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2023 (3) TMI 204 - AT - Income TaxAssessment u/s 144C - contract receipts from HPCL - applicability of section 44BBB and Rule 10(i) - determination of profits attributable to the Permanent Establishment ( PE ) of the Appellant - applicability of transfer pricing provision to expenditures/payments covered under section 40A(2)(b) - HELD THAT - As will reveal that he has not pointed out any deficiency or anomaly in the documents furnished by the assessee. The only adverse observation made by him is to the effect that as per Note no. 15 to financial statements, the assessee has significant transaction with its related parties. Whereas, the assessee has not submitted any benchmarking analysis in order to justify that expenses in relation to the related parties are not unreasonable as per section 40A(2)(b) of the Act. Thus, in our view, AO has not implemented the directions of learned DRP in letter and spirit, in terms with section 144C(10) read with section 144C(13) of the Act. As could be seen from the facts on record, the financial statements disclosing related party transaction where available with the Assessing Officer at draft assessment stage. AO has not made any reference to the TPO to undertake an analysis to find out whether transaction with related parties are at arm s length or not. Therefore, it has to be assumed that the Assessing Officer accepted the arm s length nature of the transaction. Be that as it may, a reading of section 92BA, which defines specified domestic transaction, it is observed, the provision would not be applicable to assessee s transaction with related parties as sub-clause (1) of section 92BA, which provided for applicability of transfer pricing provision to expenditures/payments covered under section 40A(2)(b), has been omitted from the statute by Finance Act, 2017 w.e.f. 01.04.2017. Therefore, there was no obligation on the part of the assessee to furnish any benchmarking analysis in relation to such transaction. Having said that, it is necessary to examine the provisions of section 40A(2)(a) - Reading of the said provision would make it clear that where the AO is of the opinion that some expenditure incurred by the assessee is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure which according to the AO is excessive or unreasonable has to be disallowed. Admittedly, the assessee has furnished all necessary and relevant documents, including audited financial statements, Audit Reports/invoices etc. to justify its claim. Even, the assessee has furnished detailed replies to various queries made by the AO. Thus, the assessee has discharged its onus with reference to the expenses. As per the provisions of section 40A(2)(a), AO has to form an opinion not in vacuum but based on cogent material that the expenses/payments made by the assessee to the related parties are excessive and unreasonable having regard to fair market value of goods or services. In the facts of the present appeal, AO has not demonstrated in what manner he has formed the opinion that the expenses with reference to related parties are excessive and unreasonable having regarding to the fair market value. AO has not referred to even a single comparable case of similar nature of expenses to demonstrate that the payments/expenses made by the assessee are excessive and unreasonable and more than fair market value. Thus, in our view, the Assessing Officer has failed to discharge the burden cast upon him u/s 40A(2)(a) - Hence, the conditions remained unfulfilled. In any case of the matter, for the first time, at the final assessment stage, the AO has invoked the provisions of section 40A(2)(b) without providing any opportunity to the assessee. In fact, neither at the draft assessment stage, nor before the DRP, applicability of section 40A(2)(b) was ever an issue. At the final assessment stage, the Assessing Officer having not found any anomalies in the documents furnished by the assessee, only for the purpose of circumventing the directions of learned DRP and to somehow repeat the addition, has gone in a different tangent by invoking section 40A(2)(b) of the Act. This, in our view, is wholly unjustified and is in complete violation of Rules of Natural Justice. It also militates against the directions of learned DRP. In any case of the matter, we have already held that the Assessing Officer has failed to fulfill the conditions of section 40A(2)(b) of the Act. Therefore, the addition made is unsustainable. We may also address the issue regarding applicability of section 44BBB(1) of the Act. On a careful reading of the said provision, we are of the view that it is not applicable to the assessee as the assessee is neither executing any turkey power project, nor the project is approved by the Central Government or a competent authority in terms of section 44BBB(1) of the Act. Even, assuming that section 44BBB applies, sub-section (2) of section 44BBB carves out an exception by providing that the assessee may claim lower profit, if he keeps and maintains the books of account and documents prescribed under section 44AA and his accounts are audited in terms of section 44AB. In the facts of the present case, undoubtedly, the assessee has fulfilled the conditions mentioned in sub-section (2) of section 44BBB. Therefore, ignoring the provisions of sub-section (2) of section 44BBB, which overrides sub-section (1) of the said provision, the Assessing Officer could not have proceeded to estimate profit at 10% of the gross receipts. Thus, on overall analysis of facts and circumstances of the case and the ratio laid down in the decisions cited before us, we have no hesitation in holding that the disputed addition is unsustainable. Accordingly, we direct the Assessing Officer to delete the addition. Grounds are allowed.
Issues Involved:
1. Rejection of books of accounts and non-compliance with mandatory provisions of section 144C of the Income-tax Act, 1961. 2. Application of profit rate of 10% as per clause (i) of Rule 10 of Income Tax Rules, 1962. 3. Computation of interest under section 234D. Detailed Analysis: 1. Rejection of Books of Accounts and Non-Compliance with Section 144C The assessee challenged the final assessment order dated 28.07.2022, where the AO assessed the income at Rs. 26,18,81,404/- against the returned income of Rs. 12,86,92,788/-. The AO/DRP erred in rejecting the audited financial statements for determining profits attributable to the Permanent Establishment (PE) of the assessee, making the assessment order illegal and beyond jurisdiction. The DRP reversed the AO's decision to reject the books of account, directing the AO to review the documents for anomalies. However, the AO, without calling for further material, again rejected the books based on the same reasoning, which was found to be unsustainable and in violation of the DRP's directions. The AO's new allegation regarding the lack of benchmarking analysis for related party transactions under section 40A(2)(b) was made without granting the assessee an opportunity to furnish additional documents, violating the principles of natural justice. 2. Application of Profit Rate of 10% as per Rule 10(i) The AO/DRP's determination of a 10% profit rate to attribute profits amounting to INR 26,18,81,404 to the PE was contested. The AO invoked section 44BBB to compute the profit, which the assessee argued was inapplicable as the project was not a turnkey power project approved by the Central Government. Even if section 44BBB applied, the assessee fulfilled the conditions under sub-section (2) of section 44BBB, allowing for lower profits if proper books and audited accounts were maintained. The AO's failure to demonstrate that the expenses with related parties were excessive or unreasonable, and the omission of section 92BA concerning specified domestic transactions, further weakened the AO's position. The DRP's directions were not implemented in letter and spirit, leading to an unsustainable addition. 3. Computation of Interest under Section 234D The AO/DRP's computation of interest under section 234D was also challenged, but the primary focus remained on the rejection of books and profit attribution. Conclusion: The Tribunal found the AO's actions, including the rejection of books and the application of a 10% profit rate, to be unjustified and in violation of the DRP's directions. The AO's reliance on section 40A(2)(b) without providing an opportunity to the assessee and without demonstrating that the expenses were excessive or unreasonable was flawed. The Tribunal directed the AO to delete the addition, allowing the appeal in favor of the assessee.
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