DCIT, CIRCLE- 1(1)(1), INTERNATIONAL TAXATION, NEW DELHI vs. CONTINENTAL ENGINEERING CORPORATION, GURGAON

ii) The economic analysis carried by assessee is erroneous and devoid of iii) Assessee have been subcontracted the work of construction which is in the nature of technical services. It is evident that the losses arising out of the projects undertaken by the AE have been pushed to the assessee, since no rational and prudent business person would ever undertake a contract work on cost only. Further, nothing has been brought on record by assessee to demonstrate the rationale of value of project work undertaken. iv) Moreover, it is pertinent to note that the decision to enter into a contract with a third party was taken by the AE alone and therefore any profit or loss arising as a result of such contract should only be borne by the AE. On the other hand the Assessee, being a captive sub contractor is expected to earn a markup on cost for the work undertaken by it for the project, since it had no role in deciding the third party contract amount or the decision to enter into such a contract. Moreover, no third party would have agreed to take a sub-contract from the main contractor on loss due to the reason that the ultimate receipts from the customer (to the extent of work sub contracted) will be passed on. v) Assessee has not brought anything on record to justify its claim that the Assessee had charged a markup or the Assessee had a role while quoting the price to the customer (BMECL) vi) Assessee has not given any details of the cost analysis for bidding the project and nor the Assessee has disclosed the markup percentage that it has charged while bidding for the project. vii) Assessee has stated that the Assessee has incurred loss due to extraordinary circumstances, however, the Assessee has taken no pain to explain these circumstances viii) Therefore, losses earned by the Assessee are due to the mismatch in the contract work allocated and apportionment of contract revenue, in case it is accepted that the Assessee had before and provided its inputs while JV was securing contract from the customer ix) As mentioned by the Assessee, in its earlier reply that the Assessee has only one customer the related party JV companies. The contract for which the Assessee is working is not even in its name rather is in the name of JV. x) Moreover, the Assessee has not provided any explanation/details/traits/ characteristics of the Assessee which are akin to an entrepreneur. Therefore, there is no basis to conclude that the Assessee is an entrepreneur since any entrepreneur would have at least taken a contract in its name would have been exposed to third party customer which would have acted in its favor in terms of marketing.

8. Based on the above observations, TPO had benchmarked the ALP adjustments of Rs.53,60,88,338/-.

9. Aggrieved with the above order, assessee preferred an appeal before Ld. CIT(A)-42 New Delhi and filed detailed submissions which are reproduced at page 5 to 20 of the impugned order. After considering the detailed submissions of the assessee, Ld CIT(A) allowed the appeal of the assessee by observing as under:- “5.25 Before analysing the issue of service provider or entrepreneur, it may be relevant to note that the Indian employer say DMRC/BMRCL float global tender for execution of complex technical work. At times, the technical capability to perform such complex technical assignment does not vest with single entity and therefore, joint ventures (JVs) are formed to meet technical capability and financial capability to perform the complex assignments like setting up of Metro Rail system in Delhi/Bangalore. Once, JV is a successful bidder in a project, an agreement is entered into by the participating partners of JV to freeze the allocation of scope of work and corresponding contract value among the participating partners. However, as a matter of practice, the employer interacts with lead JV partner/JV. The JV entity is for the administrative convenience of the employer. There is no principle/agent relation between JV and its participating partners. As a matter of practice, different participating partners of JV raise invoices to the JV, which in turn raises one combined invoice to the employer for convenience of employer. There is no other functional utility of JV entity which is acting as an intermediary between the participating partner and employer.

5.26 It is a fact that functions performed by the entities play very critical role in deciding the arm's length price in transfer pricing analysis. I find that core functions, key responsibilities, key decision making and level of individual responsibility for the key decisions are important factors to identify the party, which has control over the risks. The conventional wisdom is that if the core functions/main operations are located in india, which in turn require important strategic decisions by management and employees of Indian entity to provide such services and control over the operational and other risks. JV in this case has only administrative functions for which all participating units contribute for the functioning of JV. JV does not own any asset and risk is also not borne. Identification of risk and the party who bears such risks are important steps in comparability analysis. The conduct of the parties is key to determine whether the actual allocation of risk conforms to contractual risk allocation. Allocation of risk depends upon ability of the parties to the transaction to exercise control over risk. Accordingly, the project office has undertaken complete functions related to assigned scope of work of the contract and in the process of undertaking functions, it has owned assets (Tunnel Boring Machine) and borne core risks. Under these circumstances, it is wrong on the part of the AO/TPO to treat the Indian project office as risk free entity.

5.27 I find that the another argument of the TPO to reject CUP method is that that its AE has pushed losses to the project office. However, it is interesting to note that the loss incurred during the year at the entity level in this case does not pertain to the project run by Joint venture. The table below shows the profit/loss incurred project wise for all projects during the year (Refer submission of the assessee vide letter dated 17.11.2017). It is noted that there is a profit of Rs. 6,22,76,903/- in respect of CEC-CICI-SOMA JV project where the international transaction of receipt of construction income of Rs.1,73,17,80,801/- has been reported. This international transaction was taken as basis for rejection of CUP method by the TPO. However, in such a situation where the assessee has earned a profit in all JV run projects as shown in the table below, it is wrong on the part of TPO to hold that the loss has been pushed to the project office by AE.

5.28 The table above shows that the loss has been incurred in 3 projects where CEC is the direct contractor and there is no AE involved in the contract Further, it is noted that the international transactions during the year pertained only to 3 projects (refer table below) which were undertaken through joint venture.

5.29 Since the transfer pricing adjustment is in respect of determining the arm's length price of the international transactions, therefore, it is important to analyse the aforesaid 3 projects.

5.30 It may be relevant to mention that the main objective of transfer pricing is to take advantage of differential taxation between countries, by structuring transactions such that the legal incidence for tax occurs in a jurisdiction with lower tax rates. Accordingly, the endeavour of various states, or more precisely, their tax administrators, through various transfer pricing enactments and judicial rules, is to ensure that such devices or mechanisms are not used to locate profits and income in such a manner as to shift to low tax regimes, with the tax payer's ultimate objective of reduced tax burden, when in reality the incidence of tax in the host jurisdiction should actually be higher. Transfer pricing laws thus seek to address the tension between these competing objectives. Crucially, in India, in balancing these objectives, the precise limits of the methods and mechanics of calculating the arm's length price are provided for by the IT Act and the IT Rules made thereunder, so as to ensure certainty in these calculations rather than roving enquiries.

5.31 Specifically, the object behind introduction of Chapter X of the IT Act was to prevent assessees from avoiding payment of tax by transferring income yielding assets to non-residents whilst at the same time retaining the power to benefit from such transactions i e. the income so generated. The Central Board of Direct Taxes ("the CBDT") by its Circular No. 14/2001 dated 12.12.2001 [2001 252 ITR (ST.) 65) spelt out the scope and effect of transfer pricing provisions The rationale for substituting the existing Section 92 of the IT Act was explained in the following extract of the said Circular:

Under the existing section 92 of the Income Tax Act, which was the only section dealing specifically with cross border transactions, an adjustment could be made to the profits of a resident arising from a business carried on between the resident and a non-resident, if it appeared to the Assessing Officer that owing to the close connection between them, the course of business was so arranged so s to produce less than expected profits to the resident. Rule 11 prescribed under the section provided a method of estimation of reasonable profits in such cases. However, this provision was of a general nature and limited in scope. It did not allow adjustment of income in the case of non- residents. It referred to a close connection? which was undefined and vague. It provided for adjustment of profits rather than adjustment of prices, and the rule prescribed for estimating profits was not scientific It also did not apply to individual transactions such as payment of royalty, etc., which are not part of a regular business carried on between a resident and a non-resident. There were also no detailed rules prescribing the documentation required to be maintained With a view to provide a detailed statutory framework which can lead to computation of reasonable, fair and equitable profits and tax in India, in the case of such multi-national enterprises, the Act has substituted section 92 with a new section, and has introduced new Sections 92A to 92F in the Income Tax Act, relating to computation of income from an international transaction having regard to the arm's length price, meaning of associated enterprise, meaning of international transaction, computation of arm's length price, maintenance of information and documents by persons entering into international transactions, furnishing of o report from an accountant by persons entering into international transactions and definitions of certain expressions occurring in the said sections.

5.32 In the backdrop of the above discussion, I may now proceed to analyse the international transactions project wise in this case from transfer pricing perspective.

CEC-SOMA JV (Contract awarded by Delhi Metro Rail Corporation (BC-16)} 5.33 CEC-SOMA JV worked on the Contract awarded by Delhi Metro Rail Corporation (BC-16). The letter of approval for this project was dated 18/12/2006 and the contract with JV was signed on 29/01/2007. The project duration was from February 2007 to July 2010. The scope of the work included Phase II of Delhi Metro. The appellant submitted that total profit of Rs. 51,97,454/- was earned out of this specific project based on percentage completion method.

5.34 During the year, the international transaction pertaining to this project is in the nature of recovery of construction income of 1.73 cr. by CEC- SOMA JV from the appellant due to negative variation in escalation. The recovery is triggered by DMRCL against CEC-SOMA JV and the same recovery without any mark-up has been passed on to the appellant against the IPC raised by the appellant. Minor operations related to this project got performed during the subject year. The recovery was in respect of work performed in preceding years.

5.35 As regard, the arm's length price of the same, the assessee submitted that the adjustment made by the Indian employer (DMRC) has been passed on completely to the assessee by the JV without any retention and therefore, the transaction effectively is between third parties. The appellant claimed that the colour of international transaction has come due to transfer of funds through JV due to the scheme of the contract. The transaction in this case is effectively uncontrolled because back to back, the payer is third party for the end payee.

5.36 The appellant clarified that "variation" is basically any amount charged which is over and above the original contract value. Variation could be positive or negative. Negative variation is the reversal of excess part of IPC (Interim Payment Certificate) issued on account of negative variation of material price/work. This reversal of excess IPC does not impact profit & loss account because the revenue is recognized in the Profit & Loss account as per the percentage of completion method. P&L Account has nothing to do with negative variation and the actual billing. The negative variation is therefore routed through the Balance Sheet. in totality, the IPC and the variations would equal to the revenue booked through Percentage of Completion method after completion of entire project.

5.37 It is important to note that negative variation in escalation is due to change in material cost or change in scope of work. Such changes are not under the control of project office or JV, and the IV project office as well as the JV merely gives effect to the same. In other words, this transaction is effectively not between JV and project office but between DMRCL and project office, which are independent parties.

5.38 I find that the JV is a pass through entity because its existence is for administrative convenience in managing JV run project. Therefore, the decision taken by the employer (DMRCL) related to cost variation has to be routed through JV office to finally pass it on to the participating partner of JV, for example, project office of CEC, in this case. There is no value addition made by the JV and no risk is borne by the IV. There is no dispute that the negative variation was pertaining to the appellant only.

5.39 Section 92(2) of the IT Act provides that where in an international transaction, the parties allocate or apportion or contribute any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided in connection with benefit, service or facility, the cost or expense allocated or apportioned to, or, as the case may be, contributed by, any such enterprise shall be determined having regard to the arm's length price of such benefit, service or facility, as the case may be. As discussed above, I do not find the transaction to involve any benefit, service or facility creation between JV and the project office. Therefore, the provisions of section 92 are not applicable in this case. The transaction between JV & Project office is limited to the extent of administrative convenience. There is no other function/asset/risk involved between JV & Project office.

CEC-CICI JV (CC04-DMRC Project).

5.40 This JV received letter of approval on 29/12/2011 from DMRC. The project duration was from February, 2010 to January, 2015. The scope of work included Phase III of construction of Mukundpur- Yamuna Vihar corridor of Delhi MRTS design and construction contract. Following three international transactions pertain to this project.

5.41 During the year, the project was in the initial phase where investment of Rs. 6,00,00,000/- has been made in common pool of JV by the project office (appellant) as one of the JV constituents. It is seen that the fixed lumpsum contract price for CC-04 Contract was of Rs. 416.8 Crore. The share of JV office in the contract value is around 4 to 5% of the contract price for the administrative functions performed by JV office and the same has been frozen in the JV agreement signed amongst all partners of the JV. Therefore, the JV has taken initial investment from all the constituents to fund the JV office to kick start the project and in this regard, the share of the project office (appellant) for the subject year was of Rs.6 crores. The appellant submitted that the similar contribution has been taken by the JV from other partners of IV. Since JV has received contribution from all parties as per the agreement, therefore, the amount of transaction of contribution to JV is at arm's length. Further, on receipt of the funds from the Employer at a later stage, the JV settles the account as per the agreement between JV & participating partner.

5.42 Further, since, this is the first year of the project, therefore, the mobilization advance of Rs. 11,00,00,000/- for the project has been released by JV after receiving the same from the employer. As per the appellant, no major project activity related to scope of work took place during the year. Effectively, this investment and mobilization advance is in the nature of advance, and it is not debited in P&L account for the subject year. The said transaction of advance and the initial investment is in line with the agreement between JV & Participating partner which is frozen at the start of the work. Further, similar transactions have also taken place vis-à-vis other partners of JV partner in accordance with the frozen share of respective party and therefore, the such transactions are at arm's length.

5.43 As regards the reimbursement of Rs.1,16,22,850/- received by the appellant from CEC-CICI JV, the appellant submitted that the entire work is allocated by JV between JV partners including assessee and at times, the partners incur expenses on behalf of each other; for which they reimburse each other on cost to cost basis. The appellant submitted that these transactions are occurred to facilitate the other party and no profit element is involved. During the year, the assessee claimed to have received reimbursement on cost to cost basis from JV for expenses such as bank guarantee charges, salaries and other miscellaneous expenses such as telephone, printing, stationary etc. on behalf of CEC-CICI JV 5.44 It may be relevant to take note of the findings of Hon'ble Delhi High Court in the case of Cushman and Wakefield. The HC ruled that even though the transaction involves only a recovery of cost, as the transaction is between two AEs, it is necessary to test whether an uncontrolled entity for the same or comparable services charges an amount less than or equal to or more than what was charged to the Taxpayer by the AEs. Application of Section 92(3), which does not permit application of ALP if it has the effect of reducing tax incidence, cannot be inferred merely because the AEs recover costs without a mark-up. Α comprehensive transfer pricing (TP) analysis is required to test the appropriateness of the costs that are allocated as well as for determining applicability of Section 92(3).

5.45 As per ITS 2009 Transfer Pricing Guidelines accepted by the OECD, when an AEs is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may be not appropriate to determine ALP as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than that would be appropriate for the performance of the services themselves.

5.46 However, it is noted that in this case, while incurring expenses in normal routine by the project office, there are situations where expenses of common nature for project office and JV are incurred and at a later date, the debit note is raised for recovery of the expenses incurred on behalf of JV. For example, particular resource has been engaged by project office and the same resource has also worked partly for JV, in such a situation, the salary for the part of work performed for JV is recovered. So effectively, there is no agency function performed by the project office (appellant) in this case for the JV and therefore, there is no case for charging mark up in this case.

CEC-SOMA-CICI JV (Contract awarded by Bangalore Metro Rail Corporation) (UG-2):

5.47 Contract was awarded on 10/03/2010 by BMRCL to CEC-SOMA CICI JV for the designing and construction of underground stations and tunnels in underground stretch. It is further important to note that during the year, the appellant had received a sum of Rs. 1,731,780,801/- from JV against IPC (Interim payment certificate) raised during the year. The interim payment certificate of Rs. 1,731,780,801/- has been raised based on completion of milestones as defined in the contract and its certification of the same by the engineer.

5.48 The total value of awarded contract amounting to INR 9,952,000,000 was divided into following parts with the percentage of amount payable to the total value of the contract:-

5.49 Out of the total works awarded by BMRCL as specified above; most of works related to construction of tunnel were allocated to the assessee and rest of the works were allocated between SOMA, CICI and JV in the following manner:

5.50 As regard, the arm's length price of the same, the assessee submitted that the Interim Payment Certificate (IPC) raised by the assessee based on milestones as per the contract to the JV has been passed on completely to the Indian employer (BMRCL) by the JV without any mark up and therefore, the transaction effectively is between third parties. The JV had acted as pass through entity while receiving the IPC from project office as well as while passing on to BMRCL. There is no value addition made by the JV and no risk is borne by the JV. There is no dispute that the IPC has been raised as per the contract value assigned to project office. No benefit, service or facility is linked to the transaction between JV and the project office. The service connection is effectively between the project office and BMRCL. Therefore, the provisions of section 92 are not applicable in this case. The appellant claimed that the colour of international transaction has come due to transfer of funds through JV due to the scheme of the contract. Since JV has not retained even a single paisa out of the proceeds, therefore, as per the assessee, the transaction in this case is effectively uncontrolled because back to back, the payer is third party for the end payee.

5.51 The assessee stated that the price charged in uncontrolled transaction is same as the price charged in controlled transaction. Accordingly, the transaction is claimed to be concluded at arm's length using internal comparable uncontrolled price method. It is important to note that there is no dispute on the fact of back to back payment by JV to the assessee against the invoice raised by the appellant.

International Transactions with Head Office of the appellant:-

5.52 It is noted that the appellant company had made payment as well as receipt reimbursement from its head office payments The appellant has received reimbursement of Rs 31,914,520/- and made payment of Rs. The appellant submitted that it has incurred some general expenses which is in the nature of payment towards SAP license taken by CEC, Taiwan and cost is allocated between group entities in the portion of licenses used. It is submitted that the expenses are incurred on back to back basis. b) Expenses pertain to related party amounting to Rs. 26,783,712/- The appellant submitted that these expenses pertain to reimbursement of salaries of Taiwan's expatriates working for Indian operations. These expenses are incurred on back to back basis c) Bank Guarantee charges amounting to Rs. 28,540,407/- In this regard, it is submitted that CEC Taiwan provided guarantees for Indian operations. These charges are the bank guarantee charges. These expenses pertain to related party (AE).

5.53 It is noted that the head office as well as project office have incurred expenses on behalf of each other and therefore, the reimbursements are from both sides i.e. inbound as well as outbound. No mark up has been claimed to be charged by both the sides in this case. Further, it is important to note that the reimbursements are in respect of such expenses (salary, information technology and bank guarantee charges) where the payment has been made to independent parties say for bank guarantee charges, the charges have been paid to bank and salary has been paid to employees etc. Therefore, the transactions of cost to cost reimbursements are bound to be at arm's length.

5.54 Further, the appellant has received a sum of Rs.30,40,04,184/ on account of capital infusion by the head office to the appellant. This contribution is capital in nature and does not impact profit & loss account. Therefore, the benchmarking of such transaction using TNMM method is factually incorrect 5.55 The appellant has received a sum of Rs. 19,86,013/- from CICI (related party). It may be added that CICI (CEC International Corporation (India) Pvt. Ltd.) is a company registered in India. In this regard, the appellant submitted that the assessee and CICI are JV partners and they incur expenses on behalf of each other and get reimbursements for the same. The appellant further averred that these transactions are occurred on cost to cost basis i.e. without charging any markup and there is no service element involved. No mark up has been claimed to be charged by CICI (related party in India) in this case.

5.56 After analysing all above discussed international transactions, I find that the international transactions can be broadly divided into following categories: a) Reimbursements, b) capital infusion, c) recovery of receipts due to negative variation, d) receipts against interim payment certificates (IPC) e) capital contribution to JV f) mobilization advance received from JV 5.57 All international transactions as discussed above have no impact on the profit & loss account because the P&L account is based on project completion method. Further, there is only one international transaction, which is the receipt of Rs. 1,731,780,801/- against services delivered by the project office. All other transactions are not against any provision of services.

5.58 The appellant relied on the decision of ITAT, Hyderabad in the case of DCIT, Hyderabad vs. M/s IJM (India) Infrastructure. Ltd, to claim that for the purpose of transfer pricing applicability, Indian project office of a foreign company should be treated as a domestic entity. Further, by extending this logic. the appellant claimed that a transaction between JV & Project office should be treated as a domestic transaction and not as an international transaction under section 92B of the Income- tax Act, 1961 (the Act).

5.59 Further, it is noted that the TPO has compared the appellant with pure engineering service providers using TNMM as the most appropriate method. While doing so, the TPO has ignored the fact that the revenue recognition policy of the comparable company is different from the assessee because the revenue and costs in case of assessee are recognized in accordance with AS-7 as it is a construction company.

5.60 In the process of comparability; FAR analysis (i.e. analysis of functions performed, assets employed and risks assumed) plays very critical role in the acceptance or rejection of comparables. The appellant has highlighted that there is substantial difference in the ratio of Fixed Assets to Turnover of the company and of the assessee. Further, the appellant demonstrated the difference in the functions performed, fixed assets and inventory of the company and of the assessee.

5.61 The appellant pointed out that profit shifting is a way to shift funds from India to foreign entity intentionally. The assessee is a project office of CEC-Taiwan which carries out the allocated works related to construction carried out in India and whatever revenue the assessee generates from its Indian operations based in India is retained in India. CEC-Taiwan doesn't have any right to claim any share of revenue out of the total revenue generated from Indian business operations. It is noted that CEC-Taiwan is the only foreign entity with whom the assessee has entered into international transaction during the year. The transactions were in the nature of reimbursements and receipt of funds.

5.62 It is submitted that the concept of profit shifting is applicable where one party is situated outside India and another entity is based out of India and with intent to evade taxes in India; profits are shifted outside India. However in the relevant case, there cannot be any case of shifting since all the related parties who are the JV members are based in India. It is worth to note that SOMA (JV partner) is an unrelated party; accordingly, no shifting can be done in any transaction entered with third party.

5.63 In view of the above discussion, I find that the TPO has wrongly applied TNMM for benchmarking of arm's length price of international transactions. The transactions between JV & the appellant are international transactions only due to the specific arrangement of routing the invoices through JV office for administrative convenience.

Effectively, the transaction is between third parties. The international transactions in the nature of cost to cost re-imbursements is not against any service but for the expenses incurred on common basis in respect of third parties say salary, information technology, bank charges etc. Certain international transactions are in the nature of capital contribution and mobilization advances. Therefore, the arm's length price of such international transaction have been correctly benchmarked by the assessee. Moreover, the entire contract receipts pertaining to project office of CEC have been offered to tax in India, therefore, the profit shifting is not feasible. Accordingly, the ground of appeal is allowed.”

10. Aggrieved with the above order, the revenue is in appeal before us raising following grounds of appeal:-

1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in not upholding the TNMM method applied by the AO/TPO?

2. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in law in not appreciating the fact that the assessee is a captive sub-contractor which has been sub-contracted the work of construction which is in the nature of technical services. The assessee is expected to earn markup on cost for the work undertaken by it for the project since it had no role in deciding the third party contract amount or the decision to enter into such contract?

3. The appellant craves leave, to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.

12. On the other hand, Ld. AR submitted the detailed submissions at the time of hearing and also filed written submission, the same are reproduced below: -

1. 1. The Assessee in AY 2013-14 has undertaken 6 contracts/projects (3 independently and 3 through JVs). In AY 2014-15 the Assessee has undertaken 9 contracts/projects (6 independently and 3 through JVs). CIT(A)’s order. a. Para 5.4 of CIT(A) order for AY 2013-14, internal page.

21. For ease of reference, the same is reproduced hereinbelow – 5.4 During the year, the project office was working on 6 projects in all as per the transfer pricing study report. Out of the 6 projects, 3 projects (C12-NHAI,

C13- NHAI & ORR-HUDA) were undertaken d1rectiy as a contractor and other 3 projects (BC-16 with DMRC ,UG-2 project with BMRCL,CC04 with DMRC) were undertaken through above referred 3 separate joint ventures. The objective behind formation of joint venture is to extend and expand their capital, bonding capacity, or expertise by joining together with other competent contractors to perform work that is challenging either in terms of size or type. It is a most common practice of construction companies by making JVs. The scope of work is clearly demarcated between the participating partners of JV and participation ratio alongwith the responsibility of the respective parties to the joint venture is as per the agreement entered between them. JV as an entity handles the administrative matters and acts as single window for the main employer (DMRC/BMRCl.) for contract purpose. b. para 5.4 of CIT(A) order for AY 2014-15, internal page. 19.For ease of reference, the same is reproduced hereinbelow – 5.4 During the year, the project office was working on 8 projects in all as per the transfer pricing study report. Out of the 8 projects, 5 projects (C12-NHAI, C13-NHAI, ORR-HUDA, PWD & JMRCL) were undertaken directly as a contractor and other 3 projects (BC-16 with DMRC ,UG-2 project with BMRCL,CC04 with DMRC) were undertaken through above referred 3 separate joint ventures.As per the appellant, the objective behind formation of joint venture is to extend and expand their capital, bonding capacity, or expertise by joining together with other competent contractors to perform work that is challenging either in terms of size or type. The appellant added that it is a most common practice of construction companies by making JVs and the scope of work is clearly demarcated between the participating partners of JV and participation ratio alongwith the responsibility of the respective parties to the joint venture is as per the agreement entered between them. Further, it was submitted that JV as an entity handles the administrative matters and acts as single window for the main employer (DMRC/BMRCL) for contract purpose.

2. The Assessee is an independent entrepreneur and is capable of undertaking its own projects and performing its own functions directly as the contractor. It is primarily engaged for building tunnels and undertakes large infrastructure and construction projects. The details of independent contracts/ projects are mentioned in the CIT(A) order- a. Para 5.5, 5.6 and 5.7 of CIT(A) order for AY 2013-14, internal page. 21 &22. For ease of reference, the same is reproduced hereinbelow – 5.5 Brief description of the projects undertaken by the Project office of CEC (appellant) is as under: Hyderabad Bangalore National Highway (C-12 & C-13): 5.6 This project was undertaken directly by the appellant. The scope of work included construction of two sections of carriageway between Hyderabad & Bangalore. The project duration as per transfer pricing study report was from March, 2007 to November, 2010. The activity performed during the subject year were after the completion of the contract in November, 2010 on account of the “Defect Liability Period” clause of the contract. Loss of Rs. 9,92,65,225/- and Rs. 1,00,21,705/- were incurred in C-12 & C-13 respectively due to rectification activities performed after the completion of contract. Hyderabad Outer Ring Road (ORR) 5.7 This project was undertaken by the appellant directly. The scope of the work included construction of section of 6/8 lane access to controlled expressway from 11 km to 24.38 km. of ORR to Hyderabad. The project duration as per transfer pricing study report was from July, 2006 to July,2011. The project incurred profit of Rs. 20,44,777/- during the year. CEC-SOMA JV (Delhi Metro Rail Corporation (BC-16)):

b. Para 5.5 to 5.10 of CIT(A) order for AY 2014-15, internal page. 19&20. For ease of reference, the same is reproduced hereinbelow – 5.5 Brief description of the projects undertaken by the Project office of CEC (appellant) is as under: Hyderabad Bangalore National Highway (C-12 & C-13): 5.6 This project was undertaken directly by the appellant. The scope of work included construction of two sections of carriageway between Hyderabad & Bangalore. The project duration was from March, 2007 to November, 2010. The activity performed during the subject year wason account of additional scope of work/defect liability or both. Profit of Rs. 8,50,608/- and Rs. 49,81,074/-were incurred in C-12 & C-13 respectively due to rectification activities performed after the completion of contract. Hyderabad Outer Ring Road (ORR) 5.7 This project was undertaken by the appellant directly. The scope of the work included construction of section of 6/8 lane access to controlled expressway from 11 km to 24.38 km. of ORR to Hyderabad. The project duration was from July, 2006 to July,2011. The activity performed during the subject year was on account of additional scope of work/defect liability or both. The project incurred profit of Rs. 10,32,82,517/- during the year. JMRCL Project 5.8 The Assessee has entered into an agreement with Jaipur Metro Rail Corporation Limited on 5thOctober, 2013, subsequent to receipt of LOA dated 9th September, 2013 to execute a project for Design and Construction of Tunnel between Candpole and BadiChouper and reversal line by Shield TBM, Underground Metro Stations as ChotiChouper by Cut and Cover Method on East-West Corridor of Jaipur Metro (Phase 1B) at Jaipur, Rajasthan. The project was in progress during the year and incurred loss of Rs. 5,27,35,443/- during the year. PWD Project 5.9 The Assessee has entered into an agreement with Public Works Department (“PWD”) on 21stMay, 2013, subsequent to receipt of LOA dated 29th April, 2013 to execute a project for Comprehensive Development of Corridor (Outer Ring Road) between Mukarba Chowk to Wazirabad Chowk. State Highway C/o Flyover, Loops, Bridge across supplementary drain, FOBs, Footpath, Cycle Track, Widening of Road on embankment, Rain Water Harvesting Scheme, Electrical works and other allied works.The project incurred profit of Rs. 1,13,03,756/- during the year. CEC-SOMA JV (Delhi Metro Rail Corporation (BC-16)):

5.10 Contract is awarded by DMRCL to CEC-SOMA JV for the designing and construction of tunnel by shield TBM and four stations by cut and cover method. The project duration was from Feburary,2007 to July,2010. The entire work is divided into three schedules A, B and C.The total value of awarded contract amounting to INR 8,135,100,000; divided into three schedules which is as follows:-

3. The fact that the Assessee undertakes so many independent contracts itself each year, substantiates the fact that the Assessee is an entrepreneur and has the ability to function independently.

4. It is the case of the Assessee that it is not a sub-contractor in respect of the 3 contracts/projects undertaken through the JVs as stated by the TPO.

5. The objective behind formation of JV is to extend and expand its capital, bonding capacity, or expertise by joining together with other competent contractors to perform work. This is a common practice in the construction industry. The scope/work/duties/responsibilities/risks are clearly demarcated. (This finding is at para 5.4 of CIT(A) order for AY 2013-14-internal page. 21 and at para 5.4 of CIT(A) order for AY 2014-15-internal page. 19 as stated above.)

6. The CIT(A) has given a detailed finding and has analysed the fact as to why the JVs are formed. The Indian employer like Bangalore Metro Rail Corporation Ltd. (‘BMRCL’) or Delhi Metro Rail Corporation Ltd. (‘DMRCL’) float tender for execution of big contracts. At times, the technical capabilities to perform the entire contract may not vest with one entity and hence JVs are formed for meeting the eligibility criteria. Once JV is allotted the project and is the successful bidder, there is due allocation of work and contract value. However, for administrative convenience, Indian employer like Bangalore Metro Rail Corporation Ltd. (‘BMRCL’) or Delhi Metro Rail Corporation Ltd. (‘DMRCL’) tends to interact with the JV entity only. All JV partners raise invoice to the JV which in turn raises one invoice to the Indian employer for his convenience.

a. In para 5.25 and 5.26 of the CIT(A) order for AY 2013-14- internal page. 29 and 30. For ease of reference, the same is reproduced hereinbelow – 5.25 Before analysing the issue of service provider or entrepreneur, it may be relevant to note that the Indian employer say DMRC/BMRCL float global tender for execution of complex technical work. At times, the technical capability to perform such complex technical assignment does not vest with single entity and therefore, joint ventures (JVs) are formed to meet technical capability and financial capability to perform the complex assignments like setting up of Metro Rail system in Delhi/Bangalore. Once, JV is a successful bidder in a project, an agreement is entered into by the participating partners of JV to freeze the allocation of scope of work and corresponding contract value among the participating partners. However, as a matter of practice, the employer interacts with lead JV partner/JV. The JV entity is for the administrative convenience of theemployer. There is no principle/agent relation between JV and its participating partners. As a matter of practice, different participating partners of JV raise invoices to the JV, which in turn raises one combined invoice to the employer for convenience of employer. There is no other functional utility of JV entity which is acting as an intermediary between the participating partner and employer. 5.26 It is a fact that functions performed by the entities play very critical role in deciding the arm’s length pricein transfer pricing analysis.I find that core functions, key responsibilities, key decision making and level of individual responsibility for the key decisions are important factors to identify the party which has control over the risks. The conventional wisdom is that if the core functions/main operations are located in India, which in turn require important strategic decisions by management and employees of Indian entity to provide such services and control over the operational and other risks. JV in this case has only administrative functions for which all participating units contribute for the functioning of JV. JV does not own any asset and risk is also not borne. Identification of risk and the party who bears such risks are important steps in comparability analysis. The conduct of the parties is key to determine whether the actual allocation of risk conforms to contractual risk allocation. Allocation of risk depends upon ability of the parties to the transaction to exercise control over risk. Accordingly, the project office has undertaken complete functions related to assigned scope of work of the contract and in the process of undertaking functions, it has owned assets (Tunnel Boring Machine) and borne core risks. Under these circumstances, b. In para 5.26 and 5.27- internal page. 28 and 29 of CIT(A) order for AY 2014-15. For ease of reference, the same is reproduced hereinbelow – 5.26 Before analysing the issue of service provider or entrepreneur, it may be relevant to note that in a case where the Indian employer say DMRC/BMRCL float global tender for execution of complex technical work,the technical capability to perform such complex technical assignment may not vest with single entity and therefore, joint ventures (JVs) are formed to meet technical capability and financial capability to perform the complex assignments like setting up of Metro Rail system in Delhi/Bangalore. Once, JV is a successful bidder in a project, an agreement is entered into by the participating partners of JV to freeze the allocation of scope of work and corresponding contract value among the participating partners. However, as a matter of practice, the employer interacts with lead JV partner/JV. The JV entity is for the administrative convenience of the employer. There is no principle/agent relation between JV and its participating partners. As a matter of practice, different participating partners of JV raise invoices to the JV, which in turn raises one combined invoice to the employer for convenience of employer. As per the appellant, there is no other functional utility of JV entity, which is acting as an intermediary between the participating partner and employer. 5.27 It is a fact that functions performed by the entities play very critical role in deciding the arm’s length pricein transfer pricing analysis.I find that core functions, key responsibilities, key decision making and level of individual responsibility for the key decisions are important factors to identify the party which has control over the risks. The conventional wisdom is that if the core functions/main operations are located in India, which in turn require important strategic decisions by management and employees of Indian entity to provide such services and control over the operational and other risks. JV in this case has only administrative functions for which all participating units contribute for the functioning of JV. JV does not own any asset and risk is also not borne. Identification of risk and the party who bears such risks are important steps in comparability analysis. The conduct of the parties is a keyto determine whether the actual allocation of risk conforms to contractual risk allocation. Allocation of risk depends upon ability of the parties to the transaction to exercise control over risk. Accordingly, the project office has undertaken complete functions related to assigned scope of work of the contract and in the process of undertaking functions, it has owned assets (Tunnel Boring Machine) and borne core risks. Under these circumstances, I held that it is wrong on the part of the AO/TPO to treat the Indian project office as risk free entity.

7. The CIT(A) has analysed the business model of the Assessee at great length and concluded that core functions/main operations are located in India, which in turn require important strategic decisions by management and employees of Indian entity to provide such services. JV has only administrative role to perform and has no asset of risk. (In para 5.26 for AY 2013-14 and in para 5.27 for AY 2014-15 as stated above)

8. Thus CEC-PO has undertaken complete functions related to assigned scope of work of the contract and in this process it also owns assets and bears core risk (last 4 lines of para 5.26 for AY 2013-14 and 5.27 for AY 2014-15). Hence this is a factual finding of the CIT(A) in this regard that the Assessee is not a mere sub-contractor but is fully and is independently performing its part of the contractual obligation qua these projects.

Judgments on the point that CUP is preferred in case of back to back transactions It is humbly submitted that the following judgments are on the direct proposition that CUP can be applied and is the preferred method in case of back to back transactions. It is an undisputed fact that in the present case it’s a back to back transaction. This is not denied by the TPO and also finds mention in the CIT(A) order (refer pg. 6,7,8 and 9 of CIT(A) order for AY 2013-14 and also para 5.8 to para 5. 15 (finding) of CIT(A) order for AY 2013-14) and (refer 5.10 to 5.17 of CIT(A) order for AY 2014-15) as stated above.

1. Delhi ITAT – DCIT vs. Calance Software (P.) Ltd.- [2017] 82 taxmann.com 390 (Delhi - Trib.). held that- (Kindly refer Pg. 1-5 of Compilation) “5. We find that, so far as the back to back transactions are concerned, the services rendered by the assessee to the AE are exactly the same as, in effect, rendered by the AE to the independent transaction. The price charged for the same service by the AE to the independent end customer is thus the best CUP input in respect of such a back to back transaction. If a unit sells a product to its AE for INR 100 and the AE sells the same product to an independent enterprise for INR 100, the intra AE transaction cannot but be termed as the arm's length transaction. The stand of the revenue however is that, as evident from FAR analysis, the functions performed by the Calance US are far more comprehensive, the assets employed Calance US are much more and risks assumed are much higher. What is, however, overlooked that this FAR analysis has to be with respect to the particular transaction, and when transaction is exactly the same, there cannot be any occasion for theFAR of the transaction being any different. In principle, thus, so far as back to back transactions at the same price are concerned-whether between the AEs or by the AE to the end customer independent enterprise, these are inherently arm's length transactions on the basis of CUP analysis. The distinction drawn by the TPO on the basis of FAR analysis of the enterprise rather than the transaction, which is sought to be justified before us by the learned Departmental Representative, is a distinction without any difference. It is also incorrect to proceed on the basis, as has been done by the TPO, that when TNMM in puts are available, the application of CUP can be rejected. CUP is not a residuary method. As a matter of fact, when perfect CUP inputs are available- as in this case in respect of back to back transaction, that is the best and inherently most suitable method, as it is a direct method and it hardly leaves any scope for distortion of results by extraneous factors. We reject the plea of the learned Departmental Representative on this point.”

3. Kolkata ITAT- AT & S India (P) Ltd. vs. DCIT- (Kindly refer Pg. 24-72 of Compilation)

“14. Aggrieved by the order of the ld. DRP/Assessing Officer, the assessee is in appeal before us. The ld. counsel for the assessee at the outset submitted before us that suitable method for the assessee company is only Comparable Uncontrolled Price (CUP) method. The CUP method for computing arm’s length price of the assessee’s sale of finished goods to its AE is suitable, as the specific characteristics of PCBs (indicated by product identification number) sold by the assessee to AT&S AG were exactly the same as the specific characteristics of PCBs sold by AT&S AG to independent customers in back to back transactions. The prices at which PCBs were sold by the assessee to AT&S AG were exactly equal to the prices at which PCBs were sold by AT&S AG to independent customers in back to back transactions.The quantities in which PCBs were sold by the assessee to AT&S AG were exactly equal to the quantities in which PCBs were sold by AT&S AG to independent customers in back to back transactions. The controlled transactions as well as uncontrolled transactions took place in Europe i.e. in the same geographical location as disclosed in the copies of back to-back invoices submitted to the TPO/DRP on sample basis. For administrative convenience, AT&S AG retained distribution commission and warranty expense out of the sale proceeds collected from the independent customers and remitted the balance to the assessee. Therefore, the CUP method is suitable for the assessee.

invoice clearly shows that the price at which M/s Intel Semiconductor Limited supplied to RedingtonDistribution Pvt. Ltd, Singapore and price at which the latter sold to the assessee in India, was one and the same. We are of the opinion that when the Associate Enterprise had sold the items to the assessee at the same price at which it had purchased it, there cannot be any arm's length price adjustment done, unless and until the original vendor was also an Associate Enterprise. Here, admittedly, M/s Intel Semiconductor Limited was not an Associate Enterprise of assessee or its Associate Enterprise in Singapore. Therefore, we cannot say that the price at which M/s-Intel Semiconductor Limited sold toRedington Distribution Pvt. Lid., Singapore, was not at arm's length price. In our opinion, when Redington Distribution Pvt. Ltd. sold the items to assessee at very same price at which it had purchased from M/s Intel Semiconductor limited, there cannot be any question of under pricing or over pricing. Weare, therefore, of the opinion that the adjustment carried out by the lower authorities, based on list price, on the purchase of 1250 Pentium IV processors from Associate Enterprise was not called for. Such adjustment, therefore, stands deleted."

1. CUP Method being preferred over the profit based methods. In this connection we rely on the decision of the Hon'ble Delhi Tribunal in the matter of Hughes Systique India (P.) Ltd vs. ACIT reported in [2013] 36 taxmann.com 41 (Delhi Trib.), wherein the Hon'ble Tribunal inter alia held that: - (Kindly refer Pg. 81-96 of Compilation) "6.5 The CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Reliance is placed in this regard on the following decisions: - Aztec Software & Technologies Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxman 119 (Bang.) (SB) - UCB India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 95 (Mum.) - Gharda Chemicals Ltd. v. Oy. CIT [2010] 35 SOT 406 (Mum.) - Intervet India (P.) Ltd. v. Asstt. CIT [2010] 39 SOT 93 (Mum.) - Asstt. CIT v. Dufon Laboratories [2010] 39 SOT 59 (Mum.) 11”

2. Reliance in this regard is also placed on the decision of Hon'ble Mumbai Tribunal in the case of Serdia Pharmaceuticals (India) (P.) Ltd. v. Asstt. CIT reported in [2011] 44 SOT 391/9 taxmann.com 13 wherein the Hon'ble Tribunal while dealing with the priority of applications of methods for the determination of ALP, has held as under: "64... as long as CUP method can be reasonably applied in determining the arm's length price of an international transaction in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. The reason is simple. When associated enterprises enter into a transaction at such conditions in commercial and financial terms, which are different from commercial and financial terms imposed in comparable transaction between independent enterprises, the difference in these two sets of conditions in financial and commercial terms re attributed to inter relationship between the associated enterprises that is sought to be neutralized by the transfer pricing regulations. As long as CUP method can be reliably applied on the facts of a case, it does offer most direct method of neutralizing the impact of inter- relationship between AEs on the price at which the transactions have been entered into by such AEs.”

1. Another reasoning given by the TPO is that AE pushed its losses to the project office. In para 5.27, 5.28 and 5.29 of the CIT(A) order for AY 2013-14 (internal page. 30 and 31), the CIT(A) has recorded a table which shows all profit/loss incurred for all projects during the year. From that it can be seen that all 3 AE transactions which are the JV projects (serial no. 8,9 and 10 have all incurred profits, which is offered to tax as this is a case of admitted PE and the Assessee on an entity level during the year under consideration has had a loss arising on account of direct/independent/third party contracts which is immaterial from a transfer pricing perspective.

2. For ease of reference, the same is reproduced hereinbelow- S.No. Projects Contractor Contract Profit/Loss Remarks Status 8. BC16-DMRC CEC- In progress 51,97,454 Profits SOMA JV 9. UG02-BMRCL CEC- In progress 6,22,76,903 Profits SOMA- CICI JV 10. CC04-DMRC CEC-CICI In progress 84,79,861 Profits JV

Hence, the very base and premise of the TPO for AY 2013-14 is factually incorrect and hence the CIT(A) has rightly deleted the said addition and taken this into consideration.

4. For AY 2014-15, again the CIT(A) has in detail analysed this aspect factually. In para 5.28 (internal page. 29 and 30), the chart is reproduced and serial no. 5,6 and 7 are the JV/AE transactions. Out of 9 projects undertaken for this year, 3 are via the JV model, out of which 2 are in profit and in 1 only there is a loss.

5. For ease of reference, the same is reproduced hereinbelow- S.No. Projects Contractor Contract Profit/Loss Remarks Status 5. CC04-DMRC CEC-CICI In progress 2,31,84,571 Profits JV 6. UG02-BMRCL CEC- In progress (10,37,80,407) Loss SOMA- CICI JV 7. CC04-DMRC CEC-CICI In progress 1,66,03,301 Profits JV

6. The loss making aspect in one project is also discussed at length in para 5.52 and 5.53 of CIT(A) order for AY 2014-15, internal page. 38 whereby it is stated that the same is converted to profits in next year and in earlier year also which is offered to tax. Detail discussion is there with respect to this project in the CIT(A) order.

7. Hence, the allegation of the TPO that AEs have passed on its losses to the Assessee is factually incorrect as substantiated before Your Honours.

The allegation of TPO that the decision to enter into the contract with the DMRC/BMRC was taken by the AE alone and the Assessee had no role to pay in that is again factually incorrect as all3 JVs were set up and the JV contract is entered into only after the bid is successfully won.

9. CEC-SOMA JV was awarded the contract by DMRC on 18.12.2006 and JV contract was signed on29.01.2007 and JV was set up on 08.02.2007.

11. Even CEC-CICI JV received the approval from DMRC on 29.12.2011 and was setup thereafter on 29.12.2011. These dates and facts are mentioned in the TPO order and in the CIT(A) order aswell.

Re-characterisation as done by the TPO is not permitted in law It is also humbly submitted that it is a settled law that in transfer pricing, recharacterization is not permitted. Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241(Del) has held the same and in a plethora of ITAT rulings, consistently this view has been taken. Hence, the action of TPO to attempt to recharacterize the transaction is illegal and bad in law. The same proposition has also been upheld by Hon’ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt. Ltd. vs. CIT [2015] 374 ITR 118 (Del). Detail project wise analysis undertaken by the CIT(A) qua the international transaction (para 5.32 to para 5.63 of CIT(A) order for AY 2013-14 and para 5.33 to para 5.53 of CIT(A) order for AY 2014-15)

BC16-DMRC CEC-SOMA JV, contract by DMRC para 5.33 to 5.39 Findings for AY 2013-14 1. CEC-SOMA JV was awarded the contract by DMRC on 18.12.2006 and JV contract was signed on29.01.2007. The scope of work was Phase II of Delhi Metro and project duration was February 2007 to July 2010. A profit of Rs. 51,97,454/- was earned on percentage completion method.

2. The international transaction pertaining to this project is in the nature of recovery of construction income of Rs. 1.73 crores by CEC-SOMA JV. The recovery is triggered by DMRC against CEC-SOMA JV and the same recovery without any mark-up has been passed on to the Assessee (para 5.34)

The recovery is on account of negative variation which is basically any amount charged which is over and above the original contract value. Negative variation is the reversal of excess part of IPC(Interim Payment Certificate) issued on account of negative variation of material price/work (para 5.36).

4. The CIT(A) has given a categorical finding as regards the above.

5. The CIT(A) has also stated that this reversal of excess IPC does not impact profit and loss account because the revenue is recognised in the P&L account as per percentage of completion method. P&L account has nothing to do with negative variation and the actual billing. The negative variation is therefore routed through the Balance Sheet. In totality, the IPC and the variations would equal to the revenue booked through percentage of completion method after completion of the entire project. (para 5.36) 6. The CIT(A) has also appreciated that negative variation is due to change in material cost or change in scope of work which is beyond the control of the Assessee or the JV. The adjustment is made by DMRC and is directly passed on from the JV to the Assessee and hence effectively it is a transaction between DMRC and the Assessee only, who are independent parties. (Para 5.35, 5.37 and 5.38) 7. Similar finding is there for AY 2014-15 aswell. In this year it’s a case of positive variation whereby Assessee has recovered the same from DMRC. DMRC paid it to the JV and the same amount has been passed on by the JV to the Assessee- hence same and detailed findings are there in this year also. (Para 5.34 to Para 5.40 of CIT(A) order for AY 2014-15, internal page. 31-33-)

CC04-DMRC CEC-CICI JV, contract by DMRC para 5.40 to 5.46 Findings for AY 2013-14

1. CEC-CICI JV was awarded the contract by DMRC. The scope of work was 2. Phase III of Delhi Metro and project duration was February 2010 to January 2015. A profit of Rs. 84,79,861/- was earned. The letter of approval came on 29.11.2011. 3. Following 3 international transactions were undertaken pertaining to this JV and this project- CEC-CICI JV Reimbursement received for expenses 1,16,22,850 Mobilization advance 11,00,00,000 Investment in JV 6,00,00,000

In para 5.41, 5.42 and 5.43, these 3 transactions are discussed in detail. It is to be appreciated that all 3 are capital account transactions only. 5. Similar finding is there in AY 2014-15 also. In para 5.41 to 5.46, internal page. 34 to 36, the CIT(A) has given a detailed finding as regards the same international transactions qua this specific project.

UG-2-BMRC CEC-SOMA-CICI JV, contract by BMRC para 5.47 to 5.51 Findings for AY 2013-14

1. CEC-SOMA-CICI JV was awarded the contract by BMRC on 10.03.2010. The scope of work was for designing and construction of underground stations and tunnels in underground stretch. A profit of Rs. 6,22,76,903/- was earned.

2. The international transaction pertains to a sum of Rs. 1731780,801/- from JV against IPC(Interim Payment Certificate), which is raised as per the milestones mentioned in the contract. Para 5.47, 5.48, 5.49 and 5.50 of the CIT(A) order contains all factual details of the contract and the scope and allotment of work.

3. In para 5.50, the CIT(A) has noted that the IPC raised by the Assessee based on milestones as per the contract has been passed on completely from BMRC and is directly passed on from the JV to the Assessee and hence effectively it is a transaction between BMRC and the Assessee only, who are independent parties.

4. Similar finding is there in AY 2014-15 also. In para 5.47 to 5.53, internal page. 36 to 38, the CIT(A) has given a detailed finding as regards the same international transaction qua this specific project.

International transactions with the Head Office para 5.52 to 5.55

1. The CIT(A) has analysed the details and concluded that these are only re- imbursements or capital infusion. Para 5.52 to 5.55 in CIT(A) order for AY 2013-14 and Para 5.54 to 5.59 in CIT(A) order for AY 2014-15.

After analysing all of the above, CIT(A) has concluded (in para 5.56 and 5.57 of the CIT(A) order for AY 2013-14, internal page 42)that these are all international transactions which are capital in nature and have no bearing on profit and loss account as P&L is based on project completion method and in any case profits earned in each year are already offered to tax since this is a case of admitted PE. Similar finding is there in para 5.60, 5.61 and 5.69 of the CIT(A) order for AY 2014-15. Concluding Paras are reproduced below for ease of reference – a. Para 5.56 and 5.57 of the CIT(A) order for AY 2013-14, internal page 42 5.56 After analysing all above discussed international transactions, I find that the international transactions can be broadly divided into following categories: a) Reimbursements, b) capital infusion, c) recovery of receipts due to negative variation, d) receipts against interim payment certificates (IPC) e) capital contribution to JV f) mobilization advance received from JV 5.57 All international transactions as discussed above have no impact on the profit & loss account because the P&L account is based on project completion method. Further, there is only one international transaction, which is the receipt of Rs. 1,731,780,801/- against services delivered by the project office. All other transactions are not against any provision of services. b. Para 5.60, 5.61 and 5.69 of the CIT(A) order for AY 2014-15- 5.60 After analysing all above discussed international transactions, I find that the international transactions can be broadly divided into following categories: a) Provision of services b) Reimbursements, c) capital infusion, d) recovery of receipts due to variation, e) receipts against interim payment certificates (IPC) f) capital contribution to JV g) mobilization advance received from JV 5.61 All international transactions as discussed above have no impact on the profit & loss account because the P&L account is based on project completion method. Further, only two international transaction, (the receipt of Rs. 1,09,88,25,263/- Rs. 4,25,59,936/- in the case of CC-04 and Rs. 1,05,62,65,327/- in the case of UG2) are against the services delivered by the project office in the case of CC-04 and UG2.All other international transactions are not against any provision of services. 5.69 Further, certain international transactions are in the nature of capital contribution and mobilization advances. Therefore, the arm’s length price of such international transaction has been correctly benchmarked by the assessee. Moreover, the entire contract receipts pertaining to project office of CEC have been offered to tax in India, therefore, the profit shifting is not feasible. Accordingly, the grounds of appeal no 1 to 11 are allowed.

Case-laws on the proposition that these transactions do not attract TP provisions Mobilization advance

Moreover, these business advances cannot be categorised as ‘loans and advances’ so as to consider them for adjustment. Relying on the various case law relied upon by the Ld. Counsel, we are of the opinion that since assessee- company is not charging any interest from the AEs and non-AEs and also not paying any interest on the amounts received by it from the main contractor, this adjustment is not warranted. Respectfully following the principles laid down in Capital contribution/Investment in JV • Bombay High Court- Vodafone Services Pvt. Ltd. vs. Union of India reported in 268 ITR1 • Bombay High Court- PCIT vs. PMP Auto Components Pvt. Ltd.- of 2016 Reimbursement of cost to cost expenses – Para 5.67 (14-15) and Para 5.63 (13-14) • Pune ITAT in Emerson Climate Technologies (India) Ltd. [2018] 90 taxmann.com 125 (Pune-Trib.). • CIT v. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi) • Delhi ITAT in Danisco India Pvt. Ltd. The Assessee should be treated as a domestic entity and hence this is not an international transaction The CIT(A) has captured that the Assessee, CEC-PO is a project office and is subjected to tax in India and this is a case of admitted PE and hence since JV is in India and all JV members are based in India, and CEC-PO is subjected to tax in India, it is not an international transaction. a. Para 5.58 of the CIT(A) order for AY 2013-14. For ease of reference, the same is reproduced hereinbelow – 5.58 The appellant relied on the decision of ITAT, Hyderabad in the case of DCIT, Hyderabad vs. M/s IJM (India) Infrastructure Ltd, to claim that for the purpose of transfer pricing applicability; Indian project office of a foreign company should be treated as a domestic entity. Further, by extending this logic, the appellant claimed that a transaction between JV & Project office should be treated as a domestic transaction and not as an international transaction under section 92B of the Income-tax Act, 1961 (the Act). b. Para 5.62 of the CIT(A) order for AY 2014-15. For ease of reference, the same is reproduced hereinbelow – 5.62 The appellant relied on the decision of ITAT, Hyderabad in the case of DCIT, Hyderabad vs. M/s IJM (India) Infrastructure Ltd, to claim that for the purpose of transfer pricing applicability; Indian project office of a foreign company should be treated as a domestic entity. Further, by extending this logic, the appellant claimed that a transaction between JV & Project office should be treated as a domestic transaction and not as an international transaction under section 92B of the Income-tax Act, 1961 (the Act).

In this regard reliance has been placed on the following decisions-

1. Hyderabad ITAT- IJM (India) Infrastructure Ltd- the Court held that-(Kindly refer Pg. 97-137 of Compilation) “3.3 The AR submitted that the TPO had erroneously exercised the jurisdiction under the provisions of Chapter X even though there were no transactions, which are in the nature of the 'International Transaction' as defined under Sec. 92B of Income Tax Act, 1961 inasmuch as neither of the parties to the transaction is a non-resident. On bare reading of the provisions of Sec. 92B(1) of Income Tax Act, 1961, it is crystal-clear that in order to be characterised as international transaction, the following salient features must be present: (i) There should be a 'transaction.' (ii) Such 'transaction' should be between two or more AEs and either or both of whom should be nonresidents. (iii) Such transaction should be of the nature as referred to in Sec. 92B. 3.4 According to the AR, all the above three (3) conditions must be cumulatively satisfied so as to make a transaction an 'international transaction'. If there is a transaction between two AEs and such transaction is of nature as referred to in Sec. 92B of Income Tax Act, 1961, it will not become an 'international transaction' so as to fall within the domain of Chapter X, unless such transaction is between two or more AEs and either or both of them should be non-residents. He relied on the decision of the Delhi Special Bench of the Tribunal in the case of L.G. Electronics India (P) Ltd. & Ors. vs. ACIT (Del) (SB), 152 TTJ 273 (Del). 3.7 The AR submitted that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and it is assessed to income-tax in the status of domestic company and whereas the AEs with whom the assessee had transactions are IJM Corporation Berhad, Delhi Project Office (PE in India), has the place of business in India under the provisions of Sec. 592 of the Companies Act, 1956 w.e.f. 30th May, 2005. 3.14 The AR submitted that in the present case the transactions are between two resident parties only and there is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits.

The assessee is a company incorporated under the provisions of the Companies Act, 1956 and is assessed to incometax in the status of domestic company and whereas the AEs with whom the assessee had transactions are IJM Corporation Berhad, Delhi Project Office (PE in India), established the place of business in India under the provisions of Sec. 592 of the Companies Act, 1956 w.e.f. 30th May, 2005. 5.9 By virtue of its registration under provisions of sec. 92 of Companies Act, 1956 and its affairs are managed and controlled in India. Further, one of the Directors of the Principal Company is nominated as Attorney for the purpose of undertaking the contract awarded by the Municipal Corporation of Delhi and National Highways Authority of India and is empowered to manage and operate entire operations in India and all the decisions in respect of operations in India are taken only in India and that nominated Director had been residing in India only. In other words, control and management of branch affairs were situated in India within the meaning of Sec. 6(3) (ii) of Income-tax Act, 1961. In this connection, it is pertinent to extract the observation made by the Hon'ble Calcutta High Court in the case of CIT vs. Bank of China (In Liquidation) - 154 ITR 617 vide Para 8: "Para 8: Under section 6(3) a non- Indian company is said to be resident in India in any previous year if during that year the control and management of its affairs is situated wholly in India. The determination as to what place or places the control and management of a particular company is situated is essentially a question of fact to be determined on the facts and in the circumstances of the particular case. A company can be simultaneously resident in more than one place but the question is whether the control and management is situated wholly in India during the relevant previous year. The expression 'control and management' signifies the controlling and directive power, the head and brain as it is sometimes called and 'situated' implies the functioning of such power at a particular place with some degree of permanence. The word 'wholly' as used in section 6(3) would indicate that seat of such power may be divided between two distinct and separate places. The expression 'control and management' means de facto control and management and not merely the right or power to control and manage. In order to hold that a non-Indian company is resident in India during any previous year, it must be established that such company de facto controls and manages its affairs in India. The principles are by now well settled. " 5.10 Vide paragraph 9 of the cited judgment, the Calcutta High Court has clarified that the word 'affairs' means affairs which are relevant for the purpose of the Act and which have some relation to the income sought to be assessed. It is not the bare possession of powers by the directors, but their taking part in or controlling the affairs relating to the trading, that is of importance in determining the question of the place where the control is exercise. They must exercise their power of control in relation to business or activity wherefrom the profit is derived. (See - Egyptian Hotels Ltd. v. Mitchell [1915) 6 TC 542 (HL.). The Power of Attorney executed by the principal Company in favour of the Indianresident Director to manage the branch operations in India clearly goes to establish beyond any pale of doubt the fact that the entire control and management in relation to operations in India is situated in India only. Therefore, the PE should undisputedly be treated as resident in India 5.17 Further in the present case the transactions are between two resident parties as outlined at paras 3.18 and 3.19 of this order. There is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore, its transactions with AEs are outside the purview of the transfer pricing regulations. This PE is assessed to income-tax in India in the status of foreign company in respect of its business profits. No shifting of profits outside India or erosion of taxes in India is involved, that is, there is no motive to shift the profits or evade the taxes in India inasmuch as its business profits are taxable as separate entity in India”.

2. Hyderabad ITAT-Swarnandhra IJMII Integrated Township Development Company Pvt. Ltd. - (para 24.14 to 24.24 to para 28.7 and 28.8). Also, domestic TP will not be applicable in view of retrospective amendment in Section 92BA and even otherwise, the conditions for invoking the same are not satisfied in the instant case.

Not a case of shifting of profits The next argument of the Assessee which is rightly appreciated by the CIT(A) is that the entire contract receipts pertaining to the PO of CEC have been offered to tax in India, therefore profit shifting is not possible. All related parties who are JV members are based in India and even the JV is based in India. As regards, CEC-SOMA JV, SOMA is an unrelated party. a. Para 5.61 and 5.62 and 5.63 of CIT(A) order for AY 2013-14. For ease of reference, the same is reproduced hereinbelow – 5.61 The appellant pointed out that profit shifting is a way to shift funds from India to foreign entity intentionally. The assessee is a project office of CEC- Taiwan which carries out the allocated works related to construction carried out in India and whatever revenue the assessee generates from its Indian operations based in India is retained in India. CEC-Taiwan doesn’t have any right to claim any share of revenue out of the total revenue generated from Indian business operations. It is noted that CEC-Taiwan is the only foreign entity with whom the assessee has entered into international transaction during the year. The transactions were in the nature of reimbursements and receipt of funds. 5.62 It is submitted that the concept of profit shifting is applicable where one party is situated outside India and another entity is based out of India and with intent to evade taxes in India; profits are shifted outside India. However in the relevant case, there cannot be any case of shifting since all the related partieswho are the JV membersare based in India. It is worth to note that SOMA (JVpartner) is an unrelated party; accordingly, no shifting can be done in any transaction entered with third party. 5.63 In view of the above discussion, I find that the TPO has wrongly applied TNMM for benchmarking of arm's length price of international transactions. Thetransactions between JV & the appellant are international transactions only dueto the specific arrangement of routing the invoices through JV office foradministrative convenience. Effectively, the transaction is between third parties. The international transactions in the nature of cost to cost re- imbursements is not against any service but for the expenses incurred on common basis in respectof third parties say salary, information technology, bank charges etc. Certaininternational transactions are in the nature of capital contribution andmobilization advances. Therefore, the arm's length price of such internationaltransaction have been correctly benchmarked by the assessee. Moreover, theentire contract receipts pertaining to project office of CEC have been offered totax in India, therefore, the profit shifting is not feasible . Accordingly, the groundof appeal is allowed . b. Para 5.65 and 5.66 and 5.67 of CIT(A) order for AY 2014-15. For ease of reference, the same is reproduced hereinbelow – 5.65 The appellant pointed out that profit shifting is a way to shift funds from India to foreign entity intentionally. The assessee is a project office of CEC- Taiwan which carries out the allocated works related to construction carried out in India and whatever revenue the assessee generates from its Indian operations based in India is retained in India. CEC-Taiwan doesn’t have any right to claim any share of revenue out of the total revenue generated from Indian business operations. It is noted that CEC-Taiwan is the only foreign entity with whom the assessee has entered into international transaction during the year. The transactions were in the nature of reimbursements as receipt of funds and the reimbursement were also in respect of third party expenses. 5.66 It is submitted that the concept of profit shifting is applicable where one party is situated outside India and another entity is based out of India and with intent to evade taxes in India; profits are shifted outside India. However in the present case, there cannot be any case of shifting since all the related parties who are the JV members are based in India. It is worth to note that SOMA (JV partner) is an unrelated party; accordingly, no shifting can be done in any transaction entered with third party. 5.67 In view of the above discussion, I find that the TPO has wrongly applied TNMM for benchmarking of arm’s length price of international transactions. The transactions between JV & the appellant are international transactions only due to the specific arrangement of routing the invoices through JV office for administrative convenience. Effectively, the transaction is between third parties. The international transactions in the nature of cost to cost re- imbursements is not against any service but for the expenses incurred on common basis in respect of third parties say salary, information technology, bank charges etc.

The comparables taken by the TPO are also incorrect Detailed submissions in this regard were filed, which find mention in the CIT(A) order and the CIT(A) has given a finding on this respect aswell. a. Para 5.59 and 5.60 of CIT(A) order for AY 2013-14. For ease of reference, the same is reproduced hereinbelow – 5.63 Further, it is noted that the TPO has compared the appellant with pure engineering service providers using TNMM as the most appropriate method. While doing so, the TPO has ignored the fact that the revenue recognition policy of the comparable company is different from the assessee because the revenue and costs in case of assesseeare recognized in accordance with AS-7 as it is a construction company. 5.64 In the process of comparability; FAR analysis (i.e. analysis of functions performed, assets employed and risks assumed) plays very critical role in the acceptance or rejection of comparables. The appellant has highlighted that there issubstantial difference in the ratio of Fixed Assets to Turnover of the company and of the assessee. Further, the appellant demonstrated the difference in the functions performed, fixed assets and inventory of the company and of the assessee. b. Para 5.63 and 5.64 of CIT(A) order for AY 2014-15. For ease of reference, the same is reproduced hereinbelow –

Further, it is noted that the TPO has compared the appellant with pure engineering service providers using TNMM as the most appropriate method. While doing so, the TPO has ignored the fact that the revenue recognition policy of the comparable company is different from the assessee because the revenue and costs in case of assesseeare recognized in accordance with AS-7 as it is a construction company. 5.64 In the process of comparability; FAR analysis (i.e. analysis of functions performed, assets employed and risks assumed) plays very critical role in the acceptance or rejection of comparables. The appellant has highlighted that there issubstantial difference in the ratio of Fixed Assets to Turnover of the company and of the assessee. Further, the appellant demonstrated the difference in the functions performed, fixed assets and inventory of the company and of the assessee.

PRINCIPLE OF CONSISTENCY QUA THE ASSESSEE It is also humbly submitted that with the 3 JVs, these are not new contracts and the Assessee has been using this business model for the last many years which is accepted by the Department under Section 143(3) orders. Orders for AY 2008-09, AY 2010-11, AY 2011-12 and AY 2012-13 (all earlier years, assessment order and even TP orders) are on record wherein it can be clearly seen that the Department has accepted the same in earlier years. The relevant page numbers of the orders are as below- CEC AY 2008-09 order Pg. 138-141 of the Compilation CEC AY 2010-11 order Pg. 142-148 of the Compilation CEC AY 2011-12 order Pg. 149-153 of the Compilation CEC AY 2012-13 order Pg. 154-155 of the Compilation In this regard, it is respectfully submitted that though principle of res-judicata does not apply to the income tax proceedings, it is well settled that if there being no change either in facts or in law, as compared to the earlier and subsequent years, the position accepted/ determined by the Department needs to be followed even on the principle of consistency. Reliance in this regard is placed on the following decisions: ✓ CIT v. Excel Industries Ltd.: 358 ITR 295 (SC) ✓ Radhasoami Satsang v. CIT: 193 ITR 321 (SC) ✓ CIT v. Neo Polypack (P) Ltd: 245 ITR 492 (Del.) ✓ CIT v. SewaBharti Haryana Pradesh: 325 ITR 599 (P&H)

It is also important to note that all 3 JVs for both the AYs under consideration have been assessed to tax under Section 143(3) (with TP assessment aswell) and hence the contracts, JV model, and back to back transactions stands accepted. Once the same is accepted in the hands of the JV, there arises no occasion for the Department to dispute the same in hands of the Assessee. The orders of the JVs for both the years under consideration are on record. The relevant page numbers of the orders are as below- CEC- CICI JV order for both AYs (AY 2013-14 and Pg. 156-162 of the Compilation AY 2014-15) CEC- SOMA-CICI JV order for both AYs (AY Pg. 163- 179 of the 2013-14 and AY 2014-15) Compilation CEC- SOMA JV order for both AYs (AY 2013-14 Pg. 180-186 of the Compilation and AY 2014-15) 13. Considered the rival submissions and material placed on record. We observed that the assessee, a project office for the CEC Taiwan participated in the tenders to bid the government projects like BMRCL and DMRCL. As per the complexity and access to the big government projects, JVs are formed to execute the projects with efficiency and depend upon the individual strength of the each partners, they participated to the bid the projects in the JV formats and get the complex as well as high value projects. Accordingly, the CEC Taiwan entered JVs with Soma and CICI for BMRC project, similarly in DMRC project, it entered into JV with CICI. Depending upon the nature of work allocated between the JV partners, the work are allocated for example, in DMRCL project awarded to the CEC-Some JV, the work are allocated on the basis of individual strength of the JV partners, they apportioned the work exclusively to CEC, exclusively to Soma and other common works are being allocated to CEC-Soma jointly. Depending upon the work allocation to each of JV partners, the total contract value is distributed between the partners. It is fact on record that the JVs are created to facilitate the work, it is nothing but pass through entity, all the contracts are executed based on the work allocated to the individual JV partners. The risk and benefits are passed on to the JV partners to the extent of work allocated to them. None of the other partners will share the burden of the other JV partners.

c. Even though the project is executed by the CEC India, they do not have resources to execute the project. The main partner to the JV is the CEC Taiwan who had all the resources to back the assessee to execute the project. d. As far as JV is concerned, the JV partners are CEC Taiwan, SOMA and CICI. e. All the work are executed by the CEC Taiwan thru the project office in India and the relevant work allocated to CEC Taiwan was executed by CEC India representing CEC Taiwan. f. All the works executed by the JVs thru the JV partners are work completed in India and none of the works are executed outside India. g. The JVs are nothing but SPV for the execution of the projects and they are compensated with the administration expenses, and no profits are allocated to them, even otherwise, the profits are allocated to them which is enough to take care of the administrative expenses. They are only facilitators, beyond that they do not execute anything. h. All the project executed by the JV are domestic projects, therefore, the transactions are only executed in India. i. The transactions carried on by the CEC India with its AE i.e., CEC Taiwan alone will be considered as international transactions, which involves the following transactions: i) Reimbursements, ii) capital infusion, iii) recovery of receipts due to negative variation, iv) receipts against interim payment certificates (IPC) v) capital contribution to JV vi) mobilization advance received from JV The above transactions are between the assessee at the project office and main contractor is CEC Taiwan. This transaction has nothing to do with JV. The TPO was expected to verify only to the extent of international transaction carried on by the assessee. The TPO had not commented anything on the transactions between the assessee and CEC Taiwan. Further we observed that there is no involvement of international transaction in the execution of the projects in India, which are awarded by the BMRCL and DMRCL. It is purely domestic projects. The project was carried out by the assessee, and all the transactions are recorded in the books of the assessee and the relevant tax are paid as per the declared result in the financial statements.

16. Coming to the issue of international transactions, these are only transactions between the assessee as project office and its AE, which is the main partner to the JVs. The AE had transacted with the assessee relating to capital infusion for the purpose of execution of project in India, mobilization of advances received from JV and reimbursement towards the expenses incurred by the assessee. The other type of reimbursement of expenses between the JV partners is related to domestic transactions which are reimbursed by the assessee, there is no involvement of AE. All these transactions that are carried out relating to JV are only in domestic currency. We noticed that Ld CIT(A) has rightly appreciated the facts and observed that concept of profit shifting is applicable where one party is situated outside India and another party based in India, in this case, the operations of JV are conducted only in India and all the JV partners are involved in the completion of the project within the territory of India. The work allocated to assessee ie., the ultimate JV partner is the CEC Taiwan, the assessee had represented them in the form of project office. The relevant financials are already offered to tax in India. There is absolutely no possibility of shifting of profit outside India.

As discussed above, the international transactions transacted between the assessee as project office and CEC Taiwan as the principal, can be considered as the internal transactions between them. The Job of the TPO is to verify whether the relevant expenses are reimbursed by the AE or not is the issue, apart from that there is no scope for TP study in the given case. He has exceeded his jurisdiction to go beyond the mandate, particularly the scope of functions performed by the assessee and JV partners are only domestic transactions.

by the revenue are dismissed.

21. In the result, appeal filed by the revenue is dismissed.

22. The facts in the appeal no 7781/Del/2018 are exactly similar to the facts in the the findings in the are applicable mutatis mutandis in ITA 7781/Del/2018 (AY 2014-15), accordingly the grounds raised by the revenue are also dismissed.

23. In the result, appeals preferred by the revenue are dismissed. Order pronounced in the open court on this day of 12th February, 2026.