DCIT, CIRCLE -2(1), HYDERABAD vs. TPSC(INDIA) PRIVATE LIMITED, HYDERABAD
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Income Tax Appellate Tribunal, HYDERABAD BENCHES “B”, HYDERABAD
Before: SHRI RAMA KANTA PANDA & SHRI K. NARASIMHA CHARY
आदेश / ORDER PER K. NARASIMHA CHARY, J.M: Aggrieved by the final assessment order passed consequent to the directions of Hon'ble Dispute Resolution Panel, Bengaluru (“DRP”), in the case of TPSC (India) Private Limited, (“the assessee”) for the assessment year 2017-18, under section 143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (for short “the Act”), assessee filed this appeal.
ITA-TP No. 225/Hyd/2022
Brief facts of the case are that the assessee was established in 1998 as a subsidiary of Toshiba Plant Systems & Services Corporation, Japan (‘TPSC Japan’ and along with its affiliates referred as ‘TPSC Group’). TPSC group globally carries out integrated operations ranging from planning and engineering to procurement, construction and field services which include a broad range of products and services viz., infrastructure and environmental facilities for commercial and private power generation facilities; renewable power generation and substation facilities for hydraulic, solar, geothermal and other forms of energy, various types of industrial plants and installations, water supply and sewage facilities, communication facilities; Airports, Roads and Railways. TPSC India is engaged in providing engineering, consulting, designing, construction management, site work, operations & maintenance, local supplies and other construction related activities in the field of power generation, transmission & distribution etc. TPSC India conducts its operations in India and neighboring regions of Asia.
For the assessment year under consideration, the assessee filed its return of income on 29/11/2017, declaring loss of Rs. 41,93,38,198/-. In view of the international transactions entered into by the assessee during the financial year 2016-17, reference under section 92CA of the Act was made to the learned Transfer Pricing Officer (learned TPO) . Learned TPO proposed the adjustments for the transactions of provision of engineering services and receipt of services, reimbursement of expatriates salary, bonuses and PF cost and interest on trade receivables. Learned Assessing Officer after taking into consideration the adjustments proposed by the learned TPO, proposed further adjustments on account of disallowance of
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miscellaneous expenses, capital loss, provision for loss on project and CSR expenses.
Assessee filed objections before the learned DRP and the learned DRP disposed of the objections by way of directions issued on 23/02/2022. Assessee is therefore, before us in this appeal on as many as 12 grounds, but at the time of arguments submitted that grounds No. 1 and 2 are general in nature and grounds No. 11 and 12 are consequential, and do not require any specific adjudication. He further submitted that the assessee is not pressing grounds No. 3, 4, and 7. He therefore submitted that what needs to be adjudicated in this appeal is only in respect of the action of the learned TPO in not restricting or proportionating the transfer pricing adjustments to the international transactions with the AEs only, pertaining to provision of engineering services and receipt of technical advisory services, covered by ground No. 5, addition in respect of reimbursement of expatriate salary, bonus and the provident fund costs covered by ground No. 6, disallowance of miscellaneous expenditure covered by grounds No. 8 and 9, and lastly provision for losses on project covered by ground No. 10. Now, we shall deal with these grounds which needs adjudication in this matter hereunder.
Coming to ground No. 5, the facts are that the assessee company provided engineering services to Toshiba Plant Systems and Services Corporation and the TPSC (Thailand) Company Limited amounting to Rs. 8,55,58,994/- and the assessee computed segmented operating margin on cost from rendering of designing engineering and other related services to its AE taking the operating revenue at Rs. 8,55,58,994/- and the operating cost at Rs. 7,76,68,929/-. Grievance of the assessee is that the learned
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Assessing Officer has taken the total revenue and total expenditure at Rs. 4,27,60, 39,978/- and Rs. 4,73,85,15,330/- respectively for the purpose of determining the Arm’s Length Price (ALP) which renders the revenue and cost relatively to the international transaction to 2.06% and 1.64% respectively.
Learned AR submitted that in terms of the mandate of Rule 10B of the Income Tax Rules, 1962 (“the Rules”), for computing the net margin from the international transaction, all the incomes and the expenses which have relationship with the international transaction alone should be considered, and the computation of net margin at entity level by the authorities is contrary to the provisions of Rule 10B of the Rules. He placed reliance on the decisions reported in Adecco India (P.) Ltd vs. DCIT 148 taxmann.com 374, CIT vs. Thyssen Krupp Industries India (P.) Ltd., 70 taxmann.com 329, CIT vs. Tara Jewels Exports (P.) Ltd., 80 taxmann.com 117 and other decisions, in support of his argument that the adjustment which is mandated by Rule 10B is only in respect of international transaction and not transactions entered into by the assessee with independent unrelated third parties. Learned AR further submitted that the assessee computed the operating margin at transaction level, by taking the revenue from AEs and costs in relation to the revenue earned for computing the operating margin, and the details regarding the apportionment of expenses were submitted by the assessee before the learned TPO and the learned DRP, and such details now form part of the paper book vide page Nos. 251 to 258 of the paper book, but unfortunately the authorities did not take those details into consideration.
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Learned DR heavily relied upon the orders of the authorities and submitted that the segmental data in relation to profits earned by the assessee from AEs as well as non-AEs was not available and therefore, the authorities are justified in considering the entity level figures for computing the operating margin.
We have gone through the record in the light of the submissions made on either side. On a perusal of the paper book, we find that vide Annexure-A to the submissions made on 08/01/2021 before the DCIT, the assessee submitted the details of margin computation of the TPSC India for provision of the services to the AEs and such details were available before both the authorities.
In the case of CIT vs. Tara Jewels Exports (P.) Ltd., [2017] 80taxmann.com117 (Bombay) the grievance of the assessee before the Tribunal was in respect of the margin of 4.79% being applied in respect of all the sales of the assessee, and not restricted to the international transactions entered into by with AEs. While referring to the provisions of Chapter X of the Act, the Hon'ble Bombay High Court held that the adjustment which has to be done to arrive at ALP is only in respect of the transaction with AEs. In the case of Adecco India (P.) Ltd. vs DCIT, [2023] 148taxmann.com374 (Bangalore - Trib.), the assessee filed net operating margin analysis of AE and non-AE segment in its documentation maintained under section 92D, but learned TPO computed margins of assessee at entity level and not considered segment margin analysis given by assessee in TP documentation, the Tribunal held that the learned TPO should consider margin analysis as provided by assessee relating to AE
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segment alone. For the sake of completeness, we reproduce hereunder the relevant paragraphs,-
“18. In this regard, we find that the assessee had entered into various transactions with its AEs during the year. The Assessee had adopted the MAM applicable for each type of transaction separately as listed out appropriately against the type of transaction as per the documentation maintained under section 92D of the Income-tax Act, 1961. The reason for adopting each of the method is given in detail therein. The TPO rejected the ALP determined by the assessee and the MAM adopted by the assessee for each of the transaction and instead adopt TNMM as the MAM for all the transactions entered into with AEs by the assessee. 19. This is a fundamentally faulty way of assessing the Arms' Length Price ("ALP") of the international transactions undertaken by the assessee with AEs since the Revenue transactions with AE constitute only 0.75% of the total "Revenue from Operations" earned by the assessee and expenditure transactions with AE constitute only 0.62% of total expenses incurred. Hence, to apply TNMM on an overall basis at the entity level is against the basic canons of transfer pricing law. 20. The assessee had already furnished to the TPO that the net operating margin analysis of the AE and non-AE segment in the TP documentation. As can be seen from therein, the net operating margins of the AE segment is 20.20%. The assessee requested the TPO to consider this instead of looking at the overall margins of the company which includes negligible transactions with AEs. 21. In page 3 of the order, the TPO has computed the net operating margins of the assessee stating that it is "segmental financials of the taxpayer as computed by the TPO". However, the TPO has computed the margins of the assessee at the entity level and not considered the segment margin analysis given by the assessee in the TP documentation nor has computed the segmented margin himself. The TPO had wrongly made transfer pricing adjustment with reference to the total costs incurred/revenue earned by the Company, without considering the facts that it includes substantial revenue and expenses with non-AEs. The TPO then proportionately reduced the adjustment to AE transactions. 22. The TPO has not assigned any reasons in the order for not considering the allocation of expenses done by the taxpayer. Moreover, certain expenses are incurred exclusively for non-AE transactions. It is not appropriate to allocate the same to AE
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segment also based on turnover since it has nothing to do with the AE business segment. 23. Certified segmental margin analysis was furnished to the Hon'ble DRP during the course of the proceedings before them on 3rd and 10th June 2022. (Pages 3726-3728 of paper book 9). The DRP ignored this and stated that there is no audited segmental data available in para 2.3.4 of the DRP order dated 28th June 2022. 24. The DRP has also stated in para 2.3.3 of its order that "The entire argument of the assessee is theoretical because we will not be in a position to get information about the comparables at transaction level and hence, no comparison can be carried out at the transaction level." The DRP has also stated further in para 2.3.4 that "Even as per TP study of the assessee there is no segregation of profits between the AE transactions and non-AE transactions. The assessee has not computed the margins for the AE transactions which are reliable. Hence it is not possible to arrive at net profits for AE and non-AE transactions separately." 25. These observations of the Hon'ble DRP are factually incorrect as the assessee had filed the net operating margin analysis of the AE and non-AE segment in its documentation maintained u/s 92D of the Income-tax Act, 1961. A certified statement of the same was subsequently filed before the Hon'ble Panel on 3rd and 10th June 2022. (Pages 3726-3728 of paper book 9). 26. It is relevant to note the provisions of Rule 10B(1)(e) of the Income-tax Rules, 1962 ('the Rules') which provides for the manner of determination of ALP of an international transaction while applying TNMM that reads as under:
i.[10B. Determination of arm's length price under section 92C. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: ii.(a)……..….. iii.(e) transactional net margin method, by which — (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard of any other relevant base;
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iv.Clause (i) of Rule 10B(1)(e) of the Rules specifically provides that net profit margin realized by an enterprise from an international transaction is to be computed as the law mandates that whenever TNMM is applied or sought to be applied, as a 1st step the profit margin realized from the international transaction is to be computed. Accordingly, undertaking a companywide analysis of the profitability is not in compliance the provisions of the Income-tax Act, 1961 (the Act). More so when the revenue transactions with AE is less than 1% of total revenue. 27. Further, the guidance from OECD Transfer Pricing Guidance on Multinational Enterprises and Tax Administrations (2017) v."3.42 An analysis under the transactional net margin method should consider only the profits of the associated enterprise that are attributable to particular controlled transactions. Therefore, it would be inappropriate to apply the transactional net margin method on a company-wide basis if the company engages in a variety of different controlled transactions that cannot be appropriately compared on an aggregate basis with those of an independent enterprise. Similarly, when analyzing the transactions between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when profit margins of an independent enterprise are used, the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise." 28. Hence, the guidance from the Indian legislation on transfer pricing as well as the global guidance on transfer pricing, which is followed by several countries, voices out the same principle of benchmarking only the profitability of the international transactions and not the profitability of the whole company. 29. The Hon'ble Bombay High Court in the case of CIT v. Thyssen Krupp Industries India (P.) Ltd. [2016] 70 taxmann.com 329, wherein the Hon'ble High Court observed as under: vi."…… We find that in terms of Chapter X of the Act, re-determination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in
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respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act." 30. Likewise, the Hon'ble Co-ordinate Bench, Bangalore, in the case of Genisys Integrating Systems (India) (P.) Ltd. v. Dy. CIT [2012] 20 taxmann.com 715/53 SOT 159 (Bang. - Trib.) and several other judgements have also explicitly held that while determining the ALP, transfer pricing adjustments should be restricted to only international transactions between AEs, and observed as under: vii."…... Chapter-X of IT Act relates to special provisions relating to avoidance of tax and sec. 92 therein relates to computation of income from international transactions having regard to ALP. Thus, it can be seen that only international transactions between the associated enterprises either or both of whom are non-resident are to be computed having regard to ALP. This issue is also covered by the decisions relied upon by the learned counsel for the assessee. Accordingly, the AO is directed to make the transfer pricing adjustments by restricting the adjustments to the transactions of the AE only by adopting the operating revenue and operating costs of these transactions only." 31. Similar views have been expressed by: The Hon'ble Bombay High Court in the case of CIT v. Hindustan Unilever Ltd. [2016] 72 taxmann.com 325; The Hon'ble Tribunal, Hyderabad Bench, in the case of Alumeco India Extrusion Ltd. v. Asstt. CIT [2013] 38 taxmann.com 371/[2014] 148 ITD 432 (Hyderabad - Trib.) and The Hon'ble Tribunal, Delhi Bench, in the case of Cornell Overseas (P.) Ltd. v. Dy. CIT [2017] 78 taxmann.com 76. 32. The assessee had furnished the net operating margin analysis of the AE and non-AE segment in pages 67-68 of the TP documentation. As can be seen from therein, the net operating margins of the AE segment is 20.20%. (Pages 112-113 of Paper book 1). There was no reason for the TPO to look at the overall margins of the company which includes substantial transactions with non-AEs and to make a transfer pricing adjustment with reference to the total costs incurred/revenue earned by the Company, which includes considerable expenses and sales with non-AEs. This is factually wrong. It may also be noted that the AO has not assigned any
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reasons for ignoring the margin analysis and allocation of expenses of AE and non-AE segment furnished by the appellant. The AO has also not stated as to why he had redone the margin analysis by allocating all expenses on turnover basis rather than accept the basis of allocation followed by the assessee. 33. For the reasons stated above, we allow ground No. 3 raised by the assessee and direct the AO/TPO to consider the margin analysis as provided by the assessee relating to AE segment alone. In view of the decision on ground Nos.2 and 3, grounds 4 to 20 raised by the assessee become academic and hence not adjudicated.”
Apart from these, learned AR submitted that for the assessment year 2020-21, while computing the operating margin on cost for rendering of the same engineering and other related services, the learned TPO considered only the segmental operating margin on cost, but not at the entity level. He, therefore, submitted that the same view may be taken for this year also. This fact also requires verification.
In the circumstances and after hearing the learned DR, we are of the considered opinion that the details furnished by the assessee in respect of margin computation for provision of services to the AEs by the assessee, vide Annexure-A to the submissions made before the learned TPO on 08/01/2021 deserves consideration and for such purpose, we restore the issue to the file of the learned Assessing Officer/learned TPO, who will consider the same and take a fresh look on this issue, after affording an opportunity to the assessee. Ground No. 5 is accordingly treated as allowed for statistical purpose.
Ground No. 6 of the appeal relates to the adjustment of Rs. 11,53,67,386/- towards reimbursement of expatriates’ salary, bonus and the provident fund costs. According to the assessee, assessee incurred
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these expenses towards reimbursement inasmuch as the expenses which were to be incurred by the assessee, were incurred by the AE on behalf of the assessee for administrative convenience, but as a matter of fact, the expatriates directly working under the control of the assessee and the expenses of salary, bonus and the provident fund are to be incurred by the assessee alone.
Learned TPO recorded that when requested to furnish the complete details of the employees, their place of work, years of service they have put in and terminal benefits availed by them, and also the copies of appointment letters of all the employees, attendance register for the relevant period under consideration along with the latest salary details at the time of expatriation, the assessee failed to furnish the same and, therefore, the learned TPO treated that no such expenses were actually incurred.
In the impugned order, the learned DRP recorded that the plea of the assessee that the entire amount represented reimbursement was not proved with reference to any proper evidence and documentation, and further the assessee was called upon to furnish the copy of the deputation agreement, the same was not furnished. Learned DRP, therefore, held that the provision of services of technical or other personnel, would as such constitute fee for included services under Article 12(4) of the India Japan Double Taxation Avoidance Agreement.
Learned AR submits that the copy of the deputation agreement is now available with them and they are ready to furnish the same and therefore an opportunity may be granted to the assessee to produce such
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agreement before the authorities and get the matter disposed of on merits. On a careful consideration of the matter, and also in view of the fact that the earlier issue was restored to the file of the learned AO/learned TPO, we deem it just and proper to restore this issue also to the file of the learned AO/learned TPO with a direction to the assessee to produce all the requisite documents sought by the learned TPO on the earlier occasion and cooperate with the proceedings. Ground No. 6 is accordingly treated as allowed for statistical purpose.
Grounds No. 8 and 9 relate to the disallowance of miscellaneous expenditure to the tune of Rs. 1,09,86,866/- considering the same as prior period expenses and also capital in nature. According to the assessee, for the purpose of construction of a temporary site office, the assessee entered into a service contract and incurred an expenditure of Rs. 1,09,86,866/- on account of site mobilization work subcontracted and submitted the invoices. According to the learned AO/learned TPO such expenses related to the prior period are capital in nature. So also, the learned DRP.
Learned AR submitted that the learned DRP considered the dates of the work order to reach a conclusion that such expenditure relates to the prior period, but as a matter of fact pursuant to the work orders, that were issued in the earlier year, the work was completed during the current year and as evidenced by the invoices dated 04/04/2016, 20/06/2016, 19/08/2016 etc., to be found in the paper book from page Nos. 838 to 848 of the paper book, such an expenditure relates to the current year only. Learned DR relied upon the orders of the authorities only.
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On a perusal of the invoices, the copies of which are to be found at page Nos. 838 to 848, we find force in the argument of the learned AR and since this matter requires verification at the end of the learned AO/learned TPO, this issue is also restored to the file of the learned AO/learned TPO to verify the invoices and take a view as to the nature of this expenditure. Grounds No. 8 and 9 are also accordingly treated as allowed for statistical purpose.
Now coming to the last aspect of provision for loss on projects, covered by ground No. 10, case of the assessee is that assessee debited Rs. 19,46,890/- in Profit and Loss Account (P&L Account) in Accounting Standard 7-Construction Contract, and claimed the same as a provision for loss on a project under the head miscellaneous expenditure. When the learned Assessing Officer proposed to disallow the same, the assessee submitted that it is following the Accounting Standard-7-Construction Contract describes and lays out the accounting treatment in respect of the revenue and costs in relation to a construction contract and it has to be used in for the accounting of construction contracts in the financial statements of the contractors. Assessee further submitted that where it is expected that the total contract costs will exceed total revenue from such contract, the expected losses should be immediately recognised as expenses and such losses shall be determined immediately irrespective of the fact whether the work has commenced on the contract or not, or the stage of completion, or the number of profits expected to arise on other contracts which are segmented as explained.
Learned AR further submitted that as per para 22.2 of ICDS-III, on construction contracts contract revenue and cost associated with the
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construction contract, which was commenced on or before 31/03/2016, but not completed by the said date, shall be recognised based on the method regularly followed by the person prior to the previous year beginning on 1st day of April, 2016.
Learned DR submitted that the assessee did not bring it to the notice of the learned DRP about the stipulation in para 22.2 of the ICDS-III and therefore the learned DRP did not have any opportunity to examine the issue in the light of the stipulation under ICDS-III.
In this situation, we deem it just and necessary to give an opportunity to the assessee to take such a plea before the learned DRP and to have the facts verified by the learned DRP in the light of ICDS-III. For this purpose, we restore this issue to the file of the learned DRP and the assessee will make all the submissions relating to this aspect to the learned DRP, and considering the submissions, facts and material, learned DRP will take a view according to law. Ground No. 10 is also treated as allowed for statistical purpose.
In the result, appeal of the assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on this the 18th day of March, 2024. Sd/- Sd/- (RAMA KANTA PANDA) (K. NARASIMHA CHARY) VICE PRESIDENT JUDICIAL MEMBER Hyderabad, Dated: 18/03/2024 TNMM
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