Boeing India Defense Private Limited Vs DCIT (ITAT Delhi)
Conclusion: Transfer Pricing Officer (TPO) had wrongly recharacterised Boeing India Defense Private Limited as a full-risk service provider despite the Associated Enterprise (AE) assuming the entire contractual and operational risks relating to defence support services rendered to the Indian Air Force (IAF).
Held: Assessee, a subsidiary of Boeing Company group, was engaged in rendering marketing, technical, management and construction-related support services to its Associated Enterprises (“AEs”) on a cost-plus basis. During the relevant assessment year, assessee entered into international transactions including receipt of training and technical services from its AE in connection with C-17 aircraft training and BBJ aircraft technical support services provided to the Indian Air Force (“IAF”). Assessee benchmarked the transaction under the Transactional Net Margin Method (“TNMM”) and characterized itself as a limited-risk service provider. However, the Transfer Pricing Officer (“TPO”) rejected assessee’s characterization, treated it as a full-risk service provider, adopted the AE as the tested party, and made an adjustment of Rs. 38.20 crore by determining that only a small portion of the technical fees paid to the AE was at arm’s length. Assessee contended that it merely acted as a coordination and liaison entity between the AE and the IAF, while the AE possessed the technical know-how, simulators, proprietary technology, and operational capabilities necessary for rendering the services. It was submitted that all substantial risks including performance guarantees, liquidated damages, and customer claims were contractually borne by the AE, whereas assessee earned only a fixed mark-up on its value-added costs. Assessee also challenged TPO’s reliance on royalty and technology license agreements as comparables, contending that such agreements were functionally incomparable to the impugned service arrangement. Tribunal observed that the assessee neither owned any simulator nor possessed any proprietary technical know-how or specialized infrastructure for independently rendering training or technical services to the IAF. It was noted that the actual execution of services was undertaken by the AE and third-party entities engaged by the AE, while the assessee merely facilitated coordination and local interface support. The Tribunal further found that the inter-company agreements clearly established that the AE assumed all substantial business and contractual risks, including liabilities relating to performance and customer claims. Accordingly, the Tribunal accepted the assessee’s characterization as a limited-risk service provider and held that the TPO erred in recharacterizing the assessee as a full-risk entity. Tribunal also held that the Department had accepted the same benchmarking approach and FAR profile in the immediately preceding assessment year and there being no change in the factual matrix, the Revenue could not arbitrarily deviate from the accepted position. Applying the principle of consistency and finding no material brought on record by the TPO to justify departure from earlier years, Tribunal directed the AO/TPO to accept the benchmarking analysis undertaken by the assessee under TNMM. Consequently, transfer pricing adjustment of Rs. 38.20 crore made on account of technical fees paid to the AE was deleted and the appeal of the assessee was allowed.
