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TMI Blog2019 (12) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... udy, relevant pages 558 to 590 of the paper book, showing activities of the BO being restricted to basic design and engineering services. Furthermore, HO was otherwise responsible for its own market development research and negotiation for contract. Nature of activities carried out by the expatriate Director stationed at Gurgaon - Held that:- AO observed that, he has played a major role in supervising market research to find out customers, procuring orders, contract negotiations, etc. It has come on record that there is no evidence on record brought forward by the AO to support his contention regarding doing aforesaid work by the Director in India in market research and related jobs. Merely because of the fact that expatriate Director was present in India, no nexus can be held to be established between HO and BO. Aforesaid addition made by the AO/DRP qua attribution of profits to HO from direct supplies and services to customers in India to PE in India i.e. BO is not sustainable, hence ordered to be deleted. Attribution of profit to PE - Held that:- when transaction between the HO and BO has otherwise been held at arm s length by taking into account the risk bearing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engineering, and supervision services. 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in rejecting / arbitrarily modifying the search process and filters adopted by the Appellant for the purpose of benchmarking its international transactions of provision of design and engineering, and supervision services to AEs. 5. That on the facts and circumstances of the case and in law, the AO, DRP , TPO erred in arbitrarily rejecting the comparable companies selected by the Appellant applying arbitrary' subjective search filters. 6. That on the facts and circumstances of the case and in law, the AO, DRP , TPO erred in arbitrarily rejecting the comparable company namely, Gherzi Eastern Limited, without appreciating that it passed all the search filters adopted by the TPO. 7. That on the facts and circumstances of the case and in law, the AO, DRP, TPO erred in selecting fresh comparable companies, on the basis of arbitrary search filters and incorrect appreciation of the functions, assets and risk ( FAR ) profile of Appellant and the comparable companies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without appreciating that the subject transactions have been scrutinized by the TPO and no further profits could have been attributed. 16. That on the facts and circumstances of the case and in law, the AO / DRP have erred by completely misinterpreting the facts of the case and making assumptions in attributing further profits to the PE of the Appellant, being the branch office in India. 17. That on the facts and circumstances of the case and in law, the AO has erred in not giving credit of taxes amounting to INR 4,73,055, while computing the alleged tax payable by the Appellant. 18. Without prejudice to the above grounds, the AO has also erred in not giving credit of taxes amounting to INR 7,27,883 withheld on payments received by head office of the Appellant from the Indian customer. 19. That on the facts and circumstances of the case and in law, the AO has erred in applying tax rate of 10.5575 percent on the royalty / Fee for Technical Services ( FTS ) income received by the head office of the Appellant instead of 10 percent tax rate prescribed under the India-Netherlands tax treaty for taxation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Reimbursement of expenses received Reimbursement at cost 52,24,700/- 4. The taxpayer in its TP analysis has benchmarked its international transactions qua supply of equipment, providing design and engineering services and providing supervision services together on combined transaction approach on the ground that provision of supervisory support services and supply of equipment is interlinked with the primary transaction of provision of design and engineering services. The taxpayer applied Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI) as Most Appropriate Method (MAM) and computed its margin at 46.54% on cost after claiming idle capacity adjustment whereas the average margin of comparable is 21.12% by using multiple year data and found its international transactions at arm s length. 5. Ld. Transfer Pricing Officer (TPO) denied the idle capacity adjustment of ₹ 2,50,63,818/- i.e. 21.90% of the total cost of ₹ 11,44,23,546/- claimed by the taxpayer on the ground that the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t employee performance and asset in taking measures to reduce cost and also enables taxpayer to analyse reasons for idle capacity; that issue of idle capacity also arises in cases where the taxpayer is not having sufficient number of projects to work for; that to establish comparability, the taxpayer excluded the cost of idle hours from its cost base in order to determine the true and fair profitability; that similar idle capacity adjustment has been granted by the Tribunal in taxpayer s own case for AYs 2008-09 and 2009-10 and also relied upon the decision rendered by the Tribunal in Transwitch India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151 (Delhi), SITEL India (P) Ltd. vs. ACIT (2013) 55 SOT 541 (Mumbai), DCIT vs. Panasonic AVC Network India Co. Ltd. (2014) 63 SOT 121 (Delhi), HCL Technologies BPO Services Ltd. vs. ACIT (2015) 69 SOT 571 (Delhi), Bechtel India (P) Ltd. vs. DCIT (2016) 66 taxmann.com 160 (Delhi), Ariston Thermo India Ltd. vs. DCIT (2014) 147 ITD 388 (Pune) and DCIT vs. Genesis Integrating Systems (India) (P) Ltd. (2016) 66 taxmann.com 20 (Bangalore) . 10. However, on the other hand, ld. DR for the Revenue relied upon the orders of the lower Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Rules, 1962, Indian transfer pricing provisions prescribe only for reasonable and accurate adjustment and further adjustment to the margins of comparables can be made only if they enhance comparability. But at the same time the data for the same must be relevant reliable and robust. Idle Capacity as a general rule cannot be allowed unless the similar robust data for comparables is also available. The revised OECD guidelines of 2010 has also stated in para 3.54 as under:- Ensuring the needed level of transparency of comparability adjustments may depend upon the availability of an explanation of any adjustments performed the reasons for the adjustments being considered appropriate, how they were calculated how they changed the results for each comparable and how the adjustment improves comparability. Issues regarding documentation of comparability adjustments are discussed in Chapter V. Even the various judicial decisions on the issue of adjustments and even OECD guidelines, impresses upon time and again that the adjustment should be reasonable accurate adjustment . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of uncontrolled transactions, on the same parameters for the transactions with AEs as well as Non AEs, i.e. independent enterprises, and as long as the net profits earned from the controlled transactions are the same or higher than the net profits earned on uncontrolled transactions, no ALP adjustments are warranted. It is not at all necessary that such a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit. We are, therefore, of the view that the authorities below were in error in rejecting the segmental results on the ground that the segmental accounts were not audited and that these segmental accounts were not maintained in the normal course of business. As regards vague generalizations by the TPO to the effect that these accounts are manipulated, that allocation basis of expenses is unfair and that these accounts conceal true profitability, we find that these observations are too sweeping and generalized the observations to have any merits. In any event, learned counsel for the assessee has painstakingly taken us through the segmental accounts, pointed out the basis of allocation of the expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 012, this issue is decided in favour of the assessee. 15. In view of what has been discussed above, we are of the considered view that idle capacity from the total expenditure incurred by the taxpayer while determining ALP is required to be excluded as has been held by the coordinate Bench of the Tribunal in Transwitch India Pvt. Ltd. vs. DCIT (2012) 53 SOT 151 (Delhi) and SITEL India (P) Ltd. vs. ACIT (2013) 55 SOT 541 (Mumbai). 16. Since the taxpayer has come up with complete detail of idle hours of its work force in order to claim the idle capacity adjustment to be excluded from the total expenditure incurred while determining the ALP, as discussed in the preceding paras, but the same has not been examined by the ld. TPO/DRP, so we are of the considered view that the issue is required to be set aside to the ld. TPO to decide afresh after due verifications of the details given by the taxpayer qua idle capacity adjustments in the light of the decisions rendered by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2008-09 and 2009-10 and in view of the decision rendered by the coordinate Bench of the Tribunal in Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the paper book, relevant pages 717 to 724, it is proved on record that EIL is working in diversified areas eg. Petroleum refining, petrochemical projects, pipelines division, strategic storage services, metallurgy sector, infrastructure division, turnkey projects, engineering division, construction division, process design development and heat mass transfer. From pages 722 723 of the annual report paper book, it shows that EIL is into the extensive Research Development activities and has also filed for one patent based on innovative work for the Oxygen enriched Claus process and presented several papers in national and international conferences/seminar. Furthermore, detail of distribution of shareholding during the year under assessment of EIL given at page 747 of the annual report paper book shows that Government of India is having 90.401% of total shares and majority of the projects undertaken and completed by EIL were of public sector undertakings like Indian Oil Corporation Ltd., Oil and Natural Gas Corporation, etc. Furthermore, it has come on record that EIL is having huge net worth of assets to the tune of ₹ 60 crore whereas the taxpayer is having routine asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that its related party transaction was not in excess of 25 per cent of its total turnover. Thus, applying consistent filter of 25 per cent or less of related party transaction alone to be considered comparable, Engineers India Ltd. could not be considered to be comparable. 23. Keeping in view the facts and circumstances of the case inter alia that EIL is into the area of diverse activities whereas the taxpayer is a routine engineering design services provider; that EIL is into extensive Research Development activities as against no R D activities of the taxpayer; and that EIL is having huge assets of ₹ 60 crores as against ₹ 17 lakhs of the taxpayer cannot be a suitable comparable vis- -vis the taxpayer, hence ordered to be excluded from the final set of comparables. RITES LTD. (RITES) 24. The taxpayer sought exclusion of Rites as a comparable vis - vis the taxpayer for benchmarking the international transaction on the grounds inter alia that Rites is into providing high-end technical services and having diverse nature of activities; that Rites is a Government of India wholly own company; that Ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... huge asset base of ₹ 163 crores, detailed at page 893 of the paper book, as against ₹ 17 lakhs of the taxpayer. 26. So, bare perusal of functional profile and asset base and the fact that Rites is a wholly owned Government of India company, it cannot be a suitable comparable of Rites vis- -vis the taxpayer. 27. Coordinate Bench of the Tribunal excluded EIL as a comparable vis- -vis routine engineering design services provider in case of International SOS Service India P. Ltd. vs. DCIT (2016) 67 taxmann.com 73 (Delhi-Trib.) on the grounds inter alia that a 100% Government company cannot be selected as comparable and that company having no intangible assets cannot be a valid comparable vis- -vis a company owning intangible assets in the form of technical know-how. Order of the coordinate Bench of the Tribunal has been upheld by the Hon ble Delhi High Court vide order dated 30.05.2017 passed in ITA 454/2016 and SLP filed by the Revenue in the Hon ble Supreme Court has also been dismissed. 28. Coordinate Bench of the Tribunal examined the suitability of a Government company vis- -vis routine engineering design serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, project management and procurement of medical equipments, drugs pharmaceuticals, etc. for various prestigious challenging projects. Perusal of page 937 of the annual report of paper book shows that HSCC shows that HSCC s major on-going consultancy projects are qua architectural planning, design project management services, procurement management services, studies and training services. Perusal of segmental reporting in terms of AS-17, available at page 975 of the paper book, shows that HSCC is confined only to consultancy in a single primary segment, whereas no segmental data is available to explain diversified categories of services being carried out by HSCC. Perusal of Schedule 3 of fixed assets shows that HSCC is having asset base of ₹ 6.32 crores as against ₹ 17 lakhs of the taxpayer. 35. Coordinate Bench of the Tribunal excluded a Government company as a comparable vis- -vis routine engineering design services provider in case of International SOS Service India P. Ltd. vs. DCIT (2016) 67 taxmann.com 73 (Delhi-Trib.) on the grounds inter alia that a 100% Government company cannot be selected as comparable and that com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi-Trib.) . 39. Coordinate Bench of the Tribunal in the case of DCIT vs. Terex India Pvt. Ltd. (2019) 104 taxmann.com 281 (Delhi-Trib.) ordered to exclude Mahindra as a comparable vis- -vis a routine engineering design services provider on the ground that it is into variety of services out of which only one is engineering services and segmental information of same is not available. 40. Coordinate Bench of the Tribunal in M/s. Terex India Pvt. Ltd. for AY 2010-11 order dated 30.05.2019 ordered to exclude Mahindra as a comparable by returning following findings :- 32. Perusal of functions of Mahindra, available at page 444 of the paper book, shows that it is engaged in providing consulting services in infrastructure sector in the area of Special Economic Zones, Water supply sewerage, solid waste management, urban infrastructure, agri horti infrastructure, social infrastructure, marine infrastructure, industrial infrastructure, renewable energy, sustainability studies, institutional strategies / planning studies, industrial plants and systems etc.. 33. Coordinate Bench of the Tribunal examined t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shows that TCEL is also into providing services in infrastructure, energy, process, project management consulting and advanced technologies. 44. Perusal of schedule forming part of the balance sheet at page 1013 shows that TCEL is having huge asset base of ₹ 38 crores as against ₹ 17 lakhs of the taxpayer. Furthermore, when we examine profit loss account, available at page 1011 of the paper book, there is only single reportable segment i.e. income from engineering consultancy services without any bifurcation of diversified categories of services being provided by the company. 45. Coordinate Bench of the Tribunal in M/s. Terex India Private Ltd. (supra) has excluded the TCEL as comparable vis- - vis the routine engineering design services provider by returning following findings :- 40. Perusal of the annual report of TCE Consulting, available at pages 538 to 559 of the paper book, shows that it is into various other services apart from engineering services like providing services of designing, development of new product and Computer Aided Designing (CAD), but its segmental financials are not available. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t engineering from inception to project engineering and turnkey design, supply and installation of engineered equipment, and is into providing services of engineering studies and design engineering services is having different functional profile vis- -vis the taxpayer who is a routine engineering design services and moreover TCEL is having a single reportable segment showing income from engineering consultancy services and no bifurcation is available qua variety of services being provided by TCEL, hence not a suitable comparable vis- -vis the taxpayer. So, we order to exclude the same from the final set of comparables. KITCO LTD. (KITCO) 47. The taxpayer sought exclusion of Kitco on the grounds inter alia that it is a Government of India owned company; that it is into diversified nature of activities; that its financial segmental are not available and relied upon the decisions of PCIT vs. SOS Services India (P) Ltd., PCIT vs. Bechtel India Pvt. Ltd., CIT vs. Thyssen Krupp Industries India (P.) Ltd. (supra) and Genzyme India (P) Ltd. vs. ACIT (2018) 93 taxmann.com 222 (Delhi-Trib.). 48. Ld. DR for the Revenue, on the other hand, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ThyssenKrupp Industries India Private Limited ITA No. 6460/MUM/2012. 23. The relevant findings given in the case of ThyssenKrupp Industries India Private Limited and of the coordinate bench in assessee's own case read as under: We find it as undisputed that Engineers India Limited is a Government company. It has several segments which also include 'Turnkey project' page 700 of the paper book is a copy of annual report of Engineers India Limited on turnkey project. It can be seen that the revenue has arisen from completing paraxylene plant of IOCL and further that company is engaged in execution of other unit of IOCL's Panipat Naphtha cracker project. In our considered opinion' this case should not have been included in the list of final comparables for two reasons. First reason is that profit motive is not a relevant consideration in case of Government undertakings. Many Government Undertakings even operate on losses in furtherance of the social obligations of the government. The second reason is that Engineers India Limited earned income from turnkey project by successfully com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India for the business activities of HO as the BO was involved in negotiations and other activities of HO and that expenses of BO did not commensurate with the scale of its turnover showing more work done than contended by the taxpayer and that the customers of BO and HO were common and presence of BO s employees to provide services to HO s clients implying involvement of BO in activities of the HO. 56. Ld. AR for the taxpayer contended that the taxpayer has a BO in India and consequently income earned by it is taxed in India. It is also contended by the ld. AR for the taxpayer that the transactions between HO and BO are subject to transfer pricing provisions and have been already benchmarked and the profit related to that part of the contract, which is directly carried out by the HO, shall only be taxable in Netherland and as such, no further income is liable to be attributable to the BO and also relied upon Article 7 of the Tax Treaty between India and Netherland. 57. The ld. AR for the taxpayer further contended that the AO has proceeded on the basis of assumption that BO performed all the activities detailed at page 13 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further relevant to note that the assessee's accounts were examined by the TPO, who has not pointed out even a single rupee expense attributable to the direct transactions between HO and Indian customers. When this is the position obtaining in this case, we fail to comprehend as to how an income can be estimated in this regard. Such addition made by the Assessing Officer is, therefore, directed to be deleted. This ground is allowed. 59. It is further contended by the ld. AR for the taxpayer that AO has wrongly relied upon the order of Reserve Bank of India (RBI) dated 13.04.1999 because BO was granted specific approval by the RBI for performing certain activities which was restricted only to permit activities, and the income earned from such permitted activities has already been offered to tax in India. 60. No activities have been performed by the BO on behalf of the HO as presumed by the AO. Moreover, the taxpayer has specifically explained the functions performed and risk undertaken by the HO and BO in its TP study, relevant pages 558 to 590 of the paper book, showing activities of the BO being restricted to basic design and engineering s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India vs. CIT (1972) 86 ITR 1 (SC) . 64. In view of what has been discussed above and following the order passed by the Tribunal in taxpayer s own case in 2006-07, 2008-09 2009-10, we are of the considered view that aforesaid addition made by the AO/DRP qua attribution of profits amounting to ₹ 76,33,390/- to HO from direct supplies and services to customers in India to PE in India i.e. BO is not sustainable, hence ordered to be deleted. GROUND NO.15 65. AO/DRP have further attributed profits to PE of the taxpayer ignoring the fact that the said transactions have already been considered by the TPO and no further profits could have been attributed. 66. Undisputedly, TPO in its TP analysis has considered all the transactions between BO and HO and after conducting FAR analysis the same has been compensated on arm s level basis. In these circumstances, no further attribution of profit to BO can be made. 67. Hon ble Supreme Court in the case of DIT vs. Morgan Stanley and Co. Inc. (2007) 292 ITR 416 (SC) decided the issue by returning following findings :- As regards attr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r any substantial changes which have been made in their respective taxation laws. 71. Under Article 2(3) of the DTAA, tax includes Income-tax and surcharge thereon and as such, surcharge is included in the income-tax and the tax rate of 10% for fee for technical services as prescribed in Article 12 is deemed to be included surcharge as cess is nothing but an additional surcharge, so only tax rate of 10% under DTAA is applicable. Ld. AR for the taxpayer relied upon the decision rendered by the coordinate Bench of the Tribunal in Soregam SA vs. DCIT (2019) 101 taxmann.com 94 (Delhi-Trib.) wherein the identical issue has been decided in favour of the taxpayer by holding that since education cess is a form of additional surcharge, education cess or any other surcharge cannot be applied additionally to increase the tax rate prescribed in the DTAA i.e. 10%. So, we direct the AO to apply tax rate of 10% in this case on royalty/FTS. Consequently, this issue is decided in favour of the taxpayer. GROUND NO.20 72. AO has charged the interest u/s 234 B, which has been challenged by the taxpayer on the ground that this issue has been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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