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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI R.K. PANDA & SHRI SUDHANSHU SRIVASTAVA
PER SUDHANSHU SRIVASTAVA, J.M.
ITA No. 494/Kol/2015 is assessee’s appeal against
the final assessment order passed subsequent to the
directions of the Ld. DRP in assessment year 2010-11,
whereas ITA 567/Kol/2015 is the department’s cross
appeal for the same year. ITA No. 1057/Del/2016 is the
department’s appeal against the final assessment order
passed subsequent to the directions of the Ld. DRP for
assessment year 2011-12. ITA No. 1154/Del/2016 is the
assessee’s cross appeal for assessment year 2011-12 and
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
ITA No. 3207/Del/2016 is also assessee’s appeal for
assessment year 2011-12 wherein order u/s 154(3) of the
Income Tax Act, 1961 (hereinafter called 'the Act') passed
by the Transfer Pricing Officer (TPO) has been
challenged. All these appeals were heard together and
for the sake of convenience, they are being disposed of
through this consolidated order.
At the outset, the Ld. CIT DR submitted that the
department’s appeal for assessment year 2010-11 and
bearing ITA No. 567/Kol/2015 was delayed in filing by a
period of ten days due to the file being on transit
movement through the proper channel. He drew our
attention to the delay condonation application and the
affidavit in this regard and prayed that the delay be
condoned.
2.1 The Ld. AR opposed the prayer for condonation of
delay and submitted that the appeal should be
dismissed.
2.2 Having heard both the parties and after having gone
through the affidavit as well the delay condonation
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
application, we are of the considered opinion that in the
interest of justice, the delay deserves to be condoned.
We, accordingly, condone the delay.
Brief facts of the case are that the assessee is a
wholly owned subsidiary of KHD Humboldt Wedag
International GmbH (Humboldt Austria). The company is
primarily engaged in designing, supplying of equipment,
supervision of installation, erection and commissioning
activities for the cement industry on a turn-key basis
(non-civil). The return of income for assessment year
2010-11 was filed at a total income of Rs.77,56,15,890/-.
Subsequently, after processing of the return u/s 143(1)
of the Act, the return was selected for scrutiny through
CASS. Reference was also made to the Transfer Pricing
Officer (TPO) u/s 92CA of the Act for determination of
the Arms Length Price (ALP) in respect of the
international transactions entered into with its
Associated Enterprises (AE). During the assessment year
2010-11, the assessee had entered into the following
international transactions with its AE:-
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
S N o A s s o c i a t e d A m o u n t M e t h o d C l a s s o f A m o u n t p a i d D e s c r i p t i o n E n t e r p r i s e r e c e i v e d / u s e d t r a n s a c t i o n ( R s . ) o f t r a n s a c t i o n l . C o n t r a c t S e r v i c e s 3 0 0 , 1 8 0 , 2 0 9 T N M M H u m b o l d t r e v e n u e W e d a g G m b H . S e r v i c e s 8 , 4 1 3 , 3 4 5 T N M M K o l n T e c h n i c a l s e r v i c e s r e v e n u e 8 , 0 9 0 , 5 4 9 T N M M P u r c h a s e o f I m p o r t o f r a w m a t e r i a l s s p a r e p a r t s
R e i m b u r s e m e n t 3 , 1 9 9 , 5 4 0 C U P P u r c h a s e o f f i x e d a s s e t s S e r v i c e s 1 , 2 4 1 , 8 0 5 T N M M S u p e r v i s i o n e x p e n s e s S e r v i c e s 3 , 7 6 8 , 4 9 2 C U P B a n k g u a r a n t e e e x p e n s e s R e i m b u r s e m e n t 4 , 8 4 6 , 2 1 3 C U P R e p a i r & m a i n t e n a n c e e x p e n s e s R e i m b u r s e m e n t 1 , 5 1 7 , 4 4 5 C U P T r a v e l l i n g c o n v e y a n c e I n s u r a n c e R e i m b u r s e m e n t C U P 1 4 , 7 8 9 , 3 0 1 R e i m b u r s e m e n t 5 8 , 7 7 8 C U P S e m i n a r e x p e n s e R e i m b u r s e m e n t 7 8 2 , 4 5 1 C U P S t a f f w e l f a r e e x p e n s e s R e i m b u r s e m e n t C U P 4 9 4 , 4 2 3 T r a i n i n g e x p e n s e s C U P 3 5 , 9 0 1 , 6 5 3 R e c o v e r y o f R e c o v e r y o f e x p e n s e s e x p e n s e s 2 . R o y a l t y 3 6 , 6 6 6 , 0 0 3 C U P K I I D P a y m e n t f o r H u m b o l d t r o y a l t y S e r v i c e s 3 5 , 9 9 2 , 0 0 3 C U P W e d a g B a n k g u a r a n t e e I n t e r n a t i o n a l e x p e n s e s G m b h S e r v i c e s 3 2 , 5 8 9 , 1 6 8 T N M M L e g a l & p r o f e s s i o n a l e x p e n s e s R e i m b u r s e m e n t C U P R e c o v e r y o f 5 3 0 , 0 6 6 e x p e n s e s 3 . H u m b o l d t S e r v i c e s 1 , 7 4 3 , 4 5 4 T N M M S u p e r v i s i o n W e d a g I n c . U S A e x p e n s e s _______________________________________________________________________________________ 4. Reimbursement of R e i m b u r s e m e n t 3 7 7 , 0 5 4 C U P e x p e n s e s HumboltWedag Purchase of Import of raw 231,661 TNMM Coal & Mineral Spare parts materials Tech Gmbh _____________________________________________________
3.1 As per the Transfer Pricing Study (TP Study), the
Profit Level Indicator (PLI) had been calculated at 8.27%
by taking OP/TC and the assessee had selected 8
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
comparables at the entity level. The TPO, however,
conducted a fresh search for determining the companies
which were performing similar functions. In the process,
he identified 21 comparables with an average margin of
16.51%. Thereafter, after taking the objections of the
assessee into consideration, the TPO selected a list of 22
companies as comparable having an average margin of
16.77%. The TPO proceeded to make a transfer pricing
adjustment of Rs. 5,15,14,950/- on account of the
difference in ALP on the price charged by the assessee to
its AE. The TPO also allowed a downward pricing
adjustment of Rs. 22,80,898/- by giving benefit in
respect of operating cost with respect to the international
transaction as compared to the operating cost of the
assessee as a whole. The TPO also made an upward
adjustment of Rs. 3,25,89,168/- with respect to the ALP
of the intra- group services received by the assessee.
3.2 The AO also made some other
disallowances/additions in the final assessment order
which pertained to liquidated damages, addition in
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
respect of advances and deposits written off and addition
relating to provision for warranty
3.3 Aggrieved, the assessee approached the Ld. Dispute
Resolution Panel (DRP) and the Ld. DRP, after
considering the objections of the assessee, directed the
TPO to re-compute the determination of ALP by directing
the re-computation of profit level indicator for upward
and downward adjustment. The Ld. DRP, however,
upheld the adjustment of Rs. 42,50,763/- with respect to
legal and professional services received by the assessee
under intra group services. The Ld. DRP, however, gave
relief to the assessee in respect of liquidated damages,
addition in respect of advances and deposits written off
and addition relating to provision for warranty
3.4 Now, the assessee has approached the ITAT
challenging the directions of the Ld. DRP and the
subsequent order of the Assessing Officer (AO) in making
an adjustment of Rs.42,50,763/- (including mark up)
towards receipt of intra group services.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
3.5 The Department is also before the ITAT and is
challenging the directions of the Ld. DRP in deleting the
disallowance pertaining to liquidated damages, addition
in respect of advances and deposits written off, deletion
of addition relating to provision for warranty as well as
for giving relief in respect of transfer pricing adjustment
vis-a-vis intra group services.
3.6 The respective grounds raised by both the parties
are as under:-
3.6.1 ITA No.567/Kol/2015 (Department’s appeal):
“ 1. That the DRP has erred in law and in facts, in disallowing the addition of provision for liquated damages, without examining the issue involved and the findings of the A.O.
That the DRP has erred in law and in facts in disallowing the addition of advances & provisions written off, without allowing the AO to examine whether the entries were actually written off in the books and ledger of the assessee.
The DRP has erred in law and in facts, in disallowing the addition of provision for warranty, as the assessee has failed to maintain a scientific and consistent method for estimation of/determination of its provision for warranty.
Whether the Ld DRP has erred in concluding that the services offered by the AE was not stewardship service, whereas the purpose of management services
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
agreement, between the KHD Humboldt, and the assessee company, resulting in payment for legal & professional charges under consideration, was to exercise control and supervision of the assessee’s activities to fit the same, into the overall plan of the entire group with sole purpose for maximization of group profitability and parent company’s return, indicating the services rendered by KHD Humboldt, AE was of stewardship in nature and in the form of shareholder activity.”
3.6.2 ITA No.494/Kol/2015 (Assessee’s appeal):
General Ground
That on the facts and circumstances of the case 1. the Hon’ble DRP, Learned Transfer Pricing Officer (‘Ld. TPO’) and accordingly the Learned Assessing Officer (‘Ld. AO’) have erred in making an adjustment of Rs. 42,50,763 to the international transactions of the appellant with its Associated Enterprises (hereinafter referred to as ‘AEs’).
Specific Grounds
That on the facts and circumstances of the case, 2. the Hon’ble DRP has erred in disallowing mark-up charged by the AE in providing Intra Group Services (“IGS”) to the Appellant by considering that the same is not charged by following arm’s length principle.
That on the facts and circumstances of the case, the Appellant calculated the mark-up charged by the AE on the basis of a benchmarking analysis. However, the Hon’ble DRP erred in not considering the benchmarking analysis undertaken by the Appellant and subsequently disallowing the mark-up charged by considering it not at arm’s length.
That on the facts and circumstances of the case, the Ld. TPO and accordingly the Ld. AO have erred in disallowing Rs. 42,50,763 as mark-up charged by the
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
AE on Appellant for providing IGS. The amount represents withholding taxes (Rs.32,58,919) and mark- up (Rs. 9,91,844).
That on the facts and circumstances of the case, the Ld. TPO and accordingly the Ld. AO has erred in considering withholding tax (Rs.32,58,919) as mark-up and subsequently disallowing it from the income of the appellant as part of mark-up charged by AE. Further, the Ld. TPO and consequently the Ld. AO have erred in not appreciating the fact that the Appellant has already paid Rs. 32,58,919 as withholding tax.
Without prejudice to the above ground, assessee would like to put forward that had the assessee taken such services from a third party, it would have charged a mark-up for such services. Hence, on reasonable facts and circumstances, the Hon’ble DRP erred in giving direction for adjustment to the extent of mark-up charged by the AE for providing intra-group services.
Without prejudice to all the above Grounds, the assessee craves leave to add to and to alter, amend, rescind or modify the grounds raised hereinabove before or at the time of hearing of the appeal.
Corporate Tax Related:
On the facts and in the circumstances of the case and in law, the Ld. AO has erred in proposing and the Hon’ble DRP has erred in confirming the disallowance of provision for loss on suspended contracts of Rs. 9,00,00,000 by treating the same as contingent or disputed liability.
On the facts and in the circumstances of the case and in law, the Ld. AO has erred in proposing and the Hon’ble DRP has erred in not appreciating that,
(i) Provision is in respect of advance bank guarantee actually encashed by the customer in respect of suspended/ terminated contract, resulting in actual
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
business loss to the appellant;
(ii) It is an allowable deduction in accordance with the principles laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd Vs CIT [2009] 180 Taxmann 422 (SC) i.e. reliable estimation, outflow of resources, fulfils matching concept;
(iii) Without prejudice to the above, the Ld. AO should be directed to allow the deduction in the next assessment year [i.e. Assessment Year 2011-12] as per directions of the Hon’ble DRP.”
The Ld. AR submitted that ground nos. 1 and 3 in the
department’s appeal pertaining to provision for liquidated
damages and provision for warranty respectively were considered
by the ITAT in assessee’s own case for assessment year 2008-09
also. It was submitted that ITAT Delhi Bench in assessee’s own
case for assessment year 2008-09 in ITA No. 2295/Del/2013 had
held that provision for liquidated damages was deductible if the
assessee, while writing back the provisions, had paid tax on the
excess provision. With respect to the provision for warranty, it
was submitted that if the provision has been made based on
actual expenditure incurred on warranty, no disallowance could
be made. It was submitted that likewise provision for liquidated
damages had been held to be deductible by the aforesaid order of
the ITAT.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
4.1 With respect to ground no. 2 of the department’s appeal
pertaining to advances and provisions written off, it was
submitted that the Ld. DRP had given directions for giving relief
to the assessee in view of the various detailed evidences filed
before the Assessing Officer in respect of this issue. Reliance was
placed on the directions of the Ld. DRP in this regard.
4.2 With respect to ground no. 4 of the department’s appeal, it
was submitted that this ground was identical to ground nos. 2 to
6 of the assessee’s appeal. It was submitted that the KHD Group
has adopted a ‘global services cost allocation arrangement’
wherein an entity operated as a central services provider for a
particular service for the group. It was submitted that the
assessee was also a central service provider for marketing
services. It was also submitted that the KHD Group has a proper
cost allocation methodology to remunerate a central services
provider wherein a charge or cost related to shareholder activities
has already been deducted from the cost base. It was also
submitted that detailed evidences had been submitted regarding
the services rendered but the TPO had made only selective
observations while making the transfer pricing adjustment. It
was also submitted that while making the adjustment, the TPO
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
had grossly overlooked the voluminous evidences furnished by
the assessee in this regard and, further, that the TPO cannot
question the business expediency of an expenditure incurred by
the assessee. It was further submitted that had these services
i.e. legal and professional services not been received from the AE,
the assessee would have had to perform the functions in-house
or hire experienced and trained service providers. It was also
submitted that the TPO had not pointed out any specific instance
but had made a general statement to conclude that these services
were in the nature of stewardship services. It was submitted that
the CUP method applied by the TPO was incorrect as the TPO
himself had not brought out any comparable uncontrolled
transaction to justify the ALP at nil. It was also submitted that
the department had not followed the rule of consistency while
making this adjustment as these payments had been duly
accepted by the department in the earlier assessment years as
well as in subsequent assessment year 2012-13 and the
impugned adjustment had been made without bringing on record
any material to bring out the difference between the facts of the
year in which they were accepted and in the present year under
consideration. The Ld. AR also submitted that the TPO had
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
passed a rectification order on 18/04/2017 which has resulted in
reduction of total adjustment from Rs. 42,50,763/- to Rs.
9,91,844/- only which represents the disallowance of mark-up
charged by the AE. It was also submitted that the Final
Assessment Order subsequent to the rectification by the TPO was
still awaited. The Ld. AR submitted that and if the assessee’s
ground was accepted in principle, the adjustment with respect to
the mark up will not be contested by the assessee.
4.3 With respect to ground nos. 8 and 9 relating to corporate
tax issues in the assessee’s appeal, the Ld. AR submitted that the
assessee had received an advance of Rs. 15.908 crore in
assessment year 2008-09 from certain customers for executing a
contract and these customers had cancelled these contracts in
assessment year 2009-10. It was further submitted that the
assessee had credited the entire advance to the profit and loss
account and had treated the same as income in assessment year
2009-10 by forfeiting the advance. It was further submitted that
the customers approached the Hon’ble High Court for a refund of
the advance and the Hon’ble Delhi High Court, vide order dated
24.09.2009 relevant to assessment year 2010-11 i.e. the year
under consideration, had directed the assessee to furnish a bank
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
guarantee of Rs. 9 crore and this amount was reflected as
provision for loss on suspended contracts in assessment year
2010-11. It was further submitted that the customers had en-
cashed this bank guarantee in assessment year 2011-12. It was
submitted that the disallowance had been made for this provision
for loss on suspended contracts amounting to Rs. 9 crore
although the bank guarantee had actually been en-cashed by the
customers resulting in actual business loss to the assessee and,
therefore, this was an allowable deduction.
In response, with respect to the department’s appeal, the
Ld. CIT DR placed extensive reliance on the findings and
observations of the TPO. With respect to the assessee’s appeal,
the Ld. CIT DR placed reliance on the findings of the TPO as well
as the directions of the Ld. DRP and vehemently argued that no
further relief was allowable to the assessee.
ITA Nos. 1057/Del/2016, 1154/Del/2016 and 3207/Del/2016 for AY 2011-12
Brief facts relevant to this assessment year are that in this
year, the return of income was filed showing total income of Rs.
27,51,23,720/-. After a reference being made to the Transfer
Pricing Officer, the TPO proposed an adjustment of Rs.
8,28,95,238/- in respect of difference in ALP of international
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
related party transactions. Apart from this, an addition was also
made on account of liquidated damages amounting to Rs. 9 crore.
Another addition was made with respect to disallowance of
provision for warranty amounting to Rs. 18,76,87,197/- and an
addition of Rs. 1,12,667/- towards advances and deposits written
off. Another disallowance was made in respect of advertisement
expenses amounting to Rs. 25,34,649/- u/s 40(a)(ia) of the Act.
Similar to AY 2010-11, loss on suspended contracts was also
disallowed.
6.1 The assessee filed objections before the Ld. DRP and the Ld.
DRP reduced the transfer pricing adjustments in respect of the
international transaction with related parties to an amount of Rs.
3,06,96,810/- against Rs. 8,28,95,238/- proposed by the TPO by
restricting the adjustment to legal and professional services only.
The Ld. DRP also directed the deletion of additions pertaining to
liquidated damages, provision for warranty, advances and
deposits written off, provision for loss and disallowance with
respect to advertising expenses. The Ld. DRP, however, directed
that the disallowance in respect of suspended contracts be
maintained.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
6.2 Now, the assessee is in appeal against the directions of the
Ld. DRP in not allowing the deduction of provision for loss on
suspended contracts and the department is in appeal challenging
the directions of the Ld. DRP in restricting the transfer pricing
adjustment to legal and professional charges only as well as in
directing the deletion of addition with respect to liquidated
damages, provision for warranty, write off of advances and
deposits.
6.3 The grounds taken by both the parties are as under:-
6.3.1 ITA No.1154/Del/2016 (Assessee’s appeal):
“1. On the facts and in the circumstances of the case and in law, the Ld AO has erred in not allowing the deduction of provision for loss on suspended contracts of Rs. 9,00,00,000 recovered by the customer during AY 2011-12 by not appreciating that,
The Hon’ble Dispute Resolution Panel (“DRP”) in (i) its directions for AY 2010-11 has itself stated that liability of Rs. 9,00,00,000 with respect to provision for loss on suspended contracts created during AY 2010- 11 crystalized during AY 2011-12;
(ii) Further, the Hon’ble DRP in its directions for AY 2011-12 has itself stated that deduction of provision for loss on suspended contracts of Rs. 9,00,00,000 utilised during AY 2011-12 should be allowed to the appellant in view of the pending appeal of the appellant.
On the facts and in the circumstances of the case and in law, the Ld AO has erred in making adjustment
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
of refund of Rs. 44,94,685 and consequent levy of interest u/s 234D of the Act of Rs. 10,78,724 in the computation form enclosed with the assessment order for AY 2011-12 by not appreciating that,
(i) The appellant did not receive such refund of Rs. 44,94,685 for AY 2011-12. Also, the appellant did not receive any intimation for adjustment of said refund of Rs. 44,94,685 due for the subject AY;
(ii )Since the appellant neither received refund of Rs. 44,94,685 nor received any intimation for adjustment of said refund, consequent levy of interest u/s 234D of the Act of Rs. 10,78,724 is incorrect.
The appellant prays for leave to add, alter, rescind from or withdraw any at or before the time of hearing of the appeal.”
6.3.2 ITA No.1057/Del/2016 (Department’s appeal):
“1. The Ld. DRP has erred in concluding that the services offered by the AE were not stewardship service, whereas the purpose of management services agreement, between the KHD Humboldt and the assessee company resulting in payment for legal and professional charges under consideration was to exercise control and supervisions of the assessee's activities to fit the sale, into the overall plan of the entries group with sole purpose for maximization of group profitability and parent company's return.
The Ld. DRP has erred in concluding that the computational of entity level profit margin of the assessee contravened the provisions of Rule 80B(l)(c)(i) of the rules when in fact the TPO allowed proportionate adjustment to the assessee.
The Ld. DRP has erred in law and in facts in disallowing the addition of provisions for liquidated damages, without examining the issue involved and the
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
finding of the AO.
The Ld. DRP has erred in law and in facts in disallowing the addition of provisions for warranty, as the assessee has failed to maintain a scientific and consistent method for estimation of / determination of its provision of warranty.
The Ld. DRP has erred in law and facts in disallowing the addition of advances & provisions written off, without allowing the AO to examine whether the entries were actually written off in the books and ledger of the assessee.
The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.”
Subsequently, after passing of the final assessment order for
AY 2011-12, the TPO passed a rectification order u/s 154 with
respect to assessment year 2011-12 vide order dated 09.02.2016.
The TPO passed another rectification order u/s 154 with respect
to assessment year 2011-12 vide order 25.02.2016 and made
final adjustment with respect to provision for management
support services amounting to Rs. 14,32,171/-, provision for
technical support services amounting to Rs. 16,11,690/- and
purchase of spare parts amounting to Rs. 1,12,27,864/-. Thus,
the total adjustment proposed by the TPO as per the second
rectification order amounted to Rs. 1,42,71,725/- as against the
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
adjustment of Rs. 8,28,95,238/- proposed in the first transfer
pricing proceedings.
7.1 The assessee is in appeal before the ITAT challenging the
second rectification order dated 25.02.2016 passed u/s 154 of
the Act by the TPO as aforesaid and the following grounds have
raised by the assessee in ITA No. 3207/Del/2016:-
“1. On facts and in law, the Assistant Commissioner of Income Tax, Circle 11(2), New Delhi ('Ld. AO') [along with the Deputy Commissioner of Income Tax (Transfer Pricing) - 2(1)(1), New Delhi ('Ld. TPO') - under reference from the Ld. AO] erred in making an adjustment of Rs. 14,271,725 to the total income of the Appellant on account of the difference in the arm's length price ('ALP') of its international related party transactions under the provisions of section 92CA(4) of the Income Tax Act, 1961 ('the Act').
On facts and in law, the Ld. AO/ Ld. TPO erred in passing the impugned rectification order which violates various statutory provisions and is liable to be quashed. In doing so, the Ld. AO/ Ld. TPO erred in:
2.1 violating the provisions of section 154(3) of the Act; 2.2 defying the principles of natural justice by not granting an opportunity of being heard to the Appellant;
2.3 violating the provision of section 154(1) of the Act as the basis of issuing the impugned rectification order is not a mistake apparent from record and do not qualify the requirements section 154 of the Act.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
Without prejudice to Ground no. 2, on facts and in law, the Ld. AO/ Ld. TPO erred in disregarding the directions of the Hon’ble Dispute Resolution Panel (‘Hon’ble DRP’) while issuing the impugned rectification order and in doing so, violated the provisions of section 144C(10) of the Act.
Without prejudice to Ground no. 2, on facts and in law, the Ld. AO/ Ld. TPO erred in rejecting the economic analysis carried out by the Appellant, substituting the same with his own analysis and in doing so, not appreciating that conditions set out in section 92C(3) of the Act are not satisfied in the present case.
Without prejudice to Ground no. 2, on facts and in law, the Ld. AO/ Ld. TPO erred in rejecting the transfer pricing analysis undertaken by the Appellant in line with the Rule 10B(2) of the Rules to determine the arm's length price of international transactions pertaining to purchase of spare parts. In doing so, the Ld. AO/ Ld. TPO has grossly erred in
5.1 misinterpreting the directions given by the Hon'ble DRP that hold the transaction level analysis to be valid; and
5.2 misinterpreting the directions given by the Hon'ble DRP that hold the Appellant to be considered as the tested party.
Without prejudice to Ground no. 2 and Ground no. 5, on the facts and in law, the Ld. AO has grossly erred in computing the profit level indicator of the Appellant by disregarding the directions of the Hon'ble DRP that hold the treatment of income and expenses of similar nature to be consistent.
Without prejudice to Ground no. 2, on facts and in law, Ld. AO/ Ld. TPO has grossly erred in rejecting the transfer pricing analysis undertaken by the Appellant in line with the rule 10B(2) of the Rules to
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
determine the arm's length price of international transactions pertaining to provision of global marketing services. In doing so, the Ld. AO/ Ld. TPO erred in misinterpreting the directions given by the Hon'ble DRP that hold the Appellant to be considered as the tested party.
Without prejudice to Ground no. 2 and Ground no. 7, on facts and in law, Ld. AO/ Ld. TPO has grossly erred in computing the transfer pricing adjustment by considering wrong cost base of the segment pertaining to provision of global marketing services.
Without prejudice to Ground no. 2, on facts and in law, Ld. AO/ Ld. TPO erred in rejecting the transfer pricing analysis undertaken by the Appellant in line with the Rule 10B(2) of the Rules to determine the arm's length price of international transactions pertaining to provision of technical services. In doing so, the Ld. AO/ Ld. TPO grossly erred in misinterpreting the directions given by the Hon'ble DRP that hold the Appellant to be considered as the tested party.
Without prejudice to Ground no. 2, on facts and in law, Ld. AO/ Ld. TPO erred in disregarding the fact that these transactions and the relevant pricing has been accepted by the Ld. AO/ Ld. TPO in the subsequent year (i.e., AY 2012-13) in the Assessee’s own case and there being no change in the facts and circumstances in AY 2011-12 vis-a-vis AY 2012-13.”
The Ld. AR submitted that ground no. 1 of assessee’s appeal
(ITA No. 1154/Del/2016) and pertaining to provision for loss on
suspended contracts amounting to Rs. 9 crore was similar to a
ground in assessee’s appeal for assessment year 2010-11 and the
adjudication of the assessee’s ground in assessment year 2010-
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
11 will decide the outcome of this ground in assessment year
2011-12 also.
8.1 With respect to ground no. 2 in the assessee’s appeal, it was
submitted that the ground pertaining to adjustment of refund
and consequent levy of interest u/s 234D of the Act was not
being pressed.
8.2 Coming to the department’s appeal (ITA No.
1057/Del/2016), the Ld. AR submitted that ground nos. 1, 3, 4
and 5 were similar to the grounds taken by the department in
assessment year 2010-11 on identical issues and since the issues
were essentially the same, the outcome of the department’s
appeal in assessment year 2010-11 will have to be followed in
assessment year 2011-12 also.
8.3 Coming to ground no. 2 of the department’s appeal, the Ld.
AR submitted that this ground challenges the direction of the Ld.
DRP in concluding that the computation of entity level profit
margin of the assessee did not contravene the provisions of Rule
10B(1)(c)(i) of the Rules. It was submitted that for the purpose of
undertaking the benchmarking analysis, the assessee had
followed transaction by transaction approach which was in
accordance with Rule 10B and 10C of the Income Tax Rules,
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
1962. It was further submitted that the assessee had identified
separate functions and line of operation while undertaking the
benchmarking analysis. It was also submitted that the principle
of undertaking transaction by transaction analysis for
determination of ALP is embedded in the Indian Transfer Pricing
Regulations, OECD Transfer Pricing Guidelines and UN Transfer
Pricing Manual. It was further submitted that as per the UN
Practice Manual, the Transfer Pricing analysis should ideally be
made on a transaction by transaction basis. It was further
submitted that each of the international transaction under
dispute viz. purchase of spare parts, provision of technical
services, provision of global marketing services were distinct and
independent transactions and warranted separate analysis so as
to determine the ALP. It was submitted that with respect to the
provision of spare parts, the assessee had purchased certain
spare parts such as machine parts, tools, jigs and spares etc.
which were sold mostly to third party customers and, thus, the
assessee was involved in trading of these parts. The Ld. AR
submitted that the assessee had earned a gross profit margin of
43.64% from the sale of these parts whereas the average of the
comparables resulted in a gross profit margin of 32.19% only. It
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
was further submitted that with respect to provision of technical
services, the average cost plus charge by the comparable
companies was 11.20% whereas the assessee had charged cost
plus 10% from its AEs which was well within the ± 5% range. It
was further submitted that the assessee had also provided
similar technical services to independent third parties as well
wherein the service charges ranged from Rs. 7,000/- per day to
Rs. 20,000/- per day averaging Rs. 10,117/- per day which was
lower than the per day rate of Rs. 30,000/- charged from its AE.
8.3.1 With respect to provision of global marketing services, it
was submitted that the margin of the comparables with respect
to the global marketing services was 8% whereas the assessee
had charged cost plus 5% from its AE which was within the ±5%
range.
8.3.2 The Ld. AR also emphasized that the value of intra
company transaction was approximately 6% of the total turnover
of the assessee, meaning thereby that approximately 94% of the
business carried out by the assessee was third party business.
The Ld. AR also placed reliance on a number of judicial
precedents supporting the transaction level benchmarking
analysis.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
Coming to assessee’s appeal bearing ITA No.
3207/Del/2016 challenging the rectification order dated
25.02.2016 passed u/s 154 of the Act, the Ld. AR submitted that
the order passed u/s 154 violated the provisions of section 154(1)
of the Act because what the TPO had sought to rectify was not a
mistake apparent from the records. It was submitted that before
the issue can be said to be eligible for rectification u/s 154, it is
essential that the issue should be a mistake in the order passed
by an income tax authority, the mistake should be apparent and
the same should be apparent from the records of the assessee. It
was submitted that by passing the rectification order, the TPO
had carried out a fresh benchmarking analysis and this
amounted to change in the view of the TPO and was not a
mistake apparent from the record. It was further submitted
that the TPO had selected fresh comparables and that too
without granting a proper opportunity to the assessee to present
its contentions and, thus, the same was not a mistake apparent
from record. The Ld. AR also submitted that an earlier
rectification order had been passed by the TPO on 9th February
2016. It was after due consideration of the material on record
wherein the TPO had accepted the analysis carried out by the
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
assessee and, therefore, the impugned rectification order was bad
in law.
9.1 It was further submitted that there was a failure to provide
an opportunity to the assessee of being heard before enhancing
the income and this violated the provisions of section 154(3) of
the Act. It was submitted that the principle of natural justice
has been upheld by the various Hon’ble Courts across the
country in numerous cases and a list of case laws being relied
upon by the assessee was also submitted before us.
9.2 It was further submitted that without prejudice to the
earlier arguments, the TPO had erred in disregarding the
directions of the Ld. DRP while issuing the impugned rectification
order wherein the Ld. DRP had clearly directed that the margin of
the assessee is to be assessed for determining the ALP whereas
the TPO misconstrued the directions in respect of purchase of
spare parts and continued with the entity level profit testing
though the adjustment had been made on a proportionate basis.
It was further submitted that the TPO had adopted contradictory
position as on the one hand, the TPO mentioned that wherever
the assessee has taken the AE as the tested party, the same
should be rectified and on the other hand, the TPO had revisited
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
all the transactions wherever the assessee has taken itself as the
tested party and, thus, the TPO had gone beyond the mandate of
Section 154 in this regard by revisiting the already settled issues
which were not a mistake apparent from record.
9.3 The Ld. AR also submitted that the TPO had erred in
rejecting the economic analysis carried out by the assessee and
has substituted the same by his own analysis. It was also
submitted that with respect to purchase of spare parts, the
assessee had applied TNMM and a comparable search had
resulted in a mean NCPN of 11.85% as compared to 4% mark up
charged by the supplier AE and the TPO in his original order had
carried out the entity level profit testing by applying the TNMM.
The Ld. DRP had upheld the assessee’s contention that margin
realized by the assessee only from the international transaction
with the AE has to be considered but in the final assessment
order, the Assessing Officer continued with the entity level profit
testing approach which was rectified by the first rectification
order darted 9th February, 2016 but vide the impugned order, the
entity level benchmarking had been reinstated.
9.4 Similarly, with respect to provision of global marketing
services, the assessee had applied TNMM but the TPO had
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
introduced fresh comparables without providing any reason for
not accepting the assessee’s approach. It was further submitted
that similar was the case with respect to the provision for
technical services.
9.5 The Ld. AR also submitted that the assessee was also
challenging the action of the TPO in rejecting the transfer pricing
analysis undertaken by the assessee and the action of the TPO in
computing the profit level indicator of the assessee by
disregarding the directions of the Ld. DRP. It was further
submitted that the assessee was also challenging the action of
the TPO in rejecting the transfer pricing analysis of the assessee
so as to determine the ALP of the international transaction
pertaining to global marketing services while misinterpreting the
directions given by the Ld. DRP that the assessee was to be
considered as the tested party. It was also submitted that the
TPO had erred in computing the transfer pricing adjustment by
considering wrong cost base of the segment pertaining to global
marketing services.
9.6 The Ld. AR also submitted that the TPO, while passing the
impugned rectification order, had disregarded the fact that the
impugned transactions and the relevant pricing had been
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
accepted by the Assessing Officer/TPO in the subsequent
assessment year i.e. assessment year 2012-13 in assessee’s own
case and there was no change in facts and circumstances in
assessment year 2011-12 vis-à-vis assessment year 2012-13.
9.7 The Ld. AR also submitted that in case the assessee’s legal
grounds challenging the validity of the impugned rectification
order were being allowed, the arguments advanced by him on
merits need not be considered as they would then become
academic in nature.
In response, the Ld. CIT DR, in respect of the assessee’s
appeal for AY 11-12, placed reliance on the order of the TPO and
the directions of the Ld. DRP.
10.1 In respect of the Department’s appeal for AY 11-12, the Ld.
CIT DR placed reliance on the findings and observations of the
TPO and vehemently argued that the Ld. DRP had erred in
allowing relief to the assessee.
10.2 With respect to the assessee’s appeal challenging the
proceedings u/s 154 of the Act, the Ld. CIT DR submitted that
the TPO had acted within the four corners of law in passing the
rectification order.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
We have heard the rival submissions and have also
considered the evidences and documents on record. We now
proceed to adjudicate on the issues involved.
ITA 494/Kol/2015:
11.1 As far as ground nos. 2 to 6 challenging the upholding of
transfer pricing adjustment pertaining to legal and professional
charges under intra-group services are concerned, it has been
submitted by the Ld. AR that the TPO had passed a rectification
order on 18/04/2017 which has resulted in reduction of total
adjustment from Rs. 42,50,763/- to Rs. 9,91,844/- only which
represents the disallowance of mark-up charged by the AE. It was
also submitted that the Final Assessment Order subsequent to
the rectification by the TPO was still awaited. The Ld. AR
submitted that and if the assessee’s ground was accepted in
principle, the adjustment with respect to the mark up will not be
contested by the assessee. In such a situation, we direct the AO
to pass the final assessment order incorporating the adjustment
only to the extent of Rs. 9,91,844/- and also protect the
assessee’s right to raise these grounds again in this assessment
year in the event of the final assessment order not having been
passed restricting the transfer pricing adjustment to Rs.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
9,91,844/- only. The assessee shall also be at liberty to challenge
the mark-up in subsequent assessment years should the need so
arise. Thus, these grounds stand allowed in terms of our
observations.
11.2 The corporate tax related grounds are ground nos. 8 and 9
and they challenge the directions of the Ld. DRP in confirming
the provision for loss on suspended contracts amounting to Rs. 9
crores by treating the same as contingent liability. The facts
remain undisputed. The amount represents bank guarantee
furnished by the assessee to its customers which was given in
the year under consideration but en-cashed by the customers in
AY 2011-12. It is also undisputed that the assessee has already
offered to tax the amount of advance which had been forfeited
from the customers and to which the bank guarantee relates. The
bank guarantee has been en-cashed in the subsequent
assessment year, therefore, the liability has crystallized in the
subsequent assessment year when it was en-cashed on
28/04/2010. The fact remains that at the time of furnishing the
bank guarantee, it was not known as to when the liability will
crystallize. Accordingly, we find no reason to interfere with the
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
directions of the Ld. DRP in this regard and dismiss ground nos.
8 and 9.
11.3 Accordingly, the assessee’s appeal ITA 494/Kol/2015
stands partly allowed.
ITA 567/Kol/2015:
Department’s ground no. 4 relates to the deletion of the
transfer pricing adjustment amounting to Rs. 3,25,89,168/-and
challenges the direction of the Ld. DRP in concluding that the
services offered by the AE were not stewardship services. It is
seen that the Ld. DRP in Para 3.3.2 of its directions has noted
that in the assessee’s case, the intra group services relate to
general administration, finance and accounting, coordination,
general management, corporate and project financing,
recruitment and education. The Ld. DRP has further noted that
the assessee is an entrepreneur in its own right and is engaged in
engineering, procurement and commissioning projects for the
third party clients and further that the assessee has hardly
operated as an extension of the AE or has been catering
exclusively to the AE. The Ld. DRP has given a finding that the
assessee virtually undertakes all the risks associated with
rendering services, marketing and also performs various complex
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
roles. The Ld. DRP has also taken note of the fact of the assessee
providing substantial evidence in form of e-mails, correspondence
with the AE etc. so as reach a conclusion that the AE was
rendering services which were beneficial for the assessee in
conducting its business and some benefits might have accrued to
the overall group but the primary beneficiary was the assessee.
The Ld. DRP concluded that the services rendered by the AE were
not in the nature of stewardship activity. Although the
Department has assailed these directions of the Ld. DRP, in the
proceedings before us, the Department could not point out any
factual or legal error in the directions of the Ld. DRP by leading
any evidence to the contrary. In such a situation, we are not in a
position to differ from the findings of the Ld. DRP and we,
accordingly, dismiss ground no. 4.
12.1 As far was ground no. 2 pertaining to deletion of
disallowance pertaining to advances and deposits written off are
concerned, it is seen that the assessee had written off Rs.
10,50,092/- pertaining to deposits and allowances and the
disallowance was made on the ground that party wise details
were not provided by the assessee. The Ld. DRP directed deletion
of disallowance by observing that from the material available on
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
record, the same appeared to be revenue in nature. Thus, it is
not the case of the department that the issue was not examined.
The Ld. DRP has returned a categorical finding in this regard
and, accordingly, we find no reason to interfere on this issue also.
Ground No. 2 also stands dismissed.
12.2 Ground No. 3 challenges the direction of the Ld. DRP in
allowing the provision for warranty amounting to Rs.
28,81,12,854/-. We find that the Ld. DRP had held the issue in
assessee’s favour by noting that this issue was a recurring issue
in the assessee’s case and a similar issue had arisen in AY 2008-
09 wherein the Ld. CIT (A) had deleted the disallowance. The Ld.
DRP has noted that the facts were identical in AY 2008-09 and
the year under consideration and, therefore, the disallowance
was to be deleted. We also find that the department’s challenge to
the findings of the Ld. CIT (A) on this issue in AY 2008-09 was
dismissed by the ITAT in ITA No. 2295/Del/2013. The
Department has not been able to bring out any distinguishing
factor with respect to the facts in the proceedings before us. In
the circumstances, we find no reason to interfere and dismiss
ground no. 3.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
12.3 Ground no. 1 challenges the direction to delete the
provision for liquidated damages amounting to Rs. 3,18,02,972/.
This issue is covered in favour of the assessee by the order of the
ITAT in assessee’s own case for AY 2008-09 (supra) wherein the
ITAT upheld the adjudication of the Ld. CIT (A) in deleting the
disallowance. In view of the facts being identical in this year also
we uphold the directions of the Ld. DRP subject to the rider that
the assessee will substantiate before the AO that tax due on
excess provision written back have been paid. Thus this ground
stands allowed for statistical purposes.
12.4 In the result ITA No. 567/Kol/2015 stands partly allowed
for statistical purposes.
ITA 1057/Del/2016:
Ground No. 1 of the department’s appeal challenges the
conclusion of the Ld. DRP that the services offered by the AE
were not in the nature of stewardship services. This has resulted
in a deletion of Rs. 5,70,59,551/- of transfer pricing adjustment.
This issue was adjudicated in favour of the assessee by the Ld.
DRP in AY 10-11 also and the Department had challenged the
same before the ITAT. We have already dismissed this ground in
department’s appeal for AY 10-11 in earlier part of this order and
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
since the facts are identical, on similar reasoning, we refuse to
interfere with the directions given by the Ld. DRP in this regard.
Accordingly, Ground No. 1 stands dismissed.
13.1 Ground No. 2 challenges the action of the Ld. DRP in
directing that the TPO/AO has to consider the margin realized by
the assessee only from its international transactions with its AEs
and there cannot be entity level margins. This has resulted in
deletion of transfer pricing adjustment of Rs. 2,79,79,689/-.
Although, the Ld. CIT DR has vehemently argued against the
directions of the Ld. DRP in this regard, the Ld. AR has been
equally vehement in arguing that for the purpose of undertaking
the benchmarking analysis, the assessee had followed
transaction by transaction approach which was in accordance
with Rule 10B and 10C of the Income Tax Rules, 1962. It has
been further argued that the assessee had identified separate
functions and line of operation while undertaking the
benchmarking analysis. It was also argued that the principle of
undertaking transaction by transaction analysis for
determination of ALP is embedded in the Indian Transfer Pricing
Regulations, OECD Transfer Pricing Guidelines and UN Transfer
Pricing Manual. It was further submitted that as per the UN
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
Practice Manual, the Transfer Pricing analysis should ideally be
made on a transaction by transaction basis. It has also been
argued that each of the international transaction under dispute
viz. purchase of spare parts, provision of technical services,
provision of global marketing services were distinct and
independent transactions and warranted separate analysis so as
to determine the ALP. Also comparative analysis has been
submitted by the Ld. AR in this regard. However, a perusal of the
directions of the Ld. DRP shows that this aspect has not been
considered in a proper perspective by the Ld. DRP and the
directions in this regard have been given without recording a
finding of fact in this regard and without giving any sound reason
for such direction. In the circumstances, we have no option but
to restore this ground to the file of the Ld. DRP with a direction to
pass a speaking order on the issue after giving proper
opportunity to the assessee. Accordingly, ground no. 2 stands
allowed for statistical purposes.
13.2 Ground No. 3 challenges the deletion of disallowance of Rs.
10,97,86,518/- pertaining to liquidated damages. An identical
ground has been held in favour of the assessee in earlier part of
this order in department’s appeal for AY 10-11 wherein we
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
upheld the directions of the Ld. DRP subject to the rider that the
assessee will substantiate before the AO that tax due on excess
provision of liquidated damages written back have been paid. On
identical facts, we restore the issue to the file of the AO with
similar directions. Thus, this ground stands allowed for
statistical purposes.
13.3 Ground No. 4 challenges the direction of the Ld. DRP in
deleting the disallowance pertaining to provision of warranty
amounting to Rs. 18,76,87,197/-. We find that a similar issue
had come up in Assessment Years 2008-09 and 2010-11 and the
department’s ground challenging the deletion had been dismissed
by the ITAT in ITA Nos. 2295/Del/2013 and 567/Kol/2015
respectively. The Department has not been able to bring out any
distinguishing factor with respect to the facts in the proceedings
before us. In the circumstances, we find no reason to interfere
and dismiss ground no. 4.
13.4 Ground No. 5 challenges deletion of disallowance in
respect of write off of advances and deposits. However, it is seen
that this ground does not arise out of the directions of the Ld.
DRP. Thus, this ground is in fructuous and is dismissed as
such.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
13.5 In the result ITA 1057/Del/2016 is partly allowed.
ITA 1154/Del/2016:
Ground No .1 of the assessee’s appeal challenges the action
of the Ld. DRP in not allowing loss on suspended contracts. In
earlier part of this order in assessee’s appeal for AY 2009-10, we
had dismissed the assessee’s claim for deduction of provision for
bank guarantee on the ground that the provision was an
unascertained liability which had not crystallized during AY 10-
14.1 It is the claim of the assessee that this amount of bank
guarantee was en-cashed in AY 10-11 i.e. the year under
consideration and, therefore, it should be allowed as a deduction
in the year of crystallization. The Ld. DRP has discussed the
issue at length on pages 11 and 12 of its directions and has held
that the contention of the assessee is allowable in view of the
facts. The AO is directed to give effect to the directions of the Ld.
DRP in this regard. Accordingly, this ground is treated as
allowed.
14.2 As the Ld. AR has submitted that Ground No. 2 challenging
the adjustment of refund due and charging of interest u/s 234D
of the Act was not being pressed, the same is dismissed as not
pressed.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
14.3 In the result, ITA No. 1154/Del/2016 stands partly
allowed.
ITA 3207/Del/2016:
This appeal by the assessee challenges the rectification
order passed by the TPO vide order dated 25.02.2016. It has been
submitted that there was a failure to provide an opportunity to
the assessee of being heard before enhancing the income and this
violated the provisions of section 154(3) of the Act. It has also
been argued that the principle of natural justice has been upheld
by the various Hon’ble Courts across the country in numerous
cases wherein it has been held that the failure to provide an
opportunity before enhancement will render the entire
proceedings null and void. Admittedly, the impugned rectification
order was passed proposing to enhance the income of the
assessee by enhancing the transfer pricing adjustments as made
in the final assessment order dated 30/12/2015 passed
subsequent to the directions of the Ld. DRP. In the proceedings
before us, the department was not able to negate the contention
of the assessee that the impugned rectification order was passed
without giving any opportunity to the assessee. It remains
uncontroverted that principle of natural justice was not followed
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
by the Transfer Pricing Officer while rectifying his earlier order. It
is settled law that it not proper to remove a defect, if any, wherein
no notice has been given to the assessee and wherein there will
be an increased tax liability on the assessee. The Hon’ble Apex
Court in the case of Chockalingam & Meyyappan Vs. CIT
reported in (1963) 48 ITR 34 is precisely holding that principle of
natural justice has to be followed by the authorities. As per
Section 154(3) of the Act amendment/rectification which has the
effect of enhancement of an assessment or reducing a refund or
otherwise increasing the liability of the assessee shall not be
made unless the authority concerned gives notice to the assessee
of its intention to do so. Therefore, it is obligatory under the
statute to issue notice by the tax authority to give a reasonable
opportunity of being heard to the Assessee. This is clearly set out
u/s 154 of the Income Tax Act and it has to be followed by the
tax authorities at the initial stages. If this procedure of issuing
the notice and giving reasonable opportunity of being heard is not
followed, any further exercise will be non est. Therefore, the order
itself becomes void ab initio. In the circumstances, we have no
other option to set aside the impugned rectification order as
being void ab initio.
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16
15.1 As we have already set aside the impugned rectification
order as being void ab initio and as has been fairly accepted by
the Ld. AR that in case of the rectification proceedings being held
as void, the grounds argued on merits will become academic, we
are not adjudicating the other grounds as having become
academic.
15.2 In the result ITA 3207/Del/2016 stands allowed.
In the final result:
(i) ITA 494/Kol/2015 stands partly allowed
(ii) ITA No. 567/Kol/2015 stands partly allowed for statistical
purposes
(iii) ITA 1057/Del/2016 is partly allowed
(iv) ITA No. 1154/Del/2016 stands partly allowed
(v) ITA 3207/Del/2016 stands allowed.
The order is pronounced in the open court on 11.06.2018.
Sd/- Sd/-
(R.K. PANDA ) (SUDHANSHU SRIVASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 11th June, 2018 ‘GS’
ITA 1057/D/16, 567/Kol/15, 494/Kol/15, 1154/D/16, 3207/D/16