Ludhiana Sangrur Infra Road Private Limited vs DCIT

TPO vide order dated 06.01.2021 rejected the "Other method and applied Transactional Net Margin Method (TNMM").

Under TNMM, TPO compared the PLI margin of the Assessee Company, engaged in "operation and maintenance" of a toll road with the margins of the companies engaged in "development, operation & maintenance" proposing adjustment of Rs 9,37,61,612/- stating affairs between the Assessee Company and its related enterprise have been so arranged to show that the Assessee Company is earning super natural profits.

The Ld. TPO also alleged that the appellant did not provide the information pertaining to the CSR Rates and therefore the said method cannot be accepted.

The Ld. Transfer Pricing Officer has misunderstood and failed to appreciate the basic nature of business of the Assessee Company. The Ld. Transfer Pricing Officer failed to appreciate that the Assessee Company is engaged in the business of "Operating and Maintaining of an existing road and Toll plaza" and maintaining the same and not in construction and development of roads.

The Ld Transfer Pricing Officer has erroneously rejected the CUP method and applied TNMM. Alternatively, without prejudice, even if TNMM is proposed to be applied it should be based on the comparable companies which are specifically engaged in the business of operation and maintenance of toll roads and collection of toll thereon and not construction of highway, bridges, etc.

The Ld. Transfer Pricing Officer has failed to appreciate that the rates given to AE are as per CSR rates which are prescribed by Government and are a valid comparison under the provisions of the Act and which are also the rate given to non- AE. Summary of rates charged by AE and Non AE in a comparative table are at pages 271 of the Paper Book.

The Ld Transfer Pricing Officer while applying TNMM did not apply the correct filters for arriving at the parties search upon in as much as the nature of business activities of the Assessee Company and searched parties are altogether different and not comparable at all. The filters and the comparable companies that the appellant applied are provided in its reply dated 09.12.2020 before the Ld. Transfer Pricing Officer (refer pages 151-159 which reveal that the comparable range of OPIOR was 30.58 - 49.54 % (Refer Pages 158-159 of the Paper Book) and that the OPIOR of the Appellant Company was 32.59% which was well within the comparable range.

The Ld. Transfer Pricing Officer has' misconstrued the basic facts of the case in as much as the Assessee Company has claimed deduction u/s 80-IA(4)(i) (b)(ii)and not u/s 80-IA(4)(i)(i) of the Act.

The conclusion drawn by the Ld Transfer Pricing Officer that the intention of the Assessee Company is to show higher rate is not tenable since there is no loss to revenue even if the same business activities were carried out by the AE. The assessee is 100% subsidiary of the AE and if the same business was carried out by the AE, the AE would be allowed the same rate of deduction u/s 80-IA (1) and there is no loss to revenue in any case.

The Id. Transfer Pricing Officer has alleged that the information was not filed before him during the course of the Transfer Pricing proceedings. Various submissions were made and these details were filed vide letters dated05.10.2020, 09.12.2020 and 11.12.2020, a copy of which is enclosed at pages 143 to 162 of the Paper Book wherein at Pages 149-159 and Para 5 and 6 it is clearly mentioned that these details are being filed before him.

It is further submitted and clarified that road construction was already done by the PRBDB and the appellant company was only given a contract to operate and maintain the said road. The total investment in Fixed Assets was to the tune of Rs.18.70 crores as per Note-8 to the Financial Statements as reproduced by the Ld. TPO at page 44 of his order.

The margins of the appellant company are governed by the number of commuters and hence there would be higher margins in the year when there are more commuters. Infact in the year there was Covid the entity went through a loss as is evident from the summary enclosed at pages 275 of the paper book along with relevant audited profit and loss account for the years displayed enclosed at pages 276-291 of the paper book.

It is also submitted that the appellant has continued to make the said claim in subsequent years and there has been no tinkering and hence on the ground of consistency also there should not be any adjustment to the profits of the appellant.

A. Functional 'profile: Before proceeding further, reference is first invited to the functional profile of the assessee company and its AE, as given in PARA 3.1./ page 18 of the of the TP study report (Page no 65 of paper book). Being pertinent, the same as reproduced below:

Functions Performed Various functions performed by LSIR and its AE as under:

Bidding and Assigning - The first stage for development of project is bidding. AE was involved in bidding for the operation maintenance & transfer of Ludhiana-Malerkotla-Sangrur road on PPP model. AE has entered into contract and LOA (Letter of Acceptance) was issued to AE by PRBDB. After receipt of LOA, AE requested to PRBDB for awarding contract to LSIR. The request was accepted by PRBDB & accordingly PRBDB entered into contract with LSIR. Both LSIR and AE are involved in Bidding and Assigning of the contract.

Construction - After tender has been assigned to the concessionaire the next step is construction of roads and highways as per the specifications. LSIR has subcontracted the construction of the roads to AE (Gawar Constructions Limited) and Non-AE (Ceigal India Limited).

Maintenance - Once the construction is completed next stop would be to maintain the roads and highways as per the set guidelines of the authority.

LSIR has subcontracted the construction and maintenance work to its AE.

Toll Collection - Once the construction of the road is completed, which is on PPP model, Toll will be collected by LSIR.

From the perusal of functional profile,. it is seen that the Concessionaire agreement is for the operation, maintenance and transfer of Ludhiana- Malerkotla-Sangrur road. It is an undisputed fact, that the bidding for the project was done by the AE of the assessee company i.e. M/s. Gawar Constructions Limited and project was also awarded to the AE only. In fact, on the request of the AE the contract awarding agency i.e PRBDB has awarded the contract to LSIR which is, again 100% owned by the AE i.e. Gawar Constructions Limited. After the contract has been awarded, the assessee company i.e. LSIR has again subcontracted the construction work to AE i.e. M/s. Gawar Constructions Limited and some part of it to non AE i.e. Ceigall India Limited. Again an admitted and accepted fact is that, after construction of the road and other ancillary things, the assessee company i.e. LSIR has again subcontracted the operation and maintenance work to AE only.

The sum and substance of the entire functional profile of the assessee, as well as its AE it is that the entire work of construction, operation and maintenance of the highway/roads is done by the AE i.e, Gawar Constructions Limited and no work at all has been done by the assessee company i.e. LSIR. Precisely for this reason only, the TPO / AO has held that as the entire work was done by the AE only and the assessee company was Showing the operations and maintenance only for contract/ agreement purposes, accordingly the profit ratios of AE was taken and it was duly benchmarked with the comparable companies involved in the work of construction, operation and maintenance of highway / roads etc.

B. Work performed as part of concessionaire agreement During the course of arguments, the assessee has taken the ground that it is not doing any major works in the contract and only involved in undertaking some minor modification like landscaping, constructing Toll plaza etc. This contention of assessee is incorrect and contrary to the facts, as mentioned in the contract/ agreement documents. For the sake of ready reference, the following details as mentioned in the contract/ agreement documents are given below. i) The references is invited to the RFP proposal given by the M/s. Punjab Roads which is mentioned in Page 176 to 185 of the paperbook.

Attention is invited to para 1.1.3 at page no.176/177 wherein the scope of work of RFP is mentioned and ready reference of the same is reproduced below:

ON (PUBLIC PRIVATE PARTNERSHIP BASIS)

Page 177/ para1.1.3. The scope of work will broadly include operation and maintenance of the existing project highway, approach roads, structures, ROBs, bridges etc and construction of project facilities including major and minor maintenance works as mentioned the bidding document. It shall also include the operation and maintenance of Dehlon Byepass (km 18+750 to km 20+800 of 2.98 km length), on the project highway pursuant to handing over on completion by the Government to the Concessionarie. As part of the bidding documents, the Government will provide Site Studies Report as prepared by the Consultant appointed by the Government and other information pertaining/relevant to the project available with it. The bidders shall be required to examine and carry out, at their cost, such studies with due diligence in greater detail as may be required for submitting their respective bids for award of the concession including implementation of the project.

ii) Reference is also invited to the Concessionaire agreement for operation, maintenance and transfer of the Ludhiana Malerkotla Sangrur Road Pvt. between PRBDB and LSIR which is mentioned from page no.166to 175 of paper book. Again reference is invited to the O&M obligations of the Concessionaire, which are mentioned in para 15.1 at page 168 and for ready reference, the relevant extract is reproduced below:

carrying out periodic preventive maintenance of the Project Highway,

undertaking routine maintenance including prompt repairs of potholes ,cracks, joints, drains, embankments, structures, pavement making, lighting, road signs and other traffic control devices

Undertaking major maintenance such as resurfacing of pavements, repairs to structures and repairs and refurbishment of tolling system and other equipments.

preventing with the assistance of concerned law enforcement agencies any unauthorized use of the Project Highway.

iii) Reference is also made to the maintenance of major and minor work, as mentioned in the Concessionaire on page no. 173 and 174 and the details as contained are reproduced below:

Major & Minor Maintenance Works

The Major maintenance works for the project highway to be undertaken by the concessionarie following COD in. accordance with specifications & standards as per schedule-C and Good industry practice includes:

From the perusal of the above, it is crystal clear that the assessee, as part of the contract / argument was supposed to perform major works, as clearly delineated in the contract /agreement. The assessee is definitely not involved in doing minor works like landscaping, constructing toll plazas etc. and all the works which are to be done in any construction, operation and maintenance contract, are being done by assessee company also, which in the instant case, has been sub contracted to the AE. Thus the assessee contention on this point is also incorrect and wrong and deserves to be rejected.

Also, during the course of hearing, it was stated by the assessee counsel that the assessee company is involved in the Toll collection only. From the perusal of the RFP, Concessionaire agreement and also the functional profile submitted by the assess only, it is seen that the collection of Toll is not the individual activity which can be carried out on its own by an agency. Collection of Toll is intricately linked with the work of construction, operation and maintenance of highway meaning thereby, that first an agency has to complete the work of construction, operation and maintenance as per the stipulated terms and conditions and only then it becomes entitled for collection of Toll. Thus the assessee ground that it has to be assessed on the basis of collection of Toll only has to be rejected, at the very outset, as the major work for which the assessee collects the Toll is done by its AE i.e. Gawar Constructions Limited and collection of TOLL cannot be treated as a separate activity.

It is further submitted that the deduction u/s. 80IA (4) is available for construction, operation and maintenance of the roads/projects/highway and there is no deduction for collection of Toll only. If a company is engaged in the work of construction, operation and maintenance of a particular project, only then it becomes entitled for collection of Toll and thus collection of Toll along with construction, operation and maintenance work is eligible for the 80IA deductions. Thus if the assessee company says, that it is involved in collection of Toll only, then there is no deduction available for it u/s. 80IA of the Act. The assessee's another contention that the AE M/s. Gawar Constructions Limited is also covered under 80IA is also wrong and incorrect, in the sense, that an agency I entity as such, is not entitled for deductions u/s. 80IA. Deductions are confined to a specific project and as M/s. LSIR is claiming the deduction u/s 80IA for this project of Ludhiana MalerKotla Sangrur Project, the other entity i.e the AE cannot claim the same deduction.

Aggregation of transactions The assessee has arranged its accounts in such a way that the major expenses are transferred to the P&L account of the AE whereas the income component gets reflected in the assessee's P & L account which results in the inflated claim of deduction u/s. 80IA. All this exercise of showing the excess profits has been done mainly with intention of claiming excess 80IA deductions which is not allowable to the assessee company under the provision of Income Tax Act. In the Transfer Pricing, the rule is to benchmark each transactions separately however, the various courts have decided/ ruled, that if the transaction are so closely linked that they cannot be separately benchmarked, then it is preferable. and desirable to benchmark the transactions in a aggregated manner. In the case of assessee, there is a single contract awarded by a state government agency i.e. M/s. PRBDB which is for the construction, operation and maintenance of project facilities and in lieu of performing that work, the Concessionaire is entitled for collection of Toll for a limited period of time. Two things are very clear from the perusal of the contract / agreement, TP Study report, that the work involved is the construction, operation and maintenance of the highway/ road and second for performing that job, the remuneration is collection of Toll. Both these activities cannot be seen/assessed in isolation as both are interdependent and so closely linked, that they cannot be segregated for benchmarking purposes. Also both these activities emanate from a single contract/agreement and both have to be seen/ benchmarked on aggregate basis. Reliance is placed on the following decisions.

Decision of Hon'ble Delhi High Court in the case of M/s. Sony Ericsson India Pvt. Ltd. in 374 ITR 118. Wherein the Hon'ble High Court has dealt with the issue of' aggregation of transactions for benchmarking purposes. The relevant extract of the decision is reproduced below:

K Aggregation or Disaggregation of Transactions and Set Off in Segregation of Bundled Transactions; whether Section 92(3) prohibits segregation.

This leads us to the question of set off when bundled transactions are segregated. Conceptually, this is justified and equitable, as tax is payable on the total income after transfer pricing computation in respect of international transactions (See Section 92(4) of the Act).

The question of aggregation and disaggregation of transactions when the TNM Method or even in other methods is sought to be applied, must have reference to the strength and weaknesses of the TNM Method or the applicable method. Aggregation of transactions is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so inter-related that it will be more reliable means of determining the arm's. length consideration/or the controlled transactions. There are often situations where separate transactions are intertwined and linked or are continuous that they cannot be evaluated adequately on separate basis. Secondly, the controlled transaction should ordinarily be based on the transaction actually undertaken by the AEs as has been struck by them. We should not be considered as advocating a broad-brush approach but, a detailed scrutinized ascertainment and determination whether or not the aggregation or segregation of transactions would be appropriate and proper while applying the particular Method, is necessary.

Reliance is also placed on the Hon'ble Punjab and Haryana decision in the case of Knorr Bremse India P. Ltd. vs, ACIT 2015 63 taxmann.com 186/380 ITR 307 wherein the Hon'ble Court had held that "in order to combine two or more transactions, it is essential that they should be either inextricably linked to each other either by way of a package deal or that a number of transactions are priced differently but on the understanding that the assessee will accept all of them together (i.e. either take all or leave all). The relevant extract of the decision is reproduced below

We will assume that the various international transactions were entered into with respect to the final commercial venture undertaken by the assessee, be it the manufacture and the sale of goods or the provision of services by it. The AO or the TPO, as the case may be, is required to determine the arm's length price in relation to "an international transaction". The acquisition of various items/components in the assessee's venture could indeed be telescoped into and form a single transaction. For instance, in the case of a package deal where each item of the package is not separately valued but all the components thereof are given a composite price, the transactions form but one composite transaction. An assessee may enter into one composite transaction with its AE involving the provision of various services or the sale of various goods. A party may opt for a single window facility where all the services and/or goods are provided under a composite agreement. Each of the components may even be priced differently. If it is established that each transaction was so inextricably linked to the other that the one could not survive without the other, it could be said that it formed a part of a transaction and that it was an international transaction. Take, for instance, a case where an AE offers to provide a bouquet of services and goods to the assessee each priced differently but on the understanding that the pricing was dependent upon the assessee accepting all the services and/or all the goods. In that event, it would not be open to the assessee to accept only some of the goods or the services at the prices indicated. It either takes all or none. This would normally constitute one transaction.

Section 92B itself contemplates an international transaction "between two or more associated enterprises". It is not necessary, therefore, that an international transaction must be between only two parties. There can be a single composite transaction "between two or more associated enterprises". This is clear from the. opening words of Section 92B that for the purposes of Sections 92, 92B, 92C, 92D and 92E, international transaction means a transaction between two or more associated enterprises. The subsequent part of Section 92B makes this clearer by providing that the international transaction means a transaction between two or more associated enterprises in the nature of purchase, sale, etc. and shall include "a mutual agreement or arrangement between two or more associated enterprises". Thus, "a mutual agreement or arrangement" meaning thereby a single agreement or arrangement is contemplated between "two or more" associated enterprises. It would follow then that several transactions between "two or more" AEs can form a single composite transaction. The doubt, if any, in this regard is set at rest by Rule 10A(d) which provides that for the purposes of Rule l0A and Rules l0B to 10E, "transaction" includes a number of closely linked transactions". Thus, the closely linked transactions can in a given situation be components of a single composite transaction.

The assessee would, however, have to prove that although each sale and each provision of service is priced separately, they were all provided under one composite agreement which constitutes an international transaction.

Thus, the above decisions clearly lays down the law that if the transactions are so closely linked that they form a single composite transaction or they cannot be evaluated separately, then they have to be benchmarked on aggregated basis.

Thus, to summarize, the following points may kindly be considered.

Collection of toll is not an isolated activity, it is dependent on the other works i.e. construction, operation and maintenance of highway/ road, accordingly both these activities are to be aggregated for benchmarking purposes, as they cannot be separately benchmarked. Further there is common agreement for both these activities and as they emanate from single source / contract, they cannot be seen in isolation.

ii) AE of the assessee company i/e. M/s Gawar constructions is performing all the major activities/ works and accordingly profit ratios of this company/ AE were considered for benchmarking and determining ALP of the transactions by comparing it, with comparable companies involved in similar kind of work.

iii) Deductions u/s 80IA are available only for construction, operation and maintenance of infrastructural facility and not for collection of Toll.”