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TMI Blog2013 (9) TMI 564X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act. 3. The learned Transfer pricing officer has erred in not appreciating that the provisions of Chapter X do not apply in respect of transactions with 'resident' entities. 4. The learned Dy. Commissioner of' Income tax, Circle 2(1), Hyderabad has erred in making addition in respect of transfer pricing adjustment made by the TPO amounting to Rs. 104,95,00,000. On facts and in the circumstances of the case and law applicable, the addition on account of transfer pricing adjustment is to be deleted in entirety. 5. The learned Transfer pricing officer has erred in not appreciating that the IJM Corporation Berhad, Malaysia Delhi Project office has sub-contracted the works to the Appellant company by retaining a very small margin of 3.2% and filing income tax returns before the Delhi Income tax authorities. 6. The learned Transfer pricing officer has erred in not appreciating that the reimbursement of expenditure is purely on cost basis and do not included any profit element. 7. The learned Transfer pricing officer has erred in not appreciating that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses. 17. The learned Dy. Commissioner of Income tax, Circle 2(1), Hyderabad has erred in levying interest under section 234B and 234D of the Act. On facts and in the circumstances of the case and law applicable, interest is not leviable under section 234B and 234D. The appellant denies its liability to pay interest under section 234B and 234D. 18. In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed by the learned Dy. Commissioner of Income tax, Circle 2(1), Hyderabad to the extent prejudicial to the appellant be quashed Or in the alternative: (i) addition on account of transfer pricing adjustment amounting to Rs.104,95,00,000/- be deleted; (ii) addition on account of disallowance of subcontract expenditure amounting to Rs.14,69,34,062. (iii) Addition on account of disallowance of travelling expenses amounting to Rs.19,98,225. (iv) Interest levied under section 234B and 234D be deleted. 3. Brief facts of the case are that the assessee is a closely held limited co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract works directly procured from various governmental and semi-governmental agencies. (iii) The TPO has rejected the TP study conducted by the assessee. The TPO has conducted an independent analysis and selected 11 companies from the data base for benchmarking analysis and determination of Arms Length Price. The assessee had objected the inclusion of 4 companies out of the 11 companies selected by TPO, the objected 4 companies are M/s. Patel Engineering Ltd., M/s. Raheja Universal Ltd., Prestige Projects Ltd., and M/s. Puravanker Projects Ltd., on the grounds of functional comparability and economic comparability and high profit margins. Without considering assessee submissions, the TPO arrived at the arithmetic mean PLI (OP/Sales) by following his own analysis. (iv) The assessee submitted before the TPO, explaining that certain transactions entered into with their related party enterprises, who were residents of India. Further explained that the said transactions were considered as international transactions as an abundant caution of complying with the law. The quantum of such transactions was submitted. Without considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payee cheques. Without considering the assessee submissions, the Assessing Officer has disallowed 5% of the expenditure in respect of some of the sub-contractor payments and arrived the disallowance amount of Rs. 1,86,12,721. (ix) During the course of assessment proceedings, the assessee submitted the books of account along with supporting vouchers. All the expenses including power and fuel were verified by the Assessing Officer along with the books and supporting vouchers. Without considering the assessee submissions and proper verification, the Assessing Officer has quantified an amount of Rs. 19,98,225 and disallowed under the head Travelling Expenses. 3.2 Firstly, the assessee company disputed the analysis done by the TPO and also disputed the rejection of TP study conducted by the assessee. Further, the assessee disputed the disallowances made by the Assessing Officer. The DRP had brushed aside the objections filed and confirmed the order of the TPO. Aggrieved, the assessee filed the present appeal before this Tribunal. 3.3 The AR submitted that the TPO had erroneously exercised the jurisdiction under the provisions of Chapter X even though there we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1956 and it is assessed to income-tax in the status of domestic company and whereas the AEs with whom the assessee had transactions are IJM Corporation Berhad, Delhi Project Office (PE in India), has the place of business in India under the provisions of Sec. 592 of the Companies Act, 1956 w.e.f. 30th May, 2005. 3.8 He submitted that by virtue of its registration under provisions of sec. 592 of Companies Act, 1956 and its affairs are managed and controlled in India. Further, one of the Directors of the Principal Company is nominated as Attorney for the purpose of undertaking the contract awarded by the Municipal Corporation of Delhi and National Highways Authority of India and is empowered to manage and operate entire operations in India and all the decisions in respect of operations in India are taken only in India and that nominated Director had been residing in India only. In other words, control and management of branch affairs were situated in India within the meaning of Sec. 6(3) (ii) of Income-tax Act, 1961. In this connection, he relied on the judgement of Calcutta High Court in the case of CIT v. Bank of China (In Liquidation) (154 ITR 617). 3.9 He also relied on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of Income-tax Act, 1961 which places "AOPs" in the same category as "Hindu Undivided Family (HUF)" and "firm" for the purpose of determining the residential status. In the case of partnership, it is settled by Supreme Court in the case of Erin Estate, Galah, Ceylon v. CIT (1958) 34 ITR 1 that the control and management of its affairs means the de facto control and not the de jure and refers to controlling and directive power often described as "head and brain". 3.14 The AR submitted that in the present case the transactions are between two resident parties only and there is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits. 3.15 He relied on the judgement of Supreme Court in the case of DIT (International Taxation) v. Morgan Stanley (292 ITR 416). 3.16 He also relied on the following judgements for the proposition that where there is no erosion of tax base in India, the provision of Transfer Pricing cannot be applied: &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, it is a matter of record that no margins are involved and the exact amount of expenditure is reimbursed and, therefore, no benchmarking is required. 3.20 He drew our attention to the following tabular chart showing the scenario after TP adjustment is as follows:- S.No. Particulars Contract value (during the year) Margin retained Revenue offered by the assessee Value of TP adjustment (proportionate adjustment of 104.95 Cr.) Total value after TP adjustment 1. IJM Corp PO-Delhi 98,26,78,976 2,94,80,369 95,31,98,607 65,92,95,900 161,24,94,506 2. IJM-IJMII JV 54,55,01,543 Nil 54,55,01,543 37,72,95,250 92,27,96,793 3. IJM-NBC-VRM JV` 1,87,05,776 Nil 1,87,05,776 1,29,08,850 3,16,14,626 3.21 According to the AR, from the above, it is clear that after TP adjustment under Section 92CA the total value of the revenue recognized in the hands of assessee exceeded the total contract value received by the AE. Therefore, such excess adjustment is not permissible in the light of judicial precedents cited supra. In any event, the margin retained by the AE is only 30/0. which is less than the tolerance limit of +/- 5%. Therefore, no adjustment is required under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce tunnel etc., for hydro-power projects. It claims to be a leader in the hydro-power segment with a 22 per cent market share. Till date the company has executed 30 hydro-power projects and 75 dam related projects. Patel Engineering also operates in the irrigation, transportation and urban infrastructure segments. It focuses on Lift Irrigation Projects as an EPC contractor, mainly in the State of Andhra Pradesh. In the transportation segment, its scope of work includes construction of roads, bridges, railways and road tunnel. However, hydro-power remains the largest segment with around 60 per cent contribution to the order book. Whereas, the assessee is engaged in the business of construction of roads, buildings and metro-rail works and even geographical locations are also different and, therefore, cannot be taken as comparables. The profit margins in two businesses will be totally different and, therefore, it cannot be taken as a comparable case. Reliance in this regard is placed on the decision of E-Gain Communication (P) Ltd. v. ITO (118 TTJ (Pune) 354) and Vedaris Technology (P.) Ltd. v. Asst. CIT [2010] 131 TTJ (Delhi) 309. Moreover, the information about* the comparable is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as under: Sl.No. Name of the company Sales (Rs. in Crores) OP/TC (%) 1. JMC Projects (India) Ltd. 915.00 7.90 2. Unity Infraprojects Ltd. 849.50 13.39 3. KMC Constructions Ltd. 729.90 12.50 4. Valecha Engineering Ltd. 501.20 5.78 5. Ahluwalla Contractors 881.24 10.46 6. Somdatt Builders 597.69 1.31 7. AMR Constructions 587.25 13.49 Arithmetic mean 9.26 Whereas the profit shown by the assessee is as under: Particulars Company's Actuals Net sales (Revenue) 736.88 Total operating income 736.88 Total cost incl. depreciation 704.77 Total operating expenses 704.77 Operating Profit 32.11 Net cost plus mark up (%) 4.56% 3.27 He submitted that the profit shown by the assessee with the AE is within the tolerance limit of + or 5% and, therefore, no TP adjustment under Sec. 92CA is required. 4. The learned DR submitted that during the previous year the assessee had transactions with two joint ventures who are the residents of India. The first joint venture is known as IJM-IJMII Joint venture. With this joint venture, the assessee had transactions for a sum of Rs. 94,31,27,708 (Rs. 54,55,01,543 + 39,76,26,165). In this joint v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 92B(1) as follows: "92B. (1) For the purposes of this section and sections 92, 92C, 920 and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises." A transaction between associated enterprises satisfying the prescribed criteria becomes an international transaction. 5.2 One of the essential limbs/constituents of an international transaction is "associated enterprise". Section 92B(2) outlines the circumstances under which a transaction between two persons would be deem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted enterprises remain so for the entire financial year. Their relationship will not change for different transactions between them. They will remain associated enterprises even if they do not have any transaction during the previous year. On the other hand, a transaction between an enterprise and another person can be deemed to be transaction between associated under section 92B(2) only in respect of transactions specified therein and not otherwise. This fiction is transaction specific and does not apply to all transactions between the enterprise and person, on the basis that one transaction attracts section 92B(2). 5.6 Section 92B(2) was enacted to hit at those cases where two associated enterprises intend to have an international transaction but want to avoid transfer pricing provisions by interposing a third party as an intermediary. In such cases, the third party intermediary will generally not be the ultimate consumer of the services or goods. The intermediary would facilitate the transfer of services or goods from one enterprise to its associate enterprise with no value addition or insignificant value addition. The intermediary is used to break a transaction into two differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear if during that year the control and management of its affairs is situated wholly in India. The determination as to what place or places the control and management of a particular company is situated is essentially a question of fact to be determined on the facts and in the circumstances of the particular case. A company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in India during the relevant previous year. The expression 'control and management' signifies the controlling and directive power, the head and brain as it is sometimes called and 'situated' implies the functioning of such power at a particular place with some degree of permanence. The word 'wholly' as used in section 6(3) would indicate that seat of such power may be divided between two distinct and separate places. The expression 'control and management' means de facto control and management and not merely the right or power to control and manage. In order to hold that a non-Indian company is resident in India during any previous year, it must be established that such company de facto controls and manages its affairs in India. The pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of law. 5.13 IJM-IJMII JV (Joint Venture between the assessee and IJM Corporation Berhad, Malaysia and IJM-NBCC-VRM (Joint Venture between National Building Construction Co. Ltd., VRM and the assessee) are also residents. These Joint Ventures are formed in India by an agreement between the respective parties and assessed in the status of AOP. In order to determine the residential status of AOPs, one has to refer to the definition given under sub-section (2) of Section 6 of Income-tax Act, 1961, which reads as under: "6. Residence in India. ---For the purpose of this Act. ... (2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India." 5.14 As may be seen from the above, the normal presumption is that an AOP will have to be considered as a resident unless its control and management are only situated outside India. The Revenue has not brought any evidence on record suggesting that these AOPs are controlled from Malaysia. Whereas the assessee led the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basic intention of the transfer pricing regulations is to prevent shifting profits out of India by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The relevant extract of the said circular is as below: "The new provision is intended to ensure that profits taxable in India are not understated (or losses are not overstated) by declaring lower receipts or higher outgoings than those which would have been declared by persons entering into similar transactions with unrelated parties in the same or similar circumstances. The basic intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, thereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction." Even as per the CBDT Circular (Circular No. 12/2001, dated 23.08.2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer had disallowed the following items of expenditure made to sub-contractors: (a) Payments to the sub-contractors an amount of - Rs. 2,29,00,000/ - ; (b) Disallowance of payments made to the sub-contractor, M/s. Maytas Infra Limited - Rs. 10,54,21,341/-; (c) Disallowance of payments made to various sub-contractors - Rs. 1,86,12,721/-; (d) Disallowance on account of power and fuel an amount of Rs. 19,98,225/-. 6.1 The learned AR submitted that the entire sub-contract payments were subjected to TDS provisions of the Act. Tax has been deducted at source and remitted to the Government within the due date. The Tribunal in the case of ECI Engineering & Construction Co., Ltd., in ITA No. 1279/Hyd/2010 vide order dated 21.04.2011 has held vide paragraph 18 of the order that "where the payments are covered by TDS, the genuineness of the expenditure cannot be doubted." Therefore, the entire expenditure should be allowed as a deduction. 6.2 In respect of disallowance of power and fuel expenses, it is submitted by the learned AR that the Assessing Officer had not brought any evidence on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The assessee further submitted the difference arose on account of advances which were considered as payments by the assessee. The Assessing Officer did not accept the explanation of the assessee. The Assessing Officer was of the view that total contract awarded to MAYTAS Infra Pvt. Ltd was for a sum of Rs. 55,55,29,469/- and during the previous year, the sub-contracts were executed by MAYTAS was for a sum of Rs. 16,50,40,621/-. The sub-contract work given to MAYTAS was for laying of the roads in the State of Madhya Pradesh whereas, the assessee submitted before the Assessing Officer that MAYTAS had carried out two works situated in Sagar and Trichi. The Assessing Officer observed that there was no evidence to accept the difference of Rs. 9.21 was on account of incomplete information furnished by MAYTAS Infra Pvt. Ltd. Despite giving adequate time, the assessee did not reconcile the difference in MAYTAS account and the TPO disallowed a sum of Rs. 10,54,21,341/- as unproved sub-contractors payments. 6.4 According to the DR, the contention of the assessee that MAYTAS Infra Pvt Ltd had executed work situated at 'Sagar' and Trichi but had furnished a part of the information only an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t during the survey, blank letter heads standing in the names of Marco Enterprises,. New Delhi and Macro Enterprises, New Delhi were found in the office of -the assessee. The assessee had paid a sum of Rs. 2.29 crores to these entities towards sub-contract charges. Letters were addressed by the Assessing Officer to these concerns and such letters were returned back by the postal authorities. Thereafter, the Assessing Officer has rightly directed the assessee to furnish the confirmation letters from the sub-contractors to prove the genuineness of the expenses. The burden is on the assessee to prove the genuineness of the expenditure incurred by it. The assessee did not discharge the onus cast upon it and the AO has rightly disallowed the payment to sub-contracts as not genuine. The action of the Assessing Officer is to be upheld. 7. We have heard both the parties and perused the material on record on the issue relating to disallowance of expenditure. There is disallowance of payment made to sub-contractors (i) Rs. 2,29,00,000, (ii) Rs. 10,54,21,341 - payment to MAYTAS Infra Ltd. and (iii) Other subcontract payments - Rs. 1,86,12,721. 7.1 Primarily, the first payment of Rs. 2.29 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure in question should not be of the nature described under the specific provisions ss 30 to 36 and 80VV of the Act( section 80VV was omitted w.e.f. from 1st April 1986) 2. The expenditure should not be of nature of capital expenditure 3. It should not be a personal expenditure 4. The expenditure have been laid out for expended wholly and exclusively for the purposes business or profession. 7.4 Now, we will examine, whether in this case the assessee has fulfilled the requirement as envisaged by the provisions of the Act. We have carefully gone through the provisions of sections 30 to 36. Section 30 relates to the allowability of payment like rent, rates, taxes, repairs and insurance for the premises used for the purpose of business or profession. In the instant case, the claim of the assessee does not relate to the kind of expenditure specified in S.30 and hence that section is not applicable. Section 31 relates to allowability of repairs and insurance in respect of machinery, plant and furniture used for the purpose of business. Similarly, section 32 is related to allowability of depreciation on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire any capital asset. 7.6 As for the third condition as to whether the payment is in the nature of personal expenditure or not, again, in our opinion, this is not the payment relating to personal benefit of any employees or directors of assessee-company. Being so, it is not personal expenditure. 7.7 Now, we have to see whether the expenditure is incurred wholly and exclusively for the purpose of business. In the case of Sassoon J. David & Co. Ltd. v. CIT (118 ITR 261 (SC) wherein held that the expression 'wholly and exclusively' used in s. 10(2)(xv) does not mean 'necessarily'. Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily without any necessity and it is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure. The fact somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv), if it satisfies otherwise the tests laid down by the law. 7.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular parties to whom the payments were made. This, the Tribunal held, could not be supplied without detriment to the business of the assessee in the very nature of things. Shri Patel then pointed out that, in paragraph 29 of the judgment, the Special Bench of the Tribunal noted that the position was the same in the case of Indochem Ltd. and that of the assessee. On the above stated facts, our judgment in the case of CIT v. Goodlass Nerolac Paints Ltd. [1991] 188 ITR 1 (Income-tax Reference No. 606 of 1976) dated August 21, 1990, squarely applies. Accordingly, we agree with the Tribunal that its conclusion is based on a finding of fact arrived at on the basis of good and cogent material" 7.10 In the instant case of the assessee-company too, the facts are identical with those considered by the Hon'ble Bombay High Court in the case of Sigma Paints (188 ITR 6). The payment vouchers giving the relevant details, including the names of the payees, and also bearing the signatures of the payees as recipients, had been produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted norm and established in this line of business and that without such payment, it was not possible to survive in this line of business, as well as the prevalent trade practice in the line of business carried on by the Assessee Company all along. However, in this case the inflating of expenditure by the assessee cannot be ruled out. Considering the entire facts and circumstance of the case and chances of inflating the expenses by the assessee, to meet the ends of justice, we are inclined to disallow 15% of this payment. 7.14 Regarding payment to MAYTAS Infra Ltd. of Rs. 10,54,21,341, the assessee failed to reconcile the difference by furnishing the bills and other evidences in its possession to explain the discrepancy in the transactions. Being so, as discussed in earlier paras 7 to 7.13, we are inclined to disallow 15% of this payment. 7.15 Regarding the disallowance of Rs. 1,86,12,721 to other subcontract payments, the Assessing Officer sent 750 letters to the sub contractors, out of this 221 letters were returned back and no reply from 414 sub contractors. The payment in respect of returned back letters consists payment of Rs. 37,22,54,421. The assessee was not able to prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
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