THE DCIT(INTL. TAXN),,, AHMEDABAD vs. M/S. SHANDONG TIEJUN ELECTRIC POWER ENGG. COMPANY LTD., KUTCH

आदेश/O R D E R

PER T. S. KAPOOR - AM:

“1. The Ld. CIT(A) erred in law and on facts in holding that the action of the AO in rejecting the books of account of the assessee company was incorrect inspite of clear evidence brought on record that the profit computed by the assesses was not reliable.

2. The Ld. CIT(A) erred in law and on facts in holding that the action of the AO in resorting to estimation of income on presumptive basis of 10% U/s.44BBB(1) or alternately @10.98% under normal provisions of the Act was not correct.

4. The Ld. CIT(A) erred in holding that the transaction of awarding of contract by Adani Power Limited and Jhajjar Power Limited to Shandong HO is a proper CUP for the transaction 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 with the transaction between APL/JPL and Shandong HO which merely related to awarding of contract.

5. The Ld. CIT(A) erred in law and on facts in holding that the comparables selected by the TPO were functionally incomparable without assigning any reason whatsoever.”

3. At the outset, learned AR submitted that issues raised by Revenue in all these three appeals are squarely covered by the orders of Hon’ble ITAT confirmed by Hon’ble Gujarat High Court in the case of assessee itself and learned CIT(A) has followed AYs.2009-10 & 2010-11 only to allow relief to the assessee. The learned AR in this aspect invited our attention to year-wise chart placed on record wherein AO’s page and para and CIT(A)’s page and para numbers were mentioned and in the remarks column 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 3 - relevant ITA Nos. in the case of assessee itself were mentioned which has been followed by learned CIT(A).

7. In this appeal, first ground is regarding the action of the learned CIT(A) by which he has allowed relief to the assessee by accepting the books of accounts which the Assessing Officer had rejected. Ground no.2 is regarding action of the learned CIT(A) whereby the learned CIT(A) has allowed relief to the assessee by holding that action of the AO resorting to estimation of income on presumptive basis @ 10% was not correct. Both these issues have been dealt by learned CIT(A) from para 3 to 13 wherein relying upon the orders of Hon’ble ITAT and that of Hon’ble Gujarat High Court in the case of assessee itself, the learned CIT(A) has allowed relief to the assessee by holding as under:

“3. I have gone through the assessment order and written submissions furnished by the AR of the Appellant which have been placed on record.

4. The AR of the Appellant has also , during the course of appeal proceedings, furnished copy of the order of the Hon'ble ITAT dated 18/01/2017 and copy of the order of the Hon'ble jurisdictional Gujarat High Court dated 18/09/2017 in the appellant's own case whereby the Hon'ble Gujarat High Court has dismissed the appeal filed by the Income Tax Department against the order of Hon'ble ITAT Ahmedabad wherein the Hon'ble ITAT has confirmed the action of the then Ld CIT (Appeals), Gandhinagar of deleting the addition on account of rejection of books of accounts on identical facts for A.Y.2009-10. , 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 4 -

5. Further, the AR of the appellant has pointed out the observation of the Ld. Assessing Officer in para 3.2 of the assessment order which reads as under:

"At the outset, it is stated that the facts of the case are exactly same as in AY 2010-II and earlier years and there is no change in the fads of the case. Therefore, arguments relied upon by the AO in AY 2010-11 and earlier years are equally applicable to the case of the assesse. The undersigned therefore relies on the reasoning provided in the said orders which are being discussed hereunder. "

7. It is also noted that the findings of CIT (A), Gandhinagar have also been confirmed by the Hon'ble ITAT and Hon'bie Gujarat High Court in the Appellant's own case for A.Y.2009-10. Since the findings of the Hon'ble Tribunal and Hon'ble Gujarat High Court are on the identical facts in the case of the appellant itself, 1 am duty bound to follow the findings given by them and adopt the same in my appellate order for the year under appeal. Therefore, I feel appropriate to reproduce the findings from the said appellate orders as under:

8. The then Ld CIT(A) has, in his order for A.Y.2009-10 in Appeal No.CIT(A)GNR/207/Intl.Taxn./2011-12 dated 18/03/2013, held as under :

"6.5 I have gone through the assessment order, submissions, case law etc. carefully. The following pertinent observations /decisions are made after thorough consideration of all facts, submissions, evidences:

, 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 5 - a) The appellant has opted for being assessed under section under section 44BBB(2) of the IT Act, The sub-section is reproduced herein under" "Notwithstanding anything 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 assesses under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee." (Emphasis supplied) The section clearly provides an option to an assesses being a foreign company engaged in the business of civil construction, erection of plant or machinery, testing and commissioning of power project to offer to lax lower profits and gains than profit deemed of 10% of the amount receivable by the appellant under section (1) of Section 44BBB of the IT Act provided following twin conditions are fulfilled" (1) The appellant shall keep and maintain such books of account and other documents as required under sub- section (2) of section 44AA of the IT Act. (2) The appellant shall get his accounts audited and furnishes a report of such audit as required under section 44AB of the IT Act. b) Admittedly, as claimed by appellant no specific books of accounts are prescribed u/s 44AA of the IT Act read with relevant IT Rules for the nature of business carried on by the appellant. It has maintained books of account and got them audited also. Besides, the appellant has submitted audit report of a chartered accountant on veracity of financial statements and audit report as per Companies (Auditor's Report), 2003 in terms of section 227(4'A) of the Companies Act. c) So far as the applicability of the AS-7 is concerned, one of the objections of Ld.AO was that the same is not applicable to the Appellant Company being a foreign company. I do not find it true, because as per Section 594 of the Companies Act, 1956 the company, which is incorporated outside India and has established place of a business in India is required to prepare its Balance Sheet and Profit & Loss Account as per the various provisions of the Companies Ac!, as if it is a Indian Company with the meaning of the Companies Act. Consequently, it follows that the Accounting Standard AS-7 is applicable to it. d) Accordingly, the Appellant has claimed to have recognized revenue and cost following the percentage completion method on the basis of proportion of cost contract costs , 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 6 - incurred for work performed till the reporting date to the estimated total contract costs. It is further an admitted fact that the books of accounts of the Appellant are audited under the Companies Act and in the notes to the financial statement, the method recognized to account for revenue and expenditure has been given in Schedule-11 of significant Accounting Policies and Notes to the Accounts. Accounting Policy (e) with regard to revenue recognition is reproduced hereinunder:

Note (e) "Shandong Tiejun Electric Power Eng. Co. Ltd is following the "percentage of completion Method" of accounting for the project as per Accounting Standard 7(Revised) Construction Contracts. Accordingly. Project Revenue is recognized as under: The company has fixed price construction contract with Adani Power Limited and Jhajar Power Limited The company started recognizing revenue in the financial year 2007-2008 as the outcome of the contract can be estimated reliably. Contract Revenue and expenses are recognized as revenue and expenses are recognized and expenses upto the stage of completion as on 31.03.2009 The management has estimated cost for the entire contract and worked out percentage of completion for each year on the basis of cost incurred as per audited accounts. Accordingly, revenue is recognized on the basis of audited corresponding percentage to cost estimates given by the management for the entire project period till date ie. 31.03.2009 as per audited accounts. Determination of Revenues under the percentage of completion method and provision for loss necessarily involves making estimates of costs to be incurred by the Management, which is being of technical nature have been relied upon by the Auditors. The difference between billed revenue and working below is accounted as Unbilled contract Revenue due. e) The AO during the course of assessment proceedings asked the appellant to furnish basis of estimating budgeted cost. In this connection, the Appellant vide letters dated 21/12/2011 and 29/12/2011 submitted to the AO that the management has estimated total cost of the project having regard to the experience in executing the contracts, tenders and quotations from various vendors and sub contractors. The Appellant further submitted detailed break-up of the estimated profit & loss account for entire project for five financial years 2007-08 to 2011- 12. The Appellant further submitted to the AO that while obtaining order u/s 197 of the Act, the Appellant has been submitting the details of budgeted cost to the tax the office, which have already been accepted by the department. The Appellant also placed on record the audited financial statements for F.Ys 2009-10 and 2010 11 and submitted and claimed that from the perusal of such , 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 7 - financial statements, it is established that the Appellant has actually incurred the cost as estimated. f) One of the objections of the AO is that the Appellant ought to have followed another method of stage of completion of the project i.e. (c) Completion of a physical proportion of the contract work. The AO has further observed that as per Annexure 3 of the contract entered into by the Appellant with Adani Power Ltd, the payment to the Appellant shall be released on the basis of milestones prescribed in Annexure 3, and till the reporting date, the Appellant has raised invoices of Rs.l30,86,91,429 which shows that physical work of the contract is completed to that extent only. Therefore, AO was of the view that the Appellant ought to have followed method (c) completion of a physical proportion of the contract work as prescribed in para 29 of AS 7, and accordingly, the difference between the actual expenditure incurred ie. Rs.211,41,21,308 and the invoices raised ie. Rs 130,86,91,429/to Adani Power Ltd, for physical work performed, ought to have been reflected in accounts as work in progress, the invoices for which should be raised in the next accounting year. The AO failed to realize that this would have resulted in much lesser revenue being recognized in the year under appeal and most probably net loss being reported.

Now, to sum up, books of account have been maintained and produced, the accounts have been subjected to audit as required, and the appellant has finalised the annual accounts, on the basis of percentage completion method based on total estimated cost. As far as the estimated cost of project concerned, I agree with the appellant that the assesse having experience in the field of work and who is taking the contract is normally the best judge. The only foul play suspected in estimation can be to initially show very high estimated cost of completion so that it may lead to deferment of tax. In the present case, I find that the figures of 3 years were made available to the AO at the assessment stage itself. There is no big difference in estimated cost and profit percentage declared from year to year. There is no reason therefore to suspect that the figures of estimated cost were deliberately tinkered with. In fact the project has been completed in 2012 itself and it is not the case that it is a long drawn project where undue deferment of tax was the motive. The AO's remark that stage of completion is a better method is not universally applicable. That is why different methods including the percentage of total estimated cost applied by the appellant have been suggested in the accounting standards. The milestone method or the stage of completion method can be very inappropriate where the contractor and contractee agree for terms of payment much different from the actual stage of work (cost of work completed) In some cases the contractee who becomes very dependent on the contractor , 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 8 - for completion of work once the work is given and started would like to retain substantial portion of payment till completion as a guarantee for the contractor being forced to complete the work. In other cases, the contractor may have capital deficiency/require heavy machinery to be purchased etc. and may bargain for upfront heavy payments at initial stages. In both these cases, recognizing revenue on completion of certain stages according to payment terms or raising of bills cannot be the best method. I do not find any wrong in the method adopted by the appellant. As observed earlier, there is no big difference estimated cost and profit percentage declared from year to year. The expenses have been audited and no substantive defect has been discovered/pointed out. The rejection of books of accounts u/s 145 (3) is not held justified these circumstances. I have noted that the jurisdictional Gujarat High court decision in the case of CIT vs. Advanced Construction Co. (P) Ltd reported in 275 ITR 30, wherein it has been held that the provision, therefore specifically provides that the choice of method of accounting lies with the assessee, the only caveat being that it has to show that the chosen method has been regularly followed. The section is couched in mandatory terms and the Department is bound to accept the assessee's choice of method and regularly employed, except for the situation, wherein the Assessing officer is permitted to intervene, in case it is found that true income, profits and gains cannot be arrived at by the method employed by the assessee. In the present case, the tribunal has categorically found that "the assessee has followed the standard accounting method as this being the first year of the business it was the sole choice of the assessee to adopt a particular method of accounting contemplated under section 145 of the Act"

9. The then Ld CIT(A), Gandhinagar has, in his order for A.Y.2010- 11 in Appeal No. CIT(A)GNR/46/Intl Taxn/2013-14 dated 28/08/2014 has followed the order of his predecessor and reproduced the above-mentioned finding in his order. To avoid duplication, the finding in the order of Ld CIT(A) for A.Y.2010- 11 is not reproduced here.

10. During the course of the appellate proceedings, the Appellant further submitted that the order of C1T(A) for Lead matter i.e. A.Y.2009-10 has been confirmed by the ITAT in dated 18/01/2017. The Hon'ble ITAT has held as under :-

"In view of foregoing, we, therefore, uphold the findings of Id. CIT(A) that the assesses fulfilled all conditions prescribed u/s 44BBB(2) of the IT Act and also has followed one of the recognized methods prescribed for determination of stage of completion of contract as prescribed in para 29 of the Accounting Standard- 7 "Construction Contracts " as recognized by the ICAI and the Central Government. Assessee has followed , 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 9 - correct method of accounting in terms of Section 44BBB(2) read with Section 145(1) & (2) of the IT Act. Consequently we hold that the Id. AO's action of rejecting books of accounts in terms of Section 145(3) of the IT Act and assessing income u/s 44BBB(1) of the IT Act. on presumptive basis is not justified, the order of Id. C1T(A) is upheld. Our view is fortified by Delhi 1TATjudgment in the case of Royal Jordanian airlines (supra) which after dwelling over all relevant aspects of charging and mechanical provisions, statutory mandate, and jurisprudence of regular assessment vis-a-vis presumptive assessment and catena of judicial precedents as detailed in this order. "

11. The Appellant has further contended before me that the aforesaid order of the Tribunal was challenged by the Department before the Hon'ble Gujarat High Court by filing appeal in Tax Appeal No.623 of 2017; however, the same has been dismissed by the Hon'ble Gujarat High Court on 18/09/2017. The Hon'ble Gujarat High Court has held as under :

"6. Under sub-section (I) of section 44BBB of the Act therefore in case of 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 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.

, 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 10 - 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 assesses 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 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.

12. Therefore, respectfully following the orders of Hon'ble Gujarat High Court in the case of the Appellant itself for A.Y.2009-10, as well the order of Hon'ble ITAT, it is held that the action of Ld AO in rejecting books of accounts of the Appellant and estimating income at Rs.103,02,46,617/ is not sustainable. I further hold that the Appellant has rightly and legitimately offered income u/s 44BBB(2) of the Act. I further reject the action of Ld AO in making alternative addition u/s 44BBB(1) of the Act.

13. In view of above, the addition made by the AO by rejecting the books of accounts and estimating the income u/s 44BBB(1) of the Act as well as on the basis of comparable companies are hereby deleted. Accordingly, Grounds Nos. 1 to 5 as raised by the Appellant in the Grounds of Appeal are allowed.”

In view of the above, following the above judicial precedents in the case of assessee itself, Ground nos. 1 & 2 of the Revenue are dismissed.

8. Ground nos. 3, 4 & 5 are interconnected and are consequent to ground no.2. The learned CIT(A) has dealt this issue from para 19 to 27 wherein he has dealt with the issues raised by A.O. and has decided in favour of assessee by relying on the decisions of Hon’ble Tribunal and Hon’ble Gujarat High Court in the case of assessee itself.

i) The Ld. CIT(A) erred in law and on facts in holding that the action of the AO in rejecting the books of account of the assessee 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 11 - company was incorrect inspire of clear evidence brought on record that the profit computed by the assessee was not reliable. ii) The Ld. CIT(A) erred in law and on facts in holding that the action of the AO in resorting to estimation of income on presumptive basis at 10% u/s 44BBB(1) or alternately @ 11.79% under normal provisions of the Act was not correct. iii) The Ld. CIT(A) erred in holding that in the present facts and circumstances, CUP was a better method for benchmarking as against TNMM adopted by the TPO. iv) The Ld. CIT(A) erred in holding that the transaction of awarding of contract by Adani Power Limited and Jhajjar Power Limited to Shandong HO is a proper CUP for the transaction 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 with the transaction between APL/JPL and Shandong HO which merely related to awarding of contract. v) The Ld. CIT(A) erred in law and on facts in holding that the comparables selected by the TPO were functionally incomparable without assigning any reason whatsoever. vi) Therefore the order of the Ld. CIT(A) deserves to be deleted and that the order of Assessing Officer be restored.

“15. We have heard the rival contentions and perused the record placed before us. So far as the issue that whether the transfer pricing provisions are applicable on the transactions between the Shandong HO and Shandong Project Office in India, we find no infirmity in the findings of the learned CIT(A) that the transactions between both the entities are deemed international transactions and the transfer pricing provisions are applicable between the foreign company i.e. HO and its PE, by observing as follows:- "7.5.2 I am unable to agree with the contentions of the appellant that the transactions between head office of the appellant company and its 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(1)(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 DTAA also stipulates that the HO and the PO of the 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 12 - 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 DTA A and para 15, 16 & 17 of the commentary on Article 7 on Model tax convention published by OECD in 2010 also states that permanent establishment is to be treated as a functionally separate entity. Accordingly, the profits to the PE shall have to be attributed at Arm's Length Price. In the facts of the present case since the AE (HO) entered into an agreement with APL and JPL to execute the contract of power project for2 APL and JPL. 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 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 and JPL, the transaction between appellant and APL and JPL is a deemed international transaction u/s. 92B(2). Accordingly, it is held that the TPO is justified in holding the transactions between the appellant and its head office as international transaction.

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(iiia) as a fixed place of business through which the business of 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 the 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 filed report under form 3 CEB wherein transactions between itself i.e. the PO and its Head office in China is reported.

Accordingly, I hold that the transfer pricing provisions are applicable where transactions have taken place between the foreign company i.e. HO and its PE in India i.e. PO."

16. Further coming to the issue of application of method for calculating the Arm's Length Price, we find that the Assessing Officer applied the TNMM method; whereas, the learned CIT(A) has held that the CUP method is most appropriate method. Learned CIT(A), while deciding that the CUP method is the most appropriate method, as pleaded by the assessee, observed following findings:- "8. As mentioned above, the appellant company has alternatively submitted that the AO ought to have selected CUP as Most Appropriate Method over TNMM in view of availability of CUP of APL & 3PL transaction with HO of the appellant 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 13 -

company more so when the transactions are functionally comparable. I have also perused judicial pronouncements cited by the appellant company to contend that where CUP is available, CUP method should be followed in preference to other methods for determination of the ALP. I find force in the contention of the appellant company that CUP is the most appropriate method for determining ALP in the given set of facts in view of availability of CUP of APL & JPL with HO. Further, I hold that transaction of APL & JPL with HO of the appellant can be treated as CUP being functionally comparable uncontrolled transactions in terms of Rule 10B(2) & (3) of the IT Rules and more particularly in view of the fact that entire income from the transaction is offered for tax in India.

Accordingly, I hold that on this count also the transfer pricing addition is unsustainable and is hereby deleted."

17. Learned CIT(A) further observed that the transfer pricing addition was incorrectly made by selecting functionally incomparable transactions by observing as follows:- "10. I have perused the above submission of the appellant company. The appellant has pointed out various shortcomings in -application of filter while selecting comparable companies and also emphasized that the comparable transactions selected by the AO for benchmarking the deemed international transactions for determining ALP are not comparable uncontrolled transactions in terms of Rule 10B & Rule 10C of the IT Rules r.w Section 92C of the IT Act. Also I have perused the submission filed vide page no 60 to 80 of the Paper Book more particularly detailed information of the said comparables provided vide page nos 81 to 146 of the Paper Book. Further, I have perused the information about 10 comparable companies provided vide above referred submission dated 1st August, 2014. I have found that the comparables selected by the AO are not comparable in view of functional compatibility of the said transactions, absence of segment information for individual line of business in case of those comparables which are engaged in various line of business and generalized filter applied for selection of comparables.

Accordingly, I hold that the transfer pricing addition is incorrectly made by selecting functionally incomparable transactions and is therefore deleted."

18. We further find that the transactions 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 transactions of Shandong PO. For the sake of clarity, we reproduce Rule 10C of the Income-tax Rules, wherein with respect to section 92C of the Act relating to the most appropriate method of calculating the Arm's Length Price, which reads as under:- "10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 14 -

transaction, and which provides the most reliable measure of an arm's length price in relation to the international transaction, as the case may be.

(2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely;-- (a) the nature and class of the international transaction; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method."

“(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 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?”

The questions of law have been answered in favour of the assessee by Hon’ble High Court from para 14 to 18 which for the sake of completeness is reproduced below:

“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 81 & 82/Ahd/18 [DCIT vs. M/s. Shandong Tiejun Electric Power Engineering Co. Ltd.] A.Y. 2011-12 to 2013-14 - 16 - 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 prices are the same, the conditions 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 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.

This Order pronounced in Open Court on 04/03/2020

Sd/- Sd/- (RAJPAL YADAV) (T. S. KAPOOR) ACCOUNTANT MEMBER VICE PRESIDENT Ahmedabad: Dated 04/03/2020 True Copy S. K. SINHA आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. राज�व / Revenue 2. आवेदक / Assessee 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाइल / Guard file. By order/आदेश से,

उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद ।