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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 ..... losing related party transaction where available with the Assessing Officer at draft assessment stage. AO has not made any reference to the TPO to undertake an analysis to find out whether transaction with related parties are at arm s length or not. Therefore, it has to be assumed that the Assessing Officer accepted the arm s length nature of the transaction. Be that as it may, a reading of section 92BA, which defines specified domestic transaction, it is observed, the provision would not be applicable to assessee s transaction with related parties as sub-clause (1) of section 92BA, which provided for applicability of transfer pricing provision to expenditures/payments covered under section 40A(2)(b), has been omitted from the statute by Finance Act, 2017 w.e.f. 01.04.2017. Therefore, there was no obligation on the part of the assessee to furnish any benchmarking analysis in relation to such transaction. Having said that, it is necessary to examine the provisions of section 40A(2)(a) - Reading of the said provision would make it clear that where the AO is of the opinion that some expenditure incurred by the assessee is excessive or unreasonable having regard to the fair market v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. Therefore, the addition made is unsustainable. We may also address the issue regarding applicability of section 44BBB(1) of the Act. On a careful reading of the said provision, we are of the view that it is not applicable to the assessee as the assessee is neither executing any turkey power project, nor the project is approved by the Central Government or a competent authority in terms of section 44BBB(1) of the Act. Even, assuming that section 44BBB applies, sub-section (2) of section 44BBB carves out an exception by providing that the assessee may claim lower profit, if he keeps and maintains the books of account and documents prescribed under section 44AA and his accounts are audited in terms of section 44AB. In the facts of the present case, undoubtedly, the assessee has fulfilled the conditions mentioned in sub-section (2) of section 44BBB. Therefore, ignoring the provisions of sub-section (2) of section 44BBB, which overrides sub-section (1) of the said provision, the Assessing Officer could not have proceeded to estimate profit at 10% of the gross receipts. Thus, on overall analysis of facts and circumstances of the case and the ratio laid down in the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udited financial statements of the Appellant, alleging that Appellant has not submitted any benchmarking analysis in order to justify that expenses in relation to its related parties are not unreasonable as per section 40A(2)(b). 2.4 That on the facts and circumstances of the case and in law, the AO/DRP erred in not considering that no disallowance is permitted if the transactions are at arm's length price as defined in clause (ii) of section 92F. Re: Proposed Application of profit rate of 10 percent as per clause (i) of Rule 10 of Income Tax Rules, 1962 3. That on the facts and circumstances of the case and in law, the AO/DRP has erred in determining profit rate @ 10% to attribute profits amounting to INR 26,18,81,404 to the PE of the Appellant in India. 3.1 That on the facts and circumstance of the case and in law, the AO/DRP has erred in not appreciating that the India specific audited financial statements ought to have been considered in determination of profits attributable to the PE of the Appellant in India. 3.2 Without prejudice to the above, that on the facts and circumstances of the case and in law, the AO/DRP has erred in disregarding the global profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in final setting up of unit. The activities are project management, licence, preparation of basic design and engineering, procurement, fabrication, inspection, erection, installation, commissioning, performance guarantee test run etc. Thus, the Assessing Officer observed that the assessee has a single point responsibility for execution of the entire project. He observed, for executing the contract the assessee has set up a project office in India, which constitutes a Permanent Establishment (PE) in India under Article 5 of India Italy Double Taxation Avoidance Agreement (DTAA). He observed, as per Article 7 of India Italy DTAA, profits from business are taxable in Indian in case the non-resident has a PE in India. Since, according to the Assessing Officer, the assessee has a PE in India, business profits are taxable in India. Having held so, he observed that as per Rule 10, the profits attributable to the PE should be arm s length profit. Thereafter, alleging that the assessee has not furnished the financial statements pertaining to the assessment year under dispute, the Assessing Officer observed that the profit has to be computed as per the provisions of the Act. Thereafter, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment 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 rejection of books of account by the Assessing Officer, alleging that documents were not furnished. He submitted, despite such clear cut directions of learned DRP, the Assessing Officer has again rejected the books of account and estimated profit attributable to PE by invoking Rule 10(i) alleging that the assessee has not filed the financial statements benchmarking the transactions with the related parties, which falls within the purview of section 40A(2)(b). He submitted, this is a totally new allegation made by the Assessing Officer, which was never made in the draft assessment order. He submitted, no opportunity was granted to the assessee by the Assessing Officer to furnish any additional documents/information, which he may require before passing the final assessment order. He submitted, once learned DRP had reversed the decision of the Assessing Officer in rejecting the books of account by recording a finding that books of account, financial statements and other relevant documents were furni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 section 40A(2)(b) of the Act. In support of such contention, learned counsel relied upon the following decisions: 1. CIT Vs. Enviro Control Associated (P.) Ltd. (2014) 225 Taxman 56 2. Voltamp Transformers (P.) Ltd. Vs. Commissioner of Income-tax, ITA No.29 of 1976 (Gujarat HC) 3. CIT Vs. Modi Xerox Ltd., ITA No.31 of 2001 (Allahabad HC) 4. CIT Vs. Nestle India Ltd., [2011] 337 ITR 103 11. Further, he submitted, the Assessing Officer cannot reject the audited financial statements without demonstrating that they are incorrect or unreliable. He submitted, the books of account of the PE of the assessee have been duly certified/verified by statutory auditors and tax auditors. Therefore, the Assessing Officer has to provide adequate reasons to indicate that the accounts are unreliable or incorrect. In this context, he relied upon the following judgments: 1. CIT Vs. Paradise Holidays [2010] 195 Taxman 291 (Delhi) 2. Madnani Construction Corporation (P.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uired 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 is lower than the rate of 10% should have been considered. He submitted, without ascribing any reasons, why sub-section (2) of section 44BBB is not applicable to the assessee, the Assessing Officer has straightway applied section 44BBB(1) and attributed profit to the AE at 10% of the gross receipts. Drawing our attention to Article 7(2) of the India Italy DTAA, learned counsel submitted, PE shall be subject to tax in India on profits that it would be expected to make if it was a distinct and separate entity. He submitted, since, the assessee has maintained separate accounts for the PE, attribution of profit has to be based on accounts. He submitted, only in exceptional circumstances as provided under Article 7(2), attribution of profit on estimation basis can be made in terms of rule 10. In this context, he relied upon a decision of the Hon ble Supreme Court in case of CIT Vs. Hyundai Heavy Industries Co. Ltd., [2007] 161 Taxman 191 (SC). He submitted, at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Officer did not furnish any report despite repeated reminders, which compelled learned DRP to issue directions as the proceedings were getting barred by limitation on 30th June, 2022. While dealing with the allegation of the Assessing Officer regarding non-furnishing of response to queries pertaining to expenses incurred by the assessee and other documents, the specific observations of learned DRP are as under: Under these circumstances AO is directed to take the documents filed before it on dates mentioned above, and which were subsequently filed before the DRP, into consideration. The books rejected by the AO on the reason of not furnishing the documents is not correct. However, AO shall go through the documents mentioned above and shall take such decision in case anomalies are observed in the documents so filed. Consequential action of invoking section 44BBB(i) of the I.T. Act and provisions of the Rule 10(i) of the I.T. Rules is dependent on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses 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 144C(10) read with section 144C(13) of the Act. 19. As could be seen from the facts on record, the financial statements disclosing related party transaction where available with the Assessing Officer at draft assessment stage. However, the Assessing Officer has not made any reference to the Transfer Pricing Officer (TPO) to undertake an analysis to find out whether transaction with related parties are at arm s length or not. Therefore, it has to be assumed that the Assessing Officer accepted the arm s length nature of the transaction. Be that as it may, a reading of section 92BA, which defines specified domestic transaction, it is observed, the provision would not be applicable to assessee s transaction with related parties as sub-clause (1) of section 92BA, which provided for applicability of transfer pricing provision to expenditures/payments covered under section 40A(2)(b), has been omitted from the statute by Finance Act, 2017 w.e.f. 01.04.2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever an issue. At the final assessment stage, the Assessing Officer having not found any anomalies in the documents furnished by the assessee, only for the purpose of circumventing the directions of learned DRP and to somehow repeat the addition, has gone in a different tangent by invoking section 40A(2)(b) of the Act. This, in our view, is wholly unjustified and is in complete violation of Rules of Natural Justice. It also militates against the directions of learned DRP. In any case of the matter, we have already held that the Assessing Officer has failed to fulfill the conditions of section 40A(2)(b) of the Act. Therefore, the addition made is unsustainable. 22. For the sake of completeness, we may also address the issue regarding applicability of section 44BBB(1) of the Act. On a careful reading of the said provision, we are of the view that it is not applicable to the assessee as the assessee is neither executing any turkey power project, nor the project is approved by the Central Government or a competent authority in terms of section 44BBB(1) of the Act. Even, assuming that section 44BBB applies, sub-section (2) of section 44BBB carves out an exception by providing that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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