ACIT, FARIDABAD vs. M/S. BCEOM (INDIA) P. LTD., FARIDABAD

This is the bunch of four appeals in case of an assessee for four different years involving similar ground of appeal

The learned authorised representative submitted that TPO has accepted the segmental account submitted by the assessee as per para No. 3.1 of his order. He further referred to page No. 32 of the order of the learned CIT(A) to show that the learned CIT appeal has considered all the arguments raised. He also referred to page number 115 of his paper book ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 which is as Transfer Pricing Study Report wherein it is submitted that the company does not incur any marketing or business development expenses for business procured from associated enterprise, however the company incurred substantial cost towards marketing and business development expenses for procuring business from independent 3rd parties. He therefore submitted that marketing cost is for the non-AE business only. He therefore submitted that there is no infirmity in the order of the learned CIT( A).

We have carefully considered the rival contention and perused the orders of the learned AO, TPO and the learned CIT(A). The brief functional profile of the assessee shows that it is engaged in rendering services of technical assistance, project management, undertaking of studies in the field of audit, consultancy, engineering, supplying of qualified experts, participation involves supervision, design, draft, inspection, estimate, survey, improvisation in the designing, supply, construction, installation, operation or maintenance of any structure, roads and highways et cetera. For bench making of international transaction of rendering of technical and consultancy services to its associated enterprise assessee adopted Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM). It selected 3 comparables whose arithmetic mean of the Profit Level Indicator (PLI) of operating profit/total cost was 1.68%, whereas the assessee’s profit level indicator was 1.36% and therefore it was stated that its international transactions are at arm’s-length. The assessee computed its profit level indicator with respect to the transactions with associated enterprise and nonassociated enterprise as under:- particulars Associated enterprise Non-associated enterprise 192064997 17959145 Operating income 189491737 21404968 Operating expenditure 2573260 (-) 3445823 Operating profit contribution 1.36% (-) 16.10% Net Page | 5 ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 margin

The learned transfer pricing officer challenged the above margin of 1.36 percentage earned by the assessee from associated enterprises and a negative margin of (-) 16.10% from non-associated enterprise. Therefore, the show cause notice was issued. In response to the show cause notice, assessee abandoned earlier 3 comparables chosen by it, and came out with 4 different altogether new comparables stating that their average profit level indicator of operating profit/operating expenditure is(-) 12.06%. Assessee came out with a new internal segmental profit and loss account between non-AE and AE as under:- particulars Nonassociated Associated Profit and loss enterprise enterprise account 17959145 192064997 210024142 Project income 02/05/2007 219309 239816 Difference in exchange 2528 27031 29559 Amount written back 17982179 192311338 210293517 Total operating income 19607 209691 229298 Other income 18001786 192521029 210522815 Total Expenditure 5646209 47108798 52755006 Salary 1966600 24361012 26327612 Professionals 22169953 65675620 87845572 Indirect expenses 3514086 37581570 41095656 Common cost now are located 2737065 – 2737065 Other expenses 36033912 174726999 210760912 Total operating expenses 13039 139445 152484 Loss on sale of assets ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 163479 1748335 1911814 Provision for doubtful debts 36210430 176614779 212825210 Total expenditure (18208644) 15906249 2302395 Net profit/(loss)

On the basis of above segmentation of the profit and loss account, assessee prepared the internal comparable profitability comparability analysis of the transaction with associated enterprise and non-associated enterprise as under:- particulars Associated enterprise Nonassociated segment enterprise segment 192311338 17982179 Operating income 174726999 36033912 Operating expenditure 17584338 (18021733) Operating profit 10.06% (50.1)% Net profit margin

The learned TPO questioned the abandoning original search by the assessee in the transfer pricing study report and also the segmentation. Therefore, he rejected the segmentation created by the assessee for the reason that there is an inappropriate indirect expenses allocation, non- allocation of other expenses etc. Therefore, the learned Transfer Pricing Officer, computed the profit level indicator of assessee taking the total operating income of Rs. 210293517/– and the total operating expenses of Rs. 210760912/- and thereby deriving operating loss of Rs. 467395/- and stated that the profit level indicator of operating profit/operating expenses of the assessee is (0.22) percentage. Thereafter he selected the comparables afresh, allowed the assessee to object them and ultimately selected 8 comparables, whose profit level indicator of operating profit/operating expenditure was found to be 24.91% and then, against the total price paid of Rs. 192064997/– arm’s-length price at Rs. Page | 7 ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 236694129/– and accordingly proposed an adjustment of Rs. 44629132/- . Consequently, the assessment order u/s 143 (3) of the act was passed on 7/1/2011 determining the total income of the assessee of Rs. 45806733/- against the returned income of Rs. Nil. The assessee preferred an appeal before the learned CIT(A). The learned Commissioner of Income Tax (Appeals) in para No. 6.1 of his order has accepted that internal uncontrolled transactions are the good comparables after relying upon the OECD guidelines. He therefore reached conclusion that these guidelines suggest preference for internal comparable of assessee. He relied on the decision of the coordinate bench in case of Birla soft India Ltd vs DCIT, wherein it has been held that the assessee was justified in undertaking internal comparison on standalone basis by placing on record working of operating profit margin from international transaction with its associated enterprise and transactions with uncontrolled prices undertaken in similar functional and economic scenario. Therefore, he held that such internal comparison is valid in all the methods. He further held that learned Transfer Pricing Officer has not given any reason that economic scenario of controlled and uncontrolled transactions were different. In view of this, he held that the attempt should always be made to determine the arm’s-length price of controlled transaction by comparing the same with internal uncontrolled transactions undertaken in similar economic situations. With respect to the segment -wise result he stated that in para number 3.1 of the order of the learned Transfer Pricing Officer, he has given certain reasons for rejection of the segmental income and the marketing expenses, however he noted that TPO has given a finding that segmental accounts have been drawn in such a manner as to hide the entity level loss, whereas, the contention of the assessee was that the expenses were distributed mainly on the basis of actuals is and on the basis of turnover. The assessee also furnished statement of segmental profitability after considering the direct and indirect expenses attributable to every project and allocation was based ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 on actual expenses. After recording the finding that the business activity of the company was technical consultancy in a specialised field and the major customers are mostly government organisations and all the businesses were allotted on the basis of open tenders. For wide difference between the revenue earned with PE and with the non-AE companies, and the marketing expenditure he held that there may be no correlation between the revenue earned on the marketing expenditure in the initial few years of the development of the business cycle. He further approved the argument of the assessee that in order to procure business from the associated enterprise, the appellant did not incur any advertisement expenses however for the purpose of acquiring business with Non-AE assessee need to incur these expenditure. Therefore, they are properly allocated to the non-AE segment. He further held that as long as the services are similar, segmental results will have to be accepted. He further held that the learned TPO while rejecting the revised segmental figures, has accepted the original segmental figures and also used the margin over the cost as given by the assessee. Therefore he held that on both the counts, the segmental results of the associated segment are better than Non-AE segment, and internal benchmarking analysis under the segmental results prepared using the valid allocation key is justified. On careful analysis of the decision of the CIT(A) we find that he has given a valid reasons for accepting the segmental results. Further with respect to all the arguments raised by the learned departmental representative, there is an answer in the order of the learned CIT(A) which cannot be dislodged without having any factual infirmity in the same. Further, on reading the transfer pricing study report prepared by the assessee, it is mentioned that assessee incurred marketing expenses only for procuring business from Non AE customers without giving any finding that such is not the fact the factual statement cannot be ignored. Further, ld TPO also did not state what is the difference between the functions performed, assets deployed and risk ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 assumed by the assessee in its transactions with AE and Non-AE customers. The TP Study report of the assessee states that ther is no such functional dissimilarity. Same is also the finding of ld CIT(A) which is also not controverted before us. Regarding allocation keys adopted by assessee, ld TPO has not stated that how same are incorrect. Therefore, there is no infirmity in the order of the learned CIT(A) we confirm the same. In view of this, we dismiss ground number 1 of the appeal of the AO.

Accordingly for assessment year 2007-08 preferred by the learned assessing officer is dismissed.

Now we come to the appeal preferred by the learned assessing officer for assessment year 2008-09 in ITA No. 583/Del/2014 wherein following grounds of appeal have been raised:- “(1) Ld. CIT(A) has erred in allowing the internal TNMM applied by the assessee which wasn't forming part of the Audit Financials and TP Report. Moreover, it also ignored that TP Report of the assessee has a set of 07 comparable companies with mean margin of 16.45% whereas assessee's margin were merely 3.66% (OP/OR). Further, to add here that Assessee has come forward with a new search before the TPO with a set of 05 comparable with mean margin of 3.52%. Before the TPO assessee hasn't demonstrated how the TP Report prepared as per requirement of act and rules of Income Tax can be sidelined with new set of comparables so produced. Ld. CIT(A) is absolutely silent on the issue. (2) Ld. CIT(A) also erred on allowing the plea of assessee, merely on the submission of the assessee that comparable companies selected by the TPO in its order without remanding back the matter to the TPO. The Ld. CIT(A) has accepted assessee's plea of rejecting a comparable having RPT of 15%. In this regard Judicial ITAT decision in the case of M/s Global Logic India P. Ltd. (2011 TTI-35- ITAT-Del-TP), M/s ADPP Limited (2001-TO-44-ITAT-Hry-TP) and ST Microelectronics (2011-TII-63-rTAT-Del-TP), where it is upheld that threshold limit of RPT should be 25%. And in case of two other comparables, reasons given by the assessee that current year financials were not available which is factually incorrect. The annual reports of all the comparable companies were very much available on the public domain. Thus, Ld. CIT(A) grossly erred in deletion of TP Adjustment made by the TPO which was scientific and accurate in all respect. Page | 10 ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 (3) On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the addition of Rs.7,52,66,923/- made by the Assessing Officer on account of Arm's Length Price of International Transaction u/s 92CA(3) of the Act in view of findings of the TPO order dated 28.10.2011 and as per the provisions of section 92CA(4) of the I.T. Act.”

The assessee filed its return of income declaring income of Rs. 222615/– on 26/9/2008. The assessment u/s 143(3) read with section 144C of the act was completed at RS. 75489540/- on 26/12/2011 wherein the addition of Rs. 75266923/– was made. Against the order of the learned Assessing Officer, assessee preferred an appeal before the learned CIT(A), Faridabad who allowed the appeal and therefore revenue is in appeal before us. The only dispute is an addition of Rs. 75266923/– on account of arm’s-length price of international transaction. The assessee entered into an international transaction with its associated enterprise of rendering of technical and consultancy services to the associated enterprise. The assessee selected the TNMM as the most appropriate method for benchmarking the international transaction after selecting 7 comparables whose arithmetic mean of the profit level indicator of operating profit/total cost was 16.45% and the assessee’s margin was 13.92%. Accordingly, assessee submitted that it is international transactions are at arm’s-length price. While deriving the margin, the assessee segregated the operating profit between the transaction of the associated enterprise and non-associated enterprise. The assessee showed PLI of 4.46% on transaction with associated enterprise and 1.15% with non-associated enterprise. Similarly in assessment year 2007-08, the assessee during the course of assessment proceedings before the learned transfer pricing officer abandoned its transfer pricing study report and came with the fresh set of comparables. The fresh set of comparables thrown by the assessee were 5 in number where the average PLI of operating profit/ total cost was 3.52%. The learned transfer pricing officer rejected the TP study of the assessee and passed an order u/s 92CA (3) of the act on 28/10/2011 proposing an adjustment Page | 11 ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 of Rs. 75266923/–. Assessee used Transactional Net Margin Method to justify the arm’s-length price and filed segmental income declaring operating profit/operating cost at 4.46% in the case of a transaction and loss of 1.15% in case of non-AE transaction. The transfer pricing officer rejected the segmental results given by the assessee and also all the comparables and selected his own 5 comparables and determined the average PLI of 36.09% adopting operating profit/operating expenses as the profit level indicator. Accordingly, adjustment was proposed.

Both the parties agreed before us that the facts of the case are identical to the facts of the case for assessment year 2007-08, wherein on identical facts the learned assessing officer has preferred this appeal.

We have also carefully considered the orders of the lower authorities and find that the facts are identical to the facts of the assessment year 2007- 08. We have already decided the appeal of the AO as per this order for assessment year 2007 – 08, wherein we have upheld the order of the learned CIT(A). For similar reasons, we also uphold order of the learned CIT – A for assessment year 2008 – 09 and dismiss the appeal of the learned assessing officer.

In the result for assessment year 2008 – 09 filed by the learned assessing officer is dismissed.

Now we come to the appeal of the learned assessing officer for assessment year 2009 – 10 in ITA No. 2316/Del/2015. The learned assessing officer has raised the following grounds of appeal:- “1. The ld CIT(A) erred in accepting the assessee’s contention that internal CUP can be used when margins are being compared. The use of CUP the comparison of actual and not margins.

We have carefully considered the rival contentions and perused the orders of lower authorities. It is found that the assessee has entered into an international transaction of provision of technical services to its associated enterprise and the assessee benchmarked with the cost plus methods and substantiated it with transactional net margin method. The learned transfer pricing officer found that the assessee has shown the margin of operating profit/operating cost of 10.36% in its transaction with the associated enterprise and profit of 2.10% on its transactions with non-associated enterprises. The learned transfer pricing officer also rejected the internal transactional net margin method employed by the assessee in his TP study report. On careful perusal of the orders of the lower authorities it is apparent that facts are identical to the case involved in the appeal for assessment year 2007 – 08 filed by the learned assessing officer. By this order we have already dismissed appeal of the learned assessing officer upholding the order of the learned CIT(A) and therefore, for similar reasons, we also dismiss the appeal of the learned assessing officer for this year also. Accordingly ITA No. 2316/Del/2015 ACIT Vs M/s. BCEOM (India)P. Ltd, 2316/Del/2015 & 583/Del/2014 & 6152/Del/2015 (Assessment Year: 2007-08 to 2010-11 filed by the Assessing Officer for assessment year 2009-10 is also dismissed. 21. Now we come to the appeal of the learned assessing officer wherein he has raised the following grounds of appeal in for the Assessment Year 2010-11:- “1. Whether on the facts and in the circumstances of the case, the ld CIT(A) is correct in accepting the assessee’s contention that CUP can be used when margins are being compared. The use of CIP require the comparison of actual price and not margins.