TaxTMI 
TaxTMI 
2026 (8) TMI 767
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.... Assessing Officer has rightly assessed the income us.44BBB(1) of the Income Tax Act, 1961 after rejecting the books of accounts for the reason that the assessee failed to fulfill all the conditions prescribed u/s. 145(3) of the Act? (aa) Whether, on the facts and circumstances of the case and in law, the learned ITAT has erred in not upholding the decision of the Assessing Officer in rejecting the books of accounts of the assessee for not maintaining the books as per Section 44BBB r.w.s. 145 of the I.T. Act and not recognizing the revenue as per the Accounting Standards, and in estimating the profit based on All adjustment determined by the Transfer Pricing Officer (TPO) and alternatively as per the rates provided in Section 44BBB of the I.T. Act? (b) Whether on the facts and in the circumstances of the case and in law, the learned ITAT has erred in confirming the order of the CIT(A) holding that accounts of the assessee could not be rejected inspite of the facts that the account of the assessee were not complete as required u/s.145(3) of the Act for the reason that the assessee has failed to recognize closing WIP in the books of account, which is accepted by the....
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.... has erred in rejecting the Transactional Net Margin Method (TNMM) method and the comparable without appreciating that the Assessing Officer has given detailed reasoning to establish the comparable selected for Transactional Net Margin Method (TNMM) are correct comparable? (j) Whether on the facts and in the circumstances of the case and in law, the learned ITAT has erred in holding that in the present set of facts, Comparable Uncontrolled Price (CUP) was a better method of benchmarking as against Transactional Net Margin Method (TNMM) adopted by the TPO? (k) Whether on the facts and in the circumstances of the case and in law, the learned ITAT has erred in holding that the transaction of awarding the contract by Adani Power Limit to SFPML HO was a proper CUP for the transaction between the assessee (SFPML LO) and SFPML HO without appreciating that nature of transaction between SFPML HO and the assessee were totally different and functionally incomparable to the Comparable Uncontrolled Price (CUP) cited by the learned ITAT? (l) Whether on the facts and in the circumstances of the case and in law, the learned ITAT has erred in holding that the comparable s....
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....enses to the parent company and therefore, it was not required to report the same as payment to AE to attract the transfer pricing provisions. 6.4. The TPO on verification of the shipping bills found serious deficiencies and huge difference in price charges, charged by the shipping agencies. The TPO thereafter, sought explanation from the assessee about the huge difference in the shipping bills. The assessee furnished all the details along with invoices raised by M/s. Adani Power Private Limited which were in accordance with the contract agreement. However, the Assessing Officer rejected the contention of the assessee by observing that the third party shipping bills offered by the assessee as Comparable Uncontrolled Price (CUP) for reimbursement is not acceptable as the assessee did not submit any document based on which shipping expenses under considerations were incurred by the AE and bills furnished by the assessee did not corelate to the consultancy service carried out by the assessee in absence of any quotation of freight price given by the shipper. 6.5. The TPO therefore concluded that bills raised by M/s. COSCO logistics were not reliable and in absence of external CUP....
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....s per Section 92C of the Act read with Rule 10B(1)(a) of the Rules and rejected the comparison made by the two uncontrolled transactions so as to make an adjustment in uncontrolled transaction which is not sustainable in eye of law. The CIT (Appeals) arrived at the conclusion by directing the Assessing Officer not to make any adjustment referred by the TPO. 6.6. The CIT (Appeals) thereafter, considering the analysis of comparables found that none of the companies selected by the TPO can be compared to the assessee. 6.7. Being aggrieved by the order passed by the CIT (Appeals), the Revenue preferred an Appeal before the Tribunal. The Tribunal, after considering the submissions regarding Assessment Year 2008-09, held as under: "10. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case the dispute relates to the rejection of the books of accounts and the adjustment made by the transfer pricing officer with respect to the transaction for the so-called shipping expenses reimbursed by the assessee to the head office based in China. 10.1 The AO in the present case has rejected the books of account....
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....inting out any defect in the books of accounts of the assessee. The relevant extract of the judgement is reproduced as under: 5. Section 44BBB of the Act reads as under: 44BBB. Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects.- (1) Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf, a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession". (2) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the ....
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.... such accounts. We may not dispute this proposition. However, the Assessing Officer, as recorded by the Tribunal has not found any major defects in such accounts. The Commissioner (Appeals) in fact elaborated that the assessee had the past experience from which it could estimate the total cost and had presented figures to show the percentage completion of the project. These figures match with the actual income and expenditure statements of the subsequent financial years. In fact the entire project was completed by the time the Commissioner (Appeals) decided the appeal. 8. In the result, tax appeal is dismissed." 10.4 In view of the above and after considering the facts in totality, we are of the view that the books of accounts of the assessee were not liable to be rejected under the provisions of section 145(3) of the Act and therefore the income/loss shown by the assessee in the audited financial statements should be accepted as it is without any variation. Accordingly, we do not find any reason to interfere in the order of the learned CIT-A. 10.5 Regarding the adjustments made by the AO/TO for Rs. 2,32,74,967.00, we note that there was no international ....
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....it notes raised by it on its associated enterprises along with copies of the corresponding debit notes raised by the associated enterprises on the ultimate clients. The aforesaid was canvassed by the assessee to substantiate that there was one to one co-relation and that the entire exercise did not involve any element of profit or mark-up in the hands of the associated enterprises. The aforesaid material is placed at pages 518 to 612 of the Paper Book and which was also before the lower authorities. At the time of hearing, the Ld. Representative for the assessee had also referred to page 613 to 645 of the Paper Book, wherein are placed copies of assessee's arrangement with the associated enterprises and also the sample agreements between the associated enterprises and the ultimate clients, which prescribe that all impugned travel and related expenses are separately chargeable on a cost to cost basis. All this material clearly brings out a pertinent feature that in the entire transaction involving payment of expenditure by the assessee, its recovery from the associated enterprises, which-in turn recovers it from the end clients, there is no involvement of any profit-element in the h....
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....e contract, valued at 20 million, the assessee has set up a project office in India. As per the TPO, the project office in India is acting as subcontractor on behalf of the assessee. As such the primary responsibility lies with the assessee only for the satisfactory execution of the project. As per the TPO, the transactions between the assessee and the head office should be at arm length price. In other words, the consideration to be received by the project office should be at arm length price. However, it was the contention of the assessee that all the income and the expenses have been booked by the project office in India for the services to be rendered to APPL and therefore no adjustment is required to be made. Without prejudice to the above, the assessee contended that at the most, the expenses reimbursed by the assessee to the Head Office on account of freight and salary expenses can be considered for the purpose of the arm length price. 24.1 However, the TO rejected the contention of the assessee by observing that as per the provisions of section 92A of the Act the transaction between the head office and the TPO is to be decided at the arm length price as it comes wi....
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....he transaction/ the contract between the head office and the APPL will act as the benchmark for deciding the ALP because it is between 2 independent parties. As such the contract by the assessee being head office, with the APPL, has been given to the project office which is responsible for all the risk and rewards. Therefore, if the CUP method is applied, then no addition to the given facts and circumstances is warranted. 25.3 Besides the above, the assessee also objected to the comparable selected by the TPO while determining the ALP in the given case. The objection raised by the assessee has been reproduced by the ld. CIT-A in his order. 25.4 The learned CIT-A after considering the submission of the assessee and the order of the authorities below held that the transaction between the assessee and the head office is an international transaction between the associated enterprises. Therefore, the same has to be carried out at the arm length price. Thus, the learned CIT-A rejected the contention of the assessee by observing as under: "I have perused the order passed by the TPO, submissions made by the appellant-company in its statement of facts and further ....
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....he Act itself considers a Permanent establishment as an enterprise. Therefore, all the dealings between the enterprise and its permanent establishment in India have to pass the test of Transfer Pricing. In the given case, the transaction have taken place between the foreign company i.e. Head office and its PE in India i.e. project office in India and therefore the contention of the appellant that he Transfer Pricing provisions are not applicable to it is incorrect as project office. This finding also gets support from the vital fact that the appellant company has itself fled report under form 3 CEB wherein transaction between itself i.e the PO and is Head office in Chine is reported." 25.5 The learned CIT-A accepted the selection of the CUP method as submitted by the assessee by observing as under: "8.5. I find force in the facts and legal submissions of the appellant the transactions between SFPML HO and APPL is uncontrolled in nature. Thus the contract between SFPML HO and APPL is an uncontrolled transaction and is at arm's length as per the requirements of Indian Transfer Pricing provisions. Further as substantially all the functions in respect of the project i....
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.... Hughes Systique India (P.) Ltd v. Assistant Commissioner of Income-tax, Range-12() [2013] 36 taxmann.com 41 (Delhi - Trib.); • Deputy Commissioner of Income-tax, Circle-4 (1) v. Lumax Industries Ltd [2013] 36 taxmann.com 380 (Delhi - Trib.); • Livingstones v. Deputy Commissioner of Income-tax 16(3), Mumbai - [2014] 41 taxmann.com 499 (Mumbai - Trib.); • KTC Ferro Alloys (P.) Ltd. v. Additional Commissioner of Income-tax, Range-3, Visakhapatnam [2014] 43 laxmann.com 152 (Visakhapatnam - Trib.); • Tilda Riceland (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle -16(1), New Delhi [2014] 42 taxmann.com 400 (Delhi - Trib.); and • J.P.Morgan India Private Limited Vs. ACIT, Mumbai for AY 2002-03, ITA. 8.7. The TPO in his order has rejected this plea of the appellant stating that the standard of comparability are very strict in CUP and a small difference in the factor of comparability may have large difference in price. However the TPO while doing so conceded that the transaction between the HO and APL may pass the test of "uncontrolled" nature, he further went on to make observation that it doesn't satisfy ....
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....he case of Clear Plus India (P) Ltd supra, CUP method should be considered as the Most appropriate method. The findings of the TPO rejecting CUP method is therefore reversed. Thus I uphold that CUP being available should be adopted as the Most Appropriate Method (MAM)" 25.6 The learned CIT-A further found that the comparables selected by the TPO for determining the ALP under the TNMM were not right comparables. The Id. CIT-A analyzed each comparables selected by the TPO and thereafter rejected the same. The reasons given by the learned CIT-A are available on pages 87 to 94 of his order." 6.9. The Tribunal, after considering the rival submissions of the parties, dismissed the Appeal filed by the Revenue holding that internal cup method is a right course of action adopted by the CIT (Appeals) for Head Office as under: "27. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case there was a contract awarded by APPL to the assessee being the head office for the sum of 720 million which was delegated to the project office in India. Admittedly the whole of the project was awarded by the head office to....
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....s in question, after deducing this profit amount, the price compliant with the arm's length principle to be charged at the sale of gods or series to related individuals would be determined. * Cost-plus method; is defined as estimation of the price compliant with the arm's length principle by increasing the cost amount of related goods or services up to an appropriate gross profit rate. The appropriate gross profit rate here refers to the profit rate reflecting the price to be charged for the sale of goods or services to unrelated individuals. Under favourable conditions, the general gross profit margin applied for transactions of goods or services to unrelated individuals would be perceived as an ideal rate. In case of insufficient number of transactions for comparison, the criterion for an appropriate gross profit would be considered as the profit rate reflecting the price to be charged for the sale of goods or services in question to unrelated individuals. This method is mostly used especially in transactions involving the goods manufactured by raw materials and intermediate goods. * Transactional net margin method; is based on the analysis of net profi....
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....by applying transaction profit method. In the case of SNF (Australia) Pty, Ltd. (supra) it has been held that the focus is on the market in which products are acquired. The ratio of this case is applicable mutatis-mutandis to the facts of the case as the focus is on the market in which products are sold. Therefore, the CUP method could validly be employed provided product comparability is established. Therefore, it would have been appropriate for the assessee to make the data of the associated enterprise available to the Assessing Officer, at least in respect of sale of Chinese and Indian wipers so as to establish the comparability. Nonetheless that by itself would not displace the CUP method, which is objective in terms of the purchase price of the associated enterprise. Accordingly, it is held that the Assessing Officer erred in changing the method for determining arm's length price. 7.2 We may now discuss the analysis carried out by the assessee. The sale price of the assessee is higher than the sale price of the Chinese manufacturers to the associated enterprise except in case of all season wipers of 26" and 28". The sale price of 25" wiper is US Dollars 0.99 against t....
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....te that the assessee has succeeded on merit of the case. In other words, the grounds of appeal filed by the revenue are dismissed. Therefore, we do not find any reason to entertain the objections raised by the assessee in the CO. As such, they become infructuous. Accordingly, we dismiss the same. Hence the grounds of appeal filed by the revenue are dismissed whereas the objections raised by the assessee are also dismissed." 6.10. For the Assessment Year 2010-11 also, the Tribunal followed its decision for Assessment Years 2008-09 and 2009-10 and dismissed the Appeal of the Revenue. 7. We have considered the elaborate discussion made by the CIT (Appeals) and the Tribunal, arriving at a concurrent findings of fact that the assessee being a company based in China has entered into a contract of providing the service to M/s. Adani Power Private Limited and the assessee was responsible for transportation of goods and equipments, to be supplied to M/s. Adani Power Private Limited through suppliers. The assessee has entered into a contract valued at Rs.20 Million to set up a project office in India. According to the TPO, project office was acting as a subcontractor on behalf of the a....