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TMI Blog2019 (8) TMI 703X X X X Extracts X X X X X X X X Extracts X X X X ..... had held that adjustment on account of arm s length price of international transactions cannot exceed the maximum arm s length price. Entire amount recovered by the AE from the third party i.e. DMRC had been passed on to BTIPL and, therefore, BTIPL could not have recovered any amount which is higher than the amount charged by the AE from the third party. It has been pleaded that although this ground was vehemently raised before the Ld. CIT (A), the CIT (A) did not specifically adjudicate this ground and proceeded to dismiss the assessee s challenge to rejection of the CUP method without considering these alternate arguments of the assessee. As perused the order of the CIT (A) and we do note that although the Ld. CIT (A) has duly reproduced the submissions of the assessee in this regard, he, however, has not adjudicated this issue specifically. The discussion of the CIT (A) centers around the rejection of CUP method but does not refer to the submissions of the assessee regarding the issue as aforesaid. Interest of substantial justice would be served if these grounds are reconsidered by the Ld. CIT (A) and the Ld. CIT (A), after giving due opportunity to the assessee, passes a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Co. Limited - Although the assessee has agitated the inclusion of this comparable on the ground of functional incomparability because this company deals in manufacturing of wagons, bogies, couplers, steel casting and structural fabrications as against the metro coaches which were being manufactured by the assessee company, the fact remains that this company was held as a comparable by the ITAT in the immediately preceding year also. ITAT had directed that adjustment should be made with respect to FOC supplies while computing the margins. In this year, the TPO, while giving effect to the order of the CIT (A), has not given effect to the FOC supplies adjustment. Therefore, this comparable is restored to the file of the TPO for the limited purpose of re-computing the margin of this comparable after making suitable adjustment with respect to FOC supplies. Besco Limited - In the case of this comparable also, it is seen that the Ld. Commissioner of Income Tax (A), while following the order of the ITAT in the immediately preceding year, had directed that FOC supplies adjustment should be given while computing the margins but the TPO while giving effect to the order of the Ld. Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee filed a revised return of income wherein it had declared a loss of ₹ 751,768,805/- under the normal provisions of the Act and loss of ₹ 506,682,596/-under section 115JB of the Act. 2.2 During the assessment proceedings, the Assessing Officer (AO) made a reference under section 92CA of the Act to the Additional Commissioner of Income Tax, Transfer Pricing Officer - 1(3), New Delhi ( TPO ) for determination of the Arm's Length Price ( ALP ) of the international transactions entered into by the Assessee with its Associated Enterprises ( AEs ) during the captioned AY, which were also duly reported in the Accountant's Report i.e. Form No. 3CEB, filed along with the return of income. 2.3 During the course of the Transfer Pricing (TP) assessment proceedings, the TPO accepted the arm's length nature of all the international transactions except for the transaction pertaining to sale of metro trains under the PGR BOG division. The TPO proposed to disregard the Comparable Uncontrolled Price ( CUP ) analysis conducted by the assessee in its TP Documentation with regard to the determination of ALP of its international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 5 comparable companies (namely Titagarh Wagons Limited, Texmaco Rail and Engineering Limited, Braithwaite India Limited, Burn Standard Company Limited and Besco Limited), the TPO had made an inappropriate comparison whereby these companies which were into wagon manufacturing were compared to the Assessee which is a manufacturer of metro trains, thus ignoring the fundamental difference between wagons and metro trains business. 2.7 Further, it had been submitted that it had analysed few more comparables and had found 2 more such comparables which were similar to the aforesaid companies proposed by the Ld. TPO. These 2 comparables were Jessop Co. Limited which was rejected by the TPO on the ground that it failed his quantitative filter of sales turnover of 50% and Bharat Wagon Engineering Limited which was rejected on the ground that its financial data for the captioned AY was not available. 2.8 Thereafter, the TPO considered a revised average OP/OC margin of 4.74% (after including one comparable i.e. Jessop Co. Limited) using TNMM as the most appropriate method. The final comparable set considered by the TPO is provided below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer ( TPO ) is bad in law and void-ab-initio. 2. That on the facts and in the circumstances of the case and in law, the Commissioner of Income tax (Appeals) erred in not holding that the reference made by the AO suffers from jurisdictional error in as much as the AO did not record any reasons in the assessment order based on which the AO reached the conclusion that it was expedient and necessary to refer the matter to the TPO for computation of the Arm s Length Price ( ALP ), as required under section 92CA(1) of the Act. 3. That on the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the TPO in enhancing the ALP of the international transaction pertaining to sale of metro trains in the Passengers (PGR) and Bogies (BOG) division by INR 1,108,096,654 by rejecting Comparable Uncontrolled Price (CUP) method applied by the appellant and instead applying Transactional net margin method (TNMM) as the most appropriate method. 4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the appellant had supplied metro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Incometax (Appeals) erred on facts and in law in upholding the action of the Ld. TPO in applying inappropriate quantitative and qualitative filters for selection of comparable uncontrolled enterprises 5.3 Without prejudice that the Commissioner of Income-tax (Appeals) / the TPO erred on facts and in law in considering (i) Texmaco Rail Engineering Ltd., (ii) Titagarh Wagons Ltd., (iii) Braithwaite Co. and (iv) Bum Standard Co. Ltd., who are engaged in supply of wagons, etc. to be functionally comparable to the appellant, not appreciating that specific characteristics of the product being different, such companies did not satisfy the test of comparability in terms of clause (i) of rule 10B(2) of the Income-tax Rules. 5.4 Without prejudice that on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in not holding that only the metro coach division of BEML Ltd. executing similar contracts for supply of Metro coaches to DMRC satisfied the test of comparability as provided in rule 10B(2) of the Income-tax Rules for undertaking benchmarking analysis of international transaction of sale of metro rails ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Without prejudice that the Commissioner of Incometax (Appeals) erred on facts and in law in inappropriately including miscellaneous income earned by Jessop Co. Ltd as part of operating income for computing the Operating Profit/ Operating Cost ratio, even though the source of miscellaneous income was not ascertainable from the audited Financial statements. 7. Without prejudice that the Commissioner of Incometax (Appeals) erred on facts and in law in rejecting Bum Standard and Co. Ltd. on the basis that the said company was incurring persistent loss not appreciating that the said company passed the filter of persistent losses and negative net worth applied by the TPO. 8. Without prejudice that the Commissioner of Incometax (Appeals) erred on facts and in law in not appreciating that at best the Engineering Products segment of Bum Standard and Co. Ltd. could only be considered as functionally comparable for the purpose of benchmarking analysis. 9. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) has erred in not adjudicating ground relating to levy of interest u/s 234A, B, C and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE. It was submitted that the same train was supplied by BTIPL to BTG which were supplied onward by BTG to DMRC and, therefore, trains in both the transactions were identical with respect to their appearance and were designed, manufactured and tested as per the parameters set forth by the DMRC. It was further submitted that all units were metro train units manufactured indigenously by the assessee s facility and that all the inputs were obtained from the same source and the manufacturing process and the site were also identical. 3.2 Referring to the observations of the Ld. Commissioner of Income Tax (A) with respect to the contractual terms that the agreement seemed to be the one relating to a consortium but the initial deliveries were made by the AE directly to DMRC with no involvement of the assessee and, therefore, the amount of loss to be suffered by the assessee was not taken into account while entering into the contract with DMRC, the Ld. AR submitted that all supplies made to DMRC were governed by the contract RS2 (at pages 243 to 308 of the Paper Book) and all terms and conditions relating to all supplies were commercially enforceable by the same contract. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled to BTG and when subsequently BTG billed to DMRC. It was also emphasised that while entering into an agreement with DMRC, the quality of the product agreed was based on the intangible property owned by the Bombardier group and, therefore, practically there was no realistic alternative available with the buyer and seller. The Ld. AR submitted that the application of CUP was most appropriate under the given circumstances and that there was no ambiguity on the fact that sale of metro coaches from the assessee to BTG was identical in all respects to the coaches sold by BTG to DMRC. It was prayed that the methodology adopted by the assessee should be accepted. 3.5 With respect to ground nos. 4.3, 5 and 5.1, the Ld. AR submitted that these grounds were alternate grounds on the same issue i.e. the appropriateness of the methodology adopted by the assessee. It was submitted that the remuneration of the assessee from the international transaction cannot be greater than the overall revenue received from a third party. The Ld. AR reiterated that the assessee had sold metro train sets to its AE which were further sold by the AE to DMRC and the comparison of the sale prices ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his ground by the Ld. Commissioner of Income Tax (A), the issue should be restored to the file of the Ld. Commissioner of Income Tax (A). 3.7 With respect to ground no. 5.2, the Ld. AR submitted that this ground challenged the incorrect rejection of filters. It was submitted that with regard to this filter, the TPO had held that the industry segment in which the assessee has been operating in is not witnessing persistent losses and the Ld. Commissioner of Income Tax (A) had followed the order of the ITAT in assessee s own case for the immediately preceding year. The Ld. AR submitted that rejection of persistent loss making companies was incorrect inasmuch as loss making companies were also part and parcel of an industry as are profit making companies. It was submitted that the elimination of companies merely on the ground that they were loss making would tantamount to eliminating one-half of the spectrum of comparable companies which would result in certain higher mark-up. It was further submitted that the Indian transfer pricing provisions provided for the comparability of the arithmetic mean of the profit level indicator of the set of comparables wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable. ii) Titagarh Wagons Limited It was submitted that this company is dealing in wagons as against the assessee company which is dealing in Metro train coaches and bogies and both use an entirely different technology and, therefore, the product profile being different, comparison cannot be made. It was also submitted that while accepting Titagarh for the previous year, the ITAT had concluded that the company is functionally comparable after providing for free of cost supplies adjustment. However, in the current year, another company, namely Titagarh Steel Limited merged into the company and also acquired the wagon manufacturing unit in France. Therefore, due to this extraordinary event, the company no longer remained a comparable. It was also submitted that in the immediately preceding year, the TPO had taken only wagon segment of the company as a comparable to the assessee whereas during the current year, the company as a whole was taken as a comparable whereas only the wagon segment of the company could be compared to the assessee company. iii) Braithwaite and Co. Limited The Ld. AR submitted that this company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted because the TPO had taken the same at 0.5% whereas after merging the two segments, the correct margin comes to 2.38%. 3.9 It was further submitted by the Ld. AR that ground nos. 7 and 8 were not pressed and ground no. 9 was consequential. 4.0 In response, the Ld. C.I.T. DR submitted that ground nos. 3 to 4.2 and 4.3 to 5.1 already stood covered against the assessee by the order of the Tribunal in assessee s own case for the immediately preceding year. It was further submitted that the grounds raised in ground nos. 4.3 to 5.1 were not alternate submissions of the assessee on the same issue and there was no change in facts in this year as compared to the immediately preceding year wherein the ITAT had already considered the CUP method and had rejected the same. It was submitted that under the garb of alternate submissions, the assessee was trying to build a new case. It was also submitted that the Ld. Commissioner of Income Tax (A) had duly considered all the arguments of the assessee and it was incorrect to say that the assessee s submissions had not been considered and adjudicated upon. It was also submitted that there was no requirement for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s submitted that this company had two segments EMU segment and CS wagon segment but both could be combined if the company is to be taken as a whole for the purpose of comparability. It was submitted that the jugglery of accounting results and mathematical results cannot be allowed to artificially reduce the margin by increasing the large number of comparables artificially. It was also submitted that miscellaneous income is a normal incidence of business because extraordinary items of income have been shown separately. 4.6 The Ld. C.I.T. DR submitted that the appeal of the assessee deserves to be dismissed. 5.0 We have heard the rival submissions and have perused the material available on record. The first issue arising for our consideration is the assessee s challenge to rejection of CUP method by the department. Ground nos. 3, 4, 4.1 and 4.2 agitate the action of the TPO in rejecting the assessee s stand that CUP method was the Most Appropriate Method. This view of the TPO was further upheld by the Ld. Commissioner of Income Tax (A) who has relied on the order of the ITAT in assessee s own case for assessment year 2010-11 wherein the ITAT also has r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd reimbursement of ex pact salary are so closely related that they cannot be evaluated adequately on an individual basis. The reliance of the judgment of Hon ble Delhi High Court in case of Ramgreen Solutions Pvt. Ltd. Vs. Commissioner of Income Tax (ITA No. 102/2015) also asserts this point and clearly held in para 44 that: While using TNMM, the search for comparables may be broadened by including comparables offering services/products which are not entirely similar to the controlled transaction/entity. However, this can be done only if (a) the functions performed by the tested party and the selected comparable entity are similar including the assets used and the risks assumed; and (b) the difference in services/products offered has no material bearing on the profitabililty. 19. The case laws which are referred by the assessee at the time of argument are not applicable in the present case first because of the factual difference as those cases were decided on its own factual matrix and whether to apply TNMM or CUP method was depending upon the various factors in those cases. Thus the case laws given by assessee will not be applicable in this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty. In this regard, the assessee has drawn our attention to the order of the Delhi Tribunal in the case of Global Vantedge vs. DCIT in ITA No. 2763 and 2764/Del/2009 wherein the Tribunal had held that adjustment on account of arm s length price of international transactions cannot exceed the maximum arm s length price. Reliance has also been placed on the fact that the Hon ble Delhi High Court had upheld this order of the Tribunal and the SLP of the revenue before the Hon ble Apex Court was also dismissed and further reliance has been placed by the assessee in the case of Pepsico India Housing Pvt. Ltd. vs. ACIT in ITA No. 834/Del/2010 and also some other case laws which are part of the written submissions filed by the assessee. The contention of the assessee, while relying on these judicial precedents, is that the entire amount recovered by the AE from the third party i.e. DMRC had been passed on to BTIPL and, therefore, BTIPL could not have recovered any amount which is higher than the amount charged by the AE from the third party. It has been pleaded that although this ground was vehemently raised before the Ld. CIT (A), the Ld. CIT (A) did not specifically adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax (A) has given relief to the assessee by allowing adjustment to be made on account of free of cost supplies. But it is also seen that in the earlier year, only segmental results pertaining to heavy engineering segment were included whereas in this year, the margins at the entity level have been taken. Therefore, it will be in the fitness of things if only segmental results of heavy engineering segment are included by the TPO and further the TPO also gives adequate adjustment in respect of free of cost supplies. As far as the assessee s claim of extraordinary event is concerned, it is seen that the TPO has duly considered the assessee s claim of extraordinary event and has noted that this company has been a steady performer and that the demerger has not caused any radical difference to the performance of the company. This observation of the TPO could not be contradicted by the Ld. AR on facts. Therefore, this argument is rejected and accordingly, this comparable is restored to the file of the TPO/Assessing Officer for re-adjudication and recomputation of the margin after including only the heavy engineering segment after giving the benefit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not done so. Therefore, this comparable is also restored to the file of the TPO for recalculation of the margin after making adjustment to FOC supplies. v) Jessop and Company Limited This comparable has been agitated by the assessee on the ground that the TPO has taken combined segmental profitability of both EMU and Wagon segments whereas in the immediately preceding assessment year 2010-11, these two segments were taken as two different segments. It has also been agitated that there are computational errors while computing the margin of this company. It has also been agitated that the TPO has taken the miscellaneous income as operating income for the purposes of calculating of margin of this company. In view of the anomalies pointed out by the Ld. AR in this regard, we deem it fit to restore this comparable also to the file of the TPO for duly considering these objections of the assessee. 5.4 Ground nos. 1 and 2 being general in nature do not require any separate adjudication. 5.5 Ground no. 7 and 8 are dismissed as not pressed. 5.6 Ground no. 9 is consequential in nature and requires no spe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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