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TMI Blog2024 (12) TMI 628X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. [ 2014 (11) TMI 844 - ITAT DELHI ] CUP method is the most appropriate method for computation of ALP. Objection of Revenue is with regard to applicability of CUP method that the variation payment made on hourly base - contention of the assessee is that since it paid the lowest of third parties hence, such variation becomes irrelevant - Coupled with the fact the Revenue failed to demonstrate as to why Rule of Consistency should not be followed in the present case. Strangely, the rates quoted in the quotations are not acceptable but same price actually claimed to have been paid is accepted by the Revenue in other years. And on such basis, CUP method is treated to be appropriate in the AYs 2011-12 and 2020-21. In the light of discussion herein before, the AO is hereby directed to apply CUP method for determining the ALP and if found in order, would delete the impugned addition. Appeal of the assessee is allowed for statistical purposes only. - SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER For the Appellant: Shri Ashutosh Mohan Rastogi Shri Dhruv Seth, Adv For the Respondent: Shri Gaurav Bansal, Sr. DR ORDER PER KUL BHARAT, JM : The present appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, declaring total loss of INR 28,28,51,190/- on 25.10.2012. The case was selected for scrutiny assessment and a notice u/s 143(2) of the Income Tax Act, 1961 ( the Act ) was issued and served upon the assessee. In response to the statutory notice, Ld. Authorized Representative ( AR ) of the assessee attended the assessment proceedings. The Assessing Officer ( AO ) noticed that the assessee had entered into international transaction with its Associated Enterprises ( AEs ). Therefore, after obtaining the necessary approval from the Competent Authority in accordance with the provision of section 92CA of the Act, the issue of transfer pricing adjustment was referred to the Transfer Pricing Officer ( TPO ) for determining Arm s Length Price ( ALP ). The TPO vide order dated 27.01.2016 proposed certain adjustments, thereby he proposed T.P. adjustment at INR 1,26,07,833/- u/s 92CA of the Act. Thereafter, the AO passed a draft assessment order dated 23.03.2016 proposing to make addition(s) of INR 156,62,092/- inclusive of T.P. adjustments and other corporate taxes i.e. PF and ESI contribution and unexplained ROC fee. In response to the draft assessment order, the assessee company did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises, and the arm's length conditions can be established by directly substituting the price in the comparable uncontrolled transaction for the price of the controlled transaction. ii. Outcome under CUP Method is not distorted by extraneous factors such as overhead costs, miscellaneous expenses and other third-party costs not in control of the assessee. iii. Both OECD and UN Guidelines endorse CUP method as the most direct and reliable method, according preference to this method over other methods. iv. Reliable information on CUP data was available with Takenaka India for benchmarking international transactions pertaining to receipt of technical services. Available CUP data also satisfies all comparability criteria required for applicable of CUP Method (i.e. similarity in nature of services, grade or level of service, geographical location and time period) as explained in table below (Refer to the submission dated January 22,2016 on Page No. 44 of the Paperbook). Table Satisfactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion - Rs 4,01,98,995 Total Cost of Operations - Rs 103,05,54,323 Value in Percentage Terms- approx. 4% of Total Cost of Operations Smaller percentage in current year makes an even more compelling case for CUP as it is a direct method (Refer Transfer Pricing Order for FY 2011-12 on Pg 89 of the Merit Appeal Paperbook) (For FY 2019-20: Value - Rs 1,50,73477, Percentage is approx. 1% of total cost) Inter- Company Agreement for services Refer Copy of Inter Company Agreement on page 414-422 of paperbook Same inter-company agreement continues to apply to FY 2011-12 as well. Refer Copy of Inter Company Agreement on page 414-422. CUP data relied upon by Assessee: For purpose of benchmarking, Assessee relied upon Standard daily fee for Construction Engineers for Public Work, 2011 issued by Land and Transportation Ministry of Japan. (Refer Transfer Pricing Report for FY 2010-11 on page 881 and 884 (of the Paperbook) For purpose of benchmarking, Assessee relied upon Standard daily fee for Construction Engineers for Public Work, 2012 issued by Land and Transportation Ministry of Japan. Refer English Translation of the Japanese Rate Notification placed on 309 to 310 of the paperbook) Rates and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ineering/infrastructure industry (refer to inter-company service agreement on Page nos. 414-422 of the paperbook; refer written submission filed before CIT(A) on page 1031 to 1033 of the Paperbook] III. The Ld. TPO has also rejected CUP Method on the ground that signed timesheet were not provided (Refer to Para 3.2.8 of the TP order on (Page 27 of the Paperbook) i) Time-sheets are normally computer/software generated based on timesheet data and do not require employee signatures ii) The timesheets are documents internal to the Company and there is no law or signed by employees iii) Hence, timesheets cannot be rejected on this vague ground. Same format of timesheets accepted by TPO for FYs 2010-11 and 2019-20 where CUP Method has been accepted [Refer written submission filed before CIT(A) on page 1033 to 1034 of the Paperbook] Furnish the basis of calculation by the Ld. TPO under the TNMM method; Ld TPO rejected the CUP Method and instead applied TNMM relying on comparables that were not functionally similar to the Appellant. The comparables were engaged in large turnkey projects such as petrochemical plants, power plants, infrastructure works such as roads, bridges, dams etc. On th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution pipelines, upgrade of water treatment facility for petroleum companies etc (refer Annual Report of Jaihind on Pg 761-762 of Paperbook). The company has clients in water, gas and petroleum sector such GAIL, IOCL, ONGC, EIL etc for whom it carries out pipeline and related infrastructure work (refer Pg 764 of Paperbook). As per annual report it operates in single segment 'Laying of pipes' (pg 788 of paperbook). For above reasons, the Company is functionally different from the Appellant (engaged in design of office building) and deserves to be rejected. III. Rebuttal to Department's Submission dated April 2, 2024 Department's Submission Assessee's Response Application of CUP method requires reliance on actual transactions and not on quotation Reliance on previous year's Transfer Pricing Order cannot be placed as principle of 'Res Judicata' is not applicable in Tax Proceedings Section 92F(ii) of the Act defines an 'arm's length price' as: arm's length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Rule 10D(3) (c) of the Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices and to provide construction services through third parties with a service scope of a general contractor. The company is also engaged in a business of importing and exporting building materials, tools, machineries and any kind of item which are related to construction and carried on all other construction related business including project management. The assessee has used CUP Method for AY 2012-13 to benchmark its international transaction pertaining to payment of technical fees. However, the assessing officer for reasons mentioned in TP order rejected the CUP method and applied the TNMM as the Most Appropriate Method. The Assessee preferred an appeal before CIT(A) which was decided in favour of the Revenue. Hence, the Assessee has filed an appeal before Hon'ble ITAT against the above orders. II. Issue wise comments/arguments : The assessee has raised several contentions against the approach followed by the TPO by rejecting CUP applying TNMM. The same are discussed in detail in the following paragraphs: 1. At the outset, the assessee has contended that related party transaction to the cost base with respect to technical services is only 3.91% which constitutes a very sm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aphical market is concerned the rates considered as CUP by assessee are the general rates given by Japanese government for services rendered in Japan. In the instant case services have been rendered to India and since the two different geographical markets are involved the CUP cannot be applied in the instant case. III. Clarification/Information: During the hearing before 'I' Bench ITAT, New Delhi on 07.03.2024 the Hon'ble ITAT has sought clarification on the following issues: - 1. To provide the value of international transaction for A.Y.2011-12, 2012-13 and 2020-21 and value of total transaction of the assessee for the above said period. 2. To provide justification why CUP method has been discarded in A.Y.2012-13 in favour of TNMM and accepted in A.Y.2011-12 and A.Y.2020-21 as MAM. 3. To provide clarification that whether there is any material change in facts of the case/nature of transactions for change in MAM chosen by the TPO in A.Y.2020-21 as compared to AY2012-13. A letter in this regard was written to TPO-3(2)(1), New Delhi to provide his comments/information on the clarification sought by the ITAT. The TPO has submitted his response to the above queries which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed in TPO order para 12.1), it is seen that the service provided in case of Non AE's and the AEs are totally different. The Services Provided by AEs in this case as per agreement are as under: a) Gathering and Analysis of marketing and Sales Information. b) Negotiation on the terms and Conditions of Contracts c) Preparation for Tender Participation and Support Services for Successful Tender. d) Customer Service and Management. e) Market Research. f) Investigation of Financial Standing of Customer. g) Production Plan. h) Design Supervision. Whereas, the services provided by Non-AEs are as under: - Scope of work shall include the construction drawings work for our Project, as described here in below: Civil Works The other related works required by Engineer-in-Charge Thus, from the above it can be seen that there is a huge variation in the scope of services provided by the AE and that by Non-AE and the agreements do not completely satisfy the benchmarking analysis required for CUP. Further, the time sheets furnished by the assessee are of AE and it is not a running sheet bearing no day to day entries and signatures etc. such a document cannot prove the justification of CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical fees it says that Assessee company received specialized services from its AEs which are not available in India. Further, on one hand the assessee claims its services to be the best in its class and on the other is asking for it be compared with the works of general contractors. Hence, this company is a valid comparable and satisfies all the comparability filters applied in the TP benchmarking by applying TNNM method. The above arguments are in addition to the facts marshalled in TPO Order and CIT (A) Order in favour of revenue which are submitted for kind perusal of the Hon'ble ITAT. 7. We have heard Ld. Authorized Representatives of the parties and perused the material available on record. The Revenue has not disputed that in the AYs 2011-12 2021-22, the method for computation of ALP by the assessee has been accepted by it. The Revenue tried to justify its action by stating that CUP method is applicable on actual transactions but such method cannot be applied on the quotation furnished by the assessee. It is further stated that each year is an independent year. Therefore, principle of res-judicata would not be applicable. Further, it is stated that Rule of Consistency can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion, under any method of determining the arm's length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm's length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression ' price which would have been charged on paid is used in rule 10BA, dealing with this method, in this method the place of price charged or paid , as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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