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TMI Blog2016 (12) TMI 942X X X X Extracts X X X X X X X X Extracts X X X X ..... thod for determination of ALP for international transactions. The assessee is also directed to furnish the comparables based on independent TP study for adoption of CUP method and produce such other evidences and documents before the Learned TPO / AO to ensure quick disposal of this set aside proceedings. We also direct the Learned TPO / AO to permit the assessee to use multiple year data and adopt the weighted average data of the financial information of the comparables and use the same for determination of ALP of the international transactions of the assessee. - ITA No.382/Kol/2015 - - - Dated:- 29-9-2016 - Shri Mahavir Singh, JM and Shri M.Balaganesh, AM For The Appellant : Shri J.P.Khaitan, Sr.Counsel Shri Pratushi Jhunjhunwala, Advocate For The Respondent : Sk. Z.H.Tanveer, JCIT, Sr.DR. ORDER Per Shri M.Balaganesh, AM 1. This appeal of the assessee arises out of the proceedings for the Asst Year 2010- 11 of the Learned Dispute Resolution Panel (DRP) dated 29.12.2014 in which directions are given to the Learned AO u/s 144C(5) read with section 144C(8) of the Income Tax Act, 1961 (hereinafter referred to as the Act ). 2. Shri.J.P.Khaitan, Senio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 2009-10, the AE provided services for Metro Rail project entailing labour expenses, overhead expenses and consultancy charges and also received payments for consultancy fees from KMRCL. Accordingly the said transactions constituted International Transactions of the Indian Project Office with the AE in USA. The Indian Project office contemplates to provide the following services to its AE in relation to general consultancy for Kolkata Metro Rail Projects: a) Provision of key and support personnel b) Lead transportation planning c) Lead spatial planning of the underground stations, entrances and associated surface works d) Provide inputs for Chief Quality Surveyor and Cost Estimator, Chief Safety Engineer and Transport Oriented Property Development Planning 4.2. The financial year 2009-10 was the first year of operation of the Indian Project office. The Project office adopted the Completed Contract method for recognizing income. The nature of work in India was such that major portion of the expenses were incurred in the first year of operation but revenue was to accrue subsequently. During the Asst Year 2010-11, the assessee undertook the following international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The transactions are therefore in compliance with the Arm s Length Principle. 4.4. The assessee adopted CUP method in Form 3CEB filed along with the return of income in respect of the following:- Labour expenses - ₹ 9,84,14,467 Overhead expenses - ₹ 1,08,35,031 Sustainable EMS Invoices (USD) - ₹ 1,54,94,256 Kolkata Metro Rail Corporation Invoices - ₹ 11,93,43,920 But before the Transfer Pricing Officer (TPO), the assessee did extensive transfer pricing (TP) study and shifted from CUP method to Transactional Net Margin Method (TNMM) for determination of its ALP. Under TNMM, the Profit Level Indicator (PLI) of the tested party (i.e the assessee herein) was -3.03% and whereas the PLI of comparables chosen by the assessee based on multiple year data was 2.95%. When assessee was asked to submit the comparative analysis based on single year data instead of multiple year data, the assessee vide submission dated 9.7.2013 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made from its AE on cost to cost basis without any mark up and the receipt of project income is only from KMRCL which is a Government body and hence TNMM may not be MAM in that scenario. He vehemently argued that only when there is an element of profit, it would be advisable to adopt TNMM as the MAM, whereas in the instant case, the reimbursement of labour expenses, overhead expenses and consultancy charges are made by Head office to LHPA India (assessee herein) on cost to cost basis without any profit element. He further argued that under TNMM, profits of comparables are compared to determine the ALP. Hence in the absence of profit on an international transaction, TNMM cannot be adopted as the MAM and hence requested for adoption of CUP as MAM as pleaded in the additional grounds of appeal. He argued that the assessee is in its first year of operation wherein the revenues would start flowing only in the future whereas the expenditure would have to be incurred in the beginning. He placed on record the details of experience of each company used as comparables in a tabular form. He further argued that from the tabulation, it could be seen that the comparables chosen by the Learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the Learned AR pleaded that the additional grounds raised by the assessee be admitted wherein it had sought for adoption of CUP method as the MAM as originally adopted in Form 3CEB along with the return. We find that the Learned DR had duly objected for admission of additional ground raised before us in his written submission by relying on various decisions. However, we find that the issue raised in the additional ground involves a legal ground and goes into the root of the matter for deciding the issue before us. We find that the assessee had adopted CUP method in Form 3CEB filed along with the return of income and this is not a fresh ground raised now before us. It is already available in the materials on record. Accordingly, by placing reliance on the decision of the Hon ble Apex Court in the case of NTPC Ltd vs CIT reported in 229 ITR 383 (SC), we admit the additional ground raised before us as they go into the root of the matter for deciding the issue before us. 7.2. The reasons adduced by the Learned AR for adoption of CUP method has lot of force as the assessee is only seeking reimbursement of labour expenses, overhead expenses and consultancy charges paid by it from i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons are possible unless the impact of the import contents are eliminated, or unless it is the case, as was the case before the Tribunal in Sony India Ltd. s case (supra), that the decision to have such a huge import content was a conscious decision taking into consideration all commercial considerations including the obvious benefits of a better quality which is bound to reflect or translate into higher seller product. No doubt, a higher import content of raw material by itself does not warrant, an adjustment in operating margins, as was held in Sony India Ltd. s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee s control. As was observed by a coordinate bench of this Tribunal in the case of E Gain Communications (P.) Ltd. (supra) the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect . We do not agree with the Assessing Officer that every time the assessee pays t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the Transfer Pricing Officer to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the Transfer Pricing Officer for fresh adjudication in the light of our above observations and particularly dealing with the contention that the present year being first full year of operations, the assessee was forced to have higher import content in raw material as the manufacturing facilities, and vendor development, was not complete, as also dealing with the contention that the business model in this year of operation was fundamentally different from the business model of the comparable concerns. The Transfer Pricing Officer will also consider whether the import content of the raw material have substantially come down in the succeeding years and will take into account the conclusions that can be drawn from such a decline or consistency, as the case may be, of the import content in the raw material. In case the Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icing Officer, and as these issues are somewhat academic at this stage which will be relevant only when the assessee s plea regarding adjustment on account of higher import duties being warranted by peculiarities of operations in this year, we refrain from making any observations on the merits of the case. With the above observations, we hereby remit the matter to the file of the Transfer Pricing Officer so far as question of determination of Arms Length Price under the TNMM method is concerned. 7.4. Now coming to the next issue as to whether the assessee, having adopted CUP method in Form 3CEB certification, later shifting to TNMM as the most appropriate method during the assessment proceedings, could again shift his stand to adopt CUP as the MAM at the appellate stage if the TNMM is found not to be the appropriate method in the facts and circumstances of the case. We find that this aspect has been adjudicated at length in the decision of Mumbai Tribunal rendered in the case of Mattel Toys (I) (P) Ltd vs DCIT reported in (2013) 34 taxmann.com 203 (Mumbai- Trib) , wherein it was held that :- 41. Now coming to the argument of the learned Departmental Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 (Bangalore Trib.) , wherein it was held that : 28. The learned counsel for the Assessee further submitted that payment of technical and management costs is an expense transaction for which the test of ALP cannot be done by applying transaction net margin method. In such a situation CUP would be the most appropriate method. Since there is lack of data CUP method cannot also be applied. Therefore determination of ALP in respect of individual transaction is not possible. Hence, adopting TNMM at the entity level was justified and had to be accepted. 29. The learned DR reiterated the stand of the revenue as contained in the order of the DRP and the TPO. 30. We have given a very careful consideration to the rival submissions. At the outset we observe In the case of Dresser Rand India (P.) Ltd. v. Addl. CIT [2011] 47 SOT 423/13 taxmann.com 82 (Mum.), the Hon'ble Mumbai Tribunal had an occasion to examine as to what is the approach that has to be adopted for determining ALP in the case of cost contribution agreement which is akin to the arrangement in the present case between the Assessee and its parent company. The assessee in case of Dresser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. 9. ** ** ** 10. In case the Assessing Officer comes to the conclusion that the assessee has indeed received the services from the AE the next question which we have to decide is as to what is the arm's length price of these services received under cost contribution agreement. It hardly needs to be emphasized that even cost contribution arrangement should be consistent with arm's length principle, which, in plain words, requires that assessee's share of overall contribution to the costs is consistent with benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. .. 31. The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing arm's length remuneration: Whether services were received from related party. Nature of services including quantum of services received by the related party. Services were provided in order to meet specific need of recipient of the services. The economic and commercial benefits derived by the recipient of intra group services. In comparable circumstances an independent enterprise would be willing to pay the price for such services? An independent third party would be willing and able to provide such services? 7.6. The assessee bears lesser business risk than independent comparable enterprises due to the nature of its revenue model. It is beyond any doubt that the project receipts are from KMRCL which is a Government body and hence the margins earned by the assessee is bound to be comparatively lower to reflect the lower level of business risk involved. Moreover, the comparables selected for the analysis also include companies that performs additional functions while being engaged in providing comparable services. Further the risk profiles of independent companies differ from that of assessee. The impact of these functional and risk diff ..... X X X X Extracts X X X X X X X X Extracts X X X X
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