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CASE LAW

2016-TII-441-ITAT-KOL-TP

LEE HOURS POMEROY ARCHITECTS Vs DCIT: KOLKATA ITAT (Dated: August 24, 2016)

Income Tax - Sections 143(3), 144C & 254(2).

Keywords - rectification of errors - determination of ALP - error apparent on record - AE - PE in india - project office - Completed Contract method - TNMM - CUP method.

Whether directions given by Department regarding adoption of "most appropriate method" is not mandatory for an assessee to follow, selection of the most appropriate TP method for a particular case will depend on the availability of reliable information & comparable data - YES: ITAT

Whether in case the direction given by the Tribunal is contrary to the statutory provisions, the same can be considered as a mistake apparent on the face of the record which has no legal value - YES: ITAT

The assessee is a company established under the laws of USA along with a consortium of members consisting of various companies including an Indian entity. The group was awarded a contract by Kolkata Metro Rail Corporation Limited (KMRCL) to undertake the Kolkata East West Metro Rail Project to provide additional transport infrastructure to Kolkata. For this purpose, the parent company, LHPA USA, had set up a project office in Kolkata during the FY 2009-10, which was a PE in India. During the FY 2009-10, the first year of operations for the Indian Project office, 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 Transactions of the Indian Project Office with the AE in USA. The Project office adopted the Completed Contract method for recognizing income. The nature of work in India was such that major portion of the expenses were incurred in the first year of operation but revenue was to accrue subsequently.

LHPA provides both onshore and offshore 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 planning 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 specifications provided by LHPA USA. The onshore services 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.

For the purpose of computing ALP of the international transactions entered into, the assessee had adopted CUP method in its Form 3CEB filed along with the return of income. Before the TPO, assessee did extensive TP study and shifted from CUP method to TNMM for determination of its ALP. Under TNMM, the Profit Level Indicator (PLI) of the tested party was -3.03% and whereas the PLI of comparables chosen by the assessee based on multiple year data was 2.95%. When assessee was asked to submit the comparative analysis based on single year data instead of multiple year data, the assessee 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) was 2.51% on operating cost.

The TPO determined the ALP using TNMM by rejecting the two comparables and made an upward adjustment of Rs. 2,38,81,864/-. AO passed a draft assessment order u/s 143(3) read with section 144C(1). DRP also upheld the order of TPO.

Having heard the matter, the Tribunal held that,

+ the selection of the most appropriate transfer pricing method for a particular case will depend on the availability of reliable information to apply it, and in particular, on the availability of reliable comparable data. Where it is possible to locate comparable uncontrolled transactions the CUP method is the most direct and reliable way to apply the arm's length principle. The comparable uncontrolled price method can be applied on the basis of the taxpayer’s transactions with independent enterprises (“internal comparables”), or on the basis of transactions between other independent enterprises (“external comparables”). Among the two, internal comparable is preferable to external comparable. The above observations do not in any way stand in the way of the Assessee making a claim before the AO that one internal comparable would be sufficient to determine the ALP of the international transaction. The above observations should be construed as a direction that CUP method as MAM and liberty is given to the Assessee to file TP study adopting CUP as the MAM. These observations, in our view, would be sufficient safeguard and there is no need to delete the same;

+ as far as the direction with regard to use of multiple year data and adopting weighted average data of financial information of the comparables is concerned, it has been pointed out before us that use of multiple year data and adopting weighted average data is permissible only in respect of international transactions entered into on or after the 1st April, 2014 as per the Amendment to Rule 10B and Rule 10CA of the Income Tax Rules, 1962 by the Income-Tax (16th Amendment) Rules, 1962. These amendments brought to our notice shows that the same do not apply to the determination of ALP of the international transaction in the present case. The direction given by the Tribunal in paragraph-7.7 of the order of the Tribunal regarding use of multiple year data and adopting weighted average data of financial information of the comparables, being contrary to the statutory provisions, is a mistake apparent on the face of the record and the same is hereby directed to be deleted. In the result, the M.A. is partly allowed as indicated above.

Assessee's appeal partly allowed