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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, JM & SHRI S RIFAUR RAHMAN, AM
O R D E R
PER ABY T. VARKEY, JM:
This is an appeal preferred by the assessee against the order of the AO dated Nil passed u/s 143(3) read with section 144C(1) of the Income Tax Act, 1961 (hereinafter “the Act”).
At the outset, the Ld. AR of the assessee brought to our notice that the only issue is regarding the Transfer Pricing Adjustment made by the AO pursuant to the Dispute Resolution Panel (DRP) direction dated 23.12.2016. According to the Ld. AR, the assessee/TIPO is a project office/PE of M/s. Tecnimont SPA (TCM), a Foreign Company incorporated at Milan, Italy which is engaged in engineering & construction world-wide in section of Chemical, Petro-chemical Oil & Gas, Energy etc; According to the Ld. AR, the assessee/TIPO has been awarded inter-alia turnkey project by M/s. Indian Oil Corporation (hereinafter “M/s. IOCL”) at Panipat Project. And the assessee/TIPO Technimont SPA India in turn has entered into sub-contracting agreement with its one (1) of its Associated Enterprises/AE (i) M/s. Technimont Private Ltd (TPL) [previously known as Technimont ICB Private Ltd] (TICB). And for the sub-contract work carried out by the AE, they were remunerated by the assessee, which according to the Transfer Pricing Officer (TPO) was excessive. The TPO noted the International transactions entered by the PE/Assessee with TPL/TICB during the year as under: - Name of Particular of international transaction Amount (INR) Entity TPL/TICB Execution of EPC project 28,37,89,107 Total 28,37,89,107
And the assessee filed the TP study, which the TPO reproduces (relevant parts) at para 6 of his order; and thereafter the TPO however, was of the opinion that the TP study being neither signed nor auditors name not discernable, he took note of the earlier years [two (2) years] wherein the Most Appropriate method (MAM) adopted was TNMM instead of CPM [as suggested in this year T.P. Study], and he adopted TNMM as MAM; and consequently, [PLI is operating profit by operating income] he proceeded to benchmarking the international transactions of the PE/assessee with the Indian AE with his own TP analysis to examine whether the transactions carried out by it with TPL/TICB have been at Arm’s Length or not. In this regard, the TPO noted that the assessee is exclusively engaged for setting up of a significant portion of Polyproylene unit and all its revenue earnings as well as expenditure pertain to the sole business of execution of the Technimont SPA India project. As noted (supra) according to the TPO, TNMM was the most suitable method for conducting benchmarking analysis of the transactions of the assessee at an entity level, as all the business activities of the assessee are integrally linked and channelized for the purpose of the execution of the project office (PE) of the foreign company; and has made the payments to the Indian AE, and since the audited accounts didn’t have segmental accounts and figures of profitability furnished are not balanced up by segmental account, he was of the opinion that figures given are not verifiable. Therefore as done in earlier years, the profit level indicator in this case operating profit, selected (OP/OC) to find out the ALP of the payments made and the assessee itself was selected as the tested party for the purpose of his TP analysis. Thus, it was observed by TPO as under: - 7.4 However the most important fact that needs consideration is that in the audited accounts furnished by the assessee there is no “Segmental Account”. Further the figures of profitability as furnished by way of Annexure 1&4, are also not backed by any “Audit of Segmental Account”. As such the figures as incorporated are non verifiable. Accordingly in line with the preceding year the entity level profitability is being adopted, and PLI (OP/OC) of the assessee is being worked out, since receipts are tainted. 7.5 The PLI of the assessee is worked out as under:-
Particulars Amount Revenue from Operations 117,86,06,636 Expenses Cost of purchases of materials, civil construction 161,50,05,109 and job work Other expenses 4,54,62,588 Depreciation and amortization expenses 3,19,288 Bank charges 19,372 Total Operating cost 166,08,06,357 Operating profit/Loss (48,21,99,722) OP/OC (29.03)% 7.6 Accordingly in line with that of the preceding year, the PLI of these comparables, and the average of the same is worked out as under:- Sr. Name of the Comparable OP/OC % No 1 BGR Energy System Ltd (Construction & EPC Seg) 15.53 2 Techno Electric & Engineering Co. Ltd 20.83 3 U B Engineering Ltd 6.17 4 Tata Projects Ltd (Energy Seg) 21.53 Mean 16.02 % 7.7 Thus OP/OR of the assessee is (-) 29.03% which is less than that of the comparables, which is 16.02%. Therefore the transaction is not at arm’s length. The arm’s length price is calculated as under:- OI 117,86,06,636 OC 166,08,06,357 OP (482199722) OP/OI of assessee -29.03 OP/OI as per Internal TNMM for the other project 16.02 Arm’s length profit 26,60,61,178 Arm’s length cost 192,68,67,535 Difference 74,82,60,899 Transaction value 28,37,89,107 Percentage of transaction value to total revenue 24.08% Difference in transactional value 18,01,68,926 5% of transaction value 14189455 Adjustment proposed 18,01,68,926 7.8 In this case since the difference is more than +-5%, adjustment proposed is Rs. 18,01,68,923/-.
The aforesaid action of TPO was upheld by Ld DRP and the assessee is aggrieved by the same. The Ld. AR assailing the action of the TPO/DRP/AO regarding the adjustment ordered in respect of the International transactions with its AE’s viz TPL/TICB, brought to our notice an important fact regarding the assessment made by the department in the hands of AE i.e. M/s. TPL/TICB wherein the AO/TPO has accepted the remuneration given by assessee to it i.e. TPL/TICB at Arm’s length by order dt 19.01.2016 (PB page 108-119), wherein the TPO has not proposed any adjustment to the transaction/payment made by this assessee for AY 2012-13. Therefore, the assessee has raised revised ground no. 8, which according to him, if taken into consideration would take care of the main grievance of the assessee. Since the Ld. DR of the revenue does not object, we take up revised ground no. 8 which reads as under: - “Ground no. 8 – Adjustment to procurement cost of the appellant (Mirror Transaction Approach) “6. Without prejudice to the above, erred in adjusting the procurement cost of the appellant even though the same transaction (being sub- contracting income) has been accepted at arm’s length in the hands of the associated enterprises of the appellant and thereby being mirror transaction, no transfer pricing adjustment is warranted in the hands of the appellant.”
At the outset, the Ld. AR brought to our notice that the TPO has passed the order u/s 92CA(3) of the Act dt 19.01.2016 against the AE Technimont SPA India TICB/TPL, wherein no adjustment has been proposed by the TPO even though the transaction in question was taken note by the TPO at page 2 of his order. (In that order TPO has made only adjustment relating to interest on receivable & Recovery mark-up).
In the light of the aforesaid fact (TPO not making any adjustment in the hands of TICB/TPL ) in the case of AE, the Ld AR of the assessee asserted that since the TPO in the case of (AE/TICB/TPL) has accepted that the payments received by the AE (TICB/TPL) from the assessee (PE)/(TIPO) was at Arm’s Length, the necessary corollary is that no adjustment should be made in the hands of the assessee, since the payments in question made by the assessee PE to the AE cannot then be held to be not at Arm’s Length. And therefore prayed that the adjustments made by the AO by passing the impugned order should be deleted and for that proposition relied on the decision of this Tribunal in assessee’s own case for AY 2008-09; and the Co-ordinate bench decision of this Tribunal (Bangalore) in the case of M/s. U.E Development India Pvt. Ltd. Vs. DCIT in IT(TP)A. No. 1506/Bang/2012 for the AY. 2008-09 dated 14.06.2017 wherein similar issue cropped up and in that case, the relevant ground of appeal reads as under: - “On the facts and in the circumstances of the case, the Ld. TPO has missed an obvious fact viz, that when a transaction has been handled in a particular manner in the case of one of the parties to the transaction, the same transaction in the case of the other party has to be the exact converse. In the instant case for the same assessment year, the same Technimont SPA India Ld. TPO while accepting the contract cost was at arm’s length in the hands of associated enterprise (i.e. UEM) has rejected the contract revenue as not being at arm’s length in the hands of appellant and the Ld. DRP has erred in upholding the same.”
And the Tribunal adjudicated the aforesaid ground taking note of Tribunal decision in earlier years of assessee and especially the fact that the issue which was there before the Tribunal was arising from the same arrangement between that assessee and its AE’s which was considered by the Tribunal in that assessee’s own case for earlier years (AY. 2004-05 to 2007-08), vide order dated 30.08.2013 IT(TP) A No. 284 to 286/Bang/2012 at para no. 13 to 15 as under: - “13. Having heard both the parties and having considered the rival contentions, we find that the TPO has accepted the expenditure incurred by the AE to be at arm's length but has not accepted the income of the assessee to be at arm's length. Both the assessees are different legal entities with different components of expenditure and income. But when a transaction is entered into with an AE, it has to be at arms length from each other. If the transaction is found to be at ALP in the hands of one of the parties then the other end et tile transaction also has to be considered to be at arms length, Therefore, when the TPO has accepted the transaction to be at arms length in the hands of the AE, then the transaction will have to be accepted to be at arm's length in the hands of the assessee also. In view of the same, we are of opinion that the DR? was right in holding that what is true one end is true of the other end of the transaction but it erred in holding that the remedy is to suitably substitute the ALP determined in the hands of assessee' also in the hands of the AE. As rightly pointed out by the learned counsel for the DRP can only give directions as regards the Technimont SPA India determination of ALP in the hands, of the assessee before it. It cannot give directions to consider the issue in the hands of an assessee whose case is not it is for the relevant TPO AO to take action in accordance with law in the light of facts and circumstances of the case before them applying their mind Independently and not on the directions of DRP or any other authority in another case, Therefore, the relevant ground of appeal on this issue is allowed.”
8. And in the aforesaid case [M/s. UE Development Indian Pvt. Ltd. Vs. DCIT (supra)] the Tribunal held that when the TPO has accepted the transaction to be at ALP in the hands of the AE, then he cannot take a different stand in the case of the other party to the transaction; and consequently deleted the addition in that case, which decisions of the Tribunal was challenged by the revenue before the Hon’ble Karnataka High Court in in the case of PCIT Vs. M/s. UE Development India Pvt. Ltd. wherein the question of law decided by the Hon’ble High Court reads as under: - “whether on the facts and in the circumstances of the case the Tribunal is right in law in holding that in mirror transactions ALP adjustments cannot be done, ie. if one transaction is treated as at Arm’s Length, no adjustment can be made on the other related corresponding transaction of the AE without appreciating that this stand is against the provisions of Section 92(3) of the Act?”
9. And the Hon’ble High Court noted the Tribunal decision as under: - Technimont SPA India “3.4.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronounce cited. On an appreciation of the facts on record it is seen that the assessee is a subsidiary of United Engineers Mauritius Co. Ltd., which in turn is a subsidiary of United Engineers Malaysia, Berhad. In order to participate in the inter-rational bidding for the development, maintenance and management of National Highway under the NHAI, United Engineers Malaysia formed a joint venture (JV) with SR Projects Ltd., and along with its JV partner has secured three highway projects in India for the purpose of improving and four laning of national highway, under contract awarded under NHAI. Part of the work was given to the assessee through supplementary arrangements which was reported as international transaction. This issue in dispute, we find, is arising from the same arrangement between the assessee and its AZ which was considered by co-ordinate benches of this Tribunal in the assessee’s own case for asst. years 2004-05 to 2007-08 vide order in IT(TP)A No. 1104/Bang/2011 and 284 to 286/Bang/2012 dated 30/98/2013 at para 13 to 15 thereof. We also observe that the aforesaid co-ordinate bench decision in the assesse’s own case for asst. years 2004-05 to 2007-08 (Supra) has followed by another co-ordinate bench in its order in IT(TP}A No.347/Bang/2014 dated 5/5/2017 in the assessee’s own case for asst. year 2009-10. 3.4.2 In its order in dated 5/5/2017 in the assessee’s own case for asst. year 2009-10, the co-ordinate bench, following its own earlier orders in the assesse’s own case for asst. years 2004-05 to 2007-08 (Supra), at para 4 of its order, has decided the issue in dispute in favour of the assessee and against Revenue, holding as under: xxxxxxxxxxxxxxxxxx Technimont SPA India 3.4.3 Since the issue in dispute is arising from identical facts and circumstances as in the earlier/later years, it is, therefore, covered by the decision of the co-ordinate bench of the Tribunal in the assessee’s own case for asst. years 2004OS to 2007-08 dated 30.08.20i3 (Supra) and asst. year 2009-10 vide order dated 5/5/2017 (Supra). In this factual view of the matter, and following the aforesaid decisions at the coordinate benches of the Tribunal (supra), we hold that where the TPO has accepted the transaction to be at ALP in the hands of | the AE, then he cannot take a different stand in the case of the other party to the transaction, ie, the assessee therein in the case on hand and accordingly set aside the orders at the AO/TPO on this issue. Consequently, the grounds raised
by the assessee are allowed as indicated above.
5. In the result, the assessee’s appeal for asst. year 2008-09 is allowed.”
10. And thereafter the Hon’ble High Court was pleased to dismiss the appeal of the revenue holding that there was no substantial question of law. And further we note that this Tribunal in assessee’s own case M/s. Technimont SPA India for AY 2008-09 by order dt 30.09.2012 in up held similar ground raised by the assessee as under:- “Having heard both the parties and after perusal of the records, we note that the payments made by the assessee PE to its AE’s i.e. assessee with TICB and EDTICB were held to be at Arm’s Length by this Tribunal (supra); and since the same international transaction of the instant assessee’s procurement cost (being sub-contracting income for the AE’s i.e. of assessee viz TICB and EDTICB) has been accepted as Arm’s Length for the AE’s and the same being mirror transaction cannot be Technimont SPA India considered excessive in the hands of the assessee/appellant. Therefore, on the same reasoning/ratio of the decision of the Tribunal (Banglore) in UE Development India Pvt. Ltd. (supra) which has been upheld by Hon’ble High Court (supra), we hold that where the Tribunal has accepted the international transaction to be at Arm’s Length Price in the hands of AE, then the international transaction that the assessee PE had with the AE to be also at Arm’s Length Price and therefore no adjustment was warranted in the facts and circumstances of the case. And since the revenue could not point out any change in facts/law in respect to the ratio-decidendi of this Tribunal in assessee’s own case Bangalore Tribunal/Karnataka High Court in the case of UE Development India Pvt. Ltd. (supra) we allow the ground no. 8 of the assessee’s appeal and direct deletion of Arm’s Length Price made as per the impugned order
15. In the light of the decision of ours in respect of assessee’s ground no. 8, all the other grounds of appeal including the additional grounds of appeal have become academic and therefore, not adjudicated.”
Having heard both the parties and after perusal of the records, we note that the payments made by the assessee PE to its AE/ TICB/TPL was accepted by the TPO as at Arm’s length., and since the same international transaction of the instant assessee (being sub- contracting income from the AE of assessee namely M/s TICB/TPL) has been accepted as “Arm’s Length” for the AE (M/s TICB/TPL); and the same, being mirror transaction cannot be considered excessive in the hands of the assessee/appellant. Therefore, on the Technimont SPA India same reasoning/ratio of the decision of the Tribunal in the assessee’s own case as well as decision of the coordinate bench in M/s UE Development India Pvt Ltd (supra) which has been upheld by the Hon’ble High Court (supra), we hold that when the TPO has accepted the international transaction to be at Arm’s Length Price in the hands of AE, then the international transaction that the assessee/PE had with its AE also has to be at Arm’s Length; and therefore no adjustment was warranted in the facts and circumstances of the case and the same is directed to be deleted 12. Consequently, other grounds of appeal raised by the assessee has become academic and not adjudicated.