COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION AND TRANSFER PRICING) vs. SHANDONG TIJUN ELECTRONIC POWER ENG. COMPANY LTD.

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 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   assessment   year   is   2010­11   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.

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 Standard­7   (AS­7).   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,

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.

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/­.

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 Project

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 comparable

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.

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.

1 It was submitted that since during the course of   assessment   proceedings,   the   assessee   was 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 above­mentioned 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.

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 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 pre­requisite 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.

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.

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 Income­tax 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.

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 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.

Section   92C   of   the   Act   provides   for computation   of   arm’s   length   price.   Sub­section (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 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).

In   terms   of   rule   10A   (ab)   of   the   rules, “uncontrolled   transaction”   means   a   transaction between   enterprises,   other   than   associated enterprises,   whether   resident   or   non­resident. 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: “10B Determination   of   arms’length   price under section 92C.­ (1) For the purposes of sub­section   (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 property

Rule 10C of the rules bears the heading “most appropriate   method”.   Sub­rule   (1)   thereof provides that for the purposes of sub­section (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. Sub­rule (2) provides for the factors which are required to be taken into account in selecting the most appropriate method as specified in sub­rule (1).

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

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 vis­à­vis   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 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.

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 vis­à­vis 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 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.

In   the   light   of   the   above   discussion,   the