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TMI Blog2017 (9) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ( the Rules ). 3.2. disregarding multiple year/ prior years data as used by the Appellant in the TP documentation and holding that current year (i.e. FY 2011-12) data for comparable companies should be used considering the fact that the Appellant is engaged in the execution of long term turnkey contract and it is imperative to analyse the profitability of such contracts over a period of time, in line with the applicable Accounting Standards. 3.3. rejecting the comparability analysis in the TP documentation and in conducting a fresh comparability analysis based on application of additional/ revised filters in determining the ALP and rejecting, in particular, the filters applied by the Appellant in its TP documentation; and further erred in by cherry-picking of the comparable companies on an arbitrary basis which, inter alia, is self-contradictory to his own search filters as applied while undertaking a fresh comparability analysis. 3.4. modifying the set of comparable companies selected by the Appellant in its TP documentation and selected functionally dissimilar companies. 3.5. not allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omation. (ii) M/s RTA Alesa AG, Switzerland, was awarded a EPC contract by M/s Bharat Aluminium Company Limited ( BALCO) for 55 TPH bath processing plant for carbon plant of BALCO smelter expansion project at Corba, Chattisgarh ( India). Accordingly, it set up a project office (PO) in India for executing EPC project with BALCO on a general permission from the Reserve Bank of India (RBI). This project office constituted permanent establishment (PE) of RTA Alesa, Switzerland India i.e. an entity in India for tax purposes (Assessee). (iii) The BALCO project comprised of four parts namely onshore services, onshore supply, offshore services and offshore supply. The contract with BALCO was a turnkey project, which included supply of equipments and commissioning spares, maintenance spares, erection, supervision, inspection and comprehensive project management services. (iv) A separate onshore agreement was entered into by the BALCO with RTA Alesa India project office ( RTAPO) and a separate consideration for the onshore part of the contract was agreed with the BALCO , which consisted of following scope of work: (a)supply of equipments and commissioning spares and (b)render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A NA NA (viii) In the transfer pricing study submitted, the assessee computed the operating profit margin (OP/OC) as under: Particulars Supply of Equipments Rendering of services Revenue Contract Income -Domestic 7,53,86,570 5,12,31,796 Less:- Non-operating income - - Total Income 7,53,86,570 5,12,31,796 Total Operating Revenue 7,53,86,570 5,12,31,796 Expenditure Other Contract Costs - 3,62,39,107 Material 6,85,19,996 - Provision of Warranty 51,15,650 - Depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.35% 4. Counselting Engineers Group Ltd. 17.89% 5. High quality Steel Ltd. 9.28% 6. BGR Energy Systems Ltd. 15.34% 7. BIL Infratech Ltd. -0.21% 8. MN Dastur Co. Pvt. Ltd. NA 9. Mahindra Counselting Engineers Ltd. NA Mean 17.58% (x) Further, the assessee benchmarked the international transaction relating to supply of equipments and purchase of belt conveyor using TNMM as the most appropriate method with OP/OC as PLI. The tested party margin i.e. the assessee was computed at 1.47%. The assessee chosen four comparables having average OP/OC margin of 5.99% using multiple year data. During proceeding before the TPO, the assessee submitted updated margin of the comparables having mean of 2.95% as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Revenues (A) 12,66,18,367 Total Operating Cost (B) 12,75,14,576 Arm s Length Profit (C=24.04% of B) 3,06,54,504 Arm s Length Price (D= B+C) 15,81,69,080 Difference (E= D-A) 3,15,50,713 (xiii) In the draft assessment order passed under section 143(3)/144C(1) of the Act on 03/03/2016, the Ld. Assessing Officer proposed transfer pricing addition of ₹ 3, 15, 50, 713/- under section 92CA(4) of the Act. The Assessing Officer also proposed disallowance of ₹ 34,86,766/- towards salary expenses claimed during assessment proceedings, on the ground that claim was neither made in the original return nor in the revised return of income and therefore it was not allowable in view of the decision of the Hon ble Supreme Court in the case of Goetze India Ltd. Vs. CIT, (2006) 284 ITR 323 (SC). (xiv) The Ld. DRP confirmed the approach of aggregating both the transaction of rendering of service and supply of equipments for benchmarking and rejected the contention of the assessee for determining th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and onshore services. He further referred to page 122 of the paper book and submitted that payment terms were separately agreed in the contract for supply of equipments and rendering of services. He also referred to page 167 of the paper book and submitted that separate invoices were raised in respect of supply of equipment and services rendered. In view of the above, the Ld. counsel submitted that both transactions of supply of equipments and services are separate and accordingly, should have been benchmarked separately following the transaction by transaction approach. 4.2 Ld. CIT(DR), on the other hand, submitted that the assessee company was awarded a composite contract of commissioning of the plant which included onshore and offshore supply of equipments, spare parts as well as onshore and offshore services of erection and commissioning etc. It was a turnkey project and for executing the onshore supply and services, the assessee set up a project office in India. According to the Ld. CIT(DR) the supply of equipments was integral part of the whole contract of commissioning of the plant and it was awarded as a whole to the assessee. He further referred to the contract agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggregate the controlled transactions if the transaction meet the common portfolio or packet parameter. 4.3.2 In the instant case, the Ld. counsel referred to page 517 of the paper book and submitted that the expenditure incurred was identifiable towards supply of equivalent and rendering of services. The Ld. counsel submitted that wherever the expenses were not identifiable to the transaction, same have been allocated on the basis of the revenue recognized. The Ld. counsel submitted that following this principle material cost, provision for warranty etc. was fully allocated towards supply of equipments whereas the other contract cost was allocated fully towards rendering of services. The payment to auditors, printing stationary etc. was allocated on the basis of the revenue. But when the attention of the Ld. counsel was brought towards depreciation expenses debited fully towards rendering of services, he failed to explain as why the entire depreciation expenses of ₹ 34,53,206/- was allocated only toward rendering of services, though the fixed assets of the assessee included office equipments, building, furniture and fixtures etc. and use of which towards transaction of sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, efficiency and reliability requirements failure to live up to which might cause liquidated damages payable by the contractor and (v) security which is to be given by the contractor to the project company to ensure compliance of obligations prescribed under the EPC contract. The EPC sector performance is primarily interlinked with infrastructure investment. Contractors for EPC projects are selected on the basis of a tender process for large hightech project which are executed in the public private partnership mode. 4.3.4 On perusal of various terms of the agreement between the BALCO and the assessee, which is available on page 106 to 164, we find that the entire contract is a composite contract and the assessee was required to deliver complete facility to the BALCO. The clause 3.3 of the agreement makes it evident, which is reproduced as under: 3.3 COMPLETENESS Any scope of Work, which is not specifically mentioned in this Contract, but is required for the completion and safe, trouble free, normal operation of the Facility shall, unless specifically excluded in this Contract, be considered as included in the scope of work and shall be supplied and/or rendered fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gas, construction, nuclear, industrial. 5.3 Regarding the Holtec, the Ld. counsel submitted that it was engaged in providing service to entire needs of the global cement industry and offered comprehensive services in the areas of power, highways and bridges, engineering support services for bulk material handling, structural steel detailing etc. According to the Ld. counsel, the comparable was engaged in service segment of rendering engineering consultancy services and, therefore, cannot be compared with the assessee. 5.4 The Ld. CIT-DR, on the other hand, supported the order of the TPO. 5.5 We have heard the rival submission on the issue in dispute and perused the relevant material on record. We find that the Ld. TPO in para-7.2.4 of the transfer pricing order, has characterized the assessee as engaged in providing engineering services. 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. In such circumstances the assessee cannot be considered as engaged in providing engineering services. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he part of the assessee to claim the expenses in the original return of income or in the revised of income. 6.2 We have heard the rival submission and perused the relevant material on record. The Hon ble Bombay High Court in the case of Pruthvi Brokers and Shareholder s Private Limited (supra) has observed as under: 15. It is indeed a question of exercise of discretion whether or not to allow an assessee to raise a claim which was not raised when the return was filed or the assessment order was made. As held by the Supreme Court there may be several factors justifying the raising of a new plea in appeal and each case must be considered on its own facts. However, such cases include those, where the ground though available when the return was filed or the assessment order was made, was not taken or raised for reasons which the appellate authorities may consider valid. In other words, the jurisdiction of the appellate authorities to consider a fresh or new ground or claim is not restricted to cases where such a ground did not exist when the return was filed and the assessment order was made. 6.3 Ld. counsel submitted that salary of the few expatriates was computed incor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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