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TMI Blog2022 (3) TMI 1480X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO to consider the power segment functionally of L T Limited and then compare with assessee s transactions. In addition to this, we also direct the TPO to adopt turnover filter to determine whether the power segment of L T Limited is fit into the turnover category to compare the transactions of the assessee and then re-compute the TP adjustments. Incorrect computation of margin of comparables and adjustment amount - HELD THAT:- We herein restore the matter back to the TPO with a direction to calculate OP/OC margin by comparing the entities as mentioned above. The matter is setting aside to AO for further calculation. Transfer Pricing adjustment relating to payment of Technical Royalty - HELD THAT:- In this case, the AO has given various reasons to reject the TP study conducted by the assessee for benchmarking royalty payment and thus rejected the arguments of the assessee. Having said so, let us come back to the comparables selected by the TPO. The TPO has selected two comparables M/s Amanasu Energy Corp. M/s Power verde Inc. According to the ld. Counsel of the assessee both are functionally similar and cannot be compared. He further submitted that in respect of M/s. Power ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TP") documentation maintained under section 92D of the Act read with Rule 10D of the Income-Tax Rules, 1962 (`the Rules') and applying new filters for the purpose of identification of companies comparable to the Appellant. In doing so, the Ld. AO, Ld. TPO and the Hon'ble DRP failed to discharge the statutory onus to establish that any of the conditions specified in clause (a) to (d) of Section 92C(3) of the Act have not been satisfied. Transfer Pricing adjustment relating to Purchase of project material, receipt of technical services, receipt of communication services, receipt of IT services, receipt of Legal and Professional services and salaries and other costs of seconded employee -Rs. 416.340.034 2. Economic Adjustments 2.1 0n facts and in law, the Ld. AO, Ld. TPO and the Hon'ble DRP erred in not allowing appropriate adjustments under Rule 10B(1)(e)(iii) and Rule 10B(3) of the Rules to account for differences in working capital of the comparables vis-a-vis the Appellant, even though the same was allowed in the previous assessment year(s). 3. Erroneous rejection and selection of comparable companies 3.1 0n facts and in law, the Ld. AO, Ld. TPO and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price. Corporate Tax Adjustments 8. The Ld. AO and Hon'ble DRP erred on the facts and in law in disallowing employee's contribution to Provident Fund ("PF") and employee's contribution to Employee State lnsurance ("ESI") amounting to INR 5,100,766. 9. The Ld. AO and Hon'ble DRP erred in disallowing INR 5,100,766 under section 36(1)(va) of the Income-tax Act ("the Act") on account of delayed remittance of the employee's contribution to PF and ESI. 10. The Ld. AO and Hon'ble DRP failed to appreciate that the Appellant had made the requisite remittance before the due date of filing of Return of Income ("RoI") for AY 2015-16 i.e" 30 November 2015. 11. The Ld. AO failed to appreciate the existing jurisprudence which had held that employee's contribution to PF and ESI are also covered under section 438 of the Act and that the delayed employees contribution to PF and ESI be allowed as deduction in the computation of taxable income for the year under consideration if they are paid before the due date of filing the RoI. 12. Further, the Ld. AO and Hon'ble DRP failed to appreciate the rulings of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P Adjustment:- Transfer pricing adjustment Rs 59,37,02,420/- Corporate Adjustment:- Disallowance U/s 36(1)(va) Rs 51,00,766/- 4. The assessee has filed its return of income for assessment year 2015- 16 on 30.11.2015 admitting total income of Rs. 59,41,23,930/-. The assessee has filed auditor's report in form 3CEB related to international transactions, as per which during the year under consideration, it has entered into following international transactions with its AEs:- Sl. No Description of Transaction Name of the Associated Enterprises Quantum of International Transaction (Rs. ) Method adopted by the assessee 1 Purchase of Software Licenses and other related services capitalized in books of accounts Doosan Corporation South Korea, Korea 50,71,949 Other Method 2 Payment of Royalty on Sales Doosan Heavy Industries and Constructions Co. Limited, Korea 35,32,88,531 3 Payment of Royalty for right to use Brand Trade mark Doosan Heavy Industries and Constructions Co. Limited, Korea 6,48,73,762 4 Engineering services rendered for overseas project Doosan Heavy Industries and Constructions Co. Limited, Korea 2,72,14,621 5 Doosan Engineering & Services LLC US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of Shareholder Number of Shares held Percentage Doosan Heavy Industries and Constructions Co. Limited, Korea, the holding company 3,39,08,401 99. 45% Doosan Power Systems Overseas Investment Ltd., UK 1,87,922 0. 55% Total 3,40,96,323 100.00% 5.1 The assessee company has carried out the projects with NTPC and GMR at Kudgi, Lara and Raipur & other plaaces. During the Transfer Pricing proceedings, the assessee has provided segmental P&L account for each of these projects and arrived at NPM of 2.59% for Kudgi project and 7.93% for Lara project. Apart from purchase of project material (Kudgi project - Rs. 339,66,3,414/- and Lara project Rs. 736,61,06,422/-). The assessee company has entered into transactions with its Associate Enterprise (AE) on receipt of technical services for a total sum of Rs. 31,91,03,633/- which it has allocated to Kudgi and Lara projects and benchmarked the same under NPM. The assessee adopted 'Other method' as the most appropriate method (MAM) to benchmark the transaction under each of these projects. 5.2 During proceedings the TPO in the TP study of the assessee, proceeded to determine the arm's length price in relation to the international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wards international transactions & payment of royalty. The assessee carried matter in appeal before the ITAT, Chennai Bench for adjudication. The assessee filed paper books in Volume I & II before the Bench which are kept in record. 7. Being aggrieved by final assessment order, assessee filed appeal before us. 8. Ground No.1 of assessee appeal is general in nature and does not require specific adjudication and hence, same is rejected. 9. Ground no 2 is related to working capital adjustment:- 9.1 The Observation of DRP is as follows:- "6.2.5 Before this Panel also no additional material/evidence is brought on record to substantiate this claim. Working capital adjustment as a general rule cannot be granted. It has to be demonstrated in the facts of the case that because of favourable working capital position or otherwise of the same, the profit of the comparables in the open market were impacted. The submission of the assessee has been considered. No such factual details have been provided by the assessee relating to the comparables to make out a case for consideration in favour of its contention, The TPO after detailed discussion in para 12 of his order has rejected the reques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keeping in view of the fact that there is no much variation in the margins of the assessee when compare to margins at comparables selected by the AO, he rest his arguments to the extent of adjustment made at entity level. He further submitted that as regards working capital adjustment although the issue is squarely covered in favour of the assessee by the decision of ITAT, Chennai in assessee's own case, the Ld. TPO as well as DRP has erred in not providing working capital adjustments. Therefore, a suitable direction may be given to the Ld. TPO to recompute working capital adjustments in accordance with the rules provided therein by following the decision of assessee's own case for earlier year. 8. On the other hand, the Ld. DR strongly supporting the order of Ld. TPO as well as Ld. DRP submitted that the Ld. TPO brought out clear facts in light of decision of Hon'ble ITAT, Chennai in the case of Caterpillar India Pvt. Ltd. that entity level adjustment can be made even though the issue is settled by the Hon'ble Bombay High Court in favour of the assessee in the case of M/s. Firestone International Pvt. Ltd. Further, the SLP filed by the Department against the order by Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble High Courts, but because the SLP filed by the Department has been admitted by the Hon'ble Supreme Court they have proposed adjustment at entity level to keep the issue alive. But fact remains that the SLP filed by the Department has been dismissed by the Hon'ble Supreme Court vide its order dated 31.01.2018 and hence, the issue of TP adjustment at entity level had attain finality dismissal of SLP filed by the Department by the Hon'ble Supreme Court. Therefore, we are of the considered view that the Ld. TPO as well as DRP has erred in making TP adjustment at entity level. Hence, we direct the Ld. TPO to restrict TP adjustment in respect of international transactions of the assessee with its associated enterprises. The other issue raised by the assessee including comparables selected by the AO and average margins of comparables is not pressed by the Ld. AR for the assessee and hence, there is no requirement of adjudicating the issue at this level. 10. As regards working capital adjustment, it was the claim of the Ld. AR for the assessee that the ITAT, Chennai Bench in assessee's own case for the AY 2011-12 has considered an identical issue and held that workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and declared "Navratna company". If primarily focuses on consultancy (948 cr. Revenue) and engineering (765 cr revenue). Further its predominant focus is o n petrochemical industry. Hence it is not a proper comparable. Name of the Company Assessee's objections DRP's directions Larsen and Tourbo Ltd a. L&T is a giant compared to the assessee; - Turnover is 16 times DPSI's turnover - Fixed asset base more than 15 times DPSI's fixed asset base b. Functionally dissimilar - engaged in electrical and automation, IT consulting, ship building c. Segmental company taken at entity level - power segment should be considered The assessee objected that the company is huge with 16 times the DPSI turnover. Further it is contended that it has diverse operations in the fields of electrical, automation, nuclear plants, IT consulting, mellalurgy, ship building etc. Alternatively, assessee pleaded that only that power segment of the company should be considered. After careful consideration, the size of the company is huge compared to assessee and also it is into highly diversified activities. However, if the power segment alone is considered, the size of the company would be very much compar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h and every transaction. So, the DRP accepted the observation of the TPO and rejected the assessee's observation. 10.6 The Counsel of the assessee made his reliance for exclusion of M/s Larsen and Toubro Ltd on the following judgments related to huge difference of turnover in relation to the low turnover company DPSI. The judgments are as follows: (i) Agnity India Technologies vs ITO, ITA No. 3856/Del/2010 dated 04.11.2010 (ii) Deloitte Consulting India Pvt. Ltd in ITA No. 1082& 1084/Hyd/2010 (iii) Egain Communication (P) Ltd vs ITO [2008] 23 SOT 385 (Pune) (iv) M/s. Trinity Advanced Software Labs (P) Ltd vs ACIT in iTA No. 1129/Hyd/2005 (v) DHL Express (India) Private Limited in ITA No. 7360/Mum/2010 for AY 2006-07 10.7 The Ld. DR vehemently argued. The DR took contrary view against the Counsel, As per his argument, the TPO study was made on the available records so there is no basis for rejecting the same. He relied on the order of the DRP, as per the DRP the TPO can adopt the power segment result of L&T. As per him, he could not recommend any revisionary measure so the observation of the TPO and DRP is absolutely correct. 10.8 We considered the arguments of bot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le agreements based on search conducted in royalty database. The Ld. TPO has found some observations which are reproduced as under: " 13. Comparable companies after the above filters as follows: Sl.No Comparable Company Rate - Net Sale (%) 1 Amanasu Energy Corp. 2.00% 2 PowerVerde, Inc. 3.00% Average 2.5% 14. ALP Calculation as below: Sl.No Description Amount in Rs. 1 Royalty @ 3.17% 35,32,88,531 2 Royalty @2.5% 27,86,18,715 Downward Adjustment 7,46,69,816 12.2 The assessee challenged the matter before the DRP and the DRP took the following observations: " 7.1 Panel: The assessee contended that royalty should be excluded from the operating expenses while computing adjustment/margin of the assessee as royalty was separately benchmarked. This argument of the assessee has no basis. For computing the operating net profit margin of a FPC contractor/manufacturer, under TNMM require consideration of all the operating costs which include royalty also. Royalty expenditure claimed by the assessee is integral part of the cost of the assessee. Merely because Royalty is separately benchmarked, it cannot be excluded from the cost. Accordingly, the conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected by the TPO. The TPO has selected two comparables M/s Amanasu Energy Corp. & M/s Power verde Inc. According to the ld. Counsel of the assessee both are functionally similar and cannot be compared. He further submitted that in respect of M/s. Power verde Inc., the data relied upon by the TPO pertains to AY 2014- 15, whereas, the issue pertains to AY 2015-16. He further claimed that the TPO has failed to apply proper filter to select the companies. Therefore, considering the facts and circumstances of the case, we are of the considered view that this issue will go back to the file of the TPO for fresh examination of the claim of the assessee to carryout TP analysis in respect of royalty payments. 13. Ground No. 8 to 12 Corporate Tax Adjustment: 13.1 The assessee paid PF & ESI of Rs. 5,100,766/- before filing the return u/s. 139(1) of the Act i.e., before 30.11.2015. But not before the due date as prescribed in specific Acts of ESI & PF. As per the Assessing Officer, the provisions is violated u/s. 43B of the Act in relation to Employees Contribution to PF & ESI. The Ld. DRP failed to appreciate the payments of assessee made after the due date of the specific act, but before t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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