2019 (8) TMI 612 - AT - Income Tax

Applicability of provisions of Section 44BBB on domestic company - assessee filed return declaring loss whereas AO applied profit of 11% of the cost and computed the profit from business - HELD THAT - We do not find any justification to accept the contention of the Ld. D.R. Once the provisions and Section 44BBB are not applicable to domestic company as in the case of assessee, therefore, there were no justification even to place reliance upon the same provision while making the addition against the assessee. A.O. has not given any reasons as to why the losses incurred by the assessee are not allowable deduction. Further the assessee has clearly explained that the parties to the contract are not associated concerns of the assessee, therefore, provisions on International Taxation Law would not apply in the case of the assessee. A.O. has not given any finding against the assessee as to how the provisions of transfer pricing are applicable in the case of the assessee. CIT(A) has examined the issue in detail and in his findings has specifically held that the consideration received by assessee from the contract awarded could not be termed as an international transaction. A.O. did not point-out to any material to show as to how the transaction were international transaction in the matter. Since the A.O. failed to point-out that any of the party to the contract were associated concern of the assessee, there were no justification to apply such provisions of Law against the assessee. In case there would have been any international transaction between assessee and other parties to the contract, the A.O. shall have to refer the matter to TPO for getting his Opinion into the matter. But, A.O. did not do anything and framed regular assessment against the assessee. Therefore, on this sole reason itself, the Ld. CIT(A) was justified in holding that such provisions are not applicable in the case of the assessee. The Ld. D.R. failed to point-out any error in the Order of the Ld. CIT(A) in deleting the entire addition. No justification to interfere with the Order of the Ld. CIT(A) in deleting the addition. - decided in favour of assessee.

Summary

Issues Involved:
1. Presumption of equal remuneration in subsequent years.
2. Deletion of addition by estimating net profit.
3. Application of Section 44BBB.
4. Association with M/s Mont Blanc Trading Company.
5. Transfer Pricing Study.
6. Applicability of Section 92E and Section 92D.
7. Consideration of the statement recorded under oath.

Issue-wise Detailed Analysis:

1. Presumption of Equal Remuneration in Subsequent Years:
The AO presumed that the assessee might be receiving equal remuneration in the subsequent year due to the provision of similar services. The CIT(A) rejected this presumption, stating that the AO's inference was not acceptable. The AO's assumption lacked substantial evidence to support the claim that the remuneration should be equal across different years.

2. Deletion of Addition by Estimating Net Profit:
The AO made an addition of ?67,71,145 by estimating the net profit at 11.11% of the cost incurred. The CIT(A) deleted this addition, emphasizing that the AO ignored the detailed reasons provided by the assessee, including the long tendering process and price rise, which led to the loss. The CIT(A) found that the AO's estimation was based on conjecture rather than concrete evidence.

3. Application of Section 44BBB:
The AO applied Section 44BBB, treating the assessee similar to a civil contractor of a turnkey steel plant. The CIT(A) held that Section 44BBB, which pertains to foreign companies engaged in civil construction, does not apply to the assessee, a domestic company. The CIT(A) noted that the AO incorrectly applied a profit rate of 11% instead of the prescribed 10% and based it on cost rather than gross receipts.

4. Association with M/s Mont Blanc Trading Company:
The AO treated the assessee and M/s Mont Blanc Trading Company as Associated Enterprises under Sections 92A and 92F(iii). The CIT(A) rejected this, stating that the appellant had only one associated enterprise, ISTIL, which held 99.99% of the shares. The CIT(A) determined that M/s Mont Blanc Trading Company and other entities involved were not associated enterprises of ISTIL.

5. Transfer Pricing Study:
The AO did not conduct a Transfer Pricing Study, alleging that the assessee failed to provide details regarding international transactions. The CIT(A) found that the transactions were not international and thus not subject to transfer pricing laws. The AO's inference lacked the necessary documentation and opinion from Transfer Pricing Authorities.

6. Applicability of Section 92E and Section 92D:
The AO attempted to apply Sections 92E and 92D, which pertain to international transactions and transfer pricing. The CIT(A) held that these sections were not applicable as the transactions were not international. The AO's attempt to bring the transaction under transfer pricing was based on incorrect assumptions and lacked factual basis.

7. Consideration of the Statement Recorded Under Oath:
The AO did not adequately consider the statement recorded under oath from the Managing Director of the assessee company. The CIT(A) noted that the AO's findings were based on incoherent logic and imaginary facts, without substantial evidence to support the claims.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, dismissing the appeal of the Department. The Tribunal found no justification to interfere with the CIT(A)'s order, which was based on a detailed examination of the facts and applicable laws. The AO's application of Section 44BBB, transfer pricing provisions, and assumptions about associated enterprises and international transactions were found to be incorrect and unsupported by evidence. The Tribunal affirmed that the assessee's explanations for the incurred losses were reasonable and that the provisions of international taxation laws did not apply to the case.