TaxTMI 
TaxTMI 
2013 (9) TMI 564
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....ional transactions' as defined in section 92B of the Act. 3. The learned Transfer pricing officer has erred in not appreciating that the provisions of Chapter X do not apply in respect of transactions with 'resident' entities. 4. The learned Dy. Commissioner of' Income tax, Circle 2(1), Hyderabad has erred in making addition in respect of transfer pricing adjustment made by the TPO amounting to Rs. 104,95,00,000. On facts and in the circumstances of the case and law applicable, the addition on account of transfer pricing adjustment is to be deleted in entirety. 5. The learned Transfer pricing officer has erred in not appreciating that the IJM Corporation Berhad, Malaysia Delhi Project office has sub-contracted the works to the Appellant company by retaining a very small margin of 3.2% and filing income tax returns before the Delhi Income tax authorities. 6. The learned Transfer pricing officer has erred in not appreciating that the reimbursement of expenditure is purely on cost basis and do not included any profit element. 7. The learned Transf....
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....bad, has erred in making the addition of Rs. 19,98,225 relating to Travel expenses. 17. The learned Dy. Commissioner of Income tax, Circle 2(1), Hyderabad has erred in levying interest under section 234B and 234D of the Act. On facts and in the circumstances of the case and law applicable, interest is not leviable under section 234B and 234D. The appellant denies its liability to pay interest under section 234B and 234D. 18. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned Dy. Commissioner of Income tax, Circle 2(1), Hyderabad to the extent prejudicial to the appellant be quashed Or in the alternative: (i) addition on account of transfer pricing adjustment amounting to Rs.104,95,00,000/- be deleted; (ii) addition on account of disallowance of subcontract expenditure amounting to Rs.14,69,34,062. (iii) Addition on account of disallowance of travelling expenses amounting to Rs.19,98,225. (iv) Interest levied under section 234B and 234D....
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....t PE), IJM-IJMII Joint Venture (a resident business entity) and IJM-NBCC-VRM-Joint venture (a resident business entity), apart from the contract works directly procured from various governmental and semi-governmental agencies. (iii) The TPO has rejected the TP study conducted by the assessee. The TPO has conducted an independent analysis and selected 11 companies from the data base for benchmarking analysis and determination of Arms Length Price. The assessee had objected the inclusion of 4 companies out of the 11 companies selected by TPO, the objected 4 companies are M/s. Patel Engineering Ltd., M/s. Raheja Universal Ltd., Prestige Projects Ltd., and M/s. Puravanker Projects Ltd., on the grounds of functional comparability and economic comparability and high profit margins. Without considering assessee submissions, the TPO arrived at the arithmetic mean PLI (OP/Sales) by following his own analysis. (iv) The assessee submitted before the TPO, explaining that certain transactions entered into with their related party enterprises, who were residents of India. Further explained that the said transactions were considered as inter....
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....antiated the method of awarding the work to sub-contractor, work rendered by the sub-contractor and payment made to sub-contractor through account payee cheques. Without considering the assessee submissions, the Assessing Officer has disallowed 5% of the expenditure in respect of some of the sub-contractor payments and arrived the disallowance amount of Rs. 1,86,12,721. (ix) During the course of assessment proceedings, the assessee submitted the books of account along with supporting vouchers. All the expenses including power and fuel were verified by the Assessing Officer along with the books and supporting vouchers. Without considering the assessee submissions and proper verification, the Assessing Officer has quantified an amount of Rs. 19,98,225 and disallowed under the head Travelling Expenses. 3.2 Firstly, the assessee company disputed the analysis done by the TPO and also disputed the rejection of TP study conducted by the assessee. Further, the assessee disputed the disallowances made by the Assessing Officer. The DRP had brushed aside the objections filed and confirmed the order of the TPO. Aggrieved, the assessee filed the present appeal bef....
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....e-3(3), Hyderabad in ITA No. 2072/Hyd/2011, dated 31.12.2012. 3.7 The AR submitted that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and it is assessed to income-tax in the status of domestic company and whereas the AEs with whom the assessee had transactions are IJM Corporation Berhad, Delhi Project Office (PE in India), has the place of business in India under the provisions of Sec. 592 of the Companies Act, 1956 w.e.f. 30th May, 2005. 3.8 He submitted that by virtue of its registration under provisions of sec. 592 of Companies Act, 1956 and its affairs are managed and controlled in India. Further, one of the Directors of the Principal Company is nominated as Attorney for the purpose of undertaking the contract awarded by the Municipal Corporation of Delhi and National Highways Authority of India and is empowered to manage and operate entire operations in India and all the decisions in respect of operations in India are taken only in India and that nominated Director had been residing in India only. In other words, control and management of branch affairs were situated in India within the meaning of Sec. 6(3) (ii) of Income-tax Act,....
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....n every case except where during that year the control and management of its affairs is situated wholly outside India." 3.13 He also drew our attention to the provisions of Sec. 6(2) of Income-tax Act, 1961 which places "AOPs" in the same category as "Hindu Undivided Family (HUF)" and "firm" for the purpose of determining the residential status. In the case of partnership, it is settled by Supreme Court in the case of Erin Estate, Galah, Ceylon v. CIT (1958) 34 ITR 1 that the control and management of its affairs means the de facto control and not the de jure and refers to controlling and directive power often described as "head and brain". 3.14 The AR submitted that in the present case the transactions are between two resident parties only and there is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits. 3.15 He relied on the judgement of Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley (292 ITR 416). 3.....
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.... the assessee without retaining any margin. In respect of S. No. 4, IJM-NBCC-VRM JV was awarded contract from Delhi Metro Rail Corporation. The labour component of the work was sub- contracted without retaining any margin. In respect of reimbursement of expenditure, it is a matter of record that no margins are involved and the exact amount of expenditure is reimbursed and, therefore, no benchmarking is required. 3.20 He drew our attention to the following tabular chart showing the scenario after TP adjustment is as follows:- S.No. Particulars Contract value (during the year) Margin retained Revenue offered by the assessee Value of TP adjustment (proportionate adjustment of 104.95 Cr.) Total value after TP adjustment 1. IJM Corp PO-Delhi 98,26,78,976 2,94,80,369 95,31,98,607 65,92,95,900 161,24,94,506 2. IJM-IJMII JV 54,55,01,543 Nil 54,55,01,543 37,72,95,250 92,27,96,793 3. IJM-NBC-VRM JV` 1,87,05,776 Nil 1,87,05,776 1,29,08,850 3,16,14,626 3.21 According to the AR, from the above, it is clear that after TP adjustment under Section 92CA the total value of the revenue recognized in the hands of....
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....lex by acquiring lands or on development basis. Thus, this company should be rejected as comparable. 3.23 In respect of S. No. l above, he submitted that the line of business of M/s. Patel Engg. Ltd., is different from that of the assessee as M/s. Patel Engg. Ltd., is engaged in the construction of dams, powerhouse, surge chambers, intake structures, and head race tunnel etc., for hydro-power projects. It claims to be a leader in the hydro-power segment with a 22 per cent market share. Till date the company has executed 30 hydro-power projects and 75 dam related projects. Patel Engineering also operates in the irrigation, transportation and urban infrastructure segments. It focuses on Lift Irrigation Projects as an EPC contractor, mainly in the State of Andhra Pradesh. In the transportation segment, its scope of work includes construction of roads, bridges, railways and road tunnel. However, hydro-power remains the largest segment with around 60 per cent contribution to the order book. Whereas, the assessee is engaged in the business of construction of roads, buildings and metro-rail works and even geographical locations are also different and, therefore, cannot be taken as comp....
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....usiness of Real Estate and therefore, the comparable is engaged in totally different line of business and cannot be taken as a valid comparable in view of the ratio laid down in tile cases of E-Gain Communication (P) Ltd., v. ITO (118 TTJ (Pune) 354 and Vedaris Technology (P.) Ltd. v. ACIT 131 TTJ (Del) 309. If the above four comparables are excluded, the calculation of the ALP as per TPO is as under: Sl.No. Name of the company Sales (Rs. in Crores) OP/TC (%) 1. JMC Projects (India) Ltd. 915.00 7.90 2. Unity Infraprojects Ltd. 849.50 13.39 3. KMC Constructions Ltd. 729.90 12.50 4. Valecha Engineering Ltd. 501.20 5.78 5. Ahluwalla Contractors 881.24 10.46 6. Somdatt Builders 597.69 1.31 7. AMR Constructions 587.25 13.49 Arithmetic mean 9.26 Whereas the profit shown by the assessee is as under: Particulars Company's Actuals Net sales (Revenue) 736.88 Total operating income 736.88 Total cost incl. depreciation 704.77 Total operating expenses 704.77 Operating Profit 32.11 Net cost plus mark up (%) 4.56% 3.27 He submitt....
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....es. Section 92A defines the term "associated enterprise". Section 92A(1) provides the broad parameters on satisfaction of which two or more enterprises constitute associated enterprises. These parameters are participation in the management or control or capital of the other enterprise. Sub-section (2) of section 92A enlists specific situations which make two or more enterprises associates of each other for the purposes of sub-section (1). 5.1 The term "international transaction" is defined in section 92B(1) as follows: "92B. (1) For the purposes of this section and sections 92, 92C, 920 and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cos....
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.... recourse to section 92A and section 92B(2) is required before referring to section 92B(1). (c) Section 92B(2) only deems certain transaction to be 'transaction between associated enterprises' and not as 'international transaction between two enterprises'. 5.5 There is a difference between associated enterprises defined under section 92A and transaction deemed to be between associated enterprises under section 92B(2). Under section 92A, two or more enterprises once determined to be associated enterprises remain so for the entire financial year. Their relationship will not change for different transactions between them. They will remain associated enterprises even if they do not have any transaction during the previous year. On the other hand, a transaction between an enterprise and another person can be deemed to be transaction between associated under section 92B(2) only in respect of transactions specified therein and not otherwise. This fiction is transaction specific and does not apply to all transactions between the enterprise and person, on the basis that one transaction attracts section 92B(2). 5.6 Section 92B(2) was enacted to hit at those ....
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....re taken only in India and that nominated Director had been residing in India only. In other words, control and management of branch affairs were situated in India within the meaning of Sec. 6(3) (ii) of Income-tax Act, 1961. In this connection, it is pertinent to extract the observation made by the Hon'ble Calcutta High Court in the case of CIT v. Bank of China (In Liquidation) - 154 ITR 617 vide Para 8: "Para 8: Under section 6(3) a non-Indian company is said to be resident in India in any previous year if during that year the control and management of its affairs is situated wholly in India. The determination as to what place or places the control and management of a particular company is situated is essentially a question of fact to be determined on the facts and in the circumstances of the particular case. A company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in India during the relevant previous year. The expression 'control and management' signifies the controlling and directive power, the head and brain as it is sometimes called and 'situated' implies the function....
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....table to PE are taxable in India and all business decisions relating to PE are entered and concluded in India. In other words, the control and management of the affairs of PE are situated in India and therefore, the PE should be treated as resident in India, treating PE otherwise amounts to violation of Article 24 of DTAA with Malaysia. 5.12 The Special Bench of Tribunal Ahmedabad in the case of Rajeev Sureshbhai Gajwani v. Asstt. Commissioner of Income-tax, Circie-6, Baroda (129 ITD 145) (Ahd.) (SB) also laid down the same proposition of law. 5.13 IJM-IJMII JV (Joint Venture between the assessee and IJM Corporation Berhad, Malaysia and IJM-NBCC-VRM (Joint Venture between National Building Construction Co. Ltd., VRM and the assessee) are also residents. These Joint Ventures are formed in India by an agreement between the respective parties and assessed in the status of AOP. In order to determine the residential status of AOPs, one has to refer to the definition given under sub-section (2) of Section 6 of Income-tax Act, 1961, which reads as under: "6. Residence in India. ---For the purpose of this Act. ... (2) A Hindu un....
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....iness profits. No shifting of profits outside India or erosion of taxes in India is involved, that is, there is no motive to shift the profits or evade the taxes in India inasmuch as its business profits are taxable as separate entity in India. 5.18 In the case of DIT (International Taxation) v. Morgan Stanley (292 ITR 416), the Hon'ble Supreme Court observed that "The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India". The explanatory Circular No. 14 to the Finance Act 2001 has stated that the basic intention of the transfer pricing regulations is to prevent shifting profits out of India by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The relevant extract of the said circular is as below: "The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the ....
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....ssessee carried on the impugned transactions. In our opinion, the argument of the Department is devoid of merit. Accordingly, we agree with the contention of the assessee's counsel on legal issue and allow the legal ground raised by the assessee. 5.21 Since, we have decided on the legal issue in favour of the assessee, on applicability of transfer pricing on the assessee, we refrain from going into the other grounds raised by the assessee on the issue of transfer pricing and these grounds are dismissed as infructuous. 6. In respect of other Non-TP adjustments, the Assessing Officer had disallowed the following items of expenditure made to sub-contractors: (a) Payments to the sub-contractors an amount of - Rs. 2,29,00,000/ - ; (b) Disallowance of payments made to the sub-contractor, M/s. Maytas Infra Limited - Rs. 10,54,21,341/-; (c) Disallowance of payments made to various sub-contractors - Rs. 1,86,12,721/-; (d) Disallowance on account of power and fuel an amount of Rs. 19,98,225/-. 6.1 The learned AR submitted that the entire sub-contract payments were subjected to TDS pro....
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....ith the books of account of the assessee. The total amount reflected in the books of account of the assessee in respect of 31 parties was a sum of Rs. 42,34,21,336/- whereas, the sub-contractors had reflected a sum of Rs. 31,79,99,995/- in their books of account. Thus, there was a difference of Rs. 10,54,21,341/- between the books of account of the assessee and the books of account of the sub-contractors. The assessee was requested to explain the difference by the AO. The assessee submitted that out of Rs. 10.54 crores, a sum of Rs. 9,21,54,736/- was attributable to MAYTAS Infra Limited. The assessee further submitted the difference arose on account of advances which were considered as payments by the assessee. The Assessing Officer did not accept the explanation of the assessee. The Assessing Officer was of the view that total contract awarded to MAYTAS Infra Pvt. Ltd was for a sum of Rs. 55,55,29,469/- and during the previous year, the sub-contracts were executed by MAYTAS was for a sum of Rs. 16,50,40,621/-. The sub-contract work given to MAYTAS was for laying of the roads in the State of Madhya Pradesh whereas, the assessee submitted before the Assessing Officer that MAYTAS had....
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....sub-contract payments attributable to 221 letters amounting to Rs. 1,86,12,721/- and the same is to be confirmed. 6.6 Regarding disallowance of a sum of Rs. 19,98,225/- out of the power and fuel expenses, the DR submitted that on verification of the books of account, it was noticed by the Assessing Officer that the expenditure incurred in respect of power and fuel was not supported with proper vouchers and he disallowed the same. The Assessing Officer made the addition because the assessee failed in producing the evidence and the same is to be sustained. 6.7 The DR further submitted that during the survey, blank letter heads standing in the names of Marco Enterprises,. New Delhi and Macro Enterprises, New Delhi were found in the office of -the assessee. The assessee had paid a sum of Rs. 2.29 crores to these entities towards sub-contract charges. Letters were addressed by the Assessing Officer to these concerns and such letters were returned back by the postal authorities. Thereafter, the Assessing Officer has rightly directed the assessee to furnish the confirmation letters from the sub-contractors to prove the genuineness of the expenses. The burden is on the assessee to pr....
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....ough there is no compelling necessity to incur such expenditure. It is also observed that payment itself not established and, secondly it is not the case of the assessee before the assessing authority that the particulars of the persons to whom the amounts were paid could be furnished without detriment to the business of the assessee. According to the DR the payment is based on "no evidence", but is based on irrelevant considerations. Allowance or disallowance of a claim under section 37(1) should depend upon existence or otherwise of the four conditions as follows: 1. The expenditure in question should not be of the nature described under the specific provisions ss 30 to 36 and 80VV of the Act( section 80VV was omitted w.e.f. from 1st April 1986) 2. The expenditure should not be of nature of capital expenditure 3. It should not be a personal expenditure 4. The expenditure have been laid out for expended wholly and exclusively for the purposes business or profession. 7.4 Now, we will examine, whether in this case the assessee has fulfilled the requirement as envisaged ....
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....re in case of amalgamation or de-merger. Section 35DDA deals with amortization of expenditure incurred under voluntary retirement scheme. Section 35E deals with deduction for expenditure on prospecting etc. for certain minerals. Section 36 deals with other deduction in respect of premium paid, interest, etc. 7.5 The claim of payment of subcontract by the present assessee is not disqualified for deduction under the Act. Now, coming to next question as to whether the expenditure is capital expenditure or not, we are of the opinion that the expenditure is not a capital expenditure since the assessee did not acquire any capital asset. 7.6 As for the third condition as to whether the payment is in the nature of personal expenditure or not, again, in our opinion, this is not the payment relating to personal benefit of any employees or directors of assessee-company. Being so, it is not personal expenditure. 7.7 Now, we have to see whether the expenditure is incurred wholly and exclusively for the purpose of business. In the case of Sassoon J. David & Co. Ltd. v. CIT (118 ITR 261 (SC) wherein held that the expression 'wholly and exclusively' used in s. 10(2)(xv) does not mean 'nec....
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....n respect of which secret commission had to be paid, were available. There was a complete tally between the commission paid and the Extent of business done by the mill-company. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission The assessee had given a complete list showing the turnover and the amount of secret commission paid from year to year. The percentage of secret commission was minimal. The full details of payment on the above basis in respect of several parties were available. They were correlated to the transactions which the assessee had with those persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular parties to whom the payments were made. This, the Tribunal held, could not be supplied without detriment to the business of the assessee in the very nature of things. Shri Patel then pointed out that, in paragraph 29 of the judgment, the Special Bench of the Tribunal noted that the position was the same in the case of Indochem Ltd. and that of the assessee. On the above stated facts, our judgment....
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....ly missing link was stated to be the names of the particular parties to whom the payments were made. This, the Tribunal held, could not be supplied without detriment to the business interests of that assessee, considering the very nature of things. 7.13 The initial onus and burden of proof was on the assessee. In the instant case, such initial onus and burden of proof has been duly discharged by the Assessee Company by producing its audited books of accounts, payment vouchers-and other documents giving full details as to the nature of transactions, which necessitated the payment of such subcontract works and that this was an accepted norm and established in this line of business and that without such payment, it was not possible to survive in this line of business, as well as the prevalent trade practice in the line of business carried on by the Assessee Company all along. However, in this case the inflating of expenditure by the assessee cannot be ruled out. Considering the entire facts and circumstance of the case and chances of inflating the expenses by the assessee, to meet the ends of justice, we are inclined to disallow 15% of this payment. 7.14 Regarding payment to MAY....