ITAT Rules CUP Method Applies for Transfer Pricing Under Section 44BBB(1), Upholds Assessee's Income Claims

The ITAT Ahmedabad upheld the CIT(A)'s decision rejecting the AO's action of disallowing the books of accounts and estimating income under section 44BBB(1), ruling in favor of the assessee. The Tribunal affirmed that transactions between the foreign head office and its Indian project office constitute international transactions subject to transfer pricing provisions. It held that the CUP method, not TNMM, is appropriate for determining the arm's length price, and applying CUP resulted in no transfer pricing adjustment. The Tribunal also remanded the issue of whether the AO referred the matter to the TPO for determination of ALP back to the AO for verification, allowing this issue for statistical purposes. Overall, the appeal succeeded on substantive grounds except for the procedural matter sent back for further inquiry.

---

---

ISSUES:

Whether the Assessing Officer was justified in rejecting the books of accounts under Section 145 of the Income-tax Act and estimating total income under Section 44BBB(1) by applying presumptive profit margin.Whether the Assessing Officer was justified in applying Transfer Pricing provisions and making an upward adjustment to the Arm's Length Price using the Transactional Net Margin Method (TNMM) for transactions between the foreign head office and its Indian Project Office.Whether the Assessing Officer was justified in not referring the matter to the Transfer Pricing Officer before finalizing the assessment under Section 144C read with Section 143(3) of the Act.

RULINGS / HOLDINGS:

The Assessing Officer's rejection of the books of accounts and estimation of income under Section 44BBB(1) was not justified as the assessee complied with Section 44BBB(2) by maintaining proper books and following the Percentage Completion Method in accordance with Accounting Standard 7; thus, the action of rejecting books under Section 145(3) was held incorrect.The transactions between the foreign head office and its Indian Project Office constitute international transactions between Associated Enterprises under Sections 92A and 92B, and Transfer Pricing provisions apply; however, the Comparable Uncontrolled Price (CUP) method was held to be the most appropriate method for determining Arm's Length Price, not the TNMM, as the contracts awarded by Indian parties to the head office serve as proper comparables.The Assessing Officer's failure to refer the matter to the Transfer Pricing Officer before finalizing the assessment requires verification and is remanded for statistical purposes.

RATIONALE:

The legal framework under Section 44BBB(2) provides that a foreign company engaged in civil construction may claim lower profits if it maintains proper books and gets its accounts audited as per Section 44AB; the assessee complied with these conditions and followed AS-7 (Percentage Completion Method), which is recognized by the ICAI and the Companies Act, 1956 (Section 594), mandating application of Indian accounting standards to foreign companies with business in India. The Assessing Officer's preference for revenue recognition based on physical completion was not supported by law or facts, and the method adopted by the assessee was held consistent and reliable.Transfer Pricing provisions under Chapter X (Sections 92 to 92F) apply to transactions between Associated Enterprises, including between a foreign company and its Permanent Establishment (PE) in India, as per Section 92F(iii) and Article 9 of the India-China Double Taxation Avoidance Agreement. The PE is treated as a functionally separate entity, and transactions between the HO and PE are deemed international transactions under Section 92B(2). The CUP method is preferred over TNMM when reliable comparable uncontrolled transactions exist, as per Rule 10C of the Income-tax Rules, 1962. The contracts between Indian parties and the foreign head office were functionally comparable and at the same price as between the HO and PE, negating any need for upward adjustment.The issue of non-reference to the Transfer Pricing Officer before assessment under Section 144C r.w.s. 143(3) is procedural and was remanded for verification, reflecting the requirement for proper compliance with statutory provisions regarding transfer pricing assessments.

---