9911796707
TMI Blog2014 (6) TMI 595X X X X Extracts X X X X X X X X Extracts X X X X ..... so it is not possible to accept on behalf of Revenue that this is a case where income has accrued to the assessee and later on it was applied by it by passing the share of profit in favour of the APHB - the right to receive this payment was vested with the APHB and the assessee has to comply with the agreement in true letter and spirit - the payment made by the assessee to the APHB in terms of the agreement is to be allowed as wholly and exclusively incurred for the purpose of business – Decided in favour of assessee. Disallowance of incentive paid to IJMII – Held that:- The assessee was contractually liable to pay incentive to IJMII - The payment was measured as a percentage of development costs incurred for development of integrated township - the incentive payable was quantified based on the quantum of development costs incurred till 31.3.2007 - the liability to pay incentive crystallised during the year - the incentive payable is to be finalised after completion of construction based on the total cost of development does not postpone the incurrence of liability - incentive paid to IJMII is allowable irrespective of the fact that the construction of the township had not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence placed on record to state that contractor handed over possession in time - the liability to pay liquidated damages vested in the tax payer – Decided against Assessee. Payment of handing over charges – Scope of term interest u/s 2(28A) of the Act – Held that:- The handing over charges paid were not in respect of any debt incurred or money borrowed - the assessee had merely paid compensation for delay in completion and handing over possession of flats – Relying upon Delhi Development Authority v ITO [1995 (1) TMI 126 - ITAT DELHI] - handing over charges cannot be equated with the word "interest" so as to invoke the provisions of section 40(a)(ia) of the Act and no addition is possible – Decided in favour of Assessee. Addition of cost of land attributable to flats – Held that:- Nothing prevented the tax payer to sell directly and credit such consideration to its P&L account - The necessity to conclude this agreement after incorporation of the company and to sell the flats only through shareholder is not substantiated - The expenditure is in fact incurred for the business purpose of shareholder and not for taxpayer's business - The necessity to incur such loss is also no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat there should be a transaction between two or more associated enterprises. Section 92A defines the term "associated enterprise" - Section 92A(1) provides the broad parameters on satisfaction of which two or more enterprises constitute associated enterprises - the deeming fiction u/s 92A(2) are limited to the parameters of management, control or capital. Section 92B(2) travels beyond these parameters - the primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more AEs in terms of section 92A(1) and 92A(2) of the Act - the transactions between the assessee and IJMII do not fall u/s 92B(2) of the Act. - ITA No. 2072/Hyd/2011 - - - Dated:- 31-12-2012 - SHRI CHANDRA POOJARI AND SHRI SAKTIJIT DEY, JJ. For the Appellant : Dr. M.V.R. Prasad For the Respondent : Sri K. Harilal Naik/M. Ravinder Sai ORDER PER CHANDRA POOJARI, AM: This appeal by the assessee is directed against the order of the Dispute Resolution Panel (DRP), Hyderabad dated 23.9.2011 for assessment year 2007-08. 2. The assessee company M/s. Swarnandhra IJMII Integrated Township Development Company Pvt. Ltd. was established to carry ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id the incentive to the IJMII. 3.2 The assessing officer interpreted the shareholders agreement by treating the company is not a party to the agreement. The assessing officer has disallowed an amount of Rs. 18,59,85,000 incentive paid to IJMII for its role as construction contractor and not otherwise. 3.3 During the financial year, the assessee company has paid interest u/s 234B and 234C an amount of Rs. 55,77,852/-. While filing the return of income, the assessee has disallowed the interest paid u/s 234B and 234C under the head Interest on delayed statutory payments. However, without considering the assessee voluntary disallowance, the assessing officer has disallowed the said amount of Rs. 55,77,852 again. 3.4 The Assessee sold the flats to the purchasers. As per the terms of agreement, the assessee has to complete the construction within 12 months from the date of agreement or any other specified period. However, considering the inordinate delay in completing the construction, the Assessee has paid delay in handing over charges of Rs. 7,74,36,597 to the purchasers. The said payment of Rs. 7,74,36,597 was treated by the assessing officer as interest and disallowed the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AE and the payments made at Arms Length Price was treated as NIL and the AO has made an addition of Rs 2,32,72,451/- based on the TPO order. iii) The assessee has also made a payment of Rs 1,15,67,035 as reimbursement of bank guarantee charges to its AE .The AE was sanctioned a loan on an overall basis from Standard Chartered Bank Malaysia both fund and non fund based. The share of the assessee of Rs 1,15,67,035 was reimbursed to its AE. The TPO treated the arms length price of Reimbursement towards bank guarantee charges at Rs nil. The Assessing Officer made an addition of Rs 1,15,67,035/- to the total income of the assessee based on the TPO order. Thus the details of additions are as under: S. No. Item Amount (Rs.) i) Disallowance of cost of land transferred to APHB 13,43,96,800 ii) Disallowance of incentive paid 18,59,85,000 iii) Disallowance of interest payment 55,77,852 iv) Disallowance of delay in handing over charges ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 144C(13) to the extent it is prejudicial to the assessee is bad in law and liable to be quashed. 2.1 The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in making addition of Rs. 13,43,96,800 in respect of cost of land transferred by APHB to the assessee. 2.2 The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in treating a portion of the payment made to APHB as payment towards profits. 2.3 On facts and in the circumstances of the case and law application, the addition made by the assessing officer amounting to Rs. 13,43,96,800 is incorrect, contrary to facts, underlying documents and therefore to be deleted in entirety. 3.1 The learned Deputy Commissioner of Income-tax, Circle 3(3), Hyderabad has erred in disallowing incentive paid to contractor amounting to Rs. 18,59,85,0001- on the ground that the said payment is not reasonable as per section 40A of the Act. 3.2 The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in making disallowance under section 40A without demonstrating the excess over the market value . 3.3 The conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th price without demonstrating as to why it was necessary and expedient to do so. 8.3 The learned Transfer pricing officer has erred in making adjustments under Chapter X in respect of transactions which were not 'international transactions' as defined in section 92B of the Act. 8.4 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. 8.5 The learned Assessing Officer, learned Transfer Pricing Officer and Honourable Dispute Resolution Panel have erred in (a) passing the order without demonstrating that assessee had motive of tax evasion. (b) Ignoring the fact that the members of Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the assessee, the constitution of the Dispute Resolution Panel is bad in law. (c) not appreciating that the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and therefore addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additions made to income returned are correct, the learned Assessing Officer has erred in not setting off brought forward business loss totally amounting to Rs. 2,36,46,319 in computing the taxable income for the year under consideration. 2. Assuming without admitting that the various additions made to income returned are correct, the learned Assessing Officer has erred in not setting off unabsorbed depreciation totally amounting to Rs. 28,05,937 in computing the taxable income for the year under consideration. 3.11 The assessee filed a petition for admitting the additional ground. We are admitting the additional ground after satisfying that the reasons advanced by the assessee counsel are bona-fide and the assessee is having reasonable cause for not raising the above grounds on earlier occasion. 4. With regard to addition in respect of cost of land transferred to Andhra Pradesh Housing Board (APHB) at Rs. 13,43,96,800 (Ground Nos. 2.1 to 2.3), the AR submitted as follows: 4.1 There was an acute shortage of quality residential accommodation in the state of Andhra Pradesh. In order to alleviate this problem, the Govt. of Andhra Pradesh through its arm - Andhra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the recorded the minutes on the following aspects in the said meeting. (i) Chairman to conduct the proceedings of the meeting; (ii) Appointment of first directors, additional director and chairman of the Company, and managing director; (iii) Circumstances leading to the formation of the Company and matters concerning the share capital and shareholding pattern; (iv) Approval of Foreign Investment Promotion Board (FIPB) for development of integrated township project; (v) Appointment of IJMII as the main contractor and project manager for the development of integrated township project, entering into sales and marketing agreement with IJMII; (vi) Entering into technical collaboration agreement with M/s IJM Properties Sdn. Bhd, Malaysia (vii) Appointment of M/s CESMA International, Singapore as the Architects of the project; (viii) Power of attorney from the Board in favour of the assessee; (ix) Commencement of site clearing and earth works; (x) Registered office of the Company, financial year, appointment of first auditors, common seal, printing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 2,200/- per square yard is inclusive of the land cost and APHB's share of anticipated profits in the development of integrated township. The Joint sector company shall pay the guaranteed profits at the rate of Rs. 800/- per square yard amounting to Rs. 13,43,97,120/- (Rupees Thirteen Crores Forty Three Lakhs Ninety Seven Thousand One Hundred Twenty Only), to APHB whether or not the Joint Sector Company realises profits from the integrated township. If the Joint Sector Company makes profits amounting to more than 15% of the Total Development Cost, APHB and IJMII shall be entitled to share such additional profits in the ratio of 49:51. For avoidance of doubts it is made clear that IJMII shall alone be entitled to receive all the profits generated by the Joint Sector Company up to 15% of the total development cost 4.8 The Board of directors in their meeting on 2.2.2004 discussed and recorded minutes regarding the shareholders and development agreement dated 4.11.2003 and other matters. 4.9 The Assessing Officer and the DRP have disallowed the payment of Rs. 800/- per square yard totally amounting to Rs. 13,43,96,800/- for the reason that the said payments are in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercentage of net profits, it was held that commission so paid was eligible for deduction in computing the profits chargeable to tax. The fact that the commission payable had to be computed as a percentage of net profits was held not relevant in determining whether the same is eligible for deduction. [Nizam Sugar Factory v C Ag. IT [1964) 52 ITR 939 (AP)) 4.14 According to the AR, the Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other is a question of fact to be found on the relevant circumstances, having regard to business principles. This was the view of the Supreme Court in Poona Electric Supply Co. Ltd v CIT [1965) 57 ITR 521. In the above decision, the assessee Company was liable to adjust its rates for sale of electricity periodically so that its profits did not exceed the amount of 'reasonable return'. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business, the Govt. of Travancore was entitled to a certain sum calculated at a percentage of net profits of the respondent Company. On a question as to whether the sums paid to Govt. of Travancore under the agreement constitutes diversion of income by overriding title or whether the same is allowable as deduction in computing the income, the Kerala High Court ruled in favour of the respondent Company on both the questions. The Supreme Court affirmed the above decision and held as under: On a construction of the terms of the contract in this case and the obligations arising therefrom we cannot say that the conclusions of the Kerala High Court are unsustainable. The assessee had no choice at the time of inception, as a condition of its coming into existence to agree to the several terms stipulated by the Government for transferring the profit-earning assets. No doubt, as the learned advocate for the revenue said, the company paid the Government in full for the value of the assets and the company had, therefore, no obligation to the Government on that account. This may be true to some extent but then there are the other obligations which are interlinked with the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l, the nature of the payment would not change and cannot be termed as distribution of profits. The High Court on appeal held that the amount in question had gone out of the coffers of the assessee and had been received by the member societies. He placed reliance on the judgement of the Supreme Court in CIT v. Ashokbhai Chimanbhai [1965] (56 ITR 42) where it was held that profits of a business do not accrue day to day or month to month and the same accrue at the year end on comparison of Assets at two stated points, the Gujarat High Court held that payment to member societies were not made after drawing the accounts and after determining the profits and hence, the question of distribution of profits does not arise. It was also held that the said payments were eligible for deduction in the process of computing the real profits and gains under section 28 and alternatively as a deduction under section 37. The allegation of tax evasion was jettisoned taking note of the fact that (i) the assessee-society was working under superintendence of various Government organizations; (ii) there were nominee-directors of the State Government and financial institutions on the board of directors; (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leviate the acute shortage of housing in the state of Andhra Pradesh. As per the term of the MoU dated 15.5.2002 the assessee was responsible for the construction and implementation of the housing projects as contemplated by the Board and it was bound by the policy framework of the Govt. of Andhra Pradesh. The assessee was bound by the guidelines of the Govt. of AP and the Board from time to time. The assessee undertook the development of housing projects on terms accepted and finalised by the Govt. of AP and the Board. 4.21 He submitted that the Board provided the land required for development and the joint venture partner M/s IJMII undertook to assist the assessee in development of housing projects, Vide agreement dated 4.11.2003, it was agreed that the Board and the joint venture partner should be compensated for their role in the housing project. This agreement was between the shareholders of the assessee. The terms of the agreement relating to payments proposed to be made to Board and IJMII was ratified by the Board and recorded in the minutes of Board of directors meeting held on 2,2.2004. The terms of the agreement dated 4.1.2003 was suitably incorporated in the Articles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an application of income after it accrued to the assessee-firm. The true test in determining this question is laid down in Sitaldas Tirathdas s case [1961} 41 ITR 367 (SC). The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one s own income, which has been received and is since applied. 4.24 The High Court in the above judgement f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed on. The details of rate per square yard as per Sub Registrar is not produced. Kukatpally Housing Board Colony is nearby and it is one. of the biggest townships in Asia, Hence, it is also for consideration as to why the company failed to register this developmental agreement to get it recognized or give it the authenticity. Moreover, the land was given in terms of acres because it was not yet developed. Hence, the rate per acre would be applicable and not rate per square yard. 5.2 The DR submitted that even in para (d) clause 4.1.6 of shareholders agreement, it is stated that Rs.13,43,97,120 i.e., land cost @ 800 per square yard, guaranteed profits shall .be progressively realized by the APHB from the taxpayer from time to time as sales collections are received by the assessee taxpayer on account of sale of flats . This clearly shows that only the profit accumulated is paid and the profit on land was arrived at. It should not be ignored that this agreement is subsequent to incorporation (i.e., after 8 months) and section 40A(2)(a) and (2)(b) provisions also apply. Besides this, the taxpayer knew fully well that if such payment is made from out of profits, taxes are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... q. yd amounting to RS. 13,43,97,120 (Rupees Thirteen Crores Forty three lakhs Ninety seven thousand one hundred and twenty Only) totalling to Rs. 21,61,62,836 shall be progressively realized by the APHB from the Joint Sector company from time to time, from the sales collections received by the Joint Sector Company from the sale of apartment units (other than those referred to in sub-clause 4.1.4(b) above), during the proposed development period of the integrated Township, at a redemption rate of 15% or a mutually agreed fixed amount until full settlement. (e) Notwithstanding anything contained in clause 2.3.2, but subject to the Applicable Laws and if the parties decide not to undertake new projects under the Joint Sector Company. In consideration for provision of land for the Company's project and as a compensation to APHB, IJMII will have the right to acquire or APHB would have the right to enforce acquisition of the entire share capital held by APHB within 90 days from the completion of the project for a consideration of Rs. 4,90,00,000 (Rupees Four Crores Ninety lakhs only) which shall be reduced for any dividend paid by the company to APHB in Its capacity a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n an amount which a person is obliged to apply out of its income and an amount which by the nature of the obligation as part of the contractual obligation the assessee to be incurred. Whereby there is obligation by a contract an amount incurred even before or after the income reached the assessee, it is to be allowed; but where the income is required to be applied after such income reaches the assessee the same cannot be allowed if it is clear appropriation of profit. In other words, the payment is merely an obligation to pay a portion of assessee's own income, which has been received and is since applied, it cannot be allowed as a deduction. In the present case, M/s. APHB is entitled to receive a portion from the assessee's income which is as per pre-determined terms in the contract and the assessee cannot oblige to violate the same and, therefore, the payment made by the assessee is an expenditure which was necessary for the purpose of business of the assessee to earn its income. Further, a fair and comprehensive reading of the stipulation in the agreement shows that the assessee, though not a party to the agreement (supra), it was abided by the stipulation in the agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to accept on behalf of Revenue that this is a case where income has accrued to the assessee and later on it was applied by it by passing the share of profit in favour of the APHB. As per agreement entered by APHB and IJMII, the right to receive this payment was vested with the APHB and the assessee has to comply with the agreement in true letter and spirit. In view of the above discussion, we are of the opinion that the payment made by the assessee to the APHB in terms of the agreement dated 4.11.2003 is to be allowed as wholly and exclusively incurred for the purpose of business. This ground of the assessee is allowed. 7. With regard to disallowance of incentive (Ground Nos. 3.1 to 3.4) paid to IJMII amounting to Rs. 18,59,85,000, the AR submitted as follows: 7.1 As per clause 14.1.6 of the Development Shareholders Agreement dated 4.11.2003, the assessee paid incentive to IJMII amounting to Rs. 18,59,85,000 As per the MoU and the development agreement, IJMII assisted the assessee in development of township. IJMII was the main construction contractor in developing the township. The incentive to IJMII was the consideration paid in relation to contract work u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40A(2)(a) provides as under:- Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure 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 as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. 7.5 The AR drew our attention to the scope of section 40A(2) has been set out in CBDT Circular No. 6P (LXXVI-66) of 1968, dated 6-7-1968. 7.6 He submitted that section 40A(2)(a) is placed after section 37, Disallowance under section 40A(2)(a) is made if the expenditure otherwise allowable is excessive or unreasonable, A disallowance made under section 40A(2)(a) pre-supposes that the expenditure disallowed has satisfied the tests of section 37 and is otherwise allowable as deduction, In the present case, the incentive paid to IJMII has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e allowable as deduction. In the present case, the incentive paid to IJMII has been disallowed under section 40A(2)(a). In other words, the assessing officer has accepted the fact that the incentive paid to IJMII is an expenditure wholly and exclusively incurred for the purpose of the business. However, for invoking the provisions of section 40A(2)(a}, the onus lies upon the Assessing Officer that the payment is excessive or unreasonable having regard to the fair market value of goods or legitimate needs of the business. Under the general law, transactions even with the relatives and associate concerns cannot be discarded. In other words, unless it is shown that the transaction in question is a sham one or unless the value shown is not the value in the books of account or unless it is not a bona fide transaction, it is not open to the taxing authorities to disregard the figures of the transactions shown in the books of account. The onus is on the department to prove that the transaction was sham or not bona fide or the value shown in the books was not the value really paid. The Assessing Officer must establish that the payment is excessive or unreasonable. ITO cannot proceed merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company in various manner. For example, in an Annual general meeting, it is the shareholders who appoint auditors, adopt final accounts, approve distribution of dividends etc. A special resolution is passed by the shareholders to bind the Company. A Company does not have hands and legs to conduct its business. It has to operate through Board of directors and the shareholders. The general management and administration of the Company has to be exercised by the Board of directors. However, the Board of directors does not have powers to take decisions in respect of certain matters such borrowing in excess of certain limits, amalgamation, sale of business, appointment of auditors etc. The shareholders have to approve such actions which then bind the Company. In the present case also, the payment of incentive was approved by the shareholders in the development and shareholders agreement dated 4.11.2003. Subsequently the Board of directors in their meeting held on 2.2.2004 discussed the matters concerned with the agreement dated 4.11.2004 and recorded the minutes. The payment of incentive was promoted out of business needs and commercial expediency. The revenue cannot itself put in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecuted the work in time to term the payment as incentive for timely completion. The above reasons are irrelevant in determining the allowability of the impugned expenditure. The assessee was contractually bound to pay incentive to IJMII. As explained earlier, for the year ending 31.3.2007, the cost of development incurred amounted to Rs. 367,69,09,874/- and 15% of the same amounted to Rs. 55,15,36,481/- However, expenditure in the nature of incentive was recognised only to the extent of Rs. 18,59,85,OOO/- and an amount of Rs. 33,76,53,731/- was not recognised due to sufficient profits. 7.14 He submitted that the assessee follows mercantile system of accounting. In computing the profits of business chargeable under the Act, the expenditure actually incurred and the liability accrued in respect of such expenditure (but required to be discharged at some future date) should be deducted. He placed reliance on the judgement of Supreme Court in the case of Calcutta Company Limited v. CIT [1959] 37 ITR I,, wherein held as follows: The assessee here is being assessed in respect of the profits and gains of its business and the profits and gains of the business cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It does not make any difference if the future date on which the liability shall have to be discharged is not certain. He placed reliance on the judgement of Supreme Court in the case of Bharat Earth Movers v CIT [2000] 245 IT 428 (SC)]. 7.19 He contended that in the present case, the assessee was contractually liable to pay incentive to IJMII. The said payment was measured as a percentage of development costs incurred for development of integrated township. During the year, the incentive payable was quantified based on the quantum of development costs incurred till 31.3.2007. Accordingly, the liability to pay incentive crystallised during the year. The fact that the incentive payable is to be finalised after completion of construction based on the total cost of development does not postpone the incurrence of liability. Hence, incentive paid to IJMII is allowable irrespective of the fact that the construction of the township had not been completed at the end of the year. Similarly, the fact that the execution of work was not in time is irrelevant for the purpose of allowability of expenditure. Since, substantial completion of the project is done and only some minor works are pen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. 8.2 The DR submitted that it is the assessee's contention that the AO misinterpreted the shareholders agreement. The subsequent happenings, administration, governance and all management of the taxpayer company is solely defined in the shareholders agreement. It is argued that the incentive is paid for the services rendered and it is not a case of distribution of profits. The contractor can be paid incentive. Application of section 40A is not attracted in the impugned case. A reading of the shareholders agreement, para 4.1.6 and the entire section 3 and especially para 4 is crucial to this case. One of the shareholders i.e., APHB is given Rs. 800/- per square yard as 'anticipated profit'. The other shareholder IJMII being also the contractor is also guaranteed 15% of total developmental cost (both these amounts are almost the same). With or without profit being disclosed, these sums are debited and claimed as expenditure in the case of the taxpayer. The total project cost/construction is estimated is Rs.367 crores up to 31.03.2007. It is the housing board project, where the flats are sold to the public and money raised. The cost of the land to the Housing Board is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (-) 1, 13,57,822 3,85,15,194 (-)87,22,201 (-)5,33,15,003 OP/Sales {-)0.75% 2.02% (-) 8.45% {-)57.09% OP/Cost 0.74% 2.06% (-)7.80% (-)36.34% The profit disclosed is very negligible which can be seen from the above Table. The taxpayer claimed huge refund of Rs.5.90 crores for Asst. Year 2007-08. The income disclosed by APHB, one of the shareholders, is given below: Sl. No. A.Y. Net profit/loss as per P L a/c Income returned 1 2005-06 Rs.43,62,70,753 (-)Rs.65,05,784 2 2006-07 (-)121,67,49,541 (-)8,70,76,260 3 2007-08 (-)110,96,10,573 Nil 8.5 The profit/income disclosed by the taxpayer as well as one of the shareholders is depicted above. Among other j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking the construction contract for development of integrated township. The assessing officer has not doubted the genuineness and purpose of the expenditure. The fact that the expenditure has been disallowed u/s 40A(2)(a) itself demonstrates that the requirements of section 37 has been satisfied. The scope and requirements of section 40A(2)(a) has been explained above. In order to disallow an expenditure under section 40A(2)(a), the assessing officer has to demonstrate with evidence that the impugned expenditure is excessive or unreasonable having regard to the (i) fair market value of the goods, services or facilities for which the payment is made or (ii) the legitimate needs of the business of the assessee; or (iii) the benefit derived by or accruing to him therefrom. The burden of proof under section 40A(2)(a) is on the assessing officer. 9.1 In our opinion, the assessing officer has to compare the payment made with the fair market value of the goods, services or facilities. In the present case, the fair market value of the payment made to IJMII has not been brought on record by the assessing officer. The excessiveness or unreasonableness of the impugned payments has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f tax. The assessing officer has failed to view the transaction underlying the payment of incentive on a holistic approach from commercial or business perspective. The disallowance made in violation of the requirements of s. 40A(2)(a), Board Circular No. 6P (LXXVI-66) of 1968, dated 6-7-1968 and the principles laid down by the Courts is, therefore, not justified. Therefore, on the basis of the documents placed on record, we are of the opinion that expenditure incurred was for commercial expediency and, therefore, are to be allowed as business expenditure. Commercial expediency must be decided in the context of assessee's business operations and not from the point of view of the Assessing Officer. In our opinion, in the present case, the assessee was contractually liable to pay incentive to IJMII. The said payment was measured as a percentage of development costs incurred for development of integrated township. During the year, the incentive payable was quantified based on the quantum of development costs incurred till 31.3.2007. Accordingly, the liability to pay incentive crystallised during the year. The fact that the incentive payable is to be finalised after completion of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her than interest on securities. He drew our attention to the term 'interest' is defined in section 2(28A). 11.1 The AR submitted that as per section 2(28A), interest means interest payable in any manner in respect of any moneys borrowed or debt incurred. It is clear from the definition in section 2(28A) of the Income-tax Act, 1961, that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. He placed reliance on the judgement of Delhi High Court in the case of ClT v Cargill Global Trading P. Ltd [2011] 335 ITR 94 (Del)]. In the present case, the payment of handing over charges to various buyers was made for the delay in completion of construction of flats. The said payments were not made in connection with any money borrowed or debt incurred by the assessee. He placed reliance on the following orders/judgements: Delhi Development Authority v ITO [1995] 53 ITD 19 and the judgement of Himachal Pradesh High Court in the case of CIT v HP Housing Board [2012] 340 ITR 388 has held that payment of interest to buyers for the delay in completion of construction and handover of flats ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontractor handed over possession in time and hence, the liability to pay liquidated damages squarely vested in the tax payer. Since no proper proof is adduced, the stand of the assessee. To be rejected. Findings in respect of ground Nos. 4.1: 13. We have heard both the parties and perused the material on record. In our opinion, payment of handing over charges cannot be equated with interest defined in section 2(28A) of the Act. U/s. 2(28A) interest reads as under: Interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debit incurred or in respect of any credit facility which has not been utilised. 13.1 It is clear from the above that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred. In the present case, on the aforesaid facts appearing on record, in our opinion, the handing over charges paid were not in respect of any debt incurred or money borrowed. Instead, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enient system of calculating the damages which would be uniform for all the allottees. The allottees had not given the money to the assessee by way of deposit nor had the assessee borrowed the amount from the allottees. The amount was paid under a self- financing scheme for construction of the flats and the interest was paid on account of damages suffered by the claimant for delay in completion of the flats. 13.2 In view of the above discussion, we are of the opinion that handing over charges cannot be equated with the word interest so as to invoke the provisions of section 40(a)(ia) of the Act and no addition is possible on this count. Accordingly, this ground of the assessee is allowed. 14. The next ground is with regard to addition of Rs. 1,92,19,200/- (ground No. 5.1) in respect of cost of land attributable to flats handed over to APHB. 14.1 Facts relating to this issue are that as per the development and shareholders agreement dated 4.11.2003, the assessee paid compensation to Board at the rate of Rs. 2,200/- per sq. yard of the land contributed by the Board. A part of the above consideration was directly realised by the Board by allotting / selling 500 low income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y and a meaningless ritual, on the facts of this case 15. The AR submitted that on facts and in the circumstances of the case and law applicable, addition of Rs. 1,92,19,200/- is to be deleted in entirety. 16. Regarding addition of Rs. 18.06.75.000/- (ground N. 6.1) towards of construction of houses handed over to APHB, the AR submitted as follows: 16.1 As per the terms of the development and construction agreement dated 4.11.2003, the assessee paid compensation to Board at the rate of Rs. 2,200/- per sq. yard of the land contributed by the Board. A part of the above consideration was directly realised by the Board by allotting / selling 500 low income group apartment units of the size of 450 sq. ft each at Rs. 400/- per sq.ft. The assessing officer has made an addition of Rs. 18,06,75,000/- [Rs. 803 x 2,25,000 sq. ft] computed at Rs. 803/- per sq. ft in respect of 2,25,000 sq. ft of built up area of 500 LlG apartments [500 LlG houses x 450 sq. ft]. The assessing officer computed the average cost of construction per sq. ft at Rs. 1,203/- per sq. ft. [Total cost of Rs. 337,77,71,071/- divided by total saleable area of 28,06,972 sq. ft] After considering that the assessee p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which payment has been or is to be made to any person [Emphasis supplied]. The emphasized words clearly show that there has to be an expenditure incurred and actual payment should have been or is to be made in respect of such expenditure before the provision can be said to be applicable. He placed reliance on the judgement of Delhi High Court in the case of United Exports v. CIT (2009) 185 Taxman 374 (DELHI) and ClT v Subbaraya Chetty (A.K.) and Sons [1980] 123 ITR 592 (Mad) 16.5 According to the AR, the term 'expenditure' is equal to 'expense' and 'expense' is money laid out by calculation and intention. The idea of 'spending' in the sense of 'paying out or away' money is the primary meaning of the term 'expenditure' ' Expenditure' is thus what is 'paid out or away' and is something which is gone irretrievably. He placed reliance on the judgement of Supreme Court in the case of Indian Molasses Company (P) Ltd. v. CIT [1959] 37 ITR 66 (SC). 16.6 In the present case, there was no expenditure incurred or payment by the assessee to APHB. On the other hand, the assessee received Rs. 35,000/- per unit towards electri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived by the assessee. The income received and computed as per the provisions of the Act has to be accepted by the revenue as the taxable income. b) The income from development of integrated township, being business income, would be taxable under the provision of Chapter IV-D, comprising of sections 28 to 44DB. There are no specific provisions in chapter IV-D, which enable the revenue authorities to impute higher income to the assessee on the ground that transactions are entered into by the assessee at rates below the market value. c) On the other hand there is a specific provision in this chapter, viz., section 40A(2)(a) which empowers the assessing officer to adopt fair market value in place of expenditure reflected by the assessee, if it is found that the assessee has made excessive or unreasonable payments as expenditure to specified related parties. d) It is only in specific cases that the Act provides for the adoption of fair market value or similar value for the purpose determining the income. One can refer to sections 23, 50C, 80-IA(8), 80-IA(10) and section 92 in this regard. The provisions of section 80-IA(8) and 80-IA(10) have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be respected even by revenue authorities. The revenue authorities cannot substitute its views to that of a business man. No businessman can be compelled to maximize his profits. [S.A Builders Ltd. v. CIT (A) [2007] 288 ITR 1 (SC)] 16.8 He submitted that courts have held in various cases that the department cannot impute a notional income to an assessee, even if the consideration charged by an assessee for a transaction appears low to an assessing officer. He referred to decision of the Supreme Court in CIT v. M Sivrammurthy and Raghu [1993} 204 ITR (St.) 5 (SC), Highways Construction Co. (P) Ltd. v. CIT, [1993} 199 ITR 702 (Gau), B and A Plantations Industries Ltd. v. CIT, [2000} 242 ITR 22 (Gau.); Keshrichand Jaisukhlal v. CIT, [2001} 248 ITR 47 (Gau.) and in Development Investors Ltd. v. CIT, [1997} 223 ITR 432 (Gau), Cauvery Spinning and Wvg. Mills Ltd v DCIT [2012} 340 ITR 550 (Mad), CIT v Moni Kumar Subba [2011} 333 ITR 38 (Del), CIT v Asian Hotels Ltd [2010} 323 ITR 490 (Del), CIT v Govind Agencies P Ltd (2007) 295 ITR 290 (All), CIT v J Chelladurai 204 Taxman 258 (Mad) in support of the above position of law. In view of the above, the impugned addition of Rs. 18, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l.) submitted that provisions of law such as 40A(2) etc. cannot be ignored and mutually convenient agreements concluded cannot gain precedence or importance over principles of law. 17.2 The DR submitted that the taxpayer cannot take the stand that it will not reveal or that it has no necessity to state at what rate APHB shareholders sold the flats. Nothing prevented the tax payer to sell directly and credit such consideration to its P L account. The necessity to conclude this agreement after incorporation of the company and to sell the flats only through shareholder is not substantiated. The expenditure is in fact incurred for the business purpose of shareholder and not for taxpayer's business. The necessity to incur such loss is also not established. Then again, Sec. 40A(2)(a) arises in this case as APHB is a shareholder holding 49% of shares in the company. The excess expenditure is incurred for the specified person. Further, it also amounts to diversion of profit since the shareholder, APHB, can sell at a far higher than Rs.400/- and make profit whereas the taxpayer incurs loss which is the quantum of addition made by the AO as disallowance. Moreover, already the incomes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject matter of the claim is a discounted price of offer and not an expenditure, clearly, therefore, does not arise the question of invoking the provisions of section 40A(2). Being so, the disallowance is not possible. This ground of the assessee is allowed. 19. Regarding disallowance of interest paid to IJMII (Ground No. 7.1), the AR submitted that interest paid to IJMII for delay in payment of contract bills has been disallowed for the reason that the construction agreement dated 9.2.2004 does not provide for payment of interest. It is also concluded that the payment of interest is hit by the provisions of section 40A(2)(a) of the Act. The learned assessing officer has erred in not appreciating that the payment of interest was agreed to between the parties and the same was prompted out of business or commercial expediency. There was no evasion of tax since interest paid to IJMII was offered to tax by IJMII and the taxable income of IJMII was higher than the taxable income of the assessee. The interest was paid at prevalent bank rates. Even though the construction agreement did not provide for payment of interest, the same was later on agreed between the parties orally and lat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This payment was disallowed on the reason that as per the agreement dated 9.2.2004 the assessee is not required to pay interest to IJMII and also according to the Assessing Officer provisions of section 40A(2) are applicable to this payment. This expenditure has been actually incurred by the assessee for the purpose of its business. The payment of interest is not demonstrated by the Assessing Officer that it is paid in excess of the prevailing market rate and the assessee having incurred the expenditure wholly and exclusively for the purpose of business, the same is allowable in terms of section 37 of the Act. Accordingly, this ground of the assessee is allowed. 22. Now we will take up the issue relating to transfer pricing. 23. The AR submitted with regard to adjustment under section 92CA and addition to income amounting to Rs. 38.34.39.486/- (Ground Nos. 8.1 to 8.9) as follows: 23.1 The assessee is a company created as a result of a joint venture between the Andhra Pradesh Housing Board (APHB) and IJM (India) Infrastructure Limited (hereinafter referred to as IJMII). IJMII, an Indian Company is a subsidiary of IJM Corporation, Berhad (hereinafter along with it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 105,19,32,585 23.7 The TPO has held that the above transactions with IJMII are deemed international transactions u/s 92B(2). The TPO selected 25 companies as comparable and determined the average margins at 20.35%. The transfer pricing adjustment has been determined at Rs. 34,86,00,000/- 23.8 The TPO also proposed to perform a separate transfer pricing analysis in relation to fees for technical services paid by the assessee to its associated enterprises. The TPO adopted the Comparable Uncontrolled Price Method (hereinafter referred as CUP method for short) as the most appropriate method in place of TNMM selected by the assessee. The TPO determined the arm's length price of technical services fees paid by the assessee to its associated enterprises at NIL on the ground that the assessee has not received any benefit from it. Accordingly the TPO proposed transfer pricing adjustment of Rs. 2,32,72,452/- 23.9 The TPO determined the arm's length price of bank guarantee charges reimbursed by the assessee to its AE at NIL on the ground that the assessee has not furnished any documents/evidence to justify the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO has erred in concluding that the transactions between the-assessee and its holding company IJMII, are international transaction, under section 92B(2). 24.5 The scope of section 92B(2) is explained in CBDT circular No. 14 of 2001, dated 22.11.2001 with an illustration as under: 55.8 Sub-section (2) of section 928 extends the scope of the definition of international transaction by providing that a transaction entered into with an unrelated person shall be deemed to be a transaction with an associated enterprise, if there exists a prior agreement in relation to the transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined by the associated enterprise. An illustration of such a transaction could be where the assessee, being an enterprise resident in India, exports goods to an unrelated person abroad, and there is a separate arrangement or agreement between the unrelated person and an associated enterprise which influences the price at which the goods are exported. In such a case the transaction with the unrelated enterprise will also be subject to transfer pricing regulations. 24.6 He submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction. The words substance means that which is essential and that which is used in opposition to 'form'. The word 'determined', which is derived from the word 'determine', means to fix the character by prescribing imperatively or laying down decisively or authoritatively. 24.11 The second type of influence will arise if the associate enterprise and the unrelated party are able to jointly and imperatively prescribe or fix the essence of the character of the transaction in question. In other words, the Indian entity will not have an opportunity of determining the substance of the transaction as per its volition. The Indian entity will have to yield itself to the influence of its associate enterprise and the unrelated party. 24.12 In the present case, IJMII has acted as EPC contractor of the assessee. The contract was granted by the assessee to IJMII. The TPO has not demonstrated as to how the IJM Group has in substance determined the essential terms of contract. 24.13 According to the AR, the preconditions to attract section 92B(2) have not been satisfied in the instant case. It cannot therefore be deemed that the transaction between the assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Resident Resident 24.18 The transactions between the assessee and IJMII fall under item 4 above. Consequently, the transaction between the assessee and IJMII does not constitute an international transaction. The transfer pricing provisions of Chapter X are therefore not attracted. 24.19 According to the AR, the DRP has agreed with the above contention. The DRP has held that the conclusion of the TPO of applying the transfer pricing provisions to the impugned transaction is not correct. However, the DRP declined to interfere by observing as follows: The TPO has concluded that the profits are shifted out of the country by the foreign entities (lM Corp and /JM Properties) by creating /JMII as a conduit. Inasmuch as the foreign holding companies have invested in India, they are entitled to the returns on their investments subject to the laws of the land. In this case, when the returns are paid abroad, they become subject to the provisions of TP and examined for their reasonableness. Hence, we are of the opinion that this conclusion of the TPO is not correct. Still it is a novel issue involving correct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purview of the transfer pricing regulations. 24.23 The AR reiterates that transfer pricing provisions are not applicable to transactions between two domestic related parties. The transfer pricing regulations have been specifically been made applicable to transactions between two domestic related parties by virtue of the amendment through Finance Act, 2012. In case, the existing provisions were applicable to domestic transactions then there was no need to bring about the for the above amendment. 24.24 Based on all the above the AR submitted that the TPO has erred in regarding the transactions between the assessee and its holding company IJMII, as international transaction and applying transfer pricing regulations. The addition being bad in law is liable to be rejected. 24.25 Without prejudice to the above, the AR submitted that the learned TPO has erred in rejecting certain comparables selected by it and instead selecting inappropriate comparables. 24.26 The search process adopted by the learned TPO for selecting comparable companies is as follows (page 16 and 17 of the TP order): - Companies whose data is not available for the FY 2006-07 were excluded. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. The learned TPO has computed the margin of this company at 47.76%. As per segmental information available under Notes to Accounts of the company, this company operates in three segments namely i) Real Estate; ii) Hotels; and iii) others. Based on the segmental results of Real Estate segment, the margin of this company is 29.30%. The margin computation is as below:- Particulars Amount (Rs.) Total Revenue 5,405,405,135 Operating Profits 1,584,016,817 Operating Profits/Sales 29.30% The AR submitted that margin of 29.30% should be considered for computation of arm's length price. 24.30 Based on all the above, the AR has tabulated below, a list of comparables and their operating margin, out of the TPO's comparables. Sl. No. Name of the comparable OP/Sales(%) 1. Patel Projects Ltd. 1.41 2. Jogani Constructions 8.22 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal Estate and construction business. 2. Ansal Properties and Infrastructure Ltd. No segmental results As per data available in Capitaline database this company has only one segment i.e., Real Estate Development 3. Ashiana Housing Finance (India) Ltd. No segmental results and foreign exchange revenue is zero In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. As per data available in Prowess database, 97% of the revenue of the company is from construction and sale of residential buildings. 4. Conart Engineers Ltd. No segmental results and foreign exchange revenue is zero In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. As per data available in Prowess database 100% of the revenue of the company is from construction and sale of residential buildings. 5. Kamwala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.00 7 Tribhuvan Housing Ltd. 2.00 8 Vipul Ltd. 8.00 9 Sobha Developers Ltd. 14.00 10 Patel Projects Ltd. 1.41 11 Jogani Constructions 8.22 12 Maruti Infra 5.66 13 Rajeshwari Foundations 12.96 14 Rainbow Foundations (Seg) 10.34 15 Rajeshwari Infra 7.92 16 East Buildtech Ltd. 16.90 17 Raghava Estates 12.13 18 Manjeera Constructions Ltd. 25.42 19 K. Raheja Pvt Ltd. 29.30 20 TirupatiSarjan 4.62 21 Luxmi Townsh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 Disallowance of land cost attributable to land sold by APHB on 500 LIG Houses 1,92,19,200 6 Disallowance of cost of construction 18,06,75,000 7 Disallowance of interest to IJM 2,21,95,301 Total 62,54,85,750 24.37 Without prejudice to the AR contention that the determination of ALP at Nil by the TPO and disallowance of above payments by the AO are bad in law and without basis, the AR submitted that if the above payments are disallowed, then these amounts should be reduced from the Operating Cost of the assessee while making TP Adjustment u/s 92C of the Act. 24.38 In this regard, the AR relied on the decision of Tribunal, Delhi Bench in the case of Hawarth (India) Pvt Ltd v DCIT - (2011) 11 Taxmann.com 76(Delhi). In this case, the assessee had suo moto disallowed commission payment of Rs. 1,32,09,105/- made to local dealers for assistance in procuring order for the products of assessee's associated enterprises from the Indian customers. The disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Operating Expenses 1,20,31,76,263 Net Profit 69,88,23,737 Operating profit/Operating cost 36.74% 24.41 Based on the above, the AR submitted that its operating margin of 36.74% is more than the arithmetic mean of comparable companies under both the above Tables. Therefore no adjustment is required to be made to the reported values of the assessee's transactions with its associated enterprises. 24.42 Without prejudice to the above submissions, the AR submitted that TP adjustment, if any should be restricted to AE transactions only. During the year under consideration, the assessee had transactions with both AE as well as non-AE. The total cost debited to profit and loss account was Rs. 1,906,260,711/-. Out of this cost related to transactions with AE is Rs. 1,075,205,036/- (Rs. 1,051,932,585+23,272,451) which constitutes 56.40% of total cost. Accordingly, these transactions alone are the subject matter of transfer pricing assessment under Chapter X of the Income Tax Act. The TPO cannot make an adjustment to the price or margin of the transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, ITAT observed as follows: We have considered the rival submissions carefully. We partially agree with the submissions of the Id. Counsel for the assessee that original TPO's order if definitely erroneous because he has applied the net profit margin of 7.25% on the gross sales and followed a complicated procedure to arrive at the amount of adjustment. In simple terms if the sales to Associated Enterprises is taken at Rs. 25 crores and straightway 7.25% margin is applied then approximately total margin would be Rs. 1.81 crores, whereas adjustment has been made at Rs. 2,57,26,138/- 24.47 He also submitted that the Delhi Tribunal in the case of Global Vantedge Private Limited (2010-TOIL-24-ITAT-DEL) upheld the following observations made in the CIT(A) order: In view of the above discussions, I hold that while applying the TNMM to determine ALP, the revenue earned by the assessee from servicing the independent clients, without any involvement of RCS should not be benchmarked. The proportionate (18.14%) attributable to such revenue should be ignored while computing ALP of the international transactions. 24.48 Further he placed reliance on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pricing adjustment of Rs. 2,32,72,452/-. 25.4 The learned TPO has made following arguments in determining the arm's length price of the technical services as NIL: - The assessee has not produced any evidence in support of technical services for which payment is made; - The assessee has not been able to show that it derived any economic benefit from the technical services rendered by its AE. 25.5 The AR submitted that under the transfer pricing methodology, either a price or margin is tested. Price is tested in case of CUP Method. Margin is tested in case of other methods. Once the margin is tested and held to be at arm's length, it pre-supposes that the various components of income and expenditure that have been considered in the process of arriving at the Net Profit are also at arms length. A satisfaction of margins being at arm's length cannot be re-evaluated / re-examined. Price or margins are alternative. They are not to be cumulatively satisfied. The law does not envisage a successive application of the price or margin theory with the objective of finally settling down at a revenue favouring result. On the contrary, if on either parameter, an assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our considered view, the Revenue had not brought out anything for negating any content of this chart of services and benefits derived thereof. The assessee company has disclosed net margin for 26% as against 8% average of the comparable other companies at entity level. The assessee is engaged in one class of business that is advertising and its allied services. In the business of the assessee, there are no segments or different activities which can be said independent of each other. In our considered view, the entity level benchmarking on TNMM method shall be most appropriate for all international transactions with AE. ...... 25.9 He submitted that even the DRP has agreed that once enterprise level margin is determined using TNMM method, making additional adjustments for individual international transactions would lead to double adjustment to the income of the assessee and hence not justified. The relevant observations of the DRP on page 31 of the order is are as follows: Beside the test of benefits received, the issue is raising the question whether additional adjustments for individual international transactions can be carried out once the enterprise level ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... systems and procedures for safe, efficient and optimum use thereof. f) To advice on strategies, plans and schedules for proper execution of project in accordance with the time schedules as specified by the company. g) To advice on appropriate safely measures to be implemented while executing the project. h) To advice on the cost and budgetary control aspect of execution of the project. i) To generally act as technical consults and advisors to the project, from time to time, including rendering of technical advices, opinions interpretation of technical and engineering data, planning and review of work schedules, programmes and formulating strategies. 25.13 The AR submitted that it has received the above technical services during the year and has derived adequate benefit from it. This is demonstrated by the following: The assessee is engaged in development and construction of integrated township. The design for the township was prepared by the Architects from Singapore. Without their support, the assessee could not have completed the project. The Government of Andhra Pradesh actively participates in function ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussing the applicable rules, OECD guidelines and decisions of various courts made the following observations: 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him was actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have feared better had he not incurred such ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs. 25.20 The AR submitted that the above decision supports its contention that TPO cannot question the commercial decisions made by the assessee. The main issue to be considered is whether the assessee received the services towards payments. As already detailed, the assessee has received technical services as per agreement with its AE and has derived adequate benefit from such services. 25.21 He submitted that even otherwise, the fees for technical services paid by the assessee is sought to be disallowed on the basis of the CUP method. Why and how the CUP method was chosen as the most appropriate method has not been demonstrated. Even otherwise, the conclusion has been arrived at by the TPO without considering any comparable. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess adopted by the TPO in proposing an adjustment is bad in law and is therefore to be quashed. 26. Regarding reimbursement of bank guarantee charges, the learned AR submitted as follows: 26.1 During the year under consideration, the assessee's AE provided bank guarantee for an amount of Rs. 108 crores in favour of APHB for purchase of Phase-II land. The AE paid bank guarantee charges to the Bank, which was reimbursed by the assessee. The assessee made payment of Rs. 1,15,67,035/- towards reimbursement of bank guarantee charges to its AE. As the reimbursements were made at cost without any markup, the assessee concluded that the same is at arm's length. 26.2 The learned TPO has determined the arm's length price of reimbursement of bank guarantee charges at Nil on the ground that the assessee has not furnished any documents/agreements, the AE has furnished to the bank to justify the payment of bank guarantee charges. Accordingly, the TPO has determined the ALP as NIL and made an adjustment of Rs. 1,15,67,035/- 26.3 With respect to above, the AR submitted that the debit notes raised by the AE with respect to the charges paid to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prejudice to the above, he submitted that when a TP adjustment is to be made, it should be given a benefit of 5% range as provided under proviso to section 92C(2) before making adjustments for the transfer price. 27. The DR relied on the order of the Assessing Officer and TPO. Findings on Transfer Pricing issue (Ground Nos. 8.1 to 8.10): 8.10): 28. We have heard both the parties and perused the material on record. The learned counsel for the assessee made a lengthy argument on the transfer pricing. After considering the entire facts and circumstances of the case and the findings of the DRP, we are of the opinion that the transaction taken place is with domestic enterprises and at least one among the AEs are not non-resident. Both the assessee and IJMII are the residents for the purpose of Indian Taxation as they are Indian companies. Any transaction between them will not constitute an international transaction. The primary condition for attracting transfer pricing provisions is that there should be a transaction between two or more associated enterprises. Section 92A defines the term associated enterprise . Section 92A(1) provides the broad parameters on satisfaction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise. 28.4 Section 92B(2) embodies a legal fiction. It deems a transaction to have been entered into between two associated enterprises. Though section 92B(2) is a part of section 92B with the heading Definition of international transaction , it is to be read as an extension of section 92A(2) and not as an extension of section 92B(1). This is for the following reasons: (a) Both section 92A(2) and 92B(2) deal with situations under which two or more persons constitute associated enterprises. (b) Section 92B(1) does not define the term associated enterprise . It defines the term international transaction . This definition provides that there can be an international transaction only between two or more associated enterprises and not otherwise. Therefore recourse to section 92A and section 92B(2} is required before referring to section 92B(1}. (c) Section 92B(2} only deems certain transaction to be 'transaction between associated enterprises' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of India for tax purposes. They pay their taxes in India. To fall under 92B(1), the international transaction has to be between associated enterprises, at least one of whom is a non-resident. As both the parties are residents, the transaction between the assessee and IJMII do not constitute an international transaction. Thus the basic premise for invoking the deeming fiction under section 92B(2) does not arise. (b) The transaction in question did not involve transfer of goods or services from the assessee to IJM Group or to any other non-resident enterprise, either directly or indirectly, or by using IJMII as an intermediary. The transaction in question involved direct rendering of services by IJMII to the assessee. (c) The APHB came into existence under the A.P. Housing Board Act, 1956. It performs governmental functions. Its policies are directly controlled by the Andhra Pradesh Government. In view of the active participation of the Government of AP in the functioning of the assessee, it cannot be said that IJM Group would influence the assessee either in entering into contract with IJMII or in determining the terms and conditions thereto. a. The transa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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