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Income Tax Appellate Tribunal, DELHI BENCHES : I-2 : NEW DELHI
Before: SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM
ORDER
PER R.S. SYAL, AM:
This appeal by the Revenue is directed against the order passed by the CIT(A) on 8.2.2013 in relation to the assessment year 2005-06.
The first ground is against the view taken by the ld. CIT(A) that the service of notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter also called `the Act’) was not within the limitation period.
Briefly stated, the facts of the case are that the assessee filed its return on 31.10.2005 declaring Nil income. The same was processed u/s 143(1). First notice u/s 143(2) of the Act was issued on 27.10.2006. At the time when this notice was taken for delivery by the postal authorities, it transpired that the assessee had already shifted from the address given in the return of income at which the notice was addressed.
On enquiry, the Department of Posts, Indraprastha Post Office, New Delhi, vide its letter dated 6.10.2007, confirmed that the notice was booked for delivery on 27.10.2006 by speed post and dispatched by them on 27.10.2006, but, the ‘Dak’ could not be delivered to the addressee and the same was returned to the Income-tax Officer on 1.11.2006. Again, another notice u/s 143(2) of the Act was issued on 7.2.2007 on the same address which also met with the same fate. The AO got inquiry conducted and traced out the new address of the assessee. It was on this new address that one more notice u/s 143(2) was issued on 10.7.2007 which was duly served and the proceedings were attended by the authorized representative. The assessee challenged the late service of notice before the ld. CIT(A), who held that no notice u/s 143(2) was validly served upon the assessee within the prescribed time limit and hence assessment was bad in law. The Revenue is aggrieved against this finding returned by the ld. CIT(A).
We have heard the rival submissions and perused the relevant material on record. The facts of the case lie in a narrow compass inasmuch as the first notice u/s 143(2) of the Act was issued by the AO on 27.10.2006 which fact has been confirmed by the Postal Authorities as well. This notice was sent at the address given by the assessee in its return of income. It is an accepted position that the assessee changed its address, but, did not intimate such change to the AO and, as such, the notice was sent at the address given in the return of income. Proviso to section 143(2) provides that: ‘No notice under clause (ii) shall be served on the assessee after the expiry of twelve months from the end of the month in which the return is furnished.’ Return in the instant case was filed on 31.10.2005. The said period of 12 months expired on 31.10.2006. Admittedly, notice u/s 143(2) was issued by the AO on 27.10.2006 on the address stated in the return of income which could not be served because the assessee had changed its address without intimating the new address to the AO. The ld. DR submitted that the word ‘served’ used in the proviso to section 143(2) should be read as the word ‘issued’ as has been held by the Hon’ble Punjab & Haryana High Court in V.R.A. Cotton Mills Pvt. Ltd. vs. Union of India and Ors. (2013)
359 ITR 495 (P&H). He contended that the Hon’ble Punjab & Haryana High Court in this case dealt with the same question, being the service of notice in terms of proviso to section 143(2). Dismissing the assessee’s objection, the Hon’ble High Court has held that the expression ‘served’ used in proviso to section 143(2) should be read as ‘issued.’ Since, in this case, the notice was admittedly issued by the AO within the prescribed period of 12 months from the end of the month in which the return was filed by the assessee, which fact has been confirmed by the Postal Authorities as well, the ld. DR contended that it 4 should be considered as duly ‘served’ on the assessee within the meaning of proviso to section 143(2). Albeit, this contention was earlier resisted, but during the course of hearing, the ld. AR did not oppose this argument advanced on behalf of the Revenue. He candidly, admitted that this issue may be decided in favour of the Revenue. Without going into the legal aspects of the arguments on this issue, we allow this ground of appeal on the concession made by the ld. AR. This ground is, therefore, allowed.
5. The only other ground raised in this appeal is against the deletion of addition on account of transfer pricing adjustment. Succinctly, the facts as recorded in the assessment order are that the assessee is a company incorporated in the Netherlands which had set up a liaison office in New Delhi in 1997. In 1999, the company converted its liaison office in India to a branch office. The Indian branch office is primarily engaged in the designing of engineering and construction projects in the power, oil and gas, fertilizer and petrochemical sectors. During the year under consideration, the assessee reported an international transaction of rendering `Services’ to its AEs for a sum of Rs.3,01,96,496/- and also earning of revenue from `Equipment supply’ to the tune of Rs.29,16,764/-, totaling receipts from its AEs at Rs.3,31,13,260/-. The assessee also declared transactions with non-AEs to the tune of Rs.8,08,550/-. The assessee used the Transactional net margin method (TNMM) as the most appropriate method to demonstrate that its international transactions were at arm’s length price (ALP). The assessee computed its operating profit margin at 10.81% from the international transactions as against loss of 17.89% from unrelated transactions. That is how, it was claimed that the international transactions were at ALP. The AO did not accept the application of TNMM as the most appropriate method. He opined that the Comparable Uncontrolled Price (CUP) method should have been applied on the international transactions of rendering of services with the transacted value of Rs.3.01 crore. He compared the hourly rate charged by the assessee from its AEs at Rs.1,135/- with that charged from non-AEs, namely, India Glycols Ltd. and Petron Engineering Construction Ltd., at Rs.1,500/-. When confronted, the assessee contended that the 6 calculation of Rs.1,500/- made by the AO was incorrect inasmuch as the average hourly rate charged by it from the unrelated parties stood at Rs.717/-. Not convinced with the assessee’s contention, the AO went ahead by considering the hourly rate of Rs.1,500/- as a benchmark and, consequently made an addition of Rs.1,35,52,504/- on account of transfer pricing adjustment. The ld. CIT(A) got convinced with the assessee’s contention about the AO not taking correct average of all the hourly rates charged by it from unrelated parties. Considering such average hourly rate of Rs.717/- charged from non-AEs, the ld. CIT(A) held that the rate charged by the assessee from its AEs at Rs.1,135/- per hour was at arm’s length. The Revenue is aggrieved against the deletion of consequential addition.
We have heard the rival submissions and perused the relevant material on record. The first issue is about the application of the most appropriate method to the international transactions reported by the assessee. Here, it is pertinent to note that the assessee reported two international transactions, viz., ‘Service revenue’ of Rs.3.01 crore and ‘Equipment supply revenue’ amounting to Rs.29.16 lac. The assessee applied TNMM as the most appropriate method on both these transactions. Page 15 of the assessment order reproduces the assessee’s contention made before the AO that it rendered similar services to AEs and independent third parties. When the services provided to the AEs are similar to those provided to non-AEs, we fail to understand as to how the CUP method can be discarded. It goes without saying that in a case where goods/services are sold/provided to the related parties and instances of comparable uncontrolled transactions are also available, coupled with the fact that other attending circumstances also being similar or capable of adjustment, usually CUP is the most preferable method. Application of the CUP as the most appropriate method becomes more imminent in a case where comparable uncontrolled transactions are internal. Adverting to the facts of the instant case, we find that the assessee itself admitted before the AO that the services provided to the AEs and non-AEs are similar. Since the internally uncontrolled comparable transactions of rendering similar services as provided to the AEs are available, we hold that the decision of the AO 8 to apply CUP as the most appropriate method does not warrant any interference. We, therefore, approve the view taken by the AO in determining the ALP of the international transaction of `Service’ revenue from its AE on the basis of CUP method as against TNMM applied by the assessee. Here, it is pertinent to mention that the AO has confined himself only to the determination of ALP in respect of `Service’ revenue by impliedly accepting the international transaction of `Equipment supply’ revenue at ALP.
Now, we espouse the determination of ALP of the international transaction of ‘Service revenue’ under the CUP method. It is noticed that the AO has determined the hourly rate charged by the assessee from its AEs at Rs.1,135/-. Such a determination has not been contested by the assessee. This rate charged is required to be compared with the hourly rate charged in a comparable uncontrolled transaction, which forms the bedrock of a benchmark price. At this stage, it is significant to mention that the AO has taken internally comparable uncontrolled transactions for benchmarking and there is no reference to the availability or use of any externally comparable uncontrolled hourly rate. In doing so, the AO has computed hourly arm’s length rate on the basis of the assessee’s transactions with unrelated parties, at Rs.1,500/-, as against the assessee’s contention that the average price charged from unrelated parties is Rs.717/- per hour. Thus, it is vivid that the area of dispute is the determination of the correct hourly rate charged by the assessee from unrelated parties.
At this juncture, it is relevant to mention that rule 10B(1)(a) deals with the determination of ALP under the CUP method. Sub-clause (i) of this rule provides that : `the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified’. Sub-clause (ii) talks of making adjustment to such price so as to bring the international transaction at par with the comparable uncontrolled transaction. Then sub-clause (iii) provides that the adjusted price arrived at under sub-clause (ii) is taken as an arm’s length price in respect of the property transferred or services provided in the international transaction.
There is no issue of making any adjustments in terms of sub-clause (ii) in the instant case. Accordingly, we are required to concentrate only on sub-clause (i) which talks of identifying price charged or paid for services provided in a comparable uncontrolled transaction, or a number of such transactions. A bare perusal of this provision makes it clear that if there is only one comparable uncontrolled transaction, then such sole transaction should be considered as a benchmark. On the other hand, if there are a number of such transactions, then all such transactions should be considered. In other words, in case of plurality of the comparable uncontrolled transactions, their average price is taken as a benchmark as per sub-clause (i). This has been provided in no unambiguous terms in section 92C of the Act, which deals with the computation of the ALP. First proviso to section 92C(2) states : `that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices’. Ergo, it is manifest that in case of availability of a number of comparable uncontrolled transactions, it is the arithmetic mean of the price charged in all such transactions, which is considered 11 for determining the ALP of an international transaction. In such a case, neither the AO nor the AO/Transfer Pricing Officer can resort to cherry- picking.
Reverting to the facts of the extant case, we find that the assessee has entered into transactions with two parties, namely, India Glycols Ltd., and Petron Engineering Construction Ltd. Total revenue from rendering of service to these two parties is Rs.8,08,550/-. In all, there are 8 invoices raised by the assessee, viz., seven on India Glycols Limited and one on Petron Engineering Construction Ltd., as under:-
Date Invoice No. Name of the company Amount 21.04.2004 6-2302-3-LHTD-04 India Glycols Limited 280,000 05.05.2004 6-2302-3-LHTD-05 India Glycols Limited 24,000 05.07.2004 6-2302-3-LHTD-06 India Glycols Limited 24,000 22.07.2004 6-2302-3-LHTD-07 India Glycols Limited 200,000 09.08.2004 6-2302-3-LHTD-08 India Glycols Limited 1,22,000 05.11.2004 6-2302-3-LHTD-09 India Glycols Limited 90,000 10.01.2005 6-2302-3-LHTD-10 India Glycols Limited 24,000 19.05.2004 6-2375-1-LHTD-007 Petron Engineering 44,550 Construction Ltd. Total 808,550
Copies of these invoices were admittedly filed before the AO and the same have been placed for our consideration also. It can be seen that out of seven invoices raised on India Glycols Ltd., three invoices for Rs.24,000/- each represent `Site visit’ to M/s India Glycols Ltd., for discussions about the work undertaken to be done by the assessee for them. These invoices represent site visiting charges by the assessee’s employees for which there is a charge of Rs.24,000/-, which rate on hourly basis, comes to Rs.1,500/-. In so far as the rendering of actual service is concerned, the invoices are for sum of Rs.2,80,000/-, Rs.2lac, Rs.1,22,000/- and Rs.90,000/- on India Glycols Ltd., and Rs.44,550/- on M/s Petron Engineering Construction Ltd. These five invoices represent service charges for the actual work done by the assessee to these unrelated parties. The AO has ignored these five invoices and picked up only three invoices of Rs.24,000/- each for determining the benchmark rate of Rs.1,500/- per hour, which, in fact, represented merely site visiting charges undertaken by the assessee’s employees. If all the eight invoices are considered, the average hourly rate comes to Rs.717/- per hour which was placed before the AO, who chose to ignore the same. If we ignore the three invoices of Rs.24,000/- each from both the sides, namely, revenue as well as the number of hours, the average hourly rate 13 charged comes to Rs.682/-. Viewed from any angle, the price charged by the assessee from its AEs at Rs.1135/- per hour is definitely at arm’s length in comparison with the average price of Rs.717/- or Rs.682/-, as the case may be. In view of the foregoing discussion, we are of the considered opinion that the ld. CIT(A) was justified in deleting the addition on merits. We, therefore, countenance the impugned order on this score.
In the result, the appeal is partly allowed.
The order pronounced in the open court on 15.10.2015.