TMI Blog2014 (12) TMI 805X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting of the assessee would be out-rightly rejected - As there is no doubt that the assessee has been consistently following accounting standard-7, the method followed by the assessee has to be accepted – there was no justification in not accepting the sales recorded by the assessee in its books of accounts as per Accounting Standard AS-7 – thus, the order of the CIT(A) is set aside – Decided in favour of assessee. Amortization of cost of specific equipment disallowed – Held that:- Assessee has followed a particular method of claiming depreciation/amortization - However, the Income tax Act u/s. 32 specifically provides the method of computing the depreciation and the Income Tax Rules provide the relevant rates - All assessees are bound to follow the rates prescribed under the rules and compute the depreciation as per the procedure laid down u/s. 32 of the Act - The assessee has followed none – thus, the order of the CIT(A) is upheld – Decided against assessee. Transfer pricing adjustment - International transaction with AE - The TPO has arrived at the ALP of this international transaction at Nil on the basis that the assessee was awarded a single contract work in the ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05 to 2006-07. ITA Nos. 3608 2961/M/2012 are the cross appeals by the assessee and the Revenue for assessment year 2007-08 and ITA Nos. 5787 6383/M/2013 are the cross appeals by the assessee and the Revenue for A.Y. 2008-09. All these appeals were heard together and dispose of by this common order for the sake of convenience. ITA No. 2368/Mum/2011 A.Y. 2004-05 2. The assessee is a joint venture comprising of 5 members namely S. No. Name of Member Participating Interest a. Dyckerhoff Widmann AG, Germany (later changed to Dywidag International Gmbh) 29.0% b. Larsen Toubro Ltd., India 26.0% c. Samsung Corporation, Korea 26.0% d. Ircon International Ltd. India 9.5% e. Shimizu Corpon, Japan 9.5% 100.0% 3. The Joint venture is engaged in execution of a project for construction of the Rail Corridor f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed in respect of any class of assesses or any class of income. According to the AO, the assessable income of any person engaged in carrying on a business or profession is to be computed in accordance with the provisions contained in Chapter IV-D of the Act, basically provides that all incomes from business arising and accruing during a previous year must be assessed to tax after reducing all expenses pertaining to that business incurred during the relevant previous year and also after allowing any deductions permissible under Chapter VI-A of the Act. The AO was of the firm belief that assessable income has to be computed independent of AS-7 issued by the ICAI by considering all incomes and expenses of previous year. It was further observed that the assessee has shown a turnover of ₹ 4,94,75,18,674/- in its books as per AS-7. However, the turnover declared in the returns of work contract was at ₹ 5,30,46,88,602/-. The turnover as per running account (RA) was at ₹ 5,00,68,52,523/-. The AO was of the strong belief that the turnover as per running account should be considered as the actual turnover for the year. 3.3. The assessee was asked to justify its claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive and reasonable basis for determining the sales. The method adopted by the assessee will amount to factoring many unforeseen events which are yet to occur at the time of closing of the year. According to the Ld. CIT(A), only ascertained liabilities can be allowed as deduction for the purpose of determining income. The Ld. CIT(A) further dismissed the submission of the assessee that AS-7 has already been accepted in earlier years since in earlier years, the project did not exceed completion of 50%. The Ld. CIT(A) concluded by holding that the method of accounting prescribed in ICAI could be mandatory for the assessee. However, for the purpose of income tax, the assessee has to modify the results according to the provisions of the Income tax Act and accordingly confirmed the additions made by the AO. 3.6. In so far as the claim of depreciation by amortization method by the assessee is concerned, after considering the facts and the submission, the Ld. CIT(A) was of the opinion that depreciation is a charge on current year s income by prescribed rate mandated by the statute. Therefore, there is no option available either for the assessee or for the AO to deviate from the prescri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of law. 4.3. We have heard the rival submissions and carefully perused the orders of the lower authorities. It is an undisputed fact that the assessee has been following AS-7 right from its inception. The sales are booked as per Accounting Standard AS-7. It is an admitted fact that no adverse inference has been drawn in earlier assessment years in so far as the method of recording sales in the books is concerned. The entire dispute revolves around the application of AS-7 issued by ICAI. The Revenue authorities have dismissed the application on the ground that it is not a notified Accounting Standard as per the provisions of Sec. 145 of the Act. 4.4. The principal problem relating to accounting for construction contracts is the allocation of revenues and related costs to accounting periods over the duration of the contract. For solving this problem, the Institute of Chartered Accountant of India came out with Accounting Standard AS-7 on account for construction contracts. Construction contracts are formulated in a variety of ways in general fall into two basic types (1) fixed price contracts and (2) cost plus contract. Two methods of accounting for contracts commonly f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nticity to its account. Further, Sec. 145(1) of the Act provides that Income chargeable under the head Profits and gains of business shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee which means that in either of the situation i.e. mercantile system or cash system, if the assessee is consistently following accounting standards issued by the ICAI, the same will become part of the method of accounting of the assessee and the income for the purpose of tax has to be computed as per the method of accounting followed by the assessee. No doubt, the Central Government has notified only two accounting standards. This means that if the method of accounting followed by the assessee is in contravention to the notified accounting standards, the provisions of Sec. 145 will prevail. This does not mean that if the assessee is following a particular accounting standard issued by ICAI which is not notified by the Central Government, the method of accounting of the assessee would be out-rightly rejected. As there is no doubt that the assessee has been consistently following accounting standard-7, in our considered opinion, the met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an expenditure of the nature prescribed in Sections 30 to 36 of the Act. The AO accordingly disallowed and added a sum of ₹ 23,61,29,230/-. 6. Before us, the assessee reiterated its claim of amortization. It is the say of the Ld. Counsel that even if specific rates are provided in the Act for the claim of depreciation, there is no prohibition in claiming the amount as expenditure. To substantiate, reliance was placed on the decision of the Tribunal Mumbai Bench in the case of Brics Securities Ltd., in ITA Nos. 4515 4516/M/08. Further reliance was placed on the decision of the Hon ble Delhi High Court in the case of Oracle Vs CIT 39 Taxmann.com 150. 7. Per contra, the Ld. Departmental Representative supported the findings of the Revenue authorities. 8. We have carefully considered the rival submissions and perused the orders of the lower authorities and the decisions relied upon by the assessee. The assessee has followed a particular method of claiming depreciation/amortization. However, the Income tax Act u/s. 32 specifically provides the method of computing the depreciation and the Income Tax Rules provide the relevant rates. All assessees are bound to follow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 21,74,20,707/- on account of alleged difference in sales. 13. The entire issue revolves around the applicability of Accounting Standard AS-7. We have considered this issue in detail in ITA No. 2368/M/2011 qua ground No. 1 of that appeal. For our detailed discussion in the said appeal and for similar reasons, ground No. 1 is decided in favour of the assessee and against the revenue. 14. Ground No. 2 relates to the disallowance of expenditure of ₹ 1,31,59,717/- being prior period expenses. 14.1. It was noticed that the assessee has charged spare parts imported at ₹ 84,13,454/- and ₹ 47,46,263/- for freight packing, forwarding and rates and taxes which in the opinion of the Revenue authorities pertain to earlier years and accordingly were disallowed as prior period expenses. 15. Before us, the Ld. Counsel for the assessee stated that since the assessment year 2004-05 is also under consideration, the expenses may be allowed in that year. We find force in the contention of the Ld. Counsel. It is not in dispute that the expenditure of ₹ 1,31,59,717/- has been disallowed as it pertain to A.Y. 2004-05. We, accordingly, restore this issue to the file ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed as per provisions of the law. It requires no specific direction. Ground No. 8 is accordingly dismissed. 21.4. In the result, the appeal filed by the assessee is partly allowed for statistical purpose. ITA No. 8160/Mum/2010 A.Y. 2006-07- Assessee s appeal 22. Ground No. 1 relates to the grievance that the revenue authorities have not accepted the applicability of Accounting Standard AS-7. 22.1. This issue has been discussed and decided at length by us in ITA No. 2368/M/2011 qua ground No. 1 of that appeal. For our detailed discussion in that appeal ground No. 1 is decided in favour of the assessee and against the revenue. 23. Ground No. 2 relates to the disallowance of amortization of the cost of asset. 23.1. This issue has also been decided by us in ITA No. 2368/M/11 qua ground No. 2 of that appeal. . For our detailed discussion therein ground No. 2 is decided against the assessee and in favour of the Revenue. 24. Ground No. 3 is against adjustment of ₹ 11.48 crores to arm s length price in relation to international transaction entered into with Associated Enterprises (AE). 24.1. Facts relating to this issue are that the assessee has entered into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Tax Residence: Korea Member of UJV Specialized in International trade, export, import, project financing, construction development. 4. Shimizu Corporation Seavans South, 1-2-3, Shibaura, Minato-Ku, Tokyo 105-8007 Tax Residence: Japan Member of UJV Contracting for building, Civil engineering and other construction works 24.3. During the course of the TP proceedings, the TPO noticed that the assessee was formed with the object of bagging the contract from DMRC and executing the same. The contract was already awarded to the assessee in the earlier years and the project is under continuation. It was further observed that more than 85% of the said contract has already been assigned to various sub-contractors including AEs in the form of subcontract on back to back basis. According to the TPO, there cannot be any further overhead expenses in respect of these sub-contract works assigned to others. The assessee explained that there is an agreement between the assessee and all the 5 Joint Venture (JV) partners as per which all the JV partners are permitted to allocat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4% and is justified. The TPO noticed that the assessee has awarded the sub-contract to Samsung Corporation, Japan for a sum of ₹ 69.08 crores by retaining a gross margin of 12.5%. It was claimed by the assessee that the sub-contract was awarded to the AE based on the lowest bidding by the AE. The TPO was of the firm belief that all the overhead expenses of the assessee are to be taken into account while deciding the gross margins in awarding the sub-contracts especially to the AEs. According to the TPO, if the allocation of the head office costs of the JV partners and overhead expenses of the assessee are considered, the subcontract will be at a loss. The TPO computed the loss as under: Cost of the sub-contract given to the AE ₹ 69.08 crs Add: Profit margin retained @ 12.5% thereon ₹ 8.64 crs Corresponding value (income) of the sub-contract ₹ 78.95 crs .. (A) Expenses: 1. Cost of the subcontract given to AE ₹ 69.08 crs 2. Allocation of Samsung's head offices costs 3.Prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .30 crores Total Operating Loss as per the assessee ₹ 9.86 crores Determination of ALP by applying arithmetic mean: Total value of contract receipts during the year ₹ 271.44 crores Desired profit margin @ 8.17% of comparables ₹ 22.18 crores Desired total costs based arithmetic mean ₹ 249.26 crores Actual total operating expenses claimed by assessee ₹ 281.30 crores Excess expenses claimed requiring adjustment ₹ 32.04 crores Desired total costs as determined above ₹ 249.26 crores Less: Total costs (other than AE-sub-contract cost) Claimed by assessee (281.30-69.08) ₹ 212.22 crores Desired cost of sub-contract to AE ₹ 37.04 crores Actual cost of subcontract to AE, as per assessee Rs, 69.08 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The Ld. Counsel stated that all the related documents were furnished before the lower authorities. The Ld. Counsel concluded by stating that since in earlier years the same transactions, the same set of facts have been accepted. There is no reason for taking a different view during the year under consideration. 28. Per contra, the Ld. DR strongly supported the order of the lower authorities. 29. We have carefully perused the orders of the authorities below and the relevant documentary evidences brought on record before us. The TPO has arrived at the ALP of this international transaction at Nil on the basis that the assessee was awarded a single contract work in the earlier years and more than 85% of the said contract had already been assigned to various sub-contractors including AEs on back to back basis. We find that the assessee JV came into existence with 5 independent enterprises coming together for executing the contract for DMRC. As per the agreement between the assessee and its JV partners, overhead office expenses of the respective JV partners were to be allocated to the assessee with a cap of 8.5% of the turnover of the assessee. We find that the TPO has not broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not brought on record any comparable or set of comparable in support of the adjustment on account of excess cost claimed. 32. We have also the benefit of going through the orders for A.Yrs 2004-05 and 2005-06. No adverse inferences have been drawn in respect of the ALP for this international transaction. We, therefore, do not find any merit in the findings of the TPO. We, accordingly, set aside the findings of the TPO and direct the TPO to delete the adjustments made on account of arm s length price in relation to these international transactions entered into by the assessee with its AE. Ground No. 3 with its sub-grounds are accordingly allowed. 32.1. In the result, the appeal filed by the assessee is partly allowed. ITA No. 3608/M/2012 A.Y. 2007-08 Assessee s appeal 33. The first ground relates to addition of ₹ 29,23,55,121/- on account of alleged difference in sales. 33.1. The issue relates to the applicability of Accounting Standard AS- 7. We have discussed this issue in detail in ITA No. 2368/M/2011 qua ground No. 1 of that appeal. For our detailed reasons given in that appeal ground No. 1 is allowed. 34. Ground No. 2 is not pressed and is according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 3 of ITA No. 8160/M/2010 for A.Y. 2006-07. For our detailed discussion in that appeal, this appeal by the Revenue is dismissed. 35.2. In the result, the appeal filed by the Revenue is dismissed. ITA No. 5787/M/2013 2008-09 Assessee s appeal 36. The only ground relates to the addition of ₹ 17,127,258/- on account of the alleged difference in sales. The issue revolves around the applicability of Accounting Standard AS-7. We have discussed this issue in detail in ITA No. 2368/M/2011 qua ground No. 1 of that appeal. For our detailed reasons given in that appeal this ground of the assessee is allowed. 36.1. In the result, the appeal filed by the assessee is allowed. ITA No. 6383/Mum/2013 A.Y. 2008-09 Revenue s appeal 37. The sole grievance of the Revenue relates to the deletion of the adjustment of ₹ 19,45,367/- to arm s length price in relation to international transaction entered into with an associate enterprises. 38. Facts and issues are identical to ground No. 3 of ITA No. 8160/M/2010 for A.Y. 2006-07. For our detailed discussion in that appeal, this appeal by the Revenue is dismissed. This ground of the Revenue is dismissed. 39. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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