Gujarat High Court
Commissioner Of Income Tax vs M/S. Sichuan Fortune Project … on 3 August, 2026
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/TAXAP/129/2024 JUDGMENT DATED: 03/08/2026
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 129 of 2024
With
R/TAX APPEAL NO. 130 of 2024
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
================================================================
Approved for Reporting Yes No
No
================================================================
COMMISSIONER OF INCOME TAX
Versus
M/S. SICHUAN FORTUNE PROJECT MANAGEMENT LTD.
================================================================
Appearance:
MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1
================================================================
CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE PRANAV TRIVEDI
Date : 03/08/2026
COMMON ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Heard learned advocate Mr.Varun K. Patel
for the appellant.
2. Both the Appeals are arising out of the
common Judgment and Order dated 4th
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September, 2023 passed by the Income Tax
Appeallate Tribunal, “D” Bench, Ahmedabad
in ITA No.78/2018 and ITA No.2916/2014
respectively.
3. As identical questions are raised in
both the Appeals, Tax Appeal No.130 of 2024
is treated as a lead matter.
4. The Revenue has proposed the following
substantial questions of law :
“(a) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in not appreciating
that the Assessing Officer has rightly
assessed the income us.44BBB(1) of the
Income Tax Act, 1961 after rejecting the
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books of accounts for the reason that the
assessee failed to fulfill all the
conditions prescribed u/s. 145(3) of the
Act?
(aa) Whether, on the facts and
circumstances of the case and in law, the
learned ITAT has erred in not upholding
the decision of the Assessing Officer in
rejecting the books of accounts of the
assessee for not maintaining the books as
per Section 44BBB r.w.s. 145 of the I.T.
Act and not recognizing the revenue as per
the Accounting Standards, and in
estimating the profit based on All
adjustment determined by the Transfer
Pricing Officer (TPO) and alternatively as
per the rates provided in Section 44BBB of
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the I.T. Act?
(b) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in confirming the
order of the CIT(A) holding that accounts
of the assessee could not be rejected
inspite of the facts that the account of
the assessee were not complete as required
u/s.145(3) of the Act for the reason that
the assessee has failed to recognize
closing WIP in the books of account, which
is accepted by the CIT(A) in his order?
(c) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in holding that
accounts of the assessee could not be
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rejected inspite of the fact that the
assessee has failed to compute its income
in accordance with the Accounting
Standard-9, which is in violation of
section 145(3) of the Act?
(d) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in holding that
accounts of the assessee could not be
rejected inspite of fact that the assessee
has failed to submit Contractual Agreement
of its HO with the shipping company as a
result of which correctness of the
accounts as per section 145(3) of the Act
remained unverifiable?
(e) Whether on the facts and in the
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circumstances of the case and in law, the
learned ITAT has erred in ignoring the
fact that in consequence to the orders for
A.Y. 2008-09 to A.Y. 2010-11, the assessee
itself has offered its income u/s.44BBB(1)
from A.Y. 2011-12 onwards?
(f) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in holding that the
Revenue has not brought on record any
material suggesting that the CIT(A) has
admitted additional evidence in
contravention to the provision of Rule 46A
of the Act?
(g) Whether on the facts and in the
circumstances of the case and in law, the
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learned ITAT has justified in not
appreciating the Revenue’s objection on
the adjustments made by ignoring the
provisions u/s.92A(1) & 92F (iii) of the
Income Tax Act, 1961?
(gg) Whether, on the facts and
circumstances of the case and in law, the
learned ITAT has erred in not upholding
the ALP adjustment of Rs.12,07,74,334/-
made by the Transfer Pricing Officer (TPO)
by benchmarking the international
transaction after applying Transactional
Net Margin Method (TNMM) and rejecting
Comparable Uncontrolled Price (CUP) Method
adopted by the assessee?
(h) Whether on the facts and in the
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circumstances of the case and in law, the
learned ITAT has erred in confirming the
Comparable Uncontrolled Price (CUP) method
adopted by the assessee without
appreciating that the assessee has failed
to submit relevant documents to display
the comparability of transactions?
(i) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in rejecting the
Transactional Net Margin Method (TNMM)
method and the comparable without
appreciating that the Assessing Officer
has given detailed reasoning to establish
the comparable selected for Transactional
Net Margin Method (TNMM) are correct
comparable?
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(j) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in holding that in
the present set of facts, Comparable
Uncontrolled Price (CUP) was a better
method of benchmarking as against
Transactional Net Margin Method (TNMM)
adopted by the TPO?
(k) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in holding that the
transaction of awarding the contract by
Adani Power Limit to SFPML HO was a proper
CUP for the transaction between the
assessee (SFPML LO) and SFPML HO without
appreciating that nature of transaction
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between SFPML HO and the assessee were
totally different and functionally
incomparable to the Comparable
Uncontrolled Price (CUP) cited by the
learned ITAT?
(l) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in holding that the
comparable selected by the TPO as
functionally incomparable merely on the
basis of general observations without
assigning any reason for rejection?
(m) Whether on the facts and in the
circumstances of the case and in law, the
learned ITAT has erred in accepting the
Arm’s Length Price (ALP) of the assessee
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determined by ignoring the guidelines laid
down under the Income Tax Act and Rules
and thereby violating the ratio laid down
by the Hon’ble Supreme Court in the case
of SAP Labs India Pvt. Ltd. us. ITO- 454
ITR 121?
5. The Income Tax Appellate Tribunal (for
short ‘the ITAT’) disposed of the Appeals
filed by the Revenue and assessee, against
the orders of the Commissioner of Income
Tax (for short ‘the CIT’) Appeals, arising
in the matter of Assessment Order passed
under Section 143(3) of the Act of the
Income Tax Act, 1961 (for short ‘the Act’)
relevant to Assessment Years 2008-09 to
2013-14 as well as the Cross-Objection
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filed by the assessee in the Appeal filed
by the Revenue for the Assessment Year
2013-14. Tax Appeal No.129 of 2024 is for
Assessment Year 2010-11 and Tax Appeal
No.130 of 2024 is for the Assessment Year
2009-10.
6. The brief facts of the case are as
under:
6.1. The assessee, M/s.Sichuan Fortune
Project Management Limited, is a foreign
company incorporated in China and is
engaged in the business of rendering
services for erecting, testing, installing
and commissioning of the infrastructure
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power project.
6.2. The assessee executed an agreement
with M/s. Adani Power Private Limited to
provide the service for setting up a power
project in two phases at Mundra, Kutch, set
up a project office in India known as camp
office/Permanent Establishment (PE) in
India.
6.3. For the assessment year 2008-09, the
assessee filed return of income claiming
loss. The Assessing Officer on verification
of Form 3CEB found that the assessee-
Company had entered into the international
transaction with its parent company
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[Associated Enterprise (AE)] and it was
found that shipping expenses were incurred
by the parent company on behalf of the
assessee which had been reimbursed on cost
basis. The Assessing Officer, therefore,
refer the case to the Transfer Pricing
Officer (TPO) for determining the Arm’s
Length Price (ALP) for the said
transaction. The TPO, considering the Form
3CEB found that the assessee has only
stated that it was reimbursement of the
expenses to the parent company and
therefore, it was not required to report
the same as payment to AE to attract the
transfer pricing provisions.
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6.4. The TPO on verification of the
shipping bills found serious deficiencies
and huge difference in price charges,
charged by the shipping agencies. The TPO
thereafter, sought explanation from the
assessee about the huge difference in the
shipping bills. The assessee furnished all
the details along with invoices raised by
M/s.Adani Power Private Limited which were
in accordance with the contract agreement.
However, the Assessing Officer rejected the
contention of the assessee by observing
that the third party shipping bills offered
by the assessee as Comparable Uncontrolled
Price (CUP) for reimbursement is not
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acceptable as the assessee did not submit
any document based on which shipping
expenses under considerations were incurred
by the AE and bills furnished by the
assessee did not corelate to the
consultancy service carried out by the
assessee in absence of any quotation of
freight price given by the shipper.
6.5. The TPO therefore concluded that bills
raised by M/s. COSCO logistics were not
reliable and in absence of external CUP
data, a reasonable approach to determine
ALP was taken by excluding the bills of
COSCO logistics from the total shipping
expenses reimbursed by the assessee to the
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AE and computed the internal cup to
benchmark the freight rate paid by the
assessee-Company to AE. It was also found
that major expenses incurred by the
assessee in respect of certain materials
shipped from China to India and such
material was further delivered from Indian
Port to work-station of M/s.Adani Power
Private Limited as there was a huge
difference between the declared turnover
and expensed claimed by the assessee. The
Assessing Officer rejected the books of
accounts of the assessee by arriving at a
conclusion that the assessee did not
maintain the books of accounts as per
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provisions of Section 44BBB read with
Section 145 of the Act and computed the
income of the assessee as per the
provisions of Section 44BBB(1) of the Act
by estimating the income at the rate of 10%
of the receipts which was more than the
adjustment made by the TPO in respect of
international transactions. Being
aggrieved, the assessee preferred an Appeal
before the CIT (Appeals) along with FAR
(Functions, Assets and Risks) analysis and
submitted that project office is only
responsible for execution of project in
India and transportation of goods is also
the responsibility of the project office.
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The CIT (Appeals), considering the
documents comprising of shipping bills of
third parties to whom such ocean freight
charges have been paid, copies of bills of
entries, bill of lading and Chart showing
the actual amount as per the shipping bills
which corresponded with the actual amount
reimbursed by the appellant to head office,
held that on verification of the
correspondence between the TPO and
assessee, finding of TPO in respect of non-
submission of the supporting documents was
not correct. The CIT (Appeals) also
observed that the assessee had filed the
bills of entries and invoices and bills of
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lading, which clearly support the claim of
the assessee that what was paid to HO was
nothing but the actual cost paid by the HO
to the shipping agencies which has been
reconciled by the assessee by submitting
the details of reimbursement. The CIT
(Appeals) therefore accepted the contention
of the assessee in respect of the price
charges in an uncontrolled transaction to
be compared with the price charges in
controlled transaction as per Section 92C
of the Act read with Rule 10B(1)(a) of the
Rules and rejected the comparison made by
the two uncontrolled transactions so as to
make an adjustment in uncontrolled
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transaction which is not sustainable in eye
of law. The CIT (Appeals) arrived at the
conclusion by directing the Assessing
Officer not to make any adjustment referred
by the TPO.
6.6. The CIT (Appeals) thereafter,
considering the analysis of comparables
found that none of the companies selected
by the TPO can be compared to the assessee.
6.7. Being aggrieved by the order passed by
the CIT (Appeals), the Revenue preferred an
Appeal before the Tribunal. The Tribunal,
after considering the submissions regarding
Assessment Year 2008-09, held as under:
“10. We have heard the rival contentions of
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both the parties and perused the materials
available on record. In the present case the
dispute relates to the rejection of the
books of accounts and the adjustment made by
the transfer pricing officer with respect to
the transaction for the so-called shipping
expenses reimbursed by the assessee to the
head office based in China.
10.1 The AO in the present case has rejected
the books of accounts of the assessee after
invoking the provisions of section 145(3) of
the Act and computed the income under the
provisions of section 44BBB(1) of the Act at
10% of gross receipt against the income
offered by the assessee. Subsequently, the
learned CIT-A reversed the order of the AO
and directed him to accept the loss declared
by the assessee in the income tax return.
From the preceding discussion, we note that
the AO has rejected the books of accounts of
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the assessee on several reasons which can be
categorized as under:
i. Gap in expenses and income which was
not solely attributable to the increase
in the oil price on ocean freight
expenses.
ii. Mismatch between the income and the
expenses shown by the assessee.
iii. Non-disclosure of opening/closing
work in progress. There was no matching
of expenses such as erection/
commissioning and installation with the
corresponding revenues.
iv. Non-submission of the contract with
the shipping companies.
v. Method of recognizing the revenue as
per accounting standard-7 /accounting
standard 9 issued by the ICAI.10.2 The learned CIT-A after detailed
analysis of the facts of the case,
assessment records, remand report and the
submission of the assessee reached to the
conclusion that the books of accounts of the
assessee were not liable to be rejected and
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therefore there was no occasion to estimate
the profit under the provisions of section
44BBB(1) of the Act. It is the admitted
position that books of accounts maintained
by the assessee cannot be rejected by AO on
the grounds discussed above which were
mainly revolving to the loss shown by the
assessee. In simple words, the losses
declared by the assessee cannot be a ground
for rejecting the books of accounts more
particularly in the circumstances where the
assessee has explained the reasons of such
losses mainly rise in the price of ocean
freight on account of oil rate in the
international market.
10.3 In addition to the above, we also note
that the assessee maintained the books of
accounts specified under section 44AA of the
Act which were duly audited. In such facts
and circumstances, it was held by the
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Hon’ble Gujarat High Court in the case of
CIT (IT & TP) Vs. Shandong Tiejun Electric
Power Engineering) Co. reported in 86
Taxmann.com 274, that profit under section
44BBB(1) cannot be determined without
pointing out any defect in the books of
accounts of the assessee. The relevant
extract of the judgement is reproduced as
under:
5. Section 44BBB of the Act reads as
under:
44BBB. Special provision for
computing profits and gains of
foreign companies engaged in the
business of civil construction,
etc., in certain turnkey power
projects.-
(1) Notwithstanding anything to the
contrary contained in sections 28
to 44AA, in the case of an
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assessee, being a foreign company,
engaged in the business of civil
construction or the business of
erection of plant or machinery or
testing or commissioning thereof,
in connection with a turnkey power
project approved by the Central
Government in this behalf, a sum
equal to ten per cent of the amount
paid or payable (whether in or out
of India) to the said assessee or
to any person on his behalf on
account of such civil construction,
erection, testing or commissioning
shall be deemed to be the profits
and gains of such business
chargeable to tax under the head
“Profits and gains of business or
profession”.
(2) Notwithstanding anything
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contained in sub-section (1), an
assessee may claim lower profits
and gains than the profits and
gains specified in that sub-
section, if he keeps and maintains
such books of account and other
documents as required under sub-
section (2) of section 44AA and
gets his accounts audited and
furnishes a report of such audit as
required under section 44AB, and
thereupon the Assessing Officer
shall proceed to make an assessment
of the total income or loss of the
assessee under sub-section (3) of
section 143 and determine the sum
payable by, or refundable to, the
assessee.’
6. Under sub-section (1) of section
44BBB of the Act therefore in case of
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assessee being a foreign company
engaged in the business of civil
construction or business of erection of
plant or machinery or testing or
commissioning thereof in connection
with a turnkey power project approved
by the Central Government would be
taxed at the rate of 10% of the amount
paid or payable to the assessee or to
any person on behalf of the assessee on
account of such civil construction,
erection etc. work. Sub-section (2) of
section 44BBB of the Act would however
give an option to the assessee to claim
lower profit if the assessee keeps and
maintains the books of accounts and
other documents as provided in
subsection (2) of section 44AA of the
Act and gets the accounts audited and
furnishes the audit report as required
under section 44AB. The AO thereupon
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would frame an assessment of the total
income of the assessee under sub-
section (3) of section 143 of the Act.
In the present case, the CIT (Appeals)
as well as the Tribunal both held that
the assessee had fulfilled all
requirements of sub-section (2) of
section 44BBB of the Act. It is not the
case of the revenue that the assessee
had not maintained the books of
accounts and documents as required
under sub-section (2) of section 44AA
or that the assessee’s accounts were
not audited or the audit report not
furnished before the Assessing Officer.
The Commissioner and the Tribunal also
held that the Assessing Officer was
wrong in holding that the accounting
standard AS-7 did not apply to the
assessee.
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7. Such being the facts, we see no
reason to interfere since no question
of law arises. Learned counsel for the
Revenue, however, strenuously urged
that the Assessing Officer was
authorised to examine the books of
accounts and other documents and if
found that the assessee had not
recorded the details correctly, he
could have rejected such accounts. We
may not dispute this proposition.
However, the Assessing Officer, as
recorded by the Tribunal has not found
any major defects in such accounts. The
Commissioner (Appeals) in fact
elaborated that the assessee had the
past experience from which it could
estimate the total cost and had
presented figures to show the
percentage completion of the project.
These figures match with the actual
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income and expenditure statements of
the subsequent financial years. In fact
the entire project was completed by the
time the Commissioner (Appeals) decided
the appeal.
8. In the result, tax appeal is
dismissed.”
10.4 In view of the above and after
considering the facts in totality, we are
of the view that the books of accounts of
the assessee were not liable to be rejected
under the provisions of section 145(3) of
the Act and therefore the income/loss shown
by the assessee in the audited financial
statements should be accepted as it is
without any variation. Accordingly, we do
not find any reason to interfere in the
order of the learned CIT-A.
10.5 Regarding the adjustments made by the
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AO/TO for Rs. 2,32,74,967.00, we note that
there was no international transaction
carried out between the associated
enterprises except merely the reimbursement
of expenses incurred by the head office on
behalf of the assessee. As such, in
substance, the transaction/ was between the
assessee and the shipping agencies which
were unconnected parties to each other ald
therefore the same cannot be categorized as
associated enterprises which is one of the
pre-requisites for attracting the transfer
pricing provisions. The necessary invoices
raised by the shipping agencies are placed
on pages 57 to 63 of the paper book which
were reimbursed by the assessee to the head
office. There was no evidence brought on
record by the AO suggesting that there was
any margin or markup added by the head
office in the value of the invoices raised
by the shipping agencies. We also note that
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the ITAT Mumbai tribunal in the case of M/s
Ness Technology India Pvt. Ltd. Vs. DCIT
reported in 76 Taxmann.com 209 has held
that where there is any transaction between
the associated enterprises on cost-to-cost
basis, without any markup, no adjustment in
the international transaction is required
to be made. The relevant extract of the
order is reproduced as under:
“13.3 We have considered the rival
submissions. At the outset, in our
considered opinion, it would be
appropriate to cull out appropriate
facts which are relevant to decide the
controversy. Notably, assessee is
rendering services to its associated
enterprises abroad for which it is to
be compensated on a cost plus mark-up
basis and such transactions have been
separately bench-marked. In the course
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of rendering such services, assessee
also incurred certain costs relating to
travel, accommodation, visa, per diem
and other day-to-day expenses, which
were expended by its personnel.
Further, assessee also incurred certain
out of pocket expenses on the specific
request of its associated enterprises.
The responsibility for the aforesaid
type of expenses was of the associated
enterprises but the payment towards
these costs were initially made by the
assessee and thereafter, recoveries
were made from the associated
enterprises. Before the DRP, assessee
also pointed out that such expenses,
which are recovered by it from its
associated enterprises, are in-turn
recovered by the associated enterprises
from the ultimate clients on a cost to
cost basis. In this context, assessee
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furnished sample copies of debit notes
raised by it on its associated
enterprises along with copies of the
corresponding debit notes raised by the
associated enterprises on the ultimate
clients. The aforesaid was canvassed by
the assessee to substantiate that there
was one to one co-relation and that the
entire exercise did not involve any
element of profit or mark-up in the
hands of the associated enterprises.
The aforesaid material is placed at
pages 518 to 612 of the Paper Book and
which was also before the lower
authorities. At the time of hearing,
the Ld. Representative for the assessee
had also referred to page 613 to 645 of
the Paper Book, wherein are placed
copies of assessee’s arrangement with
the associated enterprises and also the
sample agreements between the
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associated enterprises and the ultimate
clients, which prescribe that all
impugned travel and related expenses
are separately chargeable on a cost to
cost basis. All this material clearly
brings out a pertinent feature that in
the entire transaction involving
payment of expenditure by the assessee,
its recovery from the associated
enterprises, which-in turn recovers it
from the end clients, there is no
involvement of any profit-element in
the hands of the associated
enterprises. Therefore, it would be
wrong on the part of the income tax
authorities to take a position and
infer notionally about recovery of
mark-up or profit element in the hands
of assessee. It has also been brought
out that it. Is a standard practice in
the I.T. Industry to recover out of
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pocket expenses incurred during the
course of providing services for the
clients on a cost to cost basis. Under
these circumstances, in our view, the
Transfer Pricing Officer erred in
proceeding to infer a nonexistent
understanding between assessee and its
associated enterprises so as to impute
income qua the instant transaction in
terms of section 92(1) of the Act.
Another pertinent fact which has not
been rebutted by the Revenue before us
is to the effect that in similar
situation, from assessment year 2004-05
to 2010-11, no transfer pricing
adjustment has been made by the
Assessing Officer in relation to the
International Transactions on recovery
of expenses.”
10.6 Besides the above the learned CIT-A
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after analyzing all the facts on the issue
in hand has reached to the conclusion that
there was no need for making any adjustment
in the cost incurred by the assessee
towards the shipping charges which was
reimbursed to the head office. Thus, in
such facts and circumstances, we do not
find any reason to interfere in the finding
of the learned CIT-A. At the time of
hearing, the learned DR has also not
brought anything contrary to the finding of
the learned CIT-A. Hence, the ground of
appeal of the revenue is hereby dismissed.”
6.8. For the Assessment Year 2009-10, the
Tribunal, referring to and relying upon its
reasons assigned for the Assessment Year
2008-09, dismissed the Appeal of the
Revenue. Regarding the ground raised by the
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Revenue that the CIT (Appeals) erred in
deleting the addition made by the Assessing
Officer with respect to international
transaction, the Tribunal considered the
submissions as well as the findings of the
CIT (Appeals) as under:
“24. In the present case the assessee being
a company based in China has entered in a
contract for providing the services for
Erection, Commissioning, and Installation
of the power project with Adani Power
Private Ltd. (for short APPL). The assessee
was also responsible for transportation of
the goods/ equipment to be supplied to the
APPL from the suppliers. After entering the
contract, valued at 20 million, the
assessee has set up a project office in
India. As per the TPO, the project office
in India is acting as subcontractor on
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behalf of the assessee. As such the primary
responsibility lies with the assessee only
for the satisfactory execution of the
project. As per the TPO, the transactions
between the assessee and the head office
should be at arm length price. In other
words, the consideration to be received by
the project office should be at arm length
price. However, it was the contention of
the assessee that all the income and the
expenses have been booked by the project
office in India for the services to be
rendered to APPL and therefore no
adjustment is required to be made. Without
prejudice to the above, the assessee
contended that at the most, the expenses
reimbursed by the assessee to the Head
Office on account of freight and salary
expenses can be considered for the purpose
of the arm length price.
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24.1 However, the TO rejected the
contention of the assessee by observing
that as per the provisions of section 92A
of the Act the transaction between the head
office and the TPO is to be decided at the
arm length price as it comes within the
meaning of the international transaction
between the associated enterprises.
Accordingly, the TO proceeded to determine
the arm length price based on the NMM which
was objected by the assessee on the
reasoning that Internal CUP method should
be preferred i.e. taking the transaction
between the HO and the APPL. However, the
TPO rejected the contention of the assessee
and adopted NMM as the most appropriate
method and determined the ALP of the
assessee after selecting certain
comparables in the manner as reproduced
below:
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Thus, it can be seen that the profit
attributable in respect of such activities
is 10% of the total receipts, which comes
to 11.11% of the cost, which is not very
different from the PLI calculated by the
TPO, indicating thereby that the selection
process carried out by the TPO is
scientific and fair. The calculation of
arma length price in he case of the
assessee is given below:
Arm’s length mean margin 12.69%
Operating cost9A) RS.74,04,69,109/-
Arms Length Mena profit 12.69% of the costs
Arms Length price (ALP)@ 112.69%
Rs.83,44,34,649/-
if operating cost (B)
Actual Sales shown (C) RS.71,36,60,305-
Shortfall being adjustment
RS.12,07,74,334/-
u/S.92CA(D=B=C)
5% of the ALP determined by assessee RS.3,56,83,015/-
Since the adjustment is more than
5% of the amount shown in the
books of accounts, no benefit is
available to the assessee.
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25.1 The assessee before the learned CIT-A
submitted that the entire revenue and the
expenses attributable to the contract
between the assessee and the APPL were
recorded in the books of accounts of the
project office. Therefore, it is
inappropriate to hold that the head office
has subcontracted the work to the project
office as observed by the TPO.
Furthermore, the transaction between the
project office and the APPL being
independent parties cannot be considered
as international transactions.
Accordingly, such transactions cannot also
be deemed international transactions
within the meaning of the provisions of
section 92B(2) of the Act.
25.2 Without prejudice to the above, the
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assessee contended that if the transaction
between the assessee and the head office
has to be determined at the arm length
price, then the CUP method should be
adopted. It is for the reason that the
transaction/ the contract between the head
office and the APPL will act as the
benchmark for deciding the ALP because it
is between 2 independent parties. As such
the contract by the assessee being head
office, with the APPL, has been given to
the project office which is responsible
for all the risk and rewards. Therefore,
if the CUP method is applied, then no
addition to the given facts and
circumstances is warranted.
25.3 Besides the above, the assessee also
objected to the comparable selected by the
TPO while determining the ALP in the given
case. The objection raised by the assessee
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has been reproduced by the ld. CIT-A in
his order.
25.4 The learned CIT-A after considering
the submission of the assessee and the
order of the authorities below held that
the transaction between the assessee and
the head office is an international
transaction between the associated
enterprises. Therefore, the same has to be
carried out at the arm length price. Thus,
the learned CIT-A rejected the contention
of the assessee by observing as under:
“I have perused the order passed by the
TPO, submissions made by the
appellant-company in its statement of
facts and further submissions field
during the course of appellant
proceedings. I am unable to agree with
the contention of the appellant that
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the transaction between head office of
the appellant company and is PE in
India need not be considered as
international transaction. I find that
the project office of the appellant
company and its head office are
Associated Enterprises (AEs) as per
the provisions of the section 92A(I)
(a) for the simple reason that the PO
is a separate taxable entity and the
same is managed, by Ho, controlled by
HO and even the capital contribution
also comes from HO. Moreover Article 9
of the India-China DAA also stipulates
that the HO and the PO of the
appellant company are AEs because the
head office participated directly in
the management control and capital of
the project office. Once it is held
that PO and HO are AE, I further find
that Article 7(2) of the India-China
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DTA A and para 15, 16 & 17 of the
commentary on Article 7 on Model tax
convention published by ECD in 2010
also states that permanent
establishment is to be, treated as a
functionally separate entity.
Accordingly, the profit to the PE
shall have to be 1 attributed at Arm’s
Length Price. In the facts of the
present case since the AE (HO) entered
into an agreement with APL to execute
the construction/project management
relation to construction, testing and
commissioning work of 4 X 3$Q MW power
project for APL for total
consideration of US $ 40 million, the
appellant being the PO is executing
the project under the delegation of
responsibilities by the HO. Therefore,
such delegation of responsibility by
the head office is required to be
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considered as an international
transaction between appellant and HO
of the appellant. Since there existed
a prior agreement in relation to the
transaction between the HO and APL,
the transaction between appellant and
APL is a deemed international
transaction u/s.92B(2). Accordingly,
the TO is justified in holding the
transactions between the appellant and
its head office as international
transaction. Accordingly, grounds No.
8 to 11 are dismissed.’
Further It is important to note
here that Section 92F (iii) defines
enterprise as a person including a
permanent establishment of such
person. A permanent establishment
has been defined u/s 92F (ia) as a
fixed place of business through
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which the business off the
enterprise is carried on.
Accordingly, the Act itself
considers a Permanent establishment
as an enterprise. Therefore, all
the dealings between the enterprise
and its permanent establishment in
India have to pass the test of
Transfer Pricing. In the given
case, the transaction have taken
place between the foreign company
i.e. Head office and its PE in
India i.e. project office in India
and therefore the contention of the
appellant that he Transfer Pricing
provisions are not applicable to it
is incorrect as project office.
This finding also gets support from
the vital fact that the appellant
company has itself fled report
under form 3 CEB wherein
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transaction between itself I.e the
PO and is Head office in Chine is
reported.”
25.5 The learned CIT-A accepted the
selection of the CUP method as submitted
by the assessee by observing as under:
“8.5. I find force in the facts and
legal submissions of the appellant the
transactions between SFPML HO and APPL
is uncontrolled in nature. Thus the
contract between SFPML HO and APPL is
an uncontrolled transaction and is at
arm’s length as per the requirements
of Indian Transfer Pricing provisions.
Further as substantially all the
functions in respect of the project is
carried out from India the price at
which contract was entered between HO
of the appellant company and APL the
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same can be considered as comparable
price of the appellant and since the
same price has been charged by the
appellant, the consideration is arm’s
length consideration. Hence no
adjustment is required on account of
consideration of appellant. I am
inclined to agree with the arguments
of the appellant company that the
contract price agreed between APL and
the HO of the appellant company can be
used for the purposes of benchmarking
the transaction between the appellant
company (i.e. PO) and APL under any of
situations discussed by the TPO. This
is mainly because the price between
APL and HO of the appellant company
can be regarded as a comparable
uncontrolled price (CUP) for the
purpose of benchmarking the
transaction between appellant company
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and APL. I agree with the contention
of the appellant that the price
charged between APL and HO of the
appellant constitute a valid CUP, as
per section 92Cof the Act rv.t Rule
106(1)(a) of the Income-tax Rules,
1962 (the Rules). Thus, as the law is
now well settled that applying TMM
when a direct CUP was available is not
sustainable which is discussed below.
8.6 I also accept the legal
proposition that CUP being the best
suitable and appropriate method for
the purpose of benchmarking as
compared to other methods prescribed
u/s 92C of the Act should be relied on
and preferred method than TMM as by
held by the TPO, For this purpose the
appellant relied on following judicial
pronouncements-
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>Clear Plus India (P.) Ltd v. Deputy
Commissioner of Income-tax, Circle-
3(1), Delhi(2011) 10 taxmann.com 249
(Delhi);
› Deputy Commissioner of Income tax,
Range 9(1) v. 3 Global Services (P.)
Ltd[2011] 11 taxmann.com 136 (Mum.);
>Serdia Pharmaceuticals (India) (P.)
Ltd. v. Assistant Commissioner of
Income-tax *, Circle 7(2),
Mumbai[2011] 44 SOT 391 (Mum.);
> Assistant Commissioner of Income-
tax-8(1) v. Agility Logistics (P.)
Ltd. [2012] 19 taxmann.com 159
(Mum.);
Deputy Commissioner of Income-tax,
Circle 8(2), Mumbai v. Isagro
(Asia) Agrochemicals (P.) Ltd
[2013] 31 taxmann.com 388 (Mumbai –
Trib.);
Assistant Commissioner of Income-
tax, Range 10(1) V. Vistaar Systems
(P.) Ltd[2013] 33 taxmarin.com 445
(Mumbai – Trib.); Hughes Systique
India (P.) Ltd v. Assistant
Commissioner of Income- tax, Range-
12() [2013] 36 taxmann.com 41
(Delhi – Trib.); Deputy
Commissioner of Income-tax, Circle
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-4 (1) v. Lumax Industries Ltd
[2013] 36 taxmann.com 380 (Delhi –
Trib.);
Livingstones v. Deputy Commissioner
of Income-tax 16(3), Mumbai –
[2014] 41 taxmann.com 499 (Mumbai –
Trib.);
KTC Ferro Alloys (P.) Ltd. v.
Additional Commissioner of Income-
tax, Range -3, Visakhapatnam [2014]
43 laxmann.com 152 (Visakhapatnam –
Trib.); Tilda Riceland (P.) Ltd. v.
Assistant Commissioner of Income-
tax, Circle
-16(1), New Delhi [2014] 42
taxmann.com 400 (Delhi – Trib.);
and
J.P.Morgan India Private Limited
Vs. ACIT, Mumbai for AY 2002-03,
ITA
8.7. The TPO in his order has rejected
this plea of the appellant stating that
the standard of comparability are very
strict in CUP and a small difference in
the factor of comparability may have
large difference in price. However the
TPO while doing so conceded that the
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transaction between the HO and APL may
pass the test of “uncontrolled” nature,
he further went on to make observation
that it doesn’t satisfy the test of
comparability, As against the
aforesaid, the case of the TPO is
further that all documents as
prescribed in rule 10D were not
maintained. The market conditions in
China, in which Chinese HO cared out
their business, had not been spelt out.
FAR analysis had not been done. The
financial results of the associated
enterprise had not been disclosed.
Therefore, the CUP method adopted by
the assessee did not establish the
comparably.
8.8 I differ with the observations of
the TPO. It is already clear that the
appellant (PO) was only established to
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after singing of the contract, and
except for limited functions such as
Bidding of Contract, Ultimate
responsibility for execution of the
project, Overall management control and
monitoring of the project, all other
functions were carried out by the
appellant. Entire execution was carried
out from India. The appellant has
therefore attributed entire revenue
from the contract in India. Entire
revenue accruing or arising from the
contract has been accounted on the
consistent method of accounting
followed by the appellant. Further the
appellant has also offered entire
revenues for tax in India. There is no
contract entered between the HO of the
appellant and its Project office (PE)
i.e. the appellant in India. There is
no such assignment of contract by the
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HO to its PO. The responsibility for
execution of the entire contract is
with the appellant company and to
discharge its responsibility it has
formed a project office which is
considered as a PE in India. No such
assignment of contract between HO and
its PO is brought on record by the TPO.
The concept of HO and PO being separate
legal entities is true but only for the
limited purposes of attribution of
profits. However, when entire revenues
are attributed to India the question of
further attribution does not arise
Contractually APL treats both the HO
and the PO as one single entity,
Further vis-a-vis APL both the
appellant and its HO in China are one
and the same person. Further the
appellant has executed the contract on
same and similar terms as agreed by its
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HO. Thus, the test of comparability as
laid down in Rule 108(2) r.w.t10B(3) of
the Rules are satisfied. Hence the
observations of the TPO are completely
unjustifiable and misplaced. In all the
above rulings the general principle is
that the CUP method is preferable to
NMM. Accordingly, as held in the case
of Clear Plus India (P) Ltd supra, CUP
method should be considered as the Most
appropriate method. The findings of the
TPO rejecting CUP method is therefore
reversed. Thus I uphold that CUP being
available should be adopted as the Most
Appropriate Method (MAM)”
25.6 The learned CIT-A further found that
the comparables selected by the TPO for
determining the ALP under the TNMM were
not right comparables. The Id. CIT-A
analyzed each comparables selected by the
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TPO and thereafter rejected the same. The
reasons given by the learned CIT-A are
available on pages 87 to 94 of his order.”
6.9. The Tribunal, after considering the
rival submissions of the parties, dismissed
the Appeal filed by the Revenue holding
that internal cup method is a right course
of action adopted by the CIT (Appeals) for
Head Office as under:
“27. We have heard the rival contentions of
both the parties and perused the materials
available on record. In the present case
there was a contract awarded by APPL to
the assessee being the head office for the
sum of 720 million which was delegated to
the project office in India. Admittedly
the whole of the project was awarded by
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the head office to the project office in
India which was considered as the
international transaction between the
associate enterprises and therefore the
same was required to be decided at the arm
length price. Under the provisions of
transfer pricing various methods have been
prescribed for determining the ALP between
the associated enterprises with respect to
the international transaction carried out
by them. These methods are listed below:
• Comparable uncontrolled price method;
defines a mechanism where the sales
price compliant with the arm’s length
principle charged by a corporation is
determined by comparison with the
market price changed at transactions
among unrelated natural persons or
legal entities. In order for this
method to be applicable,
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characteristics of the transactions
among related individuals must be
comparable with characteristics of the
transactions among unrelated
individuals. This concept of comparable
characteristics here refers to
similarity between the characteristics
of transactions among related
individuals and transactions among
unrelated individuals on exchange of
goods and services in question. In case
of small measurable discrepancies
between those transactions, the method
would be applicable upon elimination of
those discrepancies. However, in case
of larger discrepancies, the method
would not be applicable. This is the
most frequently used method for
comparable uncontrolled transactions by
virtue of its feature of direct
comparison.
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• Resale price method; refers to
estimation of the price compliant with
the arm’s length principle by deducing
an appropriate gross sales profit from
the price to be charged for resale of
goods and services to unrelated natural
persons or legal entities. The
essential element for reaching the
price or remuneration compliant with
the arm’s length principle in this
method is the price or remuneration to
be charged for the potential sale to
unrelated natural persons or legal
entities. The price compliant with the
arm’s length principle to be charged
for related transaction would be
reached by deducing an appropriate
gross sales profit from the price or
remuneration based on assumptions. The
appropriate gross sales profit here
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refers to a profit determined according
to market conditions by an objective
percentage which would be applicable at
the instant of transaction pertaining
to goods or services in question, after
deducing this profit amount, the price
compliant with the arm’s length
principle to be charged at the sale of
gods or series to related individuals
would be determined.
• Cost-plus method; is defined as
estimation of the price compliant with
the arm’s length principle by
increasing the cost amount of related
goods or services up to an appropriate
gross profit rate. The appropriate
gross profit rate here refers to the
profit rate reflecting the price to be
charged for the sale of goods or
services to unrelated individuals.
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Under favourable conditions, the
general gross profit margin applied for
transactions of goods or services to
unrelated individuals would be
perceived as an ideal rate. In case of
insufficient number of transactions for
comparison, the criterion for an
appropriate gross profit would be
considered as the profit rate
reflecting the price to be charged for
the sale of goods or services in
question to unrelated individuals. This
method is mostly used especially in
transactions involving the goods
manufactured by raw materials and
intermediate goods.
• Transactional net margin method; is
based on the analysis of net profit
margin determined by an appropriate
basis such as costs, sales or assets in
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a controlled transaction.
• Profit-split method; being based on
the principle of distribution of total
operating profit or loss pertaining to
one or more controlled transactions
among the related individuals
commensurate with the assumed functions
and the burdened risks within the arm’s
length principle, is applicable
especially when transactions are
intertwined
• Other methods
27.1 Before us, the question is to check
whether the contract awarded by the head
office to the project office is at arm
length price. Admittedly the HO assessee
got the project from the 3rd party being
APPL which assigned by the HO to the
project office. Thus the price charged the
HO of the assessee from APPL is certainly
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act as the benchmark considering the same
as the internal cup. In holding so, we
draw support and guidance from the
judgement of Hon’ble Delhi High Cout in
case of Clear Plus India (P.) Ltd vs. DCT
reported in 10 taxmann.com 249 where it
was held as under:
“7. We have examined the ratio of
these cases in the context of the
facts of the case. At the cost of
repetition, it may be mentioned
that goods were sold by the Chinese
manufacturers in the USA market.
The assessee has also sold the
goods in U.S.A. market. Therefore,
market conditions in the territory
of sale are the same. In view
thereof, we are in agreement with
the learned counsel that the buyer
in the USA market will be more
concerned with quality and price
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rather than economic conditions
prevailing in China and India.
7.1 The second point to be seen is
regarding comparability of the
products. No data or report is
available in this regard. The case
of the learned counsel is that
wipers do not require any
sophisticated technology for
manufacture; therefore, no great
difference is expected in the
quality of Chinese made wipers and
Indian made wipers. In fact, the
claim of the assessee is that
Chinese goods are of better quality.
However, this claim remains
unsubstantiated. The cases discussed
above do lead to a conclusion that
CUP method is the most direct method
for determining arm’s length price.
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(supra) it has been held that CUP
method is a preferred method and it
leads to more reliable results vis-
a-vis the results obtained by
applying transaction profit method.
In the case of SNF (Australia) Pty,
Ltd. (supra) it has been held that
the focus is on the market in which
products are acquired. The ratio of
this case is applicable mutatis-
mutandis to the facts of the case as
the focus is on the market in which
products are sold. Therefore, the
CUP method could validly be employed
provided product comparability is
established. Therefore, it would
have been appropriate for the
assessee to make the data of the
associated enterprise available to
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the Assessing Officer, at least in
respect of sale of Chinese and
Indian wipers so as to establish the
comparability. Nonetheless that by
itself would not displace the CUP
method, which is objective in terms
of the purchase price of the
associated enterprise. Accordingly,
it is held that the Assessing
Officer erred in changing the method
for determining arm’s length price.
7.2 We may now discuss the analysis
carried out by the assessee. The
sale price of the assessee is higher
than the sale price of the Chinese
manufacturers to the associated
enterprise except in case of all
season wipers of 26″ and 28″. The
sale price of 25″ wiper is US
Dollars 0.99 against the sale price
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of Chinese manufacturers of US
Dollars 1.50. The corresponding
figures for 28″ wipers are 1.01 US
Dollars and 1.50 US Dollars. The
analysis does not furnish the
aggregate of sale price involved in
these wipers and, therefore, it is
not feasible to ascertain the
percentage of sale price of these
items to the total sales made to the
associated enterprise. The case of
the learned counsel is that the
assessee has received interest-free
unsecured loans from the associated
enterprise for which some adjustment
should be allowed. This loan has
been advanced on 31-3-2006, the last
date of year under consideration.
Therefore, there is no impart in
this year Further, no calculation in
this regard has been furnished. In
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absence thereof, the Assessing
Officer could compute arm’s length
price of these wipers by adopting
comparable sale price of US dollars
150 per wiper.
8. In view of aforesaid discussion,
it is held:-
(i) the CUP method is the most suitable method in this
(i)
casethe assessee shall provide the sale data of the associated
(ii) enterprise in terms of sale price of Chinese and
assessee’s goods in the USA marketassessee shall also provide quantitative data of purchase
(iii) of Chinese and Indian wipers by the associated
enterprise, and the terms of payment; andthe Assessing Officer shall compute the arm’s length
(iv) price using this data, on CUP method aften hearing the
assessee.
27.2 In view of the above, we hold that the
internal cup method is the right course of
action adopted by the CIT-A for working out
the ALP for the transaction between the
head office and the project office. There
is no ambiguity, all the risk and rewards
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relating to the agreement in question were
recorded at the project office. Therefore,
the same can be said at the arm length
price under the CUP method. Accordingly, we
concur with the finding of the learned CIT-
A.
xxx
27.4 Regarding the selection of the
comparables under the TMM, we note that
the learned CIT-A has rejected all the
comparables with the reasons as
elaborately discussed in his order. At the
time of hearing, the learned DR has not
pointed out any defect in the finding of
the learned CIT-A. Hence, we do not find
any reason to interfere in the order of
the learned CIT-A.
27.5 Regarding the contentions raised by
the assessee in the CO, we note that the
assessee has succeeded on merit of the
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case. In other words, the grounds of
appeal filed by the revenue are dismissed.
Therefore, we do not find any reason to
entertain the objections raised by the
assessee in the CO. As such, they become
infructuous. Accordingly, we dismiss the
same. Hence the grounds of appeal filed by
the revenue are dismissed whereas the
objections raised by the assessee are also
dismissed.”
6.10. For the Assessment Year 2010-11 also,
the Tribunal followed its decision for
Assessment Years 2008-09 and 2009-10 and
dismissed the Appeal of the Revenue.
17. We have considered the elaborate
discussion made by the CIT (Appeals) and
the Tribunal, arriving at a concurrent
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findings of fact that the assessee being a
company based in China has entered into a
contract of providing the service to
M/s.Adani Power Private Limited and the
assessee was responsible for transportation
of goods and equipments, to be supplied to
M/s.Adani Power Private Limited through
suppliers. The assessee has entered into a
contract valued at Rs.20 Million to set up
a project office in India. According to the
TPO, project office was acting as a
subcontractor on behalf of the assessee and
according to the TPO therefore, the
transaction between the assessee and its
office should be an Arm’s Length Prices as
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against the contention of the assessee that
all the income and expenses have been
booked by the project office in India for
the services to be rendered to the
M/s.Adani Power Private Limited and
therefore, no adjustment was required to be
made.
18. The assessee also, without prejudice to
such contention demonstrated that most of
the expenses reimbursed by the assessee to
Head Office on account of the freight and
salary expenses can only be considered as
per the purpose of Arm’s Length Prices.
19. The CIT (Appeals), after considering
the submissions made by the assessee and
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the orders passed by the TPO and the
Assessing Officer, has held that the
transactions between the assessee and the
Head Office is an international transaction
between the associated enterprises. The CIT
(Appeals) therefore, rejected the
contention of the assessee and held that
the transactions were required to be
carried out at Arm’s Length Price. However,
the CIT (Appeals) accepted the selection of
CUP method as the most appropriate method
reversing the finding of the TPO applying
the TNMM method.
20. Under the provisions of the transfer
pricing, various methods have been
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prescribed for determining the Arm’s Length
Price between the associated enterprises
with respect to the international
transaction carried out by them i.e. (i)
Comparable Uncontrolled Price (CUP) method
(ii) Resale Price Method (RPM) (iii) Cost
Plus Methods (CPM) (iv) Transactional Net
Margin Method (TNMM) (v) Profit Spit Method
(PSM).
21. Out of the above methods for
determining Arm’s Length Price, the CIT
(Appeals) has found that CUP method adopted
by the assessee for determination of Arm’s
Length Price is the Most Appropriate Method
(MAM) as the responsibility of the
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execution of the entire contract was with
the assessee for which, it has set up a
project office in India and no assignment
of contract between the assessee and the
project office was brought on record by the
TPO. Therefore, though the concept of
assessee being a Head Office and the
Project Office, being separate legal
entities, is in existence but only for the
limited purpose of attribution of profits.
However, when entire revenues are
attributed to India, question of further
attribution could not arise because,
contractually M/s.Adani Power Private
Limited treats both the assessee and
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project office as one single entity and the
assessee and the Head Office are one and
the same person based at China and hence,
the test of comparability as laid down in
Rule 10B(2) read with Rule 10B(3) of the
Rules are satisfied. Therefore, the
considerations, on which the TPO has
applied the TNMM method, was rightly held
to be completely unjustifiable and
misplaced as CUP method is preferable to
TNMM.
22. The Tribunal has referred to and relied
upon the decision of the Hon’ble Delhi High
Court in case of Clear Plus India (P.) Ltd v.
Deputy Commissioner of Income-tax, Circle- 3(1),
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Delhi(2011) reported in 10 taxmann.com 249
(Delhi).
23. Applying the above ratio of the
decision of the Hon’ble Delhi High Court,
the Tribunal held that the internal CUP
method is the right course of action
adopted by the CIT (Appeals) for working
out the Arm’s Length Price for the
transaction between the Head Office and the
Project Office in view of unambiguous
position that all the risk and rewards
relating to the agreement in question were
recorded at the project office and
therefore, it can be said that the Arm’s
Length Price under CUP method.
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24. The Tribunal has therefore rightly held
that the learned CIT (Appeals) has rejected
all the comparables with reasons as
elaborately discussed in his order and
accordingly, the Tribunal has upheld the
order of the CIT (Appeals).
25. Thus, on the facts of the case, there
are concurrent findings arrived at by the
CIT (Appeals) and the Tribunal regarding
the applicability of the CUP method for
determination of the Arm’s Length Prices as
the CUP method is the most suitable method
in absence of any agreement between the
Head Office and the project office and
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therefore, the agreement between the Head
Office and M/s.Adani Power Private Limited,
have to be considered for the internal CUP
method to determine the Arm’s Length Price.
26. In view of the foregoing reasons, we
are of the opinion that no question of law,
much less any substantial question of law,
arises from the impugned Judgment and Order
of the Tribunal. The Appeals are therefore
accordingly, dismissed.
(BHARGAV D. KARIA, J)
(PRANAV TRIVEDI,J)
PALAK
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