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Income Tax Appellate Tribunal, DELHI “I” BENCH: NEW DELHI
Before: SHRI KUL BHARAT & SHRI PRADIP KUMAR KEDIA
ORDER
PER KUL BHARAT, JM :
1. The present appeal filed by the assessee is directed against the order passed by Commissioner of Income Tax (Appeals) (“CIT(A)”)-44, New Delhi dated 24.04.2019 for the assessment year 2012-13.
2. The assessee has assailed the correctness of the order on following grounds:-
1. “On the facts and in the circumstances of the case and in law, the order dated 24th April, 2019 passed by the Ld. Commissioner of Income Tax Appeal ('CIT(A)') u/s 250(6) of the Act is bad in law and void-ab-initio.
2. On the facts and in the circumstances of the case and in law, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in not appreciating that none of the provisions set out in Section 92C(3) of the Act are satisfied in the present case.
3. On the facts and in the circumstances of the case and in law, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in disregarding the arm's Length Price ('ALP') for international transactions as determined by Appellant in the TP documentation maintained by it in terms of Section 92D of the Act read with Rule 10D of the Income- tax Rules. 1962 ('Rules').
4. On the facts and in the circumstances of the case and in law, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in substituting CUP Method with TNMM. 5. Without prejudice to above grounds, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in including Jai Hind Projects Limited as comparable despite the fact that the above mentioned company is engaged in projects related to oil, gas, water pipeline, petrochemical complex and associated facilities and is functionally different from the Appellant which is engaged in construction of small to medium sized factories and industrial buildings on design/ cum build basis. 6. Without prejudice to above grounds, the Ld.TPO/AO and subsequently Ld. CIT (A) have erred in not including the comparables put forward by the Appellant and which are functionally similar to the Appellant. 7. The Ld.TPO/AO and subsequently Ld. CIT(A) have disregarded judicial pronouncements in India in undertaking the TP adjustment. 8. On the facts and in the circumstances of the case and in law, the Ld. AO has grossly erred in mechanically initiating penalty proceedings under Section 271(1)(c) of the Act for concealment of particulars of income and furnishing inaccurate particulars thereof.” 3. Facts in brief are that the assessee filed its return of income, declaring total loss of INR 28,28,51,190/- on 25.10.2012. The case was selected for scrutiny assessment and a notice u/s 143(2) of the Income Tax Act, 1961 (“the Act”) was issued and served upon the assessee. In response to the statutory notice, Ld. Authorized Representative (“AR”) of the assessee attended the assessment proceedings. The Assessing Officer (“AO”) noticed that the assessee had entered into international transaction with its Associated Enterprises (“AEs”). Therefore, after obtaining the necessary approval from the Competent Authority in accordance with the provision of section 92CA of the Act, the issue of transfer pricing adjustment was referred to the Transfer Pricing Officer (“TPO”) for determining Arm’s Length Price (“ALP”). The TPO vide order dated 27.01.2016 proposed certain adjustments, thereby he proposed T.P. adjustment at INR 1,26,07,833/- u/s 92CA of the Act. Thereafter, the AO passed a draft assessment order dated 23.03.2016 proposing to make addition(s) of INR 156,62,092/- inclusive of T.P. adjustments and other corporate taxes i.e. PF and ESI contribution and unexplained ROC fee. In response to the draft assessment order, the assessee company did not intend to file any objections before Ld. Dispute Resolution Panel (“DRP”) as intimated to AO vide letter dated 10.05.2016. Therefore, the AO proceeded to frame final assessment order u/s 143(3) r.w.s. 144C(3) of the Act. Thereby, after making adjustment suggested by the TPO, the AO assessed the income of the assessee at loss of INR 26,71,89,098/-. Aggrieved against the assessment order, the assessee carried matter in appeal before Ld.CIT(A) who partly allowed the appeal for statistical purpose. Thereby, the Ld.CIT(A) sustained the method adopted by TPO and applied for computing ALP of transactions. However, he directed the AO for exclusion of certain comparables. But he retained M/s. Jai Hind Projects Ltd. despite the objection of assessee that the comparable operate in different field and could not have been taken as a valid comparable.
4. Aggrieved against this, the assessee preferred appeal before this Tribunal.
Apropos to Grounds of appeal No.1 to 7 related to Transfer Pricing 5. issue, the Ld. Counsel for the assessee submitted that the AO was not justified in making the impugned additions. He submitted that the AO grossly erred in applying the Transactional Net Margin Method (“TNMM”) instead of Comparable Uncontrolled Price (“CUP”) method for computation of ALP. Further, he contended that the AO has accepted CUP method for Assessment Year (“AY”) 2011-12 and also in AY 2020-21. He contended that there is no change into facts and circumstances of the case. Further, he submitted that even on merit, the comparables as relied by the assessee, were not accepted and he re-iterated the contents of composite Synopsis. He urged even otherwise issue qua the adoption of CUP method is squarely covered in favour of the assessee by the decision of Hon’ble Co-ordinate Bench and cited in the written Synopsis. For the sake of clarity, the relevant contents of composite Synopsis are reproduced as under:- “Further to the hearing dated 3rd April, 2024 we submit below a composite synopsis for consideration of the Hon'ble Bench: I. Reasons why CUP should be the Most Appropriate Method (Ground Nos. 4.1 to 4.3) i. Traditional transaction methods viz. CUP Method, RPM and CPM are regarded as the most direct means of establishing whether conditions in the commercial and financial relations between associated enterprises are arm's length. This is because any difference in the price of a controlled transaction from the price in a comparable uncontrolled transaction can normally be traced directly to the commercial and financial relations made or imposed between the enterprises, and the arm's length conditions can be established by directly substituting the price in the comparable uncontrolled transaction for the price of the controlled transaction. ii. Outcome under CUP Method is not distorted by extraneous factors such as overhead costs, miscellaneous expenses and other third-party costs not in control of the assessee. iii. Both OECD and UN Guidelines endorse CUP method as the most direct and reliable method, according preference to this method over other methods. iv. Reliable information on CUP data was available with Takenaka India for benchmarking international transactions pertaining to receipt of technical services. Available CUP data also satisfies all comparability criteria required for applicable of CUP Method (i.e. similarity in nature of services, grade or level of service, geographical location and time period) as explained in table below (Refer to the submission dated January 22, 2016 on Page No. 44 of the Paperbook). Table - Satisfaction of Comparability Criterion for CUP Method Sl. Particulars Payment of technical support Third Party Comparable data No. services fee by Third Party Comparable data Takenaka Japan (AE) 1. Nature of Services received are technical Comparison has been made with hourly services inputs/ support services provided by rates earned by Japanese engineers Japanese engineers for engineering engaged in technical/ engineering design design and construction services in the construction industry (based on rates published by Japanese Ministry) 2. Grade/level of Services received are graded by the Hourly rates for the same category of staff service category of staff (for example staff (for example staff level, manager, senior level, manager, senior manager, etc). manager, etc) have been considered while applying CUP Method 3. Geographical Technical services received from Hourly Rates for Japanese engineers only Location Japan have been considered 4. Time period FY 2011-12 Hourly rates published by Japanese Government for same year i.e. FY 2011-12 v. Case Law accepting use of CUP Method for Technical/Engineering Services ADIT vs. ABB Lummus Heat Transfer BV (ITA No.2763/Del/2013) (Refer to Page No. 50-51 of the Case Law Compendium)
Hughes Systique India Pvt. Ltd. vs. ACIT (2013(25) ITR (Trib)556(Delhi)) (Refer to Page No. 15 of the Case Law Compendium)
DCIT vs. Calance Software Pvt. Ltd. (ITA 5023/Del/2012) (Refer to Page No. 4 of the Case Law Compendium)
Income-tax Officer-9(2)(1), Mumbai vs. Intertoll ICS India (P.) Ltd [2016] 71 taxmann.com 353 (Mumbai - Trib.) vi. Under similar facts and circumstances CUP method was accepted by TPO for the previous FY ie FY 2010-11. Principle of Consistency demands that if there is no material change in facts then same method should also be accepted in FY 2011-12.
Table - Comparison between Previous Year (ie FY 2010-11) and Current FY i.e. (FY 2011-12)
Particulars Previous Year (FY 2010-11) Current Year (FY 2011-12) Details of Value of Transaction - Rs 1,48,11,955 Value of Transaction - Rs 4,01,98,995 International Total Cost of Operations - Rs Total Cost of Operations - Rs 103,05,54,323 Transaction- 9,71,58,333 Value in Percentage Terms- approx. 4% of Total Cost of Receipt of Value in Percentage Terms-15% of Total Operations technical services Cost of Operations. Despite higher percentage TPO accepted Smaller percentage in current year makes an even more CUP Method in first year of operations. compelling case for CUP as it is a direct method (Refer Transfer Pricing Order for FY 2011-12 on Pg 89 of the (Refer Transfer Pricing Order for FY Merit Appeal Paperbook) 2010-11 enclosed as Annexure 1 to Submission dated 14 December, (For FY 2019-20: Value - Rs 1,50,73477, Percentage is 2023/Pg 623 of Paperbook) approx. 1% of total cost) Inter- Company Refer Copy of Inter Company Agreement Same inter-company agreement continues to apply to Agreement for on page 414-422 of paperbook FY 2011-12 as well. Refer Copy of Inter Company services Agreement on page 414-422. CUP data relied For purpose of benchmarking, Assessee For purpose of benchmarking, Assessee relied upon upon by relied upon Standard daily fee for Standard daily fee for Construction Engineers for Public Assessee: Construction Engineers for Public Work, Work, 2012 issued by Land and Transportation 2011 issued by Land and Ministry of Japan. Transportation Ministry of Japan. (Refer Transfer Pricing Report for FY Refer English Translation of the Japanese Rate 2010-11 on page 881 and 884 ( of the Notification placed on 309 to 310 of the paperbook) Paperbook)
Rates and FY 2010-11 (AY 2011-12) FY 2010-11 (AY 2011-12) hours of Particulars Takenaka Standard Hours Spent Value (in Particulars Takenaka Standard Hours Value (in Assessee Japan Rates from by Japanese INR) Japan Rates Spent by INR) Rate per Japanese Employees Rate per from Japanese hour (Yen) Govt (Yen) hour Japanese Employees (Yen) Govt Senior 7,400 7,075 1,563 66,01,247 (Yen) Manager Level General 6,875 6,875 77 7,44,716 Manager 6,500 6,475 1,192 44,23,005 manager Level Senior 6,875 6,875 1,498 1,44,31,881 Manager Assistant 5,800 5,663 795 26,31,664 Level manager
Level Manager 6,363 6,363 375 33,39,275 Level Staff Level 3,300 4,863 614 11,56,039 (A) Assistant 5,600 5,600 2,104 1,65,07,031 Total 1,48,11,955 manager Level Staff Level 3,800 4,813 6 31,950 (A) Staff Level 3,213 3,213 1,143 51,33,142 (c) Total 4,01,98,995 II. Rebuttal of TPO's contentions in TP Order S.NO. TPO'S REBUTTAL CONTENTION I. Rejection of CUP method due As assessee has paid its AE at a rate that is lower than or equal to the to variation in hourly rates lowest rate, the variation in the third-party rates becomes irrelevant. CUP charged by third parties method does not require an identity in rates/prices charged by all third- (Refer Para 3.2.5 of the TP party comparables but rather the price paid by assessee should be Order on page No.18 of the lower/favourable vis-à-vis the third-party rates. Paperbook) Supporting Case Laws * Dresser-Rand India Pvt. Ltd. Vs. Additional Commissioner of Income Tax (ITA No. 8753/Mum/2010) - variation in hourly rates not a reason to reject CUP Method * Effective Teleservices Pvt. Ltd. Vs. ACIT (ITA No. 2411/AHD/2014) [Refer written submission filed before CIT(A) on page 1029 to 1031 of the Paperbook] II. Rejection of CUP method due The Ld. TPO has merely quoted the extracts from the agreements (with AE to difference in scope of and Non-AE) and has failed to provide any cogent reasons to distinguish the services two. (Refer to Para 3.2.8 of the TP As is clearly evident from perusal of agreement with AE the scope of services order Page 27 of the involves technical services in the nature of construction, drawing and Paperbook) designs etc. which are to be provided by Japanese engineers. Similarly, the rates of engineers taken from the government notification (Land and Transportation Ministry of Japan) are the rates of engineers engaged in the construction/engineering/infrastructure industry (refer to inter-company service agreement on Page nos. 414-422 of the paperbook; refer written submission filed before CIT(A) on page 1031 to 1033 of the Paperbook] III. The Ld. TPO has also i) Time-sheets are normally computer/software generated based on rejected CUP Method on the timesheet data and do not require employee signatures ground that signed ii)The timesheets are documents internal to the Company and there is no law timesheet were not provided or signed by employees iii) Hence, timesheets cannot be rejected on this vague ground. Same format (Refer to Para 3.2.8 of the TP of timesheets accepted by TPO for FYs 2010-11 and 2019-20 where CUP order on ( Page 27 of the Method has been accepted. Paperbook) [Refer written submission filed before CIT(A) on page 1033 to 1034 of the Paperbook] Furnish the basis of calculation by the Ld. TPO under the TNMM method; Ld TPO rejected the CUP Method and instead applied TNMM relying on comparables that were not functionally similar to the Appellant. The comparables were engaged in large turnkey projects such as petrochemical plants, power plants, infrastructure works such as roads, bridges, dams etc. On the other hand, the Assessee specializes in designing and building small to medium-sized factories and industrial buildings for Indian subsidiaries of Japanese companies.
Table - Comparables Relied Upon by TPO in TP Order S. No Company Business Description OP/OR Name 1. ATV Projects Turnkey projects, construction of power plants, -0.66% India Ltd petrochemical, manufacturing equipment for industries such as sugar, fertilizer, etc.
2. Bridge & Roof EPC Turnkey projects, infrastructure projects such 6.42% Co. Ltd. as roads, bridges etc., manufacture of railway wagons, freight containers etc.
3. Engineers EPC services to oil & gas and petrochemical 19.55% India Ltd industries; infrastructure, water and waste management, solar & nuclear power and fertilizers.
Gannon Construction of power plants, petrochemical plants 7.58% Dunkerley & and refineries; infrastructure projects such as roads Co.Ltd. etc.; mechanical works such as steel fabrication, piping work etc.
VKS Projects Turnkey piping, firefighting projects, manufacturing 8.13% Ltd. of chemical equipment and commissioning of chemical plants for oil & gas, petrochemical industries etc.
Jaihind EPC company focussed on oil and pipeline 17.06% Projects Ltd construction, city gas distribution, horizontal directional drilling, water transmission projects, cross-country pipelines etc. 9.68% Mean Thus, applying the above-mentioned mean profit margin of 9.68%, the Ld. TPO proposed a TP adjustment of Rs. 1,26,07,833. The above adjustment was subsequently confirmed by Ld. AO. CIT (A) accepted Assessee's submission and rejected all of TPO comparables except Jai Hind Projects Ltd on the ground that these companies are functionally different (engaged construction of huge infrastructure projects such as roads, bridges etc., manufacture of railway, petrochemicals etc). CIT (A) accepted one of Assessee's comparables Coromandel Engineering Company Ltd engaged in construction of commercial buildings similar to assessee. In all, CIT(A) accepted two comparables, Jai Hind Projects Ltd and Coromandel Engineering Company Ltd. with a mean margin (Operating Profit/ Sales) of 2.14%. Ground 5 of Grounds of Grounds of Appeal (Exclusion of Jai-hind Projects Ltd) On TNMM, Assessee submits that, Jaihind Projects Ltd ('Jaihind') is engaged in large infrastructure projects such laying of pipeline for GAIL, laying of water distribution pipelines, upgrade of water treatment facility for petroleum companies ete (refer Annual Report of Jaihind on Pg 761-762 of Paperbook). The company has clients in water, gas and petroleum sector such GAIL, IOCL, ONGC, EIL etc for whom it carries out pipeline and related infrastructure work (refer Pg 764 of Paperbook). As per annual report it operates in single segment 'Laying of pipes' (pg 788 of paperbook). For above reasons, the Company is functionally different from the Appellant (engaged in design of office building) and deserves to be rejected. III. Rebuttal to Department's Submission dated April 2, 2024 Department's Submission Assessee's Response Application of CUP method Section 92F(ii) of the Act defines an 'arm's length price' as: requires reliance on actual transactions and not on "arm's length price" means a price which is applied or proposed quotation to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Rule 10D(3) (c) of the Rules states: " The information specified in sub-rule (1) shall be supported by authentic documents, which may include the following: ....price publications including stock exchange and commodity market quotations; Therefore, it is clear from above that arm's length price can be the actual price and also a bona-fide quotation/ price proposed to be applied between third parties. Supporting Case Laws Courts have held that CUP Method allows use of quotations provided the quotation furnished is contemporaneous and reliable or authentic (i) PCIT v. Toll Global Forwarding India (P.) [(2016) 66 taxman.com 53 (Del-HC)] (ii) Toll Global Forwarding India (P.) Ltd. v. DCIT Circle-2(1), New Delhi [2014] 51 taxmann.com 342 (Delhi - Trib.) (iii) Louis Dreyfus Commodities India (P.) Ltd v. Deputy Commissioner of Income Tax, Circle-4 (1), New Delhi (iv) Deputy Commissioner of Income-tax, Circle-13(1), New Delhi v. Noble Resources & Trading India (P.) Ltd [2016] 70 taxmann.com 300 (v) Gulf Energy Maritime Services Pvt Ltd [TS-74-ITAT-2016 (Mum)-TP] (vi) Commissioner of Income Tax Vs. Adani Wilmar Limited [TS- 114-HC-2014(GUJ)-TP] (vii) Adani Enterprise Ltd. v. Additional Commissioner of Income- tax, Range 1, Ahmedabad [2019] 111 taxmann.com 196 Reliance on previous year's Courts have drawn a clear distinction between the principle of Transfer Pricing Order cannot 'res judicata' and the principle of 'consistency'. Even if Res- be placed as principle of 'Res judicata is not applicable in tax proceedings, the principle of Judicata' is not applicable in consistency is preferred for the reasons of administration of Tax Proceedings justice and instilling confidence in the taxpayers. Court Rulings on 'Principle of Consistency' in Tax Matters Income Tax Vs. M/s. Dalmia Promoters & Devels. (P) Ltd, ([2015] 5ITR-OL277 (SC) Radhasoami Satsang vs. CIT [193 ITR 321 (SC)] S. I. Rooplal & Another vs. L. G. of New Delhi [AIR (2000) 594 (SC)] CIT Vs A.R.J Security Printers [2003]264ITR276(Delhi HC) M/s Bhansali & Co Vs. Additional Commissioner of income Tax (ITA No. 7352/Mum/2012).”
6. Ld. Sr. DR for the Revenue opposed the submissions of the assessee and has also filed written submissions on behalf of the Revenue. The submissions of Ld. Sr. DR dated 02.04.2024 are reproduced as under:- “Kindly refer to the above-mentioned subject. Brief facts of the case: The assessee i.e. Takenaka India Private Limited has been incorporated to carry on business of providing consultation, designing, engineering and supervising services and to provide construction services through third parties with a service scope of a general contractor. The company is also engaged in a business of importing and exporting building materials, tools, machineries and any kind of item which are related to construction and carried on all other construction related business including project management. The assessee has used CUP Method for AY 2012-13 to benchmark its international transaction pertaining to payment of technical fees. However, the assessing officer for reasons mentioned in TP order rejected the CUP method and applied the TNMM as the Most Appropriate Method. The Assessee preferred an appeal before CIT(A) which was decided in favour of the Revenue. Hence, the Assessee has filed an appeal before Hon'ble ITAT against the above orders. II. Issue wise comments/arguments:
The assessee has raised several contentions against the approach followed by the TPO by rejecting CUP & applying TNMM. The same are discussed in detail in the following paragraphs:
1.
At the outset, the assessee has contended that related party transaction to the cost base with respect to technical services is only 3.91% which constitutes a very small proportion of the total cost base and hence it is meaningless to benchmark the international transaction at entity level using TNMM. It is pertinent to note that the Indian Transfer Pricing Provisions do not prohibit the benchmarking of international transaction at entity level on the basis of its amount or percentage with respect to the total cost. Indian Transfer Pricing regulations have prescribed the applicability of Most Appropriate Method (MAM) which has to be chosen after considering all the facts and circumstances of the case. Hence the plea taken by the assessee that quantum of international transaction is negligible with respect to total cost is not maintainable. The assessee himself has mentioned that the selection of the MAM involves a test of relative merit.
1. Assessee has further contended that the CUP is the most direct method of testing transfer pricing. Reliance has been placed on the UN & OECD guidelines and certain judgement whereby it has been contended that since CUP is the most direct method of testing and the examiner should always consider the feasibility of applying the same. However, the UN & OECD guidelines and judgements quoted by the assessee have also stressed that the CUP can be applied "provided proper comparables are available". In the instant case the assessee has used CUP and compared the international transaction with the rate fixed by the Japanese Government for various grade of technical employees which is in the nature of quotation which is only prescriptive in nature. It is important to note here that the Rule 10B(1)(a) denotes that the CUP has to be one which has actually occurred and not a quotation/ guidance/notification of any sort. In the current case assessee has relied upon a transaction which has actually not occurred and the same does not qualify to be a CUP.
Further the CUP benchmarking requires that the quality of product/services, contractual terms and geographical market in which the transaction has taken place should be comparable. In the instant case the quality of service rendered by the AE is not comparable with the other entities because the assessee claims that its services are best in class and hence the same cannot be compared with the works of general contractors on the basis of quality. (This fact has already been highlighted in TPO order dated 29.1.2016 at para 12.4.2) 3. As regards the geographical market is concerned the rates considered as CUP by assessee are the general rates given by Japanese government for services rendered in Japan. In the instant case services have been rendered to India and since the two different geographical markets are involved the CUP cannot be applied in the instant case. III. Clarification/Information: During the hearing before 'I' Bench ITAT, New Delhi on 07.03.2024 the Hon'ble ITAT has sought clarification on the following issues: -
1. 1. To provide the value of international transaction for A.Y.2011-12, 2012-13 and 2020-21 and value of total transaction of the assessee for the above said period.
2. To provide justification why CUP method has been discarded in A.Y.2012-13 in favour of TNMM and accepted in A.Y.2011-12 and A.Y.2020-21 as MAM.
3. To provide clarification that whether there is any material change in facts of the case/nature of transactions for change in MAM chosen by the TPO in A.Y.2020-21 as compared to AY2012-13.
A letter in this regard was written to TPO-3(2)(1), New Delhi to provide his comments/information on the clarification sought by the ITAT. The TPO has submitted his response to the above queries which is reproduced as under: "With reference to your office letter dated 14.03.2024, the desired information in respect of above- mentioned case as below: AY International International transaction in Total Expenses Transaction the nature of Fee for Technical (in INR) (in INR) Service 2011-12 280625917/- 1,42,43,570/- 97158333/- 2012-13 147103426/- 4,01,98,995/- 1025905729/- 2020-21 214970898/- 1,50,73,477/- 4867991403/- With regard to the material changes in the facts of the case, the following points are submitted for your due consideration: 2. In AY 2012-13, the assessee has benchmarked the transaction related to Fee from Technical Services using the CUP method. The CUP used by the assessee is the Standard daily fee for Construction Engineer for Public Works, 2012, issued by Land and Transport Ministry of Japan. The CUP data was therefore based on a guidance issued by the relevant Japan Authority. 2.1 For AY 2020-21, the assessee benchmarked the said transaction using CUP. However, the CUP used was different from AY 2012-13. In this year, the CUP used by the assessee was the hourly rates actually paid to the Japanese engineers employed by the assessee for the same financial year. 2.2 The difference between the two CUPs is evident from the above. 3 Further, guidance is sought from Rule 10B(1)(a)(i) of the Income Tax Rules, which clearly state that the arm's length price can be determined by using the comparable uncontrolled price method by which the price charged or paid is identified. The same denoted that the CUP has to be one which has actually occurred, and not a quotation/guidance/notification of any sort. In the current case the assessee has relied upon a transaction which has actually not occurred, and therefore the same does not qualify to be a CUP. The CUP was liable to be rejected & TNMM was used. 4 The facts differ in the AY 2020-21 as the assessee was using CUP data based on transaction which actually occurred. The said CUP was liable to be accepted." Thus, it is established on the basis of above reply of the Transfer Pricing Officer that the CUP benchmarking of the assessee is defective for AY 2012-13 and application of TNMM as MAM is justified and proper. Further, it is to be noted that due to such high variations, assessee has done suo moto correction of Rs.22.26 Lacs in respect of all grades except staff(A). After considering agreements (already discussed in TPO order para 12.1), it is seen that the service provided in case of Non AE's and the AEs are totally different. The Services Provided by AEs in this case as per agreement are as under: a) Gathering and Analysis of marketing and Sales Information. b) Negotiation on the terms and Conditions of Contracts c) Preparation for Tender Participation and Support Services for Successful Tender. d) Customer Service and Management. e) Market Research. f) Investigation of Financial Standing of Customer. g) Production Plan. h) Design Supervision. Whereas, the services provided by Non-AEs are as under: - "Scope of work shall include the construction drawings work for our Project, as described here in below: Civil Works The other related works required by Engineer-in-Charge"
Thus, from the above it can be seen that there is a huge variation in the scope of services provided by the AE and that by Non-AE and the agreements do not completely satisfy the benchmarking analysis required for CUP. Further, the time sheets furnished by the assessee are of AE and it is not a running sheet bearing no day to day entries and signatures etc. such a document cannot prove the justification of CUP. The Ld. CIT(A) has also observed that the TPO has largely rejected the TP documentation because the services were rendered in India while the appellant applied the rates prevalent in Japan. Hence, in view of the facts mentioned above, CUP method is not applicable in this case.
2. Principle of Consistency The assessee has contended in his argument that since CUP method was accepted last year, the same should be accepted this year too. In this regard, the TPO relied on the decision in the case of Fulford India Ltd. (2011TI1-81-ITAT- MUM-TP) where it was held that the TPO should apply his mind afresh every year and should not rely on the orders for the preceding years. This year sufficient reasons have been given relating to the fallacious benchmarking approach of the assessee, due to which the change has been made. The TPO has fulfilled the mandate that is placed upon him that the method chosen by the assessee should be rejected only after giving cogent reasons. The Hon'ble CIT (A) has stated that the proceedings under the Income Tax Act, 1961 do not follow the principle of Res Judicata and are decided on the basis of facts and circumstances of the case and the progress made in the transfer pricing laws, rules, and regulations not only in India but also in Abroad. Hence, the argument of the assessee on this ground is not tenable.
The assessee has requested to remove the following comparable in the final list of comparables: 15 | P a g e
S.No. Company Name 1. Jaihind Projects Ltd.
Assessee contended that the company is engaged in the business of construction of small to medium sized factories and industrial buildings/offices on a design cum build basis, mainly for clients that are Indian subsidiaries of Japanese companies. Hence, business of assessee cannot be compared with other general construction companies who are engaged in turnkey projects like petrochemical & chemical plants, power plants, EPC contracts, bridges, highways and such other infrastructure projects. TPO commented that the assessee's argument about the selection of comparables is not accepted as in the TP report itself the assessee has categorized itself as an Engineering, Procurement and Construction (EPC) Contractor in TPSR (Executive Summary Page No.3). It is pertinent to note here that in Assessee's submission dated 22.01.2016, in support of its reimbursement for payment for fee of technical fees it says that Assessee company received specialized services from its AEs which are not available in India. Further, on one hand the assessee claims its services to be the best in its class and on the other is asking for it be compared with the works of general contractors. Hence, this company is a valid comparable and satisfies all the comparability filters applied in the TP benchmarking by applying TNNM method. The above arguments are in addition to the facts marshalled in TPO Order and CIT (A) Order in favour of revenue which are submitted for kind perusal of the Hon'ble ITAT.”
We have heard Ld. Authorized Representatives of the parties and perused the material available on record. The Revenue has not disputed that in the AYs 2011-12 & 2021-22, the method for computation of ALP by the assessee has been accepted by it. The Revenue tried to justify its action by stating that CUP method is applicable on actual transactions but such method cannot be applied on the quotation furnished by the assessee. It is further stated that each year is an independent year. Therefore, principle of res-judicata would not be applicable. Further, it is stated that Rule of Consistency can be deviated if the facts are not identical in the Assessment year under consideration. We have given our thoughtful consideration to the submissions of the parties. Undisputedly, the Revenue accepted the method adopted by the assessee in AYs 2011-12 & 2020-21. Ld.CIT(A) excluded certain comparable as included by the TPO on the ground that the comparable could not have been compared with the assessee. After exclusion of most of the comparable from the final set of comparables, Ld.CIT(A) retained the comparables namely, Coromandel Engineering Company Ltd. and Jai Hind Projects Ltd. from the final set of comparables. The contention of the assessee is that Jai Hind Projects could not have been compared as it is functionally different because it is engaged in the different business sectors i.e. projects related to oil, gas, pipeline and associated with facilities petro-chemical complex etc. Ld.CIT(A) did not accept the objection, stating that the nature of services provided by the AEs of the assessee are similar. In our view, the assessee has successfully demonstrated that the Ld.CIT(A) committed an error in retaining M/s. Jai Hind Projects Ltd. as one of the comparables as it operated in different field. However, considering the fact that the Revenue itself has accepted CUP method as most appropriate method in Financial Years 2010-11 and 2019-20. There is no substantial change into facts and circumstances in this year. The contention of the Revenue that CUP method would not be applicable in respect of hypothetical quotation prices but same should be applicable in respect of real transaction is negated by the binding precedent rendered in the case of PCIT vs Toll Global Forwarding (P.) Ltd. [2016] 66 Taxman.com 53 (Delhi High Court) by applying the finding of Tribunal rendered in the case of Toll Global Forwarding India (P.) Ltd. vs DCIT [2014] 51 taxmann.com 342 (Delhi-Trib.) by observing as under:- “As far as the present appeals are concerned, the Court finds the impugned order of ITAT to be well-reasoned and researched. The legal principles governing the determination of ALP in a TP adjustment exercise have been expounded lucidly by ITAT in impugned order”
The Hon’ble Co-ordinate Bench of this Tribunal in the case of Toll Global Forwarding India (P.) Ltd. vs DCIT (supra) held as under:- 25. “In effect, thus, it would appear that as long as one can come to the conclusion, under any method of determining the arm's length price, that price paid for the controlled transactions is the same as it would have been, under similar circumstances and considering all the relevant factors, for an uncontrolled transaction, the price so paid can be said to be arm's length price. As we have noted earlier in this order, the price need not be in terms of an amount but can also be in terms of a formulae, including interest rate, for computing the amount. In any case, when the expression ' price which....would have been charged on paid" is used in rule 10BA, dealing with this method, in this method the place of "price charged or paid", as is used in rule 10B(1)(a), dealing with CUP method, such an expression not only covers the actual price but also the price as would have been, hypothetically speaking, paid if the same transaction was entered into with an independent enterprise. This hypothetical price may not only cover bonafide quotations, but it also takes it beyond any doubt or controversy that where pricing mechanism for associated enterprise and independent enterprise is the same, the price charged to the associated enterprises will be treated as an arm's length price. In this view of the matter, the business model said to have been adopted by the assessee, in principle, meets the test of arm's length price determination under rule 10BA as well.”
We therefore, respectfully following the binding precedents (supra), find merit in submissions of the assessee that under the facts of present case, CUP method is the most appropriate method for computation of ALP. Another objection of Revenue is with regard to applicability of CUP method that the variation payment made on hourly base. In this regard, the contention of the assessee is that since it paid the lowest of third parties hence, such variation becomes irrelevant. In support, reliance is placed on the decision of Hon’ble Co-ordinate Bench rendered in the case of Toll Global Forwarding India (P.) Ltd. vs DCIT (supra). Coupled with the fact the Revenue failed to demonstrate as to why Rule of Consistency should not be followed in the present case. Strangely, the rates quoted in the quotations are not acceptable but same price actually claimed to have been paid is accepted by the Revenue in other years. And on such basis, CUP method is treated to be appropriate in the AYs 2011- 12 and 2020-21. In the light of discussion herein before, the AO is hereby directed to apply CUP method for determining the ALP and if found in order, would delete the impugned addition. Grounds raised by the assessee in this appeal are accordingly, allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes only.
Order pronounced in the open Court on 29th May, 2024.