Commissioner Of Income Tax (International Taxation And Transfer Pricing v. Shandong Tijun Electronic Power Eng. Company Ltd

C/TAXAP/1298/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 1298 of 2018 ========================================================== COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION AND TRANSFER PRICING) Versus SHANDONG TIJUN ELECTRONIC POWER ENG. COMPANY LTD. ========================================================== Appearance:MR.VARUN K.PATEL(3802) for the Appellant(s) No. 1MR SN SOPARKAR SR. ADVOCATE WITH MR B S SOPARKAR(6851) for the Opponent(s) No. 1 ========================================================== CORAM: HONOURABLE MS.JUSTICE HARSHA DEVANIand HONOURABLE MS. JUSTICE SANGEETA K. VISHENDate : 18/10/2019ORAL ORDER (PER : HONOURABLE MS.JUSTICE HARSHA DEVANI) 1.By this appeal under section 260A of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), the appellant has challenged the order dated 13.04.2018 passed by the Income Tax Appellate Tribunal (hereinafter referred to as “the Tribunal”) in ITA No. 2926/Ahd/2014 by proposing the following questions stated to be substantial questions of law: “(a) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that CUP was a better method for benchmarking as against TNMM adopted by the TPO? (b) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that the C/TAXAP/1298/2018 ORDER transaction of awarding of contract by Adani Power Limited and Jhajjar Power Limited to Shandong HO is a proper CUP for the transactions between Shandong HO and Shandong PE without appreciating that the nature of transaction between Shandong HO and Shandong PE was functionally different and could not be compared between APJ/JPL and Shandong HO which merely related to awarding of a contract? (c) Whether in the facts and circumstances of the case, the learned ITAT has erred in law and on facts in holding that the comparable selected by the TPO were functionally incomparable without assigning any reason whatsoever?” 2.The assessment year is 2010-11 and the corresponding accounting period is the previous year 01.04.2009 to 31.03.2010. The respondent assessee filed return of income on 15.10.2010 declaring total income of Rs.300,978,326/-. The case was selected for scrutiny. Notice under section 143(2) as well as notices under section 142(1) of the Act came to be issued and the assessee company responded to the same. A draft of the proposed order of assessment came to be forwarded to the respondent assessee in terms of section 144C of the Act. The assessee filed a letter dated 24.04.2013 stating that it has decided to prefer an appeal against the additions proposed in the draft order. Consequently, the Assessing Officer passed an assessment under section 144C read with section 143(3) of the Act. C/TAXAP/1298/2018 ORDER C/TAXAP/1298/2018 ORDER 3. The backdrop of the facts in which the assessment order came to be passed are that Shandong Tiejun Electronic Power Engineering Company Ltd. is incorporated as per the laws of the People’s Republic of China. The company is engaged in erecting, testing, commissioning, etc. of power plants. The company entered into agreements with its clients, namely, Adani Power Limited (APL) and Jhajjar Power Limited (JPL). The respondent - assessee showed a turnover of Rs.612,34,10,023/-, on which it had shown actual expenditure of Rs.582,61,59,846/-, thus, showing a profit of Rs.29,72,50,177/-. During the year under consideration, the assessee had recognized revenue from the projects as per Accounting Standard-7 (AS-7). The assessee recognised revenue as per percentage completion method on the basis of proportion of actual cost incurred for the project to the total estimated cost of the contract. The assessee maintained accounts for the income earned from execution of onshore contracts of two projects by the Permanent Establishment (PE) or Project Office (PO) in India. As per Form 3CD submitted for the year under consideration, the nature of business activities of the PE was shown as construction, erection,installationandcommissioning activities. During the year under consideration, the assessee entered into international transactions with its associated enterprise, that is, Head Office (HO). 4.According to the Assessing Officer, as it is the Head Office which enters into contracts with the clients (APL/JPL) either subsequent to the tendering process or on negotiated basis, the entrepreneurial risk is taken by the Head Office and the total contract cost for complete execution of the power plant is fixed. It is only afterwards that contracts for different components or parts are executed by the Project Office. As the Head Office and the Project Office are associated enterprises for transfer pricing purposes, any transaction falling under the category of international transaction, whether actual or not, is subject to transfer pricing regulations. The Project Office only carries out the work as per the understanding between the Head Office and the client. In this case, the assessee is the foreign enterprise and not the Project Office. Project Office is the projection or foot print of the foreign enterprise, income attributable to which is taxed in the source country. But for transfer pricing purpose, they are treated as separate and distinct entities. Therefore, the execution of the contract by the Project Office, signed by the Head 0ffice, is an international transaction under section 92B read with section 92F(v) of the Act. 5.Since the assessee had not submitted any documents in relation to such transaction, a show cause notice came to be issued to it under section 92C(3) of the Act. In response thereto, the profit and loss account pertaining to the project under consideration was submitted, which showed that receipts from operations are at Rs.612,34,10,023/- and total expenditure is Rs.582,61,59,846/-. international transaction under section 92B read with section 92F(v) of the Act. 5.Since the assessee had not submitted any documents in relation to such transaction, a show cause notice came to be issued to it under section 92C(3) of the Act. In response thereto, the profit and loss account pertaining to the project under consideration was submitted, which showed that receipts from operations are at Rs.612,34,10,023/- and total expenditure is Rs.582,61,59,846/-. 6.According to the Assessing officer, the consideration received by the Project Office is required to be at arm’s length. The act of carrying out execution of the project by the Project Office and consequently, the expenses incurred by it, being Rs.582,61,59,846/-, is required to be considered as international transaction between the Head Office and the ProjectOffice.TheAssessingOfficer, thereafter, proceeded to determine the arm’s length price and discussed as to which is the most appropriate method for determining the arm’s length price. According to the Assessing Officer, either Cost Plus Method (CPM) or Transactional Net Margin Method (TNMM) may be taken as the most appropriate method in this case. Since the CPM involves comparison of gross profit margins, which may be difficult to obtain in the case of external comparable, the use of CPM as the most appropriate method in this case came to be rejected. Consequently, the Assessing Officer selected TNMM as the most appropriate method. He, accordingly, computed the arm’s length price of the transaction and determined the income of the assessee at Rs.69,73,91,334/-. 7.Being aggrieved, the assessee went in appeal before the Commissioner (Appeals). Before the Commissioner (Appeals), it was submitted by the assessee that in view of the availability of transaction of awarding of contracts by APL and JPL, Indian parties, to Shandong HO, which is a comparableuncontrolledtransaction,the Assessing Officer should have selected the Comparable Uncontrolled Price (CUP) Method for determination of arm’s length price in terms of section 92C of the Act and rules 10B and 10C of the Income Tax Rules, 1962 (hereinafter referred to as “the rules”). Relying upon certain judicial pronouncements (which find reference in paragraph 7.2 of the order passed by the Commissioner (Appeals)) it was contended that the CUP method should be preferred over other methods in determining arm's length price when comparable uncontrolled transaction is available. It was C/TAXAP/1298/2018 ORDER contended that the transaction of awarding contracts by APL and JPL, Indian parties to Shandong HO, a Chinese entity, being comparable uncontrolled transaction for benchmarking deemed international transaction of awarding contracts to Shandong PO by Shandong HO, a Chinese entity, there being no difference in terms of functions performed, assets employed and risk undertaken, the price charged in comparable uncontrolled transaction ought to have been treated as arm’s length price for benchmarking deemed transaction. It was further contended that the price at which the contracts were awarded by APL and JPL, Indian parties to Shandong HO, a Chinese entity, is the same price at which the transaction price between Shandong PO, that is the appellant (respondent herein) in India and Shandong HO, a Chinese entity, was agreed upon and offered to tax by the assessee in India. It was pointed out that Shandong HO had awarded the same scope of work to Shandong PO, as was awarded to Shandong HO by APL and JPL. It was also submitted that it is not the case of the Assessing Officer that the appellant company had offered less income in India than what was agreed upon between Shandong HO and APL and JPL respectively. 8.The Commissioner (Appeals), after considering the judicial pronouncements relied upon by the assessee, agreed that CUP is the most appropriate method for determining arm’s length price in the given set of facts in view of the comparable uncontrolled price of APL and JPL with Shandong HO. He further held that the transaction of APL and JPL with Shandong HO can be treated as CUP, being functionally comparable uncontrolled transaction, in terms of rule 10B(2) and (3) of the rules and more particularly, in view of the fact that the entire income from the transaction was offered to tax in India. The Tribunal, in the impugned order, has agreed with the findings of fact recorded by the Commissioner (Appeals) and has dismissed the appeal of the revenue. 9.Mr. Varun Patel, learned senior standing counsel for the appellant, submitted that the order passed by the Tribunal is erroneous and illegal as the basic issue in this case is whether the transaction between the Head Office and its Permanent Establishment in India would be covered by the transfer pricing provision of the Act or not. It was submitted that the Tribunal has turned down the contention of the assessee that the transaction in question is not an international transaction. 9.1 It was submitted that since during the course of assessment proceedings, the assessee was C/TAXAP/1298/2018 ORDER claiming that the transaction in question is not an international transaction, it had not filed any details whatsoever to benchmark its transaction. It was submitted that the international transaction in this case is the revenue shown by the Project Office from the above-mentioned project, which have been assigned by its Head Office. Therefore, the receipts shown in its accounts by the Project Office in India need to be benchmarked. It was submitted that the assessee did not file any details before the Assessing Officer/Transfer Pricing Officer for benchmarking its transactions in India and for the first time, raised a contention before the Commissioner (Appeals) that the international transaction can be benchmarked by comparing the contract given by the third parties to its Chinese HO and can be taken as uncontrolled comparable price. It was submitted that even on facts, both the transactions are not comparable. 9.2 It was further submitted that during the course of the assessment proceedings, the assessee had reiterated that the transaction in question is not an international transaction and therefore, section 92 of the Act is not applicable to the operations carried out by the Project Office and consequently, the application of any method for computation of the arm’s length C/TAXAP/1298/2018 ORDER 9.2 It was further submitted that during the course of the assessment proceedings, the assessee had reiterated that the transaction in question is not an international transaction and therefore, section 92 of the Act is not applicable to the operations carried out by the Project Office and consequently, the application of any method for computation of the arm’s length C/TAXAP/1298/2018 ORDER price, does not arise. It was submitted that it was only in the appeal proceedings that the assessee has made an alternative plea that the CUP method should be adopted instead of the TNMM, therefore, the Assessing Officer did not have the opportunity of examining such plea regarding applicability or otherwise of the CUP Method. It was argued that neither the Commissioner (Appeals) nor the Tribunal have given any quantitative or qualitative findings on the comparables submitted by the assessee in relation to the CUP method. It was submitted that the assessee has also failed to submit any details whatsoever of the comparable contracts which is a pre-requisite for applying the CUP method. It was emphatically argued that the assessee has also failed to disclose the comparable instances, the nature of services being rendered in both the cases, the scope of services, the basis of determination of price and whether the subject matter of both the contracts are the same, which is mandatory for applying the CUP method. It was submitted that it is settled law that the onus lies upon the assessee to bench mark the transaction with suitable Most Appropriate Method. 9.3 It was submitted that both the Commissioner (Appeals) as well as the Tribunal have rejected the comparables selected by the Assessing Officer without giving any findings as to why such comparables are unacceptable. It was accordingly urged that the appeal deserves consideration on the questions as proposed or as may be formulated by this court. 10. Opposing the appeal, Mr. S.N. Soparkar, Senior Advocate, learned counsel with Mr. B.S. Soparkar, learned advocate, appearing on caveat on behalf of the respondent, invited the attention of the court to the findings recorded by the Commissioner (Appeals) as well as the Tribunal, to submit that the findings recorded by the Tribunal are concurrent findings of fact based upon appreciation of the material on record. It was submitted that the findings of fact recorded by the Tribunal have not been challenged by the appellant on the ground that there is any perversity in such findings. Therefore, in the absence of any perversity being pointed out in the findings of fact recorded by the Tribunal on which it has based its conclusion, no question of law can be stated to arise out of the impugned order. In support of such submission the learned counsel placed reliance upon the decision of the Madras High Court in Commissioner of Income-tax v. Same Deutz Fahr India Private Limited, [2018] 405 ITR 345, wherein the question was whether M/s HMT Limited which had twice the turnover of the assessee company could be considered as a comparable, the court held that whether M/s. HMT Limited can be a comparable or not is a factual issue. The court held that right to appeal is not automatic. Right to appeal is conferred by statute. When statute confers a limited right of appeal restricted only to cases which involve substantial questions of law, it is not open for the court to sit in appeal over the factual findings arrived at by the Appellate Tribunal. The court, accordingly, held that the Tribunal had factually assessed the similarities between M/s HMT Limited and the respondent assessee, which in its considered opinion, did not warrant interference under section 260A of the Act. It was, accordingly, urged that the impugned order passed by the Tribunal being based on factual findings does not give rise to any question of law and that the appeal being devoid of merits, deserves to be dismissed. 11. Before the Commissioner (Appeals), the assessee had contended that the transaction in question is not an international transaction and had also raised an alternative contention that the method adopted by the Assessing Officer for the purpose of computation of arm’s length price C/TAXAP/1298/2018 ORDER was not the most appropriate method and that the CUP method is more appropriate in the facts of the present case than the TNMM method. The Commissioner (Appeals) has not accepted the submission of the assessee that the transaction in question is not an international transaction, but has held in favour of the assessee insofar as the alternative contention regarding the CUP method being the most appropriate method. The assessee has not challenged the order of the Commissioner (Appeals) to the extent he has held against it and hence, the finding regarding the transaction in question being an international transaction has attained finality. In the present appeal, the controversy is confined to the computation of arm’s length price of the international transaction between the respondent assessee and its Head Office located at China. 12. Section 92C of the Act provides for computation of arm’s length price. Sub-section (1) thereof provides that the arm’s length price in relation to an international transaction or specified domestic transaction shall be determined by any of the methods enumerated therein, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or C/TAXAP/1298/2018 ORDER such other relevant factors as the Board may prescribe. In all, six methods have been enumerated thereunder wherein method (a) refers to comparable uncontrolled price method (CUP) and method (e) refers to transactional net margin method (TNMM). 13. In terms of rule 10A (ab) of the rules, “uncontrolled transaction” means a transaction between enterprises, other than associated enterprises, whether resident or non-resident. Rule 10B provides for “determination of arm’s length price under section 92C” of the Act and to the extent the same is relevant for the present purpose, reads thus: “10BDetermination of arms’length price under section 92C.- (1)For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:- (a) comparable uncontrolled price method, by which, - 13. In terms of rule 10A (ab) of the rules, “uncontrolled transaction” means a transaction between enterprises, other than associated enterprises, whether resident or non-resident. Rule 10B provides for “determination of arm’s length price under section 92C” of the Act and to the extent the same is relevant for the present purpose, reads thus: “10BDetermination of arms’length price under section 92C.- (1)For the purposes of sub-section (2) of section 92C, the arm’s length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely:- (a) comparable uncontrolled price method, by which, - (i)the price charged or paid for propertytransferredorservices provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; C/TAXAP/1298/2018 ORDER (ii)such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into suchtransactions,whichcould materially affect the price in the open market; (iii)the adjusted price arrived at under sub-clause (ii) is taken to be an arm’s length price in respect of the propertytransferredorservices providedintheinternational transaction or the specified domestic transaction; (b) resale price method, xxxx (c) cost plus method, xxxx (d) profit split method xxxx (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprisefromaninternational transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii)the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v)the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; international transaction or the specified (f)any other method as provided in rule 10AB. (2)For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a)the specific characteristics of the property transferred or services provided in either transaction; (b)the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c)the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (f)any other method as provided in rule 10AB. (2)For the purposes of sub-rule (1), the comparability of an international transaction or a specified domestic transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- (a)the specific characteristics of the property transferred or services provided in either transaction; (b)the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c)the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d)conditions prevailing in the markets in which the respective parties to the transactionsoperate,includingthe geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3)An uncontrolled transaction shall be comparable to an international transaction or a specified domestic transaction if— (i)none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. (4)The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction or a specified domestic transaction shall be the data relating to the financial year in which the international transactionorthespecifieddomestic transaction has been entered into : Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.” 14. Rule 10C of the rules bears the heading “most appropriate method”. Sub-rule (1) thereof provides that for the purposes of sub-section (1) of section 92C of the Act, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction or specified domestic transaction and which provides the most reliable measure of an arm’s length price in relation to the international transaction or the specified domestic transaction as the case may be. Sub-rule (2) provides for the factors which are required to be taken into account in selecting the most appropriate method as specified in sub-rule (1). 15. The controversy involved in the present case is required to be examined in the light of the above statutory provisions. With the CUP method, the price and conditions of the controlled transaction between associated enterprises with the price and conditions of the comparable uncontrolled transaction between independent enterprises have to be compared. If the two pricesarethesame,theconditions of the controlled transaction are at arm’s length and if the two prices are different, then the conditions of the organization's commercial or financial relations with the associated enterprise may not be at arm’s length. One would then need to substitute the price in C/TAXAP/1298/2018 ORDER the controlled transaction with that of a comparable uncontrolled transaction to ascertain what the conditions need to look like to be at arm’s length. C/TAXAP/1298/2018 ORDER the controlled transaction with that of a comparable uncontrolled transaction to ascertain what the conditions need to look like to be at arm’s length. 16. The Tribunal, in the impugned order has found that the transaction of awarding contract by APL and JPL, Indian parties, to Shandong HO, a Chinese entity, ought to have been taken as comparable uncontrolled transactions to benchmark the transaction of Shandong PO. The Tribunal has placed reliance upon the provisions of rule 10C of the rules and in view thereof, found that there is no difference in the terms of functions performed, assets employed, risks undertaken, the price charged, in comparable uncontrolled transactions entered in the contracts between the parties - APL and JPL to Shandong Head Office vis-à-vis the contract awarded to Shandong Project Office by Shandong Head Office. The Tribunal has further noted that it is not disputed at the end of the Revenue that the price at which the contracts were awarded by APL and JPL, Indian parties, to Shandong HO, Chinese entity, is the same price at which transactions between Shandong PO, that is, the appellant in India and Shandong HO, the Chinese entity, had been agreed upon. The Tribunal was of the view that the total value of the contract awarded to C/TAXAP/1298/2018 ORDER the Chinese HO had been offered as gross revenue by Shandong PO, that is, the foreign entity incorporated in India and, therefore, there was no question of any shifting of profits. The Tribunal has further noted that for the purpose of computing the arm’s length price, the basic thing which is to be examined is whether the assessee has shifted the profits to its associate enterprises either directly or indirectly charging less revenue or showing excess cost to reduce the profits, but in the instant case, where the total contract terms are similar between Shandong HO and PO as well as between Shandong HO and the two Indian parties, which is the fit comparable uncontrolled transaction and there being no variation in the rates charged as well as other terms of the agreement, then there remains no room for the revenue to make any upward adjustment to make addition in the hands of the assessee. The Tribunal, in the above facts and circumstances, was of the considered opinion that for the purpose of calculating arm’s length price, CUP method should have been followed by the Assessing Officer to determine the arm’s length price and further held that if the CUP method is applied, then no transfer pricing adjustment needs to be made in the given facts and circumstances of the case. The Tribunal, accordingly, found no infirmity in the findings recorded by the Commissioner (Appeals) and decided the question against the revenue. recorded by the Commissioner (Appeals) and decided the question against the revenue. 17. In the opinion of this court, the question as to which is the most appropriate method for determining the arm's length price and as to whether the transaction between APL and JPL and Shandong Head Office is a comparable uncontrolled transaction is basically a question of fact. From the concurrent findings of fact recorded by the Tribunal and the Commissioner (Appeals) based on the material on record, it is apparent that the terms of functions performed, assets employed, risk undertaken, the price charged in comparable uncontrolled transactions entered into by virtue of the contract between APL and JPL and Shandong HO vis-à-vis the contract awarded to Shandong PO by Shandong HO, are identical. It is based upon such concurrent findings of fact recorded by it after appreciating the material on record that the Tribunal has arrived at the conclusion that the arm’s length price of the transaction in question is required to be computed by adopting the CUP method. Therefore, unless there is any perversity in the findings of fact recorded by the Tribunal upon appreciation of the evidence on record, no question of law can be said to arise from the impugned order. The learned senior standing counsel for the appellant is not in a C/TAXAP/1298/2018 ORDER position to point out any perversity in the concurrent findings of fact recorded by the Tribunal after appreciating the evidence on record. It is not the case of the revenue that any irrelevant material has been taken into consideration by the Tribunal or that any relevant material has been ignored, nor has any material to the contrary been pointed out to the court to dislodge the findings of fact recorded by the Tribunal. Moreover, a perusal of the proposed questions shows that the impugned order has not been challenged on the ground of perversity. 18. In the light of the above discussion, the conclusion arrived at by the Tribunal being based upon findings of fact recorded after appreciating the material on record, in the absence of any perversity being pointed out in the findings of fact recorded by the Tribunal, no question of law, much less, a substantial question of law, can be stated to arise out of the impugned order, so as to warrant interference. The appeal, therefore, fails and is, accordingly, dismissed. (HARSHA DEVANI, J) (SANGEETA K. VISHEN,J)