M/S. SULZER TECH INDIA P. LTD.,NAVI MUMBAI vs. ADDL./JT./ DY./ ASSTT. CIT/ INCOME TAX OFFICER, DELHI

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is mainly engaged in providing design and engineering services and drawings relating to engineering, and IT services. For the year under consideration, assessee e-filed its return of income on 29/11/2017 declaring total income at Rs. 3,28,39,010. The assessee is global technical resource centre to support Sulzer Group companies. It provides efficient and cost-effective shared engineering and tendering solution. For the year under consideration, assessee entered into following international transactions with its associated enterprises:

In respect of international transaction pertaining to ‘Rendering of Tendering, Design & Engineering services and IT services’, assessee provide specialisation based tendering and engineering services to its associated enterprises. The assessee has deployed personnel for undertaking the tendering and engineering related work. These personnel are provided the requisite training by the associated enterprises and given access to the relevant database. For benchmarking this transaction, the assessee used Transactional Net Margin Method (‘TNMM‟) as the most appropriate method with Profit Level Indicator (‘PLI‟) of operating profit to M/s. Sulzer Tech India Pvt. Ltd. ITA No.633/Mum./2021 total expenses. By considering itself as the tested party, assessee identified following 4 companies as comparable:-

The weighted average net cost plus margin (3-years) of the aforesaid comparables was 13.67% as against 7.28% of the assessee. Since, as per its own transfer pricing study, the aforesaid international transaction was not at arm’s length price, the assessee had suo-moto made transfer pricing adjustment and offered the amount of Rs. 1,43,16,761 (i.e. the difference between transactions price and the arm’s length price) in its return of income.

The Assessing Officer made reference to TPO for the determination of arm’s length price of the aforesaid international transaction. During the transfer pricing assessment proceedings, the TPO observed that Desein Pvt. Ltd. has significantly lower margin as compared to other companies in the search. The TPO further observed that Desein Pvt. Ltd. has been actively associated with Central Government statutory bodies such as Central Board of Irrigation and Power, Central Electricity Authority, etc. for standardisation and modernisation of thermal power plant, design and engineering. The TPO further noted that the government projects are based on tender/competitive bidding where the company which has lowest bidding is accorded the project and same could be the reason for this company to have lower margin. Accordingly, the TPO vide order

Vide directions dated 18/03/2021 issued under section 144C(5) of the Act, the learned Dispute Resolution Panel (‘DRP’) rejected the objections filed by the assessee, by observing as under:

Accordingly, the Assessing Officer passed the impugned final assessment order dated 31/03/2021. Being aggrieved, the assessee is in appeal before us.

During the course of hearing, learned Authorised Representative (‘learned AR‟) submitted that the lower authorities completely ignored the fact that Desein Pvt. Ltd. is also having private clientele in addition to Central Government entities and thus this company cannot be said to be earning its revenue only from Central Government entities. On the other hand, learned Departmental Representative (‘learned DR‟) vehemently relied upon the order passed by the lower authorities.

We have considered the rival submissions and perused the material available on record. In the present case, the TPO directed exclusion of Desein Pvt. Ltd. on the basis that company is actively associated with Central Government statutory bodies, wherein project is accorded to company having lowest bidding and therefore same could have resulted in lower margin of this company. The learned DRP upheld the exclusion of Page | 6

The learned DRP also held that Desein Pvt. Ltd. has huge employee cost as compared to the assessee, which resulted in low profitability. From perusal of financials of Desein Pvt. Ltd., we find that employee benefits expenses are Rs.17,85,08,908, while in the case of assessee, such expenses are Rs. 11,92,74,939. Thus, we are of the considered view that such expenses cannot be considered as huge vis-à-vis the assessee.

Further, the learned DRP has also treated Desein Pvt. Ltd. as functionally not comparable to the assessee by referring to its revenue from operations. In the present case, functional profile of the assessee is M/s. Sulzer Tech India Pvt. Ltd. ITA No.633/Mum./2021 not in dispute. The details of functions performed by the assessee, as provided in its transfer pricing study, are as under: – “4.3.2 Functions performed by Sulzer Tech and A.Es  Tendering Services Tendering is an important activity in the sales process of pumps. This involves the preparation an offer document or proposal that provides technical as well as cost specifications to the This service is executed by engineering professionals who work in close collaboration with the sales team of the AEs. As mentioned above, the AEs have outsourced some of the tendering work being performed in-house to Sulzer Tech. The step-by-step flow of activities involved in this service is set out below:  The sales team of the AEs, passes on the customer requirements and specifications of the prospective customer to their respective tendering teams. The heads of the rendering scam of the AEs may take a decision to outsource this work to Sulzer Tech;  On receiving the work request from its AEs, Sulzer Tech executes the relevant work which involves compilation of technical and cost details. This include an assessment of whether Als can meet the required technical and cost specification. Based on the outcome of the assessment, Sulzer Tech may be required to interact with other Sulzer companies as well an thed party vendors. The completed tenders are sent to its AEs who review and approve them for subind to the prospective customer, and  In the event the customer places the order with AEs of Sulzer Tech (the tender for which was prepared by the team at Sulzer Tech), further work for preparation of Order Entry Document (OED) may also be outsourced to Sulzer Tech OED is a detailed document that assists the project management team to coordinate the manufacture and execution of the said order. The execution of the above mentioned activities may require interaction with the prospective customer and continuance assistance from the A.Es.  Engineering Services The engineering server provided by Sulzer Tech caters to the needs of two departments of its AE namely 1 Product Development Center („PDC‟), and (ii) Order Related Engineering („ORE‟). Work performed for PDC: The work outsourced from PDC consists of creation of drawings for new product development, creating catalogues for bought out items, revision of old drawings, conversion of drawings not available in soft form to soft format etc. To enable the am at Salze Tech to perform the job, the scope of work is defined and reference drawings or drawing layouts and other reference documents are provided by its A.Es.

From the above, it is evident that assessee’s services are confined to Tendering, Engineering and IT services, which can be broadly characterised as consultancy in nature. On the other hand, in case of Desein Pvt. Ltd., we find from the perusal of financials, for the year ending 31/03/2016, that the company has earned income from consultancy fees as well as from Operation and Maintenance. We further find that Desein Pvt. Ltd. has recognised the revenue from aforesaid two streams differently. From the perusal of information available on the website of Desein Pvt. Ltd., we find that Desein Pvt. Ltd. and its Group companies have claimed itself to be among India’s leading operation and maintenance service provider for power stations. Further, Desein Pvt. Ltd.

Thus, from the above it is evident that Desein Pvt. Ltd. is operating in a completely different segment insofar as its revenue from operation and maintenance is concerned and the aforesaid services, in our considered view, cannot be said to be comparable to the assessee. As noted above, Desein Pvt. Ltd. also earns income from consultancy fees and same has been declared separately in its financials at Note No. 18 to Accounts. However, in the present case, lower authorities didn’t examine whether functions performed, assets employed and risks assumed for earning the income from consultancy fees is comparable to the assessee. Further, the segmental information regarding the income from consultancy fees was also not examined by any of the lower authorities and the company was excluded on one or the other reason as mentioned

The brief facts of the case pertaining to this issue, as emanating from the record, are: – According to the transfer pricing study, Sulzer Management AG, associated enterprise of the assessee, provides various IT support services, which are basic for the international communication between the Sulzer Group entities including the assessee. The various services provided by the associated enterprise to group entities are in the nature of – IT infrastructure services, centralised IT Management Services and Other IT Services. During the year under consideration, assessee has paid Rs. 2,52,49,650 to the aforesaid associated enterprise for availing such IT support services. For benchmarking, the associated enterprise was considered as tested party. Further, Cost Plus Method was selected as the most appropriate method with PLI of operating profit to total expenses. Accordingly, assessee selected 68 comparables from both APAC and EU regions, whose three-year weighted average NCP margin range from 4.08% (35th percentile) to 7.08% (65th percentile) with a median of 5.69%. As per the Group Transfer Pricing Policy, the associated enterprise charged cost plus a markup of 5% for Corporate IT Support Services. Since, the assessee has paid for the aforesaid services to its associated enterprises with a markup of 5%, which is within the range of markup earned by the comparable companies, the international transaction

The TPO, vide order passed under section 92CA(3) of the Act, by applying need – evidence – benefit test determined arm’s length price of the aforesaid international transaction to be NIL holding that in any third party case, assessee would not have paid any amount toward services which are not availed by it or which has not benefited its business. Accordingly, TPO made an adjustment of Rs. 2,52,49,650. The learned DRP vide directions issued under section 144C(5) of the Act rejected the objections filed by the assessee. Being aggrieved, assessee is in appeal before us.

During the course of hearing, learned AR referred to the agreement under which the aforesaid services were received by the assessee as well as copy of extracts of email communication between the employees of the assessee and the associated enterprise to justify the rendition of service. On the other hand, learned DR vehemently relied upon the orders passed by the lower authorities.

We have considered the rival submissions and perused the material available on record. As per the assessee, the associated enterprise of the assessee provides various IT support services in the nature of IT infrastructure services, centralised IT management services and other IT services, which are basic for the international communication between the group entities including the assessee. In this regard, assessee also M/s. Sulzer Tech India Pvt. Ltd. ITA No.633/Mum./2021 entered into an agreement dated 01/01/2015 with its associated enterprise, which is duly signed and forms part of the paper book. The agreement enlists the various IT services to be provided by the associated enterprise. The agreement further provides the remuneration model and payment terms in respect of IT services provided by the associated enterprise. The agreement also provides the allocation key to be adopted for charging remuneration for IT services. As per the agreement, the associated enterprise may also engage third-party for execution of entire or part of IT services. The assessee, in the paper book, has also provided sample copy of invoices raised on the associated enterprise by the third parties, in case where such services were rendered through a third party. From the perusal of invoices, it is evident that same also describe the services provided under the head IT services by the third-party. To prove the rendition of service, the assessee has also filed sample extracts of email communication between the employees of the assessee and the associated enterprise as well as screenshots and IT tickets raised mentioning the description of various IT services received. From careful perusal of all the details filed by the assessee, we are of the considered view that lower authorities were not justified in holding that no services were rendered by the associated enterprise in respect of which payments were made by the assessee. We are further of the view that none of the basis for rejecting these details by the learned DRP is arising from the record.

Further, the lower authorities claimed to have adopted ‘other method’ by applying need, benefit and evidence test for considering the arm’s length price of this transaction to be NIL. In this regard it is pertinent to note that the provisions of Rule 10AB of the Income Tax Rules, 1962, which provides as under:

Thus, as per the provisions of aforesaid Rule, the ‘other method’ shall be the method which takes into account the price which has been or would have been charged or paid for the same or similar uncontrolled transaction between non-associated enterprises. However, in the present case, the lower authorities without searching for similar uncontrolled transaction between non-associated enterprises, straightaway treated the value of the international transaction to be at NIL. In this regard, it is relevant to note following observations of Hon’ble Delhi High Court in Cushman and Wakefield (India) Pvt. Ltd., [2014] 367 ITR 730 (Del.):

As noted above, in the present case, no search was conducted to find out the independent entity in a comparable transaction and the arm’s length price of the international transaction was treated to be NIL. In the present case, no doubts about payments made by the assessee have been raised by the Assessing Officer under section 37 of the Act. Further, accrual of benefit to assessee or the commercial expediency of any expenditure incurred by the assessee cannot be the basis for disallowing the same, as held by Hon’ble Delhi High Court in the case of EKL Appliances Ltd. [2012] 345 ITR 241 (Del.).

We further find that Hon’ble jurisdictional High Court in CIT v/s Lever India Exports Ltd. [2017] 246 Taxmann 133 (Bom.), observed as under: “7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strates to develop its business. This results in improving the brand image of the products, resulting in higher profit to the respondent assessee due to higher sales Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific. and limited le. to determine the ALP of an International Transaction in terms of M/s. Sulzer Tech India Pvt. Ltd. ITA No.633/Mum./2021

In view of the above, we are of the considered opinion that TPO as well as learned DRP were not justified in treating the value of international transaction of ‘Payment of Corporate IT Support Services’ to be NIL, in the present case. Accordingly, ground No. 2, including grounds no. 2.1 to 2.3, raised in assessee’s appeal are allowed.

Ground No. 3, raised in assessee’s appeal, was not pressed during the course of hearing. Accordingly, the same is dismissed as not pressed.

In the result, appeal by the assessee is partly allowed for statistical purpose. Order pronounced in the open court on 25/07/2022