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Income Tax Appellate Tribunal, “J”, BENCH MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI G. MANJUNATHA & Shri Anuj Kishadwalla, AR’s
Date of Hearing 30/07/2020 Date of Pronouncement 05/08/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA (A.M):
These cross appeals filed by the assessee, as well as the revenue are directed against order of the Ld. Commissioner of Income Tax (Appeals)–58, Mumbai, dated 19/06/2017 and pertains to Asst.Years 2012-13.
2 Sonata Software Limited.
The assessee has raised the following grounds of appeal:- Ground No. 1:
On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer (TPO) /A.O. erred in making an addition of Rs. 11,37,54,713/- on account of transfer pricing adjustment in respect of arm's length price of redemption of non -cumulative convertible preference share of its wholly owned subsidiary. Ground No. 2: a) On the facts and in the circumstances of the case and in law, the learned TPO / A.O. erred in making addition of Rs. 18,76,94,907 on account of transfer pricing adjustment in respect of international transaction of provision of services to AEs. b) The Id. TPO / AO erred in considering Transactional Net Margin Method as the Most Appropriate Method for benchmarking the transaction of provision of services as against Cost Plus Method adopted by the appellant. c) Without prejudice to the above, the Id. TPO / AO erred in considering the entities which are not functionally comparable with that of the appellant while determining the ALP of the international transaction of provision of services to AEs.
The revenue has raised the following grounds of appeal:- 1 Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) is justified in holding that adjustment to the returned income can be made only on transactions with associate enterprises without appreciating the fact that on TNMM analysis the adjustment is required to be made on total transactions entered as the analysis is on entity level.
2. Whether on the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in directing the AO to compute the margin of the assessee only with respect to the AE segment without appreciating the fact that the department on the identical issue in the case of Firestone International Pvt Ltd has not accepted the decision of Hon'ble High Court and has filed SLP before the Apex Court.
3. The Ld. CIT(A)'s order is contrary in law and on facts and deserves to be set aside.
4. The appellant craves leave Lo amend or alter any ground or add a new ground that may be necessary.
5. The appellant prays that the order of C1T(A) on the above grounds be set aside and that of the AO restored.
3 Sonata Software Limited.
The brief facts of the case are that the assessee is engaged in the business of software development. The return of income was filed electronically on 29/11/2012 and the same was processed u/s 143(1) of the I.T.Act, 1961. The case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act were issued. In response to notice, the authorized representative of the assessee appeared from time and filed various details as called for. During the year under consideration, the assessee has entered into various international transactions with its Associated Enterprises (AE’s) and form 3CEB has been filed for the same. During the course of assessment proceedings, in order to determine the Arms Length Price (ALP) of the international transactions, a reference was made to the TPO. The DCIT, TP-(4)(1)(2) has passed order u/s 92CA(3) dated 14/01/2016 and has suggested Transfer Pricing adjustment of Rs.11,37,54,730/-, in respect of redemption of non cumulative convertible preference shares of the subsidiary company. The TPO had also made adjustment of Rs.18,76,94,907/-, in respect of services provided to overseas AE’s by changing the Cost Plus method selected by the assessee to Transactions Net Margin method. Consequent to TP Adjustment as suggested by the TPO, the Ld. AO has passed final assessment order on 08/03/2016 u/s 143(3) r.w.s. 92CA(4) of the I.T.Act, 1961 and determined total income at Rs.40,22,85,120/- after making TP Adjustment as suggested by the Ld.TPO. However, before passing final assessment order, the Ld. AO has not passed draft assessment order as required u/s 144C(1) of the I.T.Act, 1961.
Being aggrieved by the assessment order, the assesse has preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assesee has challenged additions made by the Ld. AO towards TP
4 Sonata Software Limited. Adjustment on account of redemption of non convertible preference shares and services provided to overseas AE’s. The Ld.CIT(A) for the reasons recorded in his appellate order, dated 19/06/2017, has partly allowed appeal filed by the assessee, where, he has upheld additions made by the Ld. AO towards TP Adjustment on account of redemption of non convertible preference shares, however allowed relief in respect of additions made towards TPA on account of services provided to overseas AE’s by holding that transactions of the assessee with its overseas AE is at arm’s length and no adjustment is called for on this transaction. Aggrieved by the Ld.CIT(A) order, the assessee as well as the revenue are in appeal before us.
The Ld. AR for the assessee, at the time of hearing submitted that the assesee has filed additional ground challenging the order passed by the Ld. AO u/s 143(3) r.w.s. 92CA(4) of the I.T.Act, 1961, dated 08/03/2016, in absence of draft assessment order. The Ld. AR for the assessee further submitted that although, the Ld. AO is required to pass draft assessment order u/s 144C(1) of the I.T.Act, 1961, before passing final assessment order, but the Ld. AO has passed final assessment order without any draft assessment order in contravention of the provisions of Act and therefore, the final assessment order passed by the Ld. AO u/s 143(3) r.w.s. 92CA(4) dated 08/03/2016 is bad in law and liable to be quashed. The Ld. AR for the assessee further submitted that ground challenging the validity of the order passed by the Ld. AO for want of draft assessment order was inadvertently omitted to be raised before the Ld. CIT(A). Further, even before ITAT, the assessee has inadvertently omitted to raise the ground challenging validity of assessment order. Therefore, a petition for admission of additional
5 Sonata Software Limited. ground has been filed on 11/09/2019 challenging the validity of assessment order passed by the Ld. AO. He, further, submitted that additional ground of appeal raises purely question of law and no facts are required to be brought on record. Therefore, additional grounds of appeal filed by the assessee may be admitted and adjudicated on merits. In this regard, he relied upon by the decision of Hon’ble Supreme Court, in the case of National Thermal Power Co. Ltd. vs CIT 229 ITR 383(SC).
The Ld. DR, on the other hand strongly opposing additional ground filed by the assessee submitted that additional ground of appeal filed by the assessee should not be admitted, because the Ld. AO has not passed draft assessment order, on the basis of admission of counsel for the assessee before the Ld. AO that the assessee is not filing objections before the Ld. DRP. Therefore, once there is an admission from the assesee for not filing objections before the Ld. DRP, the Ld. AO has proceeded to pass final assessment order and hence, challenging the validity assessment order for want of draft assessment order at this stage is incorrect.
We have heard both the parties, perused the material available on record and gone through orders of the authorities below. We find that additional ground of appeal raised by the assesee is purely a question of law and no new facts are required to be brought on record. Further, it is a settled position of law by the decision of Hon’ble Supreme Court, in the case of NTPC vs CIT (supra), where it was clearly held that the assesee can raise additional grounds of appeal challenging legal issues at any time, even if said ground is not taken before the Ld. AO. Therefore, by considering facts and circumstances of the case and also, by following the decision of 6 Sonata Software Limited. Hon’ble Supreme Court, in the case of NTPC vs CIT, we deem it appropriate to admit additional ground of appeal filed by the assessee. Hence, the additional ground of appeal filed by the assessee is admitted and to be decided on merits.
As regards the additional grounds of appeal filed by the assesee challenging validity of assessment order passed by the Ld. AO u/s 143(3) r.w.s. 92CA(4) of the I.T.Act, 1961 for want of draft assessment order u/s 144C(1) of the Act, 1961, we find that the issue is squarely covered in favour of the assessee by the decision of various high Courts, including Hon’ble Delhi High Court in the case of Turner International Pvt.Ltd. vs DCIT 398 ITR 177 (Delhi High court), where, the Hon’ble High Court held that failure by the Ld. AO to adhere to the mandatory requirement of section 144C(1) of the Act, and pass draft assessment order had invalidated the final assessment order, the consequent demand notice and penalty proceedings. The legal position was unambiguous and final assessment order stood vitiated for failure to adhere to mandatory requirements of first passing a draft assessment order in term of section 144C(1) of the I.T.Act, 1961. The Hon’ble Bombay High Court, in the case of DCIT vs Andrew Telecommunication Pvt.Ltd. (2018) 96 taxmann.com 613 has taken similar view. Further, the Hon’ble Bombay High court, in the case of Dimension Data Asia Pacific Pte.Ltd.vs DCIT (304) CTR 140 has taken similar view and held that the Ld. AO is obliged to pass a draft assessment order, even in remand proceedings by Tribunal. Further, the assessee being a foreign company and in the working out of the order dated 05/05/2017 of the Tribunal results in the returned income being varied, then the procedure of passing a draft assessment order u/s 144C(1) is mandatory and has to be complied with which has not 7 Sonata Software Limited. been done and hence, impugned order is quashed and set aside. The Hon’ble Supreme Court in the case of ACIT vs Nokia India Pvt.Ltd, while dismissing SLP filed by the revenue held that once, there is a clear order of setting aside of an assessment order with requirement of AO/TPO to undertake a fresh exercise of determining ALP, failure to pass a draft assessment order, would violate section 144C(1) of the I.T.Act, 1961 and this is not a curable defect in terms of section 292B of the I.T.Act, 1961. The sum and substance of ratios laid down by the decisions of above case laws is that the Ld. AO shall mandatorily pass draft assessment order u/s 144C(1) of the I.T.Act, 1961, before passing final assessment order. Further, in absence of a draft assessment order as required u/s 144C(1) of the I.T.Act, 1961, the final assessment order passed by the Ld. AO u/s 143(3) r.w.s. 92CA(4) of the I.T.Act, 1961, dated 08/03/2016 is null and void, which cannot be sustained under law. But, fact remains that since, the assessee has taken the ground challenging the validity of assessment order for the first time before the Tribunal and the lower authorities never had an occasion to consider the issue, we are of the considered view that the issue needs to go back to the file of the Ld. CIT(A) to ascertain the fact, whether the AO has passed draft assessment order as required u/s 144C(1) of the Act, or not. In case, the Ld. CIT(A) finds that there is no draft assessment order was passed as required u/s 144C(1) of the Act, then the assessment order passed by the Ld. AO u/s 144(3) r.w.s. 92CA(4) of the Act is bad in law and cannot be sustained. The ld. CIT(A) is directed to cause necessary enquires and pass appropriate order in accordance with law by taking note of our observations given in light of various case laws discussed hereinabove.
8 Sonata Software Limited. 10. In the result, appeal filed by the assessee, as well as the Revenue is set aside for statistical purposes.
Order pronounced in the open court on this: 05/08/2020