DIEBOLD SYSTEMS P.LTD,MUMBAI vs. DCIT CIR 12(2)(1), MUMBAI

In its appeal, assessee has raised the following Grounds of appeal :-

That on the facts and circumstance of the case and in law, the final assessment order passed by the Assessing Officer ("AO"), to the extent prejudicial to the Appellant, is bad in law and void ab-initio.

That the Final assessment order dated is also bad in law since it has not been framed in compliance with the directions issued by the Dispute Resolution Panel (DRP).

That the passing of the Final Assessment Order on a company no longer in existence is an illegality, incapable of being cured, resulting in the impugned order amenable to quashing.

That the AO/DRP grossly erred in law in not appreciating that the provisions of section 40(a)(i) of the Act were not applicable on the facts of the present case, there being no application of section 195 of the Act, in the absence of any income of the non-resident recipient chargeable to tax in India.

That on facts and in law, the TPO / DRP erred in determining/confirming the transfer pricing adjustment of INR 4,04,41,505/- to the value of international transactions pertaining to Purchase of Raw Material.

That the AO/DRP fundamentally erred on facts and in law in making the above adjustment to the value of the international transaction primarily on the grounds that the Appellant had related as well as non-related sales segment and the adjustment could not have been made on total cost base of the Appellant.

That the TPO/DRP completely failed to appreciate that the Appellant had determined its operating profitability by applying the Transactional Net margin Method (TNMM) and there being an internal TNMM available owing to non- related party sales segment, no question arose of application of external TNMM.

That on facts and in law, the TPO / DRP erred in rejecting the Transfer Pricing documentation maintained by the Appellant u/s 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 ("the Rules") and in not making appropriate adjustment in accordance with Rule 10B(3) of the Rules.

That on facts and in law, the TPO / DRP failed to make suitable adjustments while computing the profit margin owing to the difference in respect of depreciation claimed by the Appellant and the comparables.

On the facts and in law, the TPO / DRP erred in not allowing working capital adjustment to the Appellant thereby contravening the provisions of Rule 10B(1)(e)(iii) and Rule 10B(3) of the Rules.

That on facts and in law the TPO / DRP erred in not making suitable adjustment to the profit margin of the comparables under Rule 10B(1)(e)(iii) so as to eliminate the extraordinary costs affecting the profit margin of the Appellant, without prejudice that such adjustment had to be made on the operating margin of the comparables.

That on facts and in law, the TPO / DRP grossly erred in not appreciating that comparability of an international transaction with an uncontrolled transaction shall be judged in accordance with the mandate of section 92C of the Act read with Rule 10B(2) of the Rules thereby meeting the Functions, Asset and Risk ('FAR') test and further erred in not appreciating that there could be no estoppel against law in selection of comparables.

That the TPO / DRP erred in selecting comparables having significant related party transactions.

On facts and in law, the TPO / DRP erred in not granting benefit of the 5% variation as per the proviso to section 92C(2) of the Act to the Appellant, as the law stood at the time of preparation of the transfer pricing documentation.

That the AO erred in levying interest under section 234A, 234B, and 234D of the Act.

That the AO erred in initiating penalty proceedings under section 271(1)(c) of the Act.”

Though assessee has raised multiple Grounds of appeal, but the preliminary Ground relating to jurisdiction is contained in (B) above, which is being dealt with at the threshold itself. In terms of the said Ground, it is canvassed that the assessment order passed u/s 143(3) r.w.s 92CA(4) r.w.s. 153 r.w.s. 144C(13) r.w.s. 245Q dated 31.01.2017 is bad-in-law inasmuch as it has been passed in the name of a non-existent concern. The plea set-up by the assessee is that the entity, Diebold India Pvt. Ltd., in whose name assessment has been completed, did not exist on the date of assessment inasmuch as it stood merged with its successor company, Diebold Systems Pvt. Ltd. in terms of the scheme of amalgamation approved by the Hon'ble Bombay High Court vide its order dated 23.08.2013 w.e.f. 01.10.2013. Since the said issue goes to the root of the jurisdiction of the Assessing Officer to pass the assessment order, therefore, both the sides have been heard on this preliminary ground at the threshold itself.

We have carefully considered the rival arguments and also the written submissions filed by both sides. In the instant case, factually it emerges that the final assessment order passed by the Assessing Officer on 31.01.2017 (supra) is in the name of M/s. Diebold India Pvt. Ltd., a concern which was non-existent as on that date, having merged with Diebold Systems Pvt. Ltd. consequent to a scheme of merger approved by the Hon'ble Bombay High Court vide order dated 23.08.2013. Insofar as the fact of the merger being in the knowledge of the Assessing Officer is concerned, the same cannot be disputed inasmuch as while framing the assessment order in the name of Diebold India Pvt. Ltd., in the brackets it has been noted that the said concern has since merged with Diebold Systems Pvt. Ltd. The moot question is as to whether the assessment order so made in the name of Diebold India Pvt. Ltd., the erstwhile concern which is non-existent, is valid in the eyes of law or not?

The aforesaid issue is no longer res integra and is, in fact, supported by various decisions and one of them, i.e. the judgment of Hon'ble Delhi High Court in the case of Spice Infotainment Ltd. (supra) has also since been approved by the Hon'ble Supreme Court vide order dated 02.11.2017 in CA No. 285 of 2014. Notably, the Hon'ble Bombay High Court in the case of Jitendra Chandralal Navlani & Anr. (supra) has also approved the proposition that the defect of framing an assessment in the name of a non-existing concern goes to the root of the jurisdiction of the Assessing Officer to make the assessment. The Hon'ble Delhi High Court in the case of Dimension Apparels P. Ltd. (supra) also held that framing of assessment on a non- existent entity is a jurisdictional defect and such an assessment is untenable in the eyes of law. On behalf of the assessee, reliance has been placed on the decision of the Mumbai Bench of the Tribunal in the case of M/s. Shell India Markets Pvt. Ltd. (supra), wherein under similar circumstances, assessment made in the name of non-existing concern was held to be invalid and set-aside. In coming to such a decision, the Mumbai Bench of the Tribunal relied upon decisions of the Tribunal in the case of (i) M/s. Instant Holdings Ltd. (supra) and (ii) M/s. Siemens Technology Services Pvt. Ltd. (supra) and also the judgment of the Hon'ble Delhi High Court in the case of Dimension Apparels P. Ltd. (supra). In our considered opinion, having regard to the aforesaid judicial rulings and the facts of the instant case, the assessment order dated 31.01.2017 (supra), which has been made in the name of Diebold India Pvt. Ltd., the erstwhile non-existent concern, is a nullity in the eyes of law and is liable to be quashed. We hold so.

Now, we may deal with the objections which have been raised by the ld. DR at the time of hearing as well as in the written submissions. Firstly, it is sought to be canvassed that the omission to state the name of assessee correctly is a procedural error rectifiable u/s 292B of the Act. The aforesaid objection of the ld. DR is quite untenable and the same has been directly dealt with by the Hon'ble Delhi High Court in the case of Maruti Suzuki Ltd., 397 ITR 681 (Delhi). The Hon'ble Delhi High Court by relying on its earlier judgment in the case of Spice Infotainment Ltd. (supra) held that once it is found that the assessment is framed in the name of a non-existent entity, it does not remain a procedural irregularity of the nature which is curable by invoking Sec. 292B of the Act. Thus, the aforesaid objection of the ld. DR is untenable and is hereby rejected.

The second aspect raised by the ld. DR is that initiation of assessment proceedings has been correctly made. In our view, the same does not distract from the fact that the final assessment order, which is made in the name of the erstwhile non-existent entity, cannot be sustained merely because at the time of initiation of assessment proceedings, the erstwhile concern was in existence.

Thirdly, the ld. DR has referred to Sec. 170(1)(a) of the Act to justify the making of assessment in the name of erstwhile non-existent concern. In this context, there is no quarrel on the position set-out in Sec.170(1)(a) of the Act which prescribes for assessment of income in the case of succession of business, but the point that is sought to be raised before us is relating to the making of assessment. In any case, sub-section (1) of Sec. 170 of the Act is not relevant for the present. In the situation of the type before us, upon merger the erstwhile entity becomes non-existent; thus, it is a case where after merger the predecessor (the erstwhile entity) cannot be found and only the successor is available thereafter. In such a situation, the provisions of Sub-section (1) of Sec. 170 of the Act are not relevant, and instead, the same would be governed by the provisions of Sub-section (2) of Sec. 170 of the Act. The provisions of Sub-section (2) of Sec. 170 of the Act, in our view, do not conflict with the proposition that no assessment can be made in the name of a non-existing entity. Therefore, the reliance placed by the ld. DR on Sec. 170(1)(a) of the Act is in any case wrong. Notably, this very argument has been dealt with and rejected by the Hon'ble Delhi High Court in the case of Dimension Apparels P. Ltd. (supra) in the following words :-

Apart from the aforesaid, the Revenue has also relied on the judgment of the Hon'ble Calcutta High Court in the case of Shaw Wallace Distilleries Ltd. (supra). In the case before the Hon'ble Calcutta High Court, the plea of the assessee was that the assessment was a nullity because assessee had merged with another entity prior to the assessment. The Hon'ble High Court disagreed with the assessee on the basis of the peculiar facts of the case before it. The Hon'ble High Court noted that the assessee did not bring the fact of amalgamation to the notice of the Assessing Officer; and, secondly, it was also noted that for the subsequent assessment year, in the return of income filed by the assessee on a date even after the order passed by the Hon'ble High Court on amalgamation, assessee itself did not act upon the amalgamation. For these reasons, the claim of the assessee was not upheld. Quite clearly, the fact-situation in the case before us stands on a different footing inasmuch as, in the present case, the fact of erstwhile entity having merged with Diebold Systems Pvt. Ltd. is not in dispute because in the assessment order itself the name of the new entity has been noted by the Assessing Officer, albeit in brackets. Moreover, the fact that assessment made in the name of erstwhile non-existent company is invalid and goes to the root of jurisdiction of the Assessing Officer to make the assessment is a proposition upheld by the Hon'ble Bombay High Court itself and, therefore, even if there is a contrary proposition impliedly upheld by the Hon'ble Calcutta High Court, the same would not be binding on us inasmuch as the view of the jurisdictional High Court, as noted by us in the case of Jitendra Chandralal Navlani & Anr. (supra) in the earlier paras is to the contrary and, the same has to prevail. Therefore, the judgment of the Hon'ble Calcutta High Court does not help the case of the Revenue before us. Insofar as the reliance placed by the ld. DR on the decision of the Bangalore Bench of the Tribunal in the case of GE Medical Systems (India) Pvt. Ltd. (supra) is concerned, herein also the same has been rendered on its own facts. In any case, the proposition being canvassed is contrary to the decision of the jurisdictional High Court, it does not help the case of the Revenue. Further, the Hon'ble Karnataka High Court in the case of Intel Technology India (P) Ltd., 57 taxmann.com 159 has, by relying on the decision of the Hon'ble Delhi High Court in the case of Spice Infotainment Ltd. (supra), held that framing of assessment against a non-existent entity goes to the root of the matter and is not a procedural irregularity, but a jurisdictional defect. Be that as it may, the proposition canvassed on the basis of the decision of Bangalore bench of the Tribunal relied upon by the Revenue cannot prevail in the circumstances; firstly, in view of the judgment of the Hon'ble Bombay High Court in the case of Jitendra Chandralal Navlani & Anr. (supra); and, secondly, having regard to the fact that the decision of the Hon'ble Delhi High Court in the case of Spice Infotainment Ltd. (supra) has been approved by the Hon'ble Supreme Court by order dated 02.11.2017.

In view of the aforesaid discussion, we conclude by holding that the assessment made in the name of Diebold India Pvt. Ltd. is invalid inasmuch as it has been made in the name of a non-existent entity. Accordingly, the assessment order dated 31.01.2017 (supra) is hereby quashed.

Since we have approved the preliminary plea of the assessee and the assessment has been held to be invalid in the eyes of law, the necessity of examining the merits of the other Grounds raised by the assessee in its Memo of appeal is obviated. Thus, the appeal of the assessee is allowed, as above.

Resultantly, appeal of the assessee is allowed.