IT/ILT: Where in order to prove that international transactions were carried out at arm's length price, assessee had submitted audited segmental accounts in respect of its associated enterprise and non-associated enterprises, in view of fact that on basis of said accounts difference between ALP determined by TPO in respect of AE transactions and ALP charged by assessee was less than 5 per cent, benefits of proviso to section 92C(2) was available to assessee and, therefore, impugned addition made by authorities below to assessee's ALP was to be deleted
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[2013] 37 taxmann.com 415 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'K'
Tecnimont ICB (P.) Ltd.
v.
Deputy Commissioner of Income-tax-9(3)*
I.P. BANSAL, JUDICIAL MEMBER
AND N.K. BILLAIYA, ACCOUNTANT MEMBER
AND N.K. BILLAIYA, ACCOUNTANT MEMBER
IT APPEAL NO. 6394 (MUM.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
AUGUST 28, 2013
Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price [Comparables and adjustments/Safe Harbour Rules/TNM Method] - Assessment year 2008-09 - During relevant year, assessee entered into various international transactions such as rendering of technical services, execution of EPC projects etc. - In TP study, assessee benchmarked its international transactions using TNMM with PLI as operating profit to operating revenue - In order to prove that international transactions were carried out at arm's length price, assessee had submitted audited segmental accounts in respect of its associated enterprise and non-associated enterprises - TPO found that it was not clarified as to whether material/services taken from AEs were utilized for non-AE's jobs or vice versa - In absence of such information, it was not clear whether AE or non-AE segmental accounts as submitted by assessee were actually insulated - Accordingly, TPO concluded that segmental accounts furnished by assessee were not reliable and liable to be rejected - Thereupon, TPO having adopted PLI at entity level, made certain adjustment to assessee's ALP - On appeal, it was noted that entire work of assessee depended on man hours and it was maintaining a system known as TMA which generated monthly reports for purpose of tracking man hours - Assessee had even given details regarding man hours utilized by it for purpose of each project and on basis of such system assessee had prepared segmental accounts - It was also undisputed that in case results declared by assessee on segmental basis were accepted then difference between ALP determined by TPO in respect of AE transactions and ALP charged by assessee was less than 5 per cent - Whether on facts, benefit of proviso to section 92C(2) was available to assessee and, therefore, impugned addition made by authorities below was to be deleted - Held, yes [Para 8][In favour of assessee]
M.P. Lohia for the Appellant. Ajeet Kumar Jain for the Respondent.
ORDER
I.P. Bansal, Judicial Member - This is an appeal filed by the assessee. It is directed against the assessment order dated 24/09/2012 passed under section 143(3) r.w.s. 144C(13) of Income Tax Act, 1961 (the Act) for assessment year 2008-09. The grounds of appeal read as under:
"Based on the facts and circumstances of the case, Tecnimont ICB Private Limited (hereinafter referred to as the Appellant) respectfully craves leave to prefer an appeal against the final order passed by the learned Deputy Commissioner of Income-tax - 9(3) ('AO'), in pursuance of the directions issued by Dispute Resolution Panel- II ('DRP'), Mumbai under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the Act) on the following grounds. The following grounds of appeal are independent and without prejudice to each other.
On the facts and circumstances of the case and in law, the AO/Transfer Pricing Officer ('TPO') based on directions of DRP:
Rejection of audited segmental results and following an entity level approach
| 1. | erred in making the addition of Rs 24,09,18,616 being transfer pricing adjustment on account of rejection of segmental accounts of the Appellant and in determining the arm's length price of the international transactions pertaining to project/EPC services using entity level approach. | |
| Rejection of Comparable | ||
| 2. | Without prejudice to the above, erred in rejecting Nicco Corporation limited as a comparable on account of functional differences. | |
| Incorrect Computation of margins | ||
| 3. | Without prejudice to the above, erred in computing the incorrect margins of the following comparables out of the final set of comparables: |
| i. | BGR Energy Systems Limited | |
| ii. | Engineers India Limited | |
| iii. | Techno Electric and Engineering Company | |
| iv. | UB Engineering |
| Incorrect margin computation of the Appellant at the entity level | ||
| 4. | erred in not including certain operating income heads while computing the net profit of the Assessee at an entity level. | |
| Using single year data | ||
| 5. | erred in using data which was not contemporaneous and which was not available in the public domain at the time of conducting the transfer pricing study by the Assessee. | |
| 6. | erred in using single year data in conducting the comparability analysis. | |
| Variation of 5% from the arithmetic mean | ||
| 7. | erred in not granting the benefit of proviso to section 92C(2) of the Act to the Appellant. | |
| Adjustment on account of Corporate Guarantee | ||
| 8. | erred in making an addition of Rs 5,27,907 being transfer pricing adjustment on account of determination of the arm's length price on the counter guarantee provided by the Appellant at the rate of 3% of the guarantee amount. | |
| 9. | erred in using selective information! documents obtained by the TPO und'\ section 133(6) of the Act and which are not available in the public domain for the determination of ALP on the corporate guarantee provided by the Appellants | |
| Tax credits | ||
| 10. | erred in not allowing the TDS credit of Rs.41,13,253, DTAA credit of Rs'1 1,40,59,219 and levying interest under section 234B of Rs 25628346. | |
| The Appellant craves leave to add/alter/amend/delete/withdraw any or all of the grounds at or before the hearing of the appeal so as to enable the Income tax Appellate Tribunal to decide the appeal according to law." |
2. The assessee has also filed additional ground of appeal, which reads as under:
"Tecnimont ICB Private Limited (hereinafter referred to as the Appellant) craves leave to prefer an appeal on the following additional ground against the final order passed by the learned Deputy Commissioner of Income-tax - 9(3) ('AO"), in pursuance of the directions issued by Dispute Resolution Panel- II ('DRP"), Mumbai under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (hereinafter referred to as the Act).
On the facts and circumstances of the case and in law, the learned AO/DRP:
11. erred in considering Engineers India Ltd as a comparable company to Appellant without appreciating that Engineers India is a government company and has significant related party transactions.
The Assessee craves, to consider the above ground of appeal without prejudice to other grounds and craves leave to add, alter, delete or modify the above ground of appeal."
3. Ground No.1 to 7 relate to TP adjustment of Rs.24,09,18,616/- on account of Arm's Length Price (ALP) of international transactions pertaining to project/EPC services.
3.1 Reference under section 92CA of the Act was made by the AO for computation of arm's length price in respect of following international transactions :
| Transactions | Amount (Rs.) | |
| 1. | Technical Services Rendered (EPC) | 245900567 |
| 2. | Execution of EPC Projects | 1149503287 |
| 3. | Electrical and Instrumentation work | 832396911 |
| Total | 2227800765 |
3.2 In the TP study the assessee has bench marked its aforementioned transactions using TNMM with PLI as operating profit to operating revenue. The assessee selected seven comparables and three years average OP/Sales was calculated at 4.57%. It was claimed that assessee has earned OP/Sales of 9.41% (OP/TC 10.42%). However, the entity level profitability was 2.85% (OP/TC 2.92%). Thus it was claimed in the TP study that international transactions entered into by the assessee with its Associated Enterprises(AEs) were at arm's length.
3.3 In para 4.2 Ld. TPO has mentioned that during the course of proceedings before him the assessee had submitted audited segmental accounts in respect of its associated enterprise and non-associated enterprises accounts and segmental margins are as follows:
| (In Rs.000) | ||
| Particulars | AE transactions | Non AE Transaction |
| Total Income from operations | 2228306 | 291459 |
| Total cost | 2018404 | 420347 |
| Profit before tax | 209902 | - 128888 |
| Operating Profit/Operating Cost | 10.40% | - 30.66% |
| Operating Profit/Sales | 9.42 | - 44.22% |
Ld. TPO did not accept such submission of the assessee on the ground that it was not clarified that as whether material/services taken from AEs were utilized for non-AE's jobs or vice-versa. Thus Ld. TDO observed that in absence of such information it is not clear that as to AE or non-AE segmental accounts as submitted by the assessee are actually insulated. Ld. TPO further observed that in respect of non-AE transactions the assessee has shown a loss of 30.66% on the turn over of Rs.29.14 crores which is apparently against the trend of the sector in which assessee operates. He required the assessee to explain the loss of Rs.12.88 crores incurred by the assessee in respect of non-AE segment and was required to furnish the basis of allocation of expenses with evidences such as copies of tender documents, copies of bills in support of expenses incurred, copies of documents etc. It is noted by the TPO that vide order sheet noting dated 7/9/2011 the assessee was required to furnish the following information:
| (i) | the basis of allocation of indirect cost to AE and non-AE along with the necessary evidences. | |
| (ii) | Complete details with evidences of the bidding cost. | |
| (iii) | Audit notes with complete material on which the independent audit had relied to carry out the segmental audit and also to produce the working papers for the same. |
3.4 Ld. TPO further observed that such information was not produced by the assessee and it was tried to explain that the loss of Rs.12.88 crores was mainly incurred at pre-bidding stage of 11 projects. The assessee failed to win those contracts, expenditure resulted into net loss. Ld. TPO observed that assessee has only selectively produced few bills and vouchers which are of no use since the assessee has failed to establish that the payments were made in respect of pre-bidding expenses. It is also observed by him that during the course of proceedings it was stated by the assessee that it worked as a supplier of technically trained manufacturer for various projects and does not manufacture anything for the purpose of executing those projects. It was further stated that whenever the assessee bids for a contract it evaluate the costing of the project, clause for the quotations of various parties and then submit its bid. These bidding expenses were incurred in respect of projects pertaining to Public Sector Undertakings and assessee could not get those contracts, therefore, loss was incurred. On these submissions of the assessee Ld. TPO observed that in the process of bidding 11 contracts the assessee has actual lost Rs.1.17 crores per contract just for submitting bidding documents. There is no evidence on the record that the assessee paid non-refundable earnest money deposit in respect of all such bids and the said money get forfeited leaving the assessee saddled with the loss. Ld. TPO further observed that in absence of evidence corroborating the claimed loss corresponding cost on non-AE segments was attributable to AE segment and in this manner Ld. TPO also held that segmental accounts furnished by the assessee were not reliable and therefore, rejected. Therefore, Ld. TPO adopted PLI at entity level which he has computed at 2.92% as under:
| Rs. Crores | |
| Contract Revenue | 251.92 |
| Total cost (other than interest cost) | 244.75 |
| Profit | 7.17% |
| OP/TC | 2.92% |
| OP/Sales | 2.85% |
3.5 For the sake of completeness the arithmetical mean of comparables computed by the assessee at 4.57% was as under:
| Company | 2006 | 2007 | 2008 | Weighted average |
| BGR Energy Systems Ltd. | 5.26 | 8.56 | 8.90 | 8.46 |
| Engineers India Ltd. | 10.73 | 3.07 | 22.12 | 11.96 |
| Nicco Corporation Ltd. | (16.53) | (5.81) | 0.72 | (4.59) |
| Reliance Infrastructure Ltd. | 14.60 | 7.17 | NA | 9.34 |
| Tata Projects Ltd. | 3.84 | 1.45 | NA | 2.24 |
| Techno Electric & Engg. Company Ltd. | 4.98 | 10.30 | 11.62 | 9.56 |
| UB Engineering Ltd. | (2.40) | (7.68) | 6.61 | (1.09) |
| Arithmetic Mean | 4.57 |
However, as updated margin of above comparables as on 31/3/2008 was available the mean average of the above comparables was computed as under:
| Company | OP/TC |
| BGR Energy Systems | 10.75 |
| Engineers India Ltd. | 28.9 |
| Techno electric and engg company | 13.56 |
| UB engg | 11.75 |
| R Infra | 10.06 |
| Tata Projects | 4.58 |
| Average | 13.26 |
3.6 Examining the aforementioned comparables it was observed by Ld. TPO that the comparable namely Nicco Corporation Ltd. is functionally different from the activities of the assessee. He, therefore, excluded the same and he proposed a fresh set of comparables, wherein mean margin was computed at OP/TC at 33.43% and OP/Sales at 23.486%. The details are as under:
| (In %) | OP/TC | OP/Sales | |
| 1. | Engineers India Ltd. | 28.9 | 22.42 |
| 2 | ILFS Transportation network | 62.27 | 38.37 |
| 3 | ABG Infralogistics | 49.05 | 32.91 |
| 4 | Sriram EPC | 12.69 | 11.26 |
| 5 | Ashoka Buildcon Ltd. | 14.24 | 12.47 |
| Average | 33.43 | 23.486 |
3.7 In response to the aforementioned proposed action of Ld. TPO the assessee objected to inclusion of ABG Infralogistics Ltd.; (b) Ashoka Buildcon Ltd.; (c) ILFS Transportation network as comparable. Further assessee requested to include one more comparable namely Sriram EPC as suitable comparable and Engineering India Ltd. as common comparable.
3.8 Finally Ld. TPO has determined seven comparables and OP/TC is computed at 13.18429 as below:
| Company | OP/TC | Remarks |
| BGR Energy Systems | 10.75 | Assessee's |
| Engineers India Ltd. | 28.9 | Assessee's |
| Techno electric and engg company | 13.56 | Assessee's |
| UB engg | 11.75 | Assessee's |
| R Infra | 10.06 | Assessee's |
| Tata Projects | 4.58 | Assessee's |
| Sriram EPC | 12.69 | TPO's |
| AVERAGE | 13.18429 |
3.9 By taking the entity level margin of the assessee at 2.92% the difference between 13.18 and 2.92% was computed at Rs.24,09,18,616/- as under:
| Operating cost as per annual report | A | 2,438,751,000 |
| Arm's Length Profit Margin on Cost | B | 13.18% |
| Arm's Length Profit | C=A+B | 321,427,381.80 |
| Arm's Length Value of sales | D+A+C | 2,760,178,381.80 |
| Less: Value of Non-AE Sales | E | 291,459,000.00 |
| Arm's Length Value of Sales (Adjusted)AE | F+D-E | 2,468,719,381.80 |
| 95% thereof | 2,116,410,726.75 | |
| 105% of transaction value | 2,339,190,803.25 | |
| Actual Value of AE Sales | H | 222,78,00,765 |
| Adjustment | I+F-H | 240,918,616.80 |
Accordingly, addition was made.
4. The aforementioned addition made by Ld. TPO was added by the A.O. in the draft assessment order against which the assessee had filed objections before DRP, copy of the submissions on objections is filed at page 181 to 190 of the paper book. The assessee firstly objected the action of the Ld. TPO by taking PLI of the assessee as entity level as according to assessee audited segmental results could not be rejected by TPO as the basis adopted by the assessee was scientific and rational. Before Ld. DRP reference was made to written submission furnished before Ld. TPO. It was submitted that vide letter dated 19/9/2011 it was mentioned that the assessee has a man hour tracking system. (TMA) which generates monthly reports for the purpose of tacking man hours. The entire staff fill time sheet and the same is used by the assessee to generate project wise man hours which in turn is used for work-in-progress(WIP) calculation. It was submitted that total number of man hours during the financial year 2007-08 were 904713 and the number of man hours pertaining to the AE segment and non-AE segment were 605907 and 192324 respectively. The balance number of hours amounts to 1,06,482/- represented bidding and idle time. To support these facts the assessee also submitted the man hour support details and man hour of E&I Division in Annexure-1 & 2 with the aforementioned submissions. Thus it was submitted that the segmental results of the assessee could not be rejected and Ld. TPO was not justified in taking margin of the assessee at entity level. The objections taken by the assessee before DRP in respect of this adjustment were objections No. 1 to 5 and these objections of the assessee have been rejected by Ld. DRP by holding that it was necessary for the assessee to show accuracy of segmental accounts beyond the shadow of doubts and such accounts should truly reflect and work out a net profit margin in respect of the segments which have been culled out. Any estimation/approximation or allocation which is not based on primary details/facts would lead to approximate working of PLI leading to non reliable bench marking. The assessee did not give the basis of allocation of indirect cost to AE and non-AE along with necessary evidences. The complete details with evidences of the bidding cost has not been submitted before the TPO and the audit note with complete material on which the independent auditor had relied to carry out segmental audit were also not produced before the TPO. Therefore, mainly relying upon the findings recorded by Ld. TPO, Ld. DRT has upheld the addition and did not discuss about the submissions of the assessee according to which it was submitted that there was rational basis of allocation and segmental work out and all the details were submitted to the TPO which are part of the TPO's record.
5. After narrating the above mentioned facts, it was submitted by Ld. AR that the adjustment made by the AO is liable to be deleted only on one issue which is the acceptance of segmental results submitted by the assessee. He submitted that if segmental results is accepted the margin of assessee will be within the limits of safe harbour of +/- 5%. Ld. AR further submitted that according to the decision of Tribunal in assessee's own case for assessment year 2006-07 only segmental results can be considered for determination of ALP. In this regard Ld. AR referred to the order of the Tribunal dated 25/2/2011 in ITA No.7098/Mum/2010, copy of which is placed at pages 191 to 209 of the paper book. He submitted that in the said year the TPO had applied the results at entity level as against the claim of the assessee that the same should be on segmental basis. It was accepted by the Tribunal that for determining ALP segmental result should be taken into consideration. He invited our attention towards the following observations of the Tribunal from the said order:
'23. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. At the outset, we may point out that there is no dispute between the assessee and the Department over the method adopted for determining the arm's length price being TNM method. The next issue for consideration is whether to apply TNM method at entity level or at transactional level for determining the arm's length price. The assessee had submitted segmental results for its transactions with A.E's and transactions with non A.Es. The TPO rejected the segmental results as contained at Page-62 of paper book on the ground that the same were not authenticated and also did not form part of audited financial statement of accounts. Learned Counsel, during the course of hearing, submitted before us that this objection was not brought to the notice of assessee. However, when it received the order, then it got the segmental results duly audited and filed the same before the DRP as additional evidence vide its petition dated 4.th May 2010. The DRP has summarily rejected the assessee's additional evidence observing that the same was not filed before the DRP. Therefore, the first issue which arises for our consideration is regarding scope of powers of DRP reg3rding entertaining additional evidence. In this regard, we may refer to legal provisions which have to be taken into consideration when additional evidence is filed before the DRP. Section 144C, deals with reference to DRP and sub sections 5, 6 and 14, read as under:
"5. The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.
6. The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely -
| (a) | draft order; | |
| (b) | objections filed by the assessee; | |
| (c) | report, if any, of the Assessing Officer, valuation officer or transfer pricing officer or any other authority; | |
| (d) | records relating to the draft order; | |
| (e) | evidence collected by, or caused to be collected by, it; and | |
| (f) | result of any enquiry made by, or caused to be made by, it |
14. The Board may make rules for the purposes of the efficient functioning of the Dispute Resolution Panel and expeditious disposal of the objections filed under sub-section (2) by the eligible assessee."
Rule 4 of Income-Tax (Disputes Resolution Penal) Rules, 2009, deals with procedure for filing objections before DRP, which reads as under:
"4. Each panel shall have a secretariat for receiving objections, correspondence and other documents to be filed by the eligible assessee and shall also be responsible for issuing notices, correspondence and direction if any, on behalf of the panel."
A combined reading of section 144C r/w Rule 4 of Income Tax (Disputes Resolution Penal) Rules, 2009, clearly show that the DRP had to take into consideration the evidence furnished by the assessee before issuing any directions. The proviso to Rule-4B Income Tax (Disputes Resolution Penal) Rules, 2009, clearly deals with additional evidence and requires that it should be separately filed along with application stating the reasons for so doing. In the present case, learned Counsel has pointed out that there is no variation in the segmental results submitted by it in course of proceedings before TPO and audited segmental results filed before the DRP. The only objection for not considering the same was that they were not audited. This was only a procedural requirement and once the same was complied with, the audited segmental accounts should have been admitted as additional evidence by the DRP in order to impart substantial justice to the assessee. We, therefore, admit the audited segmental results filed by the assessee vide its petition dated 4th May 2010, and restore the matter back to the file of Assessing Officer for denovo consideration in accordance with law.
24. Now, coming to the main issue whether the segmental results are to be taken into consideration or profit margin at entity level is to be considered, we find that Chapter-X incorporates special provisions relating to avoiding of tax in regard to international transactions and income from international transactions has to be determined at arm's length price. Therefore, as per the provisions contained under sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level. As regards the submissions of learned Department Representative that with reference to segmental results, each and every international transaction has to be considered separately-because all the activities are separate and profit margin will be different. Learned Counsel objected to these submissions pointing out that it is not the appeal filed by the Revenue but by the assessee. He also submitted that the Tribunal has no power of enhancement and only segmental results have to be considered. On this count, we find that TPO has not at all considered the segmental results and, therefore, we refrain from making any observations with reference to the submissions made by the learned Departmental Representative and consider it appropriate to only observe that the Assessing Officer will consider the segmental results and determine the arm's length price in accordance with law. Consequently, these grounds of appeal are allowed for statistical purposes in terms of our above observations.'
5.1 Ld. AR submitted that the assessee is able to show that there is no defect in the segmental audit results submitted by the assessee before Ld. TPO and Ld. TPO as well as Ld. DRP have incorrectly rejected such results. Ld. AR invited our attention towards the submissions made before Ld. TPO and Ld. DRP alongwith necessary details and particularly reference was made to the submissions made before Ld. TPO dated 19/9/2011, copy of which has been filed at pages 158 to 163 of the paper book in which the submissions of the assessee regarding allocation of bidding cost and revenue supporting were submitted alongwith annexure.
5.2 In short, it was submitted by Ld. A.R that assessee maintains man hour tacking system and on the basis of details furnished by staff members in their time sheet, project wise man hour report was generated by the assessee on the basis of which allocation has been made. Such allocation converted into the terms of hours was placed in the shape of a chart which was made annexure-1 to the aforementioned submissions. Referring to the said chart it was submitted by Ld. AR that the entire expense in respect of non-AE bidding relate to staff. For example he mentioned that out of total loss of EPC Division amounting to Rs.11,18,16,580/- an amount of Rs.9,11,15,637/- pertains to salary and bonus and contribution to PF of the staff relating to EPC Division (Rs. 8,10,43,713/- as salary and bonus + Rs.1,01,06,924/- as contribution to PF). Balance amount of Rs.2,06,65,942/- pertains to other expenses and thus entire loss of Rs.11,18,16,580/- on account of EPC Division was in no manner related to transactions with AE. For the sake of clarification it may be mentioned here that the loss of Rs.12,88,88,242/- taken by the TPO is in respect of E&I Division and EPC Division ( loss of Rs.11,18,16,580/- for EPC Division and E&I Division of Rs. 1,70,71,662/- in respect of bidding transaction). Therefore, Ld. AR submitted that segmental results submitted by the assessee are required to be accepted and as the margin of the assessee on segmental is 10.40% and margin computed by Ld. TPO is 13.18%, the difference will be within the safe harbour of +/-5% and no addition will be called for. He submitted that the relief is allowable to assessee only on this ground and this submission of the assessee is without prejudice to the other grounds which are taken in grounds of appeal and additional grounds, on which also the impugned addition is assailable.
5.3 In view of the aforementioned submissions of Ld. AR it was considered appropriate to hear Ld. DR on this issue.
6. Ld. DR submitted that though the issue that whether the PLI of the assessee has to be taken on the basis of segmental result or at entity level, the issue is covered by the aforementioned order but the segmental results shown by the assessee are not acceptable as assessee did not furnish the required details asked for by Ld. TPO. Ld. DR submitted that segmental results shown by the assessee should not be accepted for want of details to be submitted by the assessee before Ld. TPO. Thus he submitted that this ground of the assessee should not be accepted. It was further submitted by Ld. DR that the allocation submitted by the assessee in annexure-1 along with submissions made before Ld. TPO vide letter dated 19/9/2011, copy of which is placed at page 161 of the paper book, the assessee's action on allocating a further amount of Rs.2,06,65,942/- on account of other expenses does not pertain to man hours and only a sum of Rs.9,11,50,637/- can be said to be on account of man hours as the same pertains only to salary, bonus and contribution towards PF. Thus it was submitted by Ld. DR that the adjustment made by Ld. TPO and upheld by Ld. DRP should be sustained.
7. On the other hand, it was submitted by Ld. AR that even if the contention of Ld. DR is to be accepted that amount of Rs.2,06,65,942/- cannot be attributed to man hours and allocation thereof to the EPC Division is not appropriate, even then the margin of the assessee will be 9.28% in place of 10.40%. He submitted that even margin of the assessee at 9.28% of segmental accounts will be within safe harbour of +/-5% as the margin applied by the Ld. TPO at is 13.18%. Thus it was submitted by Ld. AR that addition made is liable to be deleted.
8. We have heard both the parties on this issue. So far as it relates to the main issue that whether for bench marking the international transactions, segmental results are relevant or result at entity level are relevant, the issue is covered by the aforementioned decision of Tribunal. However, question has been raised regarding audited segmental accounts submitted by the assessee. We do not find any specific defect in the submissions made by the assessee before Ld. TPO and Ld. DRP that its entire work depends on the man hours and it is maintaining a system known as TMA which generates monthly reports for the purpose of tracking man hours. The assessee has even given the details regarding the man hours utilized by it for the purpose of each project and on the basis of such system the assessee has prepared the segmental accounts. Out of total loss of EPC Division on account of AE bidding activity of a sum of Rs.11,18,16,580/-, objection can be raised only in respect of allocation of other expenses which is a total sum of Rs.2,06,65,942/-and which is in the nature of job work; consulting fee and service charge; staff welfare; rent; rate and taxes; repairs; insurance postal and telegraph; traveling and conveyance; electricity water and gas; hire charges for machinery and equipment etc. However, all these expenditure in their entirety cannot be said to be non-allocable on the basis of man hours relating to non bidding activity of EPC Division. Even, if we accept the contention of Ld. DR that this amount of Rs.2,06,65,942/- should not be considered as loss of the assessee on the activity of non-AE bidding of EPC Division then also the margin of the assessee on segmental basis for its AE will be 9.28% for which Ld. AR has submitted a calculation as under:
"Without prejudice statement showing revised profitability of AE segment
| Amount (INR) | ||
| I. Profit as per statement at Pg. 161 of the paper book | 209,902,497 | |
| Less : Non-allocable cost allocated to Non-AE bidding | 20,665,942 | |
| Revised Profit of AE Segment | A | 189,236,555 |
| II Total operating cost of AE segment as per statement at Pg. 161 of paperbook | 2,018,403,555 | |
| Add: Non-allocable cost allocated to Non-AE Bidding | 20,665,942 | |
| Revised total cost of AE Segment | B | 2,039,069,497 |
| Operating Margin of AE Segment (OP/OC) | (A/B) | 9.28% |
| ALP Margin on Cost as per TPO set of comparables | C | 13.18 |
| Arm's Length Profit of AE Segment @ 13.18% | D+B*C | 268,749.360 |
| Arms Length value of sales | B+D | 2,307,818,857 |
| Actual value of AE sales | E | 2,227,800,765 |
| 95% of E | 2,116,410,727 | |
| 105% of E | 2,339,190,803 | |
| T.P. Adjustment | NIL |
From the above calculation it can be seen that the difference between ALP determined by the Ld. TPO in respect of AE transactions and ALP charged by the assessee is less than 5%. Therefore, benefit of proviso will be applicable to the assessee and after providing such benefit, no addition is left to be made. Accordingly, addition of Rs. 24,09,18,616/- is deleted.
8.1 As we have deleted the adjustment for the reasons discussed above, the other grounds taken by the assessee in regard to this adjustment have become academic and it was submitted by Ld. AR that they should be treated as academic. In the result, Ground No.1 of the assessee's appeal is allowed and Ground No.2 to 6 are dismissed as having become infructuous.
9. Apropos Ground No.7; it has already been held that assessee is entitled to get benefit of proviso and on grant of such benefit no addition is liable to be made, therefore, Ground No.7 is allowed.
10. Apropos Ground No.8; during the course of proceedings before Ld. TPO it came to the notice that assessee had issued counter guarantee amounting to Rs.2,92,53,940/- with regard to its AE and had received guarantee commission @ 1.2% per annum amounting to Rs.3,49,711/- and such transaction was not reported in TP study. The TPO required the assessee to explain the same and vide letter dated 24/08/2011 it was submitted as under:
"The assessee submits that for all its borrowings guarantee is provided by Technimont SpA, Italy and the assessee has not paid any consideration for this guarantee. Further, the assessee submitted that State Bank of India is a lead banker in its multiple banking consortium and they have issued sanction letter to TICB which details the rate of 1.2% as BG Commission. Based on the same rate, TICB has also recovered guarantee commission from its AE at the rate of 1.2% per annum. In light of the above TICB humbly submitted that considering the facts of the case the rate of 1.2% pa charged by TICB on the counter guarantee seems appropriate and mirror's the arm's length rate."
10.1 Ld. TPO did not accept such submission of the assessee and gathered information from State Bank of India, wherein Bank stated that the rate charged is 2.75% per annum for amount of guarantee between Rs.1.00 crore and Rs.5.00 crore. Relying upon that and adding a mark up 0.25% on the ground that assessee did not take any security from its AE and commission must also take into account the exchange rate risk, the country specific risk and the AE risk, the Ld. TPO applied 3% guarantee commission which was worked out at Rs.8,77,618/-. After reducing the commission shown by the assessee an addition of Rs.5,27,907/- was made. The addition has been upheld by Ld. DRP. The assessee is aggrieved, hence, has filed aforementioned ground.
11. During the course of hearing Ld. AR placed heavy reliance upon the Bank Guarantee given by State Bank of India in which on a Bank guarantee of Rs. 75.00 lacs commission was charged @1.2%. Copy of such Bank Guarantee is filed at pages 402 to 403 of the paper book. It was submitted that on the basis of above guarantee the rate was charged by the assessee and same should be taken as comparable in place of information gathered by Ld. TPO from the bank. It may be mentioned that Ground No.9 was not pressed by Ld. AR.
12. On the other hand, Ld. DR submitted that Ld. TPO has collected the information from SBI in which it was clearly stated that they are charging 2.75% as guarantee fee in respect of Bank Guarantee of Rs.1.00 crore to Rs.5.00 crores. He submitted that the evidences submitted by the assessee relates to a sum of Rs.75.00 lacs which is less than Rs.1.00 crore, therefore, the said evidence cannot be accepted. He submitted that assessee has not produced any evidence to suggest that the rate charged by it was at arm's length. Therefore, he submitted that deletion as sought by the assessee should not be approved.
13. We have heard both the parties on this issue. The assessee has not submitted any contradictory evidence to suggest that the rate applied by Ld. TPO at 3% was not appropriate. The evidence submitted by the assessee relates to Bank Guarantee which is less than Rs.1.00 crore. Therefore, the said evidence cannot be taken as comparable instance. In this view of the situation as no evidence has been submitted by the assessee to justify the rate charged by it from its AE, we decline to interfere in the addition upheld by Ld.DRP. This ground of the assessee is dismissed.
14. Apropos Ground No.9, it has already been stated that this ground was not pressed by Ld. AR, therefore, the same is dismissed.
15. Apropos Ground No.10, it was submitted by ld. AR that appropriate relief has already been given by Ld.AO by rectifying the demand, therefore, this ground has become infructuous. In view of this submission of Ld. AR this ground is also dismissed.
16. So far as it relates to addition ground, it was submitted by Ld. AR that in view of deletion of addition on account of acceptance of segmental account, additional ground filed by the assessee has also become infructuious. In view of this submission of Ld. AR this ground is also dismissed has having become infructuous.
17. In the result, appeal filed by the assessee is partly allowed in the manner aforesaid.
Regards
Prarthana Jalan
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