re-worked out the average OP/OC of comparables on page 12 of his order at 14.65%. In the final analysis, the TPO applied Transactional Net Margin Method (TNMM) and used average margin of comparables at 14.65% to propose addition u/s 92CA at Rs.2,15,27,090/-. The assessee was unsuccess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and second, that such net operating profit margin is to be seen with reference to any one of the bases provided in sub-rule (i), such as, costs incurred or sales effected or assets employed, etc. The assessee initially made a claim for adopting the base as `Direct costs' alone, which, in our considered opinion, has no sanction of law. When the rule provides for the base as `costs incurred', it cannot be a part of such costs. It has to be the `total cost' and not any fraction thereof. It is seen that the TPO proceeded with determination of ALP by considering the base of total costs. However, he skipped certain expenses, as discussed supra. The manner in which he selected certain expenses and ignored others, is equally not sustainable. The correct position is that total operating cost refers to cost of goods sold, administration, selling, distribution expenses and depreciation etc. Net operating profit margin, being the numerator, in the formula is excess of Operating revenue over Operating costs. There can be no question of viewing net operating profit margin with reference to a part of `total costs'. It needs to be necessarily seen with reference to the total costs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong in computing `total costs' by which the ratio of OP /TC from its international transaction was computed. It is axiomatic that when the delegated legislature provides in unequivocal terms that the `total operating costs' should to be considered, the TPO or the assessee cannot at their sweet-will choose to substitute such base with any other suitable base as per their convenience. We, therefore, set aside the calculation of OP/OC as made by the assesee as well as the TPO in respect of the assessee and comparables and direct the AO/TPO to de novo compute OP/TC of the assessee as well as comparables by considering `net operating profit margin' as numerator and `total operating costs' as denominator. We want to make it clear that there is no dispute on the selection of TNMM as the most appropriate method; selection of profit level indicator as OP/TC; and selection of comparables. No departure should be made on the above matrixes in such fresh proceedings. It is on the basis of such fresh calculation that the correct ALP will be determined for viewing if any addition on account of TP adjustment is called for. It goes without saying that the assessee will be allowed a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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