The Dy.DIT(Int.Taxn.), Ahmedabad V. M/s. Sichuan Fortune Projects Management Ltd., Kutch

ITA 1129/AHD/2014

AI Insights

The case involves multiple appeals by the Revenue against the orders of the Commissioner of Income Tax (Appeals) concerning the transfer pricing adjustments and the rejection of the assessee's books of accounts for the assessment years 2008-09 to 2013-14. The assessee, M/s Sichuan Fortune Project Management Ltd., a foreign company, had entered into a contract with M/s Adani Power Limited for providing services related to a power project in India. The Revenue challenged the CIT(A)'s decisions, which favored the assessee, arguing that the CIT(A) erred in law and on facts by not appreciating the evidence and the provisions of the Income Tax Act regarding transfer pricing and the rejection of the assessee's books of accounts.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 135835 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-09-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 06-06-2023
• Assessment Year: 2008-2009
• Appeal Filed On: 15-04-2014
• Other Referred Cases: ACIT, Range-10(1) v. ITDCementation India Ltd., Mazagaon Dock Ltd. v. JCIT, Jacobs Engg. India (P.) Ltd. v. ACIT, Dredging International v. ADIT, Hughes Systique India (P.) Ltd v. ACIT, Deputy Commissioner of Income-tax, Circle-4(1) v. Isagro (Asia) Agrochemicals (P.) Ltd, Assistant Commissioner of Income-tax, Range-10(1) v. Vistaar Systems (P.) Ltd, Deputy Commissioner of Income-tax, Circle-8(2) v. Lumax Industries Ltd, Livingstone v. Deputy Commissioner of Income-tax, Deputy Commissioner of Income-tax, Circle-16(1) v. Kanubhai Ramjibhai Makwana, Commissioner of Income Tax-1 v. Arvind Mills Ltd, CIT(IT & TP) v. Shandong Tiejun Electric Power Engineering Co., CIT(IT & TP) v. Shandong Tiejun Electric Power Engineering Co.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: FORTHEASSESSEETO; FORTHEREVENUE; STRENUOUSLYURGEDTHATTHEASSESSINGOFFICER; FOLLOWINGASISSUEDBYICAI.THUS; ITISALSOCLEARTHAT
• Assessee Lawyers: SHRIDHRUNALBHATT; WITHSHRIBIREN; OBSERVINGTHATTHEASSESSEEDIDNOTELABORATEINITSSUBMISSIONASTOWHATWAS; SUBMITTINGTHEDETAILS; IHAVEPERUSEDTHEORDERPASSEDBYTHETPO; SUBMISSIONSMADEBYTHEAPPELLANTCOMPANY; ..IFINDFORCEINTHEFACTSANDLEGALSUBMISSIONSOFTHEAPPELLANTTHETRANSACTIONS; .IHAVEGONETHROUGHTHEASSESSMENTORDER; STATEMENTOFFACTSANDFURTHER; SECTIONOFTHEACT.THISSTATUTORYRIGHT; SECTIONOFTHEACT.THISSTATUTORYRIGHTCANNOTBEWITHHELDFROMTHE
• Keywords: Depreciation; TDS

Judgement Text

आयकरअपीलीयअधिकरण , अहमदाबादनयायपीी INTHEINCOMETAXAPPELLATETRIBUNAL, ‘’D’’BENCH,AHMEDABAD BEFORESHRIWASEEMAHMED,ACCOUNTANTMEMBER And SHRISIDDHARTHANAUTIYAL,JUDICIALMEMBER Sr. No. ITA/C.O.No. Asstt. Year Nameof Appellant NameofRespondent 1. ITA No.1129/Ahd/2014 2008-09 D.D.I.T, (International Taxation)-I, Ahmedabad M/s.SichuanFortune ProjectManagement Ltd., TundaVillage, Nr.SirachaTaluka, Mundra, Kutch-382345. PAN:AALCS0495F 2-3 ITA No.2916/Ahd/2014 With C.O.No. 300/Ahd/2020 2009-10 D.C.I.T, (International Taxation)-I, Ahmedabad M/s.SichuanFortune ProjectManagement Ltd., PAN:AALCS0495F 4-5 ITANos.78- 79/Ahd/2018 2010-11 & 2011-12 D.C.I.T, (International Taxation)-I, Ahmedabad M/s.SichuanFortune ProjectManagement Ltd., PAN:AALCS0495F 6-7. ITANo.2816- 2817/Ahd/2017 2012-13 & 2013-14 D.C.I.T, (International Taxation)-I, Ahmedabad M/s.SichuanFortune ProjectManagement Ltd., PAN:AALCS0495F (Applicant)(Respondent) Revenueby:ShriSudhenduDas,CIT.D.R Assesseeby:ShriDhrunalBhatt,withShriBiren Shah,A.Rs सुनवाईकीतारीख /DateofHearing:07/06/2023 घोषणाकीतारीख /DateofPronouncement:04/09/2023 आदेश/ORDER ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 2 PERWASEEMAHMEDACCOUNTANTMEMBER: ThecaptionedappealsandCOhavebeenfiledattheinstanceofthe RevenueandtheassesseeagainsttheordersoftheLearnedCommissionerof IncomeTax(Appeals)-,Ahmedabad,(inshort“Ld.CIT(A)”)arisinginthematter ofassessmentorderpassedunders.143(3)oftheIncomeTaxAct,1961(here- in-afterreferredtoas"theAct")relevanttotheAssessmentYears2008-09to 2013-14.TheassesseehasfiledtheCrossObjectionintheRevenue’sappeal bearingITANo.2916/Ahd/2014fortheAssessmentYear2013-14. 2.First,wetakeupITANo.1129/AHD/2014,anappealbytheRevenuefor A.Y.2008-09 3.Therevenuehasraisedfollowinggroundsofappeal: 1)TheCIT(A)haserredinlawandonfactsinholdingthataccountsoftheassessee couldnotberejectedinspiteofclearevidencebroughtonrecordthattheprofitcomputed bytheassesseewasnotreliable. 2)TheCIT(A)haserredinlawandonfactsinallowingtheclaimofRs.8.20crores disallowedbytheassesseeu/s.40(a)—(ia)without appreciatingthatsuchaclaimwascontrarytotheprovisionofsection40(a)(ia)ofthel.T. Act. 3)TheCIT(A)haserredinlawandonfactsindeletingthetransfer pricingadjustmentofRs.2,32,74,967/-recommendedbytheTPO withoutanycogentreason. 4)TheCIT(A)haserredinlawandonfactsinnotappreciatingthatsincetheHOofthe assesseewasregularlydealingwithCoscoLogisticsandallthedocumentationrelatingto thetransactionbetweenHOandCoscowerenotavailable.theTPOrightlyexcludedCosco Logisticsascomparable. 5)TheLd.CIT(A)haserredinlawandonfactsinconcludingthattheTPOhadcompared thearm'slengthpriceandmadeadjustmentinuncontrolledtransactionwithout appreciatingthattheadjustmentwasmadetothecostreimbursementmadetoheHO whichwasacontrolledtransaction. 6)TheorderoftheLd.CIT(A)deservestobedeletedandthatoftheAOrestored. 7)Anyothergroundthatmaybeurgedatthetimeofhearing. 4.TheinterconnectedissueraisedbytheRevenueinGroundNos.1and3to 5isthattheld.CIT(A)erredindeletingtheadditionmadebytheAO/TPOon ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 3 accountof2,65,74,519.00andfurtherholdingthatthebooksofaccountsofthe assesseecouldnotberejected. 5.Brieffactsofthecasearethattheassesseei.e.M/sSichuanFortune ProjectManagementLimited,isaforeigncompanyincorporatedinChina.Itis engagedinthebusinessofrenderingservicesforerecting,testing,installing,and commissioningoftheinfrastructurepowerproject. 5.1TheassesseehasenteredintoanagreementwithM/sAdaniPowerLimited (inshortAPL)toprovidetheservicesforsettingupapowerprojectintwophases i.e.Phase-IandPhase-II(eachphasebeingof2X330MWs)atMundra,Kutch, Gujarat.TheassesseeforexecutingthesaidprojectsetupaprojectofficeinIndia knownascampoffice/PEinIndia.Thisisthefirstyearofoperationofcamp office/PEoftheassesseecompanyinIndia. 5.2TheassesseehasfileditsIncometaxreturnfortheyearunder considerationon30-09-2008claimingalossofRs.28,02,385/-only.Subsequently, thecaseoftheassesseewasselectedforscrutinyfortheAY2008-09byissuinga noticeu/s143(2)oftheActdated19-08-2009. 6.Duringtheassessmentproceedings,itwasfoundbytheAOonthe verificationofform3CEBthattheassesseecompanyhasenteredtheinternational transactionwithitsparentcompany(AE)tothetuneofRs.21,46,49,412/-only. Assuch,itwassubmittedthatshippingexpenseswereincurredbytheparent companyonbehalfoftheassesseeandthesamehasbeenreimbursedbythe assesseeoncostbasistotheparentcompany.Thedetailsofsuchfreight expensesisgivenonpageNo.42ofpaperbook. 6.1Inviewoftheabove,theAOreferredthecaseoftheassesseetothe TransferPricingOfficerfordeterminingtheALPoftheaforesaidtransaction.The Ld.TPOonperusalofform3CEBfoundthattheassesseehasclaimedaboutthe ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 4 above-mentionedtransactionthatitisonlyreimbursementoftheexpensestothe HO,anditisnotrequiredtoreportthesameaspaymentmadetoAEtoattract thetransferpricingprovisions. 6.1.1TheLd.TPOfurtheronperusaloftheshippingbillssubmittedbythe assesseeduringtheassessmentproceedingsfoundthatthereareserious deficienciesinsuchshippingbills.TheTPOonverificationofthebillNo. IMTB10615001raisedbyoneoftheShippernamelyM/sCoscoLogisticshas chargedtheprice686USD$pertonwhichishigherby300%fromthepriceof USD229pertonchargedbythesameshipperonanotherbillNo.XGG01A/GG01 forthesameperiod.Similarly,anothershippingagency,namelyAdani InternationalShippingAgencyCo.Ltd.raisedbillNo.0711ATSHMD01andcharged price180USD$perton.Thus,theTPOfoundahugedifferenceintheprice chargedbytheshippingagencies. 6.1.2Furthermore,theassesseehasnotfiledanycontractagreementbetween theshippingcompanyandHOoftheassessee. 6.1.3ItwasalsoobservedbytheTPOthattheassesseehasnotfurnishedthe informationregardingwhethertheequipmentshippedbytheHOwasin pursuancetothetermsofagreementbetweentheassesseeandshipping companies.Accordingly,theTPOsoughtasexplanationfromtheassesseeabout suchahugedifferenceintheshippingbillsasdiscussedabove. 6.1.4TheassesseebeforetheTPOsubmittedthatasperthecontractagreement enteredbytheassesseewithAdanipowerLtd,itwasresponsiblefortransporting thepowerplantrelatedequipment’sandvariouspartsfortheAPLpowerproject fromChinaport.Therefore,theHOoftheassesseeawardedthecontracttothe shippingagentstofacilitatethetransportationofthegoodsfromChinaportto Indiaport.Thus,thecostofsuchshippingexpenseswasreimbursedbythe assesseetoHO.Suchreimbursementissupportedbythethird-partyshippingbills ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 5 andbillofloadingforthegoodstransported.Assuch,itwasthecontentionofthe assesseethatithasreimbursedshippingexpensesonactualcostbasiswhichis incurredbytheHOonbehalfoftheassessee.Thus,thebestCUPfordetermining theALPistheinvoiceofthirdpartyavailableonrecordagainstwhichsuch reimbursementhasbeenmade.Further,theAEorassesseedoesnothaveany controlonthethirdpartywhoexecutestheshippingservicesfortheassesseeto transporttheequipment/variouspartsforthepowerplantfromtheChinaportto IndiaPort.Thus,thesameshouldbeconsideredastheCUPforthesaid transaction. 6.1.5Theassesseealsosubmittedthatthereisonlyonesingleinstancewhere theshippingagencychargedthehigherrateascomparedtotheothershipping agent.Suchahigherratewaschargedbytheshipperbecausethequantities transportedwereverylowascomparedtootherscargo.Incasetheshipped quantityislowerby70%ofthenormalquantity,thentheshipperchargesthe higherrateofshipping.Aspertheassessee,thecargoimportedvidebilloflading No.IMTB710615001throughshippingagentM/sCoscoLogistic,weighted520199 kgforwhichanamountofUSD$345000/-waspaidbytheHOtoshippingagent, thiscargowasthelowestcargointermsofquantityandweightwasonly5.20lacs kg.duringtheyearunderconsideration.Further,thepartsimportedthroughsuch shippingbillwereveryessentialatthatpointoftimeforerectionandinstallation ofthepowerplant. 6.1.6Aspertheassessee,ithasbeenfollowingtheaccrualsystemofaccounting andallthebillswereraisedbyitimmediatelyonrenderingoftheservicesof facilitationoftransportationofgoods.Further,theassesseeisalsoengagedin renderingofservicesoferection,testing,installation,andcommissioningof infrastructureproject(power)andothersimilarservices.Therevenuefromsuch activityisrecognizeduponrenderingofservices.Theassesseehasfiledallthe invoicesraisedbyittoM/sAdaniPowerLimitedwhichwereraisedinaccordance withthecontractagreemententeredbyitwithM/sAdaniPowerLimited. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 6 6.1.7Withoutprejudicetotheabove,theassesseealsosubmittedthat adjustmentshouldbeconfinedinrespectofratepertonpaidtoM/sCosco logisticstotheshippingbillthroughwhomthegoodstransportedinrespectof projectcarriedoutbytheassessee. 6.1.8However,theLd.TPO/AOrejectedthecontentionoftheassesseeby observingthatthirdpartyshippingbillsofferedbytheassesseeasCUPforthe purposeofreimbursementisnotacceptablesincetheassesseehasnotsubmitted anydocumentsbasedonwhichshippingexpensesunderconsiderationhasbeen incurredbytheAE(HO).TheBillsfurnishedbytheassesseedonotco-relateto theconsultancyservicecarriedoutbytheassessee.Theassesseehasnot submittedanyquotationoffreightpricegivenbysuchshipper. 6.1.9TheassesseeclaimedthathigherfreightchargesofUSD$-686pertonon shippingbilldated12-10-2007werepaidtoCOSCOLogisticsincomparisonofthe othershippingbillissuedbythesameoperatoratUSD$221/229duetoless quantitytransportedwhichwasessentialatthattimeforthepowerplantproject. However,theassesseehasnotfurnishedanydocumentswhichindicatethatsuch goodswereurgentlyrequired.Further,theassesseehasnotproducedanyfreight ratedataavailableforsimilarshipmentsandpackages. 6.1.10Inviewoftheabove,theTPOconcludedthatthebillsraisedbyM/sCosco Logisticarenotreliable.Further,intheabsenceofexternalCUPdata,a reasonableapproachtodetermineALPhasbeendecidedbyexcludingthebillsof COCSOlogisticsfromthetotalshippingexpensesreimbursedbytheassesseeto HOandcomputetheInternalcuptobenchmarkthefreightratepaidbythe assesseecompanytoitsAE(HO).ThedetailofcomputationofALPasunder: ShippingAgencyTotaltonnageTotalFreight(USD) AdaniInternational shippingAgencyCo. 9,6311,664,959 ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 7 Ltd. Haotong International Transportation AgentCo.Ltd. 8,5291,394,039 18,1603,058,938 Average=3058998/18160=168USDpertonne Thereforeapplyingthisaveragerateoftonnagetototaltonnageshippedbyallhe threeoperatorswillgiveusthetotalfreightexpenses,thattheassesseewassupposedto payaarmslengthpriceI.e28766*168=4,832,688USD.Applyingaveragerateof exchangeof39.60,takingfromalltherelevantperiodofinvoices,therupeevaluecomes tobeRs.19,13,74,445/-asagainstassessee’sclaimofRs.21,46,49,412/- 5.13Inviewoftheabovediscussion,iwouldbeconsideredappropriatetomake upwardadjustmentofRs.2,32,74,967/-totheIntentionaltransactionoftheassessee beingreimbursementoffreightexpenses. 6.2Inadditiontotheabove,theAOduringtheassessmentproceedings observedfromtheverificationoftheITRoftheassesseecompanythatthe assesseecompanyhasdeclaredturnoverofRs.26,57,45,191/-andclaimed expensesagainstsuchrevenueofRs.35,16,33,544/-only.Thus,theassesseehas companyincurredlossofRs.8,58,88,353/-only.However,theassesseecompany itselfhasmadecertaindisallowanceofexpensesandaddedtotheincomeofthe assesseecompany.Thus,afteradditionofcertaindisallowances,losswas computedatRs.28,02,385/-only. 6.2.1Further,onverificationoftheexpensesitwasfoundthatmajorexpenses wereincurredbytheassesseeinrespectofcertainmaterialsshippedfromChina toIndiaandsuchmaterialfurtherdeliveredfromtheIndianporttowork-station ofM/sAPL.Accordingly,theassesseewasaskedtoexplainthehugegapbetween incomeandexpensesandfurtheranexplanationwassoughthowtheassessee recognizedtheturnoverofRs.26,57,45,191/-initsbook,whatwasthemethodto recordtheturnoverinitsbooks,whatwastherelevantclauseofthecontract agreementbetweenassesseewhicharedecidingfactorofrevenuerecognition. 6.2.2Theassesseeinrespectofsuchgapbetweenincomeandexpenses submittedthatasperthecontractagreementbetweenassesseeandAdaniPower ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 8 Ltd.,theassesseecompanyisresponsiblefortransportingthepowerplantrelated equipmentandvariouspartsfortheAPLpowerprojectfromChinaporttothe Indianportandthentotheprojectsite.TheHOoftheassesseeawardedsuch worktotheindependentunrelatedthirdpartiesbeingshippingagencies.Forsake ofconvenienceandconsideringthatthattheshippingcompanieswerebasedin China,itwasdecidedthatpaymenttosuchindependentshippingagencieswillbe paidbytheHOoftheassesseeandthereafterthesamehastobereimbursedby theassesseetoHOonactualbasis. 6.2.3TheassesseebeforetheLd.AOfurthersubmittedthatduringtheyear underconsideration,theassesseehasclaimedtotalexpensesofRs. 34,55,98,856/-outofwhichexpensesofRs.28,16,21,522/-wereincurredin respectoffreightandclearingchargesasdetailedunder: a.Expensesincurredinrespectoffreightandforwardingandhandling chargesRs.5,89,62,327/-fortheGoodsTransportedfromIndianportto worksite. b.ExpensesincurredinrespectoffreightandClearingChargesofRs. 22,26,59,195/-onlyfortheGoodsTransportedfromChinaporttoIndian Port 6.2.4However,therevenuewasrecognizedfromtheactivityoffreight forwarding,clearing,andhandlingisonlyofRs.21,84,48,388/-,therefore,the lossofRs.6,31,73,134/-wasincurredduetotheactivityoffreightforwardingand handlingserviceandoceanfreight. 6.2.5Theassesseealsoclarifiedthereasonbehindsuchlossbysubmittingthatit hasincurredalossduetotheincreaseinthepriceofoilandgas.Duringtheyear underconsideration,thepriceofoilandgasroseinternationallytoanall-timehigh. Therefore,itsfreightcostwasincreasedonaccountofincreasingtheoilandgas price.ItcanalsobeseenfromtheProfit&lossaccountthatthelosswasmainly incurredduetofreightexpenses.However,asperthecontractagreement ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 9 betweentheassesseecompanyandM/sAdaniPowerLtd,therevenueofthe assesseewasfixed.Therefore,anadditiontothecostwasnotpassedontothe customerwhichhasresultedinahugelosstoit. 6.2.6Theassesseealsosubmittedthatitisnotpossibletoestimatetheexpenses inthiskindofbusinesswhichtheassesseecompanyisgoingtoincurinfuturedue touncertaintyofoilpriceandexchangeratefluctuation. 6.2.7Further,thebillofentryofthecargohandledbytheassesseecompanyhas beensubmitted.Foreverybillofentry,theamountchargedbythethirdparty fromtheassesseecompanywasalsosubmitted. 6.2.8FurtherassesseeinrespectofRevenuerecognition,submittedthatithas recordedtherevenuefromoperationduringtheyearunderconsiderationon mercantilebasisasdetailedunder: Revenuefromerection,commission,&installation4,72,96,903/- Revenuefromforwarding,handling,clearing21,84,48,388/- Total26,57,45,291/- 6.2.9AspertheClause4.2ofthecontractagreementbetweenassesseeandM/s AdanipowerLtd,therevenuerecognitiondependsupontheperformanceof serviceasperthesatisfactionofcustomerinaccordancewiththecondition specifiedintherelevantclauseofthecontractandRevenuerecognitioninrespect ofserviceoffacilitationoftransportationofgoodsfromthemanufacturersitesin ChinatotheworkplaceinKutchwhichisbasedoncostincurredbytheassessee company. 6.2.10TheassesseealsosubmittedthatasperAS-9certaintyregardingreceiptof amountofconsiderationistheessentialelementforrecognitionofrevenue.Inthe caseofanassesseesuchcertaintyisestablishedonlywhentheservicesare ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 10 performedtothesatisfactionoftheconditionsspecifiedinthecontractagreement. Accordingly,theassesseerecognizedtherevenueoffromerection,commission,& installationbasedonAS-9. 6.2.11TheassesseealsosubmittedthatitiswellsettledlawthattheLd.AO cannotrejectthebooksofaccountoftheassesseeonlybasedonlossdeclaredin incometaxreturn.Bookofaccountsoftheassesseeweredulyauditedand certifiedbytheAuditors.Further,themethodofaccountingisconsistently followedbytheassesseeonyear-to-yearbasisforthewholeprojectthatmeans assesseealsofollowedthesameaccountingprincipalinsubsequentyearalsoif anyservicenotrecognizedasincomeintheyearunderconsiderationduetonon- fullfillingtheconditionofthecontractagreement.Suchincomewillberecognized inasubsequentyearwhenitisapprovedbythecustomerasperthecontract. Therefore,itistaxneutralexercise. 6.2.12Theassesseefurthersubmittedthattheassesseecouldclaimlowerprofit &lossifitkeepsandmaintainsthebooksofaccountsasarerequiredtobekept u/s44AAoftheActandgetauditedsuchbooksofaccountu/s44ABoftheAct. 6.2.13However,theLd.AOwasnotsatisfiedwiththesubmissionoftheassessee byobservingthattheassesseedidnotelaborateinitssubmissionastowhatwas theimpactoftheincreaseinpriceofoilandhowthesamehasaffecteditsfreight expenses. 6.2.14Theassesseehasnotfiledanyagreementthatparentcompanymight haveenteredwiththeshippingagenciesorsuppliersforprovidingthefacilitation serviceoftransportationtoAdaniPowerLtd. 6.2.15Theassesseehasnotexplainedwhattheexpectedexpenseswerefor providingthefacilitationserviceoftransportationorhowitscomputationwent wrong.TheAOalsowasoftheviewthatanyprudentbusinessmanbeforesigning ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 11 thecontractfirstlyestimatethecostoftheprojectthroughsomebasisand materialcorrespondingtorevenue. 6.2.16Further,onperusaloftheprofitandlossaccount,itwasnotedthatthe assesseehadshownincomeofRs.21,84,48,388/-fromforwardingandhandling whilstexpensesbookedRs.22,26,59,195/-asfreightandclearingcharges thereforethelossofRs.42,10,807/-onlyattributedtofluctuationofoilprices. However,theassesseewastryingtojustifythelossofRs.8,58,88,353/-dueto increaseinpriceofoil. 6.2.17TheassesseehadshownincomeofRs.4,72,96,803/-asincomefrom erection,commissioning,andinstallationchargesagainsttheexpensesincurredof Rs.6,39,77,334/-meaningtherebysomeoftheinvoiceswerenotraised correspondingtosuchexpenses.Ifanyworkwhichhasbeendonebythe assesseebuthasnotbeenapprovedbythecustomerorsuchworkisnot completed,thenitshouldhavebeenshownasworkinprogressonthebalance sheet. 6.2.18Further,theassesseehasnotfurnishedtheinvoicesraisedonthe employer.Thus,intheabsenceofaninvoice,itisnotpossibletoverifytheservice performedbytheassessee. 6.2.19TheAOalsoobservedthattheassesseeenteredafixedpricecontractand therefore,itcouldhavemaintaineditsbooksofaccountsaspertheAS-7and recognizedrevenueasperthemethodspecifiedinAS-7. 6.3Inviewoftheabove,theld.,AOconcludedthattheassesseehasnot maintainedthebooksofaccountsaspertheprovisionsofsection44BBBr.w.s. 145oftheAct.Accordingly,theAOrejectedthebooksofaccountsoftheassessee. Further,intheabsenceofaninvoiceraisedbytheassesseetotheemployeritis notpossibletocomputethecorrectprofitoftheassessee.ThereforeAOis ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 12 requiredtocomputetheincomeoftheassesseeasperprovisionofsection 44BBB(1)oftheAct.Finally,theAOworkedtheincomeoftheassesseeafter rejectingthebooksatRs.2,65,74,519being10%ofthereceiptsofRs. 26,75,45,191whichwasmorethantheadjustmentmadebytheTPOinrespectof internationaltransaction.Thus,theadjustmentmadebytheTPOforRs. 2,32,74,967.00wasdeemedtobeincludedintheestimatedprofitofRs. 2,65,74,519whichwasaddedtothetotalincomeoftheassessee. 7.AggrievedassesseepreferredanappealbeforetheLd.CIT(A)and submittedthattheassesseebeingtheprojectofficewasincorporatedinIndiaby theforeigncompanynamelySFPLMHO.M/sSFPMLhasenteredaContractwith thirdpartynamelyAdaniPowerLimitedwhichisanIndianentityforprovidingthe servicessuchastransporting,erecting,testing,installation,andcommissioningof infrastructureofapowerproject. 7.1ForprovidingtheservicestoAdaniPowerLimited,itwasnecessaryforthe foreigncompany(SFPLM)toestablishaprojectofficeinIndiaasperthe guidelinesfarmedbytheReserveBankofIndia.Therefore,theprojectofficeand theforeigncompanyarenotlegallydistinctentities.But,forthelimitedpurposeof attributionofprofit/lossfromthecontract,theseshouldbeconsideredas separateentities. 7.2TheassesseebeforetheLd.CIT(A)furthersubmittedtheFARanalysisas detailedunder: BrieflytheFARundertakenbytheHOaswellasthePOisasunder: ParticularsHOPO/PE Transportationandcleaning andforwarding Erection,installation,testing& commissioning Constructionandconstruction management Legalandstatutorycompliance ContractualRisk(Contractrisk isfacedbyacontractingentity inrespectofnon-fulfillmentof ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 13 anyobligationsemanating fromthecontract) CreditRisks&marketrisks HeaboveFARisclearlyevidentfromthecontractenteredwiththeAPL.Theappellant reiteratesthatitisthesoleresponsibilityoftheprojectofficetoexecutetheprojectinIndia. ProjectofficedirectlyandindependentlyexecutesthecontractenteredwithAPPL.Asstatedabove transportationofgoodsisappellant’sobligation. 7.3BasedonFARanalysis,theassesseesubmittedthatprojectofficeisonly responsibleforexecutionofprojectinIndia.Further,thetransportationofgoods isalsotheresponsibilityoftheprojectoffice.Itcanbeseenfromtherelevant portionofthecontractwhichisreproducedonpages64to66intheorderofthe ld.CIT-A. 7.4Theassesseealsojustifiedformakingthepaymenttoshippingagency throughtheinvolvementoftheHOonaccountoftwofactors,firstly,thepayment insuchcaseswasexpeditedquicklyandsecondly,itprovidessavingtothePO fromhugeforeignexchangeriskexposure.Otherwise,theHOfirstneedstosend therequiredfundstoIndiaformakingpaymenttosuchshippingagenciesand thereafter,thePOformakingpaymenttoshippingagencies,wouldhavetosell thecurrencyreceivedfromtheHOandre-buythesamewhilemakingpayment. 7.5Theassesseefurthersubmittedthatcostofshippingexpensesincurredby theHOonbehalfofthePOhasbeenreimbursedtotheHObyPO.Thus,itcannot betreatedasinternationalTransactionwithintheprovisionofsection92Bofthe Act.Aspertheassessee,thecontractfortheservicesofthetransportationof equipmentwashandedovertotheindependentthirdpartiesshippingagency whichcannotbetermedasinternationaltransactionwithinthemeaningofsection 92BoftheAct.Further,theLd.AO/TPOhasnotbroughtonrecordanyfinding thatsuchshippingagencieswereassociatedenterprisesoftheHOorthePO. Hence,itisnotjustifiabletotreatthereimbursementofcosttoHObyPOas internationaltransaction. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 14 7.6Theassesseefurthersubmittedthatduringtheassessmentproceedings,it hadfiledthenecessarydocumentsbeforetheTPOasdetailedunder: i.Invoiceraisedbytheshippingagencies. ii.Nameofcarrier/vesselthroughwhichgoodswerebroughtinIndia. iii.PaymentProof(amountpaidbytheHOtoshippingagency). iv.Billofladingreflectingtheportofentry,volumeofgoods,dateson whichgoodswereshipped. v.AlltheinvoicesissuedtoAPLalongwiththeledgercopyofAPLinthe booksoftheassessee. 7.7However,theTPOhasignoredallthedetailsfiledbytheassesseeand reachedtheconclusionthatthetransactionsarenotgenuine.Aspertheassessee, thetransactionbetweentheprojectofficeandtheHObeingreimbursementof expensescanbebenchmarkwiththetransactionbytakingthirdpartyshippingbill asaCUP.ButtheTPOobservedthatthirdpartybillsfiledbytheassesseesuffer fromseriousdeficiencies.However,theLd.TPOhasnotbroughtonrecordany deficiencyinthebillsofthethirdparties. 7.8TheLd.TPOaswellasLd.AOhavenotdisputedthefactthatallthe shippingagenciestowhompaymentwasmadebyHOonbehalfofPOforthe transportationofgoodsfromChinatoIndiaforexecutionofpowerprojectof Adanipowerlimitedareindependentshippingagenciesandnotassociated enterprisesofHOaswellasPO.Assuch,thereimbursementtoHObythePOwas purelyinvolvingthecostofshippingexpenseswithoutanymarkup. 7.9TheassesseealsosubmittedthatwhilebenchmarkingtheALP,theLd.TPO appliedthesamerateonsuchcargo/transportationchargesnamelyAdani InternationalShippingAgencyCo.andHaotongInternationalTransportation AgentCo.Ltd.However,theLd.TPOneverdoubtedsuchshippingagencies. 7.10Theassesseeregardingtherejectionofthebooksofaccountssubmitted thatthereisnorequirementofestimatingthecostwhereallreceiptandexpenses ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 15 areverifiableandsupportedbythevouchersandcertifiedbytheauditors.The assesseealsosubmittedthatithasbeenfollowingthemercantilesystemof accountingandaccordinglyexpensesandincomearedebitedandcreditedbased onaccrualsystem.Thus,thereisnodefectinthebooksofaccountand accountingmethodadoptedbytheassessee.Theassesseefurthersubmittedthat thereisnostatutoryrequirementmandatingtofiletheestimateofcost. 7.11Theassesseefurthersubmittedthatithasfiledalltheinvoicesraisedbyit toAdaniPowerLtdagainsttheexpensesduringtheproceedingsbeforetheTPO/ AO.Therefore,theallegationoftheAOthattheassesseehasnotfiledinvoices raisedtoAdaniPowerLtdwasnotcorrect. 7.12Theassesseealsopointedoutthatithasmaintainedallthebooksof accountspecifiedundersection44AAoftheIncometaxActlikecashbook,Bank book,Ledger,Journal,andsuchbooksofaccountswerealsogotauditedu/s44AB oftheAct.TheassesseealsosubmittedthattheLd.AOhasnotpointedoutany expenseswhichwereun-vouchedornotgenuineorinflated.TheAOhasalsonot doubtedtheincomeandexpensesrecordedinthebooksofaccountsofthe assesseeandhehasadmittedalltheexpensesarelegitimatebusinessexpenses. Therefore,theactofrejectionofthebooksofaccountsandincomecomputedu/s 44BBB(1)oftheActisnotjustifiable.Theassesseeinrespectofrevenue recognitionhassubmittedthatithaspreparedthefinancialstatementsonaccrual basisofaccountingunderthehistoricalcostconventioninaccordancewith companiesAct1956andtheapplicableaccountingstandardissuedbytheICAI. 7.13Further,therevenueandexpensesrecordedinthebooksofaccountbased onworkperformed.TheassesseehasraisedtheinvoicetoAdaniPowerLtdfor twoactivities: A)forwardingandhandingofthecargo B)erection,commission,andinstallationofthepowerproject. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 16 7.14Further,theassesseesubmittedthatasperclause14titledas“Contract priceandpayment”oftheContractagreementwhereitisclearlymentionedthat APLwillmakepaymentofbillssubmittedbytheassesseefromtimetotime. Further,suchpaymentisbasedonprogressoftheworkexecutedbytheassessee company.Further,suchclausedefinesthatprogressreporttobesubmittedbythe assesseeshouldhaveincludedthefollowing: a)Chartanddetaileddescriptionofprogress b)Photographsshowingthestatusofprogressonthesite. c)Progressofconstructionwork d)Copiestobefiledofqualityplandocuments,testresultandcertificateof Materialetc. 7.15Uponfurnishingtheabovedetails,M/sAPLclearstheinvoiceofthe assessee.Thus,theinvoiceraisedbytheassesseetoAPLnotonlyformthebasis onachievingcertainmilestonesbutalsoinvoiceraisedbasedonwork performance,descriptionofprogress,Photographs,etc.Accordingly,theassessee recognizedtherevenuebyfollowingAS-9issuedbyICAI.Thus,itisalsoclearthat theallegationoftheAOthattheassesseeshouldhaverecognizedrevenueasper AS-7istotallybase-less. 7.16Theassesseealsosubmittedthecontractforthesettingupofthepower plantwithAdaniPowerLimitedwasafixedpricecontracti.e.20million.Thus,all therevenuerealizableformtheAPLhastoberecognizedinthebooksofaccount oftheassesseeoveraperiodoffouryears.i.eduringtheperiodactivityofproject continuedandultimatelyconcluded.Theassesseefurthersubmittedthatithas incurredlossforthewholeproject.Accordingly,theassesseepreparedits expectedprofitandlossaccountasperAS-7whichisreproducedonpage34in theorderoftheld.CIT-A. 7.17Itcanbeseenfromtheperusaloftheprofitandlossaccountthatthe assesseehasestimatedrevenueofRs.165croresagainsttheestimatedcostofRs. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 17 185crores.Therefore,theassesseehasexpectedlossofRs.20crores.Asper AS-7alltheexpectedlossshouldbeaccountedforintheyearimmediatelyasand whenitarises.However,theassesseedidnotapplytheprincipalofAS-7but recordedtherevenuebasedonaccrualaccountingsystemandlossclaimedin overaperiodoffouryearsduringwhichthisprojectiscontinued.Therefore,the AllegationthattheassesseeshouldhaveappliedAS-7torecognizetherevenueis notjustifiable. 7.18Further,itisclearthattheaccountingmethodappliedbytheassesseefor recordingthetransactionsinthebooksofaccountsandsamebooksrecognizedas perAS-7isataxneutralexercise. 8.TheLd.CIT(A)duringtheappellateproceedingobservedthatassesseehas claimedthatithasfiledthefollowingdocumentsbeforetheTPOaswellduring appellateproceeding. a)Copyofshippingbillofthirdpartiestowhomsuchoceanfreightcharges havebeenpaid. b)Copyofbillofentry,billoflading,and c)Chartshowingtheactualamountaspershippingbillswhichcorresponds withtheactualamountreimbursedbyappellanttoheadoffice. 8.1OnverificationofthecorrespondencebetweenTPOandassessee,finding oftheTPOinrespectofnon-submissionofthesupportingdocumentsisnot correct. 8.2Ld.CIT(A)furtherobservedthatassesseehasfiledthebillofentryand invoices,billofladingwhichclearlysupporttheclaimoftheassesseethatwhatit haspaidtoHOisnothingbutonlytheactualcostpaidbytheHOtotheshipping agencies.Thesamehasbeenreconciledbytheassesseebysubmittingthedetails ofreimbursementofRs.21,46,49,41/-only. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 18 8.3Further,theLd.CIT(A)wasinclinedtoacceptthecontentionofthe assesseeinrespectofpricechargesinanun-controlledtransactionhastobe comparedwithpricechargeinacontrolledtransactionasperthesection92Cr.w rule10B(1)(a)oftherules.However,theTPOhascomparedtwouncontrolled transactionsandmadeanadjustmentinuncontrolledtransactionwhichisnot sustainableintheeyeoflaw.Therelevantfindingoftheld.CIT-Astandsasunder: Ihaveperusedtheremandreportandthesubmissionsmadeagainsttheremand report.Thebooksofaccountshavebeenrejectedforseveralreasonsasreproduced andsummarizedaboveagainstwhichtheappellantcompanyhasfileddetailed submissionsdealingwitheachofsuchreasons.Ishallthereforeproceedtodeal witheachofthereasoncitedbytheAOforrejectingtheBooks. ReasonsforRejectionofBooksofAccounts: 1.HugeGapinExpenseandIncome:LimitedImpactofOilPrice ExpenseonOceanFreightExpenses: TheAObothintheorderaswellasremandreportstatedthattheappellanthad failedtoexplainhugelossesincurred,Furtheritwasstatedthatthevariationinoil priceshadalimitedimpactonlosseswhichwasquantifiedatRs42.10lacs (approx.)bytheAO.Theappellantsubmittedbeforemethatithadmatchedall expensesincurredtowardsoceanfreightandforwardingandhandlingwith correspondingincomeonAPL.Inthisrespecttheappellantcompanyextensively placedrelianceonthechart,submittedduringthecourseoftheassessment proceedings.ThischartisattachedasAnnexure-1formingparttothisorder. Detailsofrevenuesandexpensesfortheaforementionedactivitiesaresummarized intabularformatasunder: RevenuefromOperations: Forwarding&Handling Charges(IncludingFreight& ClearingCharges) Amount(Rs.)Total(Rs.) 21,84,48,38826,57,45,191 OperatingExpenses: Forwarding&Handling Charges (IncludingFreight& ClearingCharges) 28,16,21,522 34,55,98,856 Theappellantcompanyisinfactresponsiblefortransportationof equipmentsfromChinatoIndia,customclearance.Theappellantwasfurther responsibleforunloadingthegoodsandtransportingthecargostoprojectsite. Partofthecontractforl.e.forporthandlingandtransportingthecargostothejob sitewasawardedtoJ.MBaxi.&Co.ContractbetweentheJ.Mbaxiandthe ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 19 appellantwasalsoproducedbeforemealongwithalltheinvoicesandworksheets (onsamplebasis.).TheappellantalsoproducedalltheinvoicesraisedontheAPL againstforwardingandhandlingIncome.TheseinvoicesweresenttotheAOfor hisverificationandcomments;howevernodeficiencieshavebeenpointedoutby theAO.Appellantcompanyraisedaconsolidatedinvoiceforalltheaboveservices l.e.transportationofequipments,customclearanceandtransferringthecargosto theprojectsite.Thisalsobecomeabundantlydearfromthenarrationgiveninthe copyofinvoiceraisedontheappellantcompanyonAPL.Thedescriptionusedin eachinvoiceis"TransportationofGoodsfromtheportinChinatoPortinIndia, Clearance,PortHandlingandForwardingthegoodstoMundraPowerStationsite TheAOhasobservedvidepara8.1oftheorderthattheappellantcompanycould explain/justifyonlyRs42,10,807/oflossesonaccountofoilpricevariationwhich mainlyimpactsoceanfreightcharges.Iamoftheopinionthatthequantificationof Rs42.10lacsarrivediscompletelyunjustifiable.IndoingsotheAOhas convenientlyignoredthefactthattheappellantwasraisingcompositeinvoices. WhiletheinvoicesroseonAPLisacompositeinvoiceasdiscussedabove,theAO hasconsideredonlyoceanfreightexpensesincurredforshippingcargosfrom ChinatoIndia.TheAOcompletelydisregardedRs.5,89,62,327/-incurredforport clearance,andforwardingthegoodsfromMundraPorttothepowersite.The aboveexpenseshavebeenpaidtopartieslikeJ.M.Baxi&Co.andAdityaMarine copiesofcontract,invoices,vouchersetc.havebeencompiledinthepaperbook andverifiedaswell.NodiscrepancieshavebeenpointedoutbytheAOeitherin thebodyoftheorderorinhisremandreportinthisrespect.Thereforethefinding oftheAOthattheappellantcompanydidnotelaborateastohowvariationinoil priceshadimpactedthelossiscompletelymisplacedandnotJustifiable. Further,asfarasthereasonsforlossinsuchactivitiesisconcernedthe appellantsubmittedthatoneofthemainreasonsattributableforsuchlosswasthe increaseinoilwhichinturninflatedthefreightchargessubstantially.To substantiatetheabovestandtheappellantcompanysubmittedshippingfreights existingwhenitenteredthecontractwithAPL.Ithadestimatedtheshippingfreight tobeUSD45/FRT(approx.).Theseestimateswerebasedonquotesreceivedfrom variousshippingagencies.TheappellantcalledforQuotationfromvarious shippingcompaniesviz.SinotransTianjinCo.,LTD,ChengduZhonghalLogistics Co.,LTD.Thesamewerealsoproducedbeforeme.FurthertheBalticDryIndex (BDI),ashippingtradeIndex,roseto6500whenthefirstshipmentwassentfrom 3500existingwhentheappellantsignedthecontract.Thisbenchmarkindexfurther wentupto8000inthemonthofAugust2007.Althoughtheappellantcompanyhad keptsufficientmargins,howeverbecauseofincreaseinshippingfreightitincurred theselosses.Apartfromtheoilpricestheshippingfreightshavealsoincreasedon accountoflimitedshippingcapacityavailableforcarryingsuchequipmentsfrom ChinatoIndia.FurtherhighdemandofshipsonaccountincreaseinImportsof ChinesepowerplantequipmentsinIndiaalsofueledtheshippingrates.Therefore theappellantcompanyhaddischargeditsonusinexplainingthereasonswhichled tolosses.OntheotherhandtheAOhasnotbroughtanyevidence/materialon recordtodisprovethefactualpositionconsistentlysubmittedbeforehimaswell thisoffice.InsteadtheAOhasincorrectlyquantifiedRs.42.10lacs(approx.)as lossattributabletoshippingactivities.FurtherthecontractwithAPLbeingafixed pricecontractwithnoescalationclause,theappellantcouldnotpassonthe ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 20 increasedburdentoAPL.Thereforetheappellantcannotbesaidtohavedefaulted indischargingitsonusinexplaininglossesarisingfromtheaboveactivity.TheAO hasmadefrequentreferencestothelossaccountedforintheAuditedProfitand LossAccount,althoughmajorityofthelossesweredisallowedbytheappellant companyinitsReturnofIncome.TheAOconvenientlyignoredthesefactsandnot discussedintheorder.Consideringtheaboverejectiononbooksofaccountfornot providingforanyreasonsforlossesbeyond42.10lacsisincorrect,misplacedand hencenotjustifiable. 2.MatchingofExpensesandRevenues: TheAOhasrepeatedlyallegedthattheappellantcompanyhadfailedtomatchall expensesincurredwiththerevenuesearned.Inthisrespecttheappellantcompany hassubmittedadetailedchartattachedvideAnnexure-Itothisorder.The appellantsubmittedthatithadcorrelatedentireforwardingandhandlingincome bookedtowardstransportationofcargosfromChinatoIndia,customclearance, porthandlingandthereafterforwardingthecargostotheprojectsite.Onperusal ofthechartittranspiresthattheappellantcompanyhascorrelatedentireocean freightexpensespaidtoChineseShippingCompanies,portclearance,unloading andtransportationexpensespaidtoJ.MBaxi.Thechartiswellsupportedbythe copiesofallbillsraisedbytheshippingcompaniesandIndiansub-contractors.All theinvoicesraisedbytheappellantonAPLandbillsraisedbythevariousshippers andsub-contractorsonappellantarekeptinjuxtapositioninthechartreferred. Thereforetheappellanthasmatchedalltheexpenseswithrevenue.Thereisnota singleincidencepointedoutbytheAOeitherintheOrderorintheremandreport. Ihavecarefullygonethroughalltheinvoicesandbillsofladingandvariousother documentsproducedbytheappellant.Idonotfindanydiscrepanciesinthe invoicesraisedonAPLand/orvouchersforalltheaboveexpensesincurred.Thus ittranspiresthattheentireapproachoftheAOwascenteredonthelosses accountedbytheappellantinthebooksofaccounts.Hencetheobservationofthe AOtothisextentarereversed. 3.NoOpeningStock,closingworkInprogressandMatchingofexpensesfor Erection,CommissioningandInstallationwithcorrespondingRevenues: TheAOhasalsorejectedbooksofaccountsalsoonthegroundthatthe appellantcompanyhadnotreportedopeningstockand/orworkinprogress(WIP). Theappellantsubmittedthatthisbeinginitialyearofoperationthequestionof openingstockdoesnotarise.Iagreewiththecontentionoftheappellantandhence rejectionofbooksofaccountsongroundthatnoopeningstockbeingrecordedinis notatalljustifiable.FurtherregardingclosingWIP,theappellantsubmittedthat WIPcanonlyariseinErections,commissioningandInstallationwork.The appellantfurthersubmittedthatasperthechartreproducedabove,therevenue recognizedisRs.4,72,96,803/-asagainstexpensesof6,39,77,334/-.Accordingto theappellantrevenuesfromerection,commissionandinstallationwouldbe recognizedonlyonsubmissionofreportsAPLaslaiddowninthecontractbetween them.Italsosubmittedthattheappellanthadrecognizedrevenuesonlyafterthe workgetscertifiedbyAPL.Thereforetheappellantrecognizedrevenuesfrom erection,commissioningandinstallationwererecognizeduptoNovember2007. Copiesofallinvoicesalongwithledgercopyoferection,commissioning, ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 21 installationhavebeencompiledinthepaperbooksubmitted.Iagreewiththestand oftheappellantcompanyfornotrecognizingrevenuesbeyondNovember2007 whichisaccordancewiththecontractenteredintowiththeappellantcompany. RevenuescannotbesaidtohaveaccruedunlesstheAPLcertifiestheworkdone. ThecontractwithAPLbeingafixedpricecontracttheexerciseofallocatingmore revenueswouldbetaxneutral.Ifallocatedthesamewouldhavetobereducedfrom theyearinwhichtheyhavebeenoffered.Furtheritwouldalsonotbejustifiableto changeamethodofaccountingwhichhasbeenconsistentlyfollowedtillthe completionoftheproject.Furtheritwassubmittedthattheappellantcompanyhas incurredlossintheentireproject.Thereforetheissueofallocatingmorerevenues inthecurrentyearbecomespurelyacademic.Eveniftherevenuesareestimated forthecurrentyeartheAOwouldhavetoreducetherevenuesaccountedinthe subsequentyear.HowevertheappellantcouldcorrelateonlyRs.3,1,5,91,764/ IncurredtowardsErection,CommissioningandInstallationforthecorresponding period.Theappellantcompanysubmittedthatthebalanceexpenseof Rs.3,23,85,570/-(approx.)paid/payabletoPetronengineeringwasfortheperiod fromDecember2007toMarch2008.Theaforesaidexpensesoughttohavebeen categorizedasWIPbytheappellantcompany.Howevertheappellantsubmitted thatmajorityoferection,commissioningandInstallationexpensesweredisallowed u/s40(a)(la)oftheAct.ThereforetheappellanthadnotrecognizedWIP.TheAO isthereforedirectedtodisallowWIPofRs.3.23croresinthecurrentyear,ifatall claimedasexpensebytheappellant.TheAOshouldallowtheappellanttocarry forwardthesaidamountasopeningstockinthenextyear.Havingquantifiedthe closingWIPallexpensesforerection,commissioningandInstallationshallmatch withcorrespondingrevenues.Thereforerejectionofentirebooksonthisgroundis notatalljustifiable. 4.NonSubmissionofcontractwithShippingCompanies: NonSubmissionofContractwithShippingCompanies:TheAOhasstated intheorderthattheappellantcompanyhasfailedtoprovidewrittencopiesof contractforcarriageofgoods.Inthisrespecttheappellantsubmittedthatithad providedallcopiesofInvoicesraisedbyshippingagenciesonit,CopiesofBillof Ladings,Paymentproofmadetoshippingcompaniesandledgercopyofallthe shippingagencies.OntheotherhandtheAOfailedtopointoutdeficienciesor irregularitiesinthedetailscompiled.FurtheritisalsoacceptedbytheAOthatthe appellantcompanywasdutyboundtotransportgoodsfromChinatoIndiaand whichithascarriedoutinaccordancewiththescopeofthecontract.Itisalsonot deniedthatthecargoshavenotcometoIndia.Infacttheappellanthascorrelated customclearancecharges,porthandlingchargesforeachandeverycargo shipmentfromChinatoIndia.Thisisagainevidentfromthechartreproducedvide Annexure-Itothisorder.IamunabletoacceptthefindinggivenbytheAOinthis respectaswell.ThereforerejectionofBooksofAccountsonthisgroundisnot tenable. 5.MethodofRecognitionofRevenues-ApplicabilityofAS-7/AS-9 TheAOhasfurtherrejectedthebooksofaccountsforthereasonthattheappellant companyhasnotfollowedPercentagecompletionmethodforaccountingrevenues fromconstructioncontractasprescribedbyAccountingStandard-7/AS-9asissued ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 22 bytheICAI.Methodofrecognitionofrevenueshasbeendiscussedatlengthabove. Ihavealreadyheldthattheappellantcompanyhasbeenconsistentlyrecognizing revenuesinrespectoferection,commissioning,installationandinrespectof transportationofEquipments.FurtherIalsoagreewiththecontentionofthe appellantthattheAOhashimselfnotrecognizedrevenuesapplyingAS-7.TheAR alsoreferredtopara-21and35ofAS-7whichstatesthatwhentheoutcomeofthe constructioncontractisexpectedtobealossthensuchlossshouldberecognized asanexpenseimmediately.Theappellantcompanyhasincurredlossintheentire project.Inthisrespecthehasalsoplacedbeforemefinancialstatementsof subsequentyearsi.e.2009-10,2010-11and2011-12duringwhichtheprojectwas carriedandconcluded.TheappellanthasfurthersubmittedthatevenifAS-7is appliedinitstruespiritentireexpectedlossesshouldbeaccountedforandclaimed inthecurrentyearitself.AS-7beinganintegratedcodeinitselftheseprinciplesas laiddowncanalsonotbedoneawaywith.Insupportofthiscontentionreliance canalsobeplacedontherulingofMumbaiITATincaseofACIT,Range-10(1)v. ITDCementationIndiaLtd.bearingITANo.ITA.No.3669/Mum/2011whichin turnfollowedvariousotherrulingsvizMazagaonDockLtd.v.JCIT[2009]29SOT 356(Mum.),JacobsEngg.India(P.)Ltd.v.ACIT[2011]14taxmann.com186 (Mum.),DredgingInternationalv.ADIT[2011]48SOT430/15taxmann.com198 (Mum).Inallthesecasesithasbeenheld..thatforeseeablelossesfromafixedprice contractareallowable.Onceithasbeenestablishedthattheappellantcompany hasincurredlossintheentireprojecttheissueofallocatingmorerevenuesinthe currentyearbecomespurelyacademic.Thisismainlybecausethecontractwith APLisafixedpricecontract.Eveniftherevenuesareestimatedforthecurrent yeartheAOwouldhavetoreducetherevenuesaccountedinthesubsequentyear. TheentireexerciseoftheAOwouldbetaxneutral.ItappearsthattheAOhas himselfknowingthisfactnoappliedAS-7whiledecidingtheorder.FurthertheAO hasalsonotgivenanycommentsonapplicabilityofpara.21and35referredbythe appellantevenwhenspecificallyaskedbythisoffice.Iagreewiththecontentionof theappellantthatifatallrevenuesarerecognizedapplyingAS-7/AS-9the appellantcompanyinlightoftheabovementionedprincipleofaccountingHITOF WERwouldbeeligibleforclaimingbudgetedlosses.Inmyopinion,theappellant hasdischargeditsobligationofgivingsatisfactoryexplanationstolossappearing inthebooksofaccount.TheBooksofAccountoftheCompanyhavebeenaudited andcertifiedbytheauditors.Themethodofaccountinghasbeenconsistently followedbytheassesseeonayear-to-yearbasis.Hence,rejectionoftheBooksof Accountonthisgroundisunjustifiedandincorrect. ApplicabilityofSection44BBB TheAOhasinvokedtheprovisionsofsection44888mainlybecausethe bookswererejected.Ihavealreadyheldthatthebookshavebeenincorrectly rejectedbytheAD.ThereforeSection448BBcannotbeinvokedonthisground. Itisalsoasettledpositionthattheappellantcanclaimlowerprofitsand gainsifBooksofAccountanddocuments,asaredulymaintainedinaccordance withSection44AA[2]oftheI.T.Act,1961andgetstheBooksofAccountaudited ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 23 u/s.44ABoftheAct.Itisworthwhiletonotethattheassesseehasmaintainedall theBooksofAccountasstipulatedu/s.44AAoftheAct,viz.namely: (a)CashBook (b)BankBook (c)Journals (d)Ledger whichwereproducedbeforetheAOandaswellbeforeme.Taxauditreporthas alsobeencompiledbeforemeinthepaperbook.Therefore,Iamoftheopinionthat provisionsofSection44BBBbeingoptionalontheappellantshouldnotbeinvoked. TheAOisaccordingly,directednottoestimateprofitsapplyingSection44BBBof theAct. Tosummarize,thebooksshouldnotberejectedduetoreasonsenumerated hereunder: *ThattheAOhashimselfacceptedtherevenuesdeclaredandaccountedin auditedfinancialstatementsbytheappellantcompanywhileestimating taxableprofitsbyu/s44BBBoftheAct; *Thatjustbecausetheprojectresultedintoaloss,thebooksofaccounts cannotberejected; *Thattheappellantmatchedallexpenseswithrevenues. Onceitisheldthatbookscannotberejectedforreasonsasdiscussed hereinabove,theprovisionsofsection44BBB(1)cannotbeapplied.Consequently groundnumber2,3,4raisedisallowedsubjecttodirectionsgivenabove.” XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX “5.4Ihaveconsideredthefactsofthecase,submissionsmadebytheappellant andtheorderoftheTPO.TheTPOhasallegedthatnoInformationregardingthe reimbursementofshippingchargeswereproducedbeforehim.Howeverbeforeme thelearnedARoftheappellanthasstatedthatsuchfindingsoflearnedTPOare factuallyincorrect.TheARhasstatedthatfollowingdocumentsweresubmitted beforetheTPO: •CopyofshippingbillsofthirdpartiestowhomsuchOceanFreight Chargeshavebeenpaid; •CopyofBillofentry,BillofLadings;and •Chartshowingtheactualamountpershippingbillswhich correspondwiththeactualamountreimbursedbyappellanttoHead Office. 5.5Abovedocumentshavealsobeencompiledinthepaperbookfiledduring thecourseoftheappellateproceedings.Ihavealsoperusedthecorrespondences betweentheappellantcompanyandtheTPOinrespectoffurnishingoftheabove information.AccordinglythefindingoftheTPOinrespectofnon-submissionofthe ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 24 supportingdocumentsisnotjustifiablewiththereasonsthatalldetailsproduced beforemeandtherewasnoreasonmentionedintheorderbyTPOwhichforced theappellantnottoproducethesamedetailsbeforetheTPO,thereasonsbest knowntotheTPO. 5.6BeforemetheARalsocontendedthatasperclause4.2oftheagreement enteredintowiththeappellantandAPL,thetransportationofequipmentwas withinthescopeoftheappellantandhenceoutofbusinessprudencythepayments tosuchshippersweredirectlymadebytheHOandlaterreimbursedbythe appellant.Thesaidtransaction,inessence,isatransactionenteredintobythe appellantandsuchshippersandshippingagencies.Theappellanthasalsoproved thatthepaymentwasmadetothethirdparties(shippingagencies).Thereisno evidencebroughtonrecordtoshowthattheappellantcompanyandtheshipping companiesareparties.TheHeadOfficeoftheappellantcompanyonlyfacilitated theappellantcompanytopaythecosttoshippingagencies.Itisnotdisputedatall thattheappellantdidnotcarryouttheabovefunction.InfactboththeAOaswell astheTPOhasacceptedthattheappellantcompanydidcarryoutthefunctionof transportationofequipmentsfromChinaPorttoIndianPortinaccordancewith theAgreementbetweenitandAPL.ThereforetheobservationoftheTPOthatthe HOhastransferredhighcostliabilitiestotheappellantcompanyisnottenableand devoidofanymerit.Onceitisprovedthatthereimbursementisonlyofthecost andtherewasnomarkupchargedbytheHeadOffice,thescopeofverification fromthearm'slengthperspectiveshouldbeverylimited.TheTPOshouldhave confineditsscopeastowhetherthesamehasbeenreimbursedatcostaspaidby HOornot. 5.7Intheinstancecase,thebillentriesandinvoices,billofladingsclearly supporttheclaimthatwhathavebeenreimbursedaretheactualchargespaidby theHOtothirdparties(Non-AE's)withoutanymark-up.Thesamehasbeen reconciledbythechartproducedabovewhichentailsentiredetailsof Rs.21,46,49,412costreimbursedtotheHO.Hencetheadjustmentproposedin respectofcargoshipmentsbyCOSCOlogisticsisnottenableandhencemaybe deleted. 5.8WithoutprejudicetotheaboveavalidCUPundersection92Cr.w.s.Rule 10B(1)(a)oftheRuleshasbeenestablishedbytheappellant.FurthernoInfirmities hasbeenpointedbytheTPOinthisInvoicesacceptforstraystatementsthatsuch invoicescannotberelied.Howevernoconcretereasonshavebeenprovidedfor suchconclusionsarrivedbyhim.AccordinglytheadditionmadebyTPOby comparingtheaveragetonnageratesbyignoringtheCoscoLogisticTransactions isnotjustifiableasfarasdeterminingthearm'slengthpriceundertheCUP method. 5.9TheTPOhasthenproceededtodeterminetheALPunderCUPbyaveragerate ofFreightpertonnageignoringCoscoLogisticTransactions(merelybecausein oneoftheInstancethesaidentityhaschargedhigherratepertonnage).The appellanthassubmittedbeforemethatithasneverbeendoubtedbytheTPOthat allthethreeentitiestowhichfreightchargesarepaidviz: ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 25 >AdaniInternationalShippingAgencyCo.Ltd; >HaotongInternationalTransportationAgentCo.Ltd;and >CoscoLogistics. arenottheAssociatedEnterprisesoftheappellantundersection928oftheAct. TheappellantfurthersubmittedthattheeffectivelytheTPOhascomparedrates chargedinanuncontrolledtransactionswithanotheruncontrolledtransactions,as alltheaforementionedentitiesarenotrelatedtoappellantinanyways.Such treatmentisagainsttheessenceofCUPmethodaspersection92CoftheActand Rule10B(1)(a)oftheRules.Theappellantsubmittedthatthemethodreliedbythe TPOdoesnotfollowsmandateoftheanyofthemethodprescribedinsection92B andhencetheadditionneedstobedeleted. 5.10Ifindforceinthesubmissionsoftheappellant.Aspersection92Cr.w.rule 108(1)(a)oftheRulesthepriceschargedinanuncontrolledtransactionshastobe comparedwiththepricechargesinacontrolledtransactions.Thepricechargedin uncontrolledtransactionsaftermakingappropriatechangeshastobetreatedas arm'slengthpriceaspersection92Cr.w.rule10B(1)(a)oftheRules.TheTPO afterderivingtheaveragefreightignoringCoscoLogisticTransactionsoughtto havecomparedsuchpriceschargedinthecontrolledtransactionwhichhasnot beendonebytheTPO.TheTPOhaseffectivelycomparedchargespaidintwo uncontrolledtransactionsandhasmadeadjustmentinuncontrolledtransactions. Hencetheadjustmentmadeonthisgroundisalsonotsustainable. Accordinglyinlightofthefactsandevidencesandlegalpositiondiscussed above,IdirecttheAOnottomakeanyadjustmentreferredbyTPO.Accordingly thesegroundsareallowed.” 9.BeingaggrievedbytheorderoftheLd.CIT-A,theRevenueisinappeal beforeus. 9.1Theld.DRbeforeusfiledthewrittensubmissionsrunningfrompages1to 5dated16January2018whichismainlysupportingtheorderoftheTPOforthe transferpricingadjustments. 9.2Ontheotherhand,thelearnedARbeforeusfiledapaperbookrunning frompages1to290andcontendedthatthebooksofaccountsoftheassessee cannotberejectedinthegivenfactsandcircumstancesasnodefectwaspointed outintheauditedfinancialstatementsbeforeinvokingtheprovisionsofsection 145(3)oftheAct.ThelearnedARregardingthetransferpricingadjustment ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 26 submittedthatthetransactionbetweentheassesseeandtheheadofficewas carriedoutonacost-to-costbasisandthereforethesamecannotbesubject matteroftransferpricingadjustment.ThelearnedARbeforeusfiledaone-page writtensubmissiontothiseffect. 9.3BoththelearnedDRandtheARbeforeusvehementlysupportedtheorder oftheauthoritiesbelowasfavourabletothem. 10.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Inthepresentcasethedisputerelatestothe rejectionofthebooksofaccountsandtheadjustmentmadebythetransfer pricingofficerwithrespecttothetransactionfortheso-calledshippingexpenses reimbursedbytheassesseetotheheadofficebasedinChina. 10.1TheAOinthepresentcasehasrejectedthebooksofaccountsofthe assesseeafterinvokingtheprovisionsofsection145(3)oftheActandcomputed theincomeundertheprovisionsofsection44BBB(1)oftheActat10%ofgross receiptagainsttheincomeofferedbytheassessee.Subsequently,thelearned CIT-AreversedtheorderoftheAOanddirectedhimtoacceptthelossdeclared bytheassesseeintheincometaxreturn.Fromtheprecedingdiscussion,wenote thattheAOhasrejectedthebooksofaccountsoftheassesseeonseveralreasons whichcanbecategorizedasunder: i.Gapinexpensesandincomewhichwasnotsolelyattributabletothe increaseintheoilpriceonoceanfreightexpenses. ii.Mismatchbetweentheincomeandtheexpensesshownbytheassessee. iii.Non-disclosureofopening/closingworkinprogress.Therewasno matchingofexpensessuchaserection/commissioningandinstallation withthecorrespondingrevenues. iv.Non-submissionofthecontractwiththeshippingcompanies. v.Methodofrecognizingtherevenueasperaccountingstandard-7 /accountingstandard9issuedbytheICAI. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 27 10.2ThelearnedCIT-Aafterdetailedanalysisofthefactsofthecase, assessmentrecords,remandreportandthesubmissionoftheassesseereachedto theconclusionthatthebooksofaccountsoftheassesseewerenotliabletobe rejectedandthereforetherewasnooccasiontoestimatetheprofitunderthe provisionsofsection44BBB(1)oftheAct.Itistheadmittedpositionthatbooksof accountsmaintainedbytheassesseecannotberejectedbyAOonthegrounds discussedabovewhichweremainlyrevolvingtothelossshownbytheassessee. Insimplewords,thelossesdeclaredbytheassesseecannotbeagroundfor rejectingthebooksofaccountsmoreparticularlyinthecircumstanceswherethe assesseehasexplainedthereasonsofsuchlossesmainlyriseinthepriceofocean freightonaccountofoilrateintheinternationalmarket. 10.3Inadditiontotheabove,wealsonotethattheassesseemaintainedthe booksofaccountsspecifiedundersection44AAoftheActwhichwereduly audited.Insuchfactsandcircumstances,itwasheldbytheHon’bleGujaratHigh CourtinthecaseofCIT(IT&TP)Vs.ShandongTiejunElectricPowerEngineering Co.reportedin86Taxmann.com274,thatprofitundersection44BBB(1)cannot bedeterminedwithoutpointingoutanydefectinthebooksofaccountsofthe assessee.Therelevantextractofthejudgementisreproducedasunder: 5.Section44BBBoftheActreadsasunder: '44BBB.Specialprovisionforcomputingprofitsandgainsofforeigncompanies engagedinthebusinessofcivilconstruction,etc.,incertainturnkeypower projects.-(1)Notwithstandinganythingtothecontrarycontainedinsections28to 44AA,inthecaseofanassessee,beingaforeigncompany,engagedinthe businessofcivilconstructionorthebusinessoferectionofplantormachineryor testingorcommissioningthereof,inconnectionwithaturnkeypowerproject approvedbytheCentralGovernmentinthisbehalf,asumequaltotenpercentof theamountpaidorpayable(whetherinoroutofIndia)tothesaidassesseeorto anypersononhisbehalfonaccountofsuchcivilconstruction,erection,testingor commissioningshallbedeemedtobetheprofitsandgainsofsuchbusiness chargeabletotaxunderthehead"Profitsandgainsofbusinessorprofession". (2)Notwithstandinganythingcontainedinsub-section(1),anassesseemayclaim lowerprofitsandgainsthantheprofitsandgainsspecifiedinthatsub-section,if hekeepsandmaintainssuchbooksofaccountandotherdocumentsasrequired undersub-section(2)ofsection44AAandgetshisaccountsauditedandfurnishes areportofsuchauditasrequiredundersection44AB,andthereuponthe AssessingOfficershallproceedtomakeanassessmentofthetotalincomeorloss oftheassesseeundersub-section(3)ofsection143anddeterminethesum payableby,orrefundableto,theassessee.' ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 28 6.Undersub-section(1)ofsection44BBBoftheActthereforeincaseofassesseebeinga foreigncompanyengagedinthebusinessofcivilconstructionorbusinessoferectionof plantormachineryortestingorcommissioningthereofinconnectionwithaturnkeypower projectapprovedbytheCentralGovernmentwouldbetaxedattherateof10%ofthe amountpaidorpayabletotheassesseeortoanypersononbehalfoftheassesseeon accountofsuchcivilconstruction,erectionetcwork.Sub-section(2)ofsection44BBBof theActwouldhowevergiveanoptiontotheassesseetoclaimlowerprofitiftheassessee keepsandmaintainsthebooksofaccountsandotherdocumentsasprovidedinsub- section(2)ofsection44AAoftheActandgetstheaccountsauditedandfurnishesthe auditreportasrequiredundersection44AB.TheAOthereuponwouldframean assessmentofthetotalincomeoftheassesseeundersub-section(3)ofsection143ofthe Act.Inthepresentcase,theCIT(Appeals)aswellastheTribunalbothheldthatthe assesseehadfulfilledallrequirementsofsub-section(2)ofsection44BBBoftheAct.Itis notthecaseoftherevenuethattheassesseehadnotmaintainedthebooksofaccounts anddocumentsasrequiredundersub-section(2)ofsection44AAorthattheassessee's accountswerenotauditedortheauditreportnotfurnishedbeforetheAssessingOfficer. TheCommissionerandtheTribunalalsoheldthattheAssessingOfficerwaswrongin holdingthattheaccountingstandardAS-7didnotapplytotheassessee. 7.Suchbeingthefacts,weseenoreasontointerferesincenoquestionoflawarises. LearnedcounselfortheRevenue,however,strenuouslyurgedthattheAssessingOfficer wasauthorisedtoexaminethebooksofaccountsandotherdocumentsandiffoundthat theassesseehadnotrecordedthedetailscorrectlyhecouldhaverejectedsuchaccounts. Wemaynotdisputethisproposition.However,theAssessingOfficer,asrecordedbythe Tribunalhasnotfoundanymajordefectsinsuchaccounts.TheCommissioner(Appeals)in factelaboratedthattheassesseehadthepastexperiencefromwhichitcouldestimatethe totalcostandhadpresentedfigurestoshowthepercentagecompletionoftheproject. Thesefiguresmatchwiththeactualincomeandexpenditurestatementsofthesubsequent financialyears.InfacttheentireprojectwascompletedbythetimetheCommissioner (Appeals)decidedtheappeal. 8.Intheresult,taxappealisdismissed. 10.4Inviewoftheaboveandafterconsideringthefactsintotality,weareof theviewthatthebooksofaccountsoftheassesseewerenotliabletoberejected undertheprovisionsofsection145(3)oftheActandthereforetheincome/loss shownbytheassesseeintheauditedfinancialstatementsshouldbeacceptedas itiswithoutanyvariation.Accordingly,wedonotfindanyreasontointerferein theorderofthelearnedCIT-A. 10.5RegardingtheadjustmentsmadebytheAO/TPOforRs.2,32,74,967.00, wenotethattherewasnointernationaltransactioncarriedoutbetweenthe associatedenterprisesexceptmerelythereimbursementofexpensesincurredby theheadofficeonbehalfoftheassessee.Assuch,insubstance,thetransaction wasbetweentheassesseeandtheshippingagencieswhichwereunconnected partiestoeachotherandthereforethesamecannotbecategorizedasassociated ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 29 enterpriseswhichisoneofthepre-requisitesforattractingthetransferpricing provisions.Thenecessaryinvoicesraisedbytheshippingagenciesareplacedon pages57to63ofthepaperbookwhichwerereimbursedbytheassesseetothe headoffice.TherewasnoevidencebroughtonrecordbytheAOsuggestingthat therewasanymarginormarkupaddedbytheheadofficeinthevalueofthe invoicesraisedbytheshippingagencies.WealsonotethattheITATMumbai tribunalinthecaseofM/sNessTechnologyIndiaPvt.Ltd.Vs.DCITreportedin 76Taxmann.com209hasheldthatwherethereisanytransactionbetweenthe associatedenterprisesoncost-to-costbasis,withoutanymarkup,noadjustment intheinternationaltransactionisrequiredtobemade.Therelevantextractofthe orderisreproducedasunder: 13.3Wehaveconsideredtherivalsubmissions.Attheoutset,inourconsideredopinion,it wouldbeappropriatetoculloutappropriatefactswhicharerelevanttodecidethe controversy.Notably,assesseeisrenderingservicestoitsassociatedenterprisesabroad forwhichitistobecompensatedonacostplusmark-upbasisandsuchtransactionshave beenseparatelybench-marked.Inthecourseofrenderingsuchservices,assesseealso incurredcertaincostsrelatingtotravel,accommodation,visa,perdiemandotherday-to- dayexpenses,whichwereexpendedbyitspersonnel.Further,assesseealsoincurred certainoutofpocketexpensesonthespecificrequestofitsassociatedenterprises.The responsibilityfortheaforesaidtypeofexpenseswasoftheassociatedenterprisesbutthe paymenttowardsthesecostswereinitiallymadebytheassesseeandthereafter, recoveriesweremadefromtheassociatedenterprises.BeforetheDRP,assesseealso pointedoutthatsuchexpenses,whicharerecoveredbyitfromitsassociatedenterprises, arein-turnrecoveredbytheassociatedenterprisesfromtheultimateclientsonacostto costbasis.Inthiscontext,assesseefurnishedsamplecopiesofdebitnotesraisedbyiton itsassociatedenterprisesalongwithcopiesofthecorrespondingdebitnotesraisedbythe associatedenterprisesontheultimateclients.Theaforesaidwascanvassedbythe assesseetosubstantiatethattherewasonetooneco-relationandthattheentireexercise didnotinvolveanyelementofprofitormark-upinthehandsoftheassociatedenterprises. Theaforesaidmaterialisplacedatpages518to612ofthePaperBookandwhichwasalso beforethelowerauthorities.Atthetimeofhearing,theLd.Representativeforthe assesseehadalsoreferredtopage613to645ofthePaperBook,whereinareplaced copiesofassessee'sarrangementwiththeassociatedenterprisesandalsothesample agreementsbetweentheassociatedenterprisesandtheultimateclients,whichprescribe thatallimpugnedtravelandrelatedexpensesareseparatelychargeableonacosttocost basis.Allthismaterialclearlybringsoutapertinentfeaturethatintheentiretransaction involvingpaymentofexpenditurebytheassessee,itsrecoveryfromtheassociated enterprises,which-inturnrecoversitfromtheendclients,thereisnoinvolvementofany profit-elementinthehandsoftheassociatedenterprises.Therefore,itwouldbewrongon thepartoftheincometaxauthoritiestotakeapositionandinfernotionallyaboutrecovery ofmark-uporprofitelementinthehandsofassessee.Ithasalsobeenbroughtoutthatit isastandardpracticeintheI.T.Industrytorecoveroutofpocketexpensesincurred duringthecourseofprovidingservicesfortheclientsonacosttocostbasis.Underthese circumstances,inourview,theTransferPricingOfficererredinproceedingtoinferanon- existentunderstandingbetweenassesseeanditsassociatedenterprisessoastoimpute incomequatheinstanttransactionintermsofsection92(1)oftheAct.Anotherpertinent ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 30 factwhichhasnotbeenrebuttedbytheRevenuebeforeusistotheeffectthatinsimilar situation,fromassessmentyear2004-05to2010-11,notransferpricingadjustmenthas beenmadebytheAssessingOfficerinrelationtotheInternationalTransactionson recoveryofexpenses. 10.6BesidestheabovethelearnedCIT-Aafteranalyzingallthefactsonthe issueinhandhasreachedtotheconclusionthattherewasnoneedformaking anyadjustmentinthecostincurredbytheassesseetowardstheshippingcharges whichwasreimbursedtotheheadoffice.Thus,insuchfactsandcircumstances, wedonotfindanyreasontointerfereinthefindingofthelearnedCIT-A.Atthe timeofhearing,thelearnedDRhasalsonotbroughtanythingcontrarytothe findingofthelearnedCIT-A.Hence,thegroundofappealoftherevenueis herebydismissed. 11.The2 nd issueraisedbytherevenueingroundNo.2isthatthelearned CIT-AerredindeletingtheadditionmadebytheAOfor₹8.20croresunderthe provisionsofsection40(a)(ia)oftheAct. 12.TheassesseebeforethelearnedCIT-Ahasraisedtheadditionalgroundof appealforclaimingthedeductionoftheexpensesof₹8,20,96,426.00whichwere disallowedbytheassesseeinthecomputationofincomeonaccountofnon- depositofTDSbutsubsequentlythesamewasdepositedbeforetheduedateof filingofthereturnofincomespecifiedundersection139(1)oftheAct.The necessaryfactsrelatingtothedisputeandthefindingofthelearnedCIT-Ais reproducedasunder: AdditionalGroundsofAppeal: Theappellantfiledfollowingadditionalgroundofappealduringthecourse ofappellateproceedingsvideletterdated26thDecember2013.Thesaidgroundis reproducedhereunder: "Withoutprejudicetoallgroundsraisedbytheappellant,onthefactsand circumstancesofthecasesthelearnedAOmaybedirectedtoallowthe expensesofRs.8,20,96,426/-asadeductionfromtheprofitsofthecurrent assessmentyearinlightofthefact,thatthetaxdeductedatsource(TDS)on variousexpensescomprisingdisallowanceofRs.8,20,96,426/-hadbeen paidbeforeduedateoffilingretumundersection139(1)oftheAct." ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 31 TheAdditionalgroundofappealalongwiththefactswasforwardedtothe AOforhiscomments.Ihaveconsideredthesubmissionsmadebytheappellant company,commentsoftheAOinthisrespectmadevideremandreportdated12th February2014andrebuttalmadebytheappellantinthisbehalf.Ifindforceinthe submissionoftheappellantthatpowersofCIT(A)arewiththatofAOandthe decisionsofApexCourtincaseofGoetz(India)(supra)isapplicableonlywhena newdaimismadebeforetheAOduringthecourseofassessment.Theappellate authoritywhiledisposinganappealmayentertainanynewclaim.Thisisasettled legalposition.Inthisrespectreliancewasplacedbytheappellantonthedecision oftheHon'bleJurisdictionalHighCourtinthecaseofCommissionerOfIncome Tax-1-Appellant(s)v/sArvindMillsLtd(supra).Thereforebyvirtueofpower vesteduponmebysection251andhumblyfollowingtheHon'bleGujaratHigh Court,Iallowtheappellanttoraisetheadditionalgroundofappealbeforeme. Secondly,theappellantvidetheadditionalgroundhasraisedthe admissibilityofexpensessumminguptoRs.8,20,96,426/-undersection40(a)(la) statingthattheTDSonsuchexpensesweredeductedandpaldbeforeduedateof filingreturn.Tosubstantiatetheclaimtheappellantfiledapaperbooktoprove thatTDSwaspaidbeforeduedateoffillingreturn.Thesedetailsweresenttothe AOforhisverificationandcomments;howevertheAOhasnotmadeanycomments onthemerits.InsteadtheAOhascommentedonlywithrespecttonon-admissibility oftheadditionalground.Hehasalsosubmittedthattheoperationoftheprovisois prospective.FurthertheAOalsostatedthatbecausethebooksoftheappellant companyhavebeenrejectedtherewouldnotbeanyeffectontheestimatedIncome. Ihavealreadyheldthatthebooksareincorrectlyrejectedinlightofdetailed findingsgivenabove.Therefore,thecontentionoftheAOraisedintheremand reportfornotadmittingtheadditionalgroundisnotsustainable.Furtheritisalso notdisputedthattheappellanthasdepositedTDSonorbeforetheduedateof filingtaxreturns.Thisisalsoverifiablefromthee-TDSreturnsfiledbeforetheAO. Hencebyvirtueofamendmentbroughtinthestatutebooksinsection40(a)(ia)vide FinanceAct2010whichhasbeenheldretrospectivebymanycourtsincludingthe GujaratHighCourti.e.jurisdictionalHighCourtincaseofIncomeTaxOfficer, Ward-1,AnandVsKanubhaiRamjibhaiMakwana(supra),suchexpensesshould beallowedforpurposeofcomputingincomeundertheIncomefromBusinessand Profession.AccordinglyhumblyfollowingtheGujaratHighCourt,Iholdthatthe expensesamountingtoRs.Rs.8,20,96,426/-,onwhichtheTDSisdeductedand paidbeforetheduedateofreturnundersection139(1),isallowablewhile computingtheincomeundertheProfitandGainsfromBusinessandProfessionin thecurrentassessmentyear.TheAOisdirectedtodisallowclaimoftheabove expensesofRs.8.20croresifclaimedandallowedinsubsequentyear. 13.Beingaggrievedbytheorderoftheld.CIT-A,theRevenueisinappeal beforeus. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 32 13.1Theld.DRbeforeushasnotcontrovertedthefindingofthelearnedCIT-A. Ontheotherhand,thelearnedARbeforeusvehementlysupportedtheorderof theld.CIT-A. 14.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Itisthesettledpositionoflawthattheexpenses whichweresubjecttotheprovisionsofTDSshallnotbeallowedasdeduction untilandunlesstheassesseedeductstheTDSanddepositsthesametothe GovernmentExchequerwithintheprescribedtime.Inthepresentcase,thereis nodisputetothefactthattheassesseedepositedtheTDSbeforetheduedateof filingoftheIncomeTaxReturnundersection139(1)oftheAct.Accordingly,we donotfindanyinfirmityintheorderoflearnedCIT-A.Hence,thegroundof appealoftherevenueisherebydismissed. 15.Intheresult,theappealoftherevenueisherebydismissed. ComingtoITANo.2916/AHD/2014,fortheAY2009-10anappealby theRevenue. 16.Therevenuehasraisedthefollowinggroundsofappeal: 1.TheCIT(A)haserredinlawandonfactsinholdingthattheaccountsofthe assesseecouldnotberejectedinspiteofclearevidencebroughtonrecordthattheprofit computedbytheassesseewasnotreliable. 2.TheCIT(A)haserredinlawandonfactsinholdingthattheassesseehad sufficientlydemonstratedthereasonforlossincurredwithoutappreciatingthatsuch explanationwaswithoutanysupportingdocumentationandrequisiteagreements. 3.TheCIT(A)erredinlawandonfactsinholdingthatinthepresentfactsand circumstances,theAOwasnotjustifiedininvokingtheprovisionsofsection44BBB. 4.TheLd.CIT(A)haserredinholdingthatinthepresentsetoffacts,CUPwasa bettermethodofbenchmarkingasagainstTNMMadoptedbytheTPO. 5.TheLd.CIT(A)haserredinholdingthatthetransactionofawardingthecontract byAdaniPowerLimitedtoSFPMLHOwasaproperCUPforthetransactionbetweenthe assessee{SFPMLLO)andSFPMLHOwithoutappreciatingthatnatureoftransaction betweenSFPMLHOandtheassesseeweretotallydifferentandfunctionallyincomparable totheCUPcitedbyCIT(A). ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 33 6.TheLd.CIT(A)haserredinlawandonfactsinholdingthecomparablesselected bytheTPOasfunctionallyincomparablemerelyonthebasisofgeneralobservations withoutassigninganyreasonforrejection. 7.ThereforetheorderoftheLd.CIT(A)deservestobedeletedandthatorderof AssessingOfficerberestored. Anyothergroundthatmaybeurgedatthetimeofhearing 17.TheRevenuevideletterdated17January2023hasalsoraisedthe additionalgroundofappealwhichisreproducedasunder: Theld.CIT(A)haserredinlawandfactsinadmittingadditionalevidenceswithout recordinginwritingthereasonsforitsadmissionandwithoutallowinganopportunityto theassessingofficertoexaminetheadditionalevidencesproducedbytheassesseebefore theCIT(A). 18.Theinterconnectedissueraisedbytherevenueingroundnumbers1to3 andadditionalgroundofappealraisedvideletterdated17January2023isthat learnedCIT-Aerredinacceptingthebookresultshownbytheassesseeinthe incometaxreturn. 19.Inthepresentcase,theAOhasrejectedthebooksofaccountsunderthe provisionsofsection145(3)oftheActanddeterminedtheprofitatRs. 9,40,25,864.00beingthedifferenceintheturnoverdeterminedbytheTPOatRs. 83,49,70,412.00minustheexpensesclaimedbytheassesseeatRs. 74,09,44,548.00inthebooksofaccounts.Assuch,theassesseefiledthereturn ofincomedeclaringthelosswhereastheAOhasdeterminedtheprofitatRs. 9,40,25,864.00only. 20.Onappeal,thelearnedCIT-AdeletedtheadditionmadebytheAOafter givingoffindingthatthefactsinvolvedinthepresentcaseareidenticaltothe factsofthecaseoftheearlierassessmentyear2008-09whereinthebooks resultsdeclaredbytheassesseewereacceptedbyhim.Therelevantfindingof thelearnedCIT-Aisreproducedasunder: ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 34 “6.3Ihavegonethroughtheassessmentorder,Statementoffactsandfurther submissionsfiledbeforeme.Attheveryoutset,asmentionedabove,theappellant- companyhasbroughttomynoticethatthereasonforrejectingthebooksof accountwasidenticalwiththatofthereasonsintheimmediatelypreceding assessmentyeari.e.AY2008-09.Theorderoftheearlierassessmentyeari.e.A.Y. 2008-09hasbeenpassedbytheundersignedandthecopyoftheorderhavealso beenplacedbytheappellantinthepaper-bookcompiledbeforeme.Ihaveperused theorderoftheearlieryearandthefactsprevailingintheearlieryearaswellas thefactsofthepresentcasebeforeme.Thesamecontracthasbeencontinuedin theearlieryearandthereisnochangeinthemethodofaccountingfollowedbythe appellant-companyduringtheyearunderconsideration.Thefactsofthecaseand theissuesinvolvedareidenticalinthisyearaswellasintheimmediately precedingassessmentyear. 6.4Theappellant-companyhadenteredintoacontractwithAdaniPower Limited(APL)fortransportationofequipmentfromChinatoIndia,clearingthe goodsatportofentryi.e.India(customclearance)andthereaftertransferringthe goodstothesiteoffice.Theappellanthasalsobeenassignedtocarryouterection, commissioningtheappellantcompanysubmittedthattheInvoiceswereraisedon APLi.e.itsemployeronthebasisoftheworkdoneandontheprogressofthework executed.TheInvoiceswereraisedmainlyforcarryingouttwoactivities: (A)ForwardingandHandling,and (8)Erection,CommissioningandInstallation. Thebreakupoftherevenuesfromtheaforesaidactivitieswassubmittedto theAOduringthecourseoftheassessmentproceedings.Ithasbeenreproducedby himintheassessmentorderaswellonpageNo.12ofhisorder.Theappellant Companyhadgiventhebreak-upofrevenuesarisingfromtheaforesaidactivities alongwiththeexpensesincurredforearningtheaboveduringtheyearunder consideration.Insupportoftheaboverevenuesandexpenses,theappellant Companyhadsubmittedthefollowingdocumentaryevidenceinitssupport: a)SamplecopyoftheinvoicesraisedbytheappellantCompany. onAPL: b)Samplecopyoftheinvoicesraisedbythesub-contractorsoftheappellant Companyuponit; c)Asummarizedledgercopyofallmajorsub-contractors; d)Copiesofinvoicesraisedbyshippingagenciesfortransportationofgoods fromChinatoIndia(OceanFreightExpenses); e)CopiesofthecorrespondingBillsofLadingforgoodstransportedfrom ChinatoIndia; f)SampleCopiesofinvoicesraisedbytheJ.M.Bakshi,Adityauponthe appellantCompanyforhandlinggoodsandclearingthematcustomsin India. g)AdetailedbreakupoftonnagehandledbytheappellantCompanyduring theyearunderconsideration, ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 35 h)Bankaccountdetailsfromwhichpaymentsinrespectoftheaforesaid expensesweremade. Toexecutethiscontracttheappellantcompanyhassetupaprojectofficein IndiainaccordancewithRatGuidelinesAlthoughpartofthecontract:like coordinationforequipmentfromChinatoIndiawascaredoutfromChinathe appellantcompanyattributedentirerevenuefromtheprojecttotheIndianProject office.Theappellantcompanyfollowedaccrualbasisofaccountingand maintainedallbooksofaccountsasrequiredu/s44AAoftheAct.Theappellant hasplacedbeforemeauditedfinancialstatementofthecompany,taxauditreport ofthecompanyanddetailedcompilationcomprisingofcopyofinvoicesraisedby appellantcompanyonAPL,billraisedonitbysub-contractors,ledgercopyof subcontractorasappearinginthebooksofaccountsandalldetailsofoceanfreight i.e.billoflading,billsraisedbyshippingcompaniesonit. TheAOrejectedthebooksofaccountsandhasdeterminedprofitsby adoptingtherevenuederivedbytheTPOapplyingArm'sLengthprincipleasper section92r.w.s92CAoftheAct.Accordingly,AOcomputedtaxontheprofits@ 40percentontheprofits.AOhasobservedseveraltimesintheorderthatthe booksofaccountsarenotreliablemainlybecausetheappellantdidnotsubmitthe copyoftheinvoicesraisedbytheappellantcompanyeithertohimaswellasTPO. TheappellantcompanysubmittedthattheinvoiceswereraisedonAPLi.e.its employeronthebasisoftheworkdoneandontheprogressoftheworkexecuted. Theinvoiceswereraisedmainlyforcarryingouttwoactivities: (A)ForwardingandHandling;and (B)Erection,CommissioningandInstallation. Thebreakupoftherevenuesfromtheaforesaidactivitieswassubmittedto theA.O.duringthecourseoftheassessmentproceedings.Ithasbeenreproduced byhimintheassessmentorderaswellonpageNo.12ofhisorder.Theappellant Companyhadgiventhebreakupofrevenuesarisingfromtheaforesaidactivities alongwiththeexpensesincurredforearningaboveduringtheunderconsideration. AgainsttheobservationoftheAO,appellantfiledadetailedstatementof facts,alongwithForm35andreplyduringtheappellateproceedings.Before proceedingtothereasonshighlightedbytheARforrejectingthebooksofaccounts, itwouldbeworthwhiletorefertothescopeofwork,theappellantcompanyhad undertakenpursuanttoclause4.2oftheservicecontractbetweenAPLandthe appellant.Theappellantwasengagedmainlytocarryoutfollowingactivities: Erection,commissionInstallation; Forwardingandhandling&clearingwhichshallincludethefollowing: *TransportationofGoodfromChinaPorttoIndiaPort (MundraPort); ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 36 *AppointmentofClearingandForwardingAgent,custom clearances; *TransportationofGoodfromMundraPorttoprojectsite Theappellantsummarizedthetotalrevenuerecordedagainstthe correspondingexpensesincurred.Thesaidtableisreproducedhereunder: RevenuefromOperations:Amount(Rs.)Total(Rs.) Erection,Commissioning&Installation61,17,56,857 Forwarding&HandlingCharges (IncludingFreight&ClearingCharges) 10,19,03,448713,660,305 OperatingExpenses: Erection,Commissioning&Installation29,09,04,043 Forwarding&HandlingCharges (IncludingFreight&ClearingCharges) 35,41,92,856 64,50,96,899 6.5Thereasonsforrejectionofbooksofaccounthavebeensummarizedbyme inthisorderinparaaboveagainstwhichtheappellant-companyhasfileddetailed submissions.Ishall,therefore,proceedtodealwiththereasonscitedbytheAO forrejectingthebooksofaccount. (1)HugegapinIncomeandExpense,limitedimpactofoceanfreight expenses. TheAOintheorderhasstatedthat,timeandagaintheappellant companyhasfailedtoexplainthereasonforhugelossesincurred.Further, theAOhasstatedthattheoilpriceatalimitedimpactinthelossandthat theappellantcompanyhadnotsubmittedanyevidencewithrespecttothe impactofoilpriceofoceanfreight.Inthisrespect,theappellantcompany extensivelyplacedrelianceonthesubmissionsmadebyitduringthe assessmentproceedings.Theappellant-companyhadalsosubmittedthat thebreak-upofrevenuesandexpensesforeachandeveryactivityi.e. forwardingandhandlingfreightaswellaserection,commissioningand installation.Therevenuefromforwardingandhandlingincludingfreight andclearingchargesissubstantiallylessthantherelatedexpenses.Thusit becomesabundantlyclearthatthelosseshavebeenincurredmainlydueto incurrenceofhugeoceanfreightexpensesandlesserrealizationbythe appellant-companyfromitsemployer.Itisalsonotdisputedthatthe appellant-companyisinfactresponsiblefortransportationofequipment fromChinatoIndia,clearingthemandthereafterunloadingthemandthen transporttheCargostotheprojectsite.Partofthecontracti.e.port handling,transportationofcargoshasbeenawardedtothesub-contractor viz.J.M.Baxi&Coandothersub-contractors.Theappellantcompany submittedcopyofthecontractaswellascopyoftheinvoiceandledger copyofsub-contractorsbeforeme.Nospecificdeficiencyhasbeenpointed outbytheAOinrespectoftheaboveexpenses.Theappellant-companyhas raisedaconsolidatedinvoiceforalltheaboveservicesviz.transportation ofequipment,customclearanceandtransferringgoodstotheprojectsite. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 37 Thisalsotranspiresfromthecopyoftheinvoiceraisedbytheappellanton APL.ThereforetheobservationoftheAOthattheappellant-companyhas notbilleditsemployerfortransportationofgoodsfromChinaporttoIndia portisabsolutelyincorrectandmisplaced.Onsimilarissue,Ihavealso heldfortheearlierassessmentyearthatthebooksofaccountcannotbe rejectedandthereforeIamoftheopinionthatforthisyearaswell,the booksofcannotberejectedfortheabovereasons.Further,oneofthemain reasonsattributableforsuchlosswastheincreaseinoilprices,whichin turninflatedthefreightchargessubstantially.Tosubstantiatetheabove standtheappellantcompanysubmittedshippingfreightsexistingwhenit enteredintothecontractwithAPL.Ithasestimatedtheshippingfreightsto beUSD45/FRT(approx.).Theseestimateswerebasedonquotesreceived fromvariousshippingagencies.TheappellantcalledforQuotationfrom variousshippingagenciesviz.SinotransTianjinCo.Ltd.,ChengduZhongai LogisticsCo.,Ltd.Thesamewerealsoproducedbeforeme.Furtherthe BalticDryIndex(BDI),ashippingtradeindex,roseto6500whenthe shipmentwassentfrom3500existingwhentheappellantsignedthe contract.Thisbenchmarkfurtherwentupto8000inthemonthofAugust, 2007andwasoncontinuousincreasingtrend.Further,highdemandof shipsonaccountofincreaseinimportsofChinesepowerplantsequipment inIndiaalsofueledtheshippingrates.Thereforetheappellantcompanyhas dischargedtheonusinexplainingthereasonswhichledtolosses.Onthe otherhand,theAOfailedtobringoutanymaterialonrecordtodisprove thefactualpositionconsistentlysubmittedbeforehimaswellasthisoffice. ItisalsoacceptedbytheAOthatthecontractwithAPLwasafixedprice contracthavingnoescalationclauseandtherefore,theappellant-company couldnotpassontheincreasedburdentoitsemployer.Thereforethe findingoftheAOthattheappellant-companyhasnotdischargedtheonus ofexplainingthereasonswhichledtolossesisentirelyincorrectand misplaced.TheAOhasconvenientlyignoredthefactsandsubmissionstime andagainrepeatedlysubmittedbytheappellant.Therefore,the observationsoftheAOtothisextentarereversed.Atthecostofrepetition,I wouldliketoreproducethefindingofthisofficefortheimmediate precedingyearie.A.Y.2008-09,whereinafterdealingwiththefacts,the findingsoftheAOhadbeenreversed.Therelevantportionofthefinding readsasunder:- “Further,asfarasthereasonsforlossinsuchactivitiesis concernedtheappellantsubmittedthatoneofthemainreasons attributableforsuchlosswastheincreaseinoilprices,whichin turninflatedthefreightchargessubstantially.Tosubstantiatethe abovestandtheappellantcompanysubmittedshippingfreights existingwhenenteredthecontractwithAPLIthasestimatedthe shippingfreightstobeUSD45/FRT(approx),theseestimateswere basedonquotesreceivedfromvariousshippingagencies.The appellantcalledforQuotationfromvariousshippingagenciesviz SinotransTianjinCo.Ltd.,ChengduZhongalLogisticsCo.,Ltd.The samewerealsoproducedbeforeme.FurthertheBalticDryIndex ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 38 (BDI),ashippingtradeindex,roseto6500whentheshipmentwas sentfrom3500existingwhentheappellantsignedthecontract.This benchmarkfurtherwentupto8000inthemonthofAugust2007. Althoughtheappellantcompanyhaskeptsufficientmargins, howeverbecauseofincreaseinshippingfreightitincurredthese losses.Apartfromtheoilpricestheshippingfreightshavealso increasedonaccountoflimitedshippingcapacityavailablefor carryingsuchequipmentfromChinatoIndia.Furtherhighdemand ofshipsonaccountofincreaseinimportsofChinesepowerplants equipmentinIndiaalsouelledtheshippingrates.Thereforethe appellantcompanyhasdischargedtheonusinexplainingthe reasonswhichledtolosses” Therefore,followingtheorderoftheearlierassessmentyeari.e.A.Y. 2008-09coupledwithidenticalfactsandfindingsbytheI,Iholdthatthe rejectionofbooksofaccountonthegroundofnotprovidinganyreasons forexplaininglossisentirelyincorrect,unjustifiedandmisplaced. (ii)Matchingofexpenseswithcorrespondingrevenues: TheAOhasrepeatedlyallegedthatappellant-companyfailedto matchtheofexpenseswiththerevenuesearned.Inthistheappellant- company,atthecostofrepetitionsubmittedthatithadsummarizedthe entirerevenuesagainstcorrespondingexpensesandhadvideitsletter dated18/03/2013,submittedbreak-upofrevenuesfromoperationswhichis reproducedhereunder: RevenuefromOperations:Amount(Rs.)Total(Rs.) Erection,Commissioning&Installation61,17,56,857 Forwarding&HandlingCharges (IncludingFreight&ClearingCharges) 10,19,03,448713,660,305 OperatingExpenses: Erection,Commissioning&Installation29,09,04,043 Forwarding&HandlingCharges (IncludingFreight&ClearingCharges) 35,41,92,856 64,50,96,899 Apartfromtheabove,appellantcompanyhadalsosubmittedcopies ofinvoices,ledgercopyreflectingalltransactionstakenplacewithAPLas wellassub-contractors.Ithadalsosubmittedsummaryofthebankaccount. Ithadalsosubmittedthattheentiretransactionsweretakenplacethrough normalbankingchannelandwithheldthetaxeswhereverrequired.Further, nosuchdefectshavebeenpointedoutbytheAOintheentirebodyofthe order.ThelimitedobservationoftheAOisthatappellant-companyhad submittedasummarizedledgercopyhavingnonarration.However,the genuinenessofthetransactionsandthepartieshasnotbeenquestionedat all.Theappellant-companywasfairenoughinsubmittingsummaryofthe entirebooksbeforetheAO.Theappellant-companyhadalsosubmitted sourcedocumentviz.copyoftheinvoices,vouchers,journalentriesetc. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 39 basedonwhichthebooksofaccounthavebeencompiled.Notasingle instancehasbeenpointedoutbytheAOintheordertoshowthatthe invoicesraisedbytheappellant-companywerenotpertainingtothecurrent assessmentyear.Furtherthereisalsonotanyevidencepointedoutbythe AOthatBillsofLadingforgoodstransportedfromChinatoIndianport werenotpertainingtothecurrentassessmentyear.Further,appellant companyhassubmittedthatalltheinvoiceshavebeenraisedbyitona progressivebasisandthatinvoicesforallthemonthsi.e.fromApril,2008 toMarch,2009havebeenraised.Summaryofalltherevenuesbookedby theappellanthasalsobeenfurnishedbyfilingledgercopyofAPL appearinginitsbooksofaccount. IhavecarefullygonethroughalltheevidenceintheformofBillsof Lading,billsraisedbyappellant-companyonAPL,ledgercopy,copiesof contractsofsub-contractor,copyofthecontractbetweenAPLandthe appellant-company,bills,vouchersandallotherdocumentscompiledinthe paperbook.Idonotfindanydiscrepancyintheinvoicesraisedand/or vouchersforalltheexpensesincurred.TheentireapproachoftheAOfor rejectingthebooksismainlybecausetheappellantcompanyhadincurred losswhichhasbeendulyexplainedbytheappellant-company.The appellant-companyhadalsodischargeditsonusofmatchingtheentire expensesandrevenue.Therefore,theobservationsoftheAOtothisextent arereversed. (iii)Noopeningstock,closing/work-in-progress: TheAOhasalsorejectedthebooksofaccountsonthegroundthat theappellantcompanyhasnotreportedopeningstockandclosingstock and/orworkinprogress.Attheveryoutsetithasbeenpointedoutthatthe openingstockhasbeenquantifiedbythisofficevideorderfortheA.Y.2008- 09atRs.3.23crores.Theaboveexpenseshavingbeendisallowedforthe earlierassessment,1directtheAOtoconsiderRs.3.23croresasopening stockforthecurrentassessmentyear.Regardingclosingand/orwork-in- progresstheappellant-companyhassubmittedthatalltherevenueshave beenrecognizedonaprogressivebasis.Theappellant-hasalsofiledledger copyofAPLinitsbooksofaccountwhichhasbeensummarizedentire revenuesbookedforErection,CommissioningandInstallation. Closing/work-in-progress,ifany,canariseonlyonaccountofwork performedinrelationtoErection,CommissioningandInstallation.The appellant-companyhasraisedrevenuesinrespectoferection, commissioningandinstallationconsistentlyonaprogressivemonthlybasis. ThisfacthasnotbeendisputedbytheAO.Further,itisanaccepted positionthatthecontractbetweentheappellant-companyandAPLisafix pricecontract.Therefore,allocatingmorerevenuesincurrentyearwould purelyacademicanditwouldgotoreducetherevenuesasaccountedand bookedinthesubsequentyear.Further,itisalsobroughttomynoticethat theappellantcompanyhadincurredlassintheentireprojectandtherefore deferringrevenuesforthepurposeofdeferralofpaymentoftaxisalsonot ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 40 objective.Financialstatementandthecopiesofthereturnsofincomefiled bytheappellantcompanyforthesubsequentyearsarecompiledinthe paperbookfiledbeforeme.Therefore,eveniftherevenuesareestimatedin thecurrentyearthesamewouldhavetobereducedfromtherevenues accountedinthesubsequentyear.Theappellant-companyhadsubmitted theentiredetailsofexpensesandrevenuestotheAO.Nodefects whatsoeverhavebeenpointedoutbytheAO;insteadoftheAOwas reluctantinperforminghisdutytoverifytheentiredetailsanddocumentary evidencesfiledbytheappellant-companyandrejectedthebooksofaccount onsurmisesandconjectures.Therefore,theappellant-companyhaving bookedalltherevenuesfortheentireyearthequestionofrejectingthe booksofaccountonthegroundofnon-recognitionofclosing/work-in- progressisnotatalljustified. (iv)Non-submissionofcontractwithshippingcompanies: TheAOhasstatedintheorderthattheappellantcompanyhas failedtoprovidewrittencopiesofagreemententeredintobyitsHead- officeinChinaforcarriageofgoodsfromChinaporttoIndianport.Inthis respect,theappellant-companyhassubmittedthatithadfurnishedall copiesofinvoicesraisedbyshippingagenciesonit,CopiesofBillof Ladings,PaymentproofmadetoshippingcompaniesandLedgercopyofall theagencies.NodefectswhatsoeverhavebeenpointedoutbytheAO.Itis alsoacceptedbytheAOthattheappellant-companywasdutyboundto transportgoodsfromChinatoIndiaandthatthatithadcarriedoutin accordancewiththescopeofthecontract.Ithasalsonotdeniedthatthe cargoshavecometoIndia. Therefore,IamunabletoacceptthefindingsgivenbytheAOthat thebooksoughttohavebeenrejectedmerelyonthegroundthatwritten agreementbetweentheshippingagenciesandtheappellantcompanyhas notbeensubmitted.Rejectionofbooksofaccountonthisgroundisnot tenable.BookswerebytheAOonsimilargroundsfortheearlier assessmentyearalsoi.e.AY2008-09.ThefindingsoftheAOhavebeen reversedfortheearlieryearaswell.Thereforebooksofaccountscannotbe rejectedonthisground.TheAOisdirectedaccordingly. (v)MethodofRecognitionofRevenues-ApplicabilityofAS-7: TheAOhasfurtherthebooksofaccountsforthereasonthatthe appellantcompanyhasnotfollowedPercentagecompletionmethodfor accountingrevenuesfromconstructionscontractasprescribedbyAS-7/AS- 9asissuedbyICAI.TheA.O.afterreferringtoclause4.2ofthecontract withAPL,observedthattherevenuesoughttohavebeenaccountedin accordancewithAS-7.TheappellantCompanyoughttohavemade adequatedisclosuresundercause38and39oftheAS-7afterreferringto themintheassessmentorder.ThefindingsoftheAOaresimilartothatin ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 41 theprecedingassessmentyearandthesameargumentswereturneddown bytheCIT(A)orderofthisoffice.Therelevantportionreadsasunder: "TheAOhasfurtherrejectedthebooksofaccountsforthereasons thattheappellantcompanyhasnotfollowedPercentagecompletion methodforaccountingrevenuesfromconstructioncontractas prescribedbyAccountingStandard-7/AS-8asissuedbyICAI. Methodofrecognitionofrevenueshasbeenconsistentlyrecognizing revenuesinrespectoferection,commissioning,installationandin respectoftranspartionofEquipments.FurtherIalsoagreewiththe contentionoftheappellantthattheADhashimselfnotrecognized revenuesapplyingAS-7.TheARalsoreferredtopara21and35of A57whichstatedthatwhentheoutcomeoftheconstruction contractisexpectedtobealossthensuchlossshouldberecognized asanexpenseimmediately.Theappellantcompanyhasincurred lossintheentireproject.Inthisrespectappellantcompanyhas incurredlossintheentireproject.Inthisrespecthehasalsoplaced beforemefinancialstatementsofsubsequentyearsl.e.2009-10, 2010-11and2011-12duringwhichtheprojectswascarriedand concluded.TheappellanthasfurthersubmittedthatevenifAS7is appliedinitstruespiritentireexpectedlossesshouldbeaccounted forandclaimedinthecurrentyearitself.AS-7beinganintegrated codeinitselftheseprinciplesaslaiddowncanalsonotbedone awaywith.Insupportofthiscontentionreliancecanalsobeplaced antherulingofMumbaiITATincaseofACIT,Range10(1)v.ITD CementationIndiaLtd.bearingITANo.ITA.No.3669/Mum/2011 whichinturnfollowedvariousotherrulingsvizMazagaonDockLtd v.Jt.CIT(2009)29SOT356(Mum.)JacobsEngg.India(P)Ltd.v. Asstt.CIT[2011]14taxmann.com186(Mum.),Dredging Internationalv.Asstt.DIT(IT)[2011]48SOT430/15taxmann.com 198(Mum.).Inallthesecasesithasbeenheldthatforeseeable lossesfromafixedpricecontractareallowable.Onceithasbeen establishedthattheappellantcompanyhasincurredlossinthe entiretheissueofallocatingmorerevenuesinthecurrentyear becomespurelyacademicThisomainlybecausethecontractwith APisafixedpricecontractEventherevenuesareestimatedforthe currentyeartheAOwouldhavetoreducetherevenuesaccountedin thesubsequentyear.TheentireexerciseoftheAOwouldbetax neutralItappearsthattheAOhashimselfknowingthisfactnot appliedAS-7whiledecidingtheorder.FurthertheADhasalsonot givenanycommentsonapplicabilityofpara21and35referredby theappellantevenwhenspecificallyaskedbythisoffice.Iagree withthecontentionoftheappellantthatifatallrevenuesare recognizedapplyingAS-7/AS-9theappellantcompanyinlightof theabovementionedprincipleofaccountingwouldbeeligiblefor claimingbudgetedlosses.Inmyopinion,theappellanthas dischargeditsobligationofgivingsatisfactoryexplanationstoless appearinginthebooksofaccounts.Thebooksofaccountsofthe ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 42 companyhavebeenauditedandcertifiedbytheauditors.The methodofaccountinghasbeenconsistentlyfollowedbytheassessee onayeartoyearbasis.Hence,rejectionoftheBooksofAccounts onthisgroundisunjustifiedandincorrect. Followingthefindingofpreviousyear,Iholdthesameforthisyear aswellandrejectionofBooksofAccountonthisgroundisheldunjustified andincorrect. ApplicabilityofSection44BBB TheAOhasinvokedtheprovisionofsection44888mainlybecause thebookswererejected.Ihavealreadyheldthatthebookshavebeen incorrectlyrejectedbytheAO.Thereforesection4488Bcannotbeinvoked onthisground.Similarfindingsweregiveninpreviousyear.Therelevant portionreadsasunder: "Itisalsoasettledpositionthattheappellantcanclaim lowerprofitsandgainsifBooksofAccountanddocuments,asare dulymaintainedinaccordancewith44AA[2]oftheI.TAct,1961 andgetstheBooksofAccountauditedu/s44ABoftheAct.itis worthwhiletonotethattheassesseehasmaintainedalltheBooksof Accountasstipulatedu/s44AAoftheAct,viz.namely: (a)CashBook (b)BankBook (c)Journals (d)Ledger whichwereproducedbeforetheAOandaswellasbeforeme.Tax auditreporthasalsobeencompiledbeforemeinthepaperbook. Therefore,Iamoftheopinionthatprovisionsofsection44888being optionalontheappellantshouldnotbeinvoked.TheAOis accordingly,directednottoestimateprofitsapplyingSection44BBB oftheAct. Tosummarize,thebooksshouldnotberejecteddueto reasonsenumeratedhereunder. *ThattheAOhashimselfacceptedtherevenuesdeclaredand accountedinauditedfinancialstatementsbytheappellant companywhileestimatingtaxableprofitsbyu/s44BBBof theAct; *Thatjustbecausetheprojectresultedintoaloss,thebooks ofaccountcannotberejected; *Thattheappellantmatchedallexpenseswithrevenue,Once itisheldthatbookscannotberejectedforreasonsas ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 43 discussedhereinabove,theprovisionsofsection44BBB(1) cannotbeapplied" TheonlydifferenceinthecurrentyearisthattheAOhasnot acceptedtherevenuedeclaredbytheappellantcompany.Instead, theAOhasacceptedallthecostsdeclaredandrecordedinthe auditedfinancialstatementbytheappellantcompanywhile estimatingprofitu/s.44BBBoftheAct.OnceIhavealreadyheld thattherejectionofbooksofaccountisnotjustified,provisionsof section44BBBbeingoptionalshouldnotbeinvoked.TheAOis accordinglydirectednottoestimateprofitsapplyingsection44888 oftheAct.Consequentlygroundno.2to7areallowedsubjectto directionsgivenabove. 21.Beingaggrievedbytheorderoftheld.CIT-A,theRevenueisinappeal beforeus. 21.1Theld.DRbeforeushasnotcontrovertedthefindingofthelearnedCIT-A. Ontheotherhand,thelearnedARbeforeusvehementlysupportedtheorderof theld.CIT-A. 22.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Fromtheprecedingdiscussion,wenotethatthe learnedCIT-Ahasgivenafindingthatthefactsofthecaseonhandareidentical tothefactsofthecaseoftheearlierassessmentyear2008-09whereintheissue wasdecidedinfavouroftheassessee.Undeniably,theappealbeforeushasbeen preferredbytherevenuechallengingtheorderofthelearnedCIT-Araising3 groundsofappeal,additionalgroundofappealandthereforetheonusliesupon therevenuetopointoutthedefectintheorderofthelearnedCIT-Abasedonthe cogentmaterials.ButnodefecthasbeenpointedoutbythelearnedDRappearing onbehalfoftherevenue.AdmittedlytheorderpassedbythelearnedCIT-Aiswell reasonedandafterconsideringthefactsavailableonrecord.Evenbeforeus,the learnedDRhasnotbroughtanymaterialsuggestingthatthelearnedCIT-Ahas admittedadditionalevidenceincontraventiontotheprovisionsofrule46-Aof IncomeTaxaschallengedintheadditionalgroundofappealraisedbythe ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 44 revenue.Accordingly,inviewoftheabove,weholdthatthefactsofthecaseon handareidenticaltothefactsofthecaseoftheearlieryearassessmentyear 2008-09andthereforeinordertomaintaintheconsistency,wedonotfindany reasontointerfereintheorderoflearnedCIT-A.Assuchthefindingsgivenbythe ITATintheearlierassessmentyear2008-09shallalsobeappliedtothegivenset offacts.TherelevantfindingoftheITATinthecaseoftheassesseeforthe earlierassessmentyear2008-09inITANo.1129/AHD/2014isreproducedon paragraphnumber10ofthisorder.Hence,thegroundsofappealraisedbythe revenueareherebydismissed. 23.Thenextissueraisedbytherevenueingroundnumbers4to6isthatthe learnedCIT-AerredindeletingtheadditionmadebytheAOwithrespecttothe internationaltransactions. 24.InthepresentcasetheassesseebeingacompanybasedinChinahas enteredinacontractforprovidingtheservicesforErection,Commissioning,and InstallationofthepowerprojectwithAdaniPowerPrivateLtd.(forshortAPPL). Theassesseewasalsoresponsiblefortransportationofthegoods/equipmentto besuppliedtotheAPPLfromthesuppliers.Afterenteringthecontract,valuedat 20million,theassesseehassetupaprojectofficeinIndia.AspertheTPO,the projectofficeinIndiaisactingassubcontractoronbehalfoftheassessee.Assuch theprimaryresponsibilitylieswiththeassesseeonlyforthesatisfactoryexecution oftheproject.AspertheTPO,thetransactionsbetweentheassesseeandthe headofficeshouldbeatarmlengthprice.Inotherwords,theconsiderationtobe receivedbytheprojectofficeshouldbeatarmlengthprice.However,itwasthe contentionoftheassesseethatalltheincomeandtheexpenseshavebeen bookedbytheprojectofficeinIndiafortheservicestoberenderedtoAPPLand thereforenoadjustmentisrequiredtobemade.Withoutprejudicetotheabove, theassesseecontendedthatatthemost,theexpensesreimbursedbythe assesseetotheHeadOfficeonaccountoffreightandsalaryexpensescanbe consideredforthepurposeofthearmlengthprice. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 45 24.1However,theTPOrejectedthecontentionoftheassesseebyobserving thataspertheprovisionsofsection92AoftheActthetransactionbetweenthe headofficeandtheTPOistobedecidedatthearmlengthpriceasitcomes withinthemeaningoftheinternationaltransactionbetweentheassociated enterprises.Accordingly,theTPOproceededtodeterminethearmlengthprice basedontheTNMMwhichwasobjectedbytheassesseeonthereasoningthat InternalCUPmethodshouldbepreferredi.e.takingthetransactionbetweenthe HOandtheAPPL.However,theTPOrejectedthecontentionoftheassesseeand adoptedTNMMasthemostappropriatemethodanddeterminedtheALPofthe assesseeafterselectingcertaincomparablesinthemannerasreproducedbelow: Thus,itcanbeseenthattheprofitattributableinrespectofsuchactivitiesis10%ofthe totalreceipts,whichcomesto11.11%ofthecost,whichisnotverydifferentfromthePLI calculatedbytheTPO,indicatingtherebythattheselectionprocesscarriedoutbytheTPO isscienctificandfair.Thecalculationofarmalenghpriceinhecaseoftheasseseeisgiven below: Arm’slenghmeanmargin12.69% Operatingcost9A)Rs.74,04,69,109/- ArmsLengthMenaprofit12.69%ofthecosts ArmsLengthprice(ALP)@112.69%if operatingcost(B) Rs.83,44,34,649/- ActualSalesshown(c)Rs.71,36,60,305/- Shortfallbeingadjustment u/s.92CA(D=B=C) 12,07,74,334/- 5%oftheALPdeterminedby assessee Rs.3,56,83,015/- Sincetheadjustmentismorethan5%oftheamountshowninthebooksof accounts,nobenefitisavailabletotheassessee. (UPWARDADJUSTMENT:Rs.12,07,74,334/-) 25.AggrievedassesseepreferredanappealtothelearnedCIT-A. 25.1TheassesseebeforethelearnedCIT-Asubmittedthattheentirerevenue andtheexpensesattributabletothecontractbetweentheassesseeandtheAPPL wererecordedinthebooksofaccountsoftheprojectoffice.Therefore,itis inappropriatetoholdthattheheadofficehassubcontractedtheworktothe projectofficeasobservedbytheTPO.Furthermore,thetransactionbetweenthe projectofficeandtheAPPLbeingindependentpartiescannotbeconsideredas ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 46 internationaltransactions.Accordingly,suchtransactionscannotalsobedeemed internationaltransactionswithinthemeaningoftheprovisionsofsection92B(2)of theAct. 25.2Withoutprejudicetotheabove,theassesseecontendedthatifthe transactionbetweentheassesseeandtheheadofficehastobedeterminedatthe armlengthprice,thentheCUPmethodshouldbeadopted.Itisforthereason thatthetransaction/thecontractbetweentheheadofficeandtheAPPLwillactas thebenchmarkfordecidingtheALPbecauseitisbetween2independentparties. Assuchthecontractbytheassesseebeingheadoffice,withtheAPPL,hasbeen giventotheprojectofficewhichisresponsibleforalltheriskandrewards. Therefore,iftheCUPmethodisapplied,thennoadditiontothegivenfactsand circumstancesiswarranted. 25.3Besidestheabove,theassesseealsoobjectedtothecomparableselected bytheTPOwhiledeterminingtheALPinthegivencase.Theobjectionraisedby theassesseehasbeenreproducedbytheld.CIT-Ainhisorder. 25.4ThelearnedCIT-Aafterconsideringthesubmissionoftheassesseeandthe orderoftheauthoritiesbelowheldthatthetransactionbetweentheassesseeand theheadofficeisaninternationaltransactionbetweentheassociatedenterprises. Therefore,thesamehastobecarriedoutatthearmlengthprice.Thus,the learnedCIT-Arejectedthecontentionoftheassesseebyobservingasunder: IhaveperusedtheorderpassedbytheTPO,submissionsmadebytheappellant-company initsstatementoffactsandfurthersubmissionsfieldduringhecourseofappellant proceedings.Iamunabletoagreewiththecontentionoftheappellantthatthetransaction betweenheadofficeoftheappellantcompanyandisPEinIndianeednotbeconsidered asinternationaltransaction.Ifindthattheprojectofficeoftheappellantcompanyandits headofficeareAssociatedEnterprisesCAEs')aspertheprovisionsofthesection92A(l)(a) forthesimplereasonthatthePOisaseparatetaxableentityandthesameismanaged,by HO,controlledbyHOandeventhecapitalcontributionalsocomesfromHO.Moreover Article9oftheIndia-ChinaDTAAalsostipulatesthattheHOandthePOcftheappellant companyareAEsbecausetheheadofficeparticipateddirectlyinthemanagementcontrol andcapitaloftheprojectoffice.OnceitisheldthatPOandHOareAE,Ifurtherfindthat Article7(2)oftheIndia-ChinaDTAAandpara15,16&17ofthecommentaryonArticle7 onModeltaxconventionpublishedbyOECDin2010alsostatesthatpermanent establishmentistobe.treatedasa•functionallyseparateentity.Accordingly,theprofitsto ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 47 thePEshallhavetobe1attributedatArm'sLengthPrice.Inthefactsofthepresentcase sincetheAE(HO)enteredintoanagreementwithAPLtoexecutetheconstruction/project managementrelationtoconstruction,testingandcommissioningworkof4X3$QMW powerprojectforAPLfortotalconsiderationofUS$40million,theappellantbeingthePO isexecutingtheprojectunderthedelegationofresponsibilitiesbytheHO.Therefore,such delegationofresponsibilitybytheheadofficeisrequiredtobeconsideredasan internationaltransactionbetweenappellantandHOoftheappellant.Sincethereexisteda prioragreementinrelationtothetransactionbetweentheHOandAPL,thetransaction betweenappellantandAPLisadeemedinternationaltransactionu/s.92B(2).Accordingly, theTPOisjustifiedinholdingthetransactionsbetweentheappellantanditsheadofficeas internationaltransaction.AccordinglygroundsNo.8to11aredismissed.' FurtherItisimportanttonoteherethatSection92F(iii)definesenterprise asapersonincludingapermanentestablishmentofsuchperson.Apermanent establishmenthasbeendefinedu/s92F(iiia)asafixedplaceofbusinessthrough which'thebusinessoftheenterpriseiscarriedon.Accordingly,theActitself considersaPermanentestablishmentasanenterprise.Therefore,allthedealings betweentheenterpriseanditspermanentestablishmentinIndiahavetopassthe testofTransferPricing.Inthegivencase,thetransactionhavetakenplace betweentheforeigncompanyI.eHeadofficeanditsPEinIndiaI.eprojectoffice inIndiaandthereforethecontentionoftheappellantthatheTransferPricing provisionsarenotapplicabletoitisincorrectasprojectoffice.Thisfindingalso getssupportfromthevitalfactthattheappellantcompanyhasitselffiledreport underform3CEBwhereintransactionbetweenitselfI.ethePOandisHeadoffice inChineisreported. 25.5ThelearnedCIT-AacceptedtheselectionoftheCUPmethodassubmitted bytheassesseebyobservingasunder: 8.5.Ifindforceinthefactsandlegalsubmissionsoftheappellantthetransactions betweenSFPMLHOandAPPLisuncontrolledinnature.ThusthecontractbetweenSFPML HOandAPPLisanuncontrolledtransactionandisatarm'slengthaspertherequirements ofIndianTransferPricingprovisions.Furtherassubstantiallyallthefunctionsinrespectof theprojectiscarriedoutfromIndiathepriceatwhichcontractwasenteredbetweenHO oftheappellantcompanyandAPLthesamecanbeconsideredascomparablepriceofthe appellantandsincethesamepricehasbeenchargedbytheappellant,theconsiderationis arm'slengthconsideration.Hencenoadjustmentisrequiredonaccountofconsiderationof appellant.Iaminclinedtoagreewiththeargumentsoftheappellantcompanythatthe contractpriceagreedbetweenAPLandtheHOoftheappellantcompanycanbeusedfor thepurposesofbenchmarkingthetransactionbetweentheappellantcompany(i.e.PO) andAPLunderanyofsituationsdiscussedbytheTPO.Thisismainlybecausetheprice betweenAPLandHOoftheappellantcompanycanberegardedasacomparable uncontrolledprice(CUP)forthepurposeofbenchmarkingthetransactionbetween appellantcompanyandAPL.Iagreewiththecontentionoftheappellantthattheprice chargedbetweenAPLandHOoftheappellantconstituteavalidCUP,aspersection92Cof theActrw.tRule106(1)(a)oftheIncome-taxRules,1962(theRules).Thus,asthelawis nowwellsettledthatapplyingTNMMwhenadirectCUPwasavailableisnotsustainable whichisdiscussedbelow. 8.6IalsoacceptthelegalpropositionthatCUPbeingthebestsuitableandappropriate methodforthepurposeofbenchmarkingascomparedtoothermethodsprescribedu/s 92CoftheActshouldbereliedonandpreferredmethodthanTNMMasbyheldbythe TPO.Forthispurposetheappellantreliedonfollowingjudicialpronouncements- ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 48 ClearPlusIndia(P.)Ltdv.DeputyCommissionerofIncome-tax,Circle-3(1),Delhi(2011) 10taxmann.com249(Delhi); >DeputyCommissionerofIncometax,Range9(1)v.3GlobalServices(P.)Ltd[2011]11 taxmann.com136(Mum.); SerdiaPharmaceuticals(India)(P.)Ltd.v.AssistantCommissionerof Income-tax*,Circle7(2),Mumbai[2011]44SOT391(Mum.); >AssistantCommissionerofIncome-tax-8(1)v.AgilityLogistics(P.)Ltd. [2012]19taxmann.com159(Mum.); DeputyCommissionerofIncome-tax,Circle8(2),Mumbaiv.Isagro(Asia) Agrochemicals(P.)Ltd[2013]31taxmann.com388(Mumbai-Trib.); AssistantCommissionerofIncome-tax,Range10(1)v.VistaarSystems(P.) Ltd[2013]33taxmarin.com445(Mumbai-Trib.);>HughesSystiqueIndia(P.)Ltd v.AssistantCommissionerofIncome-tax,Range-12()[2013]36taxmann.com41 (Delhi-Trib.);DeputyCommissionerofIncome-tax,Circle-4(1)v.Lumax IndustriesLtd[2013]36taxmann.com380(Delhi-Trib.); Livingstonesv.DeputyCommissionerofIncome-tax16(3),Mumbai-[2014]41 taxmann.com499(Mumbai-Trib.); KTCFerroAlloys(P.)Ltd.v.AdditionalCommissionerofIncome-tax,Range-3, Visakhapatnam[2014]43laxmann.com152(Visakhapatnam-Trib.);Tilda Riceland(P.)Ltd.v.AssistantCommissionerofIncome-tax,Circle -16(1),NewDelhi[2014]42taxmann.com400(Delhi-Trib.);and J.P.MorganIndiaPrivateLimitedVs.ACIT,MumbaiforAY2002-03,ITA 8.7.TheTPOinhisorderhasrejectedthispleaoftheappellantstatingthatthestandard ofcomparabilityareverystrictinCUPandasmalldifferenceinthefactorofcomparability mayhavelargedifferenceinprice.HowevertheTPOwhiledoingsoconcededthatthe transactionbetweentheHOandAPLmaypassthetestof"uncontrolled"nature,he furtherwentontomakeobservationthatitdoesn'tsatisfythetestofcomparability.As againsttheaforesaid,thecaseoftheTPOisfurtherthatalldocumentsasprescribedin rule10Dwerenotmaintained.ThemarketconditionsinChina,inwhichChineseHO carriedouttheirbusiness,hadnotbeenspeltout.FARanalysishadnotbeendone.The financialresultsoftheassociatedenterprisehadnotbeendisclosed.Therefore,theCUP methodadoptedbytheassesseedidnotestablishthecomparability. 8.8IdifferwiththeobservationsoftheTPO.Itisalreadyclearthattheappellant(PO)was onlyestablishedtoaftersingingofthecontract,andexceptforlimitedfunctionssuchas BiddingofContract,Ultimateresponsibilityforexecutionoftheproject,Overall managementcontrolandmonitoringoftheproject,allotherfunctionswerecarriedoutby theappellant.EntireexecutionwascarriedoutfromIndia.Theappellanthastherefore attributedentirerevenuefromthecontractinIndia.Entirerevenueaccruingorarising fromthecontracthasbeenaccountedontheconsistentmethodofaccountingfollowedby theappellant.FurthertheappellanthasalsoofferedentirerevenuesfortaxinIndia. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 49 ThereisnocontractenteredbetweentheHOoftheappellantanditsProjectoffice(PE)i.e. theappellantinIndia.ThereisnosuchassignmentofcontractbytheHOtoitsPO.The responsibilityforexecutionoftheentirecontractiswiththeappellantcompanyandto dischargeitsresponsibilityithasformedaprojectofficewhichisconsideredasaPEin India.NosuchassignmentofcontractbetweenHOanditsPOisbroughtonrecordbythe TPO.TheconceptofHOandPObeingseparatelegalentitiesistruebutonlyforthe limitedpurposesofattributionofprofits.Howeverwhenentirerevenuesareattributedto IndiathequestionoffurtherattributiondoesnotariseContractuallyAPLtreatsboththe HOandthePOasonesingleentity,Furthervis-a-visAPLboththeappellantanditsHOin Chinaareoneandthesameperson.Furthertheappellanthasexecutedthecontracton sameandsimilartermsasagreedbyitsHO.Thusthetestofcomparabilityaslaiddownin Rule108(2)r.w.t10B(3)oftheRulesaresatisfied.HencetheobservationsoftheTPOare completelyunjustifiableandmisplaced.Inalltheaboverulingsthegeneralprincipleisthat theCUPmethodispreferabletoTNMM.AccordinglyasheldinthecaseofClearPlusIndia (P)Ltdsupra,CUPmethodshouldbeconsideredastheMostappropriatemethod.The findingsoftheTPOrejectingCUPmethodisthereforereversed.ThusIupholdthatCUP beingavailableshouldbeadoptedastheMostAppropriateMethod(MAM) 25.6ThelearnedCIT-AfurtherfoundthatthecomparablesselectedbytheTPO fordeterminingtheALPundertheTNMMwerenotrightcomparables.Theld.CIT- AanalyzedeachcomparablesselectedbytheTPOandthereafterrejectedthe same.ThereasonsgivenbythelearnedCIT-Aareavailableonpages87to94of hisorder. 26.BeingaggrievedbytheorderofthelearnedCIT-A,boththerevenueand assesseeareinappealbeforeus.Theassesseehasraisedthecrossobjectionsin theCObearingNo.300/AHD/2014whicharereproducedasunder: 1.Inlawandinfactsandcircumstancesofthecase,theLearnedCommissionerofIncome Tax(Appeals)("Ld.CIT(A)")haserredinconfirmingtheviewofTransferPricingOfficer('TPO')as wellastheAssessingOfficerinpresumingthatthecontractwithAdaniPowerLimitedwas subcontractedbytheHeadofficeoftheappellantcompanytotheProjectOfficeoftheappellant company.AccordinglytheCIT(A)haserredinconfirmingtheactionoftheTPOintreatingthe abovetransactionasaninternationaltransactionundertheIncome-tax,Act1961('theAct'). 2.Inlawandinfactsandcircumstancesofthecase,theLearnedCommissionerofIncome Tax(Appeals)(Ld.CIT(A)")haserredinconfirmingtheviewofTransferPricingOfficer("TPO')as wellastheAssessingOfficerinpresumingthattherewasdelegationofresponsibilitybytheHead OfficeoftheappellantcompanytotheProjectofficeoftheappellantcompanyinIndia. AccordinglytheCIT(A)haserredinholdingthatsuchpresumeddelegationofresponsibilityasan internationaltransactionundertheIncomeTax,Ac(“theAct”) 3.Inlawandinthefactsandcircumstancesofthecase,heLd.CI(A)haserredinconfirming theactionoftheAssessingOfficer/TPOforapplyingSection92B(2)oftheAcandtherebyholding thattheProjectOfficeofthappellantcompanytheIndiaandAdaniPowerLimitedareassociated enterprises.ConsequentlytheCIT9A)haserredinconfirmingtheactionoftheAssessing Officer/TPOinholdingtheabovetransactionbetweenbothasdeemedinternationaltransaction. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 50 4.Therespondentcravesleavetoadd,alter,amendand/orwithdrawanyground/sofcross objectioneitherbeforeoratthetimeofhearingoftheappeal. 26.1BoththelearnedDRandtheARbeforeusvehementlysupportedtheorder oftherespectiveauthoritiesbelowtotheextentfavourabletothem. 27.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Inthepresentcasetherewasacontractawarded byAPPLtotheassesseebeingtheheadofficeforthesumof₹20millionwhich wasdelegatedtotheprojectofficeinIndia.Admittedlythewholeoftheproject wasawardedbytheheadofficetotheprojectofficeinIndiawhichwas consideredastheinternationaltransactionbetweentheassociateenterprisesand thereforethesamewasrequiredtobedecidedatthearmlengthprice.Underthe provisionsoftransferpricingvariousmethodshavebeenprescribedfor determiningtheALPbetweentheassociatedenterpriseswithrespecttothe internationaltransactioncarriedoutbythem.Thesemethodsarelistedbelow: Comparableuncontrolledpricemethod;definesamechanismwherethesalesprice compliantwiththearm’slengthprinciplechargedbyacorporationisdeterminedbycomparison withthemarketpricechangedattransactionsamongunrelatednaturalpersonsorlegalentities.In orderforthismethodtobeapplicable,characteristicsofthetransactionsamongrelatedindividuals mustbecomparablewithcharacteristicsofthetransactionsamongunrelatedindividuals.This conceptofcomparablecharacteristicsherereferstosimilaritybetweenthecharacteristicsof transactionsamongrelatedindividualsandtransactionsamongunrelatedindividualsonexchange ofgoodsandservicesinquestion.Incaseofsmallmeasurablediscrepanciesbetweenthose transactions,themethodwouldbeapplicableuponeliminationofthosediscrepancies.However,in caseoflargerdiscrepancies,themethodwouldnotbeapplicable.Thisisthemostfrequentlyused methodforcomparableuncontrolledtransactionsbyvirtueofitsfeatureofdirectcomparison. Resalepricemethod;referstoestimationofthepricecompliantwiththearm’slengthprinciple bydeducinganappropriategrosssalesprofitfromthepricetobechargedforresaleofgoodsand servicestounrelatednaturalpersonsorlegalentities.Theessentialelementforreachingtheprice orremunerationcompliantwiththearm’slengthprincipleinthismethodisthepriceor remunerationtobechargedforthepotentialsaletounrelatednaturalpersonsorlegalentities. Thepricecompliantwiththearm’slengthprincipletobechargedforrelatedtransactionwouldbe reachedbydeducinganappropriategrosssalesprofitfromthepriceorremunerationbasedon assumptions.Theappropriategrosssalesprofitherereferstoaprofitdeterminedaccordingto marketconditionsbyanobjectivepercentagewhichwouldbeapplicableattheinstantof transactionpertainingtogoodsorservicesinquestion.Afterdeducingthisprofitamount,theprice compliantwiththearm’slengthprincipletobechargedatthesaleofgoodsorservicestorelated individualswouldbedetermined. Cost-plusmethod;isdefinedasestimationofthepricecompliantwiththearm’slength principlebyincreasingthecostamountofrelatedgoodsorservicesuptoanappropriategross ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 51 profitrate.Theappropriategrossprofitrateherereferstotheprofitratereflectingthepricetobe chargedforthesaleofgoodsorservicestounrelatedindividuals.Underfavourableconditions,the generalgrossprofitmarginappliedfortransactionsofgoodsorservicestounrelatedindividuals wouldbeperceivedasanidealrate.Incaseofinsufficientnumberoftransactionsforcomparison, thecriterionforanappropriategrossprofitwouldbeconsideredastheprofitratereflectingthe pricetobechargedforthesaleofgoodsorservicesinquestiontounrelatedindividuals.This methodismostlyusedespeciallyintransactionsinvolvingthegoodsmanufacturedbyraw materialsandintermediategoods. Transactionalnetmarginmethod;isbasedontheanalysisofnetprofitmargindetermined byanappropriatebasissuchascosts,salesorassetsinacontrolledtransaction.  Profit-splitmethod;beingbasedontheprincipleofdistributionoftotaloperatingprofitorloss pertainingtooneormorecontrolledtransactionsamongtherelatedindividualscommensurate withtheassumedfunctionsandtheburdenedriskswithinthearm’slengthprinciple,isapplicable especiallywhentransactionsareintertwined Othermethods 27.1Beforeus,thequestionistocheckwhetherthecontractawardedbythe headofficetotheprojectofficeisatarmlengthprice.AdmittedlytheHOassessee gottheprojectfromthe3 rd partybeingAPPLwhichassignedbytheHOtothe projectoffice.ThusthepricechargedtheHOoftheassesseefromAPPLis certainlyactasthebenchmarkconsideringthesameastheinternalcup.In holdingso,wedrawsupportandguidancefromthejudgementofHon’bleDelhi HighCourtincaseofClearPlusIndia(P.)Ltdvs.DCITreportedin10 taxmann.con249whereitwasheldasunder: 7.Wehaveexaminedtheratioofthesecasesinthecontextofthefactsofthecase.Atthecostof repetitionitmaybementionedthatgoodsweresoldbytheChinesemanufacturersintheUSA market.TheassesseehasalsosoldthegoodsinU.S.A.market.Therefore,marketconditionsin theterritoryofsalearethesame.Inviewthereof,weareinagreementwiththelearnedcounsel thatthebuyerintheUSAmarketwillbemoreconcernedwithqualityandpriceratherthan economicconditionsprevailinginChinaandIndia. 7.1Thesecondpointtobeseenisregardingcomparabilityoftheproducts.Nodataor reportisavailableinthisregard.Thecaseofthelearnedcounselisthatwipersdonot requireanysophisticatedtechnologyformanufacture;therefore,nogreatdifferenceis expectedinthequalityofChinesemadewipersandIndianmadewipers.Infact,theclaim oftheassesseeisthatChinesegoodsareofbetterquality.However,thisclaimremains unsubstantiated.ThecasesdiscussedabovedoleadtoaconclusionthatCUPmethodis themostdirectmethodfordeterminingarm'slengthprice.InthecaseofSerdia PharmaceuticalsIndia(P.)Ltd.(supra)ithasbeenheldthatCUPmethodisapreferred methodanditleadstomorereliableresultsvis-a-vistheresultsobtainedbyapplying transactionprofitmethod.InthecaseofSNF(Australia)Pty.Ltd.(supra)ithasbeenheld thatthefocusisonthemarketinwhichproductsareacquired.Theratioofthiscaseis applicablemutatis-mutandistothefactsofthecaseasthefocusisonthemarketinwhich productsaresold.Therefore,theCUPmethodcouldvalidlybeemployedprovidedproduct comparabilityisestablished.Therefore,itwouldhavebeenappropriatefortheassesseeto makethedataoftheassociatedenterpriseavailabletotheAssessingOfficer,atleastin ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 52 respectofsaleofChineseandIndianwiperssoastoestablishthecomparability. NonethelessthatbyitselfwouldnotdisplacetheCUPmethod,whichisobjectiveinterms ofthepurchasepriceoftheassociatedenterprise.Accordingly,itisheldthattheAssessing Officererredinchangingthemethodfordeterminingarm'slengthprice. 7.2Wemaynowdiscusstheanalysiscarriedoutbytheassessee.Thesalepriceofthe assesseeishigherthanthesalepriceoftheChinesemanufacturerstotheassociated enterpriseexceptincaseofallseasonwipersof26"and28".Thesalepriceof26"wiperis USDollars0.99againstthesalepriceofChinesemanufacturersofUSDollars1.50.The correspondingfiguresfor28"wipersare1.01USDollarsand1.50USDollars.Theanalysis doesnotfurnishtheaggregateofsalepriceinvolvedinthesewipersand,therefore,itis notfeasibletoascertainthepercentageofsalepriceoftheseitemstothetotalsalesmade totheassociatedenterprise.Thecaseofthelearnedcounselisthattheassesseehas receivedinterest-freeunsecuredloansfromtheassociatedenterpriseforwhichsome adjustmentshouldbeallowed.Thisloanhasbeenadvancedon31-3-2006,thelastdateof yearunderconsideration.Therefore,thereisnoimpartinthisyear.Further,nocalculation inthisregardhasbeenfurnished.Inabsencethereof,theAssessingOfficercouldcompute arm'slengthpriceofthesewipersbyadoptingcomparablesalepriceofUSdollars1.50per wiper. 8.Inviewofaforesaiddiscussion,itisheld:- 27.2Inviewoftheabove,weholdthattheinternalcupmethodistheright courseofactionadoptedbytheCIT-AforworkingouttheALPforthetransaction betweentheheadofficeandtheprojectoffice.Thereisnoambiguity,alltherisk andrewardsrelatingtotheagreementinquestionwererecordedattheproject office.Therefore,thesamecanbesaidatthearmlengthpriceundertheCUP method.Accordingly,weconcurwiththefindingofthelearnedCIT-A. 27.4RegardingtheselectionofthecomparablesundertheTNMM,wenotethat thelearnedCIT-Ahasrejectedallthecomparableswiththereasonsaselaborately discussedinhisorder.Atthetimeofhearing,thelearnedDRhasnotpointedout (i)theCUPmethodisthemostsuitablemethodinthiscase; (ii)theassesseeshallprovidethesaledataoftheassociatedenterpriseintermsofsalepriceof Chineseandassessee'sgoodsintheUSAmarket; (iii)theassesseeshallalsoprovidequantitativedataofpurchaseofChineseandIndianwipersbythe associatedenterprise,andthetermsofpayment;and (iv)theAssessingOfficershallcomputethearm'slengthpriceusingthisdata,onCUPmethodafter hearingtheassessee. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 53 anydefectinthefindingofthelearnedCIT-A.Hence,wedonotfindanyreason tointerfereintheorderofthelearnedCIT-A. 27.5RegardingthecontentionsraisedbytheassesseeintheCO,wenotethat theassesseehassucceededonmeritofthecase.Inotherwords,thegroundsof appealfiledbytherevenuearedismissed.Therefore,wedonotfindanyreason toentertaintheobjectionsraisedbytheassesseeintheCO.Assuch,they becomeinfructuous.Accordingly,wedismissthesame.Hencethegroundsof appealfiledbytherevenuearedismissedwhereastheobjectionsraisedbythe assesseearealsodismissed. 28.Intheresult,theappealfiledbytherevenueisdismissedandtheCOfiled bytheassesseeisalsodismissed. ComingtoITANo.78/AHD/2018,fortheAY2010-11anappealbythe Revenue. 29.Therevenuehasraisedthefollowinggroundsofappeal: 1.TheCIT(A)erredinlawandonfactsinholdingthattheaccountsoftheassesseecould notberejectedinspiteofclearevidencebroughtonrecordthattheprofitcomputedbythe assesseewasnotreliable. 2.TheCIT(A)erredinlawandonfactsinholdingthattheassesseehadsufficiently demonstratedthereasonforlossincurredwithoutappreciatinghatsuchexplanationwas withoutanysupportingdocumentationandrequisiteagreements. 3.TheCIT(A)erredinlawandonfactsinholdingthattheAOwasnot justifiedininvokingtheprovisionsofsection44BBB. TheId.CIT(A)haserredinlawandonfacts,CUPwasabettermethodofbenchmarkingas againstTNMMadoptedbytheTPO.5. TheId.CIT(A)haserredinlawandonfacts,inholdingthatthetransactionofawarding thecontractbyAdaniPowerLimitedtoSFPMLHOwasaproperCUPforthetransaction betweentheassessee(SFPMLLO)andSFPMLHOwithoutappreciatingthatnatureof transactionbetweenSFPMLHOandtheassesseeweretotallydifferenceandfunctionally incomparabletotheCUPcitedbyCIT(A). 6.TheId.CIT(A)haserredinlawandonfactsinholdingthecomparablesselectedbythe TPOasfunctionallyincomparablemerelyonthebasisofgeneralobservationswithout assigninganyreasonforrejection. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 54 7.ThereforetheorderoftheLd.CIT(A)deservestobedeletedandthattheorderof AssessingOfficerberestored. 8.Anyothergroundthatmaybeurgedatthetimeofhearing. 30.Theinterconnectedissueraisedbytherevenueingroundnumbers1to3is thatlearnedCIT-Aerredinacceptingthebookresultshownbytheassesseein theincometaxreturn. 31.Attheoutset,wenotethattheissuesraisedbytheRevenueinitgrounds ofappealfortheAY2010-11areidenticaltotheissuesraisedbytheRevenuein inITANo.1129and2916/AHD/2014fortheassessmentyear2008-09and2009- 10.Therefore,thefindingsgiveninITANo.1129and2916/AHD/2014shallalso beapplicablefortheassessmentyear2010-11.Thegroundsofappealofthe revenuefortheA.Y.2008-09and2009-10havebeendecidedbyusvide paragraphNo.10and22ofthisorderagainsttherevenue.ThelearnedDRand theARalsoagreedthatwhateverwillbethefindingsfortheassessmentyear 2008-09and2009-10shallalsobeappliedfortheassessmentyear2010-11. Hence,thegroundsofappealsfiledbytherevenueareherebydismissed. 32.Thenextissueraisedbytherevenueingroundnumbers4to6isthatthe learnedCIT-AerredindeletingtheadditionmadebytheAOwithrespecttothe internationaltransactions. 33.Attheoutset,wenotethattheissuesraisedbytheRevenueinit groundsofappealfortheAY2010-11areidenticaltotheissuesraisedbythe RevenueininITANo.2916/AHD/2014fortheassessmentyear2009-10. Therefore,thefindingsgiveninITANo.2916/AHD/2014shallalsobeapplicable fortheassessmentyear2010-11.Thegroundsofappealoftherevenueforthe A.Y.2009-10havebeendecidedbyusvideparagraphNo.27ofthisorderagainst therevenue.ThelearnedDRandtheARalsoagreedthatwhateverwillbethe findingsfortheassessmentyear2009-10shallalsobeappliedfortheassessment ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 55 year2010-11.Hence,thegroundsofappealsfiledbytherevenuearehereby dismissed. 34.Intheresult,theappealfiledbytherevenueisdismissed. ComingtoITANo.79/AHD/2018,fortheAY2011-12anappealbythe Revenue. 35.Therevenuehasraisedthefollowinggroundsofappeal: 1.TheCIT(A)erredinlawandonfactsinholdingthatassesseeiseligibleforsetoff ofunabsorbeddepreciationundersection32(2)oftheActagainstcurrentyeardeemed incomeofferedbyassesseeundersection44BBB(1)oftheAct,withoutappreciatingthe positionoflawassection44BBB(1)startswith'notwithstanding'clauseandunabsorbed depreciationundersection32(2)isnottobeconsideredwhenincomeisestimatedunder section44BBB(1). 2.TheCIT(A)erredinlawandonfactsinholdingthattheassesseeiseligibleforset offofunabsorbeddepreciationundersection32(2)oftheActagainstcurrentyeardeemed incomeofferedbyassesseeundersection44BBB(1)withouttakingintoaccountthe decisionofHon'bleCalcuttaHighCourtinthecaseofUniversalCargoCarriersInc.Vs. CommissionerofIncomeTax(1987)165ITR209. 3.TheCIT(A)erredinlawandonfactsinallowingthesetoffofbroughtforward businesslossesundersection72oftheActagainstthecurrentyeardeemedincome offeredbytheassesseeundersection44BBB(1)notappreciatingthepositionas enshrinedinsection29whichprovidesthatincomefromprofitsandgainsofbusinessisto becomputedaspersection30to43Dandsection44888isnotmentionedtherein. 4.TheId.CIT(A)haserredinlawandonfacts,CUPwasabettermethodofbenchmarking asagainstTNMMadoptedbytheTPO. 5.TheId.CIT(A)haserredinlawandonfacts,inholdingthatthetransactionof awardingthecontractbyAdaniPowerLimitedtoSFPMLHOwasaproperCUPforthe transactionbetweentheassessee(SFPMLLO)andSFPMLHOwithoutappreciatingthat natureoftransactionbetweenSFPMLHOandtheassesseeweretotallydifferenceand functionallyincomparabletotheCUPcitedbyCIT(A). 6.TheLd.CIT(A),haserredinlawandonfactsinholdingthecomparablesselected bytheTPOasfunctionallyincomparablemerelyonthebasisofgeneralobservations withoutassigninganyreasonforrejection. 7.ThereforetheorderoftheLd.CIT(A),deservestobedeletedandthattheorderof AssessingOfficerberestored. 8.Anyothergroundthatmaybeurgedatthetimeofhearing. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 56 36.Theinterconnectedissueraisedbytherevenueingroundnumbers1to3is thatlearnedCIT-Aerredinallowingthesetoffofunabsorbeddepreciationand broughtforwardlossesagainsttheincomedeterminedundersection44BBBof theAct. 37.Theassesseeintheyearunderconsiderationhasofferedincomeunderthe provisionsofsection44BBBoftheActwhichprovidesapresumptiverateofprofit. However,theassesseeagainstsuchprofithasclaimedthedeductionofthe unabsorbeddepreciationandthebroughtforwardlosseswhichweredeniedby theAO.AspertheAO,astheincomewasdeterminedunderpresumptivesection i.e.44BBBoftheActandthereforenobenefitofunabsorbeddepreciationand broughtforwardlossesbyadjustingagainstsuchincomecanbegiventothe assessee. 38.Onappeal,thelearnedCIT-Aallowedthegroundofappealinfavourofthe assesseebyobservingasunder: 6.3Ihavegonethroughtheassessmentorder,Statementoffactsandfurther submissionsfiledbeforeme.Attheveryoutset;asmentionedabove,theappellant- companyhasbroughttomynoticethatthedisallowanceofsetoffwasidenticalwiththat ofthereasonsintheimmediatelysubsequentassessmentyearsi.e.AY2012-13andA.Y. 2013-14.Theordersofthesubsequentassessmentyearshavebeenpassedbythe undersignedandthecopyoftheordershavealsobeenplacedbytheappellantbeforeme. Ihaveperusedtheordersofthesubsequentyearsandthefactsprevailinginthe subsequentyearsaswellasthefactsofthepresentcasebeforeme.Thesamecontract fortheyearunderconsiderationprevailsinsubsequentyearsalsoandthereisnochange inthemethodofaccountingfollowedbytheappellant-company.Thefactsofthecaseand theissuesinvolvedareidenticalinthisyearaswellasintheimmediatelysubsequent assessmentyears. Atthisjuncture,itwouldberelevanttoreproduceherethefindingoftheundersignedfor AssessmentYeari.e.A.Y.2012-13:- 7.IhaveperusedthefindingsoftheAssessingofficeraswellasdetailedsubmissions madebytheLearnedAR.Theappellantbeingaforeigncompanyhasfileditsreturn offeringincomeu/s44BBBofthe ActSection44888hasbeeninsertedinthestatutesoastofacilitatethenonresident engagedinthebusinessofcivilconstructionetc.incertaintumkeypowerprojects.Once theprovisionsofSection44880aremadeapplicabletheassesseeneednotgethisbooks ofaccountsauditedandfileataxauditreportu/s44A8oftheAct.Strictlyfollowingthe conditionstipulatedbySection44888theappellantofferedentirerevenuesgenerated ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 57 fromerectionandcommissioningofturnkeypowerprojectsfortaxation.Thesaidincome hasbeencharacterizedasbusinessincome. Againstthesaidincometheappellanthasclaimedsetoffofcarryforwardlosses. Provisionspertainingtosetoffandcarryforwardarestipulatedu/s70to80oftheAct. Section72providesastatutoryrighttotheappellanttodaimsetoffofcarriedforward losses.Thisstatutoryrightcannotbewithheldsincethelossisassessedloss.Copiesof returnofincomeaswellasassessmentorderforearlieryearshavebeenplacedbeforeme. Themannerofcomputingprofitsandgainsundertheheadshouldnotinfluencetheright ofclaimingsetoffandcarryforwardoflosses.ItisobservedthatHon'bleDelhiITATinthe caseofRollsRoyceIndustrialPowerLtd.42SOT264afterelaboratediscussionofsetoff ofbroughtforwardlossagainstcurrentyearincomehasheldasunder. 69.Wehaveconsideredtherivalcontentionsandgivenourcarefulconsiderationtothe materialsplacedonrecordandareoftheopinionthatcarryforwardbusinesslossisa statutoryrightallowabletotheassesseebysection72oftheAct.Thisstatutoryright cannotbewithheldfromtheassesseeasthislosshasbeenproperlycomputedand allowedtobecarriedforwardinthepreviousassessmentyearswhichhavebecomefinal. Copiesofthesamehavebeenfiledbeforeus.Themannerofcomputationofprofitsand gainsofbusinesswouldnotconvertprofitsandgainsofbusinessincomeunderanother headofincome.Itwillcontinuetobeprofitsandgainsofbusiness.TheAssessingOfficer inalltheseyearshasnotalsotreatedthisincometobetaxableunderanyotherheadthan 'profitsandgainsofbusiness.Onceprofitsandgainsofbusinessarecomputed,itis necessarythatcarryforwardbusinesslosshastobesetoffagainstprofitsandgainsof businessoftheyearsunderreview.TheCalcuttaHighCourthasnotstatedthatevenif youcomputeprofitsundersection44Dalreadycomputedlossofpreviousyearswouldnot besetoffagainstit.Therefore,weholdthatthecarryforwardofbusinesslossshould havebeenallowedtotheassesseeagainstprofitsandgainsofbusinesscomputedbythe AssessingOfficeralltheseyears." ItisalsoasettledpositionthattheappellantbeingassessedunderSection28to43Cof theactfortheearlieryeardoesnotmandatehimtofollowprincipleofconsistency.Honble DelhiITATinthecaseofDSDIndustrieanlagenGMBHv/sDDIT33SOT211hasalready heldthatsincethelawitselfprovidesanoptiontotheassesseetochoosethemethodof computingincomeundertheheadbusinessandprofessiontheprincipleofconsistencyof computingtaxableincomeinaparticularmannerisnotrequired. 8.Inviewofabovedecisionsandfactsofthecase,theAssessingOfficerisdirected toallowsetoffandcarryforwardofassessedlossesoftheprecedingyear.Accordingly thisgroundofappealisallowed."Thefactsofthecaseandtheissuesinvolvedare identicaltothefactsofthesubsequentassessmentyearswhereinIhavealreadyheldthat theAssessingOfficerneedstoallowthesetoffandcarryforwardofassessedlossesof precedingyears.TheAOisaccordinglydirectedtoallowsetoffandcarryforwardof assessedlossesofprecedingyearsinthepresentassessmentyearaswell.Consequently, groundno.2to3areallowedsubjecttodirectiongivenbelow. 39.BeingaggrievedbytheorderofthelearnedCIT-A,therevenueisinappeal beforeus. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 58 39.1BoththelearnedDRandtheARbeforeusvehementlysupportedtheorder oftherespectiveauthoritiesasfavourabletothem. 40.Wehaveheardtherivalcontentionsofboththepartiesandperusedthe materialsavailableonrecord.Regardingthesetoffofthebroughtforwardlosses, wenotethatthereisnoambiguity/confusionthatsuchlossiseligibleforsetoff againsttheincomedeterminedundertheprovisionsofsection44BBBoftheAct. InholdingsowerelyontheorderoftheDelhitribunalinthecaseofRollsRoyee IndustrialPowerLtd42SOT264whereinitwasheldasunder: 69.Wehaveconsideredtherivalcontentionsandgivenourcarefulconsiderationtothematerials placedonrecordandareoftheopinionthatcarryforwardbusinesslossisastatutoryright allowabletotheassesseebysection72oftheAct.Thisstatutoryrightcannotbewithheldfromthe assesseeasthislosshasbeenproperlycomputedandallowedtobecarriedforwardinthe previousassessmentyearswhichhavebecomefinal.Copiesofthesamehavebeenfiledbeforeus. Themannerofcomputationofprofitsandgainsofbusinesswouldnotconvertprofitsandgainsof businessincomeunderanotherheadofincome.Itwillcontinuetobeprofitsandgainsofbusiness. TheAssessingOfficerinalltheseyearshasnotalsotreatedthisincometobetaxableunderany otherheadthan‘profitsandgainsofbusiness’.Onceprofitsandgainsofbusinessarecomputed,it isnecessarythatcarryforwardbusinesslosshastobesetoffagainstprofitsandgainsofbusiness oftheyearsunderreview.TheCalcuttaHighCourthasnotstatedthatevenifyoucomputeprofits undersection44Dalreadycomputedlossofpreviousyearswouldnotbesetoffagainstit. Therefore,weholdthatthecarryforwardofbusinesslossshouldhavebeenallowedtothe assesseeagainstprofitsandgainsofbusinesscomputedbytheAssessingOfficeralltheseyears. 40.1Likewise,wealsofindsupportfromthejudgementofHon’bleCalcuttaHigh CourtinthecaseofUniversalCargoCarriersInc.vs.CITreportedin165ITR209 whereinitwasheldasunder: 20.Inviewoftheclearlanguageofsection44Bitappearstousthatwhileitisopento theassesseetoclaimadjustmentofbusinesslossofpastyearswhichhavebeencarried forwardagainstitsbusinessincomecomputedunderthesaidsection,itisnotopentothe assesseetoputunabsorbeddepreciationcarriedforwardinthesamebracketascarried overbusinesslossandalsoseeksuchadjustmentofthesamequaloss.Theassessee mustcomestrictlywithinthefourcornersofthesectioninordertobeentitledtothe advantage. 40.2Regardingthesetoffofunabsorbeddepreciation,wenotethattheHon’ble CalcuttaHighCourtincaseofUniversalCargoCarriersInc.vs.CIT(supra)in similarfactsandcircumstanceshasheldthesetoffofunabsorbeddepreciationis ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 59 notavailabletoassesseeincaseofpresumptiveincome.Therelevantobservation oftheHon’bleHighCourtreadsasunder: 16.Sofarasdepreciationisconcerned,theActprovidesforcompensationofthesameby anallowance,suchallowancebyitselfisnotalossbutifitcannotbeabsorbedina particularyearagainstbusinessincomethenitiscarriedforwardasanabsorbed depreciationallowanceundersection32(2).Thisunabsorbeddepreciationallowancedoes notenterintothecomputationofthebusinesslossoftheassesseeinthatparticularyear. 17.Inthesubsequentyearsuchunabsorbeddepreciationallowanceistreatedtobeapart ofthedepreciationallowanceofthesucceedingyearandtheassesseeisentitledtoclaim forabsorptioninrespectofthesameinthesucceedingyear. 18.Onastrictreadingofsection72itcannotbesaidthatunabsorbeddepreciation allowanceofanassesseeisabusinesslossparticularly,asitdoesnotenterintothe computationcontemplatedunderthesaidsection, 19.Ifadepreciationallowancecannotbeandisnotabsorbedinaparticularyearfromthe pointofviewofanaccountantthebusinesssuffersalossbutforthepurposeofenabling anassesseetoobtaintheadvantageofcarryingforwardsuchunabsorbeddepreciation allowanceandhavingitadjustedagainstthebusinessincomeofthesubsequentyearun absorbeddepreciationallowanceandthebusinesslosscarriedforwardmustbetreatedas separate. 20.Inviewoftheclearlanguageofsection44Bitappearstousthatwhileitisopento theassesseetoclaimadjustmentofbusinesslossofpastyearswhichhavebeencarried forwardagainstitsbusinessincomecomputedunderthesaidsection,itisnotopentothe assesseetoputunabsorbeddepreciationcarriedforwardinthesamebracketascarried overbusinesslossandalsoseeksuchadjustmentofthesamequaloss.Theassessee mustcomestrictlywithinthefourcornersofthesectioninordertobeentitledtothe advantage. 40.3Thus,respectfullyfollowingthejudgmentoftheHon’bleCalcuttaHigh Courtintheabove-mentionedcase,weareoftheviewthattheassesseeisnot eligibletosetoffoftheunabsorbeddeprecationagainsttheprofitcomputedunder section44BBBoftheAct.Inviewoftheaboveandafterconsideringthefactsin totalitythegroundofappealraisedregardingsetoffbroughforwardedlossesis allowedwhereasgroundofappealregardingthedisallowancesofunabsorbed depreciationisdismissed.Hencethegroundofappealoftherevenueishereby partlyallowed. 41.Thenextissueraisedbytherevenueingroundnumbers4to6isthatthe learnedCIT-AerredindeletingtheadditionmadebytheAOwithrespecttothe internationaltransactions. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 60 42.Attheoutset,wenotethattheissuesraisedbytheRevenueinitgrounds ofappealfortheAY2011-12areidenticaltotheissuesraisedbytheRevenuein inITANo.2916/AHD/2014fortheassessmentyear2009-10.Therefore,the findingsgiveninITANo.2916/AHD/2014shallalsobeapplicableforthe assessmentyear2010-11.ThegroundsofappealoftherevenuefortheA.Y. 2009-10havebeendecidedbyusvideparagraphNo.27ofthisorderagainstthe revenue.ThelearnedDRandtheARalsoagreedthatwhateverwillbethe findingsfortheassessmentyear2009-10shallalsobeappliedfortheassessment year2011-12.Hence,thegroundsofappealsfiledbytherevenuearehereby dismissed. 43.Intheresult,theappealfiledbytherevenueispartlyallowed. ComingtoITANo.2816/AHD/2017,fortheAY2012-13anappealby theRevenue. 44.Therevenuehasraisedthefollowinggroundsofappeal: 1.TheCIT(A)erredinlawandonfactsinholdingthatassesseeiseligibleforsetoffof unabsorbeddepreciationundersection32(2)oftheActagainstcurrentyeardeemedincome offeredbyassesseeundersection44BBB(1)oftheAct,withoutappreciatingthepositionoflawas section44BBB(1)startswith'notwithstanding'clauseandunabsorbeddepreciationundersection 32(2)isnottobeconsideredwhenincomeisestimatedundersection44BBB(1). 2.TheCIT(A)erredinlawandonfactsinholdingthattheassesseeiseligibleforsetoffof unabsorbeddepreciationundersection32(2)oftheActagainstcurrentyeardeemedincome offeredbyassesseeundersection44BBB(1)withouttakingintoaccountthedecisionofHon'ble CalcuttaHighCourtinthecaseofUniversalCargoCarriersInc.Vs.CommissionerofIncomeTax (1987)165ITR209. 3.TheCIT(A)erredinlawandonfactsinallowingthesetoffofbroughtforwardbusinesslosses undersection72oftheActagainstthecurrentyeardeemedincomeofferedbytheassesseeunder section44BBB(1)notappreciatingthepositionasenshrinedinsection29whichprovidesthat incomefromprofitsandgainsofbusinessistobecomputedaspersection30to43Dandsection 44BBBisnotmentionedtherein. 4.ThereforetheorderoftheLd.CIT(A)deservestobedeletedandthattheorderofAssessing Officerberestored. 5.Anyothergroundthatmaybeurgedatthetimeofhearing. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 61 45.Theinterconnectedissueraisedbytherevenueingroundnumbers1to3is thatthelearnedCIT-Aerredinallowingthesetoffofunabsorbeddepreciationand broughtforwardlossesagainsttheincomedeterminedundersection44BBBof theAct. 46.Attheoutset,wenotethattheissuesraisedbytheRevenueinitgrounds ofappealfortheAY2012-13areidenticaltotheissuesraisedbytheRevenuein inITANo.79/AHD/2018fortheassessmentyear2011-12.Therefore,thefindings giveninITANo.79/AHD/2018shallalsobeapplicablefortheassessmentyear 2012-13.ThegroundsofappealoftherevenuefortheA.Y.2011-12havebeen decidedbyusvideparagraphNo.40ofthisorderpartlyinfavoroftherevenue. ThelearnedDRandtheARalsoagreedthatwhateverwillbethefindingsforthe assessmentyear2011-12shallalsobeappliedfortheassessmentyear2012-13. Hence,thegroundsofappealsfiledbytherevenueareherebypartlyallowed. 47.Thenextissueraisedbytherevenueingroundnumbers4to6isthatthe learnedCIT-AerredindeletingtheadditionmadebytheAOwithrespecttothe internationaltransactions. 48.Attheoutset,wenotethattheissuesraisedbytheRevenueinitgrounds ofappealfortheAY2012-13areidenticaltotheissuesraisedbytheRevenuein inITANo.2916/AHD/2014fortheassessmentyear2009-10.Therefore,the findingsgiveninITANo.2916/AHD/2014shallalsobeapplicableforthe assessmentyear2010-11.ThegroundsofappealoftherevenuefortheA.Y. 2009-10havebeendecidedbyusvideparagraphNo.27ofthisorderagainstthe revenue.ThelearnedDRandtheARalsoagreedthatwhateverwillbethe findingsfortheassessmentyear2009-10shallalsobeappliedfortheassessment year2012-13.Hence,thegroundsofappealsfiledbytherevenuearehereby dismissed. 49.Intheresult,theappealfiledbytherevenueispartlyallowed. ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 62 ComingtoITANo.2817/AHD/2017,fortheAY2013-14anappealby theRevenue. 50Therevenuehasraisedthefollowinggroundsofappeal: 1.TheCIT(A)erredinlawandonfactsinholdingthatassesseeiseligibleforsetoffof unabsorbeddepreciationundersection32(2)oftheActagainstcurrentyeardeemedincome offeredbyassesseeundersection448BB(1)oftheAct,withoutappreciatingthepositionoflawas section448BB(1)startswith'notwithstanding'clauseandunabsorbeddepreciationundersection 32(2)isnottobeconsideredwhenincomeisestimatedundersection44BBB(1). TheCIT(A)erredinlawandonfactsinholdingthattheassesseeiseligibleforsetoffof unabsorbeddepreciationundersection32(2)oftheActagainstcurrentyeardeemedincome offeredbyassesseeundersection44BBB(1)withouttakingintoaccountthedecisionofHon'ble CalcuttaHighCourtinthecaseofUniversalCargoCarriersInc.Vs.CommissionerofIncomeTax (1987)165ITR209. TheCIT(A)erredinlawandonfactsinallowingthesetoffofbroughtforwardbusinesslosses undersection72oftheActagainstthecurrentyeardeemedincomeofferedbytheassesseeunder section44BBB(1)notappreciatingthepositionasenshrinedinsection29whichprovidesthat incomefromprofitsandgainsofbusinessistobecomputedaspersection30to43Dandsection 44BBBisnotmentionedtherein. 4.ThereforetheorderoftheLd.CIT(A)deservestobedeletedandthattheorderofAssessing Officerberestored. 5.Anyothergroundthatmaybeurgedatthetimeofhearing. 51.Theinterconnectedissueraisedbytherevenueingroundnumbers1to3is thatlearnedCIT-Aerredinallowingthesetoffofunabsorbeddepreciationand broughtforwardlossesagainsttheincomedeterminedundersection44BBBof theAct. 52.Attheoutset,wenotethattheissuesraisedbytheRevenueinitgrounds ofappealfortheAY2013-14areidenticaltotheissuesraisedbytheRevenuein inITANo.79/AHD/2018fortheassessmentyear2011-12.Therefore,thefindings giveninITANo.79/AHD/2018shallalsobeapplicablefortheassessmentyear 2012-13.ThegroundsofappealoftherevenuefortheA.Y.2011-12havebeen decidedbyusvideparagraphNo.40ofthisorderpartlyinfavouroftherevenue. ThelearnedDRandtheARalsoagreedthatwhateverwillbethefindingsforthe ITAnos.1129/AHD/2014 Asstt.Year2008-09wih6others 63 assessmentyear2011-12shallalsobeappliedfortheassessmentyear2013-14. Hence,thegroundsofappealsfiledbytherevenueareherebyallowed. 53.Intheresult,theappealfiledbytherevenueispartlyallowed. 54.Inthecombinedresults: OrderpronouncedintheCourton04/09/2023atAhmedabad. Sd/-Sd/- (SIDDHARTHANAUTIYAL)(WASEEMAHMED) JUDICIALMEMBERACCOUNTANTMEMBER (TrueCopy) Ahmedabad;Dated04/09/2023 Manish S.No.AppealNo.Ass.YearAppellantResult 1ITANo.1129/Ahd/20142008-09DepartmentDismissed 2to3ITANo.2916/Ahd/2014 andCO.NO. 300/Ahd/2014 2009-10DepartmentDismissed 4ITANo.78/Ahd/20182010-11DepartmentDismissed 5to7ITANo.79/Ahd/2018 andITANo.2816& 2817/Ahd/2017 2011-12 to2013- 14 DepartmentPartly Allowed