Income Tax Appellate Tribunal - Ahmedabad
The Dy.Dit(Int.Taxn.), Ahmedabad vs M/S. Sichuan Fortune Projects ... on 4 September, 2023
आयकर अपीलीय अधिकरण, अहमदाबाद नयायपीी IN THE INCOME TAX APPELLATE TRIBUNAL, '' D'' BENCH, AHMEDABAD BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER Sr. Asstt. Name of ITA/C.O. No. Name of Respondent No. Year Appellant M/s.Sichuan Fortune Project Management D.D.I.T, Ltd., (International Tunda Village, ITA
1. 2008-09 Taxation)-I, Nr. Siracha Taluka, No.1129/Ahd/2014 Ahmedabad Mundra, Kutch-382345.
PAN: AALCS0495F
ITA D.C.I.T, M/s.Sichuan Fortune
No.2916/Ahd/2014 (International Project Management
2-3 With 2009-10 Taxation)-I, Ltd.,
C.O.No. Ahmedabad
300/Ahd/2020 PAN: AALCS0495F
D.C.I.T, M/s.Sichuan Fortune
2010-11 (International Project Management
ITA Nos.78-
4-5 & Taxation)-I, Ltd.,
79/Ahd/2018
2011-12 Ahmedabad
PAN: AALCS0495F
D.C.I.T, M/s.Sichuan Fortune
2012-13 (International Project Management
ITA No.2816-
6-7. & Taxation)-I, Ltd.,
2817/Ahd/2017
2013-14 Ahmedabad
PAN: AALCS0495F
(Applicant) (Respondent)
Revenue by : Shri Sudhendu Das, CIT.D.R
Assessee by : Shri Dhrunal Bhatt, with Shri Biren
Shah, A.Rs
सुनवाई की तारीख/Date of Hearing : 07 /0 6/202 3
घोषणा की तारीख /Date of Pronouncement: 04/09/2023
आदेश/O R D E R
ITA nos.1129/AHD/2014
Asstt. Year 2008-09 wih 6 others
2
PER WASEEM AHMED ACCOUNTANT MEMBER:
The captioned appeals and CO have been filed at the instance of the Revenue and the assessee against the orders of the Learned Commissioner of Income Tax (Appeals)-, Ahmedabad, (in short "Ld. CIT(A)") arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here- in-after referred to as "the Act") relevant to the Assessment Years 2008-09 to 2013-14. The assessee has filed the Cross Objection in the Revenue's appeal bearing ITA No. 2916/Ahd/2014 for the Assessment Year 2013-14.
2. First, we take up ITA No. 1129/AHD/2014, an appeal by the Revenue for A.Y. 2008-09
3. The revenue has raised following grounds of appeal:
1) The CIT(A) has erred in law and on facts in holding that accounts of the assessee could not be rejected inspite of clear evidence brought on record that the profit computed by the assessee was not reliable.
2) The CIT(A) has erred in law and on facts in allowing the claim of Rs.8.20 crores disallowed by the assessee u/s.40(a)--(ia) without appreciating that such a claim was contrary to the provision of section 40(a)(ia)ofthel.T. Act.
3) The CIT(A) has erred in law and on facts in deleting the transfer pricing adjustment of Rs.2,32,74,967/- recommended by the TPO without any cogent reason.
4) The CIT(A) has erred in law and on facts in not appreciating that since the HO of the assessee was regularly dealing with Cosco Logistics and all the documentation relating to the transaction between HO and Cosco were not available . the TPO rightly excluded Cosco Logistics as comparable.
5) The Ld. CIT(A) has erred in law and on facts in concluding that the TPO had compared the arm's length price and made adjustment in uncontrolled transaction without appreciating that the adjustment was made to the cost reimbursement made to he HO which was a controlled transaction.
6) The order of the Ld.CIT(A) deserves to be deleted and that of the AO restored.
7) Any other ground that may be urged at the time of hearing.
4. The interconnected issue raised by the Revenue in Ground Nos. 1 and 3 to 5 is that the ld. CIT(A) erred in deleting the addition made by the AO/TPO on ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 3 account of 2,65,74,519.00 and further holding that the books of accounts of the assessee could not be rejected.
5. Brief facts of the case are that the assessee i.e. M/s Sichuan Fortune Project Management Limited, is a foreign company incorporated in China. It is engaged in the business of rendering services for erecting, testing, installing, and commissioning of the infrastructure power project.
5.1 The assessee has entered into an agreement with M/s Adani Power Limited (in short APL) to provide the services for setting up a power project in two phases i.e. Phase-I and Phase-II (each phase being of 2X330 MWs) at Mundra, Kutch, Gujarat. The assessee for executing the said project setup a project office in India known as camp office/ PE in India. This is the first year of operation of camp office/ PE of the assessee company in India.
5.2 The assessee has filed its Income tax return for the year under consideration on 30-09-2008 claiming a loss of Rs. 28,02,385/- only. Subsequently, the case of the assessee was selected for scrutiny for the AY 2008-09 by issuing a notice u/s 143(2) of the Act dated 19-08-2009.
6. During the assessment proceedings, it was found by the AO on the verification of form 3CEB that the assessee company has entered the international transaction with its parent company (AE) to the tune of Rs. 21,46,49,412/- only. As such, it was submitted that shipping expenses were incurred by the parent company on behalf of the assessee and the same has been reimbursed by the assessee on cost basis to the parent company. The details of such freight expenses is given on page No. 42 of paper book.
6.1 In view of the above, the AO referred the case of the assessee to the Transfer Pricing Officer for determining the ALP of the aforesaid transaction. The Ld. TPO on perusal of form 3CEB found that the assessee has claimed about the ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 4 above-mentioned transaction that it is only reimbursement of the expenses to the HO, and it is not required to report the same as payment made to AE to attract the transfer pricing provisions.
6.1.1 The Ld. TPO further on perusal of the shipping bills submitted by the assessee during the assessment proceedings found that there are serious deficiencies in such shipping bills. The TPO on verification of the bill No. IMTB10615001 raised by one of the Shipper namely M/s Cosco Logistics has charged the price 686 USD$ per ton which is higher by 300% from the price of USD 229 per ton charged by the same shipper on another bill No. XGG01A/GG01 for the same period. Similarly, another shipping agency, namely Adani International Shipping Agency Co. Ltd. raised bill No. 0711ATSHMD01 and charged price 180 USD$ per ton. Thus, the TPO found a huge difference in the price charged by the shipping agencies.
6.1.2 Furthermore, the assessee has not filed any contract agreement between the shipping company and HO of the assessee.
6.1.3 It was also observed by the TPO that the assessee has not furnished the information regarding whether the equipment shipped by the HO was in pursuance to the terms of agreement between the assessee and shipping companies. Accordingly, the TPO sought as explanation from the assessee about such a huge difference in the shipping bills as discussed above.
6.1.4 The assessee before the TPO submitted that as per the contract agreement entered by the assessee with Adani power Ltd, it was responsible for transporting the power plant related equipment's and various parts for the APL power project from China port. Therefore, the HO of the assessee awarded the contract to the shipping agents to facilitate the transportation of the goods from China port to India port. Thus, the cost of such shipping expenses was reimbursed by the assessee to HO. Such reimbursement is supported by the third-party shipping bills ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 5 and bill of loading for the goods transported. As such, it was the contention of the assessee that it has reimbursed shipping expenses on actual cost basis which is incurred by the HO on behalf of the assessee. Thus, the best CUP for determining the ALP is the invoice of third party available on record against which such reimbursement has been made. Further, the AE or assessee does not have any control on the third party who executes the shipping services for the assessee to transport the equipment/ various parts for the power plant from the China port to India Port. Thus, the same should be considered as the CUP for the said transaction.
6.1.5 The assessee also submitted that there is only one single instance where the shipping agency charged the higher rate as compared to the other shipping agent. Such a higher rate was charged by the shipper because the quantities transported were very low as compared to others cargo. In case the shipped quantity is lower by 70% of the normal quantity, then the shipper charges the higher rate of shipping. As per the assessee, the cargo imported vide bill of lading No. IMTB 710615001 through shipping agent M/s Cosco Logistic, weighted 520199 kg for which an amount of USD$ 345000/- was paid by the HO to shipping agent, this cargo was the lowest cargo in terms of quantity and weight was only 5.20 lacs kg. during the year under consideration. Further, the parts imported through such shipping bill were very essential at that point of time for erection and installation of the power plant.
6.1.6 As per the assessee, it has been following the accrual system of accounting and all the bills were raised by it immediately on rendering of the services of facilitation of transportation of goods. Further, the assessee is also engaged in rendering of services of erection, testing, installation, and commissioning of infrastructure project (power) and other similar services. The revenue from such activity is recognized upon rendering of services. The assessee has filed all the invoices raised by it to M/s Adani Power Limited which were raised in accordance with the contract agreement entered by it with M/s Adani Power Limited.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 6 6.1.7 Without prejudice to the above, the assessee also submitted that adjustment should be confined in respect of rate per ton paid to M/s Cosco logistics to the shipping bill through whom the goods transported in respect of project carried out by the assessee.
6.1.8 However, the Ld. TPO/ AO rejected the contention of the assessee by observing that third party shipping bills offered by the assessee as CUP for the purpose of reimbursement is not acceptable since the assessee has not submitted any documents based on which shipping expenses under consideration has been incurred by the AE (HO). The Bills furnished by the assessee do not co-relate to the consultancy service carried out by the assessee. The assessee has not submitted any quotation of freight price given by such shipper.
6.1.9 The assessee claimed that higher freight charges of USD$-686 per ton on shipping bill dated 12-10-2007 were paid to COSCO Logistics in comparison of the other shipping bill issued by the same operator at USD$ 221/229 due to less quantity transported which was essential at that time for the power plant project. However, the assessee has not furnished any documents which indicate that such goods were urgently required. Further, the assessee has not produced any freight rate data available for similar shipments and packages.
6.1.10 In view of the above, the TPO concluded that the bills raised by M/s Cosco Logistic are not reliable. Further, in the absence of external CUP data, a reasonable approach to determine ALP has been decided by excluding the bills of COCSO logistics from the total shipping expenses reimbursed by the assessee to HO and compute the Internal cup to benchmark the freight rate paid by the assessee company to its AE (HO). The detail of computation of ALP as under:
Shipping Agency Total tonnage Total Freight (USD)
Adani International 9,631 1,664,959
shipping Agency Co.
ITA nos.1129/AHD/2014
Asstt. Year 2008-09 wih 6 others
7
Ltd.
Haotong 8,529 1,394,039
International
Transportation
Agent Co. Ltd.
18,160 3,058,938
Average=3058998/18160=168 USD per tonne
Therefore applying this average rate of tonnage to total tonnage shipped by all he three operators will give us the total freight expenses, that the assessee was supposed to pay a arms length price I.e 28766*168=4,832,688 USD. Applying average rate of exchange of 39.60, taking from all the relevant period of invoices, the rupee value comes to be Rs.19,13,74,445/- as against assessee's claim of Rs.21,46,49,412/-
5.13 In view of the above discussion, i would be considered appropriate to make upward adjustment of Rs.2,32,74,967/- to the Intentional transaction of the assessee being reimbursement of freight expenses.
6.2 In addition to the above, the AO during the assessment proceedings observed from the verification of the ITR of the assessee company that the assessee company has declared turnover of Rs. 26,57,45,191/- and claimed expenses against such revenue of Rs. 35,16,33,544/- only. Thus, the assessee has company incurred loss of Rs. 8,58,88,353/- only. However, the assessee company itself has made certain disallowance of expenses and added to the income of the assessee company. Thus, after addition of certain disallowances, loss was computed at Rs. 28,02,385/- only.
6.2.1 Further, on verification of the expenses it was found that major expenses were incurred by the assessee in respect of certain materials shipped from China to India and such material further delivered from the Indian port to work-station of M/s APL. Accordingly, the assessee was asked to explain the huge gap between income and expenses and further an explanation was sought how the assessee recognized the turnover of Rs. 26,57,45,191/- in its book, what was the method to record the turnover in its books, what was the relevant clause of the contract agreement between assessee which are deciding factor of revenue recognition.
6.2.2 The assessee in respect of such gap between income and expenses submitted that as per the contract agreement between assessee and Adani Power ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 8 Ltd., the assessee company is responsible for transporting the power plant related equipment and various parts for the APL power project from China port to the Indian port and then to the project site. The HO of the assessee awarded such work to the independent unrelated third parties being shipping agencies. For sake of convenience and considering that that the shipping companies were based in China, it was decided that payment to such independent shipping agencies will be paid by the HO of the assessee and thereafter the same has to be reimbursed by the assessee to HO on actual basis.
6.2.3 The assessee before the Ld. AO further submitted that during the year under consideration, the assessee has claimed total expenses of Rs. 34,55,98,856/- out of which expenses of Rs. 28,16,21,522/- were incurred in respect of freight and clearing charges as detailed under:
a. Expenses incurred in respect of freight and forwarding and handling charges Rs. 5,89,62,327/- for the Goods Transported from Indian port to work site.
b. Expenses incurred in respect of freight and Clearing Charges of Rs. 22,26,59,195/- only for the Goods Transported from China port to Indian Port 6.2.4 However, the revenue was recognized from the activity of freight forwarding, clearing, and handling is only of Rs. 21,84,48,388/-, therefore, the loss of Rs. 6,31,73,134/- was incurred due to the activity of freight forwarding and handling service and ocean freight.
6.2.5 The assessee also clarified the reason behind such loss by submitting that it has incurred a loss due to the increase in the price of oil and gas. During the year under consideration, the price of oil and gas rose internationally to an all-time high.
Therefore, its freight cost was increased on account of increasing the oil and gas price. It can also be seen from the Profit & loss account that the loss was mainly incurred due to freight expenses. However, as per the contract agreement ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 9 between the assessee company and M/s Adani Power Ltd, the revenue of the assessee was fixed. Therefore, an addition to the cost was not passed on to the customer which has resulted in a huge loss to it.
6.2.6 The assessee also submitted that it is not possible to estimate the expenses in this kind of business which the assessee company is going to incur in future due to uncertainty of oil price and exchange rate fluctuation.
6.2.7 Further, the bill of entry of the cargo handled by the assessee company has been submitted. For every bill of entry, the amount charged by the third party from the assessee company was also submitted.
6.2.8 Further assessee in respect of Revenue recognition, submitted that it has recorded the revenue from operation during the year under consideration on mercantile basis as detailed under:
Revenue from erection, commission, & installation 4,72,96,903/- Revenue from forwarding, handling, clearing 21,84,48,388/-
Total 26,57,45,291/-
6.2.9 As per the Clause 4.2 of the contract agreement between assessee and M/s Adani power Ltd, the revenue recognition depends upon the performance of service as per the satisfaction of customer in accordance with the condition specified in the relevant clause of the contract and Revenue recognition in respect of service of facilitation of transportation of goods from the manufacturer sites in China to the work place in Kutch which is based on cost incurred by the assessee company.
6.2.10 The assessee also submitted that as per AS-9 certainty regarding receipt of amount of consideration is the essential element for recognition of revenue. In the case of an assessee such certainty is established only when the services are ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 10 performed to the satisfaction of the conditions specified in the contract agreement.
Accordingly, the assessee recognized the revenue of from erection, commission, & installation based on AS-9.
6.2.11 The assessee also submitted that it is well settled law that the Ld. AO cannot reject the books of account of the assessee only based on loss declared in income tax return. Book of accounts of the assessee were duly audited and certified by the Auditors. Further, the method of accounting is consistently followed by the assessee on year-to-year basis for the whole project that means assessee also followed the same accounting principal in subsequent year also if any service not recognized as income in the year under consideration due to non- full filling the condition of the contract agreement. Such income will be recognized in a subsequent year when it is approved by the customer as per the contract. Therefore, it is tax neutral exercise.
6.2.12 The assessee further submitted that the assessee could claim lower profit & loss if it keeps and maintains the books of accounts as are required to be kept u/s 44AA of the Act and get audited such books of account u/s 44AB of the Act.
6.2.13 However, the Ld. AO was not satisfied with the submission of the assessee by observing that the assessee did not elaborate in its submission as to what was the impact of the increase in price of oil and how the same has affected its freight expenses.
6.2.14 The assessee has not filed any agreement that parent company might have entered with the shipping agencies or suppliers for providing the facilitation service of transportation to Adani Power Ltd.
6.2.15 The assessee has not explained what the expected expenses were for providing the facilitation service of transportation or how its computation went wrong. The AO also was of the view that any prudent businessman before signing ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 11 the contract firstly estimate the cost of the project through some basis and material corresponding to revenue.
6.2.16 Further, on perusal of the profit and loss account, it was noted that the assessee had shown income of Rs. 21,84,48,388/- from forwarding and handling whilst expenses booked Rs. 22,26,59,195/- as freight and clearing charges therefore the loss of Rs. 42,10,807/- only attributed to fluctuation of oil prices. However, the assessee was trying to justify the loss of Rs. 8,58,88,353/- due to increase in price of oil.
6.2.17 The assessee had shown income of Rs. 4,72,96,803/- as income from erection, commissioning, and installation charges against the expenses incurred of Rs. 6,39,77,334/- meaning thereby some of the invoices were not raised corresponding to such expenses. If any work which has been done by the assessee but has not been approved by the customer or such work is not completed, then it should have been shown as work in progress on the balance sheet.
6.2.18 Further, the assessee has not furnished the invoices raised on the employer. Thus, in the absence of an invoice, it is not possible to verify the service performed by the assessee.
6.2.19 The AO also observed that the assessee entered a fixed price contract and therefore, it could have maintained its books of accounts as per the AS-7 and recognized revenue as per the method specified in AS-7.
6.3 In view of the above, the ld., AO concluded that the assessee has not maintained the books of accounts as per the provisions of section 44BBB r.w.s. 145 of the Act. Accordingly, the AO rejected the books of accounts of the assessee. Further, in the absence of an invoice raised by the assessee to the employer it is not possible to compute the correct profit of the assessee. Therefore AO is ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 12 required to compute the income of the assessee as per provision of section 44BBB(1) of the Act. Finally, the AO worked the income of the assessee after rejecting the books at Rs. 2,65,74,519 being 10% of the receipts of Rs. 26,75,45,191 which was more than the adjustment made by the TPO in respect of international transaction. Thus, the adjustment made by the TPO for Rs. 2,32,74,967.00 was deemed to be included in the estimated profit of Rs. 2,65,74,519 which was added to the total income of the assessee.
7. Aggrieved assessee preferred an appeal before the Ld. CIT(A) and submitted that the assessee being the project office was incorporated in India by the foreign company namely SFPLM HO. M/s SFPML has entered a Contract with third party namely Adani Power Limited which is an Indian entity for providing the services such as transporting, erecting, testing, installation, and commissioning of infrastructure of a power project.
7.1 For providing the services to Adani Power Limited, it was necessary for the foreign company (SFPLM) to establish a project office in India as per the guidelines farmed by the Reserve Bank of India. Therefore, the project office and the foreign company are not legally distinct entities. But, for the limited purpose of attribution of profit/ loss from the contract, these should be considered as separate entities.
7.2 The assessee before the Ld. CIT(A) further submitted the FAR analysis as detailed under:
Briefly the FAR undertaken by the HO as well as the PO is as under:
Particulars HO PO/PE
Transportation and cleaning
and forwarding
Erection, installation, testing &
commissioning
Construction and construction
management
Legal and statutory compliance
Contractual Risk (Contract risk
is faced by a contracting entity
in respect of non-fulfillment of
ITA nos.1129/AHD/2014
Asstt. Year 2008-09 wih 6 others
13
any obligations emanating
from the contract)
Credit Risks & market risks
He above FAR is clearly evident from the contract entered with the APL. The appellant reiterates that it is the sole responsibility of the project office to execute the projectin India. Project office directly and independently executes the contract entered with APPL. As stated above transportation of goods is appellant's obligation.
7.3 Based on FAR analysis, the assessee submitted that project office is only responsible for execution of project in India. Further, the transportation of goods is also the responsibility of the project office. It can be seen from the relevant portion of the contract which is reproduced on pages 64 to 66 in the order of the ld. CIT-A. 7.4 The assessee also justified for making the payment to shipping agency through the involvement of the HO on account of two factors, firstly, the payment in such cases was expedited quickly and secondly, it provides saving to the PO from huge foreign exchange risk exposure. Otherwise, the HO first needs to send the required funds to India for making payment to such shipping agencies and thereafter, the PO for making payment to shipping agencies, would have to sell the currency received from the HO and re-buy the same while making payment.
7.5 The assessee further submitted that cost of shipping expenses incurred by the HO on behalf of the PO has been reimbursed to the HO by PO. Thus, it cannot be treated as international Transaction within the provision of section 92B of the Act. As per the assessee, the contract for the services of the transportation of equipment was handed over to the independent third parties shipping agency which cannot be termed as international transaction within the meaning of section 92B of the Act. Further, the Ld. AO/TPO has not brought on record any finding that such shipping agencies were associated enterprises of the HO or the PO.
Hence, it is not justifiable to treat the reimbursement of cost to HO by PO as international transaction.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 14 7.6 The assessee further submitted that during the assessment proceedings, it had filed the necessary documents before the TPO as detailed under:
i. Invoice raised by the shipping agencies.
ii. Name of carrier/vessel through which goods were brought in India.
iii. Payment Proof (amount paid by the HO to shipping agency).
iv. Bill of lading reflecting the port of entry, volume of goods, dates on
which goods were shipped.
v. All the invoices issued to APL along with the ledger copy of APL in the
books of the assessee.
7.7 However, the TPO has ignored all the details filed by the assessee and
reached the conclusion that the transactions are not genuine. As per the assessee, the transaction between the project office and the HO being reimbursement of expenses can be benchmark with the transaction by taking third party shipping bill as a CUP. But the TPO observed that third party bills filed by the assessee suffer from serious deficiencies. However, the Ld. TPO has not brought on record any deficiency in the bills of the third parties.
7.8 The Ld. TPO as well as Ld. AO have not disputed the fact that all the shipping agencies to whom payment was made by HO on behalf of PO for the transportation of goods from China to India for execution of power project of Adani power limited are independent shipping agencies and not associated enterprises of HO as well as PO. As such, the reimbursement to HO by the PO was purely involving the cost of shipping expenses without any markup.
7.9 The assessee also submitted that while benchmarking the ALP, the Ld. TPO applied the same rate on such cargo/ transportation charges namely Adani International Shipping Agency Co. and Haotong International Transportation Agent Co. Ltd. However, the Ld. TPO never doubted such shipping agencies.
7.10 The assessee regarding the rejection of the books of accounts submitted that there is no requirement of estimating the cost where all receipt and expenses ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 15 are verifiable and supported by the vouchers and certified by the auditors. The assessee also submitted that it has been following the mercantile system of accounting and accordingly expenses and income are debited and credited based on accrual system. Thus, there is no defect in the books of account and accounting method adopted by the assessee. The assessee further submitted that there is no statutory requirement mandating to file the estimate of cost.
7.11 The assessee further submitted that it has filed all the invoices raised by it to Adani Power Ltd against the expenses during the proceedings before the TPO/ AO. Therefore, the allegation of the AO that the assessee has not filed invoices raised to Adani Power Ltd was not correct.
7.12 The assessee also pointed out that it has maintained all the books of account specified under section 44AA of the Income tax Act like cash book, Bank book, Ledger, Journal, and such books of accounts were also got audited u/s 44AB of the Act. The assessee also submitted that the Ld. AO has not pointed out any expenses which were un-vouched or not genuine or inflated. The AO has also not doubted the income and expenses recorded in the books of accounts of the assessee and he has admitted all the expenses are legitimate business expenses. Therefore, the act of rejection of the books of accounts and income computed u/s 44BBB(1) of the Act is not justifiable. The assessee in respect of revenue recognition has submitted that it has prepared the financial statements on accrual basis of accounting under the historical cost convention in accordance with companies Act 1956 and the applicable accounting standard issued by the ICAI.
7.13 Further, the revenue and expenses recorded in the books of account based on work performed. The assessee has raised the invoice to Adani Power Ltd for two activities:
A) forwarding and handing of the cargo B) erection, commission, and installation of the power project.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 16 7.14 Further, the assessee submitted that as per clause 14 titled as "Contract price and payment" of the Contract agreement where it is clearly mentioned that APL will make payment of bills submitted by the assessee from time to time. Further, such payment is based on progress of the work executed by the assessee company. Further, such clause defines that progress report to be submitted by the assessee should have included the following:
a) Chart and detailed description of progress
b) Photographs showing the status of progress on the site.
c) Progress of construction work
d) Copies to be filed of quality plan documents, test result and certificate of Material etc. 7.15 Upon furnishing the above details, M/s APL clears the invoice of the assessee. Thus, the invoice raised by the assessee to APL not only form the basis on achieving certain milestones but also invoice raised based on work performance, description of progress, Photographs, etc. Accordingly, the assessee recognized the revenue by following AS-9 issued by ICAI. Thus, it is also clear that the allegation of the AO that the assessee should have recognized revenue as per AS-7 is totally base-less.
7.16 The assessee also submitted the contract for the setting up of the power plant with Adani Power Limited was a fixed price contract i.e. 20 million. Thus, all the revenue realizable form the APL has to be recognized in the books of account of the assessee over a period of four years. i.e during the period activity of project continued and ultimately concluded. The assessee further submitted that it has incurred loss for the whole project. Accordingly, the assessee prepared its expected profit and loss account as per AS-7 which is reproduced on page 34 in the order of the ld. CIT-A. 7.17 It can be seen from the perusal of the profit and loss account that the assessee has estimated revenue of Rs. 165 crores against the estimated cost of Rs.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 17 185 crores. Therefore, the assessee has expected loss of Rs. 20 crores. As per AS-7 all the expected loss should be accounted for in the year immediately as and when it arises. However, the assessee did not apply the principal of AS-7 but recorded the revenue based on accrual accounting system and loss claimed in over a period of four years during which this project is continued. Therefore, the Allegation that the assessee should have applied AS-7 to recognize the revenue is not justifiable.
7.18 Further, it is clear that the accounting method applied by the assessee for recording the transactions in the books of accounts and same books recognized as per AS-7 is a tax neutral exercise.
8. The Ld. CIT(A) during the appellate proceeding observed that assessee has claimed that it has filed the following documents before the TPO as well during appellate proceeding.
a) Copy of shipping bill of third parties to whom such ocean freight charges have been paid.
b) Copy of bill of entry, bill of lading, and
c) Chart showing the actual amount as per shipping bills which corresponds with the actual amount reimbursed by appellant to head office.
8.1 On verification of the correspondence between TPO and assessee, finding of the TPO in respect of non-submission of the supporting documents is not correct.
8.2 Ld. CIT(A) further observed that assessee has filed the bill of entry and invoices, bill of lading which clearly support the claim of the assessee that what it has paid to HO is nothing but only the actual cost paid by the HO to the shipping agencies. The same has been reconciled by the assessee by submitting the details of reimbursement of Rs. 21,46,49,41/- only.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 18 8.3 Further, the Ld. CIT(A) was inclined to accept the contention of the assessee in respect of price charges in an un-controlled transaction has to be compared with price charge in a controlled transaction as per the section 92C r.w rule 10B(1)(a) of the rules. However, the TPO has compared two uncontrolled transactions and made an adjustment in uncontrolled transaction which is not sustainable in the eye of law. The relevant finding of the ld. CIT-A stands as under:
I have perused the remand report and the submissions made against the remand report. The books of accounts have been rejected for several reasons as reproduced and summarized above against which the appellant company has filed detailed submissions dealing with each of such reasons. I shall therefore proceed to deal with each of the reason cited by the AO for rejecting the Books.
Reasons for Rejection of Books of Accounts:
1. Huge Gap in Expense and Income: Limited Impact of Oil Price Expense on Ocean Freight Expenses:
The AO both in the order as well as remand report stated that the appellant had failed to explain huge losses incurred, Further it was stated that the variation in oil prices had a limited impact on losses which was quantified at Rs42.10 lacs (approx.) by the AO. The appellant submitted before me that it had matched all expenses incurred towards ocean freight and forwarding and handling with corresponding income on APL. In this respect the appellant company extensively placed reliance on the chart, submitted during the course of the assessment proceedings. This chart is attached as Annexure-1 forming part to this order. Details of revenues and expenses for the aforementioned activities are summarized in tabular format as under:
Revenue from Operations: Amount (Rs.) Total (Rs.)
Forwarding & Handling 21,84,48,388 26,57,45,191
Charges (Including Freight &
Clearing Charges)
Operating Expenses:
Forwarding & Handling 28,16,21,522
Charges
(Including Freight &
Clearing Charges)
34,55,98,856
The appellant company is in fact responsible for transportation of equipments from China to India, custom clearance. The appellant was further responsible for unloading the goods and transporting the cargos to project site. Part of the contract for l.e. for port handling and transporting the cargos to the job site was awarded to J.M Baxi.& Co. Contract between the J.M baxi and the ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 19 appellant was also produced before me along with all the invoices and worksheets (on sample basis.). The appellant also produced all the invoices raised on the APL against forwarding and handling Income. These invoices were sent to the AO for his verification and comments; however no deficiencies have been pointed out by the AO. Appellant company raised a consolidated invoice for all the above services l.e. transportation of equipments, custom clearance and transferring the cargos to the project site. This also become abundantly dear from the narration given in the copy of invoice raised on the appellant company on APL. The description used in each invoice is " Transportation of Goods from the port in China to Port in India, Clearance, Port Handling and Forwarding the goods to Mundra Power Station site The AO has observed vide para 8.1 of the order that the appellant company could explain/justify only Rs 42,10,807 / of losses on account of oil price variation which mainly impacts ocean freight charges. I am of the opinion that the quantification of Rs 42.10 lacs arrived is completely unjustifiable. In doing so the AO has conveniently ignored the fact that the appellant was raising composite invoices. While the invoices rose on APL is a composite invoice as discussed above, the AO has considered only ocean freight expenses incurred for shipping cargos from China to India. The AO completely disregarded Rs. 5,89,62,327/- incurred for port clearance, and forwarding the goods from Mundra Port to the power site. The above expenses have been paid to parties like J.M.Baxi& Co. and Aditya Marine copies of contract, invoices, vouchers etc. have been compiled in the paper book and verified as well. No discrepancies have been pointed out by the AO either in the body of the order or in his remand report in this respect. Therefore the finding of the AO that the appellant company did not elaborate as to how variation in oil prices had impacted the loss is completely misplaced and not Justifiable.
Further, as far as the reasons for loss in such activities is concerned the appellant submitted that one of the main reasons attributable for such loss was the increase in oil which in turn inflated the freight charges substantially. To substantiate the above stand the appellant company submitted shipping freights existing when it entered the contract with APL. It had estimated the shipping freight to be USD45/FRT (approx.). These estimates were based on quotes received from various shipping agencies. The appellant called for Quotation from various shipping companies viz. Sinotrans Tianjin Co., LTD, Chengdu Zhonghal Logistics Co., LTD. The same were also produced before me. Further the Baltic Dry Index (BDI), a shipping trade Index, rose to 6500 when the first shipment was sent from 3500 existing when the appellant signed the contract. This benchmark index further went up to 8000 in the month of August 2007. Although the appellant company had kept sufficient margins, however because of increase in shipping freight it incurred these losses. Apart from the oil prices the shipping freights have also increased on account of limited shipping capacity available for carrying such equipments from China to India. Further high demand of ships on account increase in Imports of Chinese power plant equipments in India also fueled the shipping rates. Therefore the appellant company had discharged its onus in explaining the reasons which led to losses. On the other hand the AO has not brought any evidence/material on record to disprove the factual position consistently submitted before him as well this office. Instead the AO has incorrectly quantified Rs. 42.10 lacs (approx.) as loss attributable to shipping activities. Further the contract with APL being a fixed price contract with no escalation clause, the appellant could not pass on the ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 20 increased burden to APL. Therefore the appellant cannot be said to have defaulted in discharging its onus in explaining losses arising from the above activity. The AO has made frequent references to the loss accounted for in the Audited Profit and Loss Account, although majority of the losses were disallowed by the appellant company in its Return of Income. The AO conveniently ignored these facts and not discussed in the order. Considering the above rejection on books of account for not providing for any reasons for losses beyond 42.10 lacs is incorrect, misplaced and hence not justifiable.
2. Matching of Expenses and Revenues:
The AO has repeatedly alleged that the appellant company had failed to match all expenses incurred with the revenues earned. In this respect the appellant company has submitted a detailed chart attached vide Annexure-I to this order. The appellant submitted that it had correlated entire forwarding and handling income booked towards transportation of cargos from China to India, custom clearance, port handling and thereafter forwarding the cargos to the project site. On perusal of the chart it transpires that the appellant company has correlated entire ocean freight expenses paid to Chinese Shipping Companies, port clearance, unloading and transportation expenses paid to J.M Baxi. The chart is well supported by the copies of all bills raised by the shipping companies and Indian sub-contractors. All the invoices raised by the appellant on APL and bills raised by the various shippers and sub-contractors on appellant are kept in juxtaposition in the chart referred. Therefore the appellant has matched all the expenses with revenue. There is not a single incidence pointed out by the AO either in the Order or in the remand report. I have carefully gone through all the invoices and bills of lading and various other documents produced by the appellant. I do not find any discrepancies in the invoices raised on APL and/or vouchers for all the above expenses incurred. Thus it transpires that the entire approach of the AO was centered on the losses accounted by the appellant in the books of accounts. Hence the observation of the AO to this extent are reversed.
3. No Opening Stock, closing work In progress and Matching of expenses for Erection, Commissioning and Installation with corresponding Revenues:
The AO has also rejected books of accounts also on the ground that the appellant company had not reported opening stock and /or work in progress (WIP). The appellant submitted that this being initial year of operation the question of opening stock does not arise. I agree with the contention of the appellant and hence rejection of books of accounts on ground that no opening stock being recorded in is not at all justifiable. Further regarding closing WIP, the appellant submitted that WIP can only arise in Erections, commissioning and Installation work. The appellant further submitted that as per the chart reproduced above, the revenue recognized is Rs. 4,72,96,803/- as against expenses of 6,39,77,334/-. According to the appellant revenues from erection, commission and installation would be recognized only on submission of reports APL as laid down in the contract between them. It also submitted that the appellant had recognized revenues only after the work gets certified by APL. Therefore the appellant recognized revenues from erection, commissioning and installation were recognized up to November 2007. Copies of all invoices along with ledger copy of erection, commissioning, ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 21 installation have been compiled in the paper book submitted. I agree with the stand of the appellant company for not recognizing revenues beyond November 2007 which is accordance with the contract entered into with the appellant company. Revenues cannot be said to have accrued unless the APL certifies the work done. The contract with APL being a fixed price contract the exercise of allocating more revenues would be tax neutral. If allocated the same would have to be reduced from the year in which they have been offered. Further it would also not be justifiable to change a method of accounting which has been consistently followed till the completion of the project. Further it was submitted that the appellant company has incurred loss in the entire project. Therefore the issue of allocating more revenues in the current year becomes purely academic. Even if the revenues are estimated for the current year the AO would have to reduce the revenues accounted in the subsequent year. However the appellant could correlate only Rs.3,1,5,91,764/ Incurred towards Erection, Commissioning and Installation for the corresponding period. The appellant company submitted that the balance expense of Rs.3,23,85,570/-( approx.) paid/ payable to Petron engineering was for the period from December 2007 to March 2008. The aforesaid expenses ought to have been categorized as WIP by the appellant company. However the appellant submitted that majority of erection, commissioning and Installation expenses were disallowed u/s 40 (a) (la) of the Act. Therefore the appellant had not recognized WIP. The AO is therefore directed to disallow WIP of Rs.3.23 crores in the current year, if at all claimed as expense by the appellant. The AO should allow the appellant to carry forward the said amount as opening stock in the next year. Having quantified the closing WIP all expenses for erection, commissioning and Installation shall match with corresponding revenues. Therefore rejection of entire books on this ground is not at all justifiable.
4. Non Submission of contract with Shipping Companies:
Non Submission of Contract with Shipping Companies: The AO has stated in the order that the appellant company has failed to provide written copies of contract for carriage of goods. In this respect the appellant submitted that it had provided all copies of Invoices raised by shipping agencies on it, Copies of Bill of Ladings, Payment proof made to shipping companies and ledger copy of all the shipping agencies. On the other hand the AO failed to point out deficiencies or irregularities in the details compiled. Further it is also accepted by the AO that the appellant company was duty bound to transport goods from China to India and which it has carried out in accordance with the scope of the contract. It is also not denied that the cargos have not come to India. In fact the appellant has correlated custom clearance charges, port handling charges for each and every cargo shipment from China to India. This is again evident from the chart reproduced vide Annexure- I to this order. I am unable to accept the finding given by the AO in this respect as well. Therefore rejection of Books of Accounts on this ground is not tenable.
5. Method of Recognition of Revenues-Applicability of AS-7/ AS-9 The AO has further rejected the books of accounts for the reason that the appellant company has not followed Percentage completion method for accounting revenues from construction contract as prescribed by Accounting Standard-7/AS-9 as issued ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 22 by the ICAI. Method of recognition of revenues has been discussed at length above. I have already held that the appellant company has been consistently recognizing revenues in respect of erection, commissioning, installation and in respect of transportation of Equipments. Further I also agree with the contention of the appellant that the AO has himself not recognized revenues applying AS-7. The AR also referred to para-21 and 35 of AS-7 which states that when the outcome of the construction contract is expected to be a loss then such loss should be recognized as an expense immediately. The appellant company has incurred loss in the entire project. In this respect he has also placed before me financial statements of subsequent years i.e. 2009-10, 2010-11 and 2011-12 during which the project was carried and concluded. The appellant has further submitted that even if AS-7 is applied in its true spirit entire expected losses should be accounted for and claimed in the current year itself. AS-7 being an integrated code in itself these principles as laid down can also not be done away with. In support of this contention reliance can also be placed on the ruling of Mumbai ITAT in case of ACIT, Range -10(1) v. ITD Cementation India Ltd. bearing ITA No. ITA. No.3669/Mum/2011 which in turn followed various other rulings viz Mazagaon Dock Ltd. v. JCIT [2009] 29 SOT 356 (Mum.), Jacobs Engg. India (P.) Ltd. v. ACIT [2011] 14 taxmann.com 186 (Mum.), Dredging International v. ADIT [2011] 48 SOT 430/15 taxmann.com 198 (Mum). In all these cases it has been held..that foreseeable losses from a fixed price contract are allowable. Once it has been established that the appellant company has incurred loss in the entire project the issue of allocating more revenues in the current year becomes purely academic. This is mainly because the contract with APL is a fixed price contract. Even if the revenues are estimated for the current year the AO would have to reduce the revenues accounted in the subsequent year. The entire exercise of the AO would be tax neutral. It appears that the AO has himself knowing this fact no applied AS-7 while deciding the order. Further the AO has also not given any comments on applicability of para. 21 and 35 referred by the appellant even when specifically asked by this office. I agree with the contention of the appellant that if at all revenues are recognized applying AS-7 / AS-9 the appellant company in light of the above mentioned principle of accounting HIT OF WER would be eligible for claiming budgeted losses. In my opinion, the appellant has discharged its obligation of giving satisfactory explanations to loss appearing in the books of account. The Books of Account of the Company have been audited and certified by the auditors. The method of accounting has been consistently followed by the assessee on a year-to- year basis. Hence, rejection of the Books of Account on this ground is unjustified and incorrect.
Applicability of Section 44 BBB The AO has invoked the provisions of section 44888 mainly because the books were rejected. I have already held that the books have been incorrectly rejected by the AD. Therefore Section 448BB cannot be invoked on this ground.
It is also a settled position that the appellant can claim lower profits and gains if Books of Account and documents, as are duly maintained in accordance with Section 44AA[2] of the I. T. Act, 1961 and gets the Books of Account audited ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 23 u/s. 44AB of the Act. It is worthwhile to note that the assessee has maintained all the Books of Account as stipulated u/s. 44AA of the Act, viz. namely:
(a) Cash Book
(b) Bank Book
(c) Journals
(d) Ledger which were produced before the AO and as well before me. Tax audit report has also been compiled before me in the paper book. Therefore, I am of the opinion that provisions of Section 44 BBB being optional on the appellant should not be invoked.
The AO is accordingly, directed not to estimate profits applying Section 44BBB of the Act.
To summarize, the books should not be rejected due to reasons enumerated hereunder:
* That the AO has himself accepted the revenues declared and accounted in audited financial statements by the appellant company while estimating taxable profits by u/s 44 BBB of the Act;
* That just because the project resulted into a loss, the books of accounts cannot be rejected;
* That the appellant matched all expenses with revenues.
Once it is held that books cannot be rejected for reasons as discussed herein above, the provisions of section 44BBB (1) cannot be applied. Consequently ground number 2, 3, 4 raised is allowed subject to directions given above."
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX "5.4 I have considered the facts of the case, submissions made by the appellant and the order of the TPO. The TPO has alleged that no Information regarding the reimbursement of shipping charges were produced before him. However before me the learned AR of the appellant has stated that such findings of learned TPO are factually incorrect. The AR has stated that following documents were submitted before the TPO:
• Copy of shipping bills of third parties to whom such Ocean Freight Charges have been paid;
• Copy of Bill of entry, Bill of Ladings; and
• Chart showing the actual amount per shipping bills which
correspond with the actual amount reimbursed by appellant to Head Office.
5.5 Above documents have also been compiled in the paper book filed during the course of the appellate proceedings. I have also perused the correspondences between the appellant company and the TPO in respect of furnishing of the above information. Accordingly the finding of the TPO in respect of non-submission of the ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 24 supporting documents is not justifiable with the reasons that all details produced before me and there was no reason mentioned in the order by TPO which forced the appellant not to produce the same details before the TPO, the reasons best known to the TPO.
5.6 Before me the AR also contended that as per clause 4.2 of the agreement entered into with the appellant and APL, the transportation of equipment was within the scope of the appellant and hence out of business prudency the payments to such shippers were directly made by the HO and later reimbursed by the appellant. The said transaction, in essence, is a transaction entered into by the appellant and such shippers and shipping agencies. The appellant has also proved that the payment was made to the third parties (shipping agencies). There is no evidence brought on record to show that the appellant company and the shipping companies are parties. The Head Office of the appellant company only facilitated the appellant company to pay the cost to shipping agencies. It is not disputed at all that the appellant did not carry out the above function. In fact both the AO as well as the TPO has accepted that the appellant company did carry out the function of transportation of equipments from China Port to Indian Port in accordance with the Agreement between it and APL. Therefore the observation of the TPO that the HO has transferred high cost liabilities to the appellant company is not tenable and devoid of any merit. Once it is proved that the reimbursement is only of the cost and there was no mark up charged by the Head Office, the scope of verification from the arm's length perspective should be very limited. The TPO should have confined its scope as to whether the same has been reimbursed at cost as paid by HO or not.
5.7 In the instance case, the bill entries and invoices, bill of ladings clearly support the claim that what have been reimbursed are the actual charges paid by the HO to third parties (Non-AE's)without any mark- up. The same has been reconciled by the chart produced above which entails entire details of Rs.21,46,49,412 cost reimbursed to the HO. Hence the adjustment proposed in respect of cargo shipments by COSCO logistics is not tenable and hence may be deleted.
5.8 Without prejudice to the above a valid CUP under section 92C r.w.s. Rule 10B(1)(a) of the Rules has been established by the appellant. Further no Infirmities has been pointed by the TPO in this Invoices accept for stray statements that such invoices cannot be relied. However no concrete reasons have been provided for such conclusions arrived by him. Accordingly the addition made by TPO by comparing the average tonnage rates by ignoring the Cosco Logistic Transactions is not justifiable as far as determining the arm's length price under the CUP method.
5.9 The TPO has then proceeded to determine the ALP under CUP by average rate of Freight per tonnage ignoring Cosco Logistic Transactions (merely because in one of the Instance the said entity has charged higher rate per tonnage). The appellant has submitted before me that it has never been doubted by the TPO that all the three entities to which freight charges are paid viz:
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 25 > Adani International Shipping Agency Co. Ltd;
> Haotong International Transportation Agent Co. Ltd; and
> Cosco Logistics.
are not the Associated Enterprises of the appellant under section 928 of the Act. The appellant further submitted that the effectively the TPO has compared rates charged in an uncontrolled transactions with another uncontrolled transactions, as all the aforementioned entities are not related to appellant in any ways. Such treatment is against the essence of CUP method as per section 92C of the Act and Rule 10B(1)(a) of the Rules. The appellant submitted that the method relied by the TPO does not follows mandate of the any of the method prescribed in section 92B and hence the addition needs to be deleted.
5.10 I find force in the submissions of the appellant. As per section 92C r.w. rule 108(1)(a) of the Rules the prices charged in an uncontrolled transactions has to be compared with the price charges in a controlled transactions. The price charged in uncontrolled transactions after making appropriate changes has to be treated as arm's length price as per section 92C r.w. rule 10B(1)(a) of the Rules. The TPO after deriving the average freight ignoring Cosco Logistic Transactions ought to have compared such prices charged in the controlled transaction which has not been done by the TPO. The TPO has effectively compared charges paid in two uncontrolled transactions and has made adjustment in uncontrolled transactions.
Hence the adjustment made on this ground is also not sustainable.
Accordingly in light of the facts and evidences and legal position discussed above, I direct the AO not to make any adjustment referred by TPO. Accordingly these grounds are allowed."
9. Being aggrieved by the order of the Ld. CIT-A, the Revenue is in appeal before us.
9.1 The ld. DR before us filed the written submissions running from pages 1 to 5 dated 16 January 2018 which is mainly supporting the order of the TPO for the transfer pricing adjustments.
9.2 On the other hand, the learned AR before us filed a paper book running from pages 1 to 290 and contended that the books of accounts of the assessee cannot be rejected in the given facts and circumstances as no defect was pointed out in the audited financial statements before invoking the provisions of section 145(3) of the Act. The learned AR regarding the transfer pricing adjustment ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 26 submitted that the transaction between the assessee and the head office was carried out on a cost-to-cost basis and therefore the same cannot be subject matter of transfer pricing adjustment. The learned AR before us filed a one-page written submission to this effect.
9.3 Both the learned DR and the AR before us vehemently supported the order of the authorities below as favourable to them.
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 accounts of the assessee after invoking the provisions of section 145(3) of the Act and computed the income under the provisions of section 44BBB(1) of the Act at 10% of gross receipt against the income offered by the assessee. Subsequently, the learned CIT-A reversed the order of the AO and directed him to accept the loss declared by the assessee in the income tax return. From the preceding discussion, we note that the AO has rejected the books of accounts of the assessee on several reasons which can be categorized as under:
i. Gap in expenses and income which was not solely attributable to the increase in the oil price on ocean freight expenses.
ii. Mismatch between the income and the expenses shown by the assessee. iii. Non-disclosure of opening/closing work in progress. There was no matching of expenses such as erection/ commissioning and installation with the corresponding revenues.
iv. Non-submission of the contract with the shipping companies. v. Method of recognizing the revenue as per accounting standard-7 /accounting standard 9 issued by the ICAI.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 27 10.2 The learned CIT-A after detailed analysis of the facts of the case, assessment records, remand report and the submission of the assessee reached to the conclusion that the books of accounts of the assessee were not liable to be rejected and therefore there was no occasion to estimate the profit under the provisions of section 44BBB(1) of the Act. It is the admitted position that books of accounts maintained by the assessee cannot be rejected by AO on the grounds discussed above which were mainly revolving to the loss shown by the assessee.
In simple words, the losses declared by the assessee cannot be a ground for rejecting the books of accounts more particularly in the circumstances where the assessee has explained the reasons of such losses mainly rise in the price of ocean freight on account of oil rate in the international market.
10.3 In addition to the above, we also note that the assessee maintained the books of accounts specified under section 44AA of the Act which were duly audited. In such facts and circumstances, it was held by the Hon'ble Gujarat High Court in the case of CIT (IT & TP) Vs. Shandong Tiejun Electric Power Engineering Co. reported in 86 Taxmann.com 274, that profit under section 44BBB(1) cannot be determined without pointing 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 profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.' ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 28
6. Under sub-section (1) of section 44BBB of the Act therefore in case of assessee being a foreign company engaged in the business of civil construction or business of erection of plant or machinery or testing or commissioning thereof in connection with a turnkey power project approved by the Central Government would be taxed at the rate of 10% of the amount paid or payable to the assessee or to any person on behalf of the assessee on account of such civil construction, erection etc work. Sub-section (2) of section 44BBB of the Act would however give an option to the assessee to claim lower profit if the assessee keeps and maintains the books of accounts and other documents as provided in sub-
section (2) of section 44AA of the Act and gets the accounts audited and furnishes the audit report as required under section 44AB. The AO thereupon would frame an assessment of the total income of the assessee under sub-section (3) of section 143 of the Act. In the present case, the CIT (Appeals) as well as the Tribunal both held that the assessee had fulfilled all requirements of sub-section (2) of section 44BBB of the Act. It is not the case of the revenue that the assessee had not maintained the books of accounts and documents as required under sub-section (2) of section 44AA or that the assessee's accounts were not audited or the audit report not furnished before the Assessing Officer. The Commissioner and the Tribunal also held that the Assessing Officer was wrong in holding that the accounting standard AS-7 did not apply to the assessee.
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 rejected 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/TPO for Rs. 2,32,74,967.00, we note that there was no international transaction carried out between the associated enterprises except merely the reimbursement of expenses incurred by the head office on behalf of the assessee. As such, in substance, the transaction was between the assessee and the shipping agencies which were unconnected parties to each other and therefore the same cannot be categorized as associated ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 29 enterprises which is one of the pre-requisites for attracting the transfer pricing provisions. The necessary invoices raised by the shipping agencies are placed on pages 57 to 63 of the paper book which were reimbursed by the assessee to the head office. There was no evidence brought on record by the AO suggesting that there was any margin or markup added by the head office in the value of the invoices raised by the shipping agencies. We also note that the ITAT Mumbai tribunal in the case of M/s Ness Technology India Pvt. Ltd. Vs. DCIT reported in 76 Taxmann.com 209 has held that where there is any transaction between the associated enterprises on cost-to-cost basis, without any markup, no adjustment in the international transaction is required to be made. The relevant extract of the order is reproduced as under:
13.3 We have considered the rival submissions. At the outset, in our considered opinion, it would be appropriate to cull out appropriate facts which are relevant to decide the controversy. Notably, assessee is rendering services to its associated enterprises abroad for which it is to be compensated on a cost plus mark-up basis and such transactions have been separately bench-marked. In the course of rendering such services, assessee also incurred certain costs relating to travel, accommodation, visa, per diem and other day-to-
day expenses, which were expended by its personnel. Further, assessee also incurred certain out of pocket expenses on the specific request of its associated enterprises. The responsibility for the aforesaid type of expenses was of the associated enterprises but the payment towards these costs were initially made by the assessee and thereafter, recoveries were made from the associated enterprises. Before the DRP, assessee also pointed out that such expenses, which are recovered by it from its associated enterprises, are in-turn recovered by the associated enterprises from the ultimate clients on a cost to cost basis. In this context, assessee furnished sample copies of debit notes raised by it on its associated enterprises alongwith 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 hands of the associated enterprises. Therefore, it would be wrong on the part of the income tax authorities to take a position and infer notionally about recovery of mark-up or profit element in the hands of assessee. It has also been brought out that it is a standard practice in the I.T. Industry to recover out of pocket expenses incurred during the course of providing services for the clients on a cost to cost basis. Under these circumstances, in our view, the Transfer Pricing Officer erred in proceeding to infer a non- existent understanding between assessee and its associated enterprises so as to impute income qua the instant transaction in terms of section 92(1) of the Act. Another pertinent ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 30 fact which has not been rebutted by the Revenue before us is to the effect that in similar situation, from assessment year 2004-05 to 2010-11, no transfer pricing adjustment has been made by the Assessing Officer in relation to the International Transactions on recovery of expenses.
10.6 Besides the above the learned CIT-A after analyzing all the facts on the issue in hand has reached to the conclusion that there was no need for making any adjustment in the cost incurred by the assessee towards the shipping charges which was reimbursed to the head office. Thus, in such facts and circumstances, we do not find any reason to interfere in the finding of the learned CIT-A. At the time of hearing, the learned DR has also not brought anything contrary to the finding of the learned CIT-A. Hence, the ground of appeal of the revenue is hereby dismissed.
11. The 2nd issue raised by the revenue in ground No. 2 is that the learned CIT-A erred in deleting the addition made by the AO for ₹ 8.20 crores under the provisions of section 40(a)(ia) of the Act.
12. The assessee before the learned CIT-A has raised the additional ground of appeal for claiming the deduction of the expenses of ₹ 8,20,96,426.00 which were disallowed by the assessee in the computation of income on account of non- deposit of TDS but subsequently the same was deposited before the due date of filing of the return of income specified under section 139(1) of the Act. The necessary facts relating to the dispute and the finding of the learned CIT-A is reproduced as under:
Additional Grounds of Appeal:
The appellant filed following additional ground of appeal during the course of appellate proceedings vide letter dated 26th December 2013. The said ground is reproduced hereunder:
"Without prejudice to all grounds raised by the appellant, on the facts and circumstances of the cases the learned AO may be directed to allow the expenses of Rs. 8, 20, 96,426/- as a deduction from the profits of the current assessment year in light of the fact, that the tax deducted at source(TDS) on various expenses comprising disallowance of Rs. 8,20,96,426/- had been paid before due date of filing retum under section 139(1) of the Act."
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 31 The Additional ground of appeal along with the facts was forwarded to the AO for his comments. I have considered the submissions made by the appellant company, comments of the AO in this respect made vide remand report dated 12th February 2014and rebuttal made by the appellant in this behalf. I find force in the submission of the appellant that powers of CIT (A) are with that of AO and the decisions of Apex Court in case of Goetz (India) (supra) is applicable only when a new daim is made before the AO during the course of assessment. The appellate authority while disposing an appeal may entertain any new claim. This is a settled legal position. In this respect reliance was placed by the appellant on the decision of the Hon'ble Jurisdictional High Court in the case of Commissioner Of Income Tax-1 - Appellant(s) v/s Arvind Mills Ltd (supra). Therefore by virtue of power vested upon me by section 251 and humbly following the Hon'ble Gujarat High Court, I allow the appellant to raise the additional ground of appeal before me.
Secondly, the appellant vide the additional ground has raised the admissibility of expenses summing up to Rs. 8,20,96,426/- under section 40(a)(la) stating that the TDS on such expenses were deducted and pald before due date of filing return. To substantiate the claim the appellant filed a paper book to prove that TDS was paid before due date of filling return. These details were sent to the AO for his verification and comments; however the AO has not made any comments on the merits. Instead the AO has commented only with respect to non-admissibility of the additional ground. He has also submitted that the operation of the proviso is prospective. Further the AO also stated that because the books of the appellant company have been rejected there would not be any effect on the estimated Income. I have already held that the books are incorrectly rejected in light of detailed findings given above. Therefore, the contention of the AO raised in the remand report for not admitting the additional ground is not sustainable. Further it is also not disputed that the appellant has deposited TDS on or before the due date of filing tax returns. This is also verifiable from the e-TDS returns filed before the AO. Hence by virtue of amendment brought in the statute books in section 40(a)(ia) vide Finance Act 2010 which has been held retrospective by many courts including the Gujarat High Court i.e. jurisdictional High Court in case of Income Tax Officer, Ward-1, Anand Vs Kanubhai Ramjibhai Makwana (supra), such expenses should be allowed for purpose of computing income under the Income from Business and Profession. Accordingly humbly following the Gujarat High Court, I hold that the expenses amounting to Rs. Rs. 8,20,96,426/-, on which the TDS is deducted and paid before the due date of return under section 139(1), is allowable while computing the income under the Profit and Gains from Business and Profession in the current assessment year. The AO is directed to disallow claim of the above expenses of Rs. 8.20 crores if claimed and allowed in subsequent year.
13. Being aggrieved by the order of the ld. CIT-A, the Revenue is in appeal before us.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 32 13.1 The ld. DR before us has not controverted the finding of the learned CIT-A. On the other hand, the learned AR before us vehemently supported the order of the ld. CIT-A.
14. We have heard the rival contentions of both the parties and perused the materials available on record. It is the settled position of law that the expenses which were subject to the provisions of TDS shall not be allowed as deduction until and unless the assessee deducts the TDS and deposits the same to the Government Exchequer within the prescribed time. In the present case, there is no dispute to the fact that the assessee deposited the TDS before the due date of filing of the Income Tax Return under section 139(1) of the Act. Accordingly, we do not find any infirmity in the order of learned CIT-A. Hence, the ground of appeal of the revenue is hereby dismissed.
15. In the result, the appeal of the revenue is hereby dismissed.
Coming to ITA No. 2916/AHD/2014, for the AY 2009-10 an appeal by the Revenue.
16. The revenue has raised the following grounds of appeal:
1. The CIT(A) has erred in law and on facts in holding that the accounts of the assessee could not be rejected inspite of clear evidence brought on record that the profit computed by the assessee was not reliable.
2. The CIT(A) has erred in law and on facts in holding that the assessee had sufficiently demonstrated the reason for loss incurred without appreciating that such explanation was without any supporting documentation and requisite agreements.
3. The CIT(A) erred in law and on facts in holding that in the present facts and circumstances, the AO was not justified in invoking the provisions of section 44BBB.
4. The Ld. CIT(A) has erred in holding that in the present set of facts, CUP was a better method of benchmarking as against TNMM adopted by the TPO.
5. The Ld. CIT(A) has erred in holding that the transaction of awarding the contract by Adani Power Limited 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 CUP cited by CIT(A).
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 33
6. The Ld. CIT(A) has erred in law and on facts in holding the comparables selected by the TPO as functionally incomparable merely on the basis of general observations without assigning any reason for rejection.
7. Therefore the order of the Ld. CIT(A) deserves to be deleted and that order of Assessing Officer be restored.
Any other ground that may be urged at the time of hearing
17. The Revenue vide letter dated 17 January 2023 has also raised the additional ground of appeal which is reproduced as under:
The ld. CIT(A) has erred in law and facts in admitting additional evidences without recording in writing the reasons for its admission and without allowing an opportunity to the assessing officer to examine the additional evidences produced by the assessee before the CIT(A).
18. The interconnected issue raised by the revenue in ground numbers 1 to 3 and additional ground of appeal raised vide letter dated 17 January 2023 is that learned CIT-A erred in accepting the book result shown by the assessee in the income tax return.
19. In the present case, the AO has rejected the books of accounts under the provisions of section 145(3) of the Act and determined the profit at Rs. 9,40,25,864.00 being the difference in the turnover determined by the TPO at Rs. 83,49,70,412.00 minus the expenses claimed by the assessee at Rs. 74,09,44,548.00 in the books of accounts. As such, the assessee filed the return of income declaring the loss whereas the AO has determined the profit at Rs. 9,40,25,864.00 only.
20. On appeal, the learned CIT-A deleted the addition made by the AO after giving of finding that the facts involved in the present case are identical to the facts of the case of the earlier assessment year 2008-09 where in the books results declared by the assessee were accepted by him. The relevant finding of the learned CIT-A is reproduced as under:
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 34 "6.3 I have gone through the assessment order, Statement of facts and further submissions filed before me. At the very outset, as mentioned above, the appellant-
company has brought to my notice that the reason for rejecting the books of account was identical with that of the reasons in the immediately preceding assessment year i.e. AY 2008-09. The order of the earlier assessment year i.e. A.Y. 2008-09 has been passed by the undersigned and the copy of the order have also been placed by the appellant in the paper-book compiled before me. I have perused the order of the earlier year and the facts prevailing in the earlier year as well as the facts of the present case before me. The same contract has been continued in the earlier year and there is no change in the method of accounting followed by the appellant-company during the year under consideration. The facts of the case and the issues involved are identical in this year as well as in the immediately preceding assessment year.
6.4 The appellant-company had entered into a contract with Adani Power Limited (APL) for transportation of equipment from China to India, clearing the goods at port of entry i.e. India (custom clearance) and thereafter transferring the goods to the site office. The appellant has also been assigned to carry out erection, commissioning the appellant company submitted that the Invoices were raised on APL i.e. its employer on the basis of the work done and on the progress of the work executed. The Invoices were raised mainly for carrying out two activities:
(A) Forwarding and Handling, and (8) Erection, Commissioning and Installation.
The breakup of the revenues from the aforesaid activities was submitted to the AO during the course of the assessment proceedings. It has been reproduced by him in the assessment order as well on page No. 12 of his order. The appellant Company had given the break-up of revenues arising from the aforesaid activities along with the expenses incurred for earning the above during the year under consideration. In support of the above revenues and expenses, the appellant Company had submitted the following documentary evidence in its support:
a) Sample copy of the invoices raised by the appellant Company.
on APL:
b) Sample copy of the invoices raised by the sub-contractors of the appellant Company upon it;
c) A summarized ledger copy of all major sub-contractors;
d) Copies of invoices raised by shipping agencies for transportation of goods from China to India (Ocean Freight Expenses);
e) Copies of the corresponding Bills of Lading for goods transported from China to India;
f) Sample Copies of invoices raised by the J.M. Bakshi, Aditya upon the appellant Company for handling goods and clearing them at customs in India.
g) A detailed break up of tonnage handled by the appellant Company during the year under consideration, ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 35
h) Bank account details from which payments in respect of the aforesaid expenses were made.
To execute this contract the appellant company has set up a project office in India in accordance with Rat Guidelines Although part of the contract: like coordination for equipment from China to India was cared out from China the appellant company attributed entire revenue from the project to the Indian Project office. The appellant company followed accrual basis of accounting and maintained all books of accounts as required u/s 44AA of the Act. The appellant has placed before me audited financial statement of the company, tax audit report of the company and detailed compilation comprising of copy of invoices raised by appellant company on APL, bill raised on it by sub-contractors, ledger copy of subcontractor as appearing in the books of accounts and all details of ocean freight i.e. bill of lading, bills raised by shipping companies on it.
The AO rejected the books of accounts and has determined profits by adopting the revenue derived by the TPO applying Arm's Length principle as per section 92 r.w.s 92CA of the Act. Accordingly, AO computed tax on the profits @ 40 per cent on the profits. AO has observed several times in the order that the books of accounts are not reliable mainly because the appellant did not submit the copy of the invoices raised by the appellant company either to him as well as TPO. The appellant company submitted that the invoices were raised on APL i.e. its employer on the basis of the work done and on the progress of the work executed. The invoices were raised mainly for carrying out two activities:
(A) Forwarding and Handling; and
(B) Erection, Commissioning and Installation.
The breakup of the revenues from the aforesaid activities was submitted to the A.O. during the course of the assessment proceedings. It has been reproduced by him in the assessment order as well on page No. 12 of his order. The appellant Company had given the breakup of revenues arising from the aforesaid activities along with the expenses incurred for earning above during the under consideration.
Against the observation of the AO, appellant filed a detailed statement of facts, along with Form 35 and reply during the appellate proceedings. Before proceeding to the reasons highlighted by the AR for rejecting the books of accounts, it would be worthwhile to refer to the scope of work, the appellant company had undertaken pursuant to clause 4.2 of the service contract between APL and the appellant. The appellant was engaged mainly to carry out following activities:
Erection, commission Installation;
Forwarding and handling & clearing which shall include the following:
* Transportation of Good from China Port to India Port
(Mundra Port);
ITA nos.1129/AHD/2014
Asstt. Year 2008-09 wih 6 others
36
* Appointment of Clearing and Forwarding Agent, custom
clearances;
* Transportation of Good from Mundra Port to project site
The appellant summarized the total revenue recorded against the corresponding expenses incurred. The said table is reproduced hereunder:
Revenue from Operations: Amount (Rs.) Total (Rs.)
Erection, Commissioning & Installation 61,17,56,857
Forwarding & Handling Charges 10,19,03,448 713,660,305
(Including Freight & Clearing Charges)
Operating Expenses:
Erection, Commissioning & Installation 29,09,04,043
Forwarding & Handling Charges 35,41,92,856
(Including Freight & Clearing Charges)
64,50,96,899
6.5 The reasons for rejection of books of account have been summarized by me
in this order in para above against which the appellant-company has filed detailed submissions. I shall, therefore, proceed to deal with the reasons cited by the AO for rejecting the books of account.
(1) Huge gap in Income and Expense, limited impact of ocean freight expenses.
The AO in the order has stated that, time and again the appellant company has failed to explain the reason for huge losses incurred. Further, the AO has stated that the oil price at a limited impact in the loss and that the appellant company had not submitted any evidence with respect to the impact of oil price of ocean freight. In this respect, the appellant company extensively placed reliance on the submissions made by it during the assessment proceedings. The appellant-company had also submitted that the break-up of revenues and expenses for each and every activity i.e. forwarding and handling freight as well as erection, commissioning and installation. The revenue from forwarding and handling including freight and clearing charges is substantially less than the related expenses. Thus it becomes abundantly clear that the losses have been incurred mainly due to incurrence of huge ocean freight expenses and lesser realization by the appellant-company from its employer. It is also not disputed that the appellant-company is in fact responsible for transportation of equipment from China to India, clearing them and thereafter unloading them and then transport the Cargos to the project site. Part of the contract i.e. port handling, transportation of cargos has been awarded to the sub-contractor viz. J.M. Baxi & Co and other sub-contractors. The appellant company submitted copy of the contract as well as copy of the invoice and ledger copy of sub-contractors before me. No specific deficiency has been pointed out by the AO in respect of the above expenses. The appellant-company has raised a consolidated invoice for all the above services viz. transportation of equipment, custom clearance and transferring goods to the project site.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 37 This also transpires from the copy of the invoice raised by the appellant on APL. Therefore the observation of the AO that the appellant-company has not billed its employer for transportation of goods from China port to India port is absolutely incorrect and misplaced. On similar issue, I have also held for the earlier assessment year that the books of account cannot be rejected and therefore I am of the opinion that for this year as well, the books of cannot be rejected for the above reasons. Further, one of the main reasons attributable for such loss was the increase in oil prices, which in turn inflated the freight charges substantially. To substantiate the above stand the appellant company submitted shipping freights existing when it entered into the contract with APL. It has estimated the shipping freights to be USD 45/FRT (approx.). These estimates were based on quotes received from various shipping agencies. The appellant called for Quotation from various shipping agencies viz. Sinotrans Tianjin Co. Ltd., Chengdu Zhongai Logistics Co., Ltd. The same were also produced before me. Further the Baltic Dry Index (BDI), a shipping trade index, rose to 6500 when the shipment was sent from 3500 existing when the appellant signed the contract. This benchmark further went up to 8000 in the month of August, 2007 and was on continuous increasing trend. Further, high demand of ships on account of increase in imports of Chinese power plants equipment in India also fueled the shipping rates. Therefore the appellant company has discharged the onus in explaining the reasons which led to losses. On the other hand, the AO failed to bring out any material on record to disprove the factual position consistently submitted before him as well as this office. It is also accepted by the AO that the contract with APL was a fixed price contract having no escalation clause and therefore, the appellant-company could not pass on the increased burden to its employer. Therefore the finding of the AO that the appellant-company has not discharged the onus of explaining the reasons which led to losses is entirely incorrect and misplaced. The AO has conveniently ignored the facts and submissions time and again repeatedly submitted by the appellant. Therefore, the observations of the AO to this extent are reversed. At the cost of repetition, I would like to reproduce the finding of this office for the immediate preceding year ie. A.Y. 2008-09, wherein after dealing with the facts, the findings of the AO had been reversed. The relevant portion of the finding reads as under:-
"Further, as far as the reasons for loss in such activities is concerned the appellant submitted that one of the main reasons attributable for such loss was the increase in oil prices, which in turn inflated the freight charges substantially. To substantiate the above stand the appellant company submitted shipping freights existing when entered the contract with APL It has estimated the shipping freights to be USD 45/FRT (approx), these estimates were based on quotes received from various shipping agencies. The appellant called for Quotation from various shipping agencies viz Sinotrans Tianjin Co. Ltd., Chengdu Zhongal Logistics Co., Ltd. The same were also produced before me. Further the Baltic Dry Index ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 38 (BDI), a shipping trade index, rose to 6500 when the shipment was sent from 3500 existing when the appellant signed the contract. This benchmark further went up to 8000 in the month of August 2007.
Although the appellant company has kept sufficient margins, however because of increase in shipping freight it incurred these losses. Apart from the oil prices the shipping freights have also increased on account of limited shipping capacity available for carrying such equipment from China to India. Further high demand of ships on account of increase in imports of Chinese power plants equipment in India also uelled the shipping rates. Therefore the appellant company has discharged the onus in explaining the reasons which led to losses"
Therefore, following the order of the earlier assessment year i.e. A.Y. 2008-09 coupled with identical facts and findings by the I, I hold that the rejection of books of account on the ground of not providing any reasons for explaining loss is entirely incorrect, unjustified and misplaced.
(ii) Matching of expenses with corresponding revenues:
The AO has repeatedly alleged that appellant-company failed to match the of expenses with the revenues earned. In this the appellant- company, at the cost of repetition submitted that it had summarized the entire revenues against corresponding expenses and had vide its letter dated 18/03/2013, submitted break-up of revenues from operations which is reproduced hereunder:
Revenue from Operations: Amount (Rs.) Total (Rs.)
Erection, Commissioning & Installation 61,17,56,857
Forwarding & Handling Charges 10,19,03,448 713,660,305
(Including Freight & Clearing Charges)
Operating Expenses:
Erection, Commissioning & Installation 29,09,04,043
Forwarding & Handling Charges 35,41,92,856
(Including Freight & Clearing Charges)
64,50,96,899
Apart from the above, appellant company had also submitted copies of invoices, ledger copy reflecting all transactions taken place with APL as well as sub-contractors. It had also submitted summary of the bank account. It had also submitted that the entire transactions were taken place through normal banking channel and withheld the taxes wherever required. Further, no such defects have been pointed out by the AO in the entire body of the order. The limited observation of the AO is that appellant-company had submitted a summarized ledger copy having no narration. However, the genuineness of the transactions and the parties has not been questioned at all. The appellant-company was fair enough in submitting summary of the entire books before the AO. The appellant- company had also submitted source document viz. copy of the invoices, vouchers, journal entries etc. ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 39 based on which the books of account have been compiled. Not a single instance has been pointed out by the AO in the order to show that the invoices raised by the appellant-company were not pertaining to the current assessment year. Further there is also not any evidence pointed out by the AO that Bills of Lading for goods transported from China to Indian port were not pertaining to the current assessment year. Further, appellant company has submitted that all the invoices have been raised by it on a progressive basis and that invoices for all the months i.e. from April, 2008 to March, 2009 have been raised. Summary of all the revenues booked by the appellant has also been furnished by filing ledger copy of APL appearing in its books of account.
I have carefully gone through all the evidence in the form of Bills of Lading, bills raised by appellant-company on APL, ledger copy, copies of contracts of sub-contractor, copy of the contract between APL and the appellant-company, bills, vouchers and all other documents compiled in the paper book. I do not find any discrepancy in the invoices raised and/or vouchers for all the expenses incurred. The entire approach of the AO for rejecting the books is mainly because the appellant company had incurred loss which has been duly explained by the appellant-company. The appellant-company had also discharged its onus of matching the entire expenses and revenue. Therefore, the observations of the AOto this extent are reversed.
(iii) No opening stock, closing/work-in-progress:
The AO has also rejected the books of accounts on the ground that the appellant company has not reported opening stock and closing stock and/or work in progress. At the very outset it has been pointed out that the opening stock has been quantified by this office vide order for the A.Y.2008- 09 at Rs.3.23 crores. The above expenses having been disallowed for the earlier assessment, 1 direct the AO to consider Rs.3.23 crores as opening stock for the current assessment year. Regarding closing and/or work-in-
progress the appellant-company has submitted that all the revenues have been recognized on a progressive basis. The appellant- has also filed ledger copy of APL in its books of account which has been summarized entire revenues booked for Erection, Commissioning and Installation. Closing/work-in-progress, if any, can arise only on account of work performed in relation to Erection, Commissioning and Installation. The appellant-company has raised revenues in respect of erection, commissioning and installation consistently on a progressive monthly basis. This fact has not been disputed by the AO. Further, it is an accepted position that the contract between the appellant-company and APL is a fix price contract. Therefore, allocating more revenues in current year would purely academic and it would go to reduce the revenues as accounted and booked in the subsequent year. Further, it is also brought to my notice that the appellant company had incurred lass in the entire project and therefore deferring revenues for the purpose of deferral of payment of tax is also not ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 40 objective. Financial statement and the copies of the returns of income filed by the appellant company for the subsequent years are compiled in the paper book filed before me. Therefore, even if the revenues are estimated in the current year the same would have to be reduced from the revenues accounted in the subsequent year. The appellant-company had submitted the entire details of expenses and revenues to the AO. No defects whatsoever have been pointed out by the AO; instead of the AO was reluctant in performing his duty to verify the entire details and documentary evidences filed by the appellant-company and rejected the books of account on surmises and conjectures. Therefore, the appellant-company having booked all the revenues for the entire year the question of rejecting the books of account on the ground of non- recognition of closing/work-in- progress is not at all justified.
(iv) Non-submission of contract with shipping companies:
The AO has stated in the order that the appellant company has failed to provide written copies of agreement entered into by its Head- office in China for carriage of goods from China port to Indian port. In this respect, the appellant-company has submitted that it had furnished all copies of invoices raised by shipping agencies on it, Copies of Bill of Ladings, Payment proof made to shipping companies and Ledger copy of all the agencies. No defects whatsoever have been pointed out by the AO. It is also accepted by the AO that the appellant-company was duty bound to transport goods from China to India and that that it had carried out in accordance with the scope of the contract. It has also not denied that the cargos have come to India.
Therefore, I am unable to accept the findings given by the AO that the books ought to have been rejected merely on the ground that written agreement between the shipping agencies and the appellant company has not been submitted. Rejection of books of account on this ground is not tenable. Books were by the AO on similar grounds for the earlier assessment year also i.e. AY 2008-09. The findings of the AO have been reversed for the earlier year as well. Therefore books of accounts cannot be rejected on this ground. The AO is directed accordingly.
(v) Method of Recognition of Revenues-Applicability of AS-7:
The AO has further the books of accounts for the reason that the appellant company has not followed Percentage completion method for accounting revenues from constructions contract as prescribed by AS-7/AS- 9 as issued by ICAI. The A.O. after referring to clause 4.2 of the contract with APL, observed that the revenues ought to have been accounted in accordance with AS-7. The appellant Company ought to have made adequate disclosures under cause 38 and 39 of the AS-7 after referring to them in the assessment order. The findings of the AO are similar to that in ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 41 the preceding assessment year and the same arguments were turned down by the CIT(A) order of this office. The relevant portion reads as under:
"The AO has further rejected the books of accounts for the reasons that the appellant company has not followed Percentage completion method for accounting revenues from construction contract as prescribed by Accounting Standard-7/AS-8 as issued by ICAI. Method of recognition of revenues has been consistently recognizing revenues in respect of erection, commissioning, installation and in respect of transpartion of Equipments. Further I also agree with the contention of the appellant that the AD has himself not recognized revenues applying AS-7. The AR also referred to para 21 and 35 of A5 7 which stated that when the outcome of the construction contract is expected to be a loss then such loss should be recognized as an expense immediately. The appellant company has incurred loss in the entire project. In this respect appellant company has incurred loss in the entire project. In this respect he has also placed before me financial statements of subsequent years l.e. 2009-10, 2010-11 and 2011-12 during which the projects was carried and concluded. The appellant has further submitted that even if AS 7 is applied in its true spirit entire expected losses should be accounted for and claimed in the current year itself. AS-7 being an integrated code in itself these principles as laid down can also not be done away with. In support of this contention reliance can also be placed an the ruling of Mumbai ITAT in case of ACIT, Range 10(1) v. ITD Cementation India Ltd. bearing ITA No. ITA. No. 3669/Mum/2011 which in turn followed various other rulings viz Mazagaon Dock Ltd v. Jt. CIT (2009) 29 SOT 356 (Mum.) JacobsEngg. India (P) Ltd. v. Asstt.CIT [2011] 14 taxmann.com 186 (Mum.), Dredging International v. Asstt.DIT (IT) [2011] 48 SOT 430 / 15 taxmann.com 198 (Mum.). In all these cases it has been held that foreseeable losses from a fixed price contract are allowable. Once it has been established that the appellant company has incurred loss in the entire the issue of allocating more revenues in the current year becomes purely academic This o mainly because the contract with AP is a fixed price contract Even the revenues are estimated for the current year the AO would have to reduce the revenues accounted in the subsequent year. The entire exercise of the AO would be tax neutral It appears that the AO has himself knowing this fact not applied AS-7 while deciding the order. Further the AD has also not given any comments on applicability of para 21 and 35 referred by the appellant even when specifically asked by this office. I agree with the contention of the appellant that if at all revenues are recognized applying AS- 7/AS-9 the appellant company in light of the above mentioned principle of accounting would be eligible for claiming budgeted losses. In my opinion, the appellant has discharged its obligation of giving satisfactory explanations to less appearing in the books of accounts. The books of accounts of the ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 42 company have been audited and certified by the auditors. The method of accounting has been consistently followed by the assessee on a year to year basis. Hence, rejection of the Books of Accounts on this ground is unjustified and incorrect.
Following the finding of previous year, I hold the same for this year as well and rejection of Books of Account on this ground is held unjustified and incorrect.
Applicability of Section 44BBB The AO has invoked the provision of section 44888 mainly because the books were rejected. I have already held that the books have been incorrectly rejected by the AO. Therefore section 4488B cannot be invoked on this ground. Similar findings were given in previous year. The relevant portion reads as under:
"It is also a settled position that the appellant can claim lower profits and gains if Books of Account and documents, as are duly maintained in accordance with 44AA[2] of the I.T Act, 1961 and gets the Books of Account audited u/s 44AB of the Act. it is worthwhile to note that the assessee has maintained all the Books of Account as stipulated u/s 44AA of the Act, viz. namely:
(a) Cash Book
(b) Bank Book
(c) Journals
(d) Ledger
which were produced before the AO and as well as before me. Tax audit report has also been compiled before me in the paper book. Therefore, I am of the opinion that provisions of section 44888 being optional on the appellant should not be invoked. The AO is accordingly, directed not to estimate profits applying Section 44BBB of the Act.
To summarize, the books should not be rejected due to reasons enumerated hereunder.
* That the AO has himself accepted the revenues declared and accounted in audited financial statements by the appellant company while estimating taxable profits by u/s 44 BBB of the Act;
* That just because the project resulted into a loss, the books of account cannot be rejected;
* That the appellant matched all expenses with revenue, Once it is held that books cannot be rejected for reasons as ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 43 discussed herein above, the provisions of section 44BBB(1) cannot be applied"
The only difference in the current year is that the AO has not accepted the revenue declared by the appellant company. Instead, the AO has accepted all the costs declared and recorded in the audited financial statement by the appellant company while estimating profit u/s.44BBB of the Act. Once I have already held that the rejection of books of account is not justified, provisions of section 44BBB being optional should not be invoked. The AO is accordingly directed not to estimate profits applying section 44888 of the Act. Consequently ground no. 2 to 7 are allowed subject to directions given above.
21. Being aggrieved by the order of the ld. CIT-A, the Revenue is in appeal before us.
21.1 The ld. DR before us has not controverted the finding of the learned CIT-A. On the other hand, the learned AR before us vehemently supported the order of the ld. CIT-A.
22. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the learned CIT-A has given a finding that the facts of the case on hand are identical to the facts of the case of the earlier assessment year 2008-09 wherein the issue was decided in favour of the assessee. Undeniably, the appeal before us has been preferred by the revenue challenging the order of the learned CIT-A raising 3 grounds of appeal, additional ground of appeal and therefore the onus lies upon the revenue to point out the defect in the order of the learned CIT-A based on the cogent materials. But no defect has been pointed out by the learned DR appearing on behalf of the revenue. Admittedly the order passed by the learned CIT-A is well reasoned and after considering the facts available on record. Even before us, the learned DR has not brought any material suggesting that the learned CIT-A has admitted additional evidence in contravention to the provisions of rule 46-A of Income Tax as challenged in the additional ground of appeal raised by the ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 44 revenue. Accordingly, in view of the above, we hold that the facts of the case on hand are identical to the facts of the case of the earlier year assessment year 2008-09 and therefore in order to maintain the consistency, we do not find any reason to interfere in the order of learned CIT-A. As such the findings given by the ITAT in the earlier assessment year 2008-09 shall also be applied to the given set of facts. The relevant finding of the ITAT in the case of the assessee for the earlier assessment year 2008-09 in ITA No. 1129/AHD/2014 is reproduced on paragraph number 10 of this order. Hence, the grounds of appeal raised by the revenue are hereby dismissed.
23. The next issue raised by the revenue in ground numbers 4 to 6 is that the learned CIT-A erred in deleting the addition made by the AO with respect to the international transactions.
24. In the present case the assessee being a company based in China has entered in a contract for providing the services for Erection, Commissioning, and Installation of the power project with Adani Power Private Ltd. (for short APPL). The assessee was also responsible for transportation of the goods/ equipment to be supplied to the APPL from the suppliers. After entering the 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.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 45 24.1 However, the TPO 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 within the meaning of the international transaction between the associated enterprises. Accordingly, the TPO proceeded to determine the arm length price based on the TNMM which was objected by the assessee on the reasoning that Internal CUP method should be preferred i.e. taking the transaction between the HO and the APPL. However, the TPO rejected the contention of the assessee and adopted TNMM as the most appropriate method and determined the ALP of the assessee after selecting certain comparables in the manner as reproduced below:
Thus, it can be seen that the profit attributable in respect of such activities is 10% of the total receipts, which comes to 11.11% of the cost, which is not very different from the PLI calculated by the TPO, indicating thereby that the selection process carried out by the TPO is scienctific and fair. The calculation of arma lengh price in he case of the assesee is given below:
Arm's lengh mean margin 12.69%
Operating cost9A) Rs.74,04,69,109/-
Arms Length Mena profit 12.69% of the costs
Arms Length price (ALP)@ 112.69% if Rs.83,44,34,649/-
operating cost(B)
Actual Sales shown (c) Rs.71,36,60,305/-
Shortfall being adjustment 12,07,74,334/-
u/s.92CA(D=B=C)
5% of the ALP determined by Rs.3,56,83,015/-
assessee
Since the adjustment is more than 5% of the amount shown in the books of accounts, no benefit is available to the assessee.
(UPWARD ADJUSTMENT : Rs.12,07,74,334/-)
25. Aggrieved assessee preferred an appeal to the learned CIT-A. 25.1 The assessee before the learned CIT-A submitted that the entire revenue and the expenses attributable to the contract between the assessee and the APPL were recorded in the books of accounts of the project office. Therefore, it is inappropriate to hold that the head office has subcontracted the work to the project office as observed by the TPO. Furthermore, the transaction between the project office and the APPL being independent parties cannot be considered as ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 46 international transactions. Accordingly, such transactions cannot also be deemed international transactions within the meaning of the provisions of section 92B(2) of the Act.
25.2 Without prejudice to the above, the assessee contended that if the transaction between the assessee and the head office has to be determined at the arm length price, then the CUP method should be adopted. It is for the reason that the 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 submissions field during he course of appellant proceedings. I am unable to agree with the contention of the appellant that the transaction between head office of the appellant company and is 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 CAEs') as per the provisions of the section 92A(l)(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 also comes from HO. Moreover Article 9 of the India-China DTAA also stipulates that the HO and the PO cf the appellant company are AEs because the head office participated directly in the management control and capital of the project office. Once it is held that PO and HO are AE, I further find that Article 7(2) of the India-China DTA A and para 15, 16 & 17 of the commentary on Article 7 on Model tax convention published by OECD in 2010 also states that permanent establishment is to be.treated as a • functionally separate entity. Accordingly, the profits to ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 47 the PE shall have to be 1 attributed at Arm's Length Price. In the facts of the present case since the AE (HO) entered into an agreement with APL to execute the construction/project management relation to construction, testing and commissioning work of 4 X 3$Q MW power project for APL for total consideration of US $ 40 million, the appellant being the PO is executing the project under the delegation of responsibilities by the HO. Therefore, such delegation of responsibility by the head office is required to be considered as an international transaction between appellant and HO of the appellant. Since there existed a prior agreement in relation to the transaction between the HO and APL, the transaction between appellant and APL is a deemed international transaction u/s.92B(2). Accordingly, the TPO is justified in holding the transactions between the appellant and its head office as international transaction. Accordingly grounds No.8 to 11 are dismissed.' Further It is important to note here that Section 92F (iii) defines enterprise as a person including a permanent establishment of such person. A permanent establishment has been defined u/s 92F(iiia) as a fixed place of business through which' the business of the enterprise is carried on. Accordingly, the 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 filed 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 is carried out from India the price at which contract was entered between HO of the appellant company and APL the same can be considered as comparable price of the appellant and since the same price has been charged by the appellant, the consideration is arm's length consideration. Hence no adjustment is required on account of consideration of appellant. I am inclined to agree with the arguments of the appellant company that the contract price agreed between APL and the HO of the appellant company can be used for the purposes of benchmarking the transaction between the appellant company (i.e. PO) and APL under any of situations discussed by the TPO. This is mainly because the price between APL and HO of the appellant company can be regarded as a comparable uncontrolled price (CUP) for the purpose of benchmarking the transaction between appellant company and APL. I agree with the contention of the appellant that the price charged between APL and HO of the appellant constitute a valid CUP, as per section 92Cof the Act rw.t Rule 106(1)(a) of the Income-tax Rules, 1962 (the Rules). Thus, as the law is now well settled that applying TNMM when a direct CUP was available is not sustainable which is discussed below.
8.6 I also accept the legal proposition that CUP being the best suitable and appropriate method for the purpose of benchmarking as compared to other methods prescribed u/s 92C of the Act should be relied on and preferred method than TNMM as by held by the TPO. For this purpose the appellant relied on following judicial pronouncements -
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 48 Clear Plus India (P.) Ltd v. Deputy Commissioner of Income-tax, Circle- 3(1), Delhi(2011) 10 taxmann.com 249 (Delhi);
> Deputy Commissioner of Income tax, Range 9(1) v. 3 Global Services (P.) Ltd[2011] 11 taxmann.com 136 (Mum.);
Serdia Pharmaceuticals (India) (P.) Ltd. v. Assistant Commissioner of Income-tax *, Circle 7(2), Mumbai[2011] 44 SOT 391 (Mum.);
> Assistant Commissioner of Income-tax-8(1) v. Agility Logistics (P.) Ltd. [2012] 19 taxmann.com 159 (Mum.);
Deputy Commissioner of Income-tax, Circle 8(2), Mumbai v. Isagro (Asia) Agrochemicals (P.) Ltd[2013] 31 taxmann.com 388 (Mumbai - Trib.);
Assistant Commissioner of Income-tax, Range 10(1) v. Vistaar Systems (P.) Ltd[2013] 33 taxmarin.com 445 (Mumbai - Trib.); >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 the test of comparability. As against the aforesaid, the case of the TPO is further that all documents as prescribed in rule 10D were not maintained. The market conditions in China, in which Chinese HO carried out their business, had not been spelt out. FAR analysis had not been done. The financial results of the associated enterprise had not been disclosed. Therefore, the CUP method adopted by the assessee did not establish the comparability.
8.8 I differ with the observations of the TPO. It is already clear that the appellant (PO) was only established to after singing of the contract, and except for limited functions such as Bidding of Contract, Ultimate responsibility for execution of the project, Overall management control and monitoring of the project, all other functions were carried out by the appellant. Entire execution was carried out from India. The appellant has therefore attributed entire revenue from the contract in India. Entire revenue accruing or arising from the contract has been accounted on the consistent method of accounting followed by the appellant. Further the appellant has also offered entire revenues for tax in India.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 49 There is no contract entered between the HO of the appellant and its Project office (PE) i.e. the appellant in India. There is no such assignment of contract by the HO to its PO. The responsibility for execution of the entire contract is with the appellant company and to discharge its responsibility it has formed a project office which is considered as a PE in India. No such assignment of contract between HO and its PO is brought on record by the TPO. The concept of HO and PO being separate legal entities is true but only for the limited purposes of attribution of profits. However when entire revenues are attributed to India the question of further attribution does not arise Contractually APL treats both the HO and the PO as one single entity, Further vis-a-vis APL both the appellant and its HO in China are one and the same person. Further the appellant has executed the contract on same and similar terms as agreed by its HO. Thus the test of comparability as laid down in Rule 108(2) r.w.t10B(3) of the Rules are satisfied. Hence the observations of the TPO are completely unjustifiable and misplaced. In all the above rulings the general principle is that the CUP method is preferable to TNMM. Accordingly as held in the 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 ld. 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.
26. Being aggrieved by the order of the learned CIT-A, both the revenue and assessee are in appeal before us. The assessee has raised the cross objections in the CO bearing No. 300/AHD/2014 which are reproduced as under:
1. In law and in facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) ("Ld. CIT(A)") has erred in confirming the view of Transfer Pricing Officer ('TPO') as well as the Assessing Officer in presuming that the contract with Adani Power Limited was subcontracted by the Head office of the appellant company to the Project Office of the appellant company. Accordingly the CIT(A) has erred in confirming the action of the TPO in treating the above transaction as an international transaction under the Income-tax, Act 1961 ('the Act').
2. In law and in facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeals) (Ld. CIT(A)") has erred in confirming the view of Transfer Pricing Officer ("TPO') as well as the Assessing Officer in presuming that there was delegation of responsibility by the Head Office of the appellant company to the Project office of the appellant company in India.
Accordingly the CIT (A) has erred in holding that such presumed delegation of responsibility as an international transaction under the Income Tax, Ac ("the Act")
3. In law and in the facts and circumstances of the case, he Ld.CI(A) has erred in confirming the action of the Assessing Officer/TPO for applying Section 92B(2) of the Ac and thereby holding that the Project Office of th appellant company the India and Adani Power Limited are associated enterprises. Consequently the CIT9A) has erred in confirming the action of the Assessing Officer/TPO in holding the above transaction between both as deemed international transaction.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 50
4. The respondent craves leave to add, alter, amend and/or withdraw any ground/s of cross objection either before or at the time of hearing of the appeal.
26.1 Both the learned DR and the AR before us vehemently supported the order of the respective authorities below to the extent favourable to them.
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 ₹20 million which was delegated to the project office in India. Admittedly the whole of the project was awarded by the head office to the project office in India which was considered as the international transaction between the associate enterprises and therefore the same was required to be decided at the arm length price. Under the provisions of transfer pricing various methods have been prescribed for determining the ALP between the associated enterprises with respect to the international transaction carried out by them. These methods are listed below:
Comparable uncontrolled price method; defines a mechanism where the sales price compliant with the arm's length principle charged by a corporation is determined by comparison with the market price changed at transactions among unrelated natural persons or legal entities. In order for this method to be applicable, characteristics of the transactions among related individuals must be comparable with characteristics of the transactions among unrelated individuals. This concept of comparable characteristics here refers to similarity between the characteristics of transactions among related individuals and transactions among unrelated individuals on exchange of goods and services in question. In case of small measurable discrepancies between those transactions, the method would be applicable upon elimination of those discrepancies. However, in case of larger discrepancies, the method would not be applicable. This is the most frequently used method for comparable uncontrolled transactions by virtue of its feature of direct comparison.
Resale price method; refers to estimation of the price compliant with the arm's length principle by deducing an appropriate gross sales profit from the price to be charged for resale of goods and services to unrelated natural persons or legal entities. The essential element for reaching the price or remuneration compliant with the arm's length principle in this method is the price or remuneration to be charged for the potential sale to unrelated natural persons or legal entities. The price compliant with the arm's length principle to be charged for related transaction would be reached by deducing an appropriate gross sales profit from the price or remuneration based on assumptions. The appropriate gross sales profit here refers to a profit determined according to market conditions by an objective percentage which would be applicable at the instant of transaction pertaining to goods or services in question. After deducing this profit amount, the price compliant with the arm's length principle to be charged at the sale of goods or services 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 ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 51 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 profit margin determined by an appropriate basis such as costs, sales or assets in a controlled transaction.
Profit-split method; being based on the principle of distribution of total operating profit or loss pertaining to one or more controlled transactions among the related individuals commensurate with the assumed functions and the burdened risks within the arm's length principle, is applicable especially when transactions are intertwined Other methods 27.1 Before us, the question is to check whether the contract awarded by the head office to the project office is at arm length price. Admittedly the HO assessee got the project from the 3rd party being APPL which assigned by the HO to the project office. Thus the price charged the HO of the assessee from APPL is certainly act as the benchmark considering the same as the internal cup. In holding so, we draw support and guidance from the judgement of Hon'ble Delhi High Court in case of Clear Plus India (P.) Ltd vs. DCIT reported in 10 taxmann.con 249 where it was held as under:
7. We have examined the ratio of these cases in the context of the facts of the case. At the cost of repetition it may be mentioned that goods were sold by the Chinese manufacturers in the USA market. The assessee has also sold the goods in U.S.A. market. Therefore, market conditions in the territory of sale are the same. In view thereof, we are in agreement with the learned counsel that the buyer in the USA market will be more concerned with quality and price rather than economic conditions prevailing in China and India.
7.1 The second point to be seen is regarding comparability of the products. No data or report is available in this regard. The case of the learned counsel is that wipers do not require any sophisticated technology for manufacture; therefore, no great difference is expected in the quality of Chinese made wipers and Indian made wipers. In fact, the claim of the assessee is that Chinese goods are of better quality. However, this claim remains unsubstantiated. The cases discussed above do lead to a conclusion that CUP method is the most direct method for determining arm's length price. In the case of Serdia Pharmaceuticals India (P.) Ltd. (supra) it has been held that CUP method is a preferred method and it leads to more reliable results vis-a-vis the results obtained 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 ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 52 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 26" wiper is US Dollars 0.99 against the sale price of Chinese manufacturers of US Dollars 1.50. The corresponding figures for 28" wipers are 1.01 US Dollars and 1.50 US Dollars. The analysis does not furnish the aggregate of sale price involved in these wipers and, therefore, it is not feasible to ascertain the percentage of sale price of these items to the total sales made to the associated enterprise. The case of the learned counsel is that the assessee has received interest-free unsecured loans from the associated enterprise for which some adjustment should be allowed. This loan has been advanced on 31-3-2006, the last date of year under consideration. Therefore, there is no impart in this year. Further, no calculation in this regard has been furnished. In absence thereof, the Assessing Officer could compute arm's length price of these wipers by adopting comparable sale price of US dollars 1.50 per wiper.
8. In view of aforesaid discussion, it is held:-
(i) the CUP method is the most suitable method in this case;
(ii) the assessee shall provide the sale data of the associated enterprise in terms of sale price of Chinese and assessee's goods in the USA market;
(iii) the assessee shall also provide quantitative data of purchase of Chinese and Indian wipers by the associated enterprise, and the terms of payment; and
(iv) the Assessing Officer shall compute the arm's length price using this data, on CUP method after hearing the assessee.
27.2 In view of the above, we hold that the internal cup method is the right course of action adopted by the CIT-A for working out the ALP for the transaction between the head office and the project office. There is no ambiguity, all the risk and rewards relating to the agreement in question were recorded at the project office. Therefore, the same can be said at the arm length price under the CUP method. Accordingly, we concur with the finding of the learned CIT-A. 27.4 Regarding the selection of the comparables under the TNMM, we note that the learned CIT-A has rejected all the comparables with the reasons as elaborately discussed in his order. At the time of hearing, the learned DR has not pointed out ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 53 any defect in the finding of the learned CIT-A. Hence, we do not find any reason to interfere in the order of the learned CIT-A. 27.5 Regarding the contentions raised by the assessee in the CO, we note 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.
28. In the result, the appeal filed by the revenue is dismissed and the CO filed by the assessee is also dismissed.
Coming to ITA No. 78/AHD/2018, for the AY 2010-11 an appeal by the Revenue.
29. The revenue has raised the following grounds of appeal:
1. The CIT(A) erred in law and on facts in holding that the accounts of the assessee could not be rejected inspite of clear evidence brought on record that the profit computed by the assessee was not reliable.
2. The CIT(A) erred in law and on facts in holding that the assessee had sufficiently demonstrated the reason for loss incurred without appreciating hat such explanation was without any supporting documentation and requisite agreements.
3. The CIT(A) erred in law and on facts in holding that the AO was not justified in invoking the provisions of section 44BBB.
The Id.CIT(A) has erred in law and on facts, CUP was a better method of benchmarking as against TNMM adopted by the TPO. 5.
The Id.CIT(A) has erred in law and on facts, in holding that the transaction of awarding the contract by Adani Power Limited 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 difference and functionally incomparable to the CUP cited by CIT(A).
6. The Id. CIT(A) has erred in law and on facts in holding the comparables selected by the TPO as functionally incomparable merely on the basis of general observations without assigning any reason for rejection.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 54
7. Therefore the order of the Ld. CIT(A) deserves to be deleted and that the order of Assessing Officer be restored.
8. Any other ground that may be urged at the time of hearing.
30. The interconnected issue raised by the revenue in ground numbers 1 to 3 is that learned CIT-A erred in accepting the book result shown by the assessee in the income tax return.
31. At the outset, we note that the issues raised by the Revenue in it grounds of appeal for the AY 2010-11 are identical to the issues raised by the Revenue in in ITA No. 1129 and 2916/AHD/2014 for the assessment year 2008-09 and 2009-
10. Therefore, the findings given in ITA No. 1129 and 2916/AHD/2014 shall also be applicable for the assessment year 2010-11. The grounds of appeal of the revenue for the A.Y. 2008-09 and 2009-10 have been decided by us vide paragraph No. 10 and 22 of this order against the revenue. The learned DR and the AR also agreed that whatever will be the findings for the assessment year 2008-09 and 2009-10 shall also be applied for the assessment year 2010-11. Hence, the grounds of appeals filed by the revenue are hereby dismissed.
32. The next issue raised by the revenue in ground numbers 4 to 6 is that the learned CIT-A erred in deleting the addition made by the AO with respect to the international transactions.
33. At the outset, we note that the issues raised by the Revenue in it grounds of appeal for the AY 2010-11 are identical to the issues raised by the Revenue in in ITA No. 2916/AHD/2014 for the assessment year 2009-10. Therefore, the findings given in ITA No. 2916/AHD/2014 shall also be applicable for the assessment year 2010-11. The grounds of appeal of the revenue for the A.Y. 2009-10 have been decided by us vide paragraph No. 27 of this order against the revenue. The learned DR and the AR also agreed that whatever will be the findings for the assessment year 2009-10 shall also be applied for the assessment ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 55 year 2010-11. Hence, the grounds of appeals filed by the revenue are hereby dismissed.
34. In the result, the appeal filed by the revenue is dismissed.
Coming to ITA No. 79/AHD/2018, for the AY 2011-12 an appeal by the Revenue.
35. The revenue has raised the following grounds of appeal:
1. The CIT(A) erred in law and on facts in holding that assessee is eligible for set off of unabsorbed depreciation under section 32(2) of the Act against current year deemed income offered by assessee under section 44 BBB(1) of the Act, without appreciating the position of law as section 44 BBB(1) starts with 'notwithstanding' clause and unabsorbed depreciation under section 32(2) is not to be considered when income is estimated under section 44 BBB (1).
2. The CIT(A) erred in law and on facts in holding that the assessee is eligible for set off of unabsorbed depreciation under section 32(2) of the Act against current year deemed income offered by assessee under section 44 BBB (1) without taking into account the decision of Hon'ble Calcutta High Court in the case of Universal Cargo Carriers Inc. Vs. Commissioner of Income Tax (1987) 165 ITR 209.
3. The CIT(A) erred in law and on facts in allowing the set off of brought forward business losses under section 72 of the Act against the current year deemed income offered by the assessee under section 44BBB (1) not appreciating the position as enshrined in section 29 which provides that income from profits and gains of business is to be computed as per section 30 to 43D and section 44888 is not mentioned therein.
4. The Id.CIT(A) has erred in law and on facts, CUP was a better method of benchmarking as against TNMM adopted by the TPO.
5. The Id. CIT(A) has erred in law and on facts, in holding that the transaction of awarding the contract by Adani Power Limited 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 difference and functionally incomparable to the CUP cited by CIT(A).
6. The Ld.CIT(A), has erred in law and on facts in holding the comparables selected by the TPO as functionally incomparable merely on the basis of general observations without assigning any reason for rejection.
7. Therefore the order of the Ld.CIT(A), deserves to be deleted and that the order of Assessing Officer be restored.
8. Any other ground that may be urged at the time of hearing.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 56
36. The interconnected issue raised by the revenue in ground numbers 1 to 3 is that learned CIT-A erred in allowing the set off of unabsorbed depreciation and brought forward losses against the income determined under section 44 BBB of the Act.
37. The assessee in the year under consideration has offered income under the provisions of section 44BBB of the Act which provides a presumptive rate of profit. However, the assessee against such profit has claimed the deduction of the unabsorbed depreciation and the brought forward losses which were denied by the AO. As per the AO, as the income was determined under presumptive section i.e. 44BBB of the Act and therefore no benefit of unabsorbed depreciation and brought forward losses by adjusting against such income can be given to the assessee.
38. On appeal, the learned CIT-A allowed the ground of appeal in favour of the assessee by observing as under:
6.3 I have gone through the assessment order, Statement of facts and further submissions filed before me. At the very outset; as mentioned above, the appellant-
company has brought to my notice that the disallowance of set off was identical with that of the reasons in the immediately subsequent assessment years i.e. AY 2012-13 and A.Y. 2013-14. The orders of the subsequent assessment years have been passed by the undersigned and the copy of the orders have also been placed by the appellant before me. I have perused the orders of the subsequent years and the facts prevailing in the subsequent years as well as the facts of the present case before me. The same contract for the year under consideration prevails in subsequent years also and there is no change in the method of accounting followed by the appellant-company. The facts of the case and the issues involved are identical in this year as well as in the immediately subsequent assessment years.
At this juncture, it would be relevant to reproduce here the finding of the undersigned for Assessment Year i.e. A.Y. 2012-13:-
7. I have perused the findings of the Assessing officer as well as detailed submissions made by the Learned AR. The appellant being a foreign company has filed its return offering income u/s 44BBB of the Act Section 44888 has been inserted in the statute so as to facilitate the nonresident engaged in the business of civil construction etc. in certain tumkey power projects. Once the provisions of Section 44880 are made applicable the assessee need not get his books of accounts audited and file a tax audit report u/s 44A8 of the Act. Strictly following the condition stipulated by Section 44888 the appellant offered entire revenues generated ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 57 from erection and commissioning of turnkey power projects for taxation. The said income has been characterized as business income.
Against the said income the appellant has claimed set off of carry forward losses. Provisions pertaining to set off and carry forward are stipulated u/s 70 to 80 of the Act. Section 72 provides a statutory right to the appellant to daim set off of carried forward losses. This statutory right cannot be withheld since the loss is assessed loss. Copies of return of income as well as assessment order for earlier years have been placed before me. The manner of computing profits and gains under the head should not influence the right of claiming set off and carry forward of losses. It is observed that Hon'ble Delhi ITAT in the case of Rolls Royce Industrial Power Ltd. 42 SOT 264 after elaborate discussion of set off of brought forward loss against current year income has held as under.
69. We have considered the rival contentions and given our careful consideration to the materials placed on record and are of the opinion that carry forward business loss is a statutory right allowable to the assessee by section 72 of the Act. This statutory right cannot be withheld from the assessee as this loss has been properly computed and allowed to be carried forward in the previous assessment years which have become final. Copies of the same have been filed before us. The manner of computation of profits and gains of business would not convert profits and gains of business income under another head of income. It will continue to be profits and gains of business. The Assessing Officer in all these years has not also treated this income to be taxable under any other head than 'profits and gains of business. Once profits and gains of business are computed, it is necessary that carry forward business loss has to be set off against profits and gains of business of the years under review. The Calcutta High Court has not stated that even if you compute profits under section 44D already computed loss of previous years would not be set off against it. Therefore, we hold that the carry forward of business loss should have been allowed to the assessee against profits and gains of business computed by the Assessing Officer all these years."
It is also a settled position that the appellant being assessed under Section 28 to 43C of the act for the earlier year does not mandate him to follow principle of consistency. Honble Delhi ITAT in the case of DSD Industrieanlagen GMBH v/s DDIT 33 SOT 211 has already held that since the law itself provides an option to the assessee to choose the method of computing income under the head business and profession the principle of consistency of computing taxable income in a particular manner is not required.
8. In view of above decisions and facts of the case, the Assessing Officer is directed to allow set off and carry forward of assessed losses of the preceding year. Accordingly this ground of appeal is allowed." The facts of the case and the issues involved are identical to the facts of the subsequent assessment years wherein I have already held that the Assessing Officer needs to allow the set off and carry forward of assessed losses of preceding years. The AO is accordingly directed to allow set off and carry forward of assessed losses of preceding years in the present assessment year as well. Consequently, ground no.2 to 3 are allowed subject to direction given below.
39. Being aggrieved by the order of the learned CIT-A, the revenue is in appeal before us.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 58 39.1 Both the learned DR and the AR before us vehemently supported the order of the respective authorities as favourable to them.
40. We have heard the rival contentions of both the parties and perused the materials available on record. Regarding the setoff of the brought forward losses, we note that there is no ambiguity/ confusion that such loss is eligible for set off against the income determined under the provisions of section 44BBB of the Act. In holding so we rely on the order of the Delhi tribunal in the case of Rolls Royee Industrial Power Ltd 42 SOT 264 wherein it was held as under:
69. We have considered the rival contentions and given our careful consideration to the materials placed on record and are of the opinion that carry forward business loss is a statutory right allowable to the assessee by section 72 of the Act. This statutory right cannot be withheld from the assessee as this loss has been properly computed and allowed to be carried forward in the previous assessment years which have become final. Copies of the same have been filed before us.
The manner of computation of profits and gains of business would not convert profits and gains of business income under another head of income. It will continue to be profits and gains of business. The Assessing Officer in all these years has not also treated this income to be taxable under any other head than 'profits and gains of business'. Once profits and gains of business are computed, it is necessary that carry forward business loss has to be set off against profits and gains of business of the years under review. The Calcutta High Court has not stated that even if you compute profits under section 44D already computed loss of previous years would not be set off against it. Therefore, we hold that the carry forward of business loss should have been allowed to the assessee against profits and gains of business computed by the Assessing Officer all these years.
40.1 Likewise, we also find support from the judgement of Hon'ble Calcutta High Court in the case of Universal Cargo Carriers Inc. vs. CIT reported in 165 ITR 209 wherein it was held as under:
20. In view of the clear language of section 44B it appears to us that while it is open to the assessee to claim adjustment of business loss of past years which have been carried forward against its business income computed under the said section, it is not open to the assessee to put unabsorbed depreciation carried forward in the same bracket as carried over business loss and also seek such adjustment of the same qua loss. The assessee must come strictly within the four corners of the section in order to be entitled to the advantage.
40.2 Regarding the setoff of unabsorbed depreciation, we note that the Hon'ble Calcutta High Court in case of Universal Cargo Carriers Inc. vs. CIT (supra) in similar facts and circumstances has held the setoff of unabsorbed depreciation is ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 59 not available to assessee in case of presumptive income. The relevant observation of the Hon'ble High Court reads as under:
16. So far as depreciation is concerned, the Act provides for compensation of the same by an allowance, such allowance by itself is not a loss but if it cannot be absorbed in a particular year against business income then it is carried forward as an absorbed depreciation allowance under section 32(2). This unabsorbed depreciation allowance does not enter into the computation of the business loss of the assessee in that particular year.
17. In the subsequent year such unabsorbed depreciation allowance is treated to be a part of the depreciation allowance of the succeeding year and the assessee is entitled to claim for absorption in respect of the same in the succeeding year.
18. On a strict reading of section 72 it cannot be said that unabsorbed depreciation allowance of an assessee is a business loss particularly, as it does not enter into the computation contemplated under the said section,
19. If a depreciation allowance cannot be and is not absorbed in a particular year from the point of view of an accountant the business suffers a loss but for the purpose of enabling an assessee to obtain the advantage of carrying forward such unabsorbed depreciation allowance and having it adjusted against the business income of the subsequent year un absorbed depreciation allowance and the business loss carried forward must be treated as separate.
20. In view of the clear language of section 44B it appears to us that while it is open to the assessee to claim adjustment of business loss of past years which have been carried forward against its business income computed under the said section, it is not open to the assessee to put unabsorbed depreciation carried forward in the same bracket as carried over business loss and also seek such adjustment of the same qua loss. The assessee must come strictly within the four corners of the section in order to be entitled to the advantage.
40.3 Thus, respectfully following the judgment of the Hon'ble Calcutta High Court in the above-mentioned case, we are of the view that the assessee is not eligible to setoff of the unabsorbed deprecation against the profit computed under section 44BBB of the Act. In view of the above and after considering the facts in totality the ground of appeal raised regarding setoff brough forwarded losses is allowed whereas ground of appeal regarding the disallowances of unabsorbed depreciation is dismissed. Hence the ground of appeal of the revenue is hereby partly allowed.
41. The next issue raised by the revenue in ground numbers 4 to 6 is that the learned CIT-A erred in deleting the addition made by the AO with respect to the international transactions.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 60
42. At the outset, we note that the issues raised by the Revenue in it grounds of appeal for the AY 2011-12 are identical to the issues raised by the Revenue in in ITA No. 2916/AHD/2014 for the assessment year 2009-10. Therefore, the findings given in ITA No. 2916/AHD/2014 shall also be applicable for the assessment year 2010-11. The grounds of appeal of the revenue for the A.Y. 2009-10 have been decided by us vide paragraph No. 27 of this order against the revenue. The learned DR and the AR also agreed that whatever will be the findings for the assessment year 2009-10 shall also be applied for the assessment year 2011-12. Hence, the grounds of appeals filed by the revenue are hereby dismissed.
43. In the result, the appeal filed by the revenue is partly allowed.
Coming to ITA No. 2816/AHD/2017, for the AY 2012-13 an appeal by the Revenue.
44. The revenue has raised the following grounds of appeal:
1. The CIT(A) erred in law and on facts in holding that assessee is eligible for set off of unabsorbed depreciation under section 32(2) of the Act against current year deemed income offered by assessee under section 44BBB(1) of the Act, without appreciating the position of law as section 44BBB(1) starts with 'notwithstanding' clause and unabsorbed depreciation under section 32(2) is not to be considered when income is estimated under section 44BBB(1).
2. The CIT(A) erred in law and on facts in holding that the assessee is eligible for set off of unabsorbed depreciation under section 32(2) of the Act against current year deemed income offered by assessee under section 44BBB(1) without taking into account the decision of Hon'ble Calcutta High Court in the case of Universal Cargo Carriers Inc. Vs. Commissioner of Income Tax (1987) 165 ITR 209.
3. The CIT(A) erred in law and on facts in allowing the set off of brought forward business losses under section 72 of the Act against the current year deemed income offered by the assessee under section 44BBB(1) not appreciating the position as enshrined in section 29 which provides that income from profits and gains of business is to be computed as per section 30 to 43D and section 44BBB is not mentioned therein.
4. Therefore the order of the Ld. CIT(A) deserves to be deleted and that the order of Assessing Officer be restored.
5. Any other ground that may be urged at the time of hearing.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 61
45. The interconnected issue raised by the revenue in ground numbers 1 to 3 is that the learned CIT-A erred in allowing the setoff of unabsorbed depreciation and brought forward losses against the income determined under section 44 BBB of the Act.
46. At the outset, we note that the issues raised by the Revenue in it grounds of appeal for the AY 2012-13 are identical to the issues raised by the Revenue in in ITA No. 79/AHD/2018 for the assessment year 2011-12. Therefore, the findings given in ITA No. 79/AHD/2018 shall also be applicable for the assessment year 2012-13. The grounds of appeal of the revenue for the A.Y. 2011-12 have been decided by us vide paragraph No. 40 of this order partly in favor of the revenue. The learned DR and the AR also agreed that whatever will be the findings for the assessment year 2011-12 shall also be applied for the assessment year 2012-13. Hence, the grounds of appeals filed by the revenue are hereby partly allowed.
47. The next issue raised by the revenue in ground numbers 4 to 6 is that the learned CIT-A erred in deleting the addition made by the AO with respect to the international transactions.
48. At the outset, we note that the issues raised by the Revenue in it grounds of appeal for the AY 2012-13 are identical to the issues raised by the Revenue in in ITA No. 2916/AHD/2014 for the assessment year 2009-10. Therefore, the findings given in ITA No. 2916/AHD/2014 shall also be applicable for the assessment year 2010-11. The grounds of appeal of the revenue for the A.Y. 2009-10 have been decided by us vide paragraph No. 27 of this order against the revenue. The learned DR and the AR also agreed that whatever will be the findings for the assessment year 2009-10 shall also be applied for the assessment year 2012-13. Hence, the grounds of appeals filed by the revenue are hereby dismissed.
49. In the result, the appeal filed by the revenue is partly allowed.
ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 62 Coming to ITA No. 2817/AHD/2017, for the AY 2013-14 an appeal by the Revenue.
50 The revenue has raised the following grounds of appeal:
1. The CIT(A) erred in law and on facts in holding that assessee is eligible for set off of unabsorbed depreciation under section 32(2) of the Act against current year deemed income offered by assessee under section 448BB(1) of the Act, without appreciating the position of law as section 448BB(1) starts with 'notwithstanding' clause and unabsorbed depreciation under section 32(2) is not to be considered when income is estimated under section 44BBB(1).
The CIT(A) erred in law and on facts in holding that the assessee is eligible for set off of unabsorbed depreciation under section 32(2) of the Act against current year deemed income offered by assessee under section 44BBB(1) without taking into account the decision of Hon'ble Calcutta High Court in the case of Universal Cargo Carriers Inc. Vs. Commissioner of Income Tax (1987) 165 ITR 209.
The CIT(A) erred in law and on facts in allowing the set off of brought forward business losses under section 72 of the Act against the current year deemed income offered by the assessee under section 44BBB(1) not appreciating the position as enshrined in section 29 which provides that income from profits and gains of business is to be computed as per section 30 to 43D and section 44BBB is not mentioned therein.
4. Therefore the order of the Ld. CIT(A) deserves to be deleted and that the order of Assessing Officer be restored.
5. Any other ground that may be urged at the time of hearing.
51. The interconnected issue raised by the revenue in ground numbers 1 to 3 is that learned CIT-A erred in allowing the set off of unabsorbed depreciation and brought forward losses against the income determined under section 44 BBB of the Act.
52. At the outset, we note that the issues raised by the Revenue in it grounds of appeal for the AY 2013-14 are identical to the issues raised by the Revenue in in ITA No. 79/AHD/2018 for the assessment year 2011-12. Therefore, the findings given in ITA No. 79/AHD/2018 shall also be applicable for the assessment year 2012-13. The grounds of appeal of the revenue for the A.Y. 2011-12 have been decided by us vide paragraph No. 40 of this order partly in favour of the revenue. The learned DR and the AR also agreed that whatever will be the findings for the ITA nos.1129/AHD/2014 Asstt. Year 2008-09 wih 6 others 63 assessment year 2011-12 shall also be applied for the assessment year 2013-14. Hence, the grounds of appeals filed by the revenue are hereby allowed.
53. In the result, the appeal filed by the revenue is partly allowed.
54. In the combined results:
S. No. Appeal No. Ass. Year Appellant Result
1 ITA No. 1129/Ahd/2014 2008-09 Department Dismissed
2 to 3 ITA No. 2916/Ahd/2014 2009-10 Department Dismissed
and CO. NO.
300/Ahd/2014
4 ITA No. 78/Ahd/2018 2010-11 Department Dismissed
5 to 7 ITA No. 79/Ahd/2018 2011-12 Department Partly
and ITA No. 2816 & to 2013- Allowed
2817/Ahd/2017 14
Order pronounced in the Court on 04/09/2023 at Ahmedabad.
Sd/- Sd/-
(SIDDHARTHA NAUTIYAL) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
(True Copy)
Ahmedabad; Dated 04/09/2023
Manish