Income Tax Appellate Tribunal - Ahmedabad
The Adit(Intl. Taxn) - Ii,, Ahmedabad vs Shandong Tijun Electric Power Engg. ... on 13 April, 2018
आयकर अपीलीय अिधकरण,
अिधकरण अहमदाबाद यायपीठ 'डी
डी'
डी अहमदाबाद।
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, AHMEDABAD
BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMBER
AND SHRI MANISH BORAD, ACCOUNTANT MEMBER
आयकर अपील सं./ ITA No. 2926/Ahd/2014 & CO No. 04/Ahd/2015
नधारण वष/Assessment Year: 2010-11
Asst. Director of Income-tax Vs. Shandong Tijun Electronic
(International Taxation)-II, Power Eng. Company Ltd.,
Ahmedabad Survey No.180P, Village Tunda
& Siracha, Mundra, Kutch-370435
PAN : AALCS 4118 F
[
अपीलाथ / (Appellant) यथ / (Respondent) &
Cross-Objector
Revenue by : Vasundhara Upmanya, CIT-DR
Assessee by : SN Soparkar & Mrunal N Shah, AR
सु न वाई क ता र ख / Date
of Hearing : 03/04/2018
घोषणा क तार ख / Date of Pronouncement: 13/04/2018
आदे श/O R D E R
PER MANISH BORAD, ACCOUNTANT MEMBER:
This appeal by the Revenue and Cross-objection thereof by the assessee are directed against the order of the Commissioner of Income Tax (Appeals), Gandhinagar dated 28.08.2014 for Assessment Year 2010-11. The Assessment u/s 144C r.w.s. 143(3) of the Income-tax Act, 1961 (hereafter referred to as "the Act") for Assessment Year 2010-11 was framed on 20.05.2013 by DDIT, International Taxation-I, Ahmedabad.
2. Briefly stated facts, as culled out from the records, are that the assessee is incorporated as per the laws of People's Republic of China and is engaged in the business of erection, testing and commission etc. of power plants. For the year under consideration, the assessee has filed return of income on 15.10.2010 declaring total income at Rs.300,978,326/- after complying with provisions of section 44BBB(2) of the Act. The case was selected for the purpose of scrutiny ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -2- assessment and accordingly notice u/s 143(2) of the Act was issued on 24.08.2011 and served upon the assessee on 29.09.2011. Notice u/s 142(1) of the Act was issued on 22.10.2012 calling for various information and documents. The assessee during the course of assessment proceedings appeared from time to time and furnished all the information and documents as required by the Assessing Officer. The learned Assessing Officer did not appreciate the various facts and law submitted by the assessee during the course of assessment proceedings and passed the order u/s 144C r.w.s. 143(3) of the Act, determining total income at Rs.69,73,91,330/- in the hands of the assessee.
3. Aggrieved, the assessee preferred appeal before the learned CIT(A) and partly succeeded. Now, the Revenue is in appeal before the Tribunal raising following grounds:-
"i) The Ld. CIT(A) erred in law and on facts in holding that the action of the AO in rejecting the books of account of the assessee company was incorrect inspire of clear evidence brought on record that the profit computed by the assessee was not reliable.
ii) The Ld. CIT(A) erred in law and on facts in holding that the action of the AO in resorting to estimation of income on presumptive basis at 10% u/s 44BBB(1) or alternately @ 11.79% under normal provisions of the Act was not correct.
iii) The Ld. CIT(A) erred in holding that in the 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 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.
v) The Ld. CIT(A) erred in law and on facts in holding that the comparables selected by the TPO were functionally incomparable without assigning any reason whatsoever.ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015
Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -3-
vi) Therefore the order of the Ld. CIT(A) deserves to be deleted and that the order of Assessing Officer be restored."
4. Assessee has also raised Cross-objections which read as under:-
"1. The ld. CIT(A) has grossly erred in law and on the facts of the case in confirming the action of Ld.AO in invoking and applying transfer pricing provisions contained in Chapter - X - Special Provisions relating to avoidance of tax in the present case.
2. The ld. CIT(A) has grossly erred in law and on the fact of the case in confirming the action of ld. AO in treating the Appellant foreign company and its Project Office in India as separate and distinct entities for the purpose of Transfer Pricing provisions as provided in Chapter X of the scheme of the Income Tax Act, 1961.
3. Both the learned authorities have failed to appreciate that when the Appellant (being a foreign company) is taxable in respect of entire income arising or accruing out of the projects carried out in India, there is no question of shifting of profit outside India, and therefore, Transfer Pricing provisions could not have been invoked and applied in the present case.
4. Both the learned authorities have failed to appreciate that when for the charging sections 4 and 9 of the Act the Appellant foreign company and its Project Office are not treated as separate and distinct entities, for the machinery provisions of Transfer Pricing, the same cannot be treated as separate and distinct entities so as to apply transfer pricing provisions.
5. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of ld. AO in holding that the Appellant foreign company and its Project Office are associated enterprises within the meaning of S.92A read with S.92F(iii) of the Act.
6. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of Ld. AO in holding that the Appellant foreign company and its Project Office are associated enterprises in terms of Article 9 of the Double Taxation Avoidance Agreement entered into by the India with the China.
7. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the presumption of Ld. AO that the Appellant foreign company had delegated responsibility of execution of the project to the Project Office, and therefore, such delegation of responsibility was deemed international transaction by virtue of S.92B(2) of the Act.
8. Both the learned authorities have failed to appreciate that in the absence of any international transaction and / or deemed international transaction as per ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -4- S.92B of the Act, provisions of S.92 of the Act alongwith other Transfer Pricing provisions could not have been applied to make TP adjustments.
9. Alternatively and without prejudice to above, no income is arising out of such alleged international / deemed international transaction, and therefore, provisions of S.92 of the Act could not have been applied in the present case so as to make TP adjustments.
10. Both the learned authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed."
5. On perusal of the grounds raised by both the parties, we find that following three issues need our adjudication;
i) Whether the learned Assessing Officer was justified in rejecting the books of accounts u/s 145 of the Act and estimating total income at Rs.69,73,91,330/- applying average profit margin at 11.97% by way of applying the provisions of Section 44BBB(1) of the Act;
ii) Whether the learned Assessing Officer was justified in applying the provisions of Transfer Pricing and alternatively making an up-ward adjustment towards Arm's Length Price at Rs.40,01,41,157/- by applying the Transactional Net Margin Method (TNMM);
iii) Whether the learned Assessing Officer was justified in not referring the matter to the Transfer Pricing Officer before finalizing the assessment under Section 144C r.w.s. 143(3) of the Act.
6. Apropos to first issue relating to the rejection of books of accounts and estimation of profits under Section 44BBB(1) of the Act, learned Counsel for the assessee, at the outset, submitted that this issue is squarely covered in favour of the assessee by the decision of the Co-ordinate Bench of this Tribunal in ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -5- assessee's own case for Assessment Year 2009-10 vide ITA No.1707/Ahd/2013 dated 18.01.2017 and further the Hon'ble jurisdictional High Court dismissed the Revenue's appeal as Hon'ble High Court held that no question of law arises in the appeal of the Revenue.
7. Learned Departmental Representative failed to controvert this submission made by the assessee.
8. We have heard the rival contentions and perused the record placed before us. The issue before us is whether the learned Assessing Officer was justified in rejecting the books of accounts and estimating the profits under Section 44BBB(1) of the Act. We observe that the assessee-company entered into agreement with Adani Power Ltd (APL) and Jhajjar Power Ltd (JPL) for Mundra and Haryana power projects. These contracts were entered into in the preceding financial year. Assessee has kept and maintained books of accounts duly audited under Section 44AB of the Act. Assessee followed and complied with the Accounting Standard AS-7 issued by the ICAI and recognized the revenue as per the Percentage Completion Method on the basis of proportion of actual cost incurred to the total estimated cost of the contract. Learned Assessing Officer was not satisfied with the accounting method adopted by the assessee for recognizing the revenue and was of the view that it should have been recognized on the basis of physical work completed at the end of the year. Books of accounts were accordingly rejected and profits were estimated under Section 44BBB(1) of the Act. We further observe that the very same issue came up before the Co-ordinate Bench in assessee's own case for Assessment Year 2009-10 and the issue was decided in favour of the assessee holding that learned Assessing Officer erred in rejecting the books of accounts and estimating the profits under Section 44BBB(1) of the Act by observing as follows:-
ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -6- "6. We have heard the rival contentions and perused the material available on record. We proceed to decide the issues as under:
i. Section 44BBB(2) which neither discounts a regular assessment nor denies the right of assessee to be assessed by way of regular provisions from sec 28 to 43A read as under:-
"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"
A plain provides an option to an assessee being a foreign company engaged in the business of civil construction shall be assessed under regular provisions of the Act on fulfillment of following conditions:
(1) The appellant shall 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 such audit as required under section 44AB of the IT Act.
It is not disputed that assessee has maintained proper books of account and got them audited and return was filed accordingly. The financial statements and audit report comply with rules Companies (Auditor's Report), 2003 in terms of Section 227(4A) of the Companies Act. Besides no other specific books of accounts are prescribed u/s 44AA. Thus assessee's books, audit, financial statements, balance Sheet, P&L A/c etc. are fully compliant to relevant provisions of Income Tax and companies Acts. ii. Ld. AO held that AS7 is not applicable to the assessee company ignoring the vital legal propositions of section 594 of the Companies Act, 1956 laying down a statutory mandate that a company, which is incorporated outside India and has established place of a business in India, is required to prepare its Balance Sheet and Profit & Loss account as per the various provisions of the Companies Act, as if it is a Indian Company with the meaning of the Companies Act. Consequently, ld. CIT(A) rightly held that the Accounting Standard AS-7 is applicable to it. We find no infirmity in this aspect of his order. Following AS 7, assessee has recognized revenue and cost following the percentage completion method on the basis of proportion of contract costs incurred for work performed till the reporting date to the estimated total contract costs. Undisputedly in the notes to the financial statement, the method recognized to account for revenue and expenditure has been specified ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -7- by assessee in Schedule - 11 of Significant Accounting Policies and Notes to the Accounts as under:
Note(s) "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 Limited and Jhajjar Power Limited. The company started recognizing revenue in the financial year 2007-2008 as the outcome of the contract can be estimated reliably. Contract Revenue and expenses are recognized as revenue and expenses are recognized as revenue and expenses up to 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 recognized on the basis of corresponding percentage to cost estimates given by the management for the entire project period till date i.e. 31.03.2009 as per audited accounts. Determination of Revenues under the percentage of completion method and provision for loss necessarily involves making 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 Unbilled Contract Revenue due". iii. Assessee much prior, while obtaining order u/s 197 of the Act, the submitted the details of budgeted cost to the tax office, which also stand accepted by the department. During the course assessment assessee furnished detailed break-up of the estimated profit & loss account for entire project for five financial years 2007-08 to 2011-12, audited financial statements for F.Ys.2009-10 and 2010-11 demonstrating that it has actually incurred the cost nearly as estimated.
iv. Ld. AO then took another line of action by objecting that assessee ought to have followed another method of 'stage of completion of the project' i.e. (c) completion of a physical proportion of the contract work. The payments of contracts should be released on the basis of milestones prescribed in Annexure - 3. Till the reporting date, the Appellant has raised invoices of Rs. 130,86, 91 ,429/-, which indicated physical work of the contract was completed to that extent only, therefore, method (c) i.e. completion a physical proportion of the contract work as prescribed in para 29 of AS-7 was applicable. Ld. AO has failed to appreciate that method followed by assessee was correct and could not be disturbed on his perception. Besides it has not be controverted that AOs proposition would have lead to lesser revenue being recognized during the impugned year. Thus even the reason of loss of revenue is not ascribable to assessee's method of accounting. In view of ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -8- these facts and circumstances we see no inconsistency in the order of ld. CIT(A) which is justified and within the parameters of law. v. No worthwhile defect has been pointed out by ld. AO qua the books of accounts, audit and P & L A/c. It has been demonstrated that estimated cost and profit percentage declared from year to year nearly match, consequently we see no reason to suspect that the figures of estimated cost were distorted. The project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO's remark that stage of completion is a better method is not substantiated either on merits or justifiable tax revenue gain. The milestone method may be very inappropriate if the contractor and the contractee agree for terms of payment much different from the actual stage of work. It becomes contingent on many uncertainties if the mile stone covenants are not adhered to by contractor. The contractor may have exigencies like capital deficiency, requirement of heavy machinery, bargain for upfront heavy payments at initial stages. Viewing all these factors recognizing revenue on completion of stages according to payment terms/raising of bills cannot be the best and only method. Thus we see no wrong in the method adopted by the appellant as observed by ld. CIT(A) also.
vi. The rejection of books of accounts u/s 145(3) by ld. AO was rightly held by ld. CIT(A) to be not justified in given facts and circumstances. Hon'ble Gujarat High Court decision in the case of CIT vs. Advanced Construction Co. (P) Ltd reported in 275 ITR 30, has 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 Department 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 it is found that true income, profits and gains cannot be arrived at by the method employed by the assessee. In the present case, the Tribunal has categorically found that "the assessee has followed the standard accounting method as this being the first year of the business it was the sole choice of the assessee to adopt a particular method of accounting contemplated under sect/on 145 of the Act".
In view of foregoing, we, therefore, uphold the findings of ld. CIT(A) that the assessee fulfilled all conditions prescribed u/s 44BBB(2) of the IT Act and also has followed one of the recognized methods prescribed for determination of stage of completion of contract as prescribed in para 29 of the Accounting Standard-7 "Construction Contracts" as recognized by the ICAI and the Central Government. Assessee has followed 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 ld. AO's action of rejecting books of accounts in terms of Section 145(3) of the IT Act and assessing income u/s 44BBB(1) of the IT Act on presumptive basis is not justified, the order of ld. CIT(A) is upheld. Our view is ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11 -9- fortified by Delhi ITAT judgment in the case of Royal Jordanian airlines (supra) which after dwelling over all relevant aspects of charging and mechanical provisions, statutory mandate, and jurisprudence of regular assessment vis-a-vis presumptive assessment and catena of judicial precedents as detailed in this order."
9. We further find that the Revenue went in appeal against the order of the Tribunal before the Hon'ble jurisdictional High Court, but failed to succeed as Hon'ble Court vide order dated 18.09.2017 in Tax Appeal No.623 of 2017 dismissed the Revenue's appeal by observing as under:-
"7. Such being the facts, we see no reason to interfere since no question of law arises. Learned counsel for the Revenue, however, strenuously urged that the Assessing Officer was authorised to examine the books of accounts and other documents and if found that the assessee had not recorded the details correctly he could have 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."
10. We, therefore, respectfully following the judgment of Hon'ble jurisdictional High Court and the decision of the Tribunal and in view of the fact that the Revenue failed to bring any contrary material to show that the facts of the year under appeal are different from the facts adjudicated in the appeal by the Tribunal for Assessment Year 2009-10, and in the given facts and circumstances of the case, find no infirmity in the order of the learned CIT(A) in holding that the action of the Assessing Officer in rejecting the books of accounts under Section 145 is not justified and also learned Assessing Officer erred in estimating the income under Section 44BBB(1) of the Act. In the result, this issue is decided in favour of the assessee.
11. Now, we take up the second issue raised by the Revenue challenging the finding of the ld. CIT(A) holding that the transactions of awarding of contract ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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by Adani Power Limited (APL) and Jhajjar Power Limited (JPL) to Shandong HO is a proper Comparable Uncontrollable Price (CUP) for the transaction between Shandong HO and Shandong PE and also holding that the transactions between Shandong HO and Shandong PE was functionally different.
12. The brief facts relating to this issue are that the assessee, which is a foreign company incorporated as per the laws of People's Republic of China and engaged in the business of erection, testing and commission etc. of power plants, entered into agreements with APL and JPL. For the purpose of executing the contracts, a project office was opened in India. During the assessment proceedings, learned Assessing Officer first of all took a view that the transactions between the HO of Shandong and the Shandong PE Project Office comes under the category of international transactions as per Section 92B of the Income-tax Act. Learned Assessing Officer, after taking a view that the alleged transactions between the Project Office and the HO being the Associated Enterprises comes under the purview of the international transactions, went ahead for applying the TNMM for determining the Arm's Length Price (ALP). Learned Assessing Officer further analyzed various comparables and after considering the comparables accepted by the assessee, calculated the Arm's Length Price @ 111.97% of operating cost and made an upward adjustment under Section 92C(3) of the Act at Rs.40,01,41,157/-. This was an alternate addition made by the Assessing Officer. Learned CIT(A), however, set aside the findings of the learned Assessing Officer and particularly confirmed the plea of the assessee of application of CUP method and also holding that for the purpose of CUP method, the rates of contract between the APL as well as JPL with Shandong China are the best comparables. Aggrieved, Revenue is now in appeal before the Tribunal.
13. Learned Departmental Representative vehemently argued submitting as under:-
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"In the case of M/s Pteriij Global Ltd. for AY 2013-14, no TP issue is involved. Hence, the written submission/brief is not required to be submitted by this office. In the case of M/s Shandong Tijun Electric Power Engg. Co. Ltd. for A.Y. 2010- 11, the written submission/brief is submitted herewith as under:
1. The Service contract agreements were entered into between APL/JPL and HO, for rendering services related to erection, construction, testing et cetera for the power project and in terms of the contract the HO is also responsible for transportation of goods/equipments supplied to APL/JPL from its suppliers in addition to services related to construction et cetera. The agreements are fixed price contract, in which the consideration for carrying out the services is included. The project office is executing these projects. The expenses incurred for the execution of project are shown in the financial statements prepared for the project office and the consideration, which is received from APL/JPL, is also shown in the financial statements.
2. Therefore the understanding between the HO and project office of executing the onshore project part is a transaction as per the Act and the same becomes an international transaction u/s 92B (2). To summarize, the HO and project office are Associated Enterprise and the understanding by which the HO gets executed the onshore portion of the project by project office, is an international transaction. Therefore apportionment of a part of the project, which is a 'Geographical and Commercial Whole', to be executed in India, becomes an International Transaction u/s 92B. And therefore arm's length price is needed to be determined as required under section 92 of the Act. To clarify further the value or the price of the onshore contracts is the value of the international transaction that the assessee was supposed to report, and to keep and maintain such documents as prescribed.
3. Project office and HO are the Associated Enterprise In order to appreciate the respective stands, it is important to first note the relationship and the requirements of law with respect to transfer pricing provisions that apply to the relationship between the permanent Establishment and the head office. There is no dispute on the fact that Project office of STEPC is a permanent Establishment of this entity. It was the claim of the assessee that the permanent Establishment and the HO are not associated enterprises. However, from perusal of the reply given in response to the show cause notice, it is seen that the assessee admitted that the transaction representing reimbursement of expenses are indeed international transactions in view of the definition provided in section 92B and assessee has declared the same in Form 3CEB. Since, the international transactions are defined to be the transactions between associated enterprise, it is clear that the assessee also considers itself, being the permanent Establishment and the HO as the associated enterprises. Further in order to examine whether the assessee and its head office are associated enterprise or not, it is important to note that the management, capital and control of the ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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permanent establishment is entirely in the hands of the head office and consequently the permanent establishment is required to be considered as associated enterprise, as per the provisions of section 92A (1)(a).
4. From perusal of the above, it can be seen that two entities are considered to be associated enterprises if both of them have common control or if one of the enterprise participates directly or indirectly in the management, control or capital of the other enterprise. It is also pertinent to mention here that the meaning of the term enterprise includes a permanent establishment of an enterprise as per section 92F of the Act. In the case of permanent Establishment, the management, control and capital is entirely controlled by the head office and consequently the two entities are required to be considered as associated enterprises, as per the provisions of Indo-China Treaty also. Consequently, the assessee and the head office are required to be considered as associated enterprises.
5. Thus it can be clearly seen that any formal/informal arrangement, whether in writing or not, enforceable or not, between the Associated Enterprises, which has the effect of affecting the profit/loss of any of the AE is required to be considered as "international transaction".
6. Adverting to the facts of the case, the AE (HO) entered into an agreement with APL/JPL or clients to execute the construction/project management related to design, survey, supply, construction, erection, testing and commissioning work for power projects for die two owners for the considerations as mentioned in the show cause reproduced earlier in this order. The project office of HO, is executing onshore parts of the projects. Thus, it is clear that the delegation of responsibilities by the HO to execute the project to the project office is an "international transaction", which has the effect of affecting the profit/loss of the project office through the amount which is to be received from APL/JPL, even though there may not be any written/formal agreement for the same. The amount of income to be received by the project office, for the entire contract period, is dependent on the contract amount decided between the HO and APL/JPL. Therefore, the contention of the assessee that there is no "international transaction" is rejected. The entire amount of income shown by the project office, in its books of accounts, for the year under consideration is required to be considered as "international transaction" between itself and HO.
7. As already discussed in detail in the TP orders of the relevant AYs, even the transaction between the assessee and APL/JPL is covered by the definition of "international transaction" as per the provisions of 92B(2). Since, the provisions are very clear and unambiguous, applicable to the facts of the case, there is no need to examine or ascertain the intention behind introduction of the provision in the Act. Therefore, the contention of the assessee that the project office came into existence after the contract was signed between HO and APL/JPL would not affect the existence of "international transaction". Since the transaction is an ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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international transaction, the arm's-length price of the same is required to determine as per the provisions of law. The same factual and legal position of the revenue is also confirmed by the Ld. CIT (A).
Application of TNMM
8. It has been established in TP orders related to various AYs that provisions of Chapter-X of the Act are applicable in the case of the assessee. The international transaction in this case is the revenue shown by project office from the aforementioned projects signed by its HO. Therefore the receipts showed by the project office in its accounts needs to be benchmarked. The comparables in the present case have been taken keeping in mind the criteria listed in Rule 10B of the IT Rules 1962. The contention of the assessee that Chinese companies should have been taken as the comparable is not correct. Since, the project office operates in India under the conditions prevailing here and therefore Indian companies have been correctly taken as the comparable in this case by the TPO. Also controlled transaction in this case between project office and HO is to be compared with the uncontrolled transactions.
9. Whether the HO is earning the profits from its activity of execution of such large-scale projects or not is immaterial as far as profitability of the project office is to be determined. Therefore the contention of the assessee that it submitted bid for 30-40% of the amount than the other bidders is of no rescue. Without prejudice to this assessee has not submitted any details and the documents as called for in the notices issued during the proceedings.
10. An elaborate discussion has been made in TP orders related to various AYs, which clearly emphasize that in respect of transactions between the Permanent Establishment and HO, the Permanent Establishment is required to be considered as an independent entity, capable of earning profits. In an independent party scenario, any entity which is executing the project on behalf of any other entity would necessarily examine and estimate the expenditures which are required to be incurred for executing the project, the corresponding revenue streams and the profit margins it is expected to earn in execution of the project It would not accept the total amount of revenue for the project, which is being offered by the entity granting the execution of the project to it, without carrying out such estimates. No computation of the estimated costs has been provided except theoretical submissions.
11. Unless, the above-mentioned details are available, it is not possible to comment on the reasons or the basis or the assumptions taken into account by the HO while accepting the total consideration as mentioned in the respective contracts from the owners. It is not known whether any other contract was also entered into by HO and APL/JPL, or any other entity of the group. Further, it is not known whether the consideration agreed upon by HO was with any other objectives such as winning the contract by deliberately keeping the contract price ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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low in order to get a foothold in Indian market. Since, no details and supporting documents were provided by the assessee, it is not possible to ascertain what exact functions are to be carried out by the project office vis-a-vis, HO and what risks are to be undertaken by the project office vis-a-vis HO etc. In the absence of this information, the application of CUP, in the present case, is unreliable. Since the international transaction does not involve distribution activities, RPM is also not appropriate on the facts of the case. There are no contribution of the unique intangibles from the assessee and HO and therefore, profit split method is also not applicable to the case. For the reasons mentioned in the show cause notice cost plus method is also not applicable and consequently TNMM is required to be considered as the most appropriate method, being the method of last resort.
12. The assessee objected for TNMM as MAM and suggested CUP as MAM which is upheld by Ld. CIT (A):
In the CUP Method, the price of the product/service being examined in the international transaction is compared with the price of the product/service for a transaction which is "comparable" to the international transaction and "uncontrolled" in nature. For the application of this method a search is required to be carried out for identifying a transaction which is comparable to the transaction being examined and it should be a transaction between independent parties. If such a transaction is identified, the price of that comparable uncontrolled transaction can be considered as the "Arm's length price".
However, this method is difficult to apply in practice because it may be difficult to find a transaction between independent enterprises that is similar enough to a controlled transaction such that no differences have a material effect on price. For example, a minor difference in the property transferred in the controlled and uncontrolled transactions could materially affect the price even though the nature of the business activities undertaken may be sufficiently similar to generate the same overall profit margin.
For the purpose of application of CUP method, highest degree of comparability is warranted. In the present case, the assessee has not submitted any details of the comparable contracts, the nature of services being rendered in all comparable instances or any documentary evidences to benchmark the transactions with CUP as MAM. It is very clear that in the TP proceedings, the onus is on the assessee to benchmark the transactions with suitable MAM. In this case, the assessee miserably failed in discharging its initial onus to benchmark the transaction. Thus, in absence of benchmarking anlaysis supported by documentary evidences, this office left with no choice in benchmarking the transaction with TNMM as MAM as mentioned above.
Therefore, it is prayed to the Hon'ble ITAT to uphold the order of the AO/TPO."ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015
Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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14. On the other hand, learned Counsel for the assessee firstly submitted that both the HO and the Project Office are of the same company; then how can international transactions happened between the same concern? He also submitted that price on which contracts were awarded by JPL and APL -
Indian parties, to Shandong HO - a Chinese entity, is the same price at which transactions price between the Shandong PE, i.e. the appellant in India, and Shandong HO - Chinese entity - was agreed upon and offered for tax by the appellant company in India. He further submitted that there is no variation between the total contracts price awarded to the Chinese entity with the gross revenue shown by the foreign company in India and when there is no difference in gross revenue, then there cannot be any possibility of adjustment in the Arm's Length Price. Reference was further made to the written submissions filed before the lower authorities.
15. We have heard the rival contentions and perused the record placed before us. So far as the issue that whether the transfer pricing provisions are applicable on the transactions between the Shandong HO and Shandong Project Office in India, we find no infirmity in the findings of the learned CIT(A) that the transactions between both the entities are deemed international transactions and the transfer pricing provisions are applicable between the foreign company i.e. HO and its PE, by observing as follows:-
"7.5.2 I am unable to agree with the contentions of the appellant that the transactions between head office of the appellant company and its PE in India need not be considered as international transaction. I find that the project office of the appellant company and its head office are Associated Enterprises ('AEs') as per the provisions of the section 92A(1)(a) for the simple reason that the PO is a separate taxable entity and the same is managed by HO, controlled by HO and even the capital contribution also comes from HO. Moreover Article 9 of the India-China DTAA also stipulates that the HO and the PO of 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 ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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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 the PE shall have to be attributed at Arm's Length Price. In the facts of the present case since the AE (HO) entered into an agreement with APL and JPL to execute the contract of power project for2 APL and JPL. 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 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 international transaction.
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 the 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 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 between the foreign company i.e. HO and its PE in India i.e. PO."
16. Further coming to the issue of application of method for calculating the Arm's Length Price, we find that the Assessing Officer applied the TNMM method; whereas, the learned CIT(A) has held that the CUP method is most appropriate method. Learned CIT(A), while deciding that the CUP method is the most appropriate method, as pleaded by the assessee, observed following findings:-
"8. As mentioned above, the appellant company has alternatively submitted that the AO ought to have selected CUP as Most Appropriate Method over TNMM ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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in view of availability of CUP of APL & 3PL transaction with HO of the appellant company more so when the transactions are functionally comparable. I have also perused judicial pronouncements cited by the appellant company to contend that where CUP is available, CUP method should be followed in preference to other methods for determination of the ALP. I find force in the contention of the appellant company that CUP is the most appropriate method for 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 that on this count also the transfer pricing addition is unsustainable and is hereby deleted."
17. Learned CIT(A) further observed that the transfer pricing addition was incorrectly made by selecting functionally incomparable transactions by observing as follows:-
"10. I have perused the above submission of the appellant company. The appellant has pointed out various shortcomings in -application of filter while selecting comparable companies and also emphasized that the comparable transactions selected by the AO for benchmarking the deemed international transactions for determining ALP are not comparable 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 submission 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 perused 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 for 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 incomparable 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 comparable uncontrolled transactions to benchmark the transactions of ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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Shandong PO. For the sake of clarity, we reproduce Rule 10C of the Income-tax Rules, wherein with respect to section 92C of the Act relating to the most appropriate method of calculating the Arm's Length Price, which reads as under:-
"10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction, as the case may be.
(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely;--
(a) the nature and class of the international transaction;
(b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises;
c) the availability, coverage and reliability of data necessary for application of the method;
(d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions;
(e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable 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 examining the facts of the instant appeal, we find that there is no difference in the terms of functions performed, assets employed and risk undertaken, the price charged, incomparable uncontrolled transactions entered in the contracts between the parties APL & JPL to Shandong HO vis-a-vis the contract awarded to Shandong PO by the Shandong HO. Further, it is also not disputed at the end of the Revenue that the price at which the contracts were awarded by APL and JPL- Indian parties - to Shandong HO - Chinese entity - is a same price at which transactions price between Shandong PO, i.e. appellant in India and Shandong HO, a Chinese ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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entity, as agreed upon. When the total value of the contract awarded to the Chinese HO has been offered as gross revenue by the Shandong PO, i.e. foreign entity incorporated in India, 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 purpose of computing Arm's Length Price, the basic thing which is to be examined that whether the assessee has shifted 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 the total contract terms are similar between the Shandong HO and PO as well as between the Shandong HO and two Indian parties which is the fit comparable uncontrollable transactions and there being no variation in the rates charged as well as the other terms of the agreement, then there remains no room for the Revenue Authorities to make any upward adjustment to make addition in the hands of the assessee. We, therefore, in the given facts and circumstances of the case are of the considered opinion that for the purpose of calculating Arm's Length Price, Comparable Uncontrollable Price (CUP) method should have been followed by the Assessing Officer to determine the ALP and we further hold that if the CUP method is applied, then no transfer pricing adjustment needs to be made in the given facts and circumstances of the case. We, therefore, find no infirmity in the findings of the learned CIT(a) and we uphold the same. In the result, this issue is also decided against the revenue and in favour of the assessee.
20. Now, coming to the last issue as to whether the learned Assessing Officer referred the matter to the Transfer Pricing Officer before finalizing the assessment, we observe that learned Counsel for the assessee strongly argued that the impugned assessment order needs to be cancelled because no reference was made to the TPO. However, learned Departmental Representative ITA No. 2926/Ahd/2014 & CO No. 4/Ahd/2015 Shandong Tijun Electronic Power Engg Co. Ltd AY : 2010-11
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submitted that this fact needs to be examined from the records. We are, therefore, of the view that this particular issue to be set aside to the file of the Assessing Officer to verify as to whether the reference was made to the Transfer Pricing Officer by the Assessing Officer for determination of the ALP of the international transaction entered into between the assessee company with its HO. In the result, this issue is allowed for statistical purposes.
21. In the result, appeal of the Revenue is dismissed and that of the assessee is partly allowed for statistical purposes.
Order pronounced in the Court on 23rd April, 2018 at Ahmedabad.
Sd/- Sd/-
(MAHAVIR PRASAD) (MANISH BORAD)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated, 13/04/2018
आदे श क त ल प अ!े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं$धत आयकर आय&
ु त / Concerned CIT
4. आयकर आय&
ु त (अपील)/ The CIT(A)-
5. वभागीय त न$ध,आयकर अपील य अ$धकरण ,राजोकट/DR,ITAT, Ahmedabad,
6. गाड0 फाईल /Guard file.
आदे शानस
ु ार/ BY ORDER,
TRUE COPY
सहायक पंजीकार (Asstt.Registrar)
आयकर अपील य अ$धकरण
ITAT, Ahmedabad
1. Date of dictation ...12.04.2018...........
2. Date on which the typed draft is placed before the Dictating Member : ...12.04.2018.........
3. Other Member...13.04.2018........
4. Date on which the approved draft comes to the Sr.P.S./P.S......13.04.2018.......
5. Date on which the fair order is placed before the Dictating Member for pronouncement...13.04.2018........
6. Date on which the fair order comes back to the Sr.P.S./P.S...20.04.2018.......
7. Date on which the file goes to the Bench Clerk...20.04.2018......
8. Date on which the file goes to the Head Clerk...
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................