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TMI Blog2023 (3) TMI 204X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax Act, 1961 ("Act") 2. That on the facts and circumstances of the case and in law, the AO/DRP has erred in rejecting and not placing reliance on the audited financial statement of the Appellant for determination of profits attributable to the Permanent Establishment ("PE") of the Appellant, and accordingly, assessment order is illegal, bad in law and liable to be quashed. 2.1 That on the facts and circumstances of the case and in law, the AO/DRP erred in passing the final assessment order without following the mandatory provisions of section 144C(10) read with section 144C(13) of the Act, without considering that not adhering to the said mandatory provisions would render the final assessment order as beyond jurisdiction, illegal and bad in law. 2.2 That on the facts and circumstances of the case and in law, the DRP erred in setting aside the proposed variation to the AO for further enquiry and passing of the assessment order, in contravention of section 144C(8) of the Act, and thus, the final assessment order as beyond jurisdiction, illegal and bad in law. 2.3 That on the facts and circumstances of the case and in law, the AO/DRP erred in rejecting the audited fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into a lumpsum turnkey contract with M/s. Hindustan Petroleum Corporation Ltd. (in short 'HPCL') for grass-root hydrogen generation unit with a design capacity of 2 x 113 Ktpa hydrogen production and fuel gas PSA unit - 36 ktpa hydrogen production for modernization project undertaken by HPCL, Vizag. Refinery. In the year under consideration, the assessee received following revenue from India: (i) Technip India Ltd. Rs.9,16,27,713/- (ii) BNP Paribas Rs.2,06,69,284/- (iii) HPCL Rs.258,89,82,048/- 6. For the assessment year under dispute, the assessee filed its return of income on 26.11.2019 declaring income of Rs.12,86,92,790/-. The receipts from Technip India Ltd. was offered to tax as Fee for Technical Services (FTS) on gross basis. The receipt from BNP Paribas was also offered as income. The dispute was only with regard to receipts from HPCL. After examining the agreement with HPCL, the Assessing Officer observed the scope of work includes the entire range of activities which will result in final setting up of unit. The activities are project management, licence, preparation of basic design and engineering, procurement, fabrication, inspection, erection, installation, co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess of documents filed by the assessee. 8. While implementing the directions of learned DRP in the final assessment order, the Assessing Officer observed that from the financial statements, ledger accounts, contract and sample invoices filed by the assessee, it was found that the assessee had significant transactions with its related parties as disclosed in the notes to financial statements. Further, he observed, the assessee has not submitted any benchmarking analysis in order to justify that the said expenses in relation to its related parties are not unreasonable as per section 40A(2)(b) of the Act. Thus, he held that assessee's books of account cannot be relied upon and attribution of profit has to be made as per rule 10(i). Thus, he attributed 10% of the gross receipts as profit of the PE in India, which worked out to Rs.26,18,81,404/-. 9. Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee submitted that there is a categorical finding of learned DRP that in course of assessment proceeding, the assessee had furnished its books of account, financial statements and various other documents. He submitted, learned DRP has also recorded a finding disapproving the rej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord. He submitted, the transactions with the related parties are subject to transfer pricing provisions under section 92 of the Act. He submitted, reference to section 40A(2)(b) has been omitted in section 92BA w.e.f. 01.04.2017. Therefore, the provisions of section 40A(2)(b) read with section 92BA of the Act are not applicable to the year under consideration. Without prejudice, he submitted, at the draft assessment stage, the assessee has furnished all relevant and necessary documents relating to its transaction, including Audit Report relating to international transactions in Form 3 CEB, audited financials of the year under consideration, tax Audit Report and other relevant documents. He submitted, related party transactions are specifically mentioned in the Audit Report. Thus, he submitted, the assessee had discharged the initial onus. Therefore, the burden shifts to the Revenue to show that the payment was excessive and unreasonable having regard to the fair market value. He submitted, the Assessing Officer has failed to discharge the burden as he has not brought on record any contrary material to demonstrate that the payment made was excessive and unreasonable in terms of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning but extends to project management, technology licensing, preparation of basic design and engineering package as well as detailed engineering, procurement etc. Thus, the additional activities/scope of work undertaken by the assessee is not envisaged under section 44BBB of the Act. Further, he submitted, the contract between the HPCL and the assessee is not approved by the Central Government or the Department of Power in the Ministry of Energy. Thus, he submitted, the provisions of section 44BBB would not be applicable. 13. Without prejudice, learned counsel submitted, even assuming that the assessee's activities are covered under section 44BBB, however, subsection (2) to section 44BBB provides an option to the assessee to claim a profitability lower than 10% subject to certain conditions, such as, the assessee maintains books of account as required under section 44AA and the assessee gets his account audited and furnishes a report of such audit as required under section 44AB of the Act. He submitted, in the facts of the present appeal, the assessee has fulfilled the conditions of section 44BBB(2). Therefore, the actual profitability as per audited financial statements, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the profit from HPCL contract attributable to the PE. As discussed earlier, as per the scope of contract with HPCL, the assessee was entrusted to execute the contract for grass root hydrogen generation unit and fuel gas unit on lumpsum turnkey basis. While framing the draft assessment order, the Assessing Officer has rejected the books of account of the assessee alleging non-furnishing of financial statements and other documents and has proceeded to estimate profit attributable to the PE at the rate of 10% by invoking the provision of section 44BBB(1) read with Rule 10(i). The assessee contested the aforesaid decision of the Assessing Officer before learned DRP. Before learned DRP, the assessee made an assertion that not only books of account but all other relevant and necessary documents, such as, financial statements, ledger copies, invoices and Audit Report were furnished before the Assessing Officer. The very same documents were again furnished before learned DRP. As observed by learned DRP, though, the submissions made by the assessee and the documents furnished were forwarded to the Assessing Officer for verification and furnishing remand report. However, the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 to Financial statements. The assessee has not submitted any benchmarking analysis in order to justify that said expenses in relation to its related parties are not unreasonable as per section 40A(2)(b). In view of this, assessee's books of accounts are not being relied upon and attribution of profits is done as per clause (i) of Rule 10. Whereby, profit attribution is done by taking the rate of 10% of the gross receipts. Such profits in turn are taxable @40% (plus applicable cess and surcharge). 18. A careful reading of the aforesaid observations of the Assessing Officer will reveal that he has not pointed out any deficiency or anomaly in the documents furnished by the assessee. The only adverse observation made by him is to the effect that as per Note no. 15 to financial statements, the assessee has significant transaction with its related parties. Whereas, the assessee has not submitted any benchmarking analysis in order to justify that expenses in relation to the related parties are not unreasonable as per section 40A(2)(b) of the Act. Thus, in our view, the Assessing Officer has not implemented the directions of learned DRP in letter and spirit, in terms with section 144 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts of the present appeal, the Assessing Officer has not demonstrated in what manner he has formed the opinion that the expenses with reference to related parties are excessive and unreasonable having regarding to the fair market value. The Assessing Officer has not referred to even a single comparable case of similar nature of expenses to demonstrate that the payments/expenses made by the assessee are excessive and unreasonable and more than fair market value. Thus, in our view, the Assessing Officer has failed to discharge the burden cast upon him under section 40A(2)(a) of the Act. Hence, the conditions remained unfulfilled. In any case of the matter, for the first time, at the final assessment stage, the Assessing Officer has invoked the provisions of section 40A(2)(b) of the Act without providing any opportunity to the assessee. In fact, neither at the draft assessment stage, nor before the DRP, applicability of section 40A(2)(b) was ever an issue. At the final assessment stage, the Assessing Officer having not found any anomalies in the documents furnished by the assessee, only for the purpose of circumventing the directions of learned DRP and to somehow repeat the additi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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