Income Tax Appellate Tribunal - Ahmedabad
The Dcit(Intl. Taxn),,, Ahmedabad vs M/S. Shandong Tiejun Electric Power ... on 4 March, 2020
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'D' अहमदाबाद । IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. Nos. 80, 81 & 82/Ahd/2018 ( नधा रण वष /Assessment Years : 2011-12, 2012-13 & 2013-14) The Dy. Commissioner of बनाम/ M/s. Shandong Tiejun Income-tax (International Vs. Electric Power Taxation) Engineering Company nd 205, 2 Floor, Navjeevan Ltd.
Trust Building, B/h. Survey No. 180P, Vill. Gujarat Vidyapith, Ashram Tunda & Siracha, Mundra Road, Ahmedabad Kutch 370435
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AALCS4118F (अपीलाथ /Appellant) .. ( यथ / Respondent) अपीलाथ ओर से /Appellant by : Shri Vinod Tanwani, Sr.D.R. यथ क ओर से / Shri S. N. Soparkar, Sr. Advocate & Shri Shrunjal Respondent by :
Shah, A.R. सन ु वाई क तार ख / Date of 03/03/2020 Hearing घोषणा क तार ख /Date of 04/03/2020 Pronouncement आदे श/O R D E R PER T. S. KAPOOR - AM:
This is a group of three appeals filed by the Revenue against the separate orders of learned CIT(A)-13, Ahmedabad, all dated 31/10/2017 relating to assessment year 2011-12 to 2013-14. I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 2 -
2. Similar grounds of appeal have been taken by the Revenue and these appeals were heard together therefore for the sake of convenience, a common and consolidated order is being passed. For the sake of completeness, the grounds of appeal taken by the Revenue in ITA No.80/Ahd/2018 are reproduced below:
"1. The Ld. CI T(A) erred in law and on facts in holding that the action of the AO in rejecting the books of account of the assessee company was incorrect inspite of clear evidence brought on record that the profit computed by the asses ses was not reliable.
2. The Ld. CI T(A) erred in law and on facts in holding that the action of the AO in resorting to estimation of income on presumptive basis of 10 % U/s.44BBB(1) or alternately @10.98 % under nor mal provisions of the Act was not correct.
3. The Ld. CI T(A) erred in holding that in t he present facts and circumstances, CUP was a better method for benchmarking as against TNMM adopted by the TPO.
4. The Ld. CIT(A) erred in holding that the transaction of awarding of contract by Adani Power Li mited and Jhajjar Power Limited to Shandong HO is a proper CUP for the transaction between Shandong HO and Shandong PE without appreciating that the nature of transaction between Shandong HO and Shandong PE was functionally different and could not be compared with the transaction between APL/JPL and Shandong HO which merely related to awarding of contract.
5. The Ld. CI T(A) erred in law and on facts in holding that the comparables selected by the TPO were functionally incompar able without assigning any reason whatsoever."
3. At the outset, learned AR submitted that issues raised by Revenue in all these three appeals are squarely covered by the orders of Hon'ble ITAT confirmed by Hon'ble Gujarat High Court in the case of assessee itself and learned CIT(A) has followed AYs.2009-10 & 2010-11 only to allow relief to the assessee. The learned AR in this aspect invited our attention to year-wise chart placed on record wherein AO's page and para and CIT(A)'s page and para numbers were mentioned and in the remarks column I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 3 -
relevant ITA Nos. in the case of assessee itself were mentioned which has been followed by learned CIT(A).
4. The learned DR fairly agreed that the issues were covered in favour of the assessee.
5. We have heard the rival parties and have gone through the material placed on record.
6. We first take ITA No. 80/Ahd/2018 for AY 2011-12.
7. In this appeal, first ground is regarding the action of the learned CIT(A) by which he has allowed relief to the assessee by accepting the books of accounts which the Assessing Officer had rejected. Ground no.2 is regarding action of the learned CIT(A) whereby the learned CIT(A) has allowed relief to the assessee by holding that action of the AO resorting to estimation of income on presumptive basis @ 10% was not correct. Both these issues have been dealt by learned CIT(A) from para 3 to 13 wherein relying upon the orders of Hon'ble ITAT and that of Hon'ble Gujarat High Court in the case of assessee itself, the learned CIT(A) has allowed relief to the assessee by holding as under:
"3. I have gone through the assessment order and written submissions furnished by the AR of the Appellant which have been placed on record.
4. The AR of the Appell ant has also , during the course of appeal proceedings, fur nished copy of the order of the Hon'ble ITAT dated 18/01/2017 and copy of the or der of the Hon'ble jurisdictional Gujarat High Court dated 18/09/2017 in the appellant's own case whereby the Hon'ble Gujarat High Court has dismissed the appeal filed by the Income Tax Department against the order of Hon'ble ITAT Ahmedabad wherein the Hon'ble ITAT has confirmed the action of the then Ld CIT (Appeals), Gandhinagar of deleting the addition on account of rejection of books of accounts on identical f acts for A.Y.2009-10. I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 4 -
5. Further, the AR of the appellant has pointed out the observation of the Ld. Assessing Officer in para 3.2 of the assessment order which reads as under:
"At the outset, it is stated that the facts of the case are exactly same as in AY 2010-II and earlier years and there is no change in the fads of the cas e. Therefore, ar guments relied upon by the AO in AY 2010-11 and earlier years are equally applicable to the case of the assesse. The undersigned ther efore relies on the reasoning provided in the said orders which are being discussed hereunder. "
6. Therefore, it has been accepted by the AO that the facts of the case for this year are exactly same as in A.Y. 2010-11 and earlier years which is also an observation of the Ld AO. Accordingly, similar actions have been taken by the Ld AO as were taken by the AO in the earlier Assessment Years 2009-10 and 2010-11. It is further seen that the cont racts entered into by the Appellant with Adani Power Ltd (APL) and Jhajjar Power Ltd (JPL) for Mundra and Haryana Power Projects respectively have continued from A.Y. 2009-10 till the year under appeal before me. There is no mat erial change in the accounting methods followed by the Appel lant and income offer ed by the Appellant u/s 44BBB(2) of the Act. The AO has also not brought on record any further evidences which can at least demonstrate that the facts in the year under appeal before me are different or distinguishable then t he immediate precedi ng A.Ys. 2009-10 and 2010-11. Therefore, I am of the opinion that the issues before me in the year under appeal have already been decided by CIT (A), Gandhinagar in the immediate preceding A.Y s.2009-10 and 2010- 11, wherein, they have given detailed reas oning in accepting the books of accounts of the Appellant; accepting the income declared u/s 44BBB(2) of the Act and discarding the action of the AO in estimating i ncome after rejecting books of accounts as well as alternative addition of income by virtue of provisions of S.44BBB(1) of the Act.
7. It is also noted that t he findings of CIT (A), Gandhinagar have also been confirmed by the Hon'ble ITAT and Hon'bie Gujarat High Court in the Appellant's own case for A.Y.2009-10. Since the findings of the Hon'ble Tribunal and Hon'ble Gujarat High Court are on the identical facts in the case of the appellant itself, 1 am duty bound to follow the findings given by them and adopt the same in my appellate order for the year under appeal. Therefore, I feel appr opriate to reproduce t he findings from the said appellate orders as under:
8. The then Ld CIT(A) has, in his order for A.Y.2009-10 in Appeal No.CI T(A)GNR/207/Intl.Taxn./2011-12 dated 18/03/2013, held as under :
"6.5 I have gone through the assessment order, submissions, case law etc. careful ly. The following pertinent observations /decisions are made after thorough consideration of all facts, submissions, evidences:
I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 5 -
a) The appellant has opt ed for being assessed under section under section 44BBB(2) of the IT Act, The sub-section is reproduced herein under"
"Notwithstanding anything contained in sub-section (1), an assessee may claim lower pr ofits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other document s 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 assesses under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee." (Emphasis supplied) The section clearly provides an option t o an assess es being a foreign company engaged in the business of civil construction, erection of plant or machinery, testing and commissioning of power project to offer to lax lower profits and gains than profit deemed of 10 % of the amount receivable by the appellant under section (1) of Section 44BBB of the IT Act provided following t win conditions are fulfilled"
(1) The appellant s hall keep and maintain such books of account and other documents as required under sub- section (2) of section 44AA of the IT Act.
(2) The appellant shall get his accounts audited and furnishes a report of s uch audit as required under section 44AB of the IT Act.
b) Admittedly, as claimed by appellant no specific books of accounts are prescribed u/s 44AA of the IT Act read with relevant IT Rules for the nature of business carried on by the appellant. It has maintained books of account and got them audited also. Besides, the appellant has submitted audit report of a chartered accountant on veracity of financial statements and audit report as per Companies (Auditor's Report ), 2003 in terms of secti on 227(4'A) of the Companies Act.
c) So far as the applicability of the AS-7 is concerned, one of the objections of Ld.AO was that the same is not applicable to the Appellant Company bei ng a foreign company. I do not find it true, because as per Section 594 of the Companies Act, 1956 the company, which is incorporated outside I ndia and has establis hed place of a business in India is required to prepare its Balance Sheet and Profit & Loss Account as per the vari ous provisions of the Companies Ac!, as if it is a Indian Company with the meaning of the Companies Act. Consequently, it follows that the Accounting Standard AS-7 is applicable to it.
d) Accordingly, the Appellant has claimed to have recognized revenue and cost following the percentage completion method on the basis of proportion of cost contract costs I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 6 -
incurred for work per formed till the reporting date to the estimated total contract costs. It is further an admitted fact that the books of accounts of the Appellant are audited under the Companies Act and in the notes to the financial statement, t he method recognized to account for revenue and expenditure has been given in Schedule-11 of significant Accounting Policies and Notes to the Accounts. Accounting Policy (e) with regard to revenue recognition is reproduced hereinunder:
Note (e) "Shandong Tiejun Electric Power Eng. Co. Ltd is following the "percentage of completion Method" of accounting for the project as per Accounting Standard 7(Revised) Construction Contracts. Accordingly. Project Revenue is recognized as under:
The company has fixed price construction contract with Adani Power Li mited and Jhajar Power Limited The company started recognizing revenue in the f inancial year 2007-2008 as the outcome of the contract can be estimated reliably. Contract Revenue and expenses are recognized as revenue and expens es are recognized and expenses upt o the stage of completion as on 31.03.2009 The management has estimated cost for the entire contract and worked out percentage of completion for each year on the basis of cost incurred as per audited accounts. Accordingly, revenue is recogni zed on the basis of audited corresponding percentage to cost estimates given by the management for the entire project period till date ie. 31.03.2009 as per audited accounts. Determination of Revenues under the percentage of completi on method and provision for loss necessarily involves maki ng estimates of costs to be incurred by the Management, which is being of technical nature have been relied upon by the Auditors.
The difference between billed revenue and working below is accounted as Unbill ed contract Revenue due.
e) The AO during the course of assessment proceedings asked the appellant to furnish basis of estimating budgeted cost. In this connection, the Appellant vide letters dated 21/12/2011 and 29/12/2011 submitted to the AO that the management has estimated total cost of the project having regard to the experience in executing the contracts, tenders and quotations from various vendors and sub contractors. The Appellant further submitted detailed break-up of the estimated profit & loss account for entire project for five financial years 2007-08 to 2011-
12. The Appellant further submitted to the AO that while obtaining order u/s 197 of the Act, the Appellant has been submitting the details of budgeted cost to the tax the office, which have already been accepted by the department. The Appellant also placed on record the audited financial statements for F.Ys 2009-10 and 2010 11 and submitted and cl aimed that from the perusal of such I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 7 -
financial statements, it is established that the Appellant has actually incurred the cost as estimated.
f) One of the objections of the AO is that the Appellant ought to have followed anot her method of stage of completion of the project i.e. (c) Completion of a physical proportion of the contract work. The AO has further obs erved that as per Annexure 3 of the contract entered into by the Appellant with Adani Power Ltd, the payment to the Appellant shall be released on the basis of milestones prescribed in Annexur e 3, and till the repor ting date, the Appellant has raised invoices of Rs.l30,86,91,429 which shows that physical work of the contract is completed to that extent only. Ther efore, AO was of the view that the Appellant ought to have followed method (c) completion of a physical proportion of the contract work as prescribed in para 29 of AS 7, and accordingly, the difference between the actual expenditure incurred ie. Rs.211,41,21,308 and the invoices raised ie. Rs 130,86,91,429/to Adani Power Ltd, for physical work performed, ought to have been reflected in accounts as work in progress, the invoices for which should be raised in the next accounting year. The AO failed t o realize that this would have resulted in much lesser revenue being recognized in the year under appeal and most probably net loss being reported.
Now, to sum up, books of account have been maintained and produced, the accounts have been subj ected to audit as required, and the appellant has finalised the annual accounts, on the basi s of percentage completion method based on total estimated cost. As far as the estimated cost of project concerned, I agree with the appellant that the assesse having experi ence in the field of work and who is taking the contract is normally the best judge. The only foul play suspected in estimation can be to initially show very high estimated cost of completion so t hat it may lead to deferment of tax. In the present case, I find that the figures of 3 years were made available to the AO at the assessment stage itself. There is no big difference in estimated cost and pr ofit percentage declared from year to year. There is no reason therefore to suspect that the figures of estimated cost were deliberately tinkered with. In fact the project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO' s remark that stage of completion is a better method is not universally applicable. That is why different methods including the percentage of total estimated cost applied by the appellant have been suggested in the accounting s tandards. The milestone method or t he stage of completion method can be very inappr opriate where the contractor and contractee agree for ter ms of payment much different from the actual stage of work (cost of work completed) In some cases the contractee who becomes very dependent on the contractor I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 8 -
for completion of wor k once the work is given and started would like to retain substantial portion of payment till completion as a guarantee for the contractor being forced to complete the work. In other cases, the contractor may have capital deficiency/require heavy machinery to be purchased etc. and may bargain for upfront heavy payments at initial stages. In both these cases, recognizing revenue on completion of certain stages according to payment terms or raising of bills cannot be the best method. I do not find any wrong in the method adopted by the appellant. As observed earlier, there is no big difference estimated cost and profit percentage declared from year to year. The expens es have been audited and no substantive defect has been discovered/pointed out. The rejection of books of accounts u/s 145 (3) is not held justified these circumstances. I have noted that the jurisdictional Gujarat High court decision in the case of CIT vs . Advanced Construction Co. (P) Ltd reported in 275 ITR 30, wherein it has been held that the provision, therefore specifically provides that the choice of method of accounting lies with the assessee, the only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the Depart ment is bound to accept the assessee's choice of method and regularly employed, except for the situation, wherein the Assessing officer is permitted to intervene, in case i t is found that true income, profits and gains cannot be arrived at by the method employed by the assessee. In the pr esent case, the tribunal has categorically found that "the assessee has followed the standard accounting method as this being the first year of the busi ness it was the s ole choice of the assessee to adopt a particular method of accounting contemplated under section 145 of the Act"
9. The then Ld CIT(A), Gandhinagar has , in his order for A.Y.2010- 11 in Appeal No. CIT(A)GNR/46/Intl Taxn/2013-14 dated 28/08/2014 has followed the order of his predecessor and reproduced the above-mentioned finding in his order. To avoid duplication, the finding in the order of Ld CIT(A) for A.Y.2010- 11 is not reproduced here.
10. During the course of the appellate proceedings, the Appellant further submitted that the order of C1T(A) for Lead matter i .e. A.Y.2009-10 has been confirmed by the ITAT in ITA No.1707/Ahd/2013 dat ed 18/01/2017. The Hon'ble ITAT has held as under :-
"In view of foregoing, we, therefore, uphol d the findings of Id. CIT(A) that the asses ses fulfilled all conditions prescribed u/s 44BBB(2) of the I T Act and also has followed one of the recognized methods prescribed for determination of stage of completion of contr act as prescribed in para 29 of the Accounting Standard- 7 "Construction Contr acts " as recognized by the ICAI and the Central Government. Assessee has followed I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 9 -
correct method of accounting in terms of Section 44BBB(2) read with Section 145(1) & (2) of the IT Act. Consequently we hold that the Id. AO's action of rejecting books of accounts in terms of Section 145(3) of the IT Act and as sessing income u/s 44BBB(1) of the IT Act. on presumptive basi s is not justified, the order of Id. C1T(A) is upheld. Our view is fortified by Delhi 1TATjudgment in the case of Royal Jordanian airlines (supra) which after dwelling over all relevant aspects of charging and mechanical provisions , statutory mandate, and jurisprudence of regular assessment vi s-a-vis presumptive as sessment and catena of judicial precedents as detailed in this order. "
11. The Appellant has furt her contended before me that the aforesaid order of the Tribunal was challenged by the Department before the Hon'ble Gujarat High Court by filing appeal in Tax Appeal No.623 of 2017; however, the same has been dismissed by the Hon'ble Gujarat High Court on 18/09/2017. The Hon'ble Gujarat High Court has held as under :
"6. Under sub-section (I) of section 44BBB of the Act therefore in case of assessee being a for eign 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 pai d 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 subsection (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 mai ntained 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 Commissi oner and the Tribunal also held that the Assessing Officer was wrong in hol ding that the accounting standar d AS- 7 did not apply to t he assessee.
7. Such being the facts, we see no reason So i nterfere since no question of law arises. Learned counsel for the Revenue, however, st renuously 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. I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 10 -
However , the Assess ing Officer, as recorded by the Tribunal has not f ound any major defects in such accounts. The Commis sioner (Appeals) in fact elaborated that the assesses 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, "
12. Therefore, respectfull y following the order s of Hon'ble Gujarat High Court in the case of the Appellant itself for A.Y.2009-10, as well the order of Hon'ble ITAT, it is held that the action of Ld AO in rejecting books of accounts of the Appellant and estimating income at Rs.103,02,46,617/ is not sustainable. I further hold that the Appellant has rightly and legitimately offered income u/s 44BBB(2) of the Act. I further reject the action of Ld AO in making alternative addi tion u/s 44BBB(1) of the Act.
13. In view of above, the addition made by the AO by rejecting the books of accounts and estimating the income u/s 44BBB(1) of the Act as well as on the basis of comparable companies are hereby deleted. Accordingly, Grounds Nos. 1 to 5 as raised by the Appellant in the Grounds of Appeal are allowed."
In view of the above, following the above judicial precedents in the case of assessee itself, Ground nos. 1 & 2 of the Revenue are dismissed.
8. Ground nos. 3, 4 & 5 are interconnected and are consequent to ground no.2. The learned CIT(A) has dealt this issue from para 19 to 27 wherein he has dealt with the issues raised by A.O. and has decided in favour of assessee by relying on the decisions of Hon'ble Tribunal and Hon'ble Gujarat High Court in the case of assessee itself.
9. We find that Hon'ble Tribunal in the case of assessee itself in AY 2010-11 has dismissed the appeal of the Revenue wherein the Revenue has taken similar grounds of appeal reproduced as follows:
"i) The Ld. CI T(A) erred in law and on facts in holding that the action of the AO in rejecting the books of account of the assessee I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 11 -
company was incorrect inspire of clear evidence brought on recor d that the profit computed by the assessee was not reliable.
ii) The Ld. CI T(A) erred in law and on facts in holding that the action of the AO in r esorting to estimation of income on presumptive basis at 10 % u/s 44BBB(1) or alternatel y @ 11.79 % under normal provisions of the Act was not correct.
iii) The Ld. CI T(A) erred in holding that in t he present facts and circumstances, CUP was a better method for benchmarking as against TNMM adopted by the TPO.
iv) The Ld. CIT(A) erred in holding that the transaction of awarding of contract by Adani Power Limited and Jhajjar Power Limit ed to Shandong HO is a pr oper CUP for the transaction between Shandong HO and Shandong PE without appreciating that the nature of transaction between Shandong HO and Shandong PE was functionally different and could not be compared wit h the transaction between APL/JPL and Shandong HO which merel y related to awardi ng of contract.
v) The Ld. CI T(A) erred in law and on facts in holding that the comparables selected by the TPO were functionally incomparable without assigning any reason whatsoever.
vi) Therefore the order of the Ld. CIT(A) deserves to be deleted and that the order of Asses sing Officer be restored."
10. Such grounds of appeal have been disposed of by the Hon'ble Tribunal from para 15 onwards and Hon'ble Tribunal has held in favour of the assessee by holding as under:
"15. We have hear d the r ival contentions and perused the record placed before us . So f ar as the issue that whether the transfer pr icing provisions are applicable on the trans actions between the Shandong HO and Shandong Pr oject Office in India, we find no infirm ity in the findings of the learned CIT(A) that the transactions between both the entities are deem ed international transactions and the transfer pricing provisions are applicable between the foreign com pany i.e. HO and its PE, by observing as f ollows:-
"7.5.2 I am unable to agree with the contentions of the appellant that the transactions between head office of the appellant company and its PE in India need not be considered as international transaction. I find that the project office of the appellant company and its head office are Associated Enterprises ('AEs' ) as per the pr ovisions of the section 92A(1)(a) for the simple reason that the PO is a separate taxable entity and the same is managed by HO, controlled by HO and even the capital contribution also comes from HO. Moreover Article 9 of the India-China DTAA als o stipulates that the HO and the PO of the I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 12 -
appellant company ar e 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 Ar ticle 7 on Model tax convention published by OECD in 2010 als o states that permanent establishment is to be treated as a functionally separate entity. Accordingly, the profits to the PE shall have to be attributed at Arm's Length Price. In the facts of t he present case since the AE (HO) entered into an agreement with APL and JPL to execute the contract of power project for 2 APL and JPL. The appel lant 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 and JPL, the transaction between appellant and APL and JPL is a deemed international transaction u/s. 92B(2). Accordingly, it is held that the TPO is justified in holding the transactions between the appellant and its head office as inter national transaction.
Further It is important to note here that Section 92F (iii) defines enterprise as a pers on including a permanent establishment of such person. A per manent 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 t he Transfer Pricing provisions are not applicable to it is incorrect as project offi ce. This finding also gets support from the vital fact that the appellant company has itself filed report under form 3 CEB wherein transactions between itself i.e. the PO and its Head office in China is reported.
Accordingly, I hold that the transfer pricing provisions are applicable where transactions have taken place bet ween the foreign company i.e. HO and its PE in Indi a i.e. PO."
16. Further com ing to the issue of application of m ethod for calculating the Arm 's Length Price, we find that the Assessing Officer applied the TNMM m ethod; whereas, the learned CIT(A) has held that the CUP m ethod is most appropriate m ethod. Lear ned CIT(A), while deciding that t he CUP m ethod is the most appropriate m ethod, as pleaded by the assessee, observed following findings:-
"8. As mentioned above, the appellant company has alternatively submitted that the AO ought to have selected CUP as Most Appropriate Method over TNMM i n view of availability of CUP of APL & 3PL transaction with HO of the appellant I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 13 -
company more so when the transactions are functionally comparable. I have also perused judicial pronouncements cited by the appellant company to contend that where CUP is available, CUP method should be followed in preference to other methods for deter mi nation of the ALP. I find force in the contention of the appellant company that CUP is the most appropriate method for determining ALP in the given set of facts in view of availability of CUP of APL & JPL with HO. Further, I hold that transaction of APL & JPL with HO of the appellant can be treated as CUP being functionally comparable uncontrolled transactions in terms of Rule 10B(2) & (3) of the IT Rules and more particularly in view of the fact that entire income from the transaction is offered for tax in India.
Accordingly, I hold t hat on this count also the transfer pricing addition is unsustainable and is hereby delet ed."
17. Learned CIT( A) f urther observed that the transfer pricing addition was incorrectly m ade by selecting functionally incom parable transactions by obser ving as follows:-
"10. I have perus ed the above submission of the appellant company. The appellant has pointed out var ious shortcomings in
-application of filter while selecting comparable companies and also emphasized that the compar able transactions selected by the AO for benchmarking the deemed international transactions for determining ALP are not compar able uncontrolled transactions in terms of Rule 10B & Rule 10C of the IT Rules r.w Section 92C of the IT Act. Also I have perused the s ubmi ssion filed vide page no 60 to 80 of the Paper Book more particularly detailed information of the said comparables provided vide page nos 81 to 146 of the Paper Book. Further , I have per used the information about 10 comparable companies provided vide above referred submission dated 1st August, 2014. I have found that the comparables selected by the AO are not comparable in view of functional compatibility of the said transactions, absence of segment information f or individual line of business in case of those comparables which are engaged in various line of business and generalized filter applied for selection of comparables .
Accordingly, I hold that the transfer pricing addition is incorrectly made by selecting functionally incompar able transactions and is therefore deleted."
18. We further find that the transactions of awarding contract by APL and JPL-Indian parties to Shandong HO- a Chinese entity, ought to have been taken as com parable uncontrolled transactions to benchm ark the transactions of Shandong PO. For the sake of clarity, we reproduce Rule 10C of the Incom e-tax Rules, wherei n with r espect to section 92C of the Act relating to the m ost appropriate m ethod of calculating the Arm 's Length Price, which r eads as under:-
"10C. (1) For the pur poses of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 14 -
transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction, as the case may be.
(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely;--
(a) the nature and class of the international transaction;
(b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;
c) the availability, cover age and reliability of data necessary for application of the method;
(d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;
(e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparabl e uncontrolled transaction or between the enterprises entering into such transactions;
(f ) the nature, extent and reliability of assumptions required to be made in application of a method."
19. In view of the above provisions and exam ining the facts of the instant appeal, we fi nd that there is no difference in the ter m s of functions perform ed, assets em ployed and risk undertaken, the price charged, incom parable uncontrolled transactions entered in the contracts between t he parties APL & JPL to Shandong HO vis-a-vis the contract awarded to Shandong PO by t he Shandong HO. Further, it is also not disputed at the end of the Revenue that the pri ce at which the contracts were awarded by APL and JPL- Indian parties - to Shandong HO - Chinese entity - is a s am e price at which transactions price between Shandong PO, i.e. appellant in India and Shandong HO, a Chinese entity, as agreed upon. W hen the total value of the contract awar ded to the Chi nese HO has been offered as gross revenue by the Shandong PO, i.e. foreign entity incorporated in I ndia, then how can there be any shifting of profits. This view further gets fortified in view of the fact that the action of the Assessing Officer in rejecting the books of accounts has already held to be invalid, which therefore, shows that the profits have been rightly shown by the assessee. For the pur pose of com puting Arm's Length Price, the basic thing which is to be exam ined that whether the assessee has s hifted the profits to its Associate Enterprises either directly charging less revenue or showing excess cost to reduce the profits, but in the instant case where t he total contract ter m s are sim ilar between the Shandong HO and PO as well as bet ween the Shandong HO and two Indian parties which i s the fit com parable uncontrollable transact ions and there being no variation in the rates charged as well as the other term s of the agr eem ent, then there rem ains no r oom for the Revenue Authorities to m ake any upwar d adjustm ent to m ake addition in the hands of the asses see. We, therefore, in the given facts and circum stances of the case are of the considered opinion that for the I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 15 -
purpose of calcul ating Arm 's Length Price, Com parable Uncontrollable Price (CUP) m ethod should have been followed by the Assessing Officer to determine the ALP and we further hold that if the CUP m ethod is applied, then no transfer pricing adjustm ent needs to be m ade in the given facts and circumstances of the case. We, therefore, find no inf irm ity in the findings of the learned CIT(a) and we uphold t he sam e. In the result, this issue is also decided against the revenue and in favour of the assessee."
11. The order of the Hon'ble Tribunal has been confirmed by Hon'ble Gujarat High Court vide order dated 18.10.2019. The Hon'ble Court had framed the following questions of law:
"(a) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that CUP was a better method for benchmarking as against TNMM adopted by the TPO?
(b) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that the transaction of awar ding of contract by Adani Power Li mited and Jhajjar Power Limi ted to Shandong HO i s a proper CUP for the transactions between Shandong HO and Shandong PE wi thout appreciating that the nature of transaction between Shandong HO and Shandong PE was functionally dif ferent and could not be compared between APJ/JPL and Shandong HO which merely r elated to awarding of a contract?
(c) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that the comparable selected by the TPO were functionally incomparable without assigning any reason whatsoever?"
The questions of law have been answered in favour of the assessee by Hon'ble High Court from para 14 to 18 which for the sake of completeness is reproduced below:
"14. Rule 10C of t he rules bears the heading "most appropriate method". Sub-rule (1) thereof provides that for the purpos es of sub-section (1) of sect ion 92C of the Act, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transact ion or specified domestic transaction and which provides the most rel iable measure of an arm's length price in relation to the international transaction or the specified domestic transaction as the case may be. Sub-rule (2) provides for the I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 16 -
factors which are required to be taken into account in selecting the most appropriate method as specified i n sub-rule (1).
15. The controversy invol ved in the present case is required to be examined in the light of the above statutory provisions. With the CUP method, the price and conditions of the controlled transaction between associated enterprises with the price and conditions of the comparable uncontrolled transaction between independent enterprises have to be compared. If the t wo prices are the same, the conditions of the controlled transaction are at arm's length and if the two prices are different, then the conditions of the organization's commerci al or financial relations wi th the associated enterprise may not be at arm's length. One would then need to substitute the price in the controlled transaction with that of a comparable uncontrolled transacti on to ascertain what the conditions need to look li ke to be at ar m's lengt h.
16. The Tribunal , in the impugned order has found that the transaction of awardi ng contract by APL and JPL, Indian parties, to Shandong HO, a Chinese entity, ought to have been taken as comparable uncontrol led transactions to benchmark the transacti on of Shandong PO. The Tri bunal has placed reliance upon the provisions of rule 10C of the rules and in view thereof, found that there is no difference in the terms of functions performed, assets employed, risks undertaken, the price charged, in compar abl e uncontrolled transactions entered in the contracts between the parties - APL and JPL to Shandong Head Office vis-à-vis the contract awarded to Shandong Project Office by Shandong Head Office. The Tribunal has further noted that it is not disputed at the end of t he Revenue that the pr ice at which the contracts were awarded by APL and JPL, Indian parties, to Shandong HO, Chinese entity, is the same price at which transactions between Shandong PO, that is, the appellant in India and Shandong HO, t he Chinese entity, had been agreed upon. The Tribunal was of the vi ew that the total value of the contract awarded to the Chinese HO had been offered as gross revenue by Shandong PO, that is, the foreign entity incorporated in India and, therefore, there was no question of any shifting of profits. The Tribunal has further noted that for the purpose of computing t he arm's length price, the basic thing which is t o be examined is whet her the assessee has s hifted the profits to its associate enterprises either directly or indir ectly charging less revenue or showing excess cost to reduce the profits, but in the instant case, where the total contract terms are si milar between Shandong HO and PO as well as between Shandong HO and the two Indian parties, which is the fit comparable uncontrolled transact ion and there being no variation in the rates charged as well as ot her terms of the agreement, then there remains no room for the revenue to make any upward adjustment to make addition in the hands of the assessee. The Tribunal, in the above facts and circumstances, was of the considered opinion that for the purpose of calculating arm's length price, CUP method should have been followed by the Assessing Officer to determine the arm's length price and further held that if the CUP method i s applied, then no tr ansfer pricing adjustment needs to be made in the given fact s and circumstances of the case. The Tribunal, accordingly, found no I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 17 -
infirmity in the findings recorded by the Commissioner (Appeals) and decided the questi on against the revenue.
17. In the opinion of this court, the question as to which is the most appropriate method for determining the arm's length price and as to whether the transaction between APL and JPL and Shandong Head Office is a comparabl e uncontrolled transaction is basically a question of fact. Fr om the concurrent findings of fact recorded by the Tri bunal and the Commissioner (Appeals ) based on t he material on record, it is apparent that the terms of functions performed, assets empl oyed, risk undertaken, the price charged in comparable uncontrolled transactions entered into by virtue of the contract between APL and JPL and Shandong HO vis-à-vis the contract awarded to Shandong PO by Shandong HO, ar e identical. It is based upon such concurrent findings of fact recorded by it after appreciating the material on record that the Tribunal has arrived at the conclusion that the arm's length price of the transaction in question is required to be computed by adopting the CUP method. Therefore, unless there is any perversity in the findings of fact recorded by the Tribunal upon appreciat ion of the evidence on recor d, no question of law can be s aid to arise from the impugned order. The learned senior standing counsel for the appellant is not in a position to point out any perversity in the concurrent findings of fact recorded by the Tribunal after appreciating the evidence on record. It is not the case of the revenue that any irrelevant material has been taken into consideration by the Tribunal or that any relevant material has been ignored, nor has any material to the contrary been pointed out to the court to dislodge the findings of fact recorded by the Tribunal. Moreover, a perus al of the proposed questions shows that the impugned order has not been challenged on the ground of perversity.
18. In the light of the above discussi on, the conclusion ar rived at by the Tribunal being based upon findings of fact recorded after appreciating the mat erial on record, i n the absence of any perversity being pointed out in the findings of fact recorded by the Tribunal, no question of law, much les s, a substantial question of law, can be stated to arise out of the i mpugned order, so as to warrant interference. The appeal, therefore, fails and is, accordingly, dismissed."
12. In view of the judicial precedents in the case of assessee itself, ground nos. 3, 4 & 5 are dismissed.
13. In view of above, ITA No.80/Ahd/2018 for AY 2011-12 is dismissed.
I T A N o s . 8 0 , 8 1 & 8 2 / Ah d / 1 8 [ D C I T v s . M / s . S h a n d o n g T i e j u n E l e c t r i c P o w e r E n g i n e e r i n g C o . Lt d . ] A. Y . 2 0 1 1 - 1 2 t o 2 0 1 3 - 1 4 - 18 -
14. The facts and circumstances of the case in ITA Nos. 81 & 82/Ahd/2018 being similar to ITA No.80/Ahd/2018 and in the absence of any changed circumstances, the same shall apply mutatis mutandis. Hence, the grounds of appeal in both appeals are also dismissed.
15. In the result, all three appeals of the Revenue are dismissed.
This Order pronounced in Open Court on 04/03/2020
Sd/- Sd/-
(RAJPAL YADAV) (T. S. KAPOOR)
VICE PRESIDENT ACCOUNTANT MEMBER
Ahmedabad: Dated 04/03/2020
True Copy
S. K. SINHA
आदे श क त!ल"प अ#े"षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं*धत आयकर आयु,त / Concerned CIT
4. आयकर आय,
ु त- अपील / CIT (A)
5. 0वभागीय 3त3न*ध, आयकर अपील य अ*धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड9 फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील य अ*धकरण, अहमदाबाद ।