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TMI Blog2024 (4) TMI 132X X X X Extracts X X X X X X X X Extracts X X X X ..... AR submits that the copy of the deputation agreement is now available with them and they are ready to furnish the same and therefore an opportunity may be granted to the assessee to produce such agreement before the authorities and get the matter disposed of on merits - HELD THAT:- As in view of the fact that the earlier issue was restored to the file of the learned AO/TPO, we deem it just and proper to restore this issue also to the file of the learned AO/learned TPO with a direction to the assessee to produce all the requisite documents sought by the TPO on the earlier occasion and cooperate with the proceedings. Ground is accordingly treated as allowed for statistical purpose. Disallowance of miscellaneous expenditure considering the same as prior period expenses and also capital in nature - According to the assessee, for the purpose of construction of a temporary site office, the assessee entered into a service contract and incurred an expenditure on account of site mobilization work subcontracted and submitted the invoices - HELD THAT:-We find force in the argument of the learned AR and since this matter requires verification at the end of the learned AO/learned TPO, this issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... local supplies and other construction related activities in the field of power generation, transmission & distribution etc. TPSC India conducts its operations in India and neighboring regions of Asia. 3. For the assessment year under consideration, the assessee filed its return of income on 29/11/2017, declaring loss of Rs. 41,93,38,198/-. In view of the international transactions entered into by the assessee during the financial year 2016-17, reference under section 92CA of the Act was made to the learned Transfer Pricing Officer (learned TPO) . Learned TPO proposed the adjustments for the transactions of provision of engineering services and receipt of services, reimbursement of expatriates salary, bonuses and PF cost and interest on trade receivables. Learned Assessing Officer after taking into consideration the adjustments proposed by the learned TPO, proposed further adjustments on account of disallowance of miscellaneous expenses, capital loss, provision for loss on project and CSR expenses. 4. Assessee filed objections before the learned DRP and the learned DRP disposed of the objections by way of directions issued on 23/02/2022. Assessee is therefore, before us in this ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Tara Jewels Exports (P.) Ltd., 80 taxmann.com 117 and other decisions, in support of his argument that the adjustment which is mandated by Rule 10B is only in respect of international transaction and not transactions entered into by the assessee with independent unrelated third parties. Learned AR further submitted that the assessee computed the operating margin at transaction level, by taking the revenue from AEs and costs in relation to the revenue earned for computing the operating margin, and the details regarding the apportionment of expenses were submitted by the assessee before the learned TPO and the learned DRP, and such details now form part of the paper book vide page Nos. 251 to 258 of the paper book, but unfortunately the authorities did not take those details into consideration. 7. Learned DR heavily relied upon the orders of the authorities and submitted that the segmental data in relation to profits earned by the assessee from AEs as well as non-AEs was not available and therefore, the authorities are justified in considering the entity level figures for computing the operating margin. 8. We have gone through the record in the light of the submissions made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses incurred. Hence, to apply TNMM on an overall basis at the entity level is against the basic canons of transfer pricing law. 20. The assessee had already furnished to the TPO that the net operating margin analysis of the AE and non-AE segment in the TP documentation. As can be seen from therein, the net operating margins of the AE segment is 20.20%. The assessee requested the TPO to consider this instead of looking at the overall margins of the company which includes negligible transactions with AEs. 21. In page 3 of the order, the TPO has computed the net operating margins of the assessee stating that it is "segmental financials of the taxpayer as computed by the TPO". However, the TPO has computed the margins of the assessee at the entity level and not considered the segment margin analysis given by the assessee in the TP documentation nor has computed the segmented margin himself. The TPO had wrongly made transfer pricing adjustment with reference to the total costs incurred/revenue earned by the Company, without considering the facts that it includes substantial revenue and expenses with non-AEs. The TPO then proportionately reduced the adjustment to AE transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard of any other relevant base; iv. Clause (i) of Rule 10B(1)(e) of the Rules specifically provides that net profit margin realized by an enterprise from an international transaction is to be computed as the law mandates that whenever TNMM is applied or sought to be applied, as a 1st step the profit margin realized from the international transaction is to be computed. Accordingly, undertaking a companywide analysis of the profitability is not in compliance the provisions of the Income-tax Act, 1961 (the Act). More so when the revenue transactions with AE is less than 1% of total revenue. 27. Further, the guidance from OECD Transfer Pricing Guidance on Multinational Enterprises and Tax Administrations (2017) v. "3.42 An analysis under the transactional net margin method should consider only the profits of the associated enterprise that are attributable to particular controlled transactions. Therefore, it would be inappropriate to apply the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p;... Chapter-X of IT Act relates to special provisions relating to avoidance of tax and sec. 92 therein relates to computation of income from international transactions having regard to ALP. Thus, it can be seen that only international transactions between the associated enterprises either or both of whom are non-resident are to be computed having regard to ALP. This issue is also covered by the decisions relied upon by the learned counsel for the assessee. Accordingly, the AO is directed to make the transfer pricing adjustments by restricting the adjustments to the transactions of the AE only by adopting the operating revenue and operating costs of these transactions only." 31. Similar views have been expressed by: The Hon'ble Bombay High Court in the case of CIT v. Hindustan Unilever Ltd. [2016] 72 taxmann.com 325; The Hon'ble Tribunal, Hyderabad Bench, in the case of Alumeco India Extrusion Ltd. v. Asstt. CIT [2013] 38 taxmann.com 371/[2014] 148 ITD 432 (Hyderabad - Trib.) and The Hon'ble Tribunal, Delhi Bench, in the case of Cornell Overseas (P.) Ltd. v. Dy. CIT [2017] 78 taxmann.com 76. 32. The assessee had furnished the net operating margin analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, assessee incurred these expenses towards reimbursement inasmuch as the expenses which were to be incurred by the assessee, were incurred by the AE on behalf of the assessee for administrative convenience, but as a matter of fact, the expatriates directly working under the control of the assessee and the expenses of salary, bonus and the provident fund are to be incurred by the assessee alone. 13. Learned TPO recorded that when requested to furnish the complete details of the employees, their place of work, years of service they have put in and terminal benefits availed by them, and also the copies of appointment letters of all the employees, attendance register for the relevant period under consideration along with the latest salary details at the time of expatriation, the assessee failed to furnish the same and, therefore, the learned TPO treated that no such expenses were actually incurred. 14. In the impugned order, the learned DRP recorded that the plea of the assessee that the entire amount represented reimbursement was not proved with reference to any proper evidence and documentation, and further the assessee was called upon to furnish the copy of the deputation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is also restored to the file of the learned AO/learned TPO to verify the invoices and take a view as to the nature of this expenditure. Grounds No. 8 and 9 are also accordingly treated as allowed for statistical purpose. 19. Now coming to the last aspect of provision for loss on projects, covered by ground No. 10, case of the assessee is that assessee debited Rs. 19,46,890/- in Profit and Loss Account (P&L Account) in Accounting Standard 7-Construction Contract, and claimed the same as a provision for loss on a project under the head miscellaneous expenditure. When the learned Assessing Officer proposed to disallow the same, the assessee submitted that it is following the Accounting Standard-7-Construction Contract describes and lays out the accounting treatment in respect of the revenue and costs in relation to a construction contract and it has to be used in for the accounting of construction contracts in the financial statements of the contractors. Assessee further submitted that where it is expected that the total contract costs will exceed total revenue from such contract, the expected losses should be immediately recognised as expenses and such losses shall be determined ..... X X X X Extracts X X X X X X X X Extracts X X X X
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