M/S PANASONIC INDUSTRIAL ASIA PTE LTD.,,GURGAON vs. ADIT, INTL. TAXATION, NEW DELHI

This is an appeal filed by the assessee against the order of the ld CIT(A)- XXIX, New Delhi dated 28.01.2013 for the Assessment Year 2003-04, wherein the only issue in appeal is that the ld CIT(A) erred on facts in law in not giving effect to the direction of the coordinate bench in toto. The grievance of the assessee is that he has upheld the method adopted by the ADIT while allocating indirect expenses against the commission income from other group company based upon sales made by other group companies in India.

The assessee has raised the following grounds of appeal:- “1. The ld CIT(Appeals) has erred on facts and in law in not giving effect to the directions of the Hon‟ble ITAT it toto.

We have carefully considered the rival contentions and also perused the orders of the lower authorities. The order of the coordinate bench which was stated to have not been followed by the ld lower authorities is reproduced as under:-

Regarding the validity of the reassessment proceedings in AY 2002- 03, the main objection of the assessee is that reassessment proceedings are not valid because the AO had no reason to believe that income had escaped assessment. This objection is based on this factual position that the assessee company was incorporated in Singapore on 14.8.2001 and thereafter, the assessee company was established in India after RBI approval obtained on 7.9.2002 and hence, the assessee had no presence in India during this year. The second objection of the assessee is that the reasons recorded by the AO for issuance of notice u/s 148 were not provided to the assessee as had been held by the Hon'ble Apex Court in the case of GKN Drive Shafts - 259 ITR 19. The third objection of the assessee is that when 4 ITA-1725 to 1727/D/2009 the reassessment proceedings are initiated u/s 148, the AO cannot pass an assessment order u/s 144 and this is the fourth objection of the assessee that such an order passed by the AO u/s 144 is barred by limitation because the assessment order was passed in the present case on 27.9.2006 whereas the time limit for passing such an order expired on 31.3.2005 i.e. on the expiry of two years from the end of the assessment year i.e. AY 2002-03. Learned DR of the Revenue supported the orders of the authorities below.

We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below. Regarding the first and main objection of the assessee in connection with validity of reassessment proceedings, we find that this aspect has been decided by the CIT(A) against the assessee by making following observations on page 4 & 5 of his order in addition to other observations and by following certain judgments. These observations of CIT(A) from page 4 & 5 of his order are reproduced below:- "It will be seen that from the appellant's own admission that initially AO framed an assessment for AY 2003-04 and came to the conclusion that the appellant had a PE in India and accordingly he brought income to tax in terms of the provisions of the Indo-Singapore DTAA. The relevant observations of the AO with regard to existence of PE as well as the attribution of profits are as under: "Taxability under the Income Tax Act The branch office of the assessee is business connection of MEI group in India as this office is responsible for identifying the customers of the group, making presentation to them, undertaking negotiation and finalisation of deal. Supervision of supplies to be made from overseas, support in custom clearance, after-sales services, receipt of payment are undertaken by Page | 4 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04) the branch in India. There was no dispute with regard to the fact that the branch office of the assessee is business connection of the group though which the group is in receipt of income 5 ITA-1725 to 1727/D/2009 from India. Therefore, it is held that the branch of the assessee in India does constitute "business connection" within the meaning of section 9 of the Income Tax Act, 1961 and accordingly profit of the assessee attributable it shall be liable to tax in India. These findings of the AO are adequate reasons to have formed to belief that income in the years had escaped assessment. It is also to be kept in mind that the AO as to only form prima-facie reasons on the basis information gathered by him during the course of assessment proceedings for AY 2003-04. It is a well established principle that while recording reasons for the reopening the assessment it is not necessary to compute the income. Prima facie reason to belief that income has escaped assessment will be sufficient to form his belief as laid down by the Hon'ble Supreme Court of India in the case of Raymond's Ltd. Only distinction that has to be made is that while recording reasons it is only a reason to believe not a reason to suspect and at the same time and not necessarily computation of income. In view of this, the AO cannot be faulted with for having issue notice u/s 148 on the basis of information which came into his possession while framing the assessment for AY 2003-04. So far as the legality of the issue for assuming jurisdiction u/s 147 is that there should be a reason to believe that income chargeable to tax has escaped assessment. Thus where there is information, after the assessment is made or even where time for filing return has passed, reassessment is unavoidable if the AO acts on the information. However, the information should be definite and not vague and may not be in the nature of change of opinion. On the basis of the information reasons have to be recorded prior to issue of notice. It is important to keep in mind that AO has in compliance to the ratio of Supreme Court decision in case of GKN Driveshaft (India) Ltd. vs. ITO(2003) 215 ITR 19 (SC) issued an order indicating the reasons and attended to the objections raised by the appellant. In short following principle has been laid down by the Supreme Court."

The third objection of the assessee is that no such order can be passed u/s 144 where the assessment has been reopened by the AO u/s 148. We are not in agreement with the learned AR of the assessee on this aspect because as per provisions of Section 144, best judgement assessment u/s 144 can be resorted to by the AO if the assessee fails to file return of income u/s 139. As per the provisions ofSection 148, the return filed or to be filed in response to notice u/s 148 is to be treated as return filed or to be filed u/s 139(1). The return filed or to be filed in response to notice u/s 148 is to be treated as return filed or to be filed u/s 139(1) and hence, the act of the assessee for not filing the return u/s 148 is equivalent to the failure of the assessee to file return of income u/s 139(1) and because of this failure of the assessee, the AO is empowered to resort to Section 144 for making best judgement assessment. Hence, this objection is also rejected.

Regarding the fourth objection of the assessee that the assessment order passed by the AO is time barred, we are not satisfied 7 ITA-1725 to 1727/D/2009 because we find that the reassessment proceedings were initiated by the AO on 3.7.2006 by way of issuing notice u/s 148 and hence, as per the provisions of Section 153(2), the order of assessment/reassessment can be passed upto the expiry of one year from the end of the financial year in which the notice u/s 148 was served. Hence, the reassessment in the present case could have been completed upto 31.3.2008 because the reassessment proceedings were initiated in the FY 2006-07 by way of issuing notice u/s 148 on 3.7.2006. Simply because the AO has mentioned in the assessment order that the assessment order is being passed u/s 144 and he has omitted to mention Section 144/148, it cannot be held that the assessment is time barred because admittedly, the proceedings itself were initiated by issuing notice u/s 148 and therefore, the provisions of Section 153(2) are applicable and not 153(1). This objection is also rejected.

Hence, we have seen that all the objections raised by the assessee are not valid and hence, the same are rejected. These grounds of the assessee are rejected. Page | 6 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04) 11. Regarding merit of the case in all the three years, it was submitted by the learned AR of the assessee that as per the appeal effect order passed by the AO, the assessed income of the assessee has been quantified at Rs. 5,38,731/- for AY 2002-03, at Rs. 12,33,302/- for AY 2003-04 and at Rs. 18,22,735/- for AY 2004-05. It is submitted by him that since the Revenue is not in appeal, the income assessed as per the appeal effect order is the maximum and it cannot be further enhanced. It was submitted by him that under this factual position, the assessee will be satisfied if only one relief is allowed i.e. regarding claim for expenses against commission income from other group companies and other income because these two incomes have been assessed by the AO on gross basis and deduction of expenses against these incomes was not allowed. He submitted a working as per which, the assessee is eligible for deduction on account of expenses to the extent of Rs. 63,09,531/- in AY 2003-04 and Rs. 2,01,70,190/- in respect of AY 2004-05 after which the taxable income will come down to Rs. 19,85,596/- in AY 2003-04 and Rs. 46,18,078/- in AY 2004-05 as against the returned income of Rs. 14,21,810/- and Rs. 48,37,180/- respectively. It is also submitted that since in AY 2004-05, the returned income is more, the final income may be determined as per returned income. It is submitted by him that for the purpose of factual verification regarding quantification of allowability of these expenses, the matter may be restored back to the file of the AO for fresh decision. Learned DR of the Revenue also agreed to this broad proposition put forward by the learned AR of the assessee and he also requested that the matter may be restored back to the file of the AO for fresh decision after allowing deduction of expenses which are incurred in connection with or in relation to the earning of income, if any.

We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below. The relevant chart submitted by the assessee for allowing deduction on account of expenses is as under:- RELIEF SOUGHT FROM YOUR HONOR'S S.No. Particulars Assessment Year 2002- Year 2003- Year 2004- 2003 (from 14 2004 (from 1 05 (from 1 August 2001 to April 2002 to April 2003 to 31 March 2002) 31 March 31 March 2003) 2004) 1 Commission income from 538,731* 1,233,302 1,822,735 PIA, Singapore (based on revised computation) (refer page 2 of paper book) 2 Commission income from 0 5,216,507 15,588,357 group companies (based on appeal effect order - it is actual income as reported in financial statements) (refer page 17 and page 18 of paper book) 3 Other income (This includes 0 1,845,318 7,377,175 Page | 7 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04) revenue on sale of certain spare parts and subsidy received which is actually reimbursement of certain expenses incurred by branch office) (refer page 3 of paper book) 4 Total income 538,731 8,295,127 24,788,267 5 Less : Claim for expenses 0 (6,309,531) (20,170,190) (refer page 5 of paper book)** 6 Balance income which may 538,731 1,985,596 4,618,078 be subject to tax 7 Total income as per return Not applicable 1,421,810 4,837,180 of income*** *The figure is based on appeal effect order passed by learned ADIT for assessment year 2002-2003. **Total expenses claimed above are out of total expenses of Rs.12,665,590 for assessment year 2003-2004 and Rs.32,154,525 for assessment year 2004-2005. ***We understand that relief under assessment year 2004-2005 would be restricted to returned income.

We find that the AO has made addition of the gross amount of income on account of commission income from group companies and other income without allowing any deduction of expenses against these incomes. With this, we are not satisfied because gross income cannot be brought to tax and only net income after allowing deduction of expenses, if any, only can be brought to tax. Deduction has been worked out by the assessee on this basis that direct expenses on account of sale of spare parts to the extent of Rs. 16,24,519/- should be considered for allowing deduction against income on account of sale of goods of Rs. 24,93,372/- in AY 2004-05. It is also contended that income considered on account of subsidy of Rs. 14,17,132/- in AY 2003-04 and Rs. 32,53,654/- in AY 2004-05 are actually reimbursement of expenses incurred by PIA, Singapore to branch office on training of employees. If the same is considered as income, then actual expenses incurred on that account have to be allowed as expenses after verifying the details and evidences regarding incurring of those expenses. In addition to this, the assessee has claimed deduction of Rs. 63,09,531/- in AY 2003- 04 and Rs. 2,01,70,190/- in AY 2004-05 being proportionate allocation of indirect expenses. Such allocation has been made after deducting the direct expenses from total expenses and then allocating the same in proportion to receipt considered as income in India. The working regarding such allocation of expenses is available on pages 4 & 5 of the submissions of the assessee before us dated 1.11.2010 and for the sake of ready reference, these workings are reproduced herein below:- DETAILS OF EXPENSES S.No. Particulars Assessment Assessment Assessment Year 2002- Year 2003- Year 2004- 2003 (from 14 2004 (from 1 2005 (from 1 August 2001 to April 2002 to April 2003 to Page | 8 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04)

Since, it is not possible for us to verify the correctness of this working, we restore this matter back to the file of the AO for this purpose. We set aside the order of CIT(A) on this issue in AY 2003-04 & 2004-05 and direct the AO to allow deduction to the assessee on account of expenses incurred by it in connection with earning of commission income from group companies and other incomes which are brought to tax on gross basis. The working of the assessee should be verified and expenses should be allowed as deduction to the extent it is found that the expenses are allocable towards earning of these two incomes. If the net income after allowing deduction of expenses is lower than returned income in any year, then the final assessed income should be the returned income which means that deduction on account of expenses should be restricted to that extent which result into net income to the extent of returned income. The AO should pass necessary order as per Page | 9 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04) law as per above discussion after providing adequate opportunity of being heard to the assessee in AY 2003-04 and 2004-05. Regarding AY 2002- 03, it has been submitted by the assessee that no working can be made available regarding expenses of this year. Hence, for AY 2002-03, we confirm the order of CIT(A) because in this year only commission from PIA, Singapore has been brought to tax and no income on account of commission from group companies and other income has been brought to tax in this year and therefore, no deduction is to be allowed in this year on account of expenses. As a result, the appeal of the assessee for AY 2002-03 is dismissed whereas the remaining two appeals for AY 2003-04 & 2004- 05 are partly allowed for statistical purposes.” (Underline supplied by us) 7. On careful reading of the order of the coordinate bench in para No. 13 it has been held that the gross commission income cannot be charged to tax and they have directed the ld Assessing Officer to allow the expenses from the gross commission income. In that paragraph the coordinate bench has reproduced the working as per submission of the assessee. Further in para 14 they have stated that it is not possible for them to verify the correctness of this working, so it was set aside to the file of the ld AO. The coordinate bench nowhere in its order has stated that the details furnished by the assessee is correct and is to be followed. Therefore, it is apparent from the direction contained therein that the correctness of the claim of the assessee is required to be verified. The correctness of the claim of the expenses would be based on the right allocation key. The allocation key adopted by the assessee is the total expenses as per the financial statement minus direct expenses on the basis of income earned. Therefore, 43.3% of the total expenditure has been claimed as indirect expenses. The ld Assessing Officer has changed the allocation key on the basis of sales to group companies which is 16.62% only and thereby he has computed the total expenditure at Rs. 18.77 lacs. The ld AO gave the proper opportunity to the assessee and the assessee availed it by furnishing the letter dated 22.12.2011 which is as under:- “22 December 2011 Page | 10 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04) Additional Director of Income Tax Range 2 International Taxation New Delhi Dear Sir, Re: Panasonic Industrial Asia Pte Limited („PIAPL‟ or „Assessee‟ or “Head office‟) Proceedings under section 144A/143(3)/254 of the Income Tax Act, 1961(„Act‟) Assessment Year ('„AY‟) 2003-2004 and 2004-05 We refer to ongoing proceedings of PIAPL for giving an appeal effect to the order passed by Income Tax Appellate Tribunal (“ITAT‟) under section 254 of the Act for AY 2003-04 and 2004-05. In this connection, we had detailed discussion with your good self on 14 December 2011 regarding allocation of direct and indirect expenses to commission income from other group companies and other income. Based on discussion with your good self, we understand that your good self is considering to allocate the indirect expenses based on figures of sales made by Head Office and other group companies. In reference to above, on behalf and under instructions of our subject client, we submit as under: PIAPL is a company incorporated in Singapore and was established on 14 August 2001. PIAPL is primarily engaged in the business of trading for industrial products such as compressors, semi- conductors, machinery and batteries. PIAPL established a Branch Office („BO‟) in India which received approval from Reserve Bank of India („RBI‟) on 7 September 2002. As per the approval granted by the RBI, the activities of BO were restricted to marketing and technical support and research activities. Thus, activities of the BO are restricted to provisions of said services only. The BO is not allowed to carry trading activities in India. In view of the fact that the BO has earned income in India from provision of services only, it is respectfully submitted that allocation of indirect expenses should be made based upon service / commission income i.e. income generated from provision of services. Further, it is a fundamental principle of cost allocation that cost is allocated to cost objective that cause it. In the instant case, indirect expenses are incurred by the BO with the objective of earning service / commission income. Therefore, indirect expenses incurred by the BO should be allocated based upon service / commission Page | 11 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04) income. This principle is confirmed by Cost Accounting Standard 3 (CAS-3) issued by Institute of Cost and Works Accountants of India also. The relevant extract of CAS -3 is reproduced as under for your kind perusal: “5. Apportionment and absorption of Production Overheads 5.1 Overheads are to be apportioned to different cost centres based on following two principles: i) Cause and Effect - Cause is the process or operation or activity and effect is the incurrence of cost. Apportionment of overheads based on this criterion ensures better rationality as it is guided by the relationship between cost object and cost. ii) Benefits received - overheads are to be apportioned to the various cost centres in proportion to the benefits received by them. " In view of above CAS, it is submitted that in instant case, provisions of services is a cause which results in incurring of various indirect expenses. Accordingly, in view of CAS-3 as issued by India‟s sole cost accounting institute, indirect expenses should be allocated based upon service / commission income. Further, it may be noted that for BO, provision of services to Head Office and other group companies are like two cost centres. The benefits are received by these cost centres in terms of service fee or commission. Therefore, in view of above CAS, it is submitted that indirect expenses of these two cost centres of the BO should be allocated in proportion to benefits received i.e. service / commission income. In view of above discussion, it is respectfully submitted that allocating the indirect expenses on the basis of sales figures made by Head Office and other group companies would be unreasonable and would cause undue hardship to the assessee. Your good self would appreciate that services provided by the BO and indirect expenses incurred for rendering such services has no one to one relation with the sales made by Head Office and other group companies. The indirect expenses incurred by the BO are wholly independent of sales made by Head Office and other group companies. This can be understood through an example as under: Company A is rendering marketing support services to company B. As part of marketing support services, Company A does market research and supplies a list of prospective customers say Customer C,D,E,F,G to Company B. Based on such list of prospective customers provided by Company A, Company B approaches to Page | 12 Panasonic Industrial Asia Pte Ltd Vs. ADIT (Assessment Year: 2003-04) those customers. However, Company B is able to materialize the sales only to Customer C and D. Therefore, Company B pays commission to Company A based on sales made to Customer C and D only. It may be noted that Company A has earned commission in respect of sales made to Customer C and D only. However, the market research activities and relative indirect expenses incurred by Company B cannot be identified specifically to Customer C and D. Company A had incurred indirect expenses in indentifying others customers as well. Therefore, indirect expenses cannot be allocated based upon sales made to Customer C and D only. In light of above discussion, we request your good self to allocate the indirect expenses based upon service income / commission income only. We hope your goodself would find the above in order and to your satisfaction. Please do let us know in case you need any other information / clarification.”