Deputy Commissioner Of Income Tax vs Oriental Nagpur Bye Pass Construction Pvt. Ltd.

"i.

With construction business codes, the assessee has shown very low profit in comparison to total revenue/other income and has claimed large amount of refund.

“6.

During the year the total revenue from operations earned by your company was Rs. 315,78,02,130/- (excluding the income from toll collection from Expressway) whereas the Sub-contracting expenses incurred by it to its holding company M/s Oriental Structural Engineers Pvt. Ltd. was Rs. 315,70,83,444/-. Further, the AO noted that in addition to the above, the assessee had also made payment of Rs. 10,42,459/- of its holding company on account of Reimbursement of expenses, Rent Payment. The AO asked the assessee to provide the documents/contract notes with respect to income earned by the assessee company and its holding company alongwith the computation /calculation of profit earned by the company from this activity and profit ratio of its holding company.”

“Thereafter, vide letter dated 05.03.2021 the assessee company sought adjournment for filing the above details. Again, vide letter dated 16.03.2021 the assessee company sought further adjournment for filing the impugned details. Again, thereafter, vide letter dated 09.04.2021 the assessee company once again sought adjournment for filing the details but the required details were not furnished by the assessee. Accordingly, a show cause notice was issued to the assessee on 03.05.2021 and the assessee was confronted with the facts and was informed that since the assessee has not filed the replies on the above points No.4, 6, 8 & 12, it was being afforded a final opportunity to file the same immediately on or before the date as mentioned in the enclosed notice u/s 142(1) of the Act failing which adverse view till be taken and its assessment would be finalised on merits and on the basis of material available on record. The case was finally fixed for hearing on 05.05.2021 but no details have been furnished by the assessee till date. In view of these facts, I have no alternative but to finalize the assessment of the assessee company on merits and on the basis of material available on record.

With regard to point No.6 it is seen that during the year the assessee company has shown revenue from operation at Rs.315,78,02,130/- and has claimed expenses on sub-contracting at Rs.315,70,83,444/- paid to its sister concern M/s Oriental Engineers Private Limited. Since the assessee company has not filed documentary evidence as asked for in the show cause notice to justify such huge expenses to its sister concern, 10% of the expenses claimed by the assessee claimed by the assessee which comes to Rs.31,57,08,344/- are being disallowed and added to the income of the assessee.

Disallowance: Rs.31,57,08,344/-“

“10.

Ground No. 2: In this ground of appeal, the appellant has challenged the action of the AO in making a disallowance of Rs. 31,57,08,344/-being 10% of the total subcontracting expenses being paid to sister concern M/s Oriental Structural Engineers Private Limited. The main thrust of the AO for making addition was that the appellant company has not filed documentary evidences to justify such huge expenses to its sister concern.

10.1

During the course of appellate proceedings, the appellant submitted that the appellant company is a SPV floated by M/s Oriental Structural Engineers Private Limited. M/s Oriental Structural Engineers Private Limited was awarded the contract after competitive bidding in NHAI for a project. For this project, the appellant company was floated as SPV by M/s Oriental Structural Engineers Private Limited. Thereafter, the concession agreement was executed between the appellant company with NHAI and EPC agreement was entered with M/s Oriental Structural Engineers Private Limited for construction of road work. Thus, the appellant company was merely a pass-through vehicle created for a specific NHAI project wherein all the works were being performed by M/s Oriental Structural Engineers Private Limited.

10.2

The appellant has submitted that the amount of Rs. 315,56,26,646/-paid to M/s Oriental Structural Engineers Private Limited was received by it from NHAI for execution of construction work as under:

10.3

Regarding the construction expenses of Rs. 88,87,35,960/-, it was submitted that the annual accounts of the company was prepared as per IND AS for F.Y. 17-18 wherein the EPC cost incurred was treated as Construction Revenue and corresponding entry 'Construction Cost' was made in the Profit and Loss Account. The amount incurred as EPC cost was shown under the head schedule 4A. Intangible Assets under Development. Thus, I find that construction expenses of Rs. 88,87,35,960/ were not claimed as revenue expense, rather the same were capitalized by the assessee-company.

10.4

The second component 'Claims paid of Rs. 50,21,80,162', it has been submitted that represents the reimbursement of Arbitration Claim Award. It has been submitted that as per the terms of the EPC Contract, any claims arising on account of EPC work executed by the appellant company are payable only upon receipt of corresponding payments from the National Highways Authority of India (NHAI). The appellant submitted that the Oriental Structural Engineers Pvt. Ltd. raised claims against the SPV, which were then passed on to NHAI. Upon adjudication, an arbitration award of Rs. 50,21,80,162/- was passed in favour of M/s Oriental Structural Engineers Pvt. Ltd. The appellant, having received this amount from NHAI, reimbursed the same to M/s Oriental Structural Engineers Pvt. Ltd. in accordance with the EPC agreement. In this regard, copy of arbitration award was also filed. In this regard, I find that the amount of Rs. 50,21,80,162/- represented the Arbitration Claim which were received by the appellant company from NHAI and passed on to M/s Oriental Structural Engineers Pvt. Ltd.

10.5

The third component 'Change of Scope and Utility Shifting of Rs. 176,47,10,524' represented the "change of scope" work pertaining to additional contract work not covered under the original scope defined in the tender or concession agreement. Such additional work is required to be executed by the same EPC contractor, under terms and conditions as finalized by NHAI. The appellant acts solely as a pass-through entity for such transactions relating to the change of scope. It was submitted that the appellant received payment from NHAI for the change of scope work, which had been duly certified by the Independent Engineer. Subsequently, the appellant passed on the same payment to the EPC contractor, M/s Oriental Structural Engineers Pvt. Ltd. (OSEPL), on a back-to-back basis. In this regard. I find that the change of Scope and Utility Shifting of Rs. 176,47,10,524 pertained to work carried out by M/s Oriental Structural Engineers Pvt. Ltd. for NHAI for additional construction work.

10.6

As regard, Utility Shifting to Third Agency expenses, it was submitted that the difference of Rs. 7,18,688/- arises between the revenue received from utility shifting (approved by NHAI) and the actual expense incurred on such utility shifting when the work was outsourced to a third party- M/s Green Ponds, Nagpur. The utility shifting work, originally part of the EPC scope, was awarded to the third-party contractor at a lower rate because the main EPC contractor was not in a position to undertake the assignment. As a result, the amount approved by NHAI exceeded the amount paid to the third-party vendor. In this regard, copy of ledger accounts along with work orders were filed.

10.7

The comments were also sought from the AO. In the remand report dated 27.12.2024, AO merely stated that the disallowance is justified since there remains insufficient independent verification of the claim that the entire amount was incurred wholly and exclusively for business purposes.

10.8

In view of the above detailed discussion of the factual matrix of the case, I find that the appellant company was merely a pass through vehicle and the all its receipts from NHAI and payments made to M/s Oriental Structural Engineers Pvt. Ltd. were in the nature of pass-through transactions arising from the contractual arrangement between NHAI, the appellant and M/s Oriental Structural Engineers Pvt. Ltd. The amounts were incurred in accordance with the Concession Agreement, EPC Agreement, and arbitration awards, all of which are substantiated by various documents filed by the appellant.

10.9

In view of the above detailed analysis, I find that the appellant has duly discharged its burden of proof by filing all necessary documents to demonstrate the genuineness and business purpose of the payments made to M/s Oriental Structural Engineers Pvt. Ltd. The AO failed to bring on record any adverse finding or evidence to justify the disallowance. Accordingly, the addition of Rs. 31,57,08,344/- being 10% of the total expenses paid to M/s Oriental Structural Engineers Pvt. Ltd. is hereby deleted. This ground of appeal is allowed.”

“1.

On facts and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 31,57,08,344/- on account of disallowance of 10% of expenses paid to M/s Oriental Structural Engineers Pvt Ltd. made by the Assessing Officer, without appreciating that the assessee failed to furnish independent, verifiable evidence (such as certified work reports, NHAI confirmations, pricing benchmarks, etc.) to substantiate the genuineness, business necessity, and reasonableness of such large-scale payments to its sister concern, M/s Oriental Structural Engineers Pvt. Ltd., especially in a related-party setting.

2.

That the appellant craves leave to add, amend, alter or forgo any ground(s) of appeal either before or at the time of hearing of the appeal.”