AI OCR 
TaxTMI 
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TaxTMI 
2026 (4) TMI 819
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....ring Corporation, Taiwan ("CEC Taiwan") is engaged in the business of Civil Engineering Construction in the fields of Highways and Mass Rapid Transit System. It was duly registered with registrar of companies on 5th December 2005 as a project office and started its operations from April 2006. 4. The assessee was also engaged in certain joint ventures formed for the purpose of getting the orders from the third parties. During the assessment year, the assessee has entered into various international transactions with its related parties. The impugned transaction was in relation to the provision of construction services to "JVs" ("AEs)". JVs were formed with an objective to get the construction contract from Bangalore Metro Rail Corporation Limited ("BMRCL") / Delhi Metro Rail Corporation Limited ("DMRCL"). After receipt of contract, the work was allocated between JV partners in a specified manner as determined in the subcontracting agreements. 5. In order to benchmark the relevant international transaction, the assessee has applied Comparable Uncontrolled Price ("CUP") method based on back to back arrangements i.e. the entire construction received by JV was allocated between JV ....
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....ve sub contractor is expected to earn a markup on cost for the work undertaken by it for the project, since it had no role in deciding the third party contract amount or the decision to enter into such a contract. Moreover, no third party would have agreed to take a sub-contract from the main contractor on loss due to the reason that the ultimate receipts from the customer (to the extent of work sub contracted) will be passed on. v) Assessee has not brought anything on record to justify its claim that the Assessee had charged a markup or the Assessee had a role while quoting the price to the customer (BMECL) vi) Assessee has not given any details of the cost analysis for bidding the project and nor the Assessee has disclosed the markup percentage that it has charged while bidding for the project. vii) Assessee has stated that the Assessee has incurred loss due to extraordinary circumstances, however, the Assessee has taken no pain to explain these circumstances viii) Therefore, losses earned by the Assessee are due to the mismatch in the contract work allocated and apportionment of contract revenue, in case it is accepted that the Assessee had be....
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....r and employer. 5.26 It is a fact that functions performed by the entities play very critical role in deciding the arm's length price in transfer pricing analysis. I find that core functions, key responsibilities, key decision making and level of individual responsibility for the key decisions are important factors to identify the party, which has control over the risks. The conventional wisdom is that if the core functions/main operations are located in india, which in turn require important strategic decisions by management and employees of Indian entity to provide such services and control over the operational and other risks. JV in this case has only administrative functions for which all participating units contribute for the functioning of JV. JV does not own any asset and risk is also not borne. Identification of risk and the party who bears such risks are important steps in comparability analysis. The conduct of the parties is key to determine whether the actual allocation of risk conforms to contractual risk allocation. Allocation of risk depends upon ability of the parties to the transaction to exercise control over risk. Accordingly, the project office has u....
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....its and income in such a manner as to shift to low tax regimes, with the tax payer's ultimate objective of reduced tax burden, when in reality the incidence of tax in the host jurisdiction should actually be higher. Transfer pricing laws thus seek to address the tension between these competing objectives. Crucially, in India, in balancing these objectives, the precise limits of the methods and mechanics of calculating the arm's length price are provided for by the IT Act and the IT Rules made thereunder, so as to ensure certainty in these calculations rather than roving enquiries. 5.31 Specifically, the object behind introduction of Chapter X of the IT Act was to prevent assessees from avoiding payment of tax by transferring income yielding assets to non-residents whilst at the same time retaining the power to benefit from such transactions i e. the income so generated. The Central Board of Direct Taxes ("the CBDT") by its Circular No. 14/2001 dated 12.12.2001 [2001 252 ITR (ST.) 65) spelt out the scope and effect of transfer pricing provisions The rationale for substituting the existing Section 92 of the IT Act was explained in the following extract of the said Ci....
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..../2006 and the contract with JV was signed on 29/01/2007. The project duration was from February 2007 to July 2010. The scope of the work included Phase II of Delhi Metro. The appellant submitted that total profit of Rs. 51,97,454/- was earned out of this specific project based on percentage completion method. 5.34 During the year, the international transaction pertaining to this project is in the nature of recovery of construction income of 1.73 cr. by CEC- SOMA JV from the appellant due to negative variation in escalation. The recovery is triggered by DMRCL against CEC-SOMA JV and the same recovery without any mark-up has been passed on to the appellant against the IPC raised by the appellant. Minor operations related to this project got performed during the subject year. The recovery was in respect of work performed in preceding years. 5.35 As regard, the arm's length price of the same, the assessee submitted that the adjustment made by the Indian employer (DMRC) has been passed on completely to the assessee by the JV without any retention and therefore, the transaction effectively is between third parties. The appellant claimed that the colour of internatio....
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....e shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. As discussed above, I do not find the transaction to involve any benefit, service or facility creation between JV and the project office. Therefore, the provisions of section 92 are not applicable in this case. The transaction between JV & Project office is limited to the extent of administrative convenience. There is no other function/asset/risk involved between JV & Project office. CEC-CICI JV (CC04-DMRC Project). 5.40 This JV received letter of approval on 29/12/2011 from DMRC. The project duration was from February, 2010 to January, 2015. The scope of work included Phase III of construction of Mukundpur- Yamuna Vihar corridor of Delhi MRTS design and construction contract. Following three international transactions pertain to this project. CEC-CICI JV Reimbursement Received For Expenses 11,622,850 Any other method Mobilization advance 110,000,000 Any other method Investment in JV 60,000,000 Any other method 5.41 During the year, the project was in the initial phase where investment of Rs. 6,00,00,000....
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....med to have received reimbursement on cost to cost basis from JV for expenses such as bank guarantee charges, salaries and other miscellaneous expenses such as telephone, printing, stationary etc. on behalf of CEC-CICI JV 5.44 It may be relevant to take note of the findings of Hon'ble Delhi High Court in the case of Cushman and Wakefield. The HC ruled that even though the transaction involves only a recovery of cost, as the transaction is between two AEs, it is necessary to test whether an uncontrolled entity for the same or comparable services charges an amount less than or equal to or more than what was charged to the Taxpayer by the AEs. Application of Section 92(3), which does not permit application of ALP if it has the effect of reducing tax incidence, cannot be inferred merely because the AEs recover costs without a mark-up. Α comprehensive transfer pricing (TP) analysis is required to test the appropriateness of the costs that are allocated as well as for determining applicability of Section 92(3). 5.45 As per ITS 2009 Transfer Pricing Guidelines accepted by the OECD, when an AEs is acting only as an agent or intermediary in the provision of servi....
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....bsp; Station Boxes including station architecture work and water supply, plumbing and drainage 43% 4,279,360,000 Total 100% 9,952,000,000 5.49 Out of the total works awarded by BMRCL as specified above; most of works related to construction of tunnel were allocated to the assessee and rest of the works were allocated between SOMA, CICI and JV in the following manner: S. No. Particulars Total Value CEC-PO SOMA CICI CEC-SOMA- CICI JV 1 Preliminary and General Requirements 497,600,000 100% 2 Design of permanent works 298,560,000 100% 3 Open cut and cut tunnels section including ramps 597,120,000 98% 2% 4 Bored Tunnels 4,279,360,000 85.641% 11.973% 2.386% 5 Station Boxes including station architecture work and water supply, plumbing and drainage 4,279,360,000 91.8324% 8.1676% Total Value of Contract 9.952,000,000 5.50 As regard, the arm's length price of the same, the assessee submi....
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....o related party amounting to Rs. 26,783,712/- The appellant submitted that these expenses pertain to reimbursement of salaries of Taiwan's expatriates working for Indian operations. These expenses are incurred on back to back basis c) Bank Guarantee charges amounting to Rs. 28,540,407/- In this regard, it is submitted that CEC Taiwan provided guarantees for Indian operations. These charges are the bank guarantee charges. These expenses pertain to related party (AE). 5.53 It is noted that the head office as well as project office have incurred expenses on behalf of each other and therefore, the reimbursements are from both sides i.e. inbound as well as outbound. No mark up has been claimed to be charged by both the sides in this case. Further, it is important to note that the reimbursements are in respect of such expenses (salary, information technology and bank guarantee charges) where the payment has been made to independent parties say for bank guarantee charges, the charges have been paid to bank and salary has been paid to employees etc. Therefore, the transactions of cost to cost reimbursements are bound to be at arm's length. ....
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....e providers using TNMM as the most appropriate method. While doing so, the TPO has ignored the fact that the revenue recognition policy of the comparable company is different from the assessee because the revenue and costs in case of assessee are recognized in accordance with AS-7 as it is a construction company. 5.60 In the process of comparability; FAR analysis (i.e. analysis of functions performed, assets employed and risks assumed) plays very critical role in the acceptance or rejection of comparables. The appellant has highlighted that there is substantial difference in the ratio of Fixed Assets to Turnover of the company and of the assessee. Further, the appellant demonstrated the difference in the functions performed, fixed assets and inventory of the company and of the assessee. 5.61 The appellant pointed out that profit shifting is a way to shift funds from India to foreign entity intentionally. The assessee is a project office of CEC-Taiwan which carries out the allocated works related to construction carried out in India and whatever revenue the assessee generates from its Indian operations based in India is retained in India. CEC-Taiwan doesn't hav....
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....struction which is in the nature of technical services. The assessee is expected to earn markup on cost for the work undertaken by it for the project since it had no role in deciding the third party contract amount or the decision to enter into such contract? 3. The appellant craves leave, to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal. 11. At the time of hearing, Ld. DR submitted that entire amount executed by the Indian Office was passed on to the AE and he wandered how the assessee filed the TP Study Report and how the TP provisions will be applicable in this case where assessee has entered into huge international transactions. He submitted that in the TP Study Report submitted by the assessee, it has applied internal CUP and it is not clear how the tested party can be its AE. In this regard he brought to our notice Page 33 of the Transfer Pricing Report submitted by the assessee, and he brought to our notice para 5.2 of the report relating to selection of tested party. He submitted that the assessee has taken CCE Taiwan as attested party. Based on the observation that costs incurred and the operating assets owne....
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....pricing study report. Out of the 8 projects, 5 projects (C12-NHAI, C13-NHAI, ORR-HUDA, PWD & JMRCL) were undertaken directly as a contractor and other 3 projects (BC-16 with DMRC,UG-2 project with BMRCL,CC04 with DMRC) were undertaken through above referred 3 separate joint ventures.As per the appellant, the objective behind formation of joint venture is to extend and expand their capital, bonding capacity, or expertise by joining together with other competent contractors to perform work that is challenging either in terms of size or type. The appellant added that it is a most common practice of construction companies by making JVs and the scope of work is clearly demarcated between the participating partners of JV and participation ratio alongwith the responsibility of the respective parties to the joint venture is as per the agreement entered between them. Further, it was submitted that JV as an entity handles the administrative matters and acts as single window for the main employer (DMRC/BMRCL) for contract purpose. 2. The Assessee is an independent entrepreneur and is capable of undertaking its own projects and performing its own functions directly as the contractor. ....
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....ion of contract. Hyderabad Outer Ring Road (ORR) 5.7 This project was undertaken by the appellant directly. The scope of the work included construction of section of 6/8 lane access to controlled expressway from 11 km to 24.38 km. of ORR to Hyderabad. The project duration was from July, 2006 to July,2011. The activity performed during the subject year was on account of additional scope of work/defect liability or both. The project incurred profit of Rs. 10,32,82,517/- during the year. JMRCL Project 5.8 The Assessee has entered into an agreement with Jaipur Metro Rail Corporation Limited on 5^th October, 2013, subsequent to receipt of LOA dated 9th September, 2013 to execute a project for Design and Construction of Tunnel between Candpole and BadiChouper and reversal line by Shield TBM, Underground Metro Stations as ChotiChouper by Cut and Cover Method on East-West Corridor of Jaipur Metro (Phase 1B) at Jaipur, Rajasthan. The project was in progress during the year and incurred loss of Rs. 5,27,35,443/- during the year. PWD Project 5.9 The Assessee has entered into an agreement with Public Works Department ("PWD") on 21^st May, 2....
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....ed. The Indian employer like Bangalore Metro Rail Corporation Ltd. ('BMRCL') or Delhi Metro Rail Corporation Ltd. ('DMRCL') float tender for execution of big contracts. At times, the technical capabilities to perform the entire contract may not vest with one entity and hence JVs are formed for meeting the eligibility criteria. Once JV is allotted the project and is the successful bidder, there is due allocation of work and contract value. However, for administrative convenience, Indian employer like Bangalore Metro Rail Corporation Ltd. ('BMRCL') or Delhi Metro Rail Corporation Ltd. ('DMRCL') tends to interact with the JV entity only. All JV partners raise invoice to the JV which in turn raises one invoice to the Indian employer for his convenience. a. In para 5.25 and 5.26 of the CIT(A) order for AY 2013-14- internal page. 29 and 30. For ease of reference, the same is reproduced hereinbelow - 5.25 Before analysing the issue of service provider or entrepreneur, it may be relevant to note that the Indian employer say DMRC/BMRCL float global tender for execution of complex technical work. At times, the technical capability to perform such complex technical assignmen....
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....the part of the AO/TPO to treat the Indian project office as risk free entity. b. In para 5.26 and 5.27- internal page. 28 and 29 of CIT(A) order for AY 2014-15. For ease of reference, the same is reproduced hereinbelow - 5.26 Before analysing the issue of service provider or entrepreneur, it may be relevant to note that in a case where the Indian employer say DMRC/BMRCL float global tender for execution of complex technical work, the technical capability to perform such complex technical assignment may not vest with single entity and therefore, joint ventures (JVs) are formed to meet technical capability and financial capability to perform the complex assignments like setting up of Metro Rail system in Delhi/Bangalore. Once, JV is a successful bidder in a project, an agreement is entered into by the participating partners of JV to freeze the allocation of scope of work and corresponding contract value among the participating partners. However, as a matter of practice, the employer interacts with lead JV partner/JV. The JV entity is for the administrative convenience of the employer. There is no principle/agent relation between JV and its participating partners. A....
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....owns assets and bears core risk (last 4 lines of para 5.26 for AY 2013-14 and 5.27 for AY 2014-15). Hence this is a factual finding of the CIT(A) in this regard that the Assessee is not a mere sub-contractor but is fully and is independently performing its part of the contractual obligation qua these projects. 9. The Assessee also wishes to state that it is not uncommon in today's modern era for companies to get together and form AOP/JVs/consortiums for the purpose of bidding for contracts. From a tax perspective as well, this standard practice has been recognised in judgments such as Ishikawajma-Harima Heavy Industries Ltd. vs. DIT (288 ITR 408(SC)- para 17) and LINDE AG vs. DIT - W.P. (C) NO. 3914/2012- DHC and there are also CBDT Board Circulars and Instructions issued in this regard, which shows that such business models are well recognised in today's world. Judgments on the point that CUP is preferred in case of back to back transactions It is humbly submitted that the following judgments are on the direct proposition that CUP can be applied and is the preferred method in case of back to back transactions. It is an undisputed fact that in th....
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....available- as in this case in respect of back to back transaction, that is the best and inherently most suitable method, as it is a direct method and it hardly leaves any scope for distortion of results by extraneous factors. We reject the plea of the learned Departmental Representative on this point." 2. Mumbai ITAT- Arkay Logistics Ltd. vs. DCIT (ITA No. 765/Mum/2018) held that- (Kindly refer Pg. 6-23 of Compilation) "14. We have considered rival submissions and perused the material on record. We have also applied our mind to the decisions relied upon. Undisputedly, for providing support/broker service to ESML, the assessee has hired six vessels on voyage charter basis from third party vendors and provided / hired them to its AE ESML on voyage charter basis. The Transfer Pricing Officer himself has admitted that the hiring of vessels by third party vendors to the assessee and by the assessee to the AE is on back-to-back basis. No doubt, in the transfer pricing study report, the assessee has given precedence to TNMM as the most appropriate method in comparison to CUP method. The reason being, neither the assessee has provided same or similar service to third part....
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....ost appropriate method, it cannot be estopped from contending that CUP is the most appropriate method to benchmark the transaction. Of course, assessee's case stands on a much better footing as in the transfer pricing study report, the assessee has also provided an alternative benchmarking applying CUP method. If the assessee applies a wrong method, it is open for him as well as the Transfer Pricing Officer to benchmark the transaction by applying a more appropriate method. In fact, in a number of cases we have noticed that the method adopted by the assessee in transfer pricing study report having found to be unsuitable / inappropriate, the Transfer Pricing Officer rejects such method and applies a more suitable method to benchmark the transaction. Therefore, the method applied by the assessee to benchmark the transaction in the transfer pricing study report cannot be considered to be sacrosanct as one has to analyse the nature of transaction and the available data to apply a particular method as the most appropriate method as provided under section 92C r/w rule 10B. The decisions relied upon by the learned Authorised Representative also support this view. It is also relevant to ob....
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....itable for the assessee. 16. We have given a careful consideration to the rival submissions and perused the material available on record, we note that ld DR for the Revenue submitted before us about the applicability of Comparable Uncontrolled Price Method ( CUP- Method) and explained the circumstances where the CUP method may not be applicable. He explained the internal CUP and external CUP and relied on certain judgments of the Tribunal, which are given in para 15 of this order. We note that all these are theoretical and academic exercise. The ld DR failed to bring on record any cogent evidence or material which can prove that CUP method is not suitable for the assessee. Why and how the uncontrolled price does not exist in the assessee`s case under consideration? The main focus of the ld DR for the Revenue is that since the assessee is a manufacturer whereas the associated enterprise (AE) is a distributor, hence, functions are different, therefore CUP method is not applicable to the assessee. We note that under the Distribution Agreement, the assessee has grant to AT & S AG (AE), the exclusive right to market, distribute and sell the products manufactured by the....
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....T and the same is reproduced hereinbelow- "12. Leaving aside the merits and demerits of different methods used for ascertaining the ALP, in the given instance, what was bought by the assessee was 1250 items of Pentium IV processors from its Associate Enterprise in Singapore. A look at the invoice raised by M/s Intel Semiconductor Limited, on the said Associate Enterprise, clearly shows that these items though sold to the Singapore entity but, directly shipped to the assessee in India. The invoice mentions the unit price as 144 US$. The said invoice clearly shows that the price at which M/s Intel Semiconductor Limited supplied to Redington Distribution Pvt. Ltd, Singapore and price at which the latter sold to the assessee in India, was one and the same. We are of the opinion that when the Associate Enterprise had sold the items to the assessee at the same price at which it had purchased it, there cannot be any arm's length price adjustment done, unless and until the original vendor was also an Associate Enterprise. Here, admittedly, M/s Intel Semiconductor Limited was not an Associate Enterprise of assessee or its Associate Enterprise in Singapore. Therefore, we cannot ....
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.... (P.) Ltd vs. ACIT reported in [2013] 36 taxmann.com 41 (Delhi- Trib.), wherein the Hon'ble Tribunal inter alia held that: - (Kindly refer Pg. 81-96 of Compilation) "6.5 The CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Reliance is placed in this regard on the following decisions: - Aztec Software & Technologies Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxman 119 (Bang.) (SB) - UCB India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 95 (Mum.) - Gharda Chemicals Ltd. v. Oy. CIT [2010] 35 SOT 406 (Mum.) - Intervet India (P.) Ltd. v. Asstt. CIT [2010] 39 SOT 93 (Mum.) - Asstt. CIT v. Dufon Laboratories [2010] 39 SOT 59 (Mum.) 11" 2. Reliance in this regard is also placed on the decision of Hon'ble Mumbai Tribunal in the case of Serdia Pharmaceuticals (India) (P.) Ltd. v. Asstt. CIT reported in [2011] 44 SOT 391/9 taxmann.com 13 wherein the Hon'ble Tribunal while dealing with the priority of applications of methods for the determination of ALP, has held as under: ....
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....O cannot be called TNMM prescribed under the Act and Rules, we have to necessarily uphold the Order of the first appellate authority, though for different reasons. Similar view is taken by the Pune Bench in Asstt. CIT v. Mss India (P.) Ltd. [2009] 123 TTJ 657/ 32 SOT 132". JV projects are profit making and hence the argument of the TPO that the AEs have passed on its losses to the Assessee is factually incorrect 1. Another reasoning given by the TPO is that AE pushed its losses to the project office. In para 5.27, 5.28 and 5.29 of the CIT(A) order for AY 2013-14 (internal page. 30 and 31), the CIT(A) has recorded a table which shows all profit/loss incurred for all projects during the year. From that it can be seen that all 3 AE transactions which are the JV projects (serial no. 8,9 and 10 have all incurred profits, which is offered to tax as this is a case of admitted PE and the Assessee on an entity level during the year under consideration has had a loss arising on account of direct/independent/third party contracts which is immaterial from a transfer pricing perspective. 2. For ease of reference, the same is reproduced hereinbelow- S. No. Projec....
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....DMRC on 18.12.2006 and JV contract was signed on 29.01.2007 and JV was set up on 08.02.2007. 10. Similarly, CEC-SOMA- CICI JV was awarded a contract by BMRC on 24.12.2009 and the JV contract was signed on 10.03.2010 and the JV was set up on 05.03.2010. 11. Even CEC-CICI JV received the approval from DMRC on 29.12.2011 and was setup thereafter on 29.12.2011. These dates and facts are mentioned in the TPO order and in the CIT(A) order as well. 12. Hence, the allegation of the TPO is factually incorrect as substantiated before Your Honours. Re-characterisation as done by the TPO is not permitted in law It is also humbly submitted that it is a settled law that in transfer pricing, recharacterization is not permitted. Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241(Del) has held the same and in a plethora of ITAT rulings, consistently this view has been taken. Hence, the action of TPO to attempt to recharacterize the transaction is illegal and bad in law. The same proposition has also been upheld by Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT [2015] 37....
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.... JV and the same amount has been passed on by the JV to the Assessee- hence same and detailed findings are there in this year also. (Para 5.34 to Para 5.40 of CIT(A) order for AY 2014-15, internal page. 31-33-) CC04-DMRC CEC-CICI JV, contract by DMRC para 5.40 to 5.46 Findings for AY 2013-14 1. CEC-CICI JV was awarded the contract by DMRC. The scope of work was 2. Phase III of Delhi Metro and project duration was February 2010 to January 2015. A profit of Rs. 84,79,861/- was earned. The letter of approval came on 29.11.2011. 3. Following 3 international transactions were undertaken pertaining to this JV and this project- CEC-CICI JV Reimbursement received for expenses 1,16,22,850 Mobilization advance 11,00,00,000 Investment in JV 6,00,00,000 4. In para 5.41, 5.42 and 5.43, these 3 transactions are discussed in detail. It is to be appreciated that all 3 are capital account transactions only. 5. Similar finding is there in AY 2014-15 also. In para 5.41 to 5.46, internal page.34 to 36, the CIT(A) has given a detailed finding as regards the same international transactions qua this speci....
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.... c) recovery of receipts due to negative variation, d) receipts against interim payment certificates (IPC) e) capital contribution to JV f) mobilization advance received from JV 5.57 All international transactions as discussed above have no impact on the profit & loss account because the P&L account is based on project completion method. Further, there is only one international transaction, which is the receipt of Rs. 1,731,780,801/- against services delivered by the project office. All other transactions are not against any provision of services. b. Para 5.60, 5.61 and 5.69 of the CIT(A) order for AY 2014-15- 5.60 After analysing all above discussed international transactions, I find that the international transactions can be broadly divided into following categories: a) Provision of services b) Reimbursements, c) capital infusion, d) recovery of receipts due to variation, e) receipts against interim payment certificates (IPC) f) capital contribution to JV g) mobilization advance received from JV 5.61 All international transactions as discussed above h....
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....s no need for charging any interest on the amounts advanced as receivables. Since this amount is part of contract work, in our view it does not attract any adjustment under TP provisions. Moreover, advances given as part of contract work does not require any special addition, when the TPO was already examined and held that the transaction relating to 'work contract expenses' are within the ALP during the year. Thus, when the whole work contract is considered within the ALP, we are of the opinion that the advances given in the course of contract does not call for special adjustment. Moreover, these business advances cannot be categorised as 'loans and advances' so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee- company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contractor, this adjustment is not warranted. Respectfully following the principles laid down in various case law relied upon by assessee above, we have no hesitation in deleting the above adjustment". Capital contribution/Inves....
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..../Hyd/2012, the Court held that-(Kindly refer Pg. 97-137 of Compilation) "3.3 The AR submitted that the TPO had erroneously exercised the jurisdiction under the provisions of Chapter X even though there were no transactions, which are in the nature of the 'International Transaction' as defined under Sec. 92B of Income Tax Act, 1961 inasmuch as neither of the parties to the transaction is a non-resident. On bare reading of the provisions of Sec. 92B(1) of Income Tax Act, 1961, it is crystal-clear that in order to be characterised as international transaction, the following salient features must be present: (i) There should be a 'transaction.' (ii) Such 'transaction' should be between two or more AEs and either or both of whom should be nonresidents. (iii) Such transaction should be of the nature as referred to in Sec. 92B. 3.4 According to the AR, all the above three (3) conditions must be cumulatively satisfied so as to make a transaction an 'international transaction'. If there is a transaction between two AEs and such transaction is of nature as referred to in Sec. 92B of Income Tax Act, 1961, it will not....
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....e by the Hon'ble Calcutta High Court in the case of CIT vs. 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 functioning of such power at a particular place with some degree of permanence. The word 'wholly' as used in section 6(3) would indicate that seat of such power may be divided between two distinct and separate places. The expression 'control and management' means de facto control and manag....
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.... The next argument of the Assessee which is rightly appreciated by the CIT(A) is that the entire contract receipts pertaining to the PO of CEC have been offered to tax in India, therefore profit shifting is not possible. All related parties who are JV members are based in India and even the JV is based in India. As regards, CEC-SOMA JV, SOMA is an unrelated party. a. Para 5.61 and 5.62 and 5.63 of CIT(A) order for AY 2013-14. For ease of reference, the same is reproduced hereinbelow - 5.61 The appellant pointed out that profit shifting is a way to shift funds from India to foreign entity intentionally. The assessee is a project office of CEC- Taiwan which carries out the allocated works related to construction carried out in India and whatever revenue the assessee generates from its Indian operations based in India is retained in India. CEC-Taiwan doesn't have any right to claim any share of revenue out of the total revenue generated from Indian business operations. It is noted that CEC-Taiwan is the only foreign entity with whom the assessee has entered into international transaction during the year. The transactions were in the nature of reimbursements and....
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....ons were in the nature of reimbursements as receipt of funds and the reimbursement were also in respect of third party expenses. 5.66 It is submitted that the concept of profit shifting is applicable where one party is situated outside India and another entity is based out of India and with intent to evade taxes in India; profits are shifted outside India. However in the present case, there cannot be any case of shifting since all the related parties who are the JV members are based in India. It is worth to note that SOMA (JV partner) is an unrelated party; accordingly, no shifting can be done in any transaction entered with third party. 5.67 In view of the above discussion, I find that the TPO has wrongly applied TNMM for benchmarking of arm's length price of international transactions. The transactions between JV & the appellant are international transactions only due to the specific arrangement of routing the invoices through JV office for administrative convenience. Effectively, the transaction is between third parties. The international transactions in the nature of cost to cost re- imbursements is not against any service but for the expenses incurred on comm....
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....ISTENCY QUA THE ASSESSEE It is also humbly submitted that with the 3 JVs, these are not new contracts and the Assessee has been using this business model for the last many years which is accepted by the Department under Section 143(3) orders. Orders for AY 2008-09, AY 2010-11, AY 2011-12 and AY 2012-13 (all earlier years, assessment order and even TP orders) are on record wherein it can be clearly seen that the Department has accepted the same in earlier years. The relevant page numbers of the orders are as below- CEC AY 2008-09 order Pg. 138-141 of the Compilation CEC AY 2010-11 order Pg. 142-148 of the Compilation CEC AY 2011-12 order Pg. 149-153 of the Compilation CEC AY 2012-13 order Pg. 154-155 of the Compilation In this regard, it is respectfully submitted that though principle of res-judicata does not apply to the income tax proceedings, it is well settled that if there being no change either in facts or in law, as compared to the earlier and subsequent years, the position accepted/ determined by the Department needs to be followed even on the principle of consistency. Reliance in this regard is placed on the following decisions: ....
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....t pass through entity, all the contracts are executed based on the work allocated to the individual JV partners. The risk and benefits are passed on to the JV partners to the extent of work allocated to them. None of the other partners will share the burden of the other JV partners. 14. We observed that there is complete misunderstanding on the part of the TPO, who had not understood how the JV works particularly in the field of construction of highways and Mass Rapid Transit systems. The heavy projects are being awarded to bidders and as per the project requirements, various category of the specialized works requires expertise in the respective fields, therefore, two or three construction companies joint together to bid and participate in the auctions, particularly heavy projects like Bangalore Metro Rail Corporation Ltd and Delhi Metro Rail Corporation Limited, they specify the various expertise requirement in the policy document itself. The objective behind formation of joint ventures is to extend the capital requirement, sharing the expertise which is challenging in terms of size or complexity involved in such huge projects, they tend to pool the expertise and required capit....
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....e expenses. They are only facilitators, beyond that they do not execute anything. h. All the project executed by the JV are domestic projects, therefore, the transactions are only executed in India. i. The transactions carried on by the CEC India with its AE i.e., CEC Taiwan alone will be considered as international transactions, which involves the following transactions: i) Reimbursements, ii) capital infusion, iii) recovery of receipts due to negative variation, iv) receipts against interim payment certificates (IPC) v) capital contribution to JV vi) mobilization advance received from JV The above transactions are between the assessee at the project office and main contractor is CEC Taiwan. This transaction has nothing to do with JV. The TPO was expected to verify only to the extent of international transaction carried on by the assessee. The TPO had not commented anything on the transactions between the assessee and CEC Taiwan. Further we observed that there is no involvement of international transaction in the execution of the projects in India, which are awarded by the BMRCL and DMRCL. It is purel....
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....ven case. He has exceeded his jurisdiction to go beyond the mandate, particularly the scope of functions performed by the assessee and JV partners are only domestic transactions. 18. The next issue is what should be the method to be applied to bench mark the transaction between the assessee and the AE, as discussed in the above paragraph that there is only services provided by the assessee to its AE as the project office, we noticed that the CEC Taiwan had given the project to be executed by the assessee on back to back basis. The result of the execution of the project is already declared in the books maintained by the assessee. The transaction with its AE is only between the project office and the principal. Therefore, the proper method to benchmark is only the CUP method. The courts have held that the proper method for bench marking purpose for the back to back transactions rendered by the assessee to its AE are like the services rendered by the AE, to its end customers or also involved execution of services in the similar line of business. We rely on the decisions of Calance Software (P) Ltd (supra), Arkay Logistics Ltd (Supra), AT&S India (P) Ltd (supra) and Redington India ....