Tribunal decision: Revenue recognition method upheld, TP adjustment issue remanded for reconsideration

The Tribunal partly allowed the appeal for A.Y. 2003-04, upholding the rejection of the percentage completion method for revenue recognition and remanding the TP adjustment issue for reconsideration. However, the appeal for A.Y. 2005-06 was dismissed with similar reasoning as for A.Y. 2003-04. The Tribunal affirmed the CIT(A)'s decision on revenue recognition and directed further review of the TP adjustment issue.

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Issues Involved:
1. Rejection of the accounting method for revenue recognition.
2. Transfer Pricing (TP) adjustment and selection of comparables.
3. Applicability of TP provisions when both entities are taxed in India.

Issue-wise Detailed Analysis:

1. Rejection of the Accounting Method for Revenue Recognition:
The assessee, a non-resident Malaysian company engaged in project management services in India, adopted the percentage completion method as per Accounting Standard 7 (AS-7) for revenue recognition. The AO rejected this method, arguing that the revenue should be recognized based on actual bills submitted to the National Highway Authorities of India (NHAI), which included additional costs for variations and price escalation. The AO estimated the income at 8% of the actual revenue, resulting in a computed income of Rs. 1,12,88,697/-.

On appeal, the CIT(A) upheld the AO's rejection of the percentage completion method, stating that the revenue and costs were measurable and should be recognized on an actual basis. CIT(A) directed the AO to compute the total income based on the actual revenue of Rs. 14,11,08,715/- and costs of Rs. 14,29,36,737/-, excluding costs pertaining to the AE and including depreciation and disallowances under section 43B of the Act.

The assessee argued that the method followed was in compliance with AS-7 and that rejecting it would lead to double taxation in subsequent years. The Tribunal upheld the CIT(A)'s decision, stating that the actual figures were undisputed and certified by NHAI, and thus, no error or illegality was found in the CIT(A)'s order.

2. Transfer Pricing (TP) Adjustment and Selection of Comparables:
The assessee reported international transactions related to sub-contract payments and materials issued for work execution, benchmarked using the Transactional Net Margin Method (TNMM). The TPO rejected the assessee's comparables and selected ten new comparables with a mean net margin of 8.37%, proposing an adjustment of Rs. 8,45,36,843/-.

The assessee contended that one of the comparables, Progressive Constructions Ltd, had 61% related party transactions (RPT) and should be excluded. The Tribunal agreed, stating that comparables should not have RPT exceeding the tolerance range of 25%. The issue was remanded to the AO/TPO to verify the RPT of the comparables and apply a suitable filter.

3. Applicability of TP Provisions when Both Entities are Taxed in India:
The assessee argued that since both entities involved in the transactions were taxed in India, TP provisions should not apply. The Tribunal rejected this argument, stating that the transactions fell under the definition of 'international transaction' as per section 92B of the Act, and the AE being a tax resident of India did not exempt the transactions from TP provisions.

Conclusion:
- For A.Y. 2003-04, the appeal was partly allowed, with the Tribunal upholding the CIT(A)'s rejection of the percentage completion method and remanding the TP adjustment issue to the AO/TPO for reconsideration.
- For A.Y. 2005-06, the appeal was dismissed, following the same reasoning as for A.Y. 2003-04.

Order pronounced on 26th August 2016.

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