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M/s. IWM Constructions (P) Ltd, Hyderabad Versus Asstt. Commissioner of Income Tax, Circle 2 (1) Range-2, Hyderabad

2016 (8) TMI 555 - ITAT HYDERABAD

Sham transactions of the assessee with its AEs - Held that:- 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 Del .....

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e findings of the authorities below that 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 f .....

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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 For The For Revenue : Shri J. Sri Kumar, DR ORDER Per Smt. P. Madhavi Devi, J.M. Both the above appeals are filed by the assessee for the A.Y 2003-04. ITA No.457/Hyd/2007 is against the order of the CIT (A) in confirming the transfer pricing adjustment proposed by the A .....

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t that the appellant is an EPC Contractor who requires technical knowledge in the nature of design, plans etc. Benefit test 1.3. erred in not appreciating the fact that substantial evidence was produced by the appellant for the technical consultancy services received by the appellant from its associated enterprises which can be substantiated through email correspondence and teleconferences and through word of mouth at the time of visit of the technical personnel; 1.4. erred in not appreciating t .....

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volume of documentation; Rejection of documents to prove benefit test on adhoc basis 1.6. erred in upholding that evidence submitted by the appellant for the Technical Services as being in nature of "General Guidance Material" that can be made available anywhere and prepared by any technically skilled personnel of the appellant and not by the technical personnel of the appellant's A.Es; Other incorrect observation or conclusion 1.7. erred in terming that the appellant's role in .....

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rking 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 c .....

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15-3, 15th Floor, WlSma UOA II. NO.21 , Jalan Pinang 50450 Kuala Lumpur. Malaysia, had entered into an agreement on 27.03.2001 with National Highways Authority of India (NHAI) to, inter alia, design, engineer, finance, procure, construct, operate and maintain on BOT basis for (a) the widening and -rehabilitation of the existing 2-Lane Highway from Km 52.8 to Km 163.6 on the Tada-Nellore Section of the National Highway NO.5 {"NH-5") in Andhra Pradesh; and (b) the widening and rehabilit .....

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nment Agreement) to assign and transfer the above mentioned agreement in favour of the Swama Toliway-Pvt. Ltd. The company, Swama Tollway Pvt. Ltd., in turn entered into an agreement with the assessee-company, M/s. I.W.M. Constructions Pvt. Ltd, (called as Contract Agreement) for 'execution of the works known as design, engineering, construction and completion of the widening -and rehabilitation of the existing 2-Lane Highway from' Km 54.383 to Km 111.600 (Designed Chainages) on the Tada .....

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execution and completion of the works and the remedying of defects therein, the final Contract Price at the times and 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 c .....

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greement, 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 observed that from out of the works received from Swarna Tollway Pvt Ltd, the assessee company has shown an amount of ₹ 129,67,19,717 as contract receipts during the year ending on 31.03.2003 .....

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incurred towards Technical & Support Services Fees paid to WCT Construction Sdn. Berhad and ₹ 1,00,90,259 to MTD Construction Adn. Berhad towards salaries and wages to the personnel of the above two companies. As per the agreement, the services to be provided by the Jt. Project Advisors involve the following: i) Project Management Services; ii) Design and Technical Services; iii) Budget and Tender services; iv) Contract and Legal services; v) Human Resources Services; and vi) Financia .....

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payment of the technical and other support service fees to the Joint Project Advisors. Thereafter, after considering the average margin of the comparable companies, the assessee observed that the profit margin @11% in the case of the assessee is much more than 4% in the case of comparable companies and therefore, transaction was considered to be at Arm s Length Price. Accordingly, assessee filed its return of income before the AO. AO, however, observed that the return of income is not accompani .....

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e 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 ot .....

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greement is said to have been entered into for the technical and other technical support services, the assessee has failed to furnish any evidence for the rendering of the so called technical and other services by the AEs to the assessee company. During the course of the Transfer Pricing Proceedings, the assessee company furnished number of blank forms under the heading services as provided to it by the Jt. Project Advisors. However, the TPO observed that blank forms are in the nature of general .....

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d further held that unless and until it is proved that these companies have provided technical services worth ₹ 7.5 crores to the assessee, the same cannot be treated as services rendered by the AEs. He also observed that the assessee was not the real contractor for the road project as the entire project was given on sub-contract to M/s. Madhucon Binapuri JV and that the role played by the assessee in the actual execution of the contract is insignificant. He further observed that the indep .....

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therefore, disbelieved that the AEs have provided any technical services to the assessee for executing the National Highway Project. Further, he also held that even if it is to be considered that some services are to be considered to have been rendered to the assessee, the huge payment 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 propo .....

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g 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 s and as there is no PE of th .....

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eated as the income of the assessee company. Against this order, the assessee preferred an appeal before the CIT (A), who confirmed the order of the AO and aggrieved by the same, the assessee is in appeal before us. 13. The learned Counsel for the assessee, Shri M.P. Lohia, while reiterating the submissions made by the authorities below, in addition to the oral submissions, has filed written submissions and also a list of the judicial precedents on which he placed reliance upon. Copies of the sa .....

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of Arm s Length Price of transaction by holding that the transaction is not a genuine transaction. As regards the AO s finding that the AEs have not rendered any services to the assessee and that the payment of commission is unwarranted and unreliable, he has placed reliance upon several judgments. As regards the determination of the ALP, he submitted that the TPO has to follow one of the methods prescribed by the Act and the rules to determine the ALP whereas in the case before us, the TPO, wit .....

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ay 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 asses .....

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thorities below are not sustainable. 14. The learned DR, on the other hand, supported the orders of the authorities below and submitted that the onus is on the assessee to prove that services have been rendered by the AE s and also that the price charged by the AEs is at ALP. He submitted that the assessee is bound to apply various filters before arriving at the ALP and for determination of the ALP, the TPO is expected to analyze the transaction and be satisfied about the rendering of the servic .....

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able for execution of any construction or infrastructure projects. Therefore, according to him, the technical and support services have not been provided to the assessee by the AE s. He submitted that even if it is to be accepted but not admitted that the TPO cannot go into the veracity of the transactions or decision of the assessee to avail the services, it is within the realm of the AO to examine the genuineness of the same and the AO in the present case has done so before disallowing the sam .....

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that in March, 2001, Govt. of India had authorized the NHAI to enter into an agreement with CIDBI Malaysia which was awarded a civil project of NHAI based on Memorandum of agreement between Govt. of India and Govt. of Malaysia, regarding various highway projects in Andhra Pradesh. In June, 2001, an assignment agreement was entered into between CIDBI and NHAI, as per which, the contract was transferred in favour of M/s Swarna Toll-way Pvt. Ltd, who in turn, entered into an agreement with the asse .....

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wn 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, .....

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ontractor, i.e., the assessee herein is responsible for the design except to the extent that the sub contractor shall be responsible for the design and suitability for the purpose or performance of any part of the subcontract works which either expressly or by implication leaves any question of design, specification or of choice of materials, goods or workmanship to the sub contractor. Clause 79 of the agreement further reiterates that the responsibility for design is with the assessee. Thus, it .....

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cal and other support service required for smooth and timely performance by the employer of its obligations under the EPC contract. The clause 2 of the agreement defines the scope and purposes of the services while, clause 2.5 sets out the general obligations of the joint project advisors. The details of the services to be provided by joint project advisors are given in Schedule A attached to the agreement. For the sake of ready reference, the same is reproduced hereunder: SCHEDULE A SERVICES TO .....

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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 Reso .....

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d also overall superintendence of the project. 18. From the assessee s submissions dated 7/3/2005 addressed to the AO which is placed at page No.366 of the paper book, the assessee has made payments of ₹ 7,50,00,000 as technical and other support services, no tax is deducted from the payment, as the same is taxable in Malaysia in the hands of foreign companies as business income under Article 7 of the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia. He has also filed .....

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e employees of the AEs had visited India and had provided the services required and therefore, the findings of the AO and the CIT (A) that the AEs have not rendered any services and the transactions are sham transactions is without any basis. He has also drawn our attention to various services provided to the company. 19. It is submitted that design management plays a key part in the overall project and such a resource was not sufficiently incorporated in the operations of the assessee in India .....

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budget and tender management, it is submitted that the AEs have provided the company viable expertise in project management wherein a systematic approach of controlling costs was adopted and are providing cost control through special cost management techniques. 21. As regards contractual and other services, it was submitted that the AEs were instrumental in assisting the company to review the EPC contract agreement from the toll concessionaire and also to produce a very risk-mitigated sub-contr .....

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d 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 employee .....

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nal was dealing with the case of an assessee wherein the TPO had treated the ALP of the technical consultancy fees as Nil and thereby proposing ALP adjustment in respect of the entire amount paid to the parent company for technical knowhow fees. The Tribunal at Para 24 of its order has dealt with the issue at length and following the judgment of the Hon'ble Delhi High Court in the case of EKL Appliances Ltd, reported in 345 ITR 241 (Del.) (H.C) held that without evaluation the ALP of a servi .....

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these circumstances that the Tribunal held that though the finding is given to the fact that no services are rendered in the light of the contradiction in the findings and the observations, it is clear that in effect, the commercial expediency of these payment is questioned. In the case before us also, though the TPO & AO have given finding that no services have been rendered to the assessee by the AEs, the AO has also treated the assessee as a representative assessee of the AEs and has trea .....

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ces. The Tribunal had also considered and held that the role of the TPO is only to determine the ALP of the transactions. 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 determi .....

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. 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, in view of the above decision. Therefore, in our opinion, the TPO as well as the AO are not correct in holding that the transactions between the assessee and its AEs are sham, pa .....

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