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Income Tax Appellate Tribunal, DELHI I BENCH: NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI MANISH AGARWAL
ORDER
PER MANISH AGARWAL, AM :
This appeal is filed by the assessee against the final assessment order u/s 143(3) r.w.s.144C(13) of the Income Tax Act, 1961 [“the Act”] dated 27.07.2022 passed after giving effect to the directions of Ld. Dispute Resolution Panel [“Ld.DRP”] given vide its order dated 30.05.2022 pertaining to assessment year 2018-19.
Brief facts of the case are that the assessee filed its return of income on 30.11.2018, declaring total income at INR 3,49,65,94,860/-. The case was selected for scrutiny u/s CASS and notice u/s 143(2) issued on 22.09.2019. Since the assessee was entered into international transactions with related parties therefore, the case of the assessee was referred to Transfer Pricing Officer (“TPO”) for determination of Arm’s Length Price [“ALP”] of such transactions. The TPO vide order dated 31.07.2021 u/s 92CA(3) of the Act proposed certain adjustments. The AO passed draft assessment order u/s 144(1)/144B wherein besides the adjustments proposed by TPO, certain other disallowances were proposed by the AO on account of lease hold expenses and e-shop expenses and accordingly, total income of the assessee was proposed to be assessed at INR 4,32,14,89,191/-.
Against this order, the assessee raised objections before Ld. DRP, who in terms of the order dated 30.05.2022 passed u/s 144C(5) of the Act, gave certain directions to the AO and accordingly, the objections raised by the assessee were decided. Subsequently, the AO passed the final assessment order u/s 143(3)/144C(13) of the Act on 27.07.2022 at the same income as has been computed in the draft assessment order at INR 4,07,29,84,576/- by making following additions/disallowances:- (i) TP adjustment of INR 35,02,39,074/-; (ii) Disallowance of lease hold expenses of INR 11,49,23,267/-; (iii) E-shopping expenses of INR 11,12,27,375/-.
Against this order of AO, the assessee preferred appeal before the Tribunal wherein following grounds of appeal are taken:- 1. “On the facts and circumstances of the case and in law, the impugned final order passed by the Ld. Assessing Officer ('Ld. AO') is bad in law.
2. On the facts and circumstances of the case and in law, Ld. AO/ Learned Transfer Pricing Officer ('Ld. TPO) in pursuance to the directions of the Ld. Dispute Resolution Panel ('Ld. DRP), erred in not accepting the returned income of INR 349,65,94,860/-.
3. On the facts and circumstances of the case and in law, the impugned final assessment order u/s 143(3) r.w.s. 144C(13) of the Act is bad in law and void ab-initio in as much as not being passed in conformity with the Hon'ble DRP directions and therefore, is in violation of the statutory provisions of section 144C (10) read with section 144C(13) of the Act. Page | 2 Grounds on Transfer Pricing Matters 4. On the facts and in the circumstances of the case and in law, the Ld. AO/TPO erred by invoking the provisions of Chapter X of the Act. 4.1 In doing so, the Ld. AO/Ld. TPO erred in incorrectly holding that DPIF and DDF are Associated Enterprises ('AEs') of the Appellant within the meaning of section 92A of the Act. 4.2 In doing so, the Ld. AO/Ld. TPO erred in misinterpreting the facts of the Appellant's case and also disregarding the pronouncement of the Hon'ble High Court of Karnataka in similar facts in the case of Page Industries Ltd (ITA No. 285 of 2017).
5. On the facts and in the circumstances of the case and in law, the Ld AO/TPO-erred by enhancing the income of the Appellant by INR 34.79.54.141/- on account of Advertising, Marketing and Promotion ('AMP') spend by: 5.1 Incorrectly establishing an arrangement between the Appellant and Domino's Pizza International Franchising Inc. ("DPIF") / Dunkin Donuts Franchising LLC ("DDF") for the development of marketing intangibles and proceeded to make an adjustment by disregarding various rulings pronounced by the Honorable Jurisdictional High Court, thereby not following the judicial discipline as mandated by law. 5.2 Incorrectly holding that AMP expenditure constitutes an international transaction under section 928 read with section 92F(v) of the Act. 5.3. Disregarding the nature of AMP expenses incurred by the Appellant and incorrectly holding that such expenses resulted in a service rendered by the Appellant in nature of development of marketing intangibles for its AEs which needs to be reimbursed by the AEs along with mark-up. 5.4 Failing to appreciate the functional profile of the Appellant and its financial arrangement with DPIF/DDF. 5.5 Incorrectly benchmarking the AMP expenses incurred by the Appellant by undertaking intensity adjustment. 5.6 Incorrectly benchmarking the AMP expenses incurred by the Appellant by applying 'bright line method and computing protective adjustment thereof. 5.7 Making dual adjustment which is not allowed under the provisions of the Act. Page | 3 5.8 Incorrectly concluding that Appellant has undertaken AMP expenses for the benefit of DPIF/DDF, whereas the Appellant is earning all the residual income from the business and only paying fixed royalty to the franchisors.
6. Without prejudice to the contentions stated in ground no. 5 supra, the impugned AMP adjustment is devoid of accuracy in as much as: 6.1. The additional comparable companies proposed by the Appellant for computation of arm's length AMP/Sales, were rejected by misapplication of persistent losses filter. 6.2. The quantum of AMP adjustment contained the value of selling expenses incurred by the Appellant, which does not fall under the purview of AMP expenditure.
7. That on the facts and in the circumstances of the case and in law, the Ld. AO/ TPO have erred in enhancing the income of the Appellant by INR 22,84,933 on account of payment of royalty, by: 7.1. Disregarding the arm's length analysis undertaken by the Appellant for payment of royalty, without providing any basis. 7.2. Not undertaking arm's length analysis in accordance with provisions of section g2C of the Act read with Rule 10B of the Income Tax Rules, 1962 ('the Rules). 7.3. Undertaking comparison between two alleged controlled transactions in order to arrive at the arm's length price. Grounds on Corporate Tax Matters 8. On facts of the case and in law, the Ld. AO/Ld. DRP erred in not allowing the claim of Rs.11,12,27.375 u/s 37(1) of the Act on options exercised by the employees during the year under consideration by alleging that the said ESOP expenses are not relatable to profits and gains arising from the business. 8.1. That on facts of the case and in law, the Ld. AO/ Ld. DRP erred in disallowing the claim of the Appellant by alleging it to be a capital receipt. 8.2. That on the facts and circumstances of the case and in law, the Ld. AO/ Ld. DRP erred in construing issue of shares at discounted value under ESOP scheme vis-à-vis market price as short receipt of capital/premium and being notional loss not allowable under the Act. 8.3. That on facts of the case and in law, the Ld. AO/Ld. DRP erred in not taking into cognizance the detailed submissions, ESOP Page | 4 working, and accounting policy filed by the Appellant during the assessment proceedings. 8.4. That on facts of the case and in law, Ld. AO/ Ld. DRP failed to appreciate that the similar issue has been decided by the Hon'ble ITAT in Appellant's favour in its own case for AYs 2012-13 and 2013- 14 and further affirmed by the Hon'ble High Court.
9. On facts of the case and in law, the Ld. AO erred in disallowing the leasehold improvements expenditure amounting to Rs.11,49,23,267 without passing a speaking order and without giving any cogent reasons. 9.1. That on facts of the case and in law, impugned draft order passed by the Ld. AO is cryptic and laconic in nature in as much as the same has been passed without following the directions of Ld. DRP. 9.2. That on facts of the case and in law, the Ld. AO/Ld. DRP erred in not appreciating that entire leasehold improvements expenditure claimed as revenue expenditure amounting to Rs. 11,49,23,267 is an allowable expenditure under section 37(1)/30(a)(i) of the Act. 9.3. That on facts of the case and in law, Ld. AO/ Ld. DRP failed to appreciate that the similar issue has been decided by the Hon'ble ITAT in Appellant's favour in its own case for AYs 2012-13 and 2013- 14 and further affirmed by the Hon'ble High Court. 9.4. Without prejudice to the above, Ld. AO erred in not allowing the expenditure of INR7.75.23.358 which has been considered as revenue expenditure as per the directions given by Hon'ble DRP and to this extent the adjustment made is excessive and has no legs to stand. 9.5. Without prejudice to the above, Ld. AO erred in not allowing depreciation of Rs.56,09,978 on disallowance of Leasehold expenditure.
10. On facts of the case and in law, the Ld. AO has erred in not granting the credit of INR 3,35,80,952 in respect of Dividend Distribution Tax chimed by the Appellant and further erred in levying interest under section 115P of the Act.
11. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in levying interest u/s 234B,234C and 234D of the Act.
12. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings u/s 270A of the Act on account of under-reporting of income. The above grounds are without prejudice to each other. Page | 5
The Appellant craves leave to alter, amend or withdraw all or any of the Grounds of Appeal contained herein or add any further grounds as may be considered necessary either before or during the hearing of the objections.”
5. Before us, Ld.AR for the assessee submitted that Ground Nos. 1 & 2 are general in nature thus, not adjudicated.
6. Ground No.3 is in relation to the action of the AO in not following the directions of Ld.DRP while passing the final assessment order.
7. Before us, Ld.AR for the assessee submits that the appellant has taken objections regarding disallowance of claim of lease hold improvement expenses at INR 11,49,23,267/-. Ld.DRP while disposing of the objections granted partial relief to the assessee while disposing Ground No.7 of the assessee. As per assessee, ld. DRP directed the AO to allow lease hold improvement expenses to the extent of INR 7,75,23,258/- as revenue expenses. However, the AO without giving effect to the directions of Ld.DRP, passed the final assessment order which is gross violation of mandatory provision of section 144C(13) of the Act. He further submits that Ld. DRP also given certain directions while disposing of the objections raised by the assessee. Ld.AR further submits that an application u/s 154 of the Act was filed in this regard which was also rejected. He thus submits that the order passed by the AO without following the directions is bad in law and therefore, deserves to be quashed. For this, reliance is placed on the judgment of Co-ordinate Bench of Tribunal, Delhi in the case of M/s Olympus Medical Systems Pvt. Ltd Vs. The A.C.I.T in dated 13.01.2022 and also in case of Global One Pvt. Ltd. vs DCIT reported in 112 taxmann.com 185 [Del. Trib.] wherein it is held that not following the directions of Ld.DRP is fatal error and therefore, assessment become null and void. He also placed reliance on the judgement of Co-ordinate Benches of Tribunal in following cases:- Page | 6
[i]. “Flextronics Technologies (India) Private Limited v. ACIT Circle 3(1) (1), Bangalore [IT(TP)A No.832/Bang/2017] [ii]. Software Paradigms Infotech (P.) Ltd. v. ACIT [2018] 89 taxmann.com 339 (ITAT Bangalore) [iii]. July Systems & Technologies Put. Ltd. v. DCIT [2018] IT(TP) A No. 368/Bang/2016 (ITAT Bangalore).”
On the other hand, Ld.CIT DR submits that the failure on the part of AO in not incorporating the directions given by DRP in the final assessment order is not a fatal error for which the order could be held as bad in law. Ld.CIT DR further submits that solely on this issue, the entire proceedings cannot be held bad in law. He placed reliance on the judgment of Hon’ble Jurisdictional High Court in the case of SRF vs NFAC, Delhi reported in 129 taxmann.com 174 [2021] (Del.) and also in the case of Anand NVH Products Ltd. vs N E Assessment Centre, Delhi in WP(C) 7936/2021 dated 06.08.2021 and judgement of Co-ordinate Bench of Tribunal, Delhi Benches in the case of Hitachi Astemo Haryana Pvt.Ltd. vs DCIT in and in the case of Honda R & D Pvt.Ltd. vs DCIT in ITA No.376/Del/2015 [AY 2010-11] order dated 19.09.2024. In all these judgements, it is held that the final assessment order passed without incorporating DRP directions, should be set aside to the file of AO for incorporation of such directions. He, therefore, prayed that the matter may be sent back to the file of AO for making necessary amendments in the final order in terms of the directions given by DRP.
Heard both the parties and perused the material available on record. In the instant case, it is seen that DRP while disposing Ground No.7 of the assessee with respect to the disallowance of INR 11,49,23,267/- claimed by the assessee as lease holding improvement expenditure in para 6.2 of the order gave following directions:-
6.2. “The submissions have been examined. It is seen that similar objections were filed on such disallowance in AY 2014-15. As the legal and factual matrix remains the same, DRP directions of AY 2014-15 shall apply mutatis mutandis for this year as well. The Ground is disposed of as above.”
From the perusal of above, it is evident that DRP has followed his directions given in assessee’s own case for AY 2014-15 wherein while deciding the objections on similar issue of disallowance of lease hold improvement expenses, DRP had given certain directions which are mutatis mutandis applied for this year. The directions given by DRP in AY 2014-15 are as under:- “xi. After due consideration, the panel directs that the AO consider the expenses at the following serial nos. as revenue expenditure: 1, 4, 8, 13 & 14. Remaining expenditure may be capitalized and deprecation to be allowed on the capitalized amount.”
From the perusal of the TPO order giving effect to the DRP directions and final assessment order dated 27.07.2022 of the AO, it is seen that the AO has made no discussion on the directions given by DRP in the final order and passed the final assessment order by making disallowance of INR 11,49,23,276/- as proposed in the draft assessment order. According to the assessee, if the directions given in AY 2014-15 are applied, the expenses to the extent of INR 7,75,23,358/- would be allowed as revenue expenditure. Apparently, the claim of the assessee found correct. The Hon’ble Jurisdictional High Court in the case of SRF vs NFAC (supra) and Anand NVH Products Ltd. vs NEAC, Delhi (supra) held that this kind of error does not lead to the assessment proceedings as fatal rather an opportunity should be given to the AO for correcting such error. In case of Hitachi Astemo Haryana Pvt.Ltd. (supra), the Co-ordinate Bench of ITAT, Delhi after considering the aforesaid orders of Hon’ble High Court set aside the final assessment order to the file of AO for incorporating DRP’s directions. The Relevant observations as in para 6 to 8 of the said order are as under:- Page | 8
“We have heard both the parties and perused the records. We have given very thoughtful consideration to the above submissions and case laws. We find that the ld. Counsel of the assessee relied upon the Tribunal decisions and one decision from Hon’ble Karnataka High Court (supra). On the other hand, ld. DR for the Revenue has relied upon three case laws from Hon’ble jurisdictional High Court and one decision from Hon’ble Madras High Court. We find that Hon’ble jurisdictional High Court is binding on the Tribunal, hence we adjudicate this issue with reference to the orders of the Hon’ble jurisdictional High Court referred above, as the facts are similar.
In the case of Anand NVH Products Pvt. Ltd. (supra), we noted that assessment order has been passed under section 143(3) read with section 144C of the Act without waiting for the decision of the DRP. Hon’ble High Court in that case set aside the final assessment order along with notice of demand and restored the matter to the level of DRP. 7.1 In the case of SRF Ltd. (supra), the final assessment order was passed without incorporating the DRP’s directions. Hon’ble High Court, in such a situation, quashed the final assessment order and the demand of notice and remitted the matter to DRP for consideration under section 144C of the Act. Thereafter, it was directed that the assessment order shall be passed in accordance with the procedure stipulated under section 144B(1) as well as section 144(C) of the Act. 7.2 In the case of Fibrehome India Pvt. Ltd. (supra) also, the final assessment order was passed without incorporating the directions of the DRP. In that case also, Hon’ble jurisdictional High Court remitted the matter to DRP keeping in view of the scheme of section 144C of the Act. In this decision, Hon’ble jurisdictional High Court inter alia referred to the decisions of Hon’ble jurisdictional High Court in the cases of Anand NVH Products Pvt. Ltd. and SRF Ltd. (supra). 8. Thus, from the above reading of Hon’ble jurisdictional High Court decisions, it is emanating that in the final assessment order passed without 8 incorporating the DRP’s directions, the matter has been remanded to the DRP by the Hon’ble High Court to give effect to the scheme of section 144C of the Act. The above case laws are binding upon us. Hence, following the same, we remit the issue to the file of AO. AO shall pass an order incorporating DRP’s directions which has been given effect by the TPO.”
The facts in the instant case are identical and also the assessee has challenged this action of AO. Thus, by respectfully following the judgements of Hon’ble Jurisdictional High Court in the case of SRF vs NFAC, Delhi (supra), Anand NVH Products Ltd (supra) and the Co-ordinate Bench of ITAT in the case of Hitachi Astemo Haryana Pvt.Ltd. and Honda R & D Pvt.Ltd. (supra), we are of the considered view that in the present case, the assessee has successfully demonstrated that AO has not followed the directions given by the Ld.DRP and accordingly, we remit back the issue to the file of AO with the direction that AO shall pass the final assessment order after incorporating and considering the directions given by Ld.DRP. Accordingly, Ground No.3 of the assessee is allowed for statistical purposes.