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2020 (3) TMI 332

..... own case [2017 (9) TMI 1164 - GUJARAT HIGH COURT]it is held that the action of Ld AO in rejecting books of accounts of the Appellant and estimating income is not sustainable. Further hold that the Appellant has rightly and legitimately offered income u/s 44BBB(2) of the Act. I further reject the action of Ld AO in making alternative addition u/s 44BBB(1) of the Act. Addition made by the AO by rejecting the books of accounts and estimating the income u/s 44BBB(1) of the Act as well as on the basis of comparable companies are hereby deleted. TPA - most appropriate method for determining the arm's length price and as to whether the transaction between APL and JPL and Shandong Head Office is a comparable uncontrolled transaction - HELD THAT:- From the concurrent findings of fact recorded by the Tribunal and the Commissioner (Appeals) based on the material on record, it is apparent that the terms of functions performed, assets employed, risk undertaken, the price charged in comparable uncontrolled transactions entered into by virtue of the contract between APL and JPL and Shandong HO vis-à-vis the contract awarded to Shandong PO by Shandong HO, are identical. It is based upon .....

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..... le. 2. 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 of 10% U/s.44BBB(1) or alternately @10.98% under normal provisions of the Act was not correct. 3. 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. 4. 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. 5. 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. 3. At the outset, learned AR submitted that issues raised by Revenue in all these three appeals are squarely covered by the orders of Hon ble ITAT confirmed by Hon ble Gujarat High .....

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..... change in the fads of the case. Therefore, arguments relied upon by the AO in AY 2010-11 and earlier years are equally applicable to the case of the assesse. The undersigned therefore relies on the reasoning provided in the said orders which are being discussed hereunder. " 6. Therefore, it has been accepted by the AO that the facts of the case for this year are exactly same as in A.Y. 2010-11 and earlier years which is also an observation of the Ld AO. Accordingly, similar actions have been taken by the Ld AO as were taken by the AO in the earlier Assessment Years 2009-10 and 2010-11. It is further seen that the contracts entered into by the Appellant with Adani Power Ltd (APL) and Jhajjar Power Ltd (JPL) for Mundra and Haryana Power Projects respectively have continued from A.Y. 2009-10 till the year under appeal before me. There is no material change in the accounting methods followed by the Appellant and income offered by the Appellant u/s 44BBB(2) of the Act. The AO has also not brought on record any further evidences which can at least demonstrate that the facts in the year under appeal before me are different or distinguishable then the immediate preceding A.Ys. 2009-1 .....

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..... f power project to offer to lax lower profits and gains than profit deemed of 10% of the amount receivable by the appellant under section (1) of Section 44BBB of the IT Act provided following twin conditions are fulfilled" (1) The appellant shall keep and maintain such books of account and other documents as required under subsection (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. b) Admittedly, as claimed by appellant no specific books of accounts are prescribed u/s 44AA of the IT Act read with relevant IT Rules for the nature of business carried on by the appellant. It has maintained books of account and got them audited also. Besides, the appellant has submitted audit report of a chartered accountant on veracity of financial statements and audit report as per Companies (Auditor's Report), 2003 in terms of section 227(4'A) of the Companies Act. c) So far as the applicability of the AS-7 is concerned, one of the objections of Ld.AO was that the same is not applicable to the Appellant Company being a foreign company. I do not find it true, because as p .....

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..... led contract Revenue due. e) The AO during the course of assessment proceedings asked the appellant to furnish basis of estimating budgeted cost. In this connection, the Appellant vide letters dated 21/12/2011 and 29/12/2011 submitted to the AO that the management has estimated total cost of the project having regard to the experience in executing the contracts, tenders and quotations from various vendors and sub contractors. The Appellant further submitted detailed break-up of the estimated profit & loss account for entire project for five financial years 2007-08 to 201112. The Appellant further submitted to the AO that while obtaining order u/s 197 of the Act, the Appellant has been submitting the details of budgeted cost to the tax the office, which have already been accepted by the department. The Appellant also placed on record the audited financial statements for F.Ys 2009-10 and 2010 11 and submitted and claimed that from the perusal of such financial statements, it is established that the Appellant has actually incurred the cost as estimated. f) One of the objections of the AO is that the Appellant ought to have followed another method of stage of completion of the proj .....

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..... ested in the accounting standards. The milestone method or the stage of completion method can be very inappropriate where the contractor and contractee agree for terms of payment much different from the actual stage of work (cost of work completed) In some cases the contractee who becomes very dependent on the contractor for completion of work once the work is given and started would like to retain substantial portion of payment till completion as a guarantee for the contractor being forced to complete the work. In other cases, the contractor may have capital deficiency/require heavy machinery to be purchased etc. and may bargain for upfront heavy payments at initial stages. In both these cases, recognizing revenue on completion of certain stages according to payment terms or raising of bills cannot be the best method. I do not find any wrong in the method adopted by the appellant. As observed earlier, there is no big difference estimated cost and profit percentage declared from year to year. The expenses have been audited and no substantive defect has been discovered/pointed out. The rejection of books of accounts u/s 145 (3) is not held justified these circumstances. I have noted .....

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..... fortified by Delhi 1TATjudgment in the case of Royal Jordanian airlines (supra) which after dwelling over all relevant aspects of charging and mechanical provisions, statutory mandate, and jurisprudence of regular assessment vis-a-vis presumptive assessment and catena of judicial precedents as detailed in this order. " 11. The Appellant has further contended before me that the aforesaid order of the Tribunal was challenged by the Department before the Hon'ble Gujarat High Court by filing appeal in Tax Appeal No.623 of 2017; however, the same has been dismissed by the Hon'ble Gujarat High Court on 18/09/2017. The Hon'ble Gujarat High Court has held as under : "6. Under sub-section (I) of section 44BBB of the Act therefore in case of assessee being a foreign company engaged in the business of civil construction or business of erection of plant or machinery or testing or commissioning thereof in connection with a turnkey power project approved by the Central Government would be taxed at the rate of 10% of the amount paid or payable to the assessee or to any person on behalf of the assessee on account of such civil construction, erection etc work. Subsection (2) .....

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..... ely offered income u/s 44BBB(2) of the Act. I further reject the action of Ld AO in making alternative addition u/s 44BBB(1) of the Act. 13. In view of above, the addition made by the AO by rejecting the books of accounts and estimating the income u/s 44BBB(1) of the Act as well as on the basis of comparable companies are hereby deleted. Accordingly, Grounds Nos. 1 to 5 as raised by the Appellant in the Grounds of Appeal are allowed. In view of the above, following the above judicial precedents in the case of assessee itself, Ground nos. 1 & 2 of the Revenue are dismissed. 8. Ground nos. 3, 4 & 5 are interconnected and are consequent to ground no.2. The learned CIT(A) has dealt this issue from para 19 to 27 wherein he has dealt with the issues raised by A.O. and has decided in favour of assessee by relying on the decisions of Hon ble Tribunal and Hon ble Gujarat High Court in the case of assessee itself. 9. We find that Hon ble Tribunal in the case of assessee itself in AY 2010-11 has dismissed the appeal of the Revenue wherein the Revenue has taken similar grounds of appeal reproduced as follows: "i) The Ld. CIT(A) erred in law and on facts in holding that the action .....

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..... mple 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 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 .....

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..... ination 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 .....

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..... e 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 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 incor .....

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..... nt and could not be compared between APJ/JPL and Shandong HO which merely related to awarding of a contract? (c) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that the comparable selected by the TPO were functionally incomparable without assigning any reason whatsoever? The questions of law have been answered in favour of the assessee by Hon ble High Court from para 14 to 18 which for the sake of completeness is reproduced below: 14. Rule 10C of the rules bears the heading most appropriate method . Sub-rule (1) thereof provides that for the purposes of sub-section (1) of section 92C of the Act, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction or specified domestic transaction and which provides the most reliable measure of an arm s length price in relation to the international transaction or the specified domestic transaction as the case may be. Sub-rule (2) provides for the factors which are required to be taken into account in selecting the most appropriate method as specified in sub-rule (1). 15. The controversy involved .....

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..... e the profits, but in the instant case, where the total contract terms are similar between Shandong HO and PO as well as between Shandong HO and the two Indian parties, which is the fit comparable uncontrolled transaction and there being no variation in the rates charged as well as other terms of the agreement, then there remains no room for the revenue to make any upward adjustment to make addition in the hands of the assessee. The Tribunal, in the above facts and circumstances, was of the considered opinion that for the purpose of calculating arm s length price, CUP method should have been followed by the Assessing Officer to determine the arm s length price and further held that if the CUP method is applied, then no transfer pricing adjustment needs to be made in the given facts and circumstances of the case. The Tribunal, accordingly, found no infirmity in the findings recorded by the Commissioner (Appeals) and decided the question against the revenue. 17. In the opinion of this court, the question as to which is the most appropriate method for determining the arm's length price and as to whether the transaction between APL and JPL and Shandong Head Office is a comparable u .....

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