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TMI Blog2019 (7) TMI 1317X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act"), which in turn was passed in pursuance to Directions issued by learned Dispute Resolution Panel-IV, Mumbai( hereinafter called " the DRP") dated 19.12.2014 issued u/s 144C(5) of the 1961 Act. Earlier, the AO passed draft assessment order dated 14.03.2014 u/s 144C(1) read with Section 143(3) of the 1961 Act, wherein transfer pricing additions were made by the AO in the aforesaid draft assessment order based on order dated 30.01.2014 passed by learned Transfer Pricing Officer, Mumbai (hereinafter called "the TPO") u/s 92CA(3) of the 1961 Act. Subsequently, the assessee filed objections before learned DRP against the aforesaid draft assessment order dated 14.03.2014 passed by the AO, which were disposed off by learned DRP by issuing directions dated 19.12.2014 u/s 144C(5) of the 1961 Act. 2. The grounds of appeals raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called "the tribunal") in ITA no. 1889/Mum/2015 for AY 2010-11, read as under:- "In the facts and circumstances of the case and in Law:- 1. The Hon'ble DRP failed to not appreciate that no proper show cause notice was served by the TPO complying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The Hon'ble DRP has erred in dismissing the objection raised for disallowance of forseeable loss of Rs. 17,61,703/- without appreciating the fact that this loss was on account of delay in completion of the project for which projectwise details of losses were filed before them. 11. The order of the Hon'ble DRP issuing directions as well as order passed by the TPO as well as Assessing officer in pursuance of the Directions issued by Hon'ble DRP are erroneous which deserves to be set aside. 12. The appellant reserves the right to add, withdraw, amend or alter any of the grounds of anneal at any time prior to or during the course of proceedings before the Hon'ble Tribunal." ITA no. 1889/Mum/2015-MX Systems International Private Limited 3. This appeal has arisen from assessment framed by the AO u/s. 143(3) r.w.s. 144C(13) of the 1961 Act vide assessment order dated 29.12.2014 passed by the AO in pursuance to directions given by learned DRP, wherein transfer pricing additions to the tune of Rs. 19,43,77,501/- were made while computing Arms Length Price in relations to international transactions entered into by assessee with its AE. 3.2 The background of the case is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g search process in Prowess. The margins of the comparables are as under:- S.No. Name of company F.Y.2007-08 FY 2008-09 FY 2009- 10 Weighted average 1 Kidde India Ltd -2.51% -11.00% .... -6.75% 2 Nitin Fire Protection -- 30.85% 21.99% 26.42% Arithmetic Mean 21.99% 9.84% 3.7 The TPO rejected Kidde India Ltd. as comparable for the following reasons, as detailed hereunder:- "Kidde India Ltd needs to be rejected for the following reasons : i) Single-year margin needs to be considered for considered and since the data of the said company is not available for FY 2009-10, the company cannot be considered for benchmarking. ii) Even if weighted average margin of three years is taken, it is seen that the company is a consistent loss-maker. In atleast two out of last three years, losses were shown." 3.8 Thus finally PLI was taken to be that of Nitin Fire Protection Industry Ltd., i.e. for FY 2009-10 at 21.99% and the adjustments were made to ALP of the international transactions entered into by the assessee with its AE, to the tune of Rs. 19,43,77,502/-, which adjustment to ALP was worked out by TPO as under: (Amount In Rs.) Operating Income(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in (2014) 111 DTR (Del) (Trib) 70 it was held in Para 5 that 'The CIT(A) granted impugned relief by making adjustments, on account of capacity underutilization, in the results shown by the tested party and thus computing hypothetical financial results which the tested party would have achieved in perfect conditions. Such an exercise is impermissible. As is the undisputed legal position, such comparability adjustments can only be made in the comparables and not the tested party itself. It is specifically provided in Rule 10B (1)(e)(iii) that adjustments for variations, which could materially affect the amount of net profit margin in the open market in comparable uncontrolled transactions, are to be made in respect of net profits realized by the comparable transactions or enterprises. The CIT(A) was thus clearly in error in proceeding to make capacity underutilization adjustments in the profits earned by the assessee. That apart, in the case of a one hundred percent captive service unit, as is the assessee before us, the very concept of capacity underutilization may not really make any sense unless the assessee has not been able to offer, for reasons beyond its control, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page 273) shows that the issue was discussed and clarifications were furnished by assessee. It is seen that an opportunity has admittedly been given through the order sheet noting. In any case, any deficiency in the opportunity has been made good during the DRP proceedings. Accordingly, this ground is dismissed. 8.10. The assessee has claimed that its own PLI should be taken as (-) 0.93% as against (-) 3.28% reported in TSPR and considered and accepted by the TPO. In the submissions filed it is seen that items of income that it had considered as non operating earlier, is now claimed to be operating. Similarly, expenses that it had claimed to be operating earlier, is now claimed to be non operating. Such income are foreign exchange gain, recovery of rent and salary expenses. These are non operating and are therefore rightly excluded by the TPO. The expenses now excluded are claim for forseeable loss. It is now claimed that this is an extraordinary expense claim. On the one hand the assessee claims that this is a valid expense claim in computing the taxable income, but for transfer pricing it claims that this is an estimate and extraordinary. This is clearly an inconsistent stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitutional. There is no lack of legislative competence for enacting the said provisions and making them applicable to the petitioner or to a class of persons falling in the category of the petitioner. Potential of multinational companies to allocate profits in intra groups transactions to outside jurisdiction or resulting in tax evasion is an acknowledged fact and is duly recognized in legislation, not only in India but elsewhere also. Keeping in view this mischief to be remedied and to advance the object of taxing the real income, provisions have been enacted. The amended provisions certainly advance the declared object by laying down the requirement of and mechanism for determination of ALP. 'International transaction' and 'associated enterprises' have been well defined under ss. 92B and 92A of the Act. International transaction is a transaction between two or more associated enterprises, either or both of whom are non-residents. Associated enterprise is an enterprise which participates in management or control of capital or other gains. The provision for computing ALP has been applied to income arising from international transactions. The statute is, thus, appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the FERA, the assessee cannot charge more than particular price, can also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to ALP in any international transaction, as defined, "(emphasis supplied). - even If transactions are between two resident entities, the Hon'ble ITAT in the case of Vodafone India Services Pvt Ltd. in its recent order dated 10/12/2014 in ITA 7514/Mum/2013 has upheld the applicability of the transfer provisions, in facts of that case. - In the TPSR in case of Minimax GMBH, it is clearly admitted that the Indian Transfer Pricing legislation applies to Minimax PO, it being a non resident having transaction with resident and non resident AEs (internal page 19). it is therefore held that the transfer pricing provisions are applicable in this case. 8.12. It has been argued that there is no motive to shift profit outside India. This argument is not accepted as the application of Transfer Pricing provisions is not contingent on establishing the motive of shifting profits as was held in Aztec case by ITAT. 8.13. It has been argued that two new comparables sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in. TPSR both in current and preceding year, should now be excluded since it has substantial related party transactions; it is functionally not comparable. Now this leaves a situation where if its contention is accepted, there are no comparables left and thus the benchmarking done by assessee fails. 8.16. Transfer Pricing is not an exact science. The availability of data has also to be considered when perfect comparability cannot be ensured within the data available. In the facts of the present case for this year, the TPO is directed to consider both Nitin Fire Protection Industries Ltd. and Kidde India Ltd as comparable with data of FY 2009-10 alone to be taken and similar accounting treatment to be followed in computation of PLI. 8.17. It has been argued that the adjustment should be computed only in respect of the transactions with the AE and not on entity level. There is no quarrels with this proposition. However, when the controlled transaction with AE is revenue received, the appropriate PLI is OP/OC. Thus, the PLI has to be applied to the relevant OC in respect of the controlled transaction. The TPO is directed to compute the adjustment keeping this direction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch that the assessee is engaged in providing fire safety to various buildings in different sectors of economy. It was explained that 74% of equity is held by its foreign parent namely Minimax GmbH Co. KG. Our attention was drawn to the directions issued by DRP. It was explained that fire safety contract was awarded by DIAL in favour of L&T, who in turn sub-contracted work to Minimax GmbH who further in turn awarded work to the assessee. The assessee has in its TPSR submitted had included Nitin Fire Protection Industries Limited and Kidde India Limited as comparable. The TPO accepted Nitin Fire Protection Industries Limited while rejected Kidde India Limited as comparable. The contention of the assessee before the tribunal is against exclusion of Kidde India Ltd. as comparable, which as per assessee could not be rejected as the said comparable was accepted by TPO in immediately preceding year also. Secondly, the learned counsel for the assessee has taken an objection that merely because Kidde India Ltd. had made loses, the same cannot be rejected as comparable as it is in the same business of fire safety. Further assessee has also objected to the inclusion of Nitin Fire Protection I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 12 raised by assessee in its appeal in memo of appeal filed with tribunal as not being pressed by the assessee. We order accordingly. 5.2 With respect to other grounds of appeal namely ground number 4-8,10 and 11 raised by the assessee in memo of appeal filed with the tribunal, we have considered rival contentions and perused the material on record. We have observed that the assessee is engaged in the business of developer, integrator and consultant of all types of electronic, electrical mechanical, engineering systems related to fire protection and telecommunication. The assessee is a joint venture between Mr. Harish Salot and Minimax International GmbH & Co. KG. The 74% equity is held by Minimax. The said Minimax International GmbH & Co, KG is a foreign company, which is approved by RBI as Project office assessable to tax in India as PE. The assessee is a complete service provider in the domain of fire protection system. The assessee offers engineered fire detection, protection and suppression systems; fire fighting foams, DCP Skids, Gas Suppression Systems and hardware. The assessee protects government, power plant, aviation, marine, transportation, petrochemical, wind turbi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Even if weighted average margin of three years is taken, it is seen that the company is a consistent loss-maker. In atleast two out of last three years, losses were shown." 5.8 Thus finally PLI was taken to be that of Nitin Fire Protection Industry Ltd., i.e. for FY 2009-10 at 21.99% and the adjustments were made to ALP of the international transactions entered into by the assessee with its AE, to the tune of Rs. 19,43,77,502/-, which adjustment to ALP was worked out by TPO as under: (Amount In Rs.) Operating Income(A) 744,088,809.00 Operating Cost(B) 769,297,738.00 Operating Profit(C) -25,208,929.00 OP/OC(actual) -3.28% Arm's Length OP/OC 21.99% Arm's Length operating profit(D)=B X 21.99% 169,168,572.99 Arm's Length operating income(E)=D+B 938,466,310.59 Adjustment =E-A 194,377,501.59 5.9 The said adjustments to ALP were approved by learned DRP and objections filed by the assessee were dismissed. The AO has also made additions to the income of the assessee towards provisions for losses made to the tune of Rs. 17,61,702/- being contingent in nature. Sr. No. stature of transaction Amount (Rs.) Method Adopted 1 Purchase of Raw material 2,77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed that assessee has incurred extraordinary expenses due to delay in DIAL project and these extraordinary expenses incurred should be excluded while computing PLI of the assessee. The assessee apart from comparables as selected in TPSR through searches in Prowess, has also introduced new comparables namely New Fire Engineers Pvt. Ltd. and Logicon Building Systems Pvt. Ltd. which were not accepted by learned DRP as comparables mainly on the grounds that these comparables were not selected by assessee while conducting its TPSR through Prowess. The learned DRP rejected these comparables firstly that the assessee cannot be allowed to do cherry picking of comparables and secondly financial segment data's are not available to make FAR analysis for comparison with assessee. The onus is on assessee to bring on record cogent material to prove that these comparables are functionally comparable with that of the assessee. 5.13 The learned counsel has prayed that in the interest of justice, matter may be restored to the file of the AO/TPO for fresh adjudication on merits in accordance with law after considering all the contentions of the assessee. The learned DR has also fairly submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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