Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2016 (8) TMI 555

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... t the entire work has been executed by the sub contractor has already been found to be not correct. In view of the same, we hold that the assessee has received some services from its AEs. Whether the benefit received by the assessee is commensurate to the payment made by it, cannot be gone into in view of the above cited decisions and therefore, we set aside the orders of the AO and the CIT (A) on this issue. Coming to the computation of the ALP, we find that the Courts have repeatedly held that the TP adjustments can only be made by adopting the prescribed five methods. The TPO has not computed the ALP by holding the transactions as sham. Therefore, the matter needs reconsideration and recomputation of the ALP by the TPO. In view of the same we deem it fit and proper to set aside the orders of the AO and set aside the matter to the AO/TPO for re-determination of the ALP in accordance with the rules and the precedents on the issue.- Decided in favour of assessee for statistical purposes. - ITA Nos.457/Hyd/2007 & 1658/Hyd/2008 - - - Dated:- 20-7-2016 - Smt. P.Madhavi Devi, Judicial Member and Shri S. Rifaur Rahman, Accountant Member For The For Assessee : Shri M.P. Lohia .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ct was limited to getting the contract from Swarna Tollway Private Limited and giving sub-contract to Madhucon Projects Limited and that the A.Es have siphoned off the profits attributable to the appellant without payment of taxes; 1.8. erred in not appreciating the fact that the independent consultants appointed by Swarna and NHAI are for monitoring and supervising the project and not to provide any technical services to the appellant; No method applied for benchmarking international transaction 1.9. erred in holding that the learned Transfer Pricing officer (TPO') has made the detailed analysis of the relevant agreements and other details filed by the appellant before concluding that the transactions are sham transactions and no value could be assigned to them; 1.10. erred in terming that no method can be applied for the determination of the Arm's length nature of transaction as the transaction is not a genuine transaction 3. Brief facts of the case are that the assessee company was incorporated on 26.07.2001 with its shares being held by the WCT (Offshore) Pvt. Ltd, Mauritius and International MTD Cap (Mauritius) Ltd, Mauritius in the rati .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... d in the manner prescribed by the Contract. In addition, the employer M/s. Swama Tollway Pvt. ltd. shall supply, material Which are, necessary for the works subject to the total combined costs of materials not exceeding ₹ 30.00 Crores. 6. The assessee-company, after obtaining the contract, has sub-contracted the entire work to M/s. Madhucom Binapuri J.V. As per the terms of contract, the company will supply only certain materials like Cement, Steel and Bitumen received from the customer, Swarna Tollway Private Ltd to the sub-contractor for a total amount of ₹ 30,00,00,000. All other materials/ additional materials shall be procured and utilized by the sub contractor on his own account. Hence, in addition to the material supplied by the company, significant amount of other materials are also used by the sub contractor for the project. 7. From the sub-contract agreement, AO observed that the entire work was given to M/s Madhucon Binapuri JV for a lump sum amount of ₹ 161,86,00,000 and also that ultimately the work was executed by M/s Madhucon Projects Pvt Ltd which is one of the constituent member of the joint venture M/s. Madhucom Binapuri JV. He also observe .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 271BA of the I.T. Act. However, the assessee, thereafter filed form No.3CEB with a delay and the penalty proceedings were not proceeded with. 10. During the course of the assessment proceedings, the assessee was asked to furnish complete details of the international transaction and also a detailed note on the above two expenses along with the relevant evidence to substantiate the claim. The assessee furnished part of the information relating to the international transactions. The AO, on verification of the same, found that the assessee has only furnished a copy of the Technical and other Support Services Agreement entered into with the companies. The AO therefore, asked the assessee to furnish complete details of the nature of the services rendered by the foreign parties, copies of documents and other relevant information which support the claim of the assessee. In response, the assessee filed only copies of permissions/approvals obtained from the Exchange Control Department, RBI, Hyderabad for onward remittance abroad. No other details were furnished. The AO, therefore, referred the matter to the file of the TPO for determination of the ALP. 11. The TPO, after considering t .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ment of ₹ 7.5 crores is excessive and not justified. He, therefore, treated the ALP of the services at Rs. Nil and proposed the TP adjustment of the entire payment of ₹ 7.5 crores. On the basis of the proposal of the TPO, the AO disallowed the Technical and Consultancy Support fees of ₹ 7,50,00,000 and added it back to the total income. 12. Without prejudice to the above finding, the AO also observed that the provisions of section 163 are attracted to the assessee s case and that the assessee has to be treated as an agent and representative assessee of the two non-resident companies. A show cause notice was accordingly issued. In response, the assessee filed its reply dated 18.01.2006 stating that favourable provisions, whether of the domestic statute or of the DTAA can be chosen by the assessee and that there is no separate article in the DTAA between India and Malaysia in respect of either fees for technical services or fees for included services and consideration for the provision of technical or other support services has not been separately classified. Further, it was also submitted that the fees paid by the assessee was business profits of the AE .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ayment lies within the sole discretion of the assessee and the commercial expediency and neither the TPO nor the AO has any role to play in it. He relied upon the decision of Hon'ble Supreme Court in the case of SA Builders vs. CIT reported in 288 ITR 1 for this proposition. The learned Counsel for the assessee, strenuously has taken us through various clauses of the agreement to demonstrate that the assessee has proved beyond reasonable doubt that the AEs have rendered services to it and therefore the payment is justified. In the alternative and without prejudice to the above contentions, the learned Counsel for the assessee also submitted that none of the authorities below have considered the TP study done by the assessee and have not examined the average margin of the comparable companies and have not arrived at the correct ALP of the transaction. In view of the same, according to him, even if the order of the CIT (A) is reversed holding that the services were rendered to the assessee, the issue will still have to be referred to the TPO for determination of the ALP. Thus, according to him, the orders of the authorities below are not sustainable. 14. The learned DR, on the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... n, entered into an agreement with the assessee company for execution of the various works and the lump sum contract work was fixed at ₹ 216 crores. The copy of the contract is placed at pages 168 to 304 of the paper book. We find that the EPC Contract was for the widening and Rehabilitation of the existing 2-lane Highway from km 54.383 to km 111.6000 (designed chainages) on the Tada- Nellore Section of the National Highway No.5 in Andhra Pradesh. From the recitals in the agreement, it is seen that the contract is for the works known as design, engineering, construction and completion of the above mentioned work. The assessee herein, in turn had entered into a sub contract with M/s Madhucon Binapuri JV for construction and completion of the above highway road awarded to it under the EPC contract except the following exclusions: a. Design and engineering, b. Toll Equipment, c. All works related to Bridge III/lover swarnamukhi, d. Works for emergency telephone system. The lumpsum sub contract price was fixed at ₹ 161,88,00,000/- and it was further agreed that the contractor shall provide free of charge to the sub contractor materials upto the value of ₹ .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... udget C. Budget Tender Advice on tender strategy Preparation of detailed budget Regular budget review and revision' D. Contract and Legal Sub contract agreements Review of sub contract agreements to ensure compliance with project agreements, Concession Agreement and other relevant agreements Review of contractual issues arising, if any Assistance in negotiation of sub contract agreement Review of EPC contract agreements E Human Resource Services * Development of project manpower J2lan F. Financial Services Design and development of Financial and Management Accounting strategies Development of accounting policies and procedures Conceptualization of project internal controls framework Review of monthly financial status to ensure compliance with strategies 17. From the above, it appears the assessee has employed the services of its parent companies/AE s for the designing and engineering services and also overall superintendence of the project. 18. From the assessee s submissions dated 7/3/2005 addressed to the AO which is placed a .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ped the company to identify and address special issues. 22. As regards Human Resource Development, it was submitted that the AEs have played a strategic role in the development of human resource and have been instrumental in the success of the project. In suppor of these contentions, the AO and the TPO directed the assessee to produce necessary evidence. However, the assessee has only filed copies of the blank forms used in the respect of the contract. As rightly pointed out by the authorities below, they are only in the nature of general guidance material, but the assessee s contention the AEs have also rendered any services pursuant to these forms has not been proved to the satisfaction of the authorities below nor to our satisfaction. Even before us, the blank forms have only been filed. The only tangible material in support of the above claim before us is that some of the employees of the assessee have gone for training to Malaysia and some of the employees of the Malaysian Company have visited India and have rendered some sort of services. Whether these services can be said to be commensurate to the payment made by the assessee is the question before us. 23. The learned .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... The Tribunal has also relied upon the decision of the Hon'ble Delhi High Court in the case of EKL Appliances (Supra) to hold that the TPO went beyond his jurisdiction in denying the payment of deduction, whereas his role is limited to determining only the ALP. The Hon'ble High Court has held that the TPO cannot question the business decision of an assessee and determine that no services were rendered. Similar view was expressed by other Coordinate Benches of the Tribunal as well. Thus, it can be seen that in the case before us, initially it was the TPO who analysed the transaction and gave a finding that the AEs have not rendered any services to the assessee and that the transactions are sham transactions. It is thereafter that the AO also went into the details of the services rendered by the AE and have come to the conclusions that the transactions are sham. Therefore, it is clear that the TPO has travelled beyond his jurisdiction as held by the Hon'ble Delhi High Court in the case of EKL Appliances (Supra). Further, applying the benefit test i.e. whether the payments made by the assessee are commensurate to the benefits acquired by it under the agreement, also fails, .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates