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TMI Blog2025 (4) TMI 1026X X X X Extracts X X X X X X X X Extracts X X X X ..... r appeal, total payments of Rs. 133,40,87,018/- was made to its constituents AE against the execution of the work out of total receipts of Rs. 133,62,54,272/ -. The return of income was filed on 30.09.2014 declaring total income at Rs. 17,27,140/- and the assessment was completed at an income of Rs. 22,01,30,901/- by making adjustments based on the order of TPO with regard to the transactions between the assessee and its AE under Arms Length Price (ALP) under domestic transaction as defined u/s.40A(2) of the Act. Besides AO also estimated the profit of the appellant. In the first appeal, the assessee got part relief, thus, the present appeal is filed before us for the adjustment made in domestic transaction price as made by the AO and uphold by the ld. CIT(A). 3. During the course of hearing the ld. AR of the assessee has relied upon the written submissions filed which reads as under :- WRITTEN SUBMISSION May it please your honour, Brief facts: Appellant is a joint venture entity, being jointly formed by KSS Petron KSSIIPL (formerly known as "Kazstroy service infrastructure India Pvt ltd) and Valecha Engineering limited. Both the venture partner are well established companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PL for carrying out work related to the ECP Contract. Accordingly, KSSIIPL undertakes all the relevant functions in relation to the execution of the said project and the Appellant only acts as contractor and does not perform any other activity in relation to the said project. Since the appellant does not perform any other function apart from sub- contracting the ECP Project, the appellant was unable to identify that there exist similar third party arrangements due to limited data available in public domain. Hence, due to lack of reliable data, the appellant cannot be selected as tested party for benchmarking the underlying transaction. On the other side, KSSIIPL, which is involved in routine execution of engineering, procurement and construction of the projects and its comparable data is readily available in public domain. Accordingly, KSSIIPL has been taken as tested party and the result of KSSIIPL has been benchmarked taking the comparable companies engaged in execution of engineering projects. However, the Ld. Transfer Pricing Officer ("Ld. TPO"), rejected the arm's length price calculated by the appellant following TNMM Method and interalia rejecting KSSIIPL as 't ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor is generally the net profit on costs or the net profit on assets. In the latter case, the tested financial indicator is generally the net profit on sales. Further As explained in para 3.18 of the 2010 OECD Guidelines, the choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e. it will most often be the one that has the less complex functional analysis. Therefore, it is contended that the tested party is usually the participant in a transaction for which profitability can be ascertained most reliably and for which reliable data on comparable can be found. The tested party will also typically be the party with the least intangibles. In the given case of the appellant, it is submitted that, the appellant performs very limited function in execution of the project, therefore it hasn't been able to identify similar third-party arrangement for comparison of transaction under consideration. Hence, appellant cannot be taken as tested party. It seems ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, but it is not a systematic requirement. Multiple year data should be used where they add value to the transfer pricing analysis. It would not be appropriate to set prescriptive guidance as to the number of years to be covered bt) multiple year analyses. 3.76 In order to obtain a complete understanding of the facts and circumstances surrounding the controlled transaction, it generally might be useful to examine data from both the year under examination and prior years. The analysis of such information might disclose facts that may have influenced (or should have influenced) the determination of the transfer price. 3.77 Multiple year data 'Will also be useful in providing information about the relevant business and product life cycles of the comparables. Differences in business or product life cycles may have a material effect on transfer pricing conditions that needs to be assessed in determining comparability. T71e data from earlier years may show whether the independent enterprise engaged in a comparable transaction was affected by comparable economic conditions in a comparable manner, or whether different conditions in an earlier year materially affected its price or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e multiple year data and wrongly restrict the right given by the act for choosing option for use of multiple year data, wherever appropriate. * Ground No. 4, 5 & 6 - Inappropriate selection of comparable in determining the arm's length price In the order under section 92CA(3), Ld. TPO rejected KSSIIPL (AE of the Appellant) as tested party and treated the Appellant itself as tested party. However, Ld. TPO while taking comparables, considered the comparables as given in the TP Documentation, as submitted by the appellant in the assessment proceedings. With regards, to the same, appellant contend that the comparables given in the TP documentation and further taken by the Ld. TPO, are comparables for KSSIIPL (AE of the Appellant) and not comparables for KSSIIPL VEL JV, which the Ld. TPO treated as tested party. Appellant further contend that all the companies included in the TP documentation and further taken by the Ld. TPO as comparables are engaged in the execution of engineering projects and are functionally similar to KSSIIPL. Whereas, KSSIIPL VEL JV does not perform any function to execute the EPC Project but only acts as a mere facilitator for the EPC Project. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of comparability of an International Transaction or a specified Domestic Transaction with an uncontrolled transaction as method specified in sub-rule 1 of rule 10B, shall be judged with reference to the following points: i). The specific characteristics of the property transferred or services provided in either transaction; ii). The functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; iii). The contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; iv). Conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. None of the points mentioned as per rule 10B(2), as discussed above, provide that the comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reproduced hereunder: Company PLI (OP/OR) Ashoka Highways (Durg) Ltd. 38.00 OB Infrastructure Ltd. 35.72 Essel Infraprojects Ltd. 25.53 IRB Infrastructure Ltd. 22.39 JKM Infra Projects Ltd. 14.58 J Kumar Infraprojects Ltd. 14.41 GVR Infra Projects Ltd. 14.35 Max Infra India Ltd. 11.67 PBA Infrastructure Ltd. 10.04 (Table - 2) With respect to the above, appellant contend that, once the comparables have been identified in the TP Documentation and also accepted by the TPO in first show cause notice issued, there after revision of search process and identification of new comparables is intended only to create hardship on the appellant. Further, no details regarding how the search process carried out and no backup of the comparables selected has been provided by the Ld. TPO to the appellant. In this situation the appellant has relied on the information available from public domain and contended as under: Ashok Highways (Durg) Ltd .: The company is engaged in providing service in relation to design, engineering, finance, construction of four lane duel carriageway road from end of Durg bypass to Chattisgarh/ Maharashtra Border which is a part of Raipur - Nagpur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y creating filters from outsides the scope of the Act and solely due to the reasons that they had suffered losses. It was also submitted that TPO has revised the search process and identified certain new comparables only to harass the assessee. 6. Regarding the comparables added by the TPO, the ld. AR specially drew our attention to the one company M/s Ashoka Highways (Durg) Ltd. of which the operating margin of 38% was considered for computing the average PLI. According to the ld. AR the business module of the company is not similar to that of the appellant as that company has already completed the construction in preceding year and in the year under consideration it was engaged in the business of toll operation where the profit margin is high. Therefore, this company cannot be selected as comparable for computing ALP margin. The ld. AR, therefore, submitted that the ALP computed by the TPO and confirmed by the ld. CIT(A) deserves to be deleted and the ALP computed by the assessee should be accepted. 7. On the other hand, ld. CIT-DR supported the order of the ld. TPO as well as the ld. CIT(A) and filed a detailed submission which reads as under :- Written Submissions on behalf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. Further, Sub Rule 2 & 3 of Rule 10B provides; "Sub Rule (2)- For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely: (a) the specific characteristics of the property transferred or services provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argin from specified domestic transactions as provided under Rule 10B (1)(e) (i) of the Income Tax Rules. Further, it is now settled position of law that entity having least complex FAR analysis is to be considered as 'Tested party'. OECD TP guidelines 2017 too stipulate that the tested party should be the least complex entity. As per para 3.18 of the OECD TP guidelines "the choice of the tested party should be consistent with the functional analysis of the transaction. As a general rule, the tested party is the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found, i.e., it will most often be the one that has the less complex functional analysis". Hon'ble Madras High Court in the decision dated 04.02.2021 in T.C A.No.996 of 2018 in the case of M/s. Virtusa Consulting Services Private Limited, Vs The Deputy Commissioner of Income Tax, Company Circle 5 (2),,Chennai held as under: "20. Now, we move on to consider the issue as to whether the assessee has to be taken as tested party for the purpose of determination of ALP or by applying the least complex theory, the AE outside the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee miserably failed to establish functional risk assumed by the AE and in the absence of any material on record with regard to the risk assumed by the AE, the assessee has to be taken as tested party for the purpose of transfer pricing adjustment. Thus, the assessee was non-suited on the ground that they have failed to establish functional risk assumed by the AE outside the Country. This finding appears to be factually incorrect as could be seen from the grounds raised before the Tribunal as well as the grounds which were canvassed before the TPD and specifically raised in the objections filed before the DRP. 22. The Tribunal had distinguished the decision in Ranbaxy Laboratories Limited on the ground that the Delhi Bench of the Tribunal has proceeded on the basis of the OECD guidelines. However, we find in paragraph 25 of the judgment of the Tribunal the principles that emerge in selection of tested party has been culled out wherein it has been held that the tested party normally should be the least complex party to the controlled transaction and that there is no bar for selection of tested party either local or foreign party and neither the Act nor the guidelines on tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract services availed by the appellant to its AE are the same as are provided by the appellant to Bhubaneswar Expressway Private Ltd i.e civil construction services. It does not make much difference whether services to Bhubaneswar Expressway Private Ltd have been provided by the appellant directly or have been provided through subcontracting to its AE. The nature of the services remains civil construction services and not of providing or availing subcontract services as is being canvassed by the appellant. Thus, selection of Associated Enterprise by the appellant as 'Tested Party' fails all the tests laid down under the statute as well as by various courts. The AE is neither the least complicated nor, it is possible to precisely identify the net profit margin realised by the AE from the specified domestic transaction. On the contrary, there is no disputing the fact that least complex functions have been performed by the appellant as compared to its AE and net profit margin from specified domestic transaction realised by the appellant can be deduced with full accuracy as the entire profit earned by the appellant is the profit realised from specified domestic transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ables. Sub Rule 4 to Rule 10 of the Income Tax Rules prescribes for adoption of multiple year data only when such data reveals facts which could have an influence on the determination of transfer price in relation to the transactions being compared. Mere submission of the appellant that data may have been affected in vary sense from economic or market conditions or any other abnormal factors, clearly shows that no case has been made out by the appellant for adoption of multiple year data. It is also submitted that even the proviso to Rule 1 OB( 4) is not applicable for transactions entered into after 01.04.2014 as the Rule 10B(4) was amended and proviso was made absolutely inapplicable. Thus, it is evident that even prior to 01.04.2014, the intention of the legislature was to consider only contemporaneous data for the purpose of examining compliance with arm's length standards, however certain leeway was provided for using data of 2 preceding years under certain specified conditions. However, at no point of time, the use of multiple year data was made absolute law as has been treated by the appellant. Since, existence of conditions precedent for taking multiple year data into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause notice issued, there after revision of search process and identification of new comparables is intended only to create hardship on the appellant. The appellant has further submitted that no details regarding how the search process carried out and no backup of the comparables selected has been provided by the Ld TPO. Submissions of the appellant in this regard are without any basis. The selection of fresh comparables was done by the Ld TPO by following the due procedure and by providing adequate opportunity to the appellant. Ld TPO in his order at Pgs 10-11 has elaborately discussed all the objections raised by the appellant in this regard. It is also submitted that all the fresh comparables selected by the Ld TPO were identified by the appellant but were rejected on some or the other pretext. In this regard reference can be made to the comparables search report of the appellant which is part of the TP documentations enclosed in the paper Book by the appellant, The details of comparables selected by the TPO and corresponding entry in the search report carried out by the appellant is tabulated as under: Sr No Name of the New Comparable Reference in search report of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Construction Company Ltd 13.34% 4 JMC Projects ( India) Ltd 8.50% 5 Punj Lloyd Ltd 6.41% 6 U B Engineering Ltd 3.43% 7 Tata Projects Ltd (Segmental) 9.03% 8 Ashoka Highway (Durg) Ltd 38.00 % 9 JKM Infra Projects Ltd 14.58% 10 J Kumar Infraprojects Ltd 14.41% 11 Max Infra Ltd 11.67 12 PBA infrastructure Ltd 10.04% Average PLI 143.19/12 11.93% (computed by TPO at 11. 60%) It is therefore submitted that Arms' length price of the specified domestic transaction has been rightly computed by the Ld TPO at 118,12,48,776/ against the transaction value of Rs 133,40,87,018/ resulting into downward adjustment of Rs. 15,33,16,226/ which has rightly been confirmed by the Ld CIT(A). Thus, the appeal of the assessee being devoid of merits deserves to be dismissed in entirety. 8. Ld. CIT-DR further submitted that the TPO has taken comparables from the TP Study Report of the appellant itself. He further submitted that during the course of hearing before the TPO the assessee in reply to show cause notice dated 16.08.2017 has submitted an alternative working wherein total 11 companies were selected for comparison, according to which the PLI was worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meager net profit on the gross receipts of Rs. 133.62 crores. From the TP study report, it is seen that the appellant has taken its AE as the tested party and after applying the filters has worked out the average PLI at 7.78% and by observing that the average margin of its AEs is 7.99%, has not made any adjustment with regard to specified domestic transaction carried out between the appellant and its AE. The AO has referred the matter to TPO who vide its order dated 06.10.2017 u/s.92CA(3) of the Act, though has worked out the ALP of the TNMM method which has also been adopted by the assessee however, has changed the tested party from its AE M/s KSSIIPL to the appellant as the tested party. The reasons for such change as has been observed in para 4 of the show cause notice dated 24.07.2017, as referred in TPO order reads as under :- 4.0 On perusal of the TPSR submitted, section 4.2.3 & 4.2.4 elaborates the functions performed by the assessee and its related party i.e KSSIIPL. Based on perusal of the same, it can be inferred that KSSIIPL performs the following critical functions as part of transaction with assessee Strategic management functions Corporate services Functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct nexus on the profitability of KSSIIPL's transaction with the assessee. Any analysis which is based on the aggregate approach instead of transaction-by-transaction approach would vitiate the essence of transfer pricing analysis. The actual margin earned by KSSIIPL while transacting with the assessee would be difficult to verify and authenticate and will have always leave room for subjectivity with respect to consideration of actual total costs incurred and corresponding margin earned. Considering the above fact, the undersign rejects KSSIIPL as tested party and considers assessee who is undertaking very limited functions and precisely no risks and whose financial data are available requiring fewer or no adjustment for undertaking arm's length analysis. 14. Thereafter the TPO identified certain more comparables and rejected few comparables out of the comparable taken by assessee by providing the reasons in para 8 of show cause notice dated 24.07.2017, which reads as under :- 8.0 Now, the undersigned proceed to select the comparable after necessary examination of the comparables stated in the TP document and by undertaking search in ACE Database. Though the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h overall operating margin of AE and no operating margin from the specified domestic transactions carried with the appellant was worked out. This is clear violation of Rule 10B(e) in IT Rules 1962. Moreover, tested party should be the one which has less complex Financial analysis. In the instant case, appellant has only worked for his principal and no services were rendered for any other party. On the contrary, AE has gross revenue of 1010.45 crore, out of which only 133.40 crore was from specified domestic transactions, which is approx. 13% of gross revenue, thus having more complex financial analysis. Therefore, we are in agreement with the TPO in choosing the assessee as the tested party. 18. For this, we rely upon the judgment of the Hon'ble Madras High Court in the case of M/s Virtusa Consulting Services Private Limited Vs. The DCIT, Circle-5(2), Chennai, rendered in T.C.A.No.996 of 2018, dated 04.02.2021, wherein the Hon'ble Court has observed as under :- "20. Now, we move on to consider the issue as to whether the assessee has to be taken as tested party for the purpose of determination of ALP or by applying the least complex theory, the AE outside the Country has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e miserably failed to establish functional risk assumed by the AE and in the absence of any material on record with regard to the risk assumed by the AE, the assessee has to be taken as tested party for the purpose of transfer pricing adjustment. Thus, the assessee was non-suited on the ground that they have failed to establish functional risk assumed by the AE outside the Country. This finding appears to be factually incorrect as could be seen from the grounds raised before the Tribunal as well as the grounds which were canvassed before the TPD and specifically raised in the objections filed before the DRP. 22. The Tribunal had distinguished the decision in Ranbaxy Laboratories Limited on the ground that the Delhi Bench of the Tribunal has proceeded on the basis of the OECD guidelines. However, we find in paragraph 25 of the judgment of the Tribunal the principles that emerge in selection of tested party has been culled out wherein it has been held that the tested party normally should be the least complex party to the controlled transaction and that there is no bar for selection of tested party either local or foreign party and neither the Act nor the guidelines on transfer pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofile and economic conditions of the appellant, three years data is more appropriate without specifically pointing out us to how all these factors effects adversely if only current year data is taken. Moreover, statute also restricts the use of multiple year data for the specified domestic transactions carried out on or after 1.4.2014. In view of these facts we are in fully agreement with TPO of that only current year data is to be considered for analysis. 22. Now, coming to the last contention that TPO has wrongly rejected few comparable taken by the appellant and the additional comparables taken by the TPO are not qualified to be compared as they were engaged in the separate line of business or having other financial activity. From the details filed by the appellant, we find that TPO has taken five additional comparables and except M/s Ashoka Highways (Durg) Ltd., the other comparables are qualified for selection as comparables and no plausible explanation was given by the assessee as to why they could not considered for computing ALP. 23. While rejecting two comparables taken by the assessee, TPO at 12 of order has provided specific reason for the same with reads as under :- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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