TaxTMI 
TaxTMI 
2018 (4) TMI 2018
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.... For the year under consideration, the assessee has filed return of income on 15.10.2010 declaring total income at Rs. 300,978,326/- after complying with provisions of section 44BBB(2) of the Act. The case was selected for the purpose of scrutiny assessment and accordingly notice u/s 143(2) of the Act was issued on 24.08.2011 and served upon the assessee on 29.09.2011. Notice u/s 142(1) of the Act was issued on 22.10.2012 calling for various information and documents. The assessee during the course of assessment proceedings appeared from time to time and furnished all the information and documents as required by the Assessing Officer. The learned Assessing Officer did not appreciate the various facts and law submitted by the assessee during the course of assessment proceedings and passed the order u/s 144C r.w.s. 143(3) of the Act, determining total income at Rs. 69,73,91,330/- in the hands of the assessee. 3. Aggrieved, the assessee preferred appeal before the learned CIT (A) and partly succeeded. Now, the Revenue is in appeal before the Tribunal raising following grounds:- "i) The Ld. CIT (A) erred in law and on facts in holding that the action of the AO in ....
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....e present case. 4. Both the learned authorities have failed to appreciate that when for the charging sections 4 and 9 of the Act the Appellant foreign company and its Project Office are not treated as separate and distinct entities, for the machinery provisions of Transfer Pricing, the same cannot be treated as separate and distinct entities so as to apply transfer pricing provisions. 5. The Ld. CIT (A) has erred in law and on the facts of the case in confirming the action of ld. AO in holding that the Appellant foreign company and its Project Office are associated enterprises within the meaning of S. 92A read with S. 92F(iii) of the Act. 6. The Ld. CIT (A) has erred in law and on the facts of the case in confirming the action of Ld. AO in holding that the Appellant foreign company and its Project Office are associated enterprises in terms of Article 9 of the Double Taxation Avoidance Agreement entered into by the India with the China. 7. The Ld. CIT (A) has erred in law and on the facts of the case in confirming the presumption of Ld. AO that the Appellant foreign company had delegated responsibility of execution of the project to the Project Of....
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....009-10 vide ITA No. 1707/Ahd/2013 dated 18.01.2017 and further the Hon'ble jurisdictional High Court dismissed the Revenue's appeal as Hon'ble High Court held that no question of law arises in the appeal of the Revenue. 7. Learned Departmental Representative failed to controvert this submission made by the assessee. 8. We have heard the rival contentions and perused the record placed before us. The issue before us is whether the learned Assessing Officer was justified in rejecting the books of accounts and estimating the profits under Section 44BBB(1) of the Act. We observe that the assessee-company entered into agreement with Adani Power Ltd (APL) and Jhajjar Power Ltd (JPL) for Mundra and Haryana power projects. These contracts were entered into in the preceding financial year. Assessee has kept and maintained books of accounts duly audited under Section 44AB of the Act. Assessee followed and complied with the Accounting Standard AS-7 issued by the ICAI and recognized the revenue as per the Percentage Completion Method on the basis of proportion of actual cost incurred to the total estimated cost of the contract. Learned Assessing Officer was not satisfied with the acc....
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....s of accounts are prescribed u/s 44AA. Thus assessee's books, audit, financial statements, balance Sheet, P&L A/c etc. are fully compliant to relevant provisions of Income Tax and companies Acts. ii. Ld. AO held that AS7 is not applicable to the assessee company ignoring the vital legal propositions of section 594 of the Companies Act, 1956 laying down a statutory mandate that a company, which is incorporated outside India and has established place of a business in India, is required to prepare its Balance Sheet and Profit & Loss account as per the various provisions of the Companies Act, as if it is a Indian Company with the meaning of the Companies Act. Consequently, ld. CIT (A) rightly held that the Accounting Standard AS-7 is applicable to it. We find no infirmity in this aspect of his order. Following AS 7, assessee has recognized revenue and cost following the percentage completion method on the basis of proportion of contract costs incurred for work performed till the reporting date to the estimated total contract costs. Undisputedly in the notes to the financial statement, the method recognized to account for revenue and expenditure has been specified by assessee i....
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....work of the contract was completed to that extent only, therefore, method (c) i.e. completion a physical proportion of the contract work as prescribed in para 29 of AS-7 was applicable. Ld. AO has failed to appreciate that method followed by assessee was correct and could not be disturbed on his perception. Besides it has not be controverted that AOs proposition would have lead to lesser revenue being recognized during the impugned year. Thus even the reason of loss of revenue is not ascribable to assessee's method of accounting. In view of these facts and circumstances we see no inconsistency in the order of ld. CIT (A) which is justified and within the parameters of law. v. No worthwhile defect has been pointed out by ld. AO qua the books of accounts, audit and P & L A/c. It has been demonstrated that estimated cost and profit percentage declared from year to year nearly match, consequently we see no reason to suspect that the figures of estimated cost were distorted. The project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO's remark that stage of completion is a better met....
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....y we hold that the ld. AO's action of rejecting books of accounts in terms of Section 145(3) of the IT Act and assessing income u/s 44BBB(1) of the IT Act on presumptive basis is not justified, the order of ld. CIT (A) is upheld. Our view is fortified by Delhi ITAT judgment in the case of Royal Jordanian airlines (supra) which after dwelling over all relevant aspects of charging and mechanical provisions, statutory mandate, and jurisprudence of regular assessment vis-a-vis presumptive assessment and catena of judicial precedents as detailed in this order." 9. We further find that the Revenue went in appeal against the order of the Tribunal before the Hon'ble jurisdictional High Court, but failed to succeed as Hon'ble Court vide order dated 18.09.2017 in Tax Appeal No. 623 of 2017 dismissed the Revenue's appeal by observing as under:- "7. Such being the facts, we see no reason to interfere since no question of law arises. Learned counsel for the Revenue, however, strenuously urged that the Assessing Officer was authorised to examine the books of accounts and other documents and if found that the assessee had not recorded the details correctly he could have rejec....
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.... Act. Learned Assessing Officer, after taking a view that the alleged transactions between the Project Office and the HO being the Associated Enterprises comes under the purview of the international transactions, went ahead for applying the TNMM for determining the Arm's Length Price (ALP). Learned Assessing Officer further analyzed various comparables and after considering the comparables accepted by the assessee, calculated the Arm's Length Price @ 111.97% of operating cost and made an upward adjustment under Section 92C(3) of the Act at Rs. 40,01,41,157/-. This was an alternate addition made by the Assessing Officer. Learned CIT(A), however, set aside the findings of the learned Assessing Officer and particularly confirmed the plea of the assessee of application of CUP method and also holding that for the purpose of CUP method, the rates of contract between the APL as well as JPL with Shandong China are the best comparables. Aggrieved, Revenue is now in appeal before the Tribunal. 13. Learned Departmental Representative vehemently argued submitting as under:- "In the case of M/s Pteriij Global Ltd. for AY 2013-14, no TP issue is involved. Hence, the written subm....
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....ses. However, from perusal of the reply given in response to the show cause notice, it is seen that the assessee admitted that the transaction representing reimbursement of expenses are indeed international transactions in view of the definition provided in section 92B and assessee has declared the same in Form 3CEB. Since, the international transactions are defined to be the transactions between associated enterprise, it is clear that the assessee also considers itself, being the permanent Establishment and the HO as the associated enterprises. Further in order to examine whether the assessee and its head office are associated enterprise or not, it is important to note that the management, capital and control of the permanent establishment is entirely in the hands of the head office and consequently the permanent establishment is required to be considered as associated enterprise, as per the provisions of section 92A (1)(a). 4. From perusal of the above, it can be seen that two entities are considered to be associated enterprises if both of them have common control or if one of the enterprise participates directly or indirectly in the management, control or capital of the....
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....e, there is no need to examine or ascertain the intention behind introduction of the provision in the Act. Therefore, the contention of the assessee that the project office came into existence after the contract was signed between HO and APL/JPL would not affect the existence of "international transaction". Since the transaction is an international transaction, the arm's-length price of the same is required to determine as per the provisions of law. The same factual and legal position of the revenue is also confirmed by the Ld. CIT (A). Application of TNMM 8. It has been established in TP orders related to various AYs that provisions of Chapter-X of the Act are applicable in the case of the assessee. The international transaction in this case is the revenue shown by project office from the aforementioned projects signed by its HO. Therefore the receipts showed by the project office in its accounts needs to be benchmarked. The comparables in the present case have been taken keeping in mind the criteria listed in Rule 10B of the IT Rules 1962. The contention of the assessee that Chinese companies should have been taken as the comparable is not correct. Since, th....
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.... are to be carried out by the project office vis-a-vis, HO and what risks are to be undertaken by the project office vis-a-vis HO etc. In the absence of this information, the application of CUP, in the present case, is unreliable. Since the international transaction does not involve distribution activities, RPM is also not appropriate on the facts of the case. There are no contribution of the unique intangibles from the assessee and HO and therefore, profit split method is also not applicable to the case. For the reasons mentioned in the show cause notice cost plus method is also not applicable and consequently TNMM is required to be considered as the most appropriate method, being the method of last resort. 12. The assessee objected for TNMM as MAM and suggested CUP as MAM which is upheld by Ld. CIT (A): In the CUP Method, the price of the product/service being examined in the international transaction is compared with the price of the product/service for a transaction which is "comparable" to the international transaction and "uncontrolled" in nature. For the application of this method a search is required to be carried out for identifying a transaction....
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....here cannot be any possibility of adjustment in the Arm's Length Price. Reference was further made to the written submissions filed before the lower authorities. 15. We have heard the rival contentions and perused the record placed before us. So far as the issue that whether the transfer pricing provisions are applicable on the transactions between the Shandong HO and Shandong Project Office in India, we find no infirmity in the findings of the learned CIT (A) that the transactions between both the entities are deemed international transactions and the transfer pricing provisions are applicable between the foreign company i.e. HO and its PE, by observing as follows:- "7.5.2 I am unable to agree with the contentions of the appellant that the transactions between head office of the appellant company and its PE in India need not be considered as international transaction. I find that the project office of the appellant company and its head office are Associated Enterprises ('AEs') as per the provisions of the section 92A(1)(a) for the simple reason that the PO is a separate taxable entity and the same is managed by HO, controlled by HO and even the capital contribution....
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....is reported. Accordingly, I hold that the transfer pricing provisions are applicable where transactions have taken place between the foreign company i.e. HO and its PE in India i.e. PO." 16. Further coming to the issue of application of method for calculating the Arm's Length Price, we find that the Assessing Officer applied the TNMM method; whereas, the learned CIT (A) has held that the CUP method is most appropriate method. Learned CIT(A), while deciding that the CUP method is the most appropriate method, as pleaded by the assessee, observed following findings:- "8. As mentioned above, the appellant company has alternatively submitted that the AO ought to have selected CUP as Most Appropriate Method over TNMM in view of availability of CUP of APL & 3PL transaction with HO of the appellant company more so when the transactions are functionally comparable. I have also perused judicial pronouncements cited by the appellant company to contend that where CUP is available, CUP method should be followed in preference to other methods for determination of the ALP. I find force in the contention of the appellant company that CUP is the most appropriate method for dete....
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.... Arm's Length Price, which reads as under:- "10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction, as the case may be. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely;- (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to....