THERMAX BABCOCK & WILCOX ENERGY SOLUTION LIMITED,MUMBAI vs. ADDL/JT/DY/CIT/ASSTT/ITO/NFAC, DELHI, DELHI

3 Disallowing the depreciation of INR. 2,03,72,076 claimed by the Appellant on the technical know- how fees which was capitalized in the books of accounts for AY 2011-12 and subsequently. computing the arm's length price of technical know-how as NIL. Not appreciating the commercial and economic circumstances under which the payment of technical know-how fees was made to its associated enterprises and the benefits accruing to the Appellant over the period of amortization Passing the order with a pre-determined mind set to disallow the depreciation claimed on the technical know-how fees without fresh application of mind and without giving due cognizance to the submission made during the proceedings and thereby completely relying on the approach followed by the Revenue Department in earlier years. Prayer The Appellant prays that the TP adjustment on account of disallowance of depreciation on the technical know-how fees amounting to INR 2.03,72.076 be deleted Ground No. 3 On the facts and in the circumstances of the case and in law, the Learned AO/DRP have erred in enhancing the income of the Appellant by INR 97,93,00,000 by treating the provision made for loss on impairment of assets as operating in nature and thereby holding that the international transactions of the Appellant pertaining to the sale of project and services its Associated Enterprises are not at arm's length. Prayer The Appellant prays that the provision made for impairment of assets should be treated as non- operating in nature On the facts and in the circumstances of the case, the Learned AO/DRP have erred in considering "interest income and interest expenses incurred by the Appellant as operating in nature. In doing so the Learned AO/DRP recomputed the operating margin of the Appellant and made TP adjustment of INR 97,93,00,000 by holding that the international transactions of the Appellant Page 3 Thermax Babcock & Wilcox Energy Solutions Ltd. Vs. DCIT, Circle 2(3)(1) pertaining to the sale of project and services to its associated enterprises is not at arm's length Prayer The Appellant prays that 'interest income and interest expenses should be considered as non- operating in nature for the purpose of computing the operating margin of the appellant Ground No. 5 On the facts and in the circumstances of the case, the Learned AO/DRP have erred in rejecting certain functionally comparable companies selected by the Appellant in its TP Study Report for AY 2017-18 solely on the ground of fluctuating margins. Prayer The Appellant prays that the comparable companies identified by the Appellant in its TP study report should be considered for the purpose of conducting comparability analysis. Ground No. 6 On the facts and in the circumstances of the case, the Learned AD/DRP has erred in not allowing the economic adjustment on account of difference in level of working capital of the Appellant and that of the comparables companies while determining the arm's length price of international transactions of sale of project and services. Prayer The Appellant prays that the economic adjustment for the difference in working capital should be allowed Ground No. 7 On the facts and in the circumstances of the case, the Learned AO/DRP have erred in not allowing the economic adjustment on account of difference in level of capacity utilization of the Appellant and that of comparable companies while determining the arm's length price of international transactions of sale of project and services. Prayer The Appellant prays that the economic adjustment for the difference in capacity utilisation should be allowed Corporate Tax Grounds Ground No. 8 On the facts and in the circumstances of the case and in law, the Learned AO/DRP have erred in Page 4 Thermax Babcock & Wilcox Energy Solutions Ltd. Vs. DCIT, Circle 2(3)(1) 8.1 8.2

3 Enhancing the income of the Appellant by INR 1,07, 18.54,148 under section 56(2)(viib) of the Act without appreciating the facts of the case vis- à-vis the applicability of the section. Upholding the enhancement of INR 1,07,18 54,148 under section 56(2)(viib) of the Act, although the provisions of section 56(2)(viib) of the Act cannot be invoked in the fact of the present case Rejecting the method of valuation adopted by the Appellant and adopted a different method for the purposes of determining the Fair Market Value ('FMV) of shares even though it is at the option of the Appellant to choose the method of valuation as per the provisions of section 56(2)(viib) of the Act read with rule 11UA of the Income-tax Rules, 1962 Prayer The Appellant prays that the addition made under section 56(2)(viib) of the Act is bad in law and deserves to be deleted. Ground No. 9 On the facts and circumstances of the case and in law, the Learned AO/DRP have erred in 9.1

2 Prayer Disallowing an amount of INR 9,72,450 under section 36(1)(va) read with section 2(24)(x) of the Act towards employees provident fund and ESIC contribution which was deposited before the due date of filing of return of income. Upholding that the amended law is applicable to the facts of the present case even though the amended law is applicable prospectively i.e from 01.04.2021 The Appellant prays that the disallowance made under section 36(1)(va) r.w.s 2(24)(x) of the Act is unwarranted and deserves to be deleted Ground No. 10 On the facts and circumstances of the case, and in law, the Learned AO/DRP have erred in disallowing interest paid of INR 3,16,643 under section 201(1A) of the Act on account of delayed payments of taxes deducted at source Prayer The Appellant prays that the disallowance made under section 201(1A) of the Act is unwarranted and deserves to be deleted Ground No. 11 On the facts and circumstances of the case, and in law, the NFAC has erred in initiating penalty Page 5 Thermax Babcock & Wilcox Energy Solutions Ltd. Vs. DCIT, Circle 2(3)(1) proceedings under section 270A of the Act. Prayer The appellant prays that the Ld AO be directed to drop penalty proceedings initiated against the Appellant under section 270A of the Act. Ground No. 12 On the facts and circumstances of the case, and in law, the NFAC has erred in initiating penalty proceedings under section 271AA of the Act. Prayer The appellant prays that the Ld AO be directed to drop penalty proceedings initiated against the Appellant under section 271AA of the Act." Fact in brief is that return of income filing nil income was filed on 31.11.2017. The assessee as a joint venture between Thermax Limited (TL) and Babcock & Wilcox India Holding (BWH) was incorporated on 26.06.2010 to manufacture subcritical boilers and supercritical boilers. The case was subject to scrutiny assessment and in order to determine the arm's length price in relation to international transactions entered into by the assessee with the associate enterprises the assessing officer referred the case to the Transfer Pricing Officer u/s 92CA(1) of the Act. The TPO passed order dated 27.01.2021 u/s 92CA(3) of the Act and proposed Arm's Length Price (ALP) adjustment of Rs.99,96,72,076/- on account of international transactions of the assessee. The assessing officer issued the draft assessment order dated 12.04.2021 u/s 143(3) r.w.s 144C of the Act after considering the TPO order. The total income of the assessee was computed as Rs. Nil under normal provisions and income/loss u/s 115JB at (-) Rs.395,02,13,243/-.

Aggrieved, the assessee filed objection before the DRP. The DRP has rejected the objection filed by the assessee vide order u/s 144C(5) of the Act dated 28.01.2022. Further facts of the case are discussed while adjudicating the ground of appeal filed by the assessee as follows:- Page 6 Thermax Babcock & Wilcox Energy Solutions Ltd. Vs. DCIT, Circle 2(3)(1) Ground No.1: This ground is general in nature therefore not required any adjudication. Ground No. 2: Transfer Pricing (TP) adjustment in respect of depreciation clamed on technical know fees capitalized in AY 2011- 12:

During the course of assessment the assessing officer noticed that assessee had capitalized Rs.30,43,17,000/- in respect of technical know how fees paid over 5 years based on the License Agreement dated 18.08.2010 entered into between BWPGG and the assessee. During the course of assessment proceedings for the assessment year 2011-12 the TPO made an adjustment of Rs.30.43 crores to the income of the assessee by treating ALP of transaction at nil. However, the Dispute Resolution Panel held that since assessee had claimed depreciation and not the full amount in books of account, therefore, the adjustment made by the TPO was restricted to the amount depreciation claimed by the assessee. During the year under consideration the assessee has claimed depreciation of Rs.203,72,076/- therefore, the DRP restricted adjustment to the said amount of depreciation.

During the course of appellate proceedings before us at the outset the ld. Counsel submitted that issue on identical fact has been decided in favour of the assessee in assessment year 2011-12 by the ITAT, Mumbai vide ITA No. 1735/Mum/2016. On the other hand, ld. D.R is fair enough to could not controvert that impugned issue has been decided in favour of the assessee by the ITAT as referred above.

Heard both the sides and perused the material on record. With the assistance of ld. Representative we have perused the decision of the ITAT. The relevant part of the decision is reproduced as under: Page 7 Thermax Babcock & Wilcox Energy Solutions Ltd. Vs. DCIT, Circle 2(3)(1) “26. Considered the rival submissions and material placed on record, we observe that the assessee (JV) was formed by the groups viz, Thermax Ltd and B&W. These two group are engaged in the power generation and suppliers of various types of boilers to the Indian entities. Thermax Ltd customizes the requirements of the Indian entities and habitually buys various types of boilers from B&W Group for this purpose. In the earlier occasion, TL has acquired the quotation for acquiring the technical knowhow from the B&W group to manufacture of super critical and sub critical boilers in India for a lumpsum fees of U 7.6 millions. As per the new industry policy of the government of India and in order to take the benefit of government policy, they formed a joint venture and based on the policy requirement, they formed the joint venture, in the form of mutual investment in the ratio of 51:49 between the groups. Based on the above joint venture, they entered into new agreement to supply the technology knowhow to the assessee, they renegotiated the transfer of technology knowhow in the new agreement and agreed for the reduced license fees of U 6.5 millions payable in the five equal installments.

Based on the above developments, both the entities become associated entities as per the definition of Sec 92C of the Act. The transaction with the assessee company becomes reportable international transactions and they have submitted the transfer pricing study report and have to bench mark the same. While doing so, they have adopted the CUP method by considering the earlier agreement with the B&W group as comparable with the present agreement with the assessee. This method of adoption of earlier agreement under CUP method was rejected by the authorities below and treated the ALP as nil. After considering the submissions and treatment by the tax authorities below, we are of the opinion that both the proposed methods are not proper for the reason that there is requirement for transfer of technology from B&W group by referring to the first agreement of transfer of technology between the groups, however it was not materialize but it shows that there is requirement of transfer of technology to the Indian entity i.e., TL. In our view, the first agreement proposed between the groups are indication that the requirement to transfer the relevant technology in India for the highly technical knowhow of critical and subcritical boilers to manufacture the same in India. This proposed agreement may be considered for justification of requirement but cannot be used as a tested transaction for the transfer of technology in the newly formed joint venture, since in this case, the character of ownership has changed, there involves the mutual benefit, wherein the interest of both the groups are involved. It is difficult to consider the share holder activities / interest in this transaction, as there is no material submitted before us like whether there is capital investments made by both the groups or mere transfer of technology between them. As such, we are of the opinion that there is certainly requirement of such transfer of technology from the B&W group to the Indian entities ie., to either Thermex Ltd or to the J/V (Assessee). With the above conclusion, we are of the view that the same proposed agreement cannot be used for the CUP method as tested transaction considering the fact that the offer was to Indian entity and present agreement to transfer the technology to the assessee are two different offers with the two different commercial objects between the groups. Secondly, there was no bench mark made for the first proposal/agreement. Even though these transactions are unique in itself, still, the bench marking has to be done for the commercial and organizational purpose keeping in mind the aspect of controlled transaction. If we consider the uniqueness of the transaction, all the international transactions are different and unique in itself. Therefore, we reject the method proposed by the assessee. Page 8 Thermax Babcock & Wilcox Energy Solutions Ltd. Vs. DCIT, Circle 2(3)(1)

At the same time, we are also not in favor of the treatment by the tax authorities that the transaction is considered as international but the ALP for payment of technical fees as NIL. As discussed above, there is requirement and necessity to transfer the technical knowhow and there has to be bench marked as per one or more of the accepted method proposed in the section 92C of the Act and relevant rules. Therefore, we are inclined to remit this issue back to the file of AO/TPO to bench mark the same as per the accepted methods prescribed in the Act after giving opportunities of being heard to the assessee. Even the assessee is directed to submit the TPSR after adopting one or more of the accepted method of determining the ALP. Accordingly, the grounds raised by the assessee are allowed for statistical purpose." Following the decision of the ITAT as referred above we remit the issue back to the file of the AO/TPO for the purpose of benchmarking the same as directed in the order of the ITAT. Therefore, ground no. 2 is allowed for statistical purpose. Ground No. 3 to 7: TP adjustment in respect of the international transaction pertaining to sale of project and services to the Association Enterprise (AE):

The assessing officer noticed that during the year under consideration the assessee had entered into the following transactions with its associate enterprises: Transaction Method adopted TNMM Profit level Indicator (PLI) Amount in Rs. Operating profit/Operating cost (OP/TC) [TC refers to operating cost] 2,74,28,91,516 Sale of Goods Consultancy Services availed towards rework charges on site. Do Do 18,01,68,181 Consultancy services obtained. Do Do 28,66,027 Technical Services provided Do Do 18,70,487 Reimbursement of expenses to the AE Do Do 3,41,47,975 The submission filed by the assessee pertaining to arm's length price of the transaction were analyzed by the TPO with reference to arm's length nature of the inter-company transactions between M/s Thermax Page 9 Thermax Babcock & Wilcox Energy Solutions Ltd. Vs. DCIT, Circle 2(3)(1) Babcock & Wilcox Energy Solutions Pvt. Ltd. (TBWES) and its AEs and gave the following findings:-