Indian Government Undertaking Company could not be accepted as comparable for benchmarking analysis Virginia Transformer India (P.) Ltd. v ITO [2017] 84 taxmann.com 245 (Delhi - Trib.)

1. TRANSFER PRICING CASE LAW UPDATE VOL. 1 01ST
SEPTEMBER, 2017
CA Reetika Agarwal
Indian Government Undertaking Company
could not be accepted as comparable for
benchmarking analysis
Virginia Transformer India (P.) Ltd. v ITO
[2017] 84 taxmann.com 245 (Delhi - Trib.)
Outcome of case: Partly in favor of Assessee
Virginia Transformer India (P) Ltd. (“the
assessee”, WOS of VTC Varginia, USA, was
engaged in designing transformer components
etc., under the projects provided by its AE.
Being the captive service provider of designing of
transformer and transformers components, the
assessee was remunerated on the basis of 250
percent of remuneration of service engineers
who were assigned to work on AE’s project.
Assessee’s Contentions:
During the course of assessment, the assessee
contended that its new office remain idle for a
period from April 2008 to October 2008.
Therefore the costs such as salaries and rent paid
during that period should be treated as abnormal
cost, hence, excluded from operating cost while
computing operating margins.
The assessee also contended that a Government
of India undertaking company and a company
having related party transaction more than 25%
could not be accepted as comparable companies.
Decision of Hon’ble ITAT:
The Hon’ble ITAT held as follows:
1. As per relevant clauses of the agreement, it is
clear that sole purpose of incorporation of the
assessee as a WOS of the AE is to render
services as captive service provider to the AE
and it will be compensated on the basis of
250 per cent of the remuneration of service
engineers. Hence, other cost and expenditure
incurred by the assessee are not relevant for
the purpose of deciding payment made by AE
to the assessee for the work executed and
services rendered; therefore, this is a normal
business expenditure of the assessee to pay
salary to the hired employees.
2. There is also an agreement between the
parties that in case AE of the assessee desires
it shall be entitled to seek on an availability
basis secondment of assessee's employees to
USA or anywhere else in the world for
training and upgrade of their knowledge. It is
manifested from the terms and conditions of
the agreement that the assessee was fully
reimbursed by AE on account of
remuneration paid to the engineers who are
assigned to work for carrying out and
executing the project of AE.
3. Also, when the assessee was not charging its
AE on the basis of cost of services rendered
by the assessee but the assessee was charging
AE at 250 per cent of remuneration of service
engineer then the other costs including rent
which were other than the salary were not
relevant and subsumed in the payment based
on 250 per cent of remuneration of the
service engineers. Therefore, could not be
treated as abnormal cost.
4. On second contention raised by the assessee,
the Hon’ble ITAT held that a Government of
India undertaking company cannot be
accepted as comparable company to the
assessee. Hence, WAPCOS Ltd. should be
excluded from the set of comparables.
5. Also, the Hon’ble ITAT directs the exclusion of
L & T Ramboll Cons. having related party
transactions more than 25% of total sales.
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