Lee Harris Pomeroy Architects PC, Kolkata V. DCIT, IT 1(2), KOLKATA, Kolkata

ITA 382/KOL/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 99832 (ITAT-KOLKATA)
• Duration Of Justice: 5 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 09-04-2015
• Court: TRIBUNAL
• Department Lawyers: SK Z H TANVEER
• Assessee Lawyers: J P KHAITAN SR; PRATUSHI JHUNJHUNWALA
• Keywords: Transfer pricing; International transaction; Permanent establishment
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH B , KOLKATA [BEFORE SHRI MAHAVIR SINGH, JM & SHRI M.BALAGANESH, AM ] ITA NO.382/KOL/2015 ASSESSMENT YEAR : 2010 - 11 ( A PPELLANT ) (RESPONDENT) LEE H ARRIS POMEROY ARCHITECTS PC - VER SUS - DCIT (IT)CIRCLE 1(2) KOLKATA KOLKATA (PAN: AABCL 6082 B) FOR THE APPELLANT : SHRI J.P.KHAITAN, SR.COUNSEL & SHRI PRATUSHI JHUNJHUNWALA, ADVOCATE FOR THE RESPONDENT : SK. Z.H.TANVEER, JCIT, SR.DR. DATE OF HEARING : 26.08 .2015. DATE OF PRONOUNCEMENT : 29.09.2015. ORDER PER SHRI M.BALAGANESH, AM 1. THIS APPEAL OF THE ASSESSEE ARISES OUT OF THE PROCEEDINGS FOR THE ASST YEAR 2010 - 11 OF THE LEARNED DISPUTE RESOLUTION PANEL (DRP) DATED 29.12.2014 IN WHICH DIRECTIONS ARE GIVEN TO THE L EARNED AO U/S 144C(5) READ WITH SECTION 144C(8) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ). 2. SHRI.J.P.KHAITAN, SENIOR ADVOCATE & SRI PRATYUSH JHUNJUNWALA, ADVOCATE, THE LEARNED ARS ARGUED ON BEHALF OF THE ASSESSEE AND SHRI . SK. Z.H. TANWEER, JCIT, THE LEARNED DR FOR TPO CASES, ARGUED ON BEHALF OF THE REVENUE. 3. THE ONLY ISSUE TO BE DECIDED IN THIS APPEAL IS THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE WHETHER THE COMPARABLE UNCONTROLLED PRICE (CUP) METHOD IS THE MOS T APPROPRIATE METHOD AS COMPARED TO TRANSACTIONAL NET MARGIN METHOD (TNMM). 4. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSESSEE (LEE HARRIS POMEROY ARCHITECTS P.C. LHPA IN SHORT) A COMPANY ESTABLISHED UNDER THE LAWS OF UNITED STATES OF AMERICA ( COM PANY ) ALONG WITH A CONSORTIUM OF MEMBERS CONSISTING OF (I) M/S MAUNSELL CONSULTANTS ASIA LTD., A COMPANY INCORPORATED UNDER THE LAWS OF HONG KONG AND HAVING ITS REGISTERED OFFICE AT 8/F, GRAND CENTRAL PLAZA, TOWER 2, 138, ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 2 SHATIN RURAL COMMITTEE RD, SHATI N, NEW TERRITORIES, HONG KONG, (II) CONSULTING ENGINEERING SERVICES (INDIA) PRIVATE LIMITED, A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956 AND HAVING ITS REGISTERED OFFICE AT 57, NEHRU PLACE, 5 TH FLOOR, NEW DELHI 110019 , (III) YACHIYO ENGINEERIN G CO. LTD., A COMPANY INCORPORATED UNDER THE LAWS OF JAPAN HAVING ITS REGISTERED OFFICE AT 18 - 12, 2, NISHIOCHIAI, SHINJUKU - KU , TOKYO, JAPAN , (IV) EGIS RAIL S.A., A COMPANY INCORPORATED UNDER THE LAWS OF FRANCE AND HAVING ITS REGISTERED OFFICE AT 25, COU RS EMILE ZOLA 69625, VILEURBANNE CEDEX, FRANCE (TOGETHER WITH THE COMPANY, THE CONSORTIUM ) WERE AWARDED A CONTRACT DATED 20.2.2009 BY KOLKATA METRO RAIL CORPORATION LIMITED, A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956, JOINTLY OWNED BY THE GO VERNMENT OF INDIA AND THE GOVERNMENT OF WEST BENGAL AND HAVING ITS REGISTERED OFFICE AT HRBC BHAWANM 4 & 5 TH FLOOR, MUNSHI PREM CHAND SARANI, KILKATA 700021 ( KMRCL ) TO UNDERTAKE THE KOLKATA EAST WEST METRO RAIL PROJECT (PARTLY UNDERGROUND AND PARTLY ELEVATED) EXTENDING FROM HOWRAH TO SALT LAKE SECTOR V, KOLKATA COVERING A TOTAL LENGTH OF 13.7 KILOMETRES , TO PROVIDE ADDITIONAL TRANSPORT INFRASTRUCTURE TO KOLKATA. FOR THIS PURPOSE, LHPA USA HAD SET UP A PROJECT OFFICE IN KOLKATA DURING THE FINANCI AL YEAR 2009 - 10 RELEVANT TO ASST YEAR 2010 - 11, WHICH IS A PERMANENT ESTABLISHMENT IN INDIA FOR THE PURPOSE OF INDIAN INCOME TAX ACT, 1961 AND THE ASSESSEE IN USA IS AN ASSOCIATED ENTERPRISE (AE) OF THE INDIAN PROJECT OFFICE. 4.1. DURING THE FINANCIAL Y EAR 2009 - 10, THE AE PROVIDED SERVICES FOR METRO RAIL PROJECT ENTAILING LABOUR EXPENSES, OVERHEAD EXPENSES AND CONSULTANCY CHARGES AND ALSO RECEIVED PAYMENTS FOR CONSULTANCY FEES FROM KMRCL. ACCORDINGLY THE SAID TRANSACTIONS CONSTITUTED INTERNATIONAL TRAN SACTIONS OF THE INDIAN PROJECT OFFICE WITH THE AE IN USA. THE INDIAN PROJECT OFFICE CONTEMPLATES TO PROVIDE THE FOLLOWING SERVICES TO ITS AE IN RELATION TO GENERAL CONSULTANCY FOR KOLKATA METRO RAIL PROJECTS: A) PROVIS I ON OF KEY AND SUPPORT PERSONNEL B) LEAD TRANSPORTATION PLANNING C) LEAD SPATIAL PLANNING OF THE UNDERGROUND STATIONS, ENTRANCES AND ASSOCIATED SURFACE WORKS ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 3 D) PROVIDE INPUTS FOR CHIEF QUALITY SURVEYOR AND COST ESTIMATOR, CHIEF SAFETY ENGINEER AND TRANSPORT ORIENTED PROPERTY DEVELOPMENT PL ANNING 4.2. THE FINANCIAL YEAR 2009 - 10 WAS THE FIRST YEAR OF OPERATION OF THE INDIAN PROJECT OFFICE. THE PROJECT OFFICE ADOPTED THE COMPLETED CONTRACT METHOD FOR RECOGNIZING INCOME. THE NATURE OF WORK IN INDIA WAS SUCH THAT MAJOR PORTION OF THE EXPEN SES WERE INCURRED IN THE FIRST YEAR OF OPERATION BUT REVENUE WAS TO ACCRUE SUBSEQUENTLY. DURING THE ASST YEAR 2010 - 11, THE ASSESSEE UNDERTOOK THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS AE, WHICH WERE DULY REPORTED IN FORM NO. 3CEB FILED ALONG WITH T HE ASSESSEE S RETURN OF INCOME : - ( A ) LABOUR EXPENSES ( B ) OVERHEAD EXPENSES ( C ) SUSTAINABLE EMS (CONSULTANCY CHARGES PAID ON BEHALF OF LHPA INDIA) ( D ) KOLKATA METRO RAIL CORPORATION (CONSULTANCY INCOME RECEIVED ON BEHALF OF LHPA INDIA) LHPA PROVIDES BOTH ONSHORE AND OFFS HORE SERVICES UNDER THE GENERAL CONSULTANCY AGREEMENT. OFFSHORE SERVICES ARE THE MAIN SERVICES FOR WHICH LHPA WAS CONTRACTED FOR THE PROJECT. THESE INCLUDE PRIMARILY ARCHITECTURAL DESIGN, SAFETY PLANNING, SCHEDULING, COST ANALYSIS, TRANSPORTATION PLANNIN G AND SUSTAINABILITY AND PROPERTY DEVELOPMENT AND OUTLINE SPECIFICATION. THESE ARE UNDERTAKEN BY THE EMPLOYEES OF LHPA IN USA. ONSHORE SERVICES MAINLY INCLUDE SUPERVISION OF EXECUTION OF THE DESIGNS AND SPECIF ICATIONS PROVIDED BY LHPA USA. THE ONSHORE SE RVICES HAVE BEEN SUBCONTRACTED TO SUPERIOR GLOBAL INFRASTRUCTURE INDIA PRIVATE LIMITED (SGI) A THIRD PARTY VENDOR, WHO UNDERTAKES THE WORK ON BEHALF OF LHPA USA. LHPA HAS ALSO DEPUTED FEW OF ITS EMPLOYEES TO SUPERVISE THE SAME. 4.3. FOR THE PURPOSE OF COMPUTING THE ARM S LENGTH PRICE (ALP) OF THE ABOVE MENTIONED INTERNATIONAL TRANSACTIO N S, THE ASSESSEE HAD ADOPTED CUP METHOD IN ITS ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 4 FORM 3CEB FILED ALONG WITH THE RETURN OF INCOME. THE ASSESSEE HAD STATED IN NOTES TO FORM 3CEB IN POINT NO. 6 AS BELOW: - THE COMPANY HAS DETERMINED COMPARABLE U NCONTROLLED PRICE METHOD (CUP) A S THE MOST APPROPRIATE METHOD U/S 92C OF THE ACT. THE CUP METHOD EVALUATES THE PRICE CHARGED IN A CONTROLLED TRANSACTION TO THE PRICE CHARGED IN A COMPARABLE UNCONTROLLED TRANSACTI ON, WHICH COULD BE IDENTIFIED EITHER THROUGH INTERNAL OR EXTERNAL COMPARABLES. THE NET PROFIT PERCENTAGE OF INTERNATIONAL TRANSACTION WITH ASSOCIATE ENTERPRISE WAS COMPARED BY THE SIMILAR TRANSACTIONS OF INDIA CLIENTS FOR THE FINANCIAL YEAR ENDED 31 ST MAR CH, 2010, WHICH WAS FOUND BY THE COMPANY TO BE AT ARM S LENGTH AS PROVIDED U/S 92C OF THE ACT. BASED ON SUCH COMPARISONS, THE AMOUNT RECEIVED / RECEIVABLE AS COMPUTED BY THE COMPANY HAVING REGARD TO THE ALP IS THE AMOUNT RECEIVED / RECEIVABLE AS PER ITS B OOKS OF ACCOUNT. FOR REIMBURSEMENT OF EXPENSES, IN CONSIDERATION OF THE OECD GUIDELINES, NO MARK UP IS REQUIRED TO BE CHARGED FOR THE EXPENSES INCURRED BY LEE HARRIS POMEROY ARCHITECTS P.C. ON BEHALF OF ITS ASSOCIATED ENTERPRISES. THE TRANSACTIONS ARE THEREFORE IN COMPLIANCE WITH THE ARM S LENGTH PRINCIPLE. 4.4. THE ASSESSEE ADOPTED CUP METHOD IN FORM 3CEB FILED ALONG WITH THE RETURN OF INCOME IN RESPECT OF THE FOLLOWING: - LABOUR EXPENSES - RS. 9,84,14,467 OVERHEAD EXPENSES - RS. 1,08 ,35,031 SUSTAINABLE EMS INVOICES (USD) - RS. 1,54,94,256 KOLKATA METRO RAIL CORPORATION INVOICES - RS. 11,93,43,920 BUT BEFORE THE TRANSFER PRICING OFFICER (TPO), THE ASSESSEE DID EXTENSIVE TRANSFER PRICING (TP) STUDY AND SHIFTED FROM CUP METHOD TO TRA NSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINATION OF ITS ALP. UNDER TNMM, THE PROFIT LEVEL INDICATOR (PLI) OF THE TESTED PARTY (I.E THE ASSESSEE HEREIN) WAS - 3.03% AND WHEREAS THE PLI OF COMPARABLES CHOSEN BY THE ASSESSEE BASED ON MULTIPLE YEAR DATA WA S 2.95%. WHEN ASSESSEE WAS ASKED TO SUBMIT THE COMPARATIVE ANALYSIS BASED ON SINGLE YEAR DATA INSTEAD OF MULTIPLE YEAR DATA, THE ASSESSEE VIDE SUBMISSION DATED 9.7.2013 STATED BEFORE THE TPO THAT ARITHMETIC MEAN OF THE MARGIN OF THE COMPARABLE COMPANIES USING DATA FOR SINGLE YEAR (I.E FOR FY 2009 - 10) IS 2.51% ON OPERATING COST. ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 5 4.5. THE TPO DETERMINED THE ALP USING TNMM BY REJECTING THE TWO COMPARABLES AS AGAINST 11 COMPARABLES OF THE ASSESSEE AND SUBSTITUTED TWO COMPARABLES BASED ON HIS RESEARCH AND APPLIED THE ARITHMETIC MEAN OF THE 11 COMPARABLES ARRIVED AT 13.18% ON THE TOTAL COST INCURRED BY THE ASSESSEE AT RS. 14,79,29,609/ - AND DETERMINED THE ALP AT RS. 1,94,97,122/ - AS AGAINST THE RETURNED LOSS OF RS. 43,84,742/ - THEREBY MAKING AN UPWARD ADJUS TMENT OF RS. 2,38,81,864/ - . THE LEARNED AO PASSED A DRAFT ASSESSMENT ORDER U/S 143(3) READ WITH SECTION 144C(1) OF THE ACT IN FEB 2014 . AGAINST THIS DRAFT ASSESSMENT ORDER, THE ASSESSEE FILED OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) WHO UPHELD THE ORDER OF THE LEARNED TPO & DRAFT ORDER OF THE LEARNED AO VIDE P ROCEEDINGS DATED 29.12.2014. LATER THE LEARNED AO PASSED THE FINAL ASSESSMENT ORDER U/S 143(3) READ WITH SECTION 144C(13) OF THE ACT ON 10.2.2015 PURSUANT TO THE DIRECTIONS OF THE DR P. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US ON VARIOUS GROUNDS. THE ASSESSEE ALSO FILED ADDITIONAL GROUNDS OF APPEAL BEFORE US. BUT THE CENTRAL GROUND REVOLVES AROUND THE MOST APPROPRIATE METHOD TO BE ADOPTED BY THE ASSESSEE IN THE FACTS AND CIRC UMSTANCES OF THE CASE AND CONSEQU ENTIAL DETERMINATION OF ALP. HENCE ALL THE GROUNDS INCLUDING THE ADDITIONAL GROUNDS ARE ADJUDICATED TOGETHER HEREIN FOR THE SAKE OF CONVENIENCE. 5. THE LEARNED AR HEAVILY RELIED ON THE PAPER BOOK FILED BY HIM BEFORE US AND GAVE A TWO PAGE CO MPILATION OF VARIOUS CASE LAWS IN SUPPORT OF HIS VARIOUS ORAL SUBMISSIONS MADE DURING THE COURSE OF HEARING. HE ARGUED THAT THOUGH THE ASSESSEE HAD ADOPTED CUP METHOD AS THE MOST APPROPRIATE METHOD (MAM) IN FORM 3CEB FILED ALONG WITH THE RETURN OF INCOME FOR DETERMINATION OF ALP FOR ITS INTERNATIONAL TRANSACTIONS, IT SOUGHT TO SHIFT TO TNMM AS THE MAM DURING THE COURSE OF ASSESSMENT PROCEEDINGS PURSUAN T TO TP STUDY CONDUCTED BY IT. HE FURTHER ARGUED THAT THE ADDITIONAL GROUND RAIS ED BY THE ASSESSEE MAY KINDLY BE ADMITTED WHEREIN THE ASSESSEE IS INSISTING FOR ADOPTION OF CUP METHOD TO BE THE MOST APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE AS ORIGINALLY ADOPTED BY IT IN FORM 3CEB AS THE ENTIRE REIMBURSEMENT OF EXPE NDITURE HAS BEEN MADE FROM ITS AE ON COST TO COST BASIS WITHOUT ANY MARK UP AND THE RECEIPT OF PROJECT INCOME IS ONLY FROM KMRCL WHICH IS A GOVERNMENT BODY AND HENCE TNMM MAY NOT BE MAM IN THAT SCENARIO. HE ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 6 VEHEMENTLY ARGUED THAT ONLY WHEN THERE IS AN ELEM ENT OF PROFIT, IT WOULD BE ADVISABLE TO ADOPT TNMM AS THE MAM, WHEREAS IN THE INSTANT CASE, THE REIMBURSEMENT OF LABOUR EXPENSES, OVERHEAD EXPENSES AND CONSULTANCY CHARGES ARE MADE BY HEAD OFFICE TO LHPA INDIA (ASSESSEE HEREIN) ON COST TO COST BASIS WITHOU T ANY PROFIT ELEMENT. HE FURTHER ARGUED THAT UNDER TNMM, PROFITS OF COMPARABLES ARE COMPARED TO DETERMINE THE ALP. HENCE IN THE ABSENCE OF PROFIT ON AN INTERNATIONAL TRANSACTION, TNMM CANNOT BE ADOPTED AS THE MAM AND HENCE REQUESTED FOR ADOPTION OF CU P AS MAM AS PLEADED IN THE ADDITIONAL GROUNDS OF APPEAL. HE ARGUED THAT THE ASSESSEE IS IN ITS FIRST YEAR OF OPERATION WHEREIN THE REVENUES WOULD START FLOWING ONLY IN THE FUTURE WHEREAS THE EXPENDITURE WOULD HAVE TO BE INCURRED IN THE BEGINNING. HE P LACED ON RECORD THE DETAILS OF EXPERIENCE OF EACH COMPANY USED AS COMPARABLES IN A TABULAR FORM. HE FURTHER ARGUED THAT FROM THE TABULATION, IT COULD BE SEEN THAT THE COMPARABLES CHOSEN BY THE LEARNED TPO ARE 22 YEARS OLD ON AN AVERAGE, WHEREAS THE ASSESS EE IS A START UP COMPANY AND IS IN ITS FIRST YEAR OF OPERATION AND ACCORDINGLY NOT COMPARABLE AT ALL. 6. THE LEARNED DR FILED WRITTEN SUBMISSIONS AND ARGUED THAT ASSESSEE ONLY ADOPTED TNMM DURING THE COURSE OF TPO PROCEEDINGS BASED ON INDEPENDENT TP S TUDY CONDUCTED BY IT THROUGH THE HELP OF EXTERNAL CONSULTANTS AND HENCE REQUEST OF ASSESSEE TO ADOPT CUP METHOD IN THE FACTS OF THE CASE IS NOT WARRANTED. HE FURTHER ARGUED THAT NO DETAILS WERE FILED BY THE ASSESSEE FOR VERIFICATION OF COST INCURRED BY TH E ASS ESSEE WHICH WERE REIMBURSED. HE VEHEMENTLY OBJECTED FOR ADMISSION OF ADDITIONAL GROUNDS OF APPEAL FILED BY THE ASSESSEE AT THE APPELLATE STAGE IN SUPPORT OF WHICH , HE RELIED ON VARIOUS CASE LAWS. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIALS AVAILABLE ON RECORD INCLUDING THE PAPER BOOKS FILED BY THE ASSESSEE AND WRITTEN SUBMISS IONS FILED BY THE LEARNED DR. WE FIND THAT THE ASSESSEE IN ITS TP STUDY IN RESPECT OF THE FOLLOWING EXPENSES INCURRED BY IT AND PROJECT FEES RECEIVED BY LHPA INDIA FROM KOLKATA METRO RAIL CORPORATION LTD (KMRCL) TO THE TUNE OF RS. 11,93,43,919/ - , CONSIDERING THE FUNCTIONAL AND RISK PROFILE OF THESE TRANSACTIONS AND EXAMINING THE AVAILABLE COMPARABLE DATA, HAD ADOPTED TNMM AS THE MOST APPROPRIATE METHO D FOR ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 7 DETERMINATION OF ITS ALP USING OPERATING PROFIT (OP) BASED ON INCOME, AS THE PROFIT LEVEL INDICATOR (PLI) : - LABOUR EXPENSES DURING THE FINANCIAL YEAR 2009 - 10, LHPA INDIA HAS TO PAY LABOUR RELATED COST OF RS. 9,84,14,467/ - FOR THE OFFSHORE SERVICES RENDERED BY THE PERSONNEL OF ASSOCIATED ENTERPRISE IN RELATION TO THE EXECUTION OF KOLKATA METRO RAIL PROJECT IN INDIA. OVERHEAD EXPENSES DURING THE FINANCIAL YEAR 2009 - 10, LHPA INDIA INCURRED AN EXPENSE OF RS. 1,08,35,031/ - TOWARDS OVERHEAD EXPENSES PAYA BLE TO ITS ASSOCIATED ENTERPRISE FOR THE EXPENSES INCURRED IN RELATION TO THE PERSONNEL PROVIDING OFFSHORE SERVICES IN INDIA IN RELATION TO THE KOLKATA METRO RAIL PROJECT. CONSULTANCY CHARGES DURING THE FINANCIAL YEAR 2009 - 10, LHPA INDIA INCURRED AN EXPEN SE OF RS. 1,54,94,256/ - AS CONSULTANCY CHARGES PAYABLE TO ITS ASSOCIATED ENTERPRISE TOWARDS THE CONSULTANTS HIRED BY THE ASSOCIATED ENTERPRISE FOR ASSISTANCE IN CARRYING OUT THE KOLKATA METRO RAIL PROJECT IN INDIA. 7.1. DURING THE APPELLATE PROCEEDINGS BEFORE US, THE LEARNED AR PLEADED THAT THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE BE ADMITTED WHEREIN IT HAD SOUGHT FOR ADOPTION OF CUP METHOD AS THE MAM AS ORIGINALLY ADOPTED IN FORM 3CEB ALONG WITH THE RETURN. WE FIND THAT THE LEARNED DR HAD DULY OB JECTED FOR ADMISSION OF ADDITIONAL GROUND RAISED BEFORE US IN HIS WRITTEN SUBMISSION BY RELYING ON VARIOUS DECISIONS. HOWEVER, WE FIND THAT THE ISSUE RAISED IN THE ADDITIONAL GROUND INVOLVES A LEGAL GROUND AND GOES INTO THE ROOT OF THE MATTER FOR DE C IDIN G THE ISSUE BEFORE US. WE FIND THAT THE ASSESSEE HAD ADOPTED CUP METHOD IN FORM 3CEB FILED ALONG WITH THE RETURN OF INCOME AND THIS IS NOT A FRESH GROUND RAISED NOW BEFORE US. IT IS ALREADY AVAILABLE IN THE MATERIALS ON RECORD. ACCORDINGLY, BY PLACING RELIANCE ON THE DECISION OF THE HON BLE APEX COURT IN THE CASE OF NTPC LTD VS CIT REPORTED IN 229 ITR 383 (SC), WE ADMIT THE ADDITIONAL GROUND RAISED BEFORE US AS THEY GO INTO THE ROOT OF THE MATTER FOR DECIDING THE ISSUE BEFORE US. ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 8 7.2. THE REASONS ADDUCED BY THE LEARNED AR FOR ADOPTION OF CUP METHOD HAS LOT OF FORCE AS THE ASSESSEE IS ONLY SEEKING REIMBURSEMENT OF LABOUR EXPENSES, OVERHEAD EXPENSES AND CONSULTANCY CHARGES PAID BY IT FROM ITS HEAD OFFICE (AE) ON COST TO COST BASIS WITHOUT ANY PROFIT ELEMENT AND HENCE IN THE ABSENCE OF PROFIT ELEMENT, TNMM MAY NOT BE THE MOST APPROPRIATE METHOD. WE ALSO AGREE WITH THE CONTENTIONS OF THE LEARNED AR THAT UNDER TNMM, COMPARISON OF PROFITS OF VARIOUS COMPARABLES ARE ADOPTED AND WHEREAS IN THE INSTANT CA SE BEFORE US, PROFIT ELEMENT IS COMPLETELY ABSENT IN RESPECT OF REIMBURSEMENT OF EXPENSES FROM HEAD OFFICE. 7.3. WE FIND THAT LHPA INDIAN PROJECT OFFICE WAS GRANTED PERMISSION TO OPERATE IN INDIA WITH EFFECT FROM 2.7.2009 AND IS IN ITS FIRST YEAR OF O PERATION. WE ARE IN AGREEMENT WITH THE ARGUMENTS OF THE LEARNED AR THAT THE 11 COMPARABLES CHOSEN BY THE LEARNED TPO ARE HIGHLY EXPERIENCED COMPANIES AND ARE IN EXISTENCE FOR A PERIOD OF 22 YEARS ON AN AVERAGE AND WOULD HAVE A LOWER FIXED COST BASE, WHERE AS THE ASSESSEE HAD TO INCUR LOT OF EXPENSES IN THE INITIAL YEAR AND THE REVENUE FOR THE SAME WOULD FLOW TO ASSESSEE SUBSEQUENTLY. MOREOVER, THE COMPARABLES ARE ENGAGED IN VARIOUS FIELDS THAT ARE FUNCTIONALLY DIFFERENT FROM THAT OF ASSESSEE. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF PUNE TRIBUNAL IN THE CASE OF SKODA AUTO INDIA P LTD VS ACIT REPORTED IN (2009) 30 SOT 319 (PUNE ITAT) , WHEREIN IT WAS HELD THAT : - 19. ONE OF THE THINGS WHICH IS CLEARLY DISCERNABLE FROM THE FACTS OF THIS CASE IS THAT SO FAR AS THE YEAR BEFORE US IS CONCERNED, WHICH WAS INCIDENTALLY FIRST FULL YEAR OF ASSESSEE S OPERATIONS, THE IMPORT CONTENT OF THE RAW MATERIALS WAS AS HIGH AT 98.55 PER CENT. THIS IS MATERIALLY DIFFERENT FROM THE IMPORT CONTENT OF THE RAW MATER IAL IN THE CASES OF THE COMPARABLES SELECTED BY THE REVENUE AUTHORITIES. THE IMPORT CONTENT OF RAW MATERIAL IN THESE CASES RANGED FROM 26 PER CENT TO 56.83 PER CENT [HINDUSTAN MOTORS - 31 PER CENT; HONDA SIEL - 48.2 PER CENT; HYUNDAI MOTORS - 25.29 PER CEN T; GENERAL MOTORS 56.83 PER CENT AND MARUTI UDYOG - 26 PER CENT]. THIS VARIATION IS PARTICULARLY IMPORTANT SINCE THE BUSINESS MODEL OF A CAR MAKER HAVING 98.5 PER CENT IMPORT CONTENT IN RAW MATERIAL NORMALLY CANNOT BE THE SAME AS OF A CAR MAKER HAVING IMPO RT CONTENT OF 26 PER CENT TO 56.84 PER CENT. WHILE THE LATTER SHOW SUBSTANTIAL INDIGENOUS INPUTS IN THE RAW MATERIAL, THE FORMER IS VIRTUALLY AN ASSEMBLY JOB OF THE IMPORTED KNOCKED DOWN KITS. THESE BUSINESS MODELS ARE SO FUNDAMENTALLY DIFFERENT THAT, IN O UR UNDERSTANDING, NO COMPARISONS ARE POSSIBLE UNLESS THE IMPACT OF THE IMPORT CONTENTS ARE ELIMINATED, OR UNLESS IT IS THE CASE, AS WAS THE CASE BEFORE THE TRIBUNAL IN SONY INDIA LTD. S CASE (SUPRA), THAT THE DECISION TO HAVE SUCH A HUGE IMPORT CONTENT WAS A CONSCIOUS DECISION TAKING INTO CONSIDERATION ALL COMMERCIAL CONSIDERATIONS INCLUDING THE OBVIOUS BENEFITS ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 9 OF A BETTER QUALITY WHICH IS BOUND TO REFLECT OR TRANSLATE INTO HIGHER SELLER PRODUCT. NO DOUBT, A HIGHER IMPORT CONTENT OF RAW MATERIAL BY ITSELF DOES NOT WARRANT, AN ADJUSTMENT IN OPERATING MARGINS, AS WAS HELD IN SONY INDIA LTD. S CASE (SUPRA), BUT WHAT IS TO BE REALLY SEEN IS WHETHER THIS HIGH IMPORT CONTENT WAS NECESSITATED BY THE EXTRAORDINARY CIRCUMSTANCES BEYOND ASSESSEE S CONTROL. AS WAS OBS ERVED BY A COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF E GAIN COMMUNICATIONS (P.) LTD. (SUPRA) 'THE DIFFERENCES WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE, COST CHARGED OR PAID IN, OR THE PROFIT IN THE OPEN MARKET ARE TO BE TAKEN INTO CONSIDERATI ON WITH THE IDEA TO MAKE REASONABLE AND ACCURATE ADJUSTMENT TO ELIMINATE THE DIFFERENCES HAVING MATERIAL EFFECT'. WE DO NOT AGREE WITH THE ASSESSING OFFICER THAT EVERY TIME THE ASSESSEE PAYS THE HIGHER IMPORT DUTY, IT MUST BE PASSED ON TO THE CUSTOMERS OR IT MUST BE ADJUSTED FOR IN NEGOTIATING THE PURCHASING PRICE. ALL THESE THINGS COULD BE RELEVANT ONLY WHEN HIGHER IMPORT CONTENT IS A PART OF THE BUSINESS MODEL WHICH THE ASSESSEE HAS CONSCIOUSLY CHOSEN BUT THEN IF IT IS A BUSINESS MODEL TO IMPORT THE SKD K ITS OF THE CARS, ASSEMBLE IT AND SELL IT IN THE MARKET, THAT IS CERTAINLY NOT THE BUSINESS MODELS OF THE COMPARABLES THAT THE TRANSFER PRICING OFFICER HAS ADOPTED IN THIS CASE. THE ADJUSTMENTS THEN ARE REQUIRED TO BE MADE FOR FUNCTIONAL DIFFERENCES. THE OT HER WAY OF LOOKING AT THE PRESENT SITUATION IS TO ACCEPT THAT BUSINESS MODELS OF THE ASSESSEE - COMPANY AND THE COMPARABLE COMPANIES ARE THE SAME AND IT IS ON ACCOUNT OF INITIAL STAGES OF BUSINESS THAT THE UNUSUALLY HIGH COSTS ARE INCURRED. THE ADJUSTMENTS A RE THUS REQUIRED EITHER WAY. IT IS, THEREFORE, PERMISSIBLE IN PRINCIPLE TO MAKE ADJUSTMENTS IN THE COSTS AND PROFITS IN FIT CASES. WE ALSO DO NOT AGREE WITH THE AUTHORITIES BELOW THAT THE ONUS IS AN THE ASSESSEE TO GET ALL SUCH DETAILS OF THE COMPARABLE CO NCERNS SO AS TO MAKE THIS COMPARISON POSSIBLE. THE ASSESSEE CANNOT BE EXPECTED TO GET THE DETAILS AND PARTICULARS WHICH ARE NOT IN PUBLIC DOMAIN. IN SUCH A SITUATION, I.E., WHEN INFORMATION AVAILABLE IN PUBLIC DOMAIN IS NOT SUFFICIENT TO MAKE THESE COMPARI SONS POSSIBLE, IT IS INEVITABLE THAT SOME APPROXIMATIONS ARE TO BE MADE AND REASONABLE ASSUMPTIONS ARE TO BE MADE. THE ARGUMENT BEFORE US WAS THAT IT WAS FIRST YEAR OF ASSESSEE S OPERATIONS AND COMPLETE FACILITIES ENSURING A REASONABLE INDIGENOUS RAW MATER IAL CONTENT WAS NOT IN PLACE. THE ASSESSEE S CLAIM IS THAT IT WAS IN THESE CIRCUMSTANCES THAT THE ASSESSEE HAD TO SELL THE CARS WITH SUCH HIGH IMPORT CONTENTS, AND ESSENTIALLY HIGH COSTS, WHILE THE NORMAL SELLING PRICE OF THE CAR WAS COMPUTED IN THE LIGHT OF THE COSTS AS WOULD APPLY WHEN THE COMPLETE FACILITIES OF REGULAR PRODUCTION ARE IN PLACE. NONE OF THESE ARGUMENTS WERE BEFORE ANY OF THE AUTHORITIES BELOW. WHAT WAS ARGUED BEFORE THE ASSESSING OFFICER WAS MERE FACT OF HIGHER COSTS ON ACCOUNT OF HIGHER I MPORT DUTY BUT THEN THIS ARGUMENT PROCEEDED ON THE FALLACY THAT AN OPERATING PROFIT MARGIN FOR HIGHER IMPORT DUTY IS PERMISSIBLE MERELY BECAUSE THE HIGHER COSTS ARE INCURRED FOR THE INPUTS. THAT ARGUMENT HAS BEEN REJECTED BY A COORDINATE BENCH AND WE ARE I N RESPECTFUL AGREEMENT WITH THE VIEWS OF OUR ESTEEMED COLLEAGUES. THIS ADDITIONAL ARGUMENT WAS NOT AVAILABLE BEFORE THE AUTHORITIES BELOW AND IT WILL INDEED BE UNFAIR FOR US TO ADJUDICATE ON THIS FACTUAL ASPECT WITHOUT ALLOWING THE TRANSFER PRICING OFFICER TO EXAMINE ALL THE RELATED RELEVANT FACTS. WE, THEREFORE, DEEM IT FIT AND PROPER TO REMIT THIS MATTER TO THE FILE OF THE TRANSFER PRICING OFFICER FOR FRESH ADJUDICATION IN THE LIGHT OF OUR ABOVE OBSERVATIONS AND PARTICULARLY DEALING WITH THE CONTENTION TH AT THE PRESENT YEAR BEING FIRST FULL YEAR OF OPERATIONS, THE ASSESSEE WAS FORCED TO HAVE HIGHER IMPORT CONTENT IN RAW MATERIAL AS THE MANUFACTURING FACILITIES, AND VENDOR DEVELOPMENT, WAS NOT COMPLETE, AS ALSO DEALING WITH THE CONTENTION THAT THE BUSINESS MODEL IN THIS YEAR OF OPERATION WAS FUNDAMENTALLY DIFFERENT FROM THE BUSINESS MODEL OF THE COMPARABLE CONCERNS. THE TRANSFER PRICING OFFICER WILL ALSO CONSIDER WHETHER THE IMPORT CONTENT OF THE RAW MATERIAL HAVE SUBSTANTIALLY COME DOWN IN THE SUCCEEDING YE ARS AND WILL TAKE INTO ACCOUNT THE CONCLUSIONS THAT CAN BE DRAWN FROM ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 10 SUCH A DECLINE OR CONSISTENCY, AS THE CASE MAY BE, OF THE IMPORT CONTENT IN THE RAW MATERIAL. IN CASE THE TRANSFER PRICING OFFICER COMES TO THE CONCLUSION THAT ADJUSTMENTS IN OPERATING P ROFITS MARGIN ON ACCOUNT OF PECULIARITIES OF BUSINESS MODEL RESULTING IN HIGHER IMPORT DUTIES, THE TRANSFER PRICING OFFICER WILL CONSIDER THE MANNER IN WHICH IMPACT OF THE SAME CAN BE REASONABLY NEUTRALIZED IN A PRACTICAL MANNER. ONE OF THE SUGGESTIONS THA T THE ASSESSEE HAS ADVANCED BEFORE US IS TO TAKE INTO ACCOUNT IMPACT OF THE NON - CENVATABLE IMPORT DUTY ADDITIONALLY BORNE BY THE ASSESSEE. THE TRANSFER PRICING OFFICER HAS TO CONSIDER THE SAME, AND OTHER OPTIONS WHICH CAN BE PUT INTO SERVICE TO NEUTRALIZE THE IMPACT OF SUCH HIGHER COSTS. WHILE SO DECIDING THE MATTER AFRESH, THE TRANSFER PRICING OFFICER SHALL ALSO GIVE A DUE AND FAIR OPPORTUNITY OF HEARING TO THE ASSESSEE, SHALL DEAL WITH THE CONTENTIONS OF THE ASSESSEE IN A FAIR AND OBJECTIVE MANNER BY WAY OF A SPEAKING ORDER, AND IN ACCORDANCE WITH THE LAW AND JUDICIAL PRECEDENTS AS MAY BE AVAILABLE AT THAT TIME. AS WE REMIT THE MATTER TO THE FILE OF THE TRANSFER PRICING OFFICER, WE ARE ALIVE TO THE FACT THAT IT IS DIFFICULT TO MISS, EVEN ON A CURSORY GLANC E, THAT MANY OF THE ARGUMENTS AND FACTS IN SUPPORT OF ARGUMENTS ARE INDEED TAKEN UP BEFORE US FOR THE FIRST TIME, AND, TO THAT EXTENT, THE AUTHORITIES BELOW NEVER HAD AN OPPORTUNITY TO EXAMINE THESE ASPECTS OF THE MATTER. TAKE, FOR EXAMPLE, THE SUBMISSIONS REGARDING CAPACITY UNDER UTILIZATION. IT WAS NEVER TAKEN UP BEFORE THE TRANSFER PRICING OFFICER IN THE FIRST PLACE. SIMILARLY, THE ISSUES REGARDING PRODUCT CYCLES AND IMPACT OF THESE PRODUCT CYCLES ON OPERATING PROFIT MARGINS WAS NEVER BEFORE THE ASSESSIN G OFFICER. THE RELEVANCE OF MULTIPLE YEAR DATA HINGES ON ACCEPTANCE OF THIS THEORY ABOUT RELEVANCE OF PRODUCT CYCLE. THE CRISIL REPORT WHICH HAS BEEN REPEATEDLY REFERRED BEFORE US WAS APPARENTLY NOT AVAILABLE TO THE TRANSFER PRICING OFFICER. IN THESE CIRCU MSTANCES AND BEARING IN MIND THE FACT THE YEAR BEFORE US WAS ONLY SECOND YEAR OF IMPLEMENTATION OF TRANSFER PRICING REGIME AND IT WAS A NEW AREA OF TAXATION LAWS IN WHICH LAW HAD NOT DEVELOPED, WE THINK THAT IT WILL MEET THE ENDS OF JUSTICE THAT THE ASSESS EE HAS LIBERTY TO RAISE ALL THESE ARGUMENTS BEFORE THE TRANSFER PRICING OFFICER SO THAT THE TRANSFER PRICING OFFICER CAN EXAMINE ALL THE RELEVANT CONTENTIONS AND DECIDE THE SAME BY WAY OF A SPEAKING ORDER IN ACCORDANCE WITH THE LAW. AS WE ARE REMITTING THE SE ISSUES TO THE FILE OF THE TRANSFER PRICING OFFICER, AND AS THESE ISSUES ARE SOMEWHAT ACADEMIC AT THIS STAGE WHICH WILL BE RELEVANT ONLY WHEN THE ASSESSEE S PLEA REGARDING ADJUSTMENT ON ACCOUNT OF HIGHER IMPORT DUTIES BEING WARRANTED BY PECULIARITIES OF OPERATIONS IN THIS YEAR, WE REFRAIN FROM MAKING ANY OBSERVATIONS ON THE MERITS OF THE CASE. WITH THE ABOVE OBSERVATIONS, WE HEREBY REMIT THE MATTER TO THE FILE OF THE TRANSFER PRICING OFFICER SO FAR AS QUESTION OF DETERMINATION OF ARMS LENGTH PRICE UNDER T HE TNMM METHOD IS CONCERNED. 7.4. NOW COMING TO THE NEXT ISSUE AS TO WHETHER THE ASSESSEE, HAVING ADOPTED CUP METHOD IN FORM 3CEB CERTIFICATION, LATER SHIFTING TO TNMM AS THE MOST APPROPRIATE METHOD DURIN G THE ASSESSMENT PROCEEDINGS, COULD AGAIN SHIFT H IS STAND TO ADOPT CUP AS THE MAM AT THE APPELLATE STAGE IF THE TNMM IS FOUND NOT TO BE THE APPROPRIATE METHOD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THIS ASPECT HAS BEEN ADJUDICATED AT LENGTH IN THE DECISION OF MUMBAI TRIBUNAL RENDERED IN THE CASE OF MATTEL TOYS (I) (P) LTD VS DCIT REPORTED IN (2013) 34 TAXMANN.COM 203 (MUMBAI - TRIB) , WHEREIN IT WAS HELD THAT : - ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 11 41. NOW COMING TO THE ARGUMENT OF THE LEARNED DEPARTMENTAL REPRESENTATIVE THAT ONCE THE ASSESSEE ITSELF HAS CHOSEN TNMM AS MO ST APPROPRIATE METHOD IN TPR, THEN IT CANNOT RESORT TO CHANGE ITS METHOD AT AN ASSESSMENT OR APPELLATE STAGE. IN OUR OPINION, SUCH A CONTENTION CANNOT BE UPHELD BECAUSE IF IT IS FOUND ON THE FACTS OF THE CASE THAT A PARTICULAR METHOD WILL NOT RESULT INTO P ROPER DETERMINATION OF THE ALP, THE TPO OR THE APPELLATE AUTHORITIES CAN VERY WELL HOLD THAT WHY A PARTICULAR METHOD CAN BE APPLIED FOR GETTING PROPER DETERMINATION OF ALP OR THE ASSESSEE CAN DEMONSTRATE A PARTICULAR METHOD TO JUSTIFY ITS ALP. THUS, EVEN I F THE ASSESSEE HAD ADOPTED TNMM AS THE MOST APPROPRIATE METHOD IN THE TRANSFER PRICING REPORT, THEN ALSO IT IS NOT PRECLUDED FROM RAISING THE CONTENTIONS/OBJECTIONS BEFORE THE TPO OR THE APPELLATE COURTS THAT SUCH A METHOD WAS NOT AN APPROPRIATE METHOD AND IS NOT RESULTING INTO PROPER DETERMINATION OF ALP AND SOME OTHER METHOD SHOULD BE RESORTED. THE ULTIMATE AIM OF THE TRANSFER PRICING IS TO EXAMINE WHETHER THE PRICE OR THE MARGIN ARISING FROM AN INTERNATIONAL TRANSACTIONS WITH THE RELATED PARTY IS AT ALP OR NOT. THE DETERMINATION OF APPROXIMATE ALP IS THE KEY FACTOR FOR WHICH MOST APPROPRIATE METHOD IS TO BE FOLLOWED. THEREFORE, IF AT ANY STAGE OF THE PROCEEDINGS, IT IS FOUND THAT BY ADOPTING ONE OF THE PRESCRIBED METHODS OTHER THAN CHOSEN EARLIER, THE MOS T APPROPRIATE ALP CAN BE DETERMINED, THE ASSESSMENT AUTHORITIES AS WELL AS THE APPELLATE COURTS SHOULD TAKE INTO CONSIDERATION SUCH A PLEA BEFORE THEM PROVIDED, IT IS DEMONSTRATED AS TO HOW A CHANGE IN THE METHOD WILL PRODUCE BETTER OR MORE APPROPRIATE ALP ON THE FACTS OF THE CASE. ACCORDINGLY, WE REJECT THE CONTENTIONS OF THE LEARNED DEPARTMENTAL REPRESENTATIVE AND ALSO THE OBSERVATIONS OF THE ASSESSING OFFICER AND THE LEARNED COMMISSIONER (APPEALS) THAT THE ASSESSEE CANNOT RESORT TO ADOPTION OF RPM METHOD INSTEAD OF TNMM. 7.5. AS FAR AS THE REIMBURSEMENT OF LABOUR EXPENSES, OVERHEAD EXPENSES AND CONSULTANCY CHARGES EXPENDED BY THE ASSESSEE ARE CONCERNED, WHICH ARE REIMBURSED BY THE AE TO THE ASSESSEE HEREIN, WE FEEL THAT THE CUP METHOD WOULD BE THE MOST APPROPRIATE METHOD AS NO MARK UP IS INVOLVED IN THE SAME AND TNMM WOULD NOT BE THE APPROPRIATE METHOD IN SUCH CIRCUMSTANCES. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF FOSROC CHEMICALS INDIA P LTD VS DCIT REPORT ED IN (2015) 58 TAXMANN.COM 85 (BANGALORE TRIB.) , WHEREIN IT WAS HELD THAT : 28. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT PAYMENT OF TECHNICAL AND MANAGEMENT COSTS IS AN EXPENSE TRANSACTION FOR WHICH THE TEST OF ALP CANNOT BE DONE B Y APPLYING TRANSACTION NET MARGIN METHOD. IN SUCH A SITUATION CUP WOULD BE THE MOST APPROPRIATE METHOD. SINCE THERE IS LACK OF DATA CUP METHOD CANNOT ALSO BE APPLIED. THEREFORE DETERMINATION OF ALP IN RESPECT OF INDIVIDUAL TRANSACTION IS NOT POSSIBLE. HENC E, ADOPTING TNMM AT THE ENTITY LEVEL WAS JUSTIFIED AND HAD TO BE ACCEPTED. 29. THE LEARNED DR REITERATED THE STAND OF THE REVENUE AS CONTAINED IN THE ORDER OF THE DRP AND THE TPO. 30. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. AT THE OUTSET WE OBSERVE IN THE CASE OF DRESSER RAND INDIA (P.) LTD. V. ADDL. CIT [2011] 47 SOT 423/13 TAXMANN.COM 82 (MUM.) , THE HON'BLE MUMBAI TRIBUNAL HAD AN OCCASION TO EXAMINE AS TO WHAT IS T HE APPROACH THAT HAS TO BE ADOPTED FOR DETERMINING ALP IN THE CASE OF COST CONTRIBUTION AGREEMENT WHICH IS AKIN TO THE ARRANGEMENT IN THE PRESENT CASE BETWEEN ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 12 THE ASSESSEE AND ITS PARENT COMPANY. THE ASSESSEE IN CASE OF DRESSER RAND INDIA (P.) LTD. (SUPRA) ENTERED INTO A 'COST CONTRIBUTION AGREEMENT' WITH ITS PARENT COMPANY PURSUANT TO WHICH IT PAID A SUM OF RS. 10.55 CRORES AS ITS SHARE OF THE COSTS. THE TPO, AO & DRP DISALLOWED THE EXPENDITURE ON THE GROUND THAT THE ALP WAS 'NIL' AS NO REAL SERVICES HAD B EEN AVAILED BY THE ASSESSEE AND THE ARRANGEMENT WAS NOT GENUINE. ON FURTHER APPEAL BY THE ASSESSEE, THE TRIBUNAL HELD AS FOLLOWS: '8. WE FIND THAT THE BASIC REASON OF THE TRANSFER PRICING OFFICER'S DETERMINATION OF ALP OF THE SERVICES RECEIVED UNDER COST C ONTRIBUTION ARRANGEMENT AS 'NIL' IS HIS PERCEPTION THAT THE ASSESSEE DID NOT NEED THESE SERVICES AT ALL, AS THE ASSESSEE HAD SUFFICIENT EXPERTS OF HIS OWN WHO WERE COMPETENT ENOUGH TO DO THIS WORK. FOR EXAMPLE, THE TRANSFER PRICING OFFICER HAD POINTED OUT THAT THE ASSESSEE HAS QUALIFIED ACCOUNTING STAFF WHICH COULD HAVE HANDLED THE AUDIT WORK AND IN ANY CASE THE ASSESSEE HAS PAID AUDIT FEES TO EXTERNAL FIRM. SIMILARLY, THE TRANSFER PRICING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD MANAGEMENT EXPERTS ON ITS ROLLS, AND, THEREFORE, GLOBAL BUSINESS OVERSIGHT SERVICES WERE NOT NEEDED. IT IS DIFFICULT TO UNDERSTAND, MUCH LESS APPROVE, THIS LINE OF REASONING. IT IS ONLY ELEMENTARY THAT HOW AN ASSESSEE CONDUCTS HIS BUSINESS IS ENTIRELY HIS PREROGATIVE AND IT IS NOT FOR THE REVENUE AUTHORITIES TO DECIDE WHAT IS NECESSARY FOR AN ASSESSEE AND WHAT IS NOT. AN ASSESSEE MAY HAVE ANY NUMBER OF QUALIFIED ACCOUNTANTS AND MANAGEMENT EXPERTS ON HIS ROLLS, AND YET HE MAY DECIDE TO ENGAGE SERVICES OF OUTSIDE EXPERTS FOR AUDIT ING AND MANAGEMENT CONSULTANCY; IT IS NOT FOR THE REVENUE OFFICERS TO QUESTION ASSESSEE'S WISDOM IN DOING SO. THE TRANSFER PRICING OFFICER WAS NOT ONLY GOING MUCH BEYOND HIS POWERS IN QUESTIONING COMMERCIAL WISDOM OF ASSESSEE'S DECISION TO TAKE BENEFIT OF EXPERTISE OF DRESSER RAND US, BUT ALSO BEYOND THE POWERS OF THE ASSESSING OFFICER. WE DO NOT APPROVE THIS APPROACH OF THE REVENUE AUTHORITIES. WE HAVE FURTHER NOTICED THAT THE TRANSFER PRICING OFFICER HAS MADE SEVERAL OBSERVATIONS TO THE EFFECT THAT, AS EV IDENT FROM THE ANALYSIS OF FINANCIAL PERFORMANCE, THE ASSESSEE DID NOT BENEFIT, IN TERMS OF FINANCIAL RESULTS, FROM THESE SERVICES. THIS ANALYSIS IS ALSO COMPLETELY IRRELEVANT, BECAUSE WHETHER A PARTICULAR EXPENSE ON SERVICES RECEIVED ACTUALLY BENEFITS AN ASSESSEE IN MONETARY TERMS OR NOT EVEN A CONSIDERATION FOR ITS BEING ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME, AND, BY NO STRETCH OF LOGIC, IT CAN HAVE ANY ROLE IN DETERMINING ARM'S LENGTH PRICE OF THAT SERVICE. WHEN EVALUATING THE ARM'S LENGTH PRIC E OF A SERVICE, IT IS WHOLLY IRRELEVANT AS TO WHETHER THE ASSESSEE BENEFITS FROM IT OR NOT; THE REAL QUESTION WHICH IS TO BE DETERMINED IN SUCH CASES IS WHETHER THE PRICE OF THIS SERVICE IS WHAT AN INDEPENDENT ENTERPRISE WOULD HAVE PAID FOR THE SAME. 9. ** ** ** 10. IN CASE THE ASSESSING OFFICER COMES TO THE CONCLUSION THAT THE ASSESSEE HAS INDEED RECEIVED THE SERVICES FROM THE AE THE NEXT QUESTION WHICH WE HAVE TO DECIDE IS AS TO WHAT IS THE ARM'S LENGTH PRICE OF THESE SERVICES RECEIVED UNDER COST CONTR IBUTION AGREEMENT. IT HARDLY NEEDS TO BE EMPHASIZED THAT EVEN COST CONTRIBUTION ARRANGEMENT SHOULD BE CONSISTENT WITH ARM'S LENGTH PRINCIPLE, WHICH, IN PLAIN WORDS, REQUIRES THAT ASSESSEE'S SHARE OF OVERALL CONTRIBUTION TO THE COSTS IS CONSISTENT WITH BENE FITS EXPECTED TO BE RECEIVED, AS AN INDEPENDENT ENTERPRISE WOULD HAVE ASSIGNED TO THE CONTRIBUTION IN HYPOTHETICALLY SIMILAR SITUATION. ..' 31. THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT V. EKL APPLIANCES LTD. [2012] 209 TAXMAN 200/24 TAXMANN.COM 199/345 ITR 241 AS WELL ELL AS CIT V. CUSHMAN & WAKEFIELD INDIA (P.) LTD. [2014] 367 ITR 730/46 TAXMANN.COM 317 (DELHI) RENDERED SI MILAR RULING AS WAS RENDERED IN THE CASE OF DRESSER RAND INDIA (P.) LTD. (SUPRA). IN THE CASE OF CUSHMAN & WAKEFIELD INDIA (P.) LTD. (SUPRA), THE HON'BLE DELHI HIGH COURT OBSERVED THAT WHETHER A THIRD PARTY - IN AN UNCONTROLLED TRANSACTION WITH THE TAXPAYE R WOULD HAVE CHARGED AMOUNTS LOWER, EQUAL TO OR GREATER THAN THE AMOUNTS CLAIMED BY ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 13 THE AES, HAS TO PERFORCE BE TESTED UNDER THE VARIOUS METHODS PRESCRIBED UNDER THE INDIAN TP PROVISIONS. FURTHER, THE HON'BLE HIGH COURT OPINED THAT CONCEPT OF BASE EROSION IS NOT A LOGICAL INFERENCE FROM THE FACT THAT THE AES HAVE ONLY ASKED FOR REIMBURSEMENT OF COST. THIS BEING A TRANSACTION BETWEEN RELATED PARTIES, WHETHER THAT COST ITSELF IS INFLATED OR NOT ONLY IS A MATTER TO BE TESTED UNDER A COMPREHENSIVE TRANSFER PRIC ING ANALYSIS. THE BASIS FOR THE COSTS INCURRED, THE ACTIVITIES FOR WHICH THEY WERE INCURRED, AND THE BENEFIT ACCRUING TO THE TAXPAYER FROM THOSE ACTIVITIES MUST ALL BE PROVED TO DETERMINE FIRST, WHETHER, AND HOW MUCH, OF SUCH EXPENDITURE WAS FOR THE PURPOS E OF BENEFIT OF THE TAXPAYER, AND SECONDLY, WHETHER THAT AMOUNT MEETS ALP CRITERION. 32. IN FACT IN ASSESSEE'S OWN CASE THE TRIBUNAL ON IDENTICAL FACTS REMANDED THE ISSUE OF DETERMINATION OF ALP TO THE TPO. THE DIRECTION OF THE TRIBUNAL HAS ALREADY BEEN EX TRACTED IN THE EARLIER PART OF THIS ORDER. THE FACTS AND CIRCUMSTANCES ARE IDENTICAL IN THE PRESENT ASSESSMENT YEAR AND THEREFORE THE ORDER OF THE AO IS SET ASIDE AND THE ISSUE REMANDED TO THE TPO/AO WITH IDENTICAL DIRECTIONS AS WAS GIVEN IN ASSESSEE'S OWN CASE IN AY 07 - 08. IN A CASE WHERE EXPENSES ARE ACTUALLY REIMBURSED WITH NO MARK - UP, THAN AS OBSERVED BY THE HON'BLE DELHI HIGH COURT, THE TRANSACTION BEING AN EXPENSE TRANSACTION, THE TAX BASE EROSION CAN HAPPEN ONLY IF THE COSTS SAID TO HAVE BEEN REIMBUR SED ARE INFLATED. IN SUCH A SITUATION THE QUESTION WOULD BE TO DETERMINE AS TO WHETHER THE COSTS CLAIMED TO HAVE BEEN APPORTIONED BETWEEN THE VARIOUS GROUP COMPANIES HAS NOT BEEN INFLATED OR WHETHER THEY ARE ALLOCATED ON A PROPER BASIS. AS A FIRST STEP THE TPO GENERALLY CONSIDERS FOLLOWING ASPECTS IN ORDER TO IDENTIFY INTRA GROUP SERVICES REQUIRING ARM'S LENGTH REMUNERATION: WHETHER SERVICES WERE RECEIVED FROM RELATED PARTY. NATURE OF SERVICES INCLUDING QUANTUM OF SERVICES RECEIVED BY THE RELATED P ARTY. SERVICES WERE PROVIDED IN ORDER TO MEET SPECIFIC NEED OF RECIPIENT OF THE SERVICES. THE ECONOMIC AND COMMERCIAL BENEFITS DERIVED BY THE RECIPIENT OF INTRA GROUP SERVICES. IN COMPARABLE CIRCUMSTANCES AN INDEPENDENT ENTERPRISE WOULD BE W ILLING TO PAY THE PRICE FOR SUCH SERVICES? AN INDEPENDENT THIRD PARTY WOULD BE WILLING AND ABLE TO PROVIDE SUCH SERVICES? 7.6. THE ASSESSEE BEARS LESSER BUSINESS RISK THAN INDEPENDENT COMPARABLE ENTERPRISES DUE TO THE NATURE OF ITS REVENUE MODEL. IT IS BEYOND ANY DOUBT THAT THE PROJECT RECEIPTS ARE FROM KMRCL WHICH IS A GOVERNMENT BODY AND HENCE THE MARGINS EARNED BY THE ASSESSEE IS BOUND TO BE COMPARATIVELY LOWER TO REFLECT THE LOWER LEVEL OF BUSINESS RISK INVOLVED. MOREOVER, THE COMPARABLES SEL ECTED FOR THE ANALYSIS ALSO INCLUDE COMPANIES THAT PERFORMS ADDITIONAL FUNCTIONS WHILE BEING ENGAGED IN PROVIDING COMPARABLE SERVICES. FURTHER THE RISK PROFILES OF INDEPENDENT COMPANIES DIFFER FROM THAT OF ASSESSEE. THE IMPACT OF THESE FUNCTIONAL AND RI SK DIFFERENCES DEFINITELY REQUIRE TO BE FACTORED WHILE DETERMINING THE ALP. ITA NO. 382/KOL/2015 LEE HARRIS POMEROY ARCHITECTS PC A.Y.2010 - 11 14 7.7. IN VIEW OF THE AFORESAID FACTS AND CIRCUMSTANCES AND THE VARIOUS JUDICIAL PRECEDENTS RELIED UPON, WE FIND THAT IN THE INTEREST OF JUSTICE AND FAIR PLAY, WE DEEM IT FIT AND APPROPRIATE TO SET ASIDE THIS ISSUE TO THE FILE OF THE LEARNED TPO / AO WITH A DIRECTION TO ADOPT CUP METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINATION OF ALP FOR INTERNATIONAL TRANSACTIONS. THE ASSESSEE IS ALSO DIRECTED TO FURNISH THE COMPARABLES BASED ON INDEPENDENT TP STUDY FOR ADOPTION OF CUP METHOD AND PRODUCE SUCH OTHER EVIDENCES AND DOCUMENTS BEFORE THE LEARNED TPO / AO TO ENSURE QUICK DISPOSAL OF THIS SET ASIDE PROCEEDINGS. WE ALSO DIRECT THE LEARNED TPO / AO TO PERMIT THE ASSESSEE TO USE MULTIPLE YEAR DATA AND ADOPT THE WEIGHTED AVERAGE DATA OF THE FINANCIAL INFORMATION OF THE COMPARABLES AND USE THE SAME FOR DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNC ED IN TH E COURT ON 29.09.2015. SD/ - SD/ - [MAHAVIR SINGH] [M.BALAG ANESH] JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 29.09.2015. R.G.(.P.S.) COPY OF THE ORDER FORWARDED TO : 1 . LEE HARRIS POMEROY ARCHITECTS PC,C/O S.K.BAJORIA AND ASSOCIATES, 6, OLD POST OFFICE STREET, GROUND FLOOR, KOLKATA - 700001. 2 THE DEPUTY DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) - 1(2), KOLKATA 3 . THE D CIT - IT - 1(2) , KOLKATA , 4 . DR, KOLKATA BENCHES, KOLKATA TRUE COPY , BY ORDER, DEPUTY /ASST. REGISTRAR , ITAT, KOLKATA BENCHES