1. Captioned appeal has been filed by the assessee challenging the final assessment order dated 28.07.2022 passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’) pertaining to assessment year 2019-20.
2. Grounds raised by the assessee are as under:
1. That on the facts and circumstances of the case and in law, the Assessing Officer ["AO"] erred in assessing the income of the Appellant at Rs.26,18,81,404/- as against returned income of Rs. 12,86,92,788/- in pursuance to the directions passed by the Hon'ble Dispute Resolution Panel ["DRP"].
Re: Rejection of books of accounts and ignorance of mandatory provisions of the section 144C of the Income-tax Act, 1961 ("Act")
2. That on the facts and circumstances of the case and in law, the AO/DRP has erred in rejecting and not placing reliance on the audited financial statement of the Appellant for determination of profits attributable to the Permanent Establishment ("PE") of the Appellant, and accordingly, assessment order is illegal, bad in law and liable to be quashed.
2.1 That on the facts and circumstances of the case and in law, the AO/DRP erred in passing the final assessment order without following the mandatory provisions of section 144C(10) read with section 144C(13) of the Act, without considering that not adhering to the said mandatory provisions would render the final assessment order as beyond jurisdiction, illegal and bad in law.
2.2 That on the facts and circumstances of the case and in law, the DRP erred in setting aside the proposed variation to the AO for further enquiry and passing of the assessment order, in contravention of section 144C(8) of the Act, and thus, the final assessment order as beyond jurisdiction, illegal and bad in law.
2.3 That on the facts and circumstances of the case and in law, the AO/DRP erred in rejecting the audited financial statements of the Appellant, alleging that Appellant has not submitted any benchmarking analysis in order to justify that expenses in relation to its related parties are not unreasonable as per section 40A(2)(b).
2.4 That on the facts and circumstances of the case and in law, the AO/DRP erred in not considering that no disallowance is permitted if the transactions are at arm's length price as defined in clause (ii) of section 92F.
Re: Proposed Application o f profit rate o f 10 percent as p er clause (i) o f Rule 10 of Income Tax Rules, 1962
3. That on the facts and circumstances of the case and in law, the AO/DRP has erred in determining profit rate @ 10% to attribute profits amounting to INR 26,18,81,404 to the PE of the Appellant in India.
3.1 That on the facts and circumstance of the case and in law, the AO/DRP has erred in not appreciating that the India specific audited financial statements ought to have been considered in determination of profits attributable to the PE of the Appellant in India.
3.2 Without prejudice to the above, that on the facts and circumstances of the case and in law, the AO/DRP has erred in disregarding the global profitability percentage for computing the income attributable to PE of the Appellant in India, without giving any cogent reasons.
3.3 That on the facts and circumstances of the case and in law, even if the AO/DRP considers section 44BBB in the Appellant's case, the case will still fall in sub-section (2) of section 44BBB which states that, an assessee can claim lower profits if it keeps and maintains books of account as per section 44AA and gets its accounts audited as required under section 44AB.
4. That on the facts and circumstances of the case and in law, the AO/DRP has erred in computing interest under section 234D.
3. The ground no. 1 is a general ground, hence, does not require adjudication.
4. As far as ground nos. 2 and 3 along with their sub-grounds are concerned, the issues are overlapping and relate to addition of Rs.26,18,81,404/-.
5. Briefly the facts are, the assessee is a non-resident corporate entity incorporated under the laws of Italy and a tax resident of Italy. As stated, the assessee operates in the field of engineering, construction and project management for the oil, gas, petrochemical, chemical and fertilizer industries. On 12th July, 2018, the assessee had entered into a lumpsum turnkey contract with M/s. Hindustan Petroleum Corporation Ltd. (in short ‘HPCL’) for grass-root hydrogen generation unit with a design capacity of 2 x 113 Ktpa hydrogen production and fuel gas PSA unit - 36 ktpa hydrogen production for modernization project undertaken by HPCL, Vizag. Refinery. In the year under consideration, the assessee received following revenue from India:
(i) Technip India Ltd. Rs.9,16,27,713/-
(ii) BNP Paribas Rs.2,06,69,284/-
(iii) HPCL Rs.258,89,82,048/-
6. For the assessment year under dispute, the assessee filed its return of income on 26.11.2019 declaring income of Rs.12,86,92,790/-. The receipts from Technip India Ltd. was offered to tax as Fee for Technical Services (FTS) on gross basis. The receipt from BNP Paribas was also offered as income. The dispute was only with regard to receipts from HPCL. After examining the agreement with HPCL, the Assessing Officer observed the scope of work includes the entire range of activities which will result in final setting up of unit. The activities are project management, licence, preparation of basic design and engineering, procurement, fabrication, inspection, erection, installation, commissioning, performance guarantee test run etc. Thus, the Assessing Officer observed that the assessee has a single point responsibility for execution of the entire project. He observed, for executing the contract the assessee has set up a project office in India, which constitutes a Permanent Establishment (PE) in India under Article 5 of India – Italy Double Taxation Avoidance Agreement (DTAA). He observed, as per Article 7 of India – Italy DTAA, profits from business are taxable in Indian in case the non-resident has a PE in India. Since, according to the Assessing Officer, the assessee has a PE in India, business profits are taxable in India. Having held so, he observed that as per Rule 10, the profits attributable to the PE should be arm’s length profit. Thereafter, alleging that the assessee has not furnished the financial statements pertaining to the assessment year under dispute, the Assessing Officer observed that the profit has to be computed as per the provisions of the Act. Thereafter, the Assessing Officer observing that the assessee has executed a turkey contract to complete a power project in India, invoked the provisions of section 44BBB to compute the profit attributable to the PE. While invoking the provisions of section 44BBB, the Assessing Officer observed that sub-section (2) of section 44BBB would not be applicable to the assessee. Accordingly, he proceeded to compute profit at 10% of the gross receipts, which resulted in addition of Rs.26,18,81,404/-, while framing the draft assessment order.
7. Against the draft assessment order, the assessee raised objections before learned Dispute Resolution Panel (DRP). After considering the submissions of the assessee in the context of facts and materials on record, learned DRP having found that the assessee has furnished its books of accounts, financial statements and various other documents before the Assessing Officer, reversed the decision of the Assessing Officer in rejecting the books of account on the allegation that the assessee had not furnished the required documents. However, learned DRP directed the Assessing Officer to go through the documents and take decision in case anomalies are observed in the documents filed by the assessee. Learned DRP observed, the applicability of section 44BBB and Rule 10(i) will depend upon the decision to be taken by the Assessing Officer on the correctness of documents filed by the assessee.
8. While implementing the directions of learned DRP in the final assessment order, the Assessing Officer observed that from the financial statements, ledger accounts, contract and sample invoices filed by the assessee, it was found that the assessee had significant transactions with its related parties as disclosed in the notes to financial statements. Further, he observed, the assessee has not submitted any benchmarking analysis in order to justify that the said expenses in relation to its related parties are not unreasonable as per section 40A(2)(b) of the Act. Thus, he held that assessee’s books of account cannot be relied upon and attribution of profit has to be made as per rule 10(i). Thus, he attributed 10% of the gross receipts as profit of the PE in India, which worked out to Rs.26,18,81,404/-.
9. Sh. Ajay Vohra, learned Senior Counsel appearing for the assessee submitted that there is a categorical finding of learned DRP that in course of assessment proceeding, the assessee had furnished its books of account, financial statements and various other documents. He submitted, learned DRP has also recorded a finding disapproving the rejection of books of account by the Assessing Officer, alleging that documents were not furnished. He submitted, despite such clear cut directions of learned DRP, the Assessing Officer has again rejected the books of account and estimated profit attributable to PE by invoking Rule 10(i) alleging that the assessee has not filed the financial statements benchmarking the transactions with the related parties, which falls within the purview of section 40A(2)(b). He submitted, this is a totally new allegation made by the Assessing Officer, which was never made in the draft assessment order. He submitted, no opportunity was granted to the assessee by the Assessing Officer to furnish any additional documents/information, which he may require before passing the final assessment order. He submitted, once learned DRP had reversed the decision of the Assessing Officer in rejecting the books of account by recording a finding that books of account, financial statements and other relevant documents were furnished before the Assessing Officer, the Assessing Officer could not have again rejected the books of accounts based on very same reasoning. Thus, he submitted, assessment order having been passed in clear violation of directions issued by learned DRP is unsustainable. In support of such contention, learned counsel relied upon the following decisions:
1. ESPN Star Sports, Mauritius S.N.C. ET Compagnie Vs. Union of India, 388 ITR 383
2. Global One India (P) Ltd. Vs. DCIT, 182 ITD 355
3. L.G. Electronics Inc. Korea Vs. DCIT [ITA No.4559/Del/2018]
4. Software Paradigms Infotech (P.) Ltd. Vs. ACIT [2018] 89 taxmann.com 339
10. He submitted, while invoking the provisions of section 40A(2)(b) of the Act at the stage of final assessment, the Assessing Officer has not granted any opportunity to the assessee by issuing any show-cause notice. Drawing our attention to section 40A(2) of the Act, learned counsel submitted, an obligation has been imposed on the Assessing Officer to justify the application of the said provision. He submitted, while invoking the provision the Assessing Officer has to form an opinion that the expenditure is excessive or unreasonable, having regard to the fair market value of the goods/services or facilities for which the payment is made. He submitted, the Assessing Officer has to form such opinion based on the documentary evidences available on record. He submitted, the transactions with the related parties are subject to transfer pricing provisions under section 92 of the Act. He submitted, reference to section 40A(2)(b) has been omitted in section 92BA w.e.f. 01.04.2017. Therefore, the provisions of section 40A(2)(b) read with section 92BA of the Act are not applicable to the year under consideration. Without prejudice, he submitted, at the draft assessment stage, the assessee has furnished all relevant and necessary documents relating to its transaction, including Audit Report relating to international transactions in Form 3 CEB, audited financials of the year under consideration, tax Audit Report and other relevant documents. He submitted, related party transactions are specifically mentioned in the Audit Report. Thus, he submitted, the assessee had discharged the initial onus. Therefore, the burden shifts to the Revenue to show that the payment was excessive and unreasonable having regard to the fair market value. He submitted, the Assessing Officer has failed to discharge the burden as he has not brought on record any contrary material to demonstrate that the payment made was excessive and unreasonable in terms of section 40A(2)(b) of the Act. In support of such contention, learned counsel relied upon the following decisions:
1. CIT Vs. Enviro Control Associated (P.) Ltd. (2014) 225 Taxman 56
2. Voltamp Transformers (P.) Ltd. Vs. Commissioner of Income-tax, ITA No.29 of 1976 (Gujarat HC)
3. CIT Vs. Modi Xerox Ltd., ITA No.31 of 2001 (Allahabad HC)
4. CIT Vs. Nestle India Ltd., [2011] 337 ITR 103
11. Further, he submitted, the Assessing Officer cannot reject the audited financial statements without demonstrating that they are incorrect or unreliable. He submitted, the books of account of the PE of the assessee have been duly certified/verified by statutory auditors and tax auditors. Therefore, the Assessing Officer has to provide adequate reasons to indicate that the accounts are unreliable or incorrect. In this context, he relied upon the following judgments:
1. CIT Vs. Paradise Holidays [2010] 195 Taxman 291 (Delhi)
2. Madnani Construction Corporation (P.) Ltd. Vs. CIT [2008] 296 ITR 45 (Gauhati)
12. As regards the attribution of profit to the PE, learned counsel submitted, in the draft assessment order, the Assessing Officer had proceeded to attribute profit at the rate of 10% of gross receipts by applying the provisions of section 44BBB of the Act. He submitted, in the final assessment order, the Assessing Officer has again attributed 10% gross receipts as profit of the PE by applying section 44BBB read with Rule 10(i). He submitted, in the first place, section 44BBB would not be applicable as it applies to a foreign company engaged in civil construction, erection, testing and commissioning of a turnkey power project, where, such turnkey power project is approved by Central Government. He submitted, vide Circular no. 552, dated 09.02.2019, it has been provided that the approval issued by the Department of Power in the Ministry of Energy shall be deemed to be the approval of the Central Government for the purpose of section 44BBB of the Act. He submitted, section 44BBB will not apply to the assessee as the PE of the assessee has been established in connection with the contract with HPCL in relation to expansion of oil refinery project and not in connection with any turnkey power project. Proceeding further, he submitted, the scope of work entrusted to the assessee under the contract is not restricted to civil, construction, erection, testing or commissioning but extends to project management, technology licensing, preparation of basic design and engineering package as well as detailed engineering, procurement etc. Thus, the additional activities/scope of work undertaken by the assessee is not envisaged under section 44BBB of the Act. Further, he submitted, the contract between the HPCL and the assessee is not approved by the Central Government or the Department of Power in the Ministry of Energy. Thus, he submitted, the provisions of section 44BBB would not be applicable.
13. Without prejudice, learned counsel submitted, even assuming that the assessee’s activities are covered under section 44BBB, however, subsection (2) to section 44BBB provides an option to the assessee to claim a profitability lower than 10% subject to certain conditions, such as, the assessee maintains books of account as required under section 44AA and the assessee gets his account audited and furnishes a report of such audit as required under section 44AB of the Act. He submitted, in the facts of the present appeal, the assessee has fulfilled the conditions of section 44BBB(2). Therefore, the actual profitability as per audited financial statements, which is lower than the rate of 10% should have been considered. He submitted, without ascribing any reasons, why sub-section (2) of section 44BBB is not applicable to the assessee, the Assessing Officer has straightway applied section 44BBB(1) and attributed profit to the AE at 10% of the gross receipts. Drawing our attention to Article 7(2) of the India – Italy DTAA, learned counsel submitted, PE shall be subject to tax in India on profits that it would be expected to make if it was a distinct and separate entity. He submitted, since, the assessee has maintained separate accounts for the PE, attribution of profit has to be based on accounts. He submitted, only in exceptional circumstances as provided under Article 7(2), attribution of profit on estimation basis can be made in terms of rule 10. In this context, he relied upon a decision of the Hon’ble Supreme Court in case of CIT Vs. Hyundai Heavy Industries Co. Ltd., [2007] 161 Taxman 191 (SC). He submitted, attribution of profit to the PE on estimate basis by wrongfully rejecting the audited financial statements is illegal. Further, he submitted, Rule 10 has to be applied in a judicious manner and while doing so global profitability has to be considered in accordance with Rule 10(ii). He submitted, though, the assessee has furnished the global financial statements before the Assessing Officer, however, ignoring that the Assessing Officer has estimated profit at 10% applying Rule 10(i). Thus, he submitted, the addition made, being illegal, should be deleted.
14. Vehemently opposing the contention of learned counsel for the assessee, learned Departmental Representative submitted, the DRP has given clear cut direction to the Assessing Officer to invoke section 44BBB(1) and rule 10(i) in case anomalies are observed in the documents filed by the assessee. He submitted, since, the Assessing Officer detected anomalies in the documents furnished by the assessee, he has rightfully invoked Rule 10(i) to estimate profit at 10%.
15. We have considered rival submissions and perused the materials on record. We have also applied our mind to the judicial precedents cited before us. As discussed earlier, the dispute between the parties is only with reference to contract receipts from HPCL. It is observed, in the return of income filed for the impugned assessment year, the assessee has offered an amount of Rs.9,88,60,790/-, being the profit from HPCL contract attributable to the PE. As discussed earlier, as per the scope of contract with HPCL, the assessee was entrusted to execute the contract for grass root hydrogen generation unit and fuel gas unit on lumpsum turnkey basis. While framing the draft assessment order, the Assessing Officer has rejected the books of account of the assessee alleging non-furnishing of financial statements and other documents and has proceeded to estimate profit attributable to the PE at the rate of 10% by invoking the provision of section 44BBB(1) read with Rule 10(i). The assessee contested the aforesaid decision of the Assessing Officer before learned DRP. Before learned DRP, the assessee made an assertion that not only books of account but all other relevant and necessary documents, such as, financial statements, ledger copies, invoices and Audit Report were furnished before the Assessing Officer. The very same documents were again furnished before learned DRP. As observed by learned DRP, though, the submissions made by the assessee and the documents furnished were forwarded to the Assessing Officer for verification and furnishing remand report. However, the Assessing Officer did not furnish any report despite repeated reminders, which compelled learned DRP to issue directions as the proceedings were getting barred by limitation on 30th June, 2022. While dealing with the allegation of the Assessing Officer regarding non-furnishing of response to queries pertaining to expenses incurred by the assessee and other documents, the specific observations of learned DRP are as under:
“…………Under these circumstances AO is directed to take the documents filed before it on dates mentioned above, and which were subsequently filed before the DRP, into consideration. The books rejected by the AO on the reason of not furnishing the documents is not correct. However, AO shall go through the documents mentioned above and shall take such decision in case anomalies are observed in the documents so filed. Consequential action of invoking section 44BBB(i) of the I.T. Act and provisions of the Rule 10(i) of the I.T. Rules is dependent on the decision so taken.”
16. As could be seen from the aforesaid observations of learned DRP, the allegation of the Assessing Officer was found to be baseless, hence, learned DRP reversed the decision of the Assessing Officer in rejecting assessee’s books of account. Further, learned DRP has given a specific direction to the Assessing Officer to go through the documents furnished by the assessee and in case any anomalies are found in the documents filed, the Assessing Officer shall take consequential action of invoking section 44BBB(i) and Rule 10(i). It is a fact on record, while implementing the aforesaid direction of learned DRP, the Assessing Officer has not called upon the assessee to furnish any further material and fresh evidence.
17. On the contrary, relying upon the very same documentary evidences furnished by the assessee at draft assessment stage, the Assessing Officer has again made the very same addition as was made in the draft assessment order by estimating profit at the rate of 10% of the gross receipts under rule 10(i). The observations of the Assessing Officer in this regard are as under:
“Pursuant to the directions of the Hon'ble DRP, the submission made by the assessee in form of financial statements, ledger accounts, contracts and sample invoices have been examined and it is noticed that assessee has significant transactions with its related parties as disclosed under Note no 15 to Financial statements. The assessee has not submitted any benchmarking analysis in order to justify that said expenses in relation to its related parties are not unreasonable as per section 40A(2)(b). In view of this, assessee's books of accounts are not being relied upon and attribution of profits is done as per clause (i) of Rule 10. Whereby, profit attribution is done by taking the rate of 10% of the gross receipts. Such profits in turn are taxable @40% (plus applicable cess and surcharge).
18. A careful reading of the aforesaid observations of the Assessing Officer will reveal that he has not pointed out any deficiency or anomaly in the documents furnished by the assessee. The only adverse observation made by him is to the effect that as per Note no. 15 to financial statements, the assessee has significant transaction with its related parties. Whereas, the assessee has not submitted any benchmarking analysis in order to justify that expenses in relation to the related parties are not unreasonable as per section 40A(2)(b) of the Act. Thus, in our view, the Assessing Officer has not implemented the directions of learned DRP in letter and spirit, in terms with section 144C(10) read with section 144C(13) of the Act.
19. As could be seen from the facts on record, the financial statements disclosing related party transaction where available with the Assessing Officer at draft assessment stage. However, the Assessing Officer has not made any reference to the Transfer Pricing Officer (TPO) to undertake an analysis to find out whether transaction with related parties are at arm’s length or not. Therefore, it has to be assumed that the Assessing Officer accepted the arm’s length nature of the transaction. Be that as it may, a reading of section 92BA, which defines specified domestic transaction, it is observed, the provision would not be applicable to assessee’s transaction with related parties as sub-clause (1) of section 92BA, which provided for applicability of transfer pricing provision to expenditures/payments covered under section 40A(2)(b), has been omitted from the statute by Finance Act, 2017 w.e.f. 01.04.2017. Therefore, there was no obligation on the part of the assessee to furnish any benchmarking analysis in relation to such transaction.
20. Having said that, it is necessary to examine the provisions of section 40A(2)(a) of the Act. Reading of the said provision would make it clear that where the Assessing Officer is of the opinion that some expenditure incurred by the assessee is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure which according to the Assessing Officer is excessive or unreasonable has to be disallowed.
21. In the facts of the present appeal, admittedly, the assessee has furnished all necessary and relevant documents, including audited financial statements, Audit Reports/invoices etc. to justify its claim. Even, the assessee has furnished detailed replies to various queries made by the Assessing Officer. Thus, the assessee has discharged its onus with reference to the expenses. As per the provisions of section 40A(2)(a), the Assessing Officer has to form an opinion not in vacuum but based on cogent material that the expenses/payments made by the assessee to the related parties are excessive and unreasonable having regard to fair market value of goods or services. In the facts of the present appeal, the Assessing Officer has not demonstrated in what manner he has formed the opinion that the expenses with reference to related parties are excessive and unreasonable having regarding to the fair market value. The Assessing Officer has not referred to even a single comparable case of similar nature of expenses to demonstrate that the payments/expenses made by the assessee are excessive and unreasonable and more than fair market value. Thus, in our view, the Assessing Officer has failed to discharge the burden cast upon him under section 40A(2)(a) of the Act. Hence, the conditions remained unfulfilled. In any case of the matter, for the first time, at the final assessment stage, the Assessing Officer has invoked the provisions of section 40A(2)(b) of the Act without providing any opportunity to the assessee. In fact, neither at the draft assessment stage, nor before the DRP, applicability of section 40A(2)(b) was ever an issue. At the final assessment stage, the Assessing Officer having not found any anomalies in the documents furnished by the assessee, only for the purpose of circumventing the directions of learned DRP and to somehow repeat the addition, has gone in a different tangent by invoking section 40A(2)(b) of the Act. This, in our view, is wholly unjustified and is in complete violation of Rules of Natural Justice. It also militates against the directions of learned DRP. In any case of the matter, we have already held that the Assessing Officer has failed to fulfill the conditions of section 40A(2)(b) of the Act. Therefore, the addition made is unsustainable.
22. For the sake of completeness, we may also address the issue regarding applicability of section 44BBB(1) of the Act. On a careful reading of the said provision, we are of the view that it is not applicable to the assessee as the assessee is neither executing any turkey power project, nor the project is approved by the Central Government or a competent authority in terms of section 44BBB(1) of the Act. Even, assuming that section 44BBB applies, sub-section (2) of section 44BBB carves out an exception by providing that the assessee may claim lower profit, if he keeps and maintains the books of account and documents prescribed under section 44AA and his accounts are audited in terms of section 44AB.
23. In the facts of the present case, undoubtedly, the assessee has fulfilled the conditions mentioned in sub-section (2) of section 44BBB. Therefore, ignoring the provisions of sub-section (2) of section 44BBB, which overrides sub-section (1) of the said provision, the Assessing Officer could not have proceeded to estimate profit at 10% of the gross receipts. Thus, on overall analysis of facts and circumstances of the case and the ratio laid down in the decisions cited before us, we have no hesitation in holding that the disputed addition is unsustainable. Accordingly, we direct the Assessing Officer to delete the addition. Grounds are allowed.
24. In the result, the appeal is allowed.
