TaxTMI 
TaxTMI 
2024 (12) TMI 550
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.... 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the entire addition of Rs. 3,05,45,593/- made by the AO ignoring report of the TPO determining the arm's length price, which is determined appropriately. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the above addition holding that the entire sale proceeds has been transferred to JV partners and the JV has not done any work when the fact is that the JV is the actual recipient and has to discharge the responsibility arising in difference in ALP determined by the TPO examining the facts and domestic transactions by the JV with its AE, as mentioned in Form No.3CEB filed by the JV. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) is not justified in deleting the additions of Rs. 16,34,369/- & Rs. 1,67,979/- made by the AO towards difference in gross receipt and non-deposit of PPF in due date respectively, in violation of provisions of Rule-46A of Income Tax Rules, 1962. 4. The appellant craves to alter, amend or add any other ground that may be consid....
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....e TPO vide its order dated 28.10.2016 has applied Transaction Net Margin Method (TNMM) to work out the domestic transactions price and accordingly an adjustment of Rs. 3,05,45,593/- is made by the TPO in view of the comments made in the order which are reproduced as under :- 5:00 TPO's comments: The reply of the assesse is perused, wherein it has stated that the main purpose for formation of JV was not to earn profits but to bring coordination among the JV partners to execute the works given by the MCL. The contention of the assessee is not acceptable. The assessee's objective was to transfer the entire sale proceeds to AE to ensure lowest sale price to MC. The assessee failed to justify the rationality of the approach since, the ultimate sale price to MCL is not linked with the cost of either assessee or AE in the entire scheme of arrangement. Further, the assessee's contention that the income of the assessee had already been taxed in the hands of its constituent partner is not tenable as the tax is not in the hands of the right person. That, the mere fact of the income sought to be taxed as per this assessment proceeding has been taxed earli....
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....P/OC D=C/A 0.00% Arm's Length operating margin/sales D 11.76% Arm's length operating profit for assessee considering 11.76% OP/OC E-C*D 3,05,45,593 TP Adjustment L-I*K 3,05,45,593 Thus, the total adjustment to be made to the total income aggregates to Rs. 3,05,45,593 for the AY 2013-14. 7:00 In view of the above adjustment the assessing officer may explore the feasibility of initiating penalty u/s 2 71AA of the Act for non-reporting of the above detailed transactions. 8:00 It is hereby clarified that the findings and discussions made in this order pertains only to the extent of determination of arm's length price of International and/or Specified Domestic Transaction(s) and are only applicable in respect to reference received for AY 2013-14 and shall apply accordingly. 5. The AO has completed the assessment by making addition of Rs. 3,05,45,593/- as adjustment in domestic transactions based on the TPO's order. In first appeal, the ld. CIT(A) after considering the arguments of the assessee and by accepting the assessee's alternative plea has deleted the addition by holding therein that since the services rendered....
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....had not awarded any work to any other entity other than its AEs, therefore, application of CUP method for computation of ALP in its case cannot be done. 8. Further the ld. CIT-DR placed reliance on the submission made by his predecessor during the course of hearing on earlier occasion, which is reproduced hereunder:- In the ITRs filed for A.Y.2013-14 & A.Y.2014-15, the assessee has itself shown it as an AOP and therefore it is a taxable entity as per provisions of Income Tax Act. The findings of the Id. CIT(Appeals) are erroneous for the following reasons: i.) During the year under reference, the assessee has paid loading and transportation charges to its associated enterprises. The entire contract from MCL (Mahanadi Coalfields Limited) has been sub- contracted to its three associated enterprises. Even in the back to back contracts, there has to be mark-up which is absent in the present case. ii.) Before the TPO, no supporting documents were submitted by the Id. AR of the assessee to substantiate the basis on which Arms Length Pricing was determined with respect to its AEs. There is no evidence that it had used CUP method for determining ALP. The TPO t....
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.... (288 ITR 179). 2) Hon'ble Kerala High Court in the case of C. Unnikrisnan vs. CIT (233 ITR 485) 3) Hon'ble Mumbai High Court in the case of Prabhavati S. Shah vs. CIT (231 ITRl) viii.) Therefore in the present case, there has been gross violation of principles of Natural Justice as the Id. CIT(A) has not allowed any opportunity to the AO to verify such evidences. Rule-46A(3) is mandatory and indispensable and non- compliance of same will require re-adjudication of the matter by the CIT(A). In this regard, reliance is placed on following decisions: 1) Hon'ble Himachal Pradesh High Court in the case of CIT vs. Shree Kangra Steel (P) Ltd. (320 ITR 691) (para-B) 2) Hon'ble Madras High Court in the case of CIT vs. Subbu Shashank (327 ITR 577) (para-G) 3) Hon'ble Delhi High Court in the case of CIT vs. United Towers (P) Ltd. (296 ITR 106) 4) Hon'ble Delhi High Court in the case of Manish Build Well (P) Ltd. (16 taxmann.com 27) ix.) As regards the late deposit of employee's PF, the same shall constitute income in the hands of the employer as per section 2(24)(x) of the Act. As per section ....
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....rging section (i.e. section 4) of the Income Tax Act, 1961 is not applicable on the appellant 11. In this regard it is further submitted that Section 4 of the Act provides for charge of tax in respect of the total Income of every person. Section 2(31) of the Act defined a person to, inter alia, include an AOP or BOI whether incorporated or not and if an entity is not a person as per Income Tax Act, 1961 then the entity shall not be exigible to Income Tax, In support of aforesaid argument it pertinent to mention here certain provision of 4 and 5 of the Act: "4. Charge of income- tax (l) Where any Central Act enacts that income- tax shall be charged for any assessment year at any rate or rates, income- tax at that rate or those rates shall be charged for that year in accordance with, and 2 subject to the provisions (including provisions for the levy of additional income- tax) of, this Act} in respect of the total income of the previous year] of every person: Provided that where by virtue of any provision of this Act income- tax is to be charged in respect of the income of a period other than the previous year, income- tax shall be charged according....
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....according to percentage of business participation as mentioned herein above. During the Assessment Year 2013-14 irrespective of clause 2.1 & 2.4 of the JV agreement, the revenue of the relevant assessment year was shared between the JV constituent as per details herein below: Name of party Amount in Rs. %of share in Revenue NCC 4,65,74,163/- 17.93 SMASL 13,46,23,119/- 51.83 JRT 7,85,44,157/- 30.24 Total 25,97,41,439/- 100 The aforesaid distribution was possible only because there was clear understanding amongst the parties that they joined the joint venture only for the purpose of securing the contract by pooling their expertise and do the works independently. The JV in fact acted only as a facilitator in securing the contract as the work awarded by the Principal Employer. All the constituents joined in pre-tendering process only to secure the project work by showing their respective expertise and capabilities. This understanding between the constituents of the JV enabled and strengthened the JV for pre- qualification of the tender. Further the aforesaid fact, of distribution of income, clearly shows that: ....
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....on and therefore, did not derive any income during the year and the additions made by the assessing officer could not be sustained. In the facts of the case, we hold that there is no mistake in the order of the CIT(A) in holding that the question of estimating profit does not arises and in deleting the addition made in the hands of the assessee. We hold that no case for disallowance/addition could be made under S.40A(2) by the Revenue and accordingly, there being no merit in the grounds of appeal of the Revenue, the same are rejected for all the three assessment years in appeal before us". Further, the Hon'ble ITAT Hyderabad Bench in the case of PCL SUNCON JV & PLL STlTCO JV vide order dated 11th April 2012 in ITA No. 149- 160/Hyd/2008 and in M/S. Ivrcl-Kbl (Jv), Hyderabad vs Department Of Income Tax on 14 May, 2012 ITA Nos. 1197, 1198, 1199/Hyd/2011 has followed the earlier order of the Tribunal dated 4.11.2011 in the case of M/s. Limak Soma Joint Venture (cited supra). It is further submitted that the Income Tax' Department accepted the above position and not made any addition in Assessment Year 2012-13 of M/s. Ivrcl-Kbl (Jv) which is evident from para-2....
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....t partner; e. the transaction of contracting further is completely tax neutral; therefore the additions made by making arm length adjustment in the assessment order should be deleted on the aforesaid grounds. II. Submission dated 12/10/2017 : The Commissioner of Income Tax Appeal-2, Bhubaneswar, Odisha PAN :AABAN3785B A.Y.: 2013-14 Ref: Appeal us 250 of the Income Tax Act, 1961 against Assessment Order u/s 143{3} r.w.s. 144C of the Income Tax Act, 1961 in the case of M/s NCC SMASl JRT (JV) for the AY 2013-14 Sub: submission for Part Grounds of Appeal taken before your good self. Respected Sir, In continuation to our earlier submissions dated 20.09.2017 we would like to press our remaining grounds and submit as under:- Brief Background / modus operandi followed the assessee: Functionality/Business profile of JV 1. At the cost of repetition it is stated that the assessee (i.e. Joint Venture) was formed between M/s. NCC Limited (NCe), M/s. Sainik Mining and Allied Services Limited (SMASL) and M/s. Jalram Transport (JRT) to execute the mining works like, OB Removal, loading, transpo....
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....nts of the JV and claimed for the same through bills, the JV had to account for the same and pass on the gross receipts to them. 5. Risk profile of JV: During the relevant assessment year the risk profile of the JV was as under Customer Credit Risk a. Since the contract Le. NIT-639 was awarded by MCL (being a subsidiary of Coal India Limited i.e. Public Sector Undertaking (PSU)}, therefore MCL is also a PSU, therefore the JV did not have risk that MCL will not make payments or fail to make payments. Hence the JV was not exposed to customer credit risk. Foreign Exchange Risk b. Since all MCL is situated in India and no other overseas party was involved in the contract therefore all the payments were sought be received in INR only, hence the JV was not exposed to foreign exchange risk. Contract Rate/Pricing Risk c. Prices of the activity to be performed by the JV were duly mentioned in the letter of acceptance of NIT-639, hence the JV was not exposed to contract rate risk. Operational Risk d. As all the Prices of the activity to be performed by the JV were duly mentioned in the letter of acceptance of NI....
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.... arises due to such comparison in controlled transactions. All the method listed in section 92C (1) (a) to (d) r.w.r.10 (1)(a) to (e) are fettered with technicalities which appellant JV may not fulfill, therefore, the appellant JV selected "any other method" as provided by Section 92C(1)(f) r.w.r.10B (1)(f) and 10AB. 9. With regard to applicability of "any other method" as mentioned in Section 92C (l)(f) of the Act, in case of appellant JV, it is pertinent to note the meaning of Arm length Price as mentioned in clause (ii) of section 92F which is reproduced herein below: 92F. In sections 92,92A, 928, 92C, 920 and 92GBP, unless the cornea otherwise requires- (ii) "Arm Length Price" means a price which is applied or proposed to be applied in a transaction between the persons other than associated enterprises, in uncontrolled conditions; In this connection it is pertinent to mention here certain provisions of Rule-10A and 10AB of Income Tax Rules, 1962. Rule 10A(ab) provides the meaning of uncontrolled transaction which is reproduced herein below: Rule 10A(ab) "Uncontrolled Transaction" means a transaction between the enterprises o....
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....d appellant JV is not governed by section 40A(2)(b). Hence, MCL cannot be termed as "associated enterprise" of the appellant JV for the purpose of Rule 10A of the "Income Tax Rules, 1962. Therefore from the above it is evident that the transactions between the appellant JV and Mahanadi Coalfield limited (MCL) were independent transactions (l.e. being transactions between two non associated enterprises) and the prices determined by Mahanadi Coalfield limited (MCL) can' act as benchmark for comparison as contemplated in Rule 10AB of the Income Tax Rules, 1962. In this connection it is also pertinent to mention here that the JV had outsourced entire work awarded by Mahanadi Coalfield Limited (MCL) on back to back basis to its constituents at price which determined by the Mahanadi Coalfield limited (MCL). Therefore as per "any other method" as mentioned in Section 92C (l)(f) of the Act, the transactions are at Arm Length Price and no impugned arm length price adjustment as proposed by Ld. TPQ and made by Ld. AO was required. Hence, the Arm Length Price adjustment was bad and devoid of any merits and is liable to be deleted. 10. Without prejudice ....
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....ll these transactions were with Calance Corporation, United States. Two of these three transactions, as noted by the Transfer Pricing Officer, were back to back transactions in respect of contracts that Calance US had entered into independent entities by the name of Adjoined Consulting (US $ 4,25,320) and Heritage Valley Health System (US $ 85,000). There is no dispute that "these contracts were passed on to the assessee company (by Calance US) and the entire amount of US $ 5,10,320 was passed 011 to the assessee". The stand of the assessee was that since these are back to back transactions, these transactions are required to be taken as having been entered into at an arm's length price " [Para 3] 5. We find that, so far as the back to back transactions are concerned, the services rendered by the assessee to the AE are exactly the same as, In effect, rendered by the AE to the independent transaction. The price charged for the same service by the AE to the independent end customer is thus the best CUP input in respect of such a back to back transaction. If a unit sells a product to its AE for INR 100 and the AE sells the same product to an independent enterprise for INR....
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....ion of law reliance is placed on the judgment of Hon'ble ITAT Delhi Bench in the matter of Rampgreen Solutions Private Umited v. (IT [2015] 60 taxmann.com 355 (Delhi) wherein it was held: "20. In order for the benchmarking studies to be reliable for the purposes of determining the ALP, it would be essential that the entities selected as comparables are functionally similar and are subject to the similar business environment and risks as the tested party. In order to impute an ALP to a controlled transaction, it would be essential to ensure that the instances of uncontrolled entities/transactions selected as comparables are similar in all material aspects that have any bearing on the value or the profitability, as the case may be, of the transaction. Any factor, which has an influence on the PLI, would be material and it would be necessary to ensure that the comparables are also equally subjected to the influence of such factors as the tested party. This would, obviously, include business environment; the nature and functions performed by' the tested party and the comparable entities; the value addition in respect of products and services provided by parties; the bu....
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....nate bench in assessee's own case for assessment year 2011 - 12 and also on basis of our analysis of functions of assessee vis - a -vis comparable, we direct ld. Transfer Pricing Officer/AD to exclude Aditya Birla capital advisors private limited for comparability analysis. [Para 20] It is further submitted that for the purpose of comparability analysis, it is essential that the characteristics and the functions are by and large similar as that of the Comparable- 1 and appellant JV, whereas ld. TPO/AO had failed to differentiate and appreciate that the functional profile of the Comparable-l and appellant N are totally different. ii. It is further submitted that the ld. TPO/AO has applied a lower turnover filter of Rs. 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it is further submitted that under rule 10B(3) to the Income-tax Rules, it is necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit ....
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....er cannot be relevant criteria in a service sector, we would like to observe that as per the recent amendment in IT Act, as per which 'Rule of safe Harbour' is introduced, it is admitted by revenue also that the provision of Software Development Services is also an eligible international transaction as per Rule 10TC and as per Rule 10TD, it has been prescribed that where the turnover in respect of Software Development Services is not in excess of Rs. SDO Crores, rate of 20% should be applied and where the turnover is in excess of Rs. 500 Crores, rate of 22% should be applied. From these provisions of the 'Rule of Safe Harbour', it becomes clear that it is now accepted position of the department also that size of the turnover has an impact on the profit margin even in respect, of service sector which may be not on account of difference in fixed overhead but may be on account of capacity to charge higher price from customers because the size of the company is big. In this view of the matter, we are of the considered opinion that earlier Tribunal order cited by Id. DR of the revenue does not lay down a binding precedence. [Para-8} 9. In view of above discussio....
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.... all risks leading to higher profits, whereas the assessee company was a captive unit of the parent company and assumed only a limited risk. In the present case also, the assessee company is providing services to the parent company and therefore, assuming only limited risk and hence, following the above decision of the coordinate bench of the Tribunal, we direct the AO/TPO to exclude this company also from the list. of final comparables. [Para-17] Further, the Hon'ble ITAT Delhi Bench '1-2' in the matter of Haidor Topsoe India (P.) Ltd. V. DCIT, Circle l2(l) [2017] 82 taxmann.com 365 IDelhi-Tribl held as under: "6.3.5 Therefore, in view of the cited precedents and on the facts of the case, IT is our considered opinion that the risk taken by an independent entity and the captive service provider are different and since the remuneration of the captive service provider is not linked with the performance, it is not a significant risk and, therefore, a suitable adjustment should be allowed. Accordingly, we restore the matter to the file of the Ld. TPO/AO for examination of the issue and provide suitable adjustment towards risk in accordance to the law. The ....
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....hereas the market size of the appellant JV is restricted to the work contract awarded by MCL, which is limited to 1095 days. ix. The main turnover of the Comparabe-2 arises from exports of goods and during the relevant assessment year the Cornparabe-2 exported goods of Rs. 421.68 Crores. Therefore the Comparabe-2 sale its good and services to the outsiders hence the company accept currency risk, foreign exchange fluctuation risk, credit risk etc, whereas the Appellant JV outsourced the contract on back to back basis. Therefore the Appellant JV assumes very minimum risk, hence the risk profile of the comparable company is totally different from the JV company, further the comparable company assumed greater risk and have all the potentials and means to mitigate the risks taken by the comparable company due to owned funds employed in the company which are closed to Rs. 107.92 crores. In this connection all the contents, averments and decision mentioned in para-12(iv) (supra) are also relied here; however the same are not repeated for the sake of brevity. x. Therefore from the above it can be said that the comparable-2 is functionally different. have high turnover, pr....
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....ce claimed by the company in its petition. Based on these orders and in accordance with the views expressed by the Comptroller and Auditor General of India (CAG), the company has booked the lignite extraction charges payable to Mine Developer cum Operator (MOO) in the same proportion as approved in the adhoc interim tariff order. The company in the disclosures of accounting policies, change in accounting policies and change in estimates has given Note-23, wherein it is stated that as and when the final RERC order determining the lignite transfer price is received, the impact of finalized tariff, MOO charges payable and turning the for relevant period will be provided in the books of accounts. Further it is also stated that based on adhoc interim transfer price and adhoc interim MDO fees the profit & loss account of the company reflect a profit after tax of Rs. 5.76 crores for F.Y. 2012-13. Therefore from the above it is evident that the final statements of the company do not reflect the true and fair position of the revenue reallzed and expenses incurred under the head of MDO fees. Therefore the financial data of the company is not reliable because the company itself has admitted t....
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....cials on adhoc interim transfer price determined by RERC and have RPT more than 25% therefore did not fulfill the filter criteria used by the Ld. TPO. Hence, the purpose of Transfer Pricing study the comparable-4 does not deserve to be considered as benchmark and liable to be deleted from the list of comparables and should not be consider while calculating the Profit Level Indicator (PLI) as per TNM method. HI-TECH ROCK PRODUCTS & AGGREGATES LIMITED (i.e. 4^th Comparable Company) hereinafter referred to as II comparable-411 xiv. The comparable-4 was engaged in the business of quarry and mining operations. During the relevant assessment year the turnover of the company was derived from sale of boulders and aggregates. The above fact can be verified from the Financial Statements and Board Report of the Comparable-4 down loaded from the website of Registrar of Companies. A copy of the financials of Comparable-4 downloaded from the website of RaC is annexed herewith as Annexure-7. Whereas the Appellant N is engaged in loading & transportation of coal, therefore the business activity of this comparable is different from the business activity of Appellant JV. In this co....
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....arable-4 is functionally different, have high turnover and have RPT more than 25% therefore did not fulfiil the filter criteria used by the ld. TPO. Hence, the purpose of Transfer Pricing study the comparable company does not fit in compare to the appellant JV. Hence, it is requested that this company should be deleted from the list of comparables and should not be consider while calculating the Profit level Indicator {PLI) as per TNM method. OREN MUD CHEMICALS PULVERISING PRIVATE LIMITED (I.e. 5th Comparable Company) hereinafter referred to as "Comparable*;" xviii. During the relevant assessment year the comparable-S was engaged in the business of pulverizing & processing of oil. The above fact can be verified from the Financial Statements and Board Report of the Comparable-S downloaded from the website of Registrar of Companies. A copy of the financials of Comparable-5 downloaded from the website of ROC is annexed herewith as Armexure-8, Whereas the Appellant N was engaged in loading & transportation of coal, therefore the business activity of this comparable is different from the business activity of Appellant N. In this connection it is again submitted that if....
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.... the request of the assessee for exclusion of 6 comparables, we find that in the case of lakshmi Precision Tools ltd the RPT percentage is 14.41% and therefore. this company Is not a uncontrolled comparable and hence. we direct the AO/TPO to exclude this company from the list of final comparable/' [Para-ll] Furthermore, as the comparable-S does not full fill the criteria/filter chosen by the ld. TPO, therefore Comparable-5 should be excluded on this sole ground alone. xxi. Therefore from the above it can be said that the comparable-5 is functionally different! have RPT more than 25% and profit & loss account of the comparable-5 is not available on the website of the ROC. Hence, the purpose of Transfer Pricing study the comparable company does not fit in compare to the appellant JV. Hence, it is requested that this company should be deleted from the list of comparables and should not be consider while calculating the Profit level Indicator (PLI) as per TNM method. In view of the position explained herein above your good self is requested to kindly delete the addition made by Ld. AO in the assessment order. We hope that your good self will find....
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....ent against the work executed by it, is tabulated as under:- Name of party Amount in Rs. %of share in Revenue NCC 4,65,74,163/- 17.93 SMASL 13,46,23,119/- 51.83 JRT 7,85,44,157/- 30.24 Total 25,97,41,439/- 100 14. Here it is relevant to state that from the perusal of the same it can be noted that the work executed is not in equal ratio by all the constituents and it is also contrary to Article 4.2 of the Joint Venture agreement which clearly provide that work shall be executed by the parties as Integrated Joint Ventures. 15. Since this transaction is covered under the specified domestic transaction, therefore, the AO has made a reference u/s. 92CA of the Act to the TPO for determination of the ALP. The TPO vide order passed u/s. 92CA(3) of the Act, dated 28.10.2016 has made an adjustment of Rs. 3,05,45,593/- on such domestic transactions by applying Transaction Net Margin Method (TNMM). The AO passed on the order and made the addition of the adjustment made by the TPO on such specified domestic transaction which stood deleted by the ld. CIT(A) by observing in para 5.2 to 5.13 as under :- 5.2 On the issue of comparables, th....
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....ses to independent parties, the price charged for the same service by associate enterprises from independent end customer was best CUP input for determining arms length pricing. Considering the above, the addition made by the assessing officer of Rs 3,05,45,593/- is directed to be deleted. The grounds of appeal are allowed. 16. From the perusal of the observation of ld. CIT(A), we find that the ld. CIT(A) has based his findings of the judgment of the coordinate Delhi Bench of the Tribunal in the case of DCIT Vs. Calance Software Pvt. Ltd., reported in (2017) 82 taxmann.com 390 (Delhi) and held that CUP method is the most suitable method under the given circumstances of the case. However, from the perusal of the submission of the assessee as reproduced above, as well as from the order of the ld. CIT(A), we find that detailed working of the CUP method had neither been provided by the assessee to the ld. CIT(A) nor any such working was done at the end of the ld. CIT(A). It is surprising that without considering the ALP as per CUP method, how the ld. CIT(A) had reached to the conclusion that the adjustment made by the AO, towards specified domestic transaction is unreasonable/excess....
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....ase where back to back contracts was given to the associate enterprises, which is similar to instant case of assessee, however, the ALP was computed by following the CUP method by assessee itself whereas in the present case, the assessee has initially worked out the ALP on the basis of "any other method specifically as provided under the Section 92C(i) of the Act", which was not accepted and allegedly TNMM method was adopted by TPO and thereafter the assessee has changed its stand in the appellate proceedings and admitted the CUP method as the most appropriate method. But at no stage any precise working was provided for any of the two methods adopted by the assessee. Under these circumstances, we are left with no other alternative but to send back the matter to the file of AO to re-examine the issue and refer the matter back to the TPO for determination of ALP based on the best suitable method. Needless to say, while doing so, the assessee shall be provided reasonable opportunity of being heard. The AO shall also examine whether the assessee has duly complied with the other provisions of the Act such as TDS etc. while making the payments to its AEs and claiming expenses in its fina....