2016 (11) TMI 731 - AT - Income Tax

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

United Engineers (Malasia) Berhad Quorum Versus Deputy Commissioner of Income-tax, (International Taxation), Circle -11 (1), Bengaluru

The Tribunal partly allowed the appeal for A.Y. 2003-04, upholding the rejection of the percentage completion method for revenue recognition and remanding ... Rejection of the accounting method adopted by the assessee for recognition of revenue and computation of the income - CIT (A) reversed the finding of the AO so far as the rejection of the books of account as well as estimation of the income at the rate of 8% but held that the income of the assessee should be computed on the basis of the actual cost and revenue as recorded in the books of account and has been certified by the NHAI - Held that:- It is not disputed by the assessee that the revenue of ₹ 14,11,08,715/- as well as cost of ₹ 14,29,36,737/- are the actual figures as per the bills raised by the assessee and cost shown in the books of account of the assessee. Further this amount is also certified by the NHAI in the IPC. Therefore in view of these undisputed facts, we do not find any error or illegality in the impugned order of the CIT (A) qua this issue. However, as regards the plea of the assessee that the consequential adjustment in the subsequent year is required, we are of the view that as per the rule of consistency the adjustment on this account is consequential and no direction is necessary. TP adjustment - limited grievance of the assessee in respect of the comparable selected by the TPO is regarding Progressive Constructions Ltd, having RPT of 61% - Held that:- There is no quarrel on the point that while determining the ALP of an international transaction, it has to be tested by comparing with uncontrolled price, which means that the comparable price should not be influenced by the transaction between the related parties. Therefore, uncontrolled price taken as ALP shall not have any revenue from RPT. However, 0% RPT is not practically possible and therefore in the due course adjudication process, the Tribunal has taken a consistent view that in the normal course 15% is the tolerance range of RPT which can be relaxed maximum to 25%. In the case of the assessee, neither the assessee nor the TPO has applied the filter of RPT. However, it is a relevant factor for selecting the comparable price that RPT should not exceed the tolerance range as discussed above. In view of the above discussion, we set aside this issue to the record of AO / TPO to verify the RPT of the comparables and then apply a suitable filter of RPT not exceeding the maximum tolerance range of 25%. Since the income of the assessee has been recomputed by taking into consideration a different revenue and cost amounts as it was taken by the assessee in the return of income, therefore, the AO / TPO is directed to recomputed the adjustment on account of ALP by considering the margins of the assessee as per the income computed by the CIT (A). Accordingly the issue of TP adjustment is set aside to the record of the AO/TPO. On the objection of the assessee regarding non-application of TP provisions when the AE of the assessee is also subjected to the tax jurisdiction of India, we find that when the transactions in question are falling under the ambit of definition of ‘international transaction’ as provided u/s.92B of the Act, then the AE being tax resident of India will not take out the matter from the purview of the TP provisions. Accordingly, we do not accept the objections raised by the assessee in this regard. 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.