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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI KUL BHARAT & SHRI MANISH BORAD
आदेश / O R D E R
PER KUL BHARAT, J.M: These two appeals by the assessee pertaining to the assessment years 2012-13 & 2013-14 are against direction
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] of the Dispute Resolution Panel-2, Mumbai both dated 14.6.17. Similar grounds have been raised in these appeals. Both were taken up together for hearing and were disposed of by way of consolidated order. First we take up appeal pertaining to the assessment year 2012-13 i.e. ITA No.686/Ind/2017. The assessee has raised following grounds of appeal:
“On the facts and circumstances of the case and in law, the Ld. TPO/Ld. AO based on directions of Dispute Resolution Panel (Hon'ble DRP):
1. 1. Erred on the facts and circumstances of the case and in law, by not accepting the economic analysis undertaken by the Appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm’s length price of the international transactions.
2. Erred in law and in facts in making an adjustment of INR 10,36,034 to the transactions related to “Contract revenue from projects”. In doing so, the Ld. TPO/Hon'ble DRP erred in: a) Inappropriately rejecting the Transaction Net Margin Method (TNMM) as most appropriate method and using Cost Plus Method (CPM) without providing any cogent reasons. b) Not considering the internal CPM analysis submitted by the Appellant, which was in accordance with the provisions of the Act read with the Rules and the internationally accepted principles. c) Applying CPM on a project-by-project basis, despite agreeing to various functional and risk differences between individual project, which would lead to unreliable results when compared on project-by-project basis.
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] d) Not taking cognizance of the fact that same international transaction of Appellant has been accepted by Revenue/Appellate authorities to be at arm’s length in earlier years. e) Ld. TPO/DRP have erred in not allowing a set off of surplus revenue/profit exceeding the arm’s length price (ALP) earned from the other projects done with AEs while computing the ALP under a transaction-by-transactions analysis approach.
Erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act against the appellant.”
The facts in brief are that the return of income was filed on 28.11.2012 declaring total income of Rs.22,70,51,890/-. The case was selected for scrutiny and the assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter called as ‘the Act’) was completed vide order dated 31.3.2015 and income was assessed at Rs.30,73,99,730/-. Subsequently, this assessment was revised by the Ld. PCIT Bhopal vide his order dated 29.12.2015, thereby the Ld. PCIT referred matter relating to the transfer pricing to the Transfer Pricing Officer (TPO).
Thereafter, the A.O. passed a draft order on the basis of the recommendation of the TPO for transfer pricing adjustments. The A.O. on the basis of the recommendation 3
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] of the TPO made adjustments in respect of transactions related to receipt of contract revenue from projects and adjustment of difference on account of arm’s length price for transactions related to payment of technical services to the Associated Enterprises (AEs). Total adjustment was made of Rs.44,48,880/-. Against this draft assessment, the assessee preferred objections before the Ld. DRP. Ld. DRP partly allowed the objections of the assessee, thereby the adjustments made on account of transactions related to payment of technical services amounting to Rs.34,12,846/- allowed the objection of the assessee.
However, the adjustment made in respect of difference on account of arm’s length price for transactions related to receipt of contract revenue from projects of Rs.10,36,034/- was sustained. Against this finding, assessee is in appeal.
The revenue has not filed any appeal against the finding of the Ld. DRP.
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] 3. Ground Nos.1 & 2 are related to confirming the adjustment in respect of transactions related to contract revenue from projects. Ld. Counsel for the assessee reiterated the submissions as made in the written synopsis. For the sake of clarity, written synopsis filed are reproduced as under:
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal]
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] 4. On the contrary, Ld. CIT(DR) passed the submissions and supported the direction of the Ld. DRP and the orders of the authorities below. Ld. CIT(DR) submitted that there is no illegality in the direction of Ld. DRP. Therefore, prayed that addition made may be sustained.
We have heard the rival submissions, perused the materials available on records and gone through the orders of the authorities below. The Ld. DRP decided the issue by observing as under:
“7.1 The present DRP has noted that a similar issue had come up for consideration of the DRP in the preceding assessment years i.e. AY 2011-12 & AY 2010-11. The DRP has vide its directions dated 23.12.2014 for AY 2010-11 has held as under:-
“There is no dispute between the assessee and the TPO as regards the method which is CPM and benchmarking which is based on internal comparable. The only dispute is that while the assessee has aggregated all the projects with AE’s (the AE’s are different) and compared the mean CPM of the projects of related party transactions with the mean of the unrelated party transactions. In contrast,
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal]
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] demonstrated to be the MAM in this case by the Assessee. The order of the Hon'ble ITAT has not examined CPM application for benchmarking as this was not the issue in that year. Objections no.2 is therefore rejected.” 7.2 In view of the above discussion, this ground of objection of the assessee company is rejected and no directions are being issued to the AO/TPO.”
The grievance of the assessee is that the Ld. DRP has not considered the facts in right perspective. It is contended that the Ld. TPO & Ld. DRP erred in adopting the CPM (Most appropriate method) despite the fact that under the identical facts, this Tribunal in earlier years had approved TNMM as most appropriate method. Further, it is pointed out that even if CPM is applied, it has to be applied on an aggregate basis i.e. an average of A.E. projects needs to be compared with average of non A.E projects since the average gross margins earned by the appellant from transactions with unrelated parties ranging from -210.290 to 4549.07% average being 13.1%, which has been compared with average gross margin of [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] transactions with A.Es ranging from -72.60% to 1075.95% average 32.29% gross of projects appellant recognizes revenue on percentage of completion method in accordance with the accounting standard-7. It is not possible to find a proper project with respect to it’s A.E., which is completely with similar functionalities to a project, which has been undertaken by appellant were a non A.E. as each project operates in a different life cycle. Moreover, in view of the nature of business of the assessee, the average profitability of the projects depends upon various factors such as nature of work, bidding process etc. It is further contended that the authorities below grossly erred in treating the project with A.E. as a separate transaction. Further, it is contended that even the OECD guidelines are misconstrued. It is further contended that the fact that the assessee is a risk comparing manufacturer & supplier of power generation equipment and assessee is likely to earn
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] low gross margins in certain transactions based on the quotient of risk involved. It is further stated that without prejudice to submissions made, the TPO/DRP not allowing set off of higher gross margins earned in some A.E. projects against the low gross margins earned in some A.E. projects. The reliance is placed on the judgement of the Hon'ble Delhi High Court rendered in the case of Sony Mobile communication and others in ITA No.16/2014.
Further reliance is placed on the decision of this Tribunal rendered in assessee’s own case in TPA No.157/Ind/2015 & TPA 316/Ind/2015, wherein it has been held that CPM analysis as done by the assessee comparing the average gross profit margins from A.E projects with the average gross profit margins from the non A.E. projects. Further, it is stated that the assessee had conducted the TP analysis using TNMM or it has other international transactions, which serves as a corroborative analysis for the [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] international transactions related to contract revenue earned from projects with AEs. He submitted that in undertaking the TNMM analysis, the appellant chose itself as tested party and operating profit as ratio of operating revenues as a profit level indicator. This contention was accepted. Further, it is submitted that this Tribunal vide order dated 27.2.2017 pertaining to the assessment year 2010-11 & 2011-12 in TPA No.157/Ind/2015 and TPA 316/Ind/2015 upheld the CPM analysis as done by the appellant i.e. comparing the average gross profit margins from the A.E projects with the average gross profit margins from the non AE projects. We find that these submissions were also made before the Ld. DRP and the Ld. DRP in its order has just brushed aside the submissions of the assessee. The grievances of the assessee are two fold.
Firstly, the method adopted by the TPO is wrong and secondly while applying the cost plus method, the TPO has [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] not considered the internal CPM analysis submitted by the assessee and applying CPM on a project by project basis.
Further, not considering the fact that some of the international transactions of the assessee has been accepted by the revenue to be at arms length in earlier years. Further, Ld. TPO/DRP have erred in not allowing a set off of surplus revenue/profit exceeding the arms length price and from the other projects done with the AEs while computing the ALP under a transaction by transaction analysis. We find that the method adopted by the TPO was also held to be correct method. The grievance of adopting this method of the assessee firstly is that it has been done with project to project basis not on the average of all projects. As per the assessee, project to project would not give a true picture as each project has its own life cycle.
Secondly, it is stated that set off of surplus revenue/profit exceeding the arms length price and from the other projects
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] has not been given while computing the ALP under a transaction by transaction analysis. We find merit into this contention of the assessee that Ld. TPO erred in comparing individual project margins of transaction with A.E. with aggregate margins earned from transactions with non A.E., which is improper as individual margins are being compared with aggregate margins that is impermissible under law, therefore, the impugned order is set aside. The A.O. is therefore directed to re-compute adjustment after comparing the margins of individual transactions with A.E. with individual transactions margins with non A.E.
Comparing the individual transactions with A.E. with aggregate transactions with non A.E. would give a distorted picture of margins, hence, ground Nos.1 & 2 of the assessee’s appeal are partly allowed as indicated herein above. It is clarified that the A.O. would apply the method
[ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] as directed by Ld. DRP except that the comparison would be made as discussed herein above.
Ground No.3 is against initiation of penalty u/s 271(1)(c) of the Act. This ground being premature is dismissed.
Now we take up for the assessment year 2013-14. The assessee has raised following grounds of appeal:
“On the facts and circumstances of the case and in law, the Ld. TPO/Ld A.O. based on directions of Dispute Resolution Panel (Hon'ble DRP):
1. 1. Erred on the facts and circumstances of the case and in law, by not accepting the economic analysis undertaken by the appellant which was in accordance with the provisions of the Act read with the Rules for establishing the arm’s length price of the international transactions.
2. Erred in law and in facts in making an adjustment of INR 22,14,516 to the transactions related to “contract revenue from projects”. In doing so, the Ld. TPO/Hon'ble DRP erred in : a) Inappropriately rejecting the Transaction Net Margin Method (TNMM) as most appropriate method and using Cost Plus Method (CPM) without providing any cogent reasons. b) Not considering the internal CPM analysis submitted by the appellant, which was in accordance with the provisions of the Act read with the Rules and the internationally accepted principles. c) Applying CPM on a project-by-project basis, despite agreeing to various functional and risk differences between individual project, which would lead to unreliable results when compared on project-by-project basis. d) Not taking cognizance of the fact that same international transaction of appellant has been accepted by [ITA 685 & 687/Ind/2017] [Andritz Hydro Private Limited, Mandideep, Bhopal] revenue/appellate authorities to be at arm’s length in earlier years. e) Ld. TPO/DRP have erred in not allowing a set off of surplus revenue/profit exceeding the arm’s length price (ALP) earned from the other projects done with AEs while computing the ALP under a transaction by transactions analysis approach. 3. Erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act against the appellant.”
The grounds are identical as were in pertaining to the assessment year 2012-13. Parties have adopted same argument. Therefore, for the same reasons, impugned order is set aside. The assessing officer is directed to re-compute adjustment in the light of the direction given in .
In the result, the appeals filed by the assessee are partly allowed.
Order was pronounced in the open court on 16 .04.2019.