M/s Andritz Hydro Private Limited, Bhopal V. The DCIT Circle 1(1), Bhopal

ITA 75/Ind/2022

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The case involves Andritz Hydro Private Ltd., a subsidiary of Andritz Hydro GmbH Austria, engaged in the business of design, manufacture, servicing, erection, and installation of hydro and thermal power generators. The assessee filed its return of income for the assessment year 2017-18, declaring a total income and reporting significant international transactions. The TPO did not accept the Transfer Pricing (TP) Study Report of the assessee for two international transactions and proposed adjustments based on the arm's length price (ALP) determined from internal comparables. The assessee contested these adjustments, arguing that the transactions were at arm's length and supported by detailed economic analysis and previous tribunal decisions. The Tribunal found that the TPO's approach of rejecting aggregation of transactions was not appropriate and directed a fresh analysis considering the scope of aggregation of closely linked transactions and functional, asset, and risk analysis (FAR).

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 130579 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 12-06-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 07-04-2022
• Other Referred Cases: Epcos India Private Limited, Sony Ericson Mobile Communication India Pvt. Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: KAUL
• Keywords: Transfer pricing; International transaction; Fair market value; Set aside
• Section: 92C; 143(3); 92E; 13; 22

Judgement Text

Page 1 of 27 आयकर अपील य अ धकरण, इंदौर यायपीठ, इंदौर IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI B.M. BIYANI, ACCOUNTANT MEMBER ITA No. 75/Bang/2022 (Assessment Year:2017-18) M/s. Andritz Hydro Private ltd. D-17, MPAKVN Industrial Area, Mandideep Raisen Vs. DCIT Circe 1(1) Bhopal (Appellant / Assessee) (Respondent/ Revenue) PAN: AABCV 2466 R Assessee by Shri Rahul, Kaul AR Revenue by Shri P.K. Mishra, CIT-DR Date of Hearing 13.06.2023 Date of Pronouncement 28.08.2023 O R D E R Per Vijay Pal Rao, JM: This appeal by the assessee is directed against the assessment order dated 22.02.2022 passed u/s 143(3) r.w. section 144C(13) of the Act in pursuant to the directions of DRP dated 25.01.2022 passed u/s 144C(5) of the Act for Assessment Year 2017-18. 2. The assesse is subsidiary of Andritz Hydro Private Limited GmbH Austria and engaged in the business of design, manufacture, servicing, erection and installation of hydro and thermal power generators. It is stated that Andritz Group is a global supplier of turnkey electromechanical equipement and services for hydropower plants. The assesse filed its return of income for the year under consideration on ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 2 of 27 Page 2 of 27 30.11.2017 declaring total income of Rs.42,46,53,612/-. The assesse also reported international transactions during the year under consideration amounting to Rs.344,96,10,445/- the details of the international transactions are given at page no. 2 & 3 of the order of TPO as under: Sr. No. Nature of Transaction Amount 1 Purchase of RM & design. AP 64,44,192/- 2 Corporate Guarantee Charges 4.40,03,282/- 3 ECB Loan Agreement 5,56,988/- 4 Erection, commissioning, site work & supervision charges 8,90,16,868/- 5 IT Software Maintenance 8,09,21,726/- 6 Milling and Boring Machine 4.78,04,834/- 7 Payment of royalty 11,65,55,079/- 8 Pur of RM & design 25,95,58,299/- 9 Recovery of expenses 1,33,258/- 10 Reimbursement of expenses - Expect salary 3,80,44,697/- 11 Reimbursement of expenses Training 96,28,432/- 12 Revenue from projects 264,05,57,464/- 13 Sales & marketing expenses 2,26,70,845/- 14 Technical Services & Support Cost 9,37,14,421/- ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 3 of 27 Page 3 of 27 Total Amount 344,96,10,385/- 3. In the Transfer Pricing Study Report the assesse has benchmarked its International transactions by applying TNMM as the most appropriate method with PLI as OP/OC and compared with the internal unrelated/uncontrolled transactions of domestic sales having profit margin @ 10.62% in comparison to the average gross margin of aggregated all international transactions @ 17.80%. Thus, the assesse has claimed that its international transactions are at Arm’s Length Price. The TPO did not accept the TP Study Report of the assessee in respect of the two international transactions i.e. (i) revenue from project (ii) technical services and support cost. 3.1 As against aggregated transactions adopted by the assesse the TPO took each and every project as separate international transaction and picked up a particular transactions of project No. AO 2 OP-I with Andritz Hydro Gmbh Austria which has shown loss of 25.5% and consequently the TPO proposed adjustment of Rs.8,94,106/- by considering ALP as uncontrolled price of the internal comparable of the assessee at 10.62%. 3.2 Secondly the TPO held that the payment towards technical services is part of the royalty payment for technical know-now under royalty agreement which covers all the payments including payment of technical services provided by the AE to the assessee and consequently the TPO determined ALP of the technical services at nil. As a result the TPO has proposed the adjustment of the entire payment towards technical services. Based upon the order of the TPO the AO prepared draft assessment order dated 15.04.2021 against which the assesse filed the objections before DRP. The DRP upheld the adjustment made by the TPO/AO while passing the directions dated 25.01.2022 culminated in impugned final assessment order. 4. Before the Tribunal the Ld. AR has submitted that the assesse has undertaken detailed economic analysis in respect of its international ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 4 of 27 Page 4 of 27 transactions with its AE and determined the price of its international transitions at arm’s length comparing with the internal uncontrolled price. He has referred to circular no.14 of 2001 issued by CBDT explaining the provision of section 92C(3) and submitted that where taxpayers determines arm’s length price in accordance with rules and substantiated the same with prescribed documentation and data used for determining of arm’s length price is reliable and correct then there can be no intervention by the AO. The assessing officer may intervene only if he is, on the basis of material or information or documents in his position, of the opinion that price charged in the international transactions has not been determined in accordance with sub-section (1) & (2) of section 92C or information and documents relating to the international transactions have not been kept and maintained by the assesse in accordance with provisions of section 92D(1) and rules made thereunder or the information or data used in computation of arm’s length price is not reliable or correct. A similar explanation has been provided by the CBDT in circular no.12 dated 23 rd August 2001. Thus, the Ld. AR has submitted as per the circular issued by the CBDT the TPO was bound to accept the analysis on account of the fact that the assesse has followed the guidelines laid down in the Rules. Ld. AR has submitted that even otherwise the overall operating margin of the assesse in respect of the international transactions is higher than the operating profit margins of the comparable. He has pointed out that the tribunal in asessesee own case for assessment years 2010-11 and 2011-12 as well as for the assessment year 2006-07 to 2009-10 upheld the transfer pricing study of the assesse in respect of international transactions. The TPO has erred in out rightly rejecting the TNMM as the most appropriate method and adopting CPM when the TNMM has been adopted by the assesse in the preceding years and upheld by the Tribunal. The assesse has adopted combined transactions approach and compared the arithmetic mean of gross margin earned by the assesse from relating party transaction with asthmatic mean of margin from unrelated transactions. The TPO failed to consider the functional and risk differences between individual controlled ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 5 of 27 Page 5 of 27 transactions and aggregate uncontrolled transactions. If the TPO decided to analysis and benchmarked each and every project as separate international transaction then the surplus revenue/profit exceeding ALP margin earned from other projects done with AE ought to have been set off against the negative margin project done with the same AE. 4.1 Ld. AR has relied upon the order of this tribunal in assesse’s own case for A.Y.2010-11 & 2011-12 wherein the Tribunal has deleted the addition made by the TPO/AO. Ld. AR has referred to Rule 10A of the Income Tax Rules and submitted that the transactions includes a number of closely linked transactions as per Rule 10A and therefore, the aggregation of the closely linked transactions is provided in Rule 10A of the I.T. Rules. He has also referred to the OECD guidelines in support of assesse’s approach of taking integrated transactions for benchmarking or determination of arm’s length price. Ld. AR has submitted that when all the contracts are executed by the assesse under one master contract with Andritz Hydro Private Limited. then all the international transactions as per Rule 10A(d) are closely linked transactions to be treated as unitary transactions. He has also referred to the guidelines note of ICAI in relation to benchmarking of closely linked transactions. He has relied upon the decision of Kolkata Benches of the Tribunal in case of Epcos India Private Limited wherein the international transaction of purchase of Raw Materials & components, Royalty payments and receipt of indenting commission based on aggregate basis under TNMM are held to be closely linked transactions because they emanate from a common source i.e. manufacture and supply of electronic components by the assesse. 4.2 He has also relied upon various judgment on the point of aggregation of the international transactions for the purpose of determining arm’s length price and submitted that the tribunal has repeatedly held that closely linked transactions emanating from a same source shall be aggregated for the purpose of determining arm’s length price. The aggregation of transaction eliminates impact of accounting differences in various transactions. Further the assessee has also given ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 6 of 27 Page 6 of 27 the working of determination of arm’s length price by adopting CPM as most appropriate method. The CPM is normally used for pricing intra group sales of goods and services. Since the subject international transactions related to the export of finished goods and gross margin information was available in respect of related and unrelated party sales by assesse, CPM was considered as the most appropriate method for determining the ALP. The assesse is making sales of generators and related parts to related and unrelated entities. While doing the analysis for determination of arm’s length price the assessee has aggregated transactions being undertaken to gross margins so that the impact of difference in terms and conditions of each project is neutralized. The gross margin earned by the assesse from project including sales of generating and related parts with unrelated parties is having a very wide range of individual margin of such projects with an average of 10.62% which has been compared with the gross margin of projects undertaken with AE’s with average of 17.80 % across all projects. Even if CPM is to be considered as most appropriate method and applied on project by project basis the set off higher gross margin earned in some AE projects should be done against low gross margin AE project. He has referred to the details where the GP margin on AE projects on aggregate basis is arrived at Rs.23,63,81,323/- after reducing short fall in gross margin of one AE project for which the TPO has made the addition. Thus, the Ld. AR has submitted that the gross margin on the other projects with AE even after reducing short fall in the gross margin in one of the project is more than the arm’s length price by taking internal uncontrolled price. 4.3 As regards the addition made on account of adjustment of payment for technical services the Ld. AR has submitted that the TPO as well as DRP erred in not considering the difference between the receipt of technical assistance and payment of royalty. Once the arm’s length price is determined by taking TNMM as the most appropriate method then the payment made for technical services merged with the arm’s length price ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 7 of 27 Page 7 of 27 determined based on the TNMM as the most appropriate method. The royalty is paid for know-how provided by the AE under “the Technology and Know-how Agreement(TCA)” whereas the payment for technical services is depending on actual expenditure incurred by the AE for providing such technical services to the assesse. The royalty is paid @ agreed between the parties as per terms of the agreement and also within the limit prescribed by the authorities and therefore, the royalty payment can not be mixed with the fee for technical services. The ld. AR has relied upon the judgment of Delhi High Court in case of Sony Ericson Mobile Communication India Pvt. Ltd. wherein the Hon’ble High Court has held that where the transactions are to be analyzed using separate transactions approach i.e. on transaction by transactions basis then the short fall arising from one transaction first be set off against surplus from other transactions before any addition is proposed to the income as a result of transfer pricing review. 4.4 Ld. AR has referred to the technology and know-how agreement (TCA) with the AE and submitted that as per article 7.1 the payments for the services of time analyzing study and checking manufacturing instruction are specifically excluded under the said agreement and therefore, the payment made by the assesse in respect of these two services are not covered by the royalty agreement. Alternatively, the AR has submitted that even after the amount of Rs.7,97,140/- paid towards technical services is considered as part of the royalty and added to the payment of royalty then the total effective royalty payout would be still at ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 8 of 27 Page 8 of 27 arm’s length as 2.27% of the sales whereas as per the agreement (TCA) the rate of Royalty is 5%/8% of sales. Thus, he has pleaded that adjustment made by the TPO/AO is not justified and the same may be deleted. 5. On the other hand, Ld. DR has submitted that the TPO has already taken a very fair and reasonable approach in determining arm’s length price and proposed the adjustment of Rs.16,91,246/- for the receipt of the international transactions about Rs.345 crore. He has relied upon the orders of the TPO and DRP and submitted that the TPO has analyzed each and every point of the issue and rightly concluded that when each project is having separate cost and revenue then ALP can be determined separately for each project instead of aggregation of the transactions which is the last resort where the price of each individual transactions with AE cannot be determined properly due to closely related transactions having impact on each other price and margins. 6. We have considered the rival submissions as well as relevant material on record. The TPO has gone to the details of each project executed by the assessee under the agreement with AE. The TPO has given details of international transaction with description and nature at page 2 & 3 as under: Sr. No. Nature of Transaction Amount 1 Purchase of RM & design. AP 64,44,192/- ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 9 of 27 Page 9 of 27 2 Corporate Guarantee Charges 4.40,03,282/- 3 ECB Loan Agreement 5,56,988/- 4 Erection, commissioning, site work & supervision charges 8,90,16,868/- 5 IT Software Maintenance 8,09,21,726/- 6 Milling and Boring Machine 4.78,04,834/- 7 Payment of royalty 11,65,55,079/- 8 Pur of RM & design 25,95,58,299/- 9 Recovery of expenses 1,33,258/- 10 Reimbursement of expenses - Expect salary 3,80,44,697/- 11 Reimbursement of expenses Training 96,28,432/- 12 Revenue from projects 264,05,57,464/- 13 Sales & marketing expenses 2,26,70,845/- 14 Technical Services & Support Cost 9,37,14,421/- Total Amount 344,96,10,385/- 6.1 Further the transactions relating to the sales to the AE for execution of the projects with project wise details are given at page 4 to 12 of the TPO as under: ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 10 of 27 Page 10 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 11 of 27 Page 11 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 12 of 27 Page 12 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 13 of 27 Page 13 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 14 of 27 Page 14 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 15 of 27 Page 15 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 16 of 27 Page 16 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 17 of 27 Page 17 of 27 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 18 of 27 Page 18 of 27 6.3. It is clear from the details of the international transactions that the assesse has entered into international transactions with as many as 14 AE’s based in difference tax jurisdiction. The details of the AEs are given in TP study at page no.107 & 108 as under: Associated enterprise Amount (Inr) ANDRITZ HYDRO GmbH, Austria 2,104,875,334 ANDRITZ HYDRO AS, Norway 162,335,856 ANDRITZ HYDRO S.A.S, France 133,689,223 ANDRITZ Hydro S.r.l. Unipersonale, Italy 106,477,297 ANDRITZ HYDRO Canada Inc., Canada 60,590,906 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 19 of 27 Page 19 of 27 ANDRITZ (China) Ltd, China 59.433,278 PT ANDRITZ HYDRO, Indonesia 6,600,761 ANDRITZ HYDRO AB, Sweden 3,526,400 ANDRITZ AG, Austria 3,028,409 Total 2,640,557,464 Associated enterprise Amount (Inr) ANDRITZ HYDRO GmbH, Austria 201,638,612 ANDRITZ HYDRO GmbH, Germany 18,860,676 ANDRITZ HYDRO S.A.S, France 14,472,459 ANDRITZ Hydro AG Switzerland 11,701,353 ANDRITZ HYDRO AB Sweden 6,980,177 ANDRITZ HYDRO Ltd. Canada 3,432,687 ANDRITZ HYDRO GmbH, New Zealand 932,950 ANDRITZ HYDRO Indonesia 899,422 ANDRITZ Power Sdn. Bhd. Malaysia 392,706 ANDRITZ HYDRO S.L. Spain 186,174 ANDRITZ HYDRO Vietname Co. Ltd. Vietnam 61,083 Total 259,558,299 ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 20 of 27 Page 20 of 27 6.4. The concept of aggregation of closely linked transactions refers to the various transactions between the assesse and its associated enterprise and the same cannot be evaluated separately as individual basis due to the reason that price of one transaction is having a bearing on the price of the other transactions between the assesse and its AE. If number of transaction()s are closely linked or continuous in nature and arising from continuous transaction of supply of services then such transaction can be regarded as closely linked transaction for the purpose of determining arm’s length price as provided under rule 10A(d). The income tax rules permits the aggregation and clubbing of close related transactions as it is also supported by the OECD guidelines on transfer pricing. In order to examine whether number of transactions are closely linked or continuous so as to aggregate for the purpose of determining of arm’s length price it is to be seen that one transaction is follow on the earlier transaction and subsequent transactions is carried out and depending wholly or substantially on the earlier transactions. It can be vice versa when the earlier transactions has been entered into between parties by keeping in mind that a continuous transaction of similar nature between the parties thereafter. Therefore, the pricing of the transactions are influenced by each other and particularly in determining price and profit involved in the transaction are depending on each other then those transactions can safely be regarded as closely linked transactions. 6.5 In case in hand the assesse has entered into various international transactions with different AEs located at different tax jurisdiction having different geographical and economic conditions then this concept of aggregation of closely linked transactions would be restricted only to the number of transactions which each AE executed in same geographical and economical environment. The transactions with separate AE’s cannot be aggregated under the rule of aggregation. Further when the AEs are based at different economic, market and geographical conditions then the transactions of project executed for different AE at different tax jurisdiction, economic, geographical and market conditions can not be ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 21 of 27 Page 21 of 27 grouped together for determination of ALP. Section 92C(1) provides for determination of ALP of an international transactions or specified domestic transactions. For ready reference section 92C(1) is quoted as under: “ (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) comparable uncontrolled price method, by which,— (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction [or the specified domestic transaction] ; (b) resale price method, by which,— (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 22 of 27 Page 22 of 27 (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which,— (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions [or specified domestic transactions] involving transfer of unique intangibles or in multiple international transactions [or specified domestic transactions] which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which— (i) the combined net profit of the associated enterprises arising from the international transaction [or the specified domestic transaction] in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 23 of 27 Page 23 of 27 (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction] : Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction [or specified domestic transaction] in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction [or the specified domestic transaction] ; (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic 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 to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; [ (f) any other method as provided in rule 10AB. ] ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 24 of 27 Page 24 of 27 6.6 This section contemplates for determination of ALP in relation to international transactions The legislative intend is clear that every international transactions of the assesse is to be benchmarked individually. However it is not always necessary that every transactions of entity are independent in all respect. In case the assesse entered into transactions with AE but the functions performed, assets employed for the purpose of that transactions in singularity cannot be ascertained then in such cases the functions performed or assets employed will have to be considered for similar transactions in unity. As per the provisions of section 92C(1) the ALP to be determined by application of most appropriate method (MAM) having regard to the nature of transactions or class of transactions or class of associated person or functions performed by the AE to the transaction. The Rule 10A(d) provided the definition of transaction for computation of arm’s length price which read as under: “10A. For the purpose of this rule and rules [10AB] to 10E- (a) Associated enterprise shall .... (b) ..... (c) ..... (d) “transaction” includes a number of closely linked transactions.” 6.7 This rule permits the aggregation of control transaction for the purpose of determination of ALP if the number of transactions are closely linked transactions. The income tax Act does not define terms closely linked transactions however, guidance note on transfer pricing u/s 92E of the Act published by ICAI-2017 clarified in para 5.7 as under: “Two or more transactions can be said to be linked when these transactions emanate from a common source being an order or a contract or an agreement or an arraignment and the nature, characteristic and terms of the transaction are substantially flowing from the said common sources” 6.8. Therefore, situation may arise where it will be appropriate that ALP in relation to such group of transaction may be determined by the ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 25 of 27 Page 25 of 27 aggregating based on parameters provided in section 92C(1) and Rule 10A(d). Thus, the aggregation of the transactions is not prohibited by TP regulation under the Income Tax Act but the scope of closely linked transaction is limited to common source or arrangement between two parties which meant multiple transactions between two parties and emanating from common source or arrangement. Therefore, the transactions between the assessee and it’s more than one AE having separate and independent functions performed or assets employed cannot be aggregated for the purpose of determination of ALP. OECD guidelines also provides for aggregation of controlled transaction in para 3.9 as under: “Idealy in order to arrive at the most appropriate approximation of the fair market value, the arm’s length principle should be applied in a transaction by transaction basis. However there are often situation where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on separate basis.” 6.9 Thus, portfolio approach is recognized for determination of arm’s length price but the relevant factors for aggregation or segregation of international transactions could be FAR analysis of the segment of which the transactions form part. The DRP has considered and decided this issue summary in para 8.3 as under: “8.3 Discussions and Directions of DRP on Grounds 2 to 4: It is found that the assessee has entered in to an aggregate value of international transactions amounting to Rs 344,96,10,445/-, whereas, the total amount of variations/ adjustments proposed are Rs 16,91,246/- only. Prima-facie, we find that the TPO has already been very fair and careful in proposing adjustments. Besides, there is a litigation history in respect of TP adjustments in this case. On some issues, the decisions of Hon'ble ITATS and the DRPS have also come whose reference has also been made in the TPO's order. The TPO has proposed adjustments after duly considering those tribunal judgements and DRP orders. For example, while proposing the first adjustment of Rs 8,94,106/- on account of the contract revenue from the AES, he has calculated the average gross margin as per CUP and thereafter, in only one instance, found a variation worth-proposing. We do not find any un-resonableness in the approach of the TPO and uphold the same. As for the another small amount of Rs 7,97,140/- being proposed on account of payment of technical services, the TPO ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 26 of 27 Page 26 of 27 has clearly mentioned at para C.2.5 at Page 95 that he has considered the Tribunal and DRP orders and the same cannot rescue the assessee as the impugned payments were duplicative and hence, there was no requirement for finding any comparable data as no commercial reasons could probably be given for double payment for the same services. We find the stand of the AO to be unassailable. There is no need to go further in to the matter. We uphold the adjustments made.Keeping in view the same, the objections of the assessee on TP grounds are hereby rejected.” 6.10 Thus, it is clear that DRP has not even discussed the objections raised by the assesse particularly in respect of the aggregation of the transactions as well as the other claim of most appropriate method and setting off the excess of margin above the arm’s length price in respect of the some projects against the short margin of the other project for which the TPO has made adjustment. 7. In view of the above legal proposition the aggregation of transactions between the assesse and each of the AEs is permissible and the arms’ length price to be determined as aggregated transactions with each AE and to be compared with uncontrolled transactions having regard to functions formed, or assets employed and risk involved (FAR). Accordingly in the facts and circumstances of the case when the assesse has aggregated all the transactions entered into with as many as 15 AEs located and based at different countries under the different tax jurisdiction and in different economic, market, geographical conditions is beyond the scope of aggregation of the transaction which are closely linked and continuous depending upon each other. Similarly the TPO in rejecting aggregation in toto is also not right and therefore, in our considered view the transfer pricing analysis is required to be done afresh having regard to the scope of aggregation of closely linked transactions provided u/s 92C(1) r.w.s 10A(d) of the Act as well as FAR analysis. The DRP has not given speaking or reasoned finding on the issue of adjustment on account of payment for technical services. Therefore, both these issues of determination of arm’s length price in respect of contract receipts as well as the payment of technical services are set aside to the record of the TPO for fresh determination of arm’s length price. Needless ITA No.75/Ind/2022 Andritz Hydro Private Ltd. Page 27 of 27 Page 27 of 27 to say the assessee be given appropriate opportunity of hearing before passing afresh order. 8. In the result, appeal of assessee is allowed for statistical purpose. Order pronounced in the open court on 28.08.2023. Sd/- Sd/- (B.M. BIYANI) (VIJAY PAL RAO) Accountant Member Judicial Member Indore, 28.08.2023 Patel/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPY Sr. Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore