2017-TII-19-HC-DEL-TP

PR CIT Vs MITSUI AND COMPANY INDIA PVT LTD: DELHI HIGH COURT (Dated: February 28, 2017)

Income tax - Sections 14A, 37(1), 92CA & 143(3)

Keywords: ALP - business profits - berry ratio - offshore supplies - PE - prior period expenditure - sales support services - service fee - RPT & TNMM

The assessee is a wholly owned subsidiary of Mitsui & Company Pvt. Ltd., Japan, and is engaged in providing sales support Services and liasoning services to its AEs with regard to the exports and imports of the commodities from its AE to/from India. During assessment, TPO noticed that assessee had paid service fee of Rs.40,78,906/- to its related parties. Finding the explanation filed by assessee not tenable, TPO/DRP disallowed the same u/s 37(1) being the expenditure not incurred wholly and exclusively for the purpose of business and considered the same as RPT. AO thereby made an addition of Rs.40,78,906/- to the total income of assessee. The AO in pursuance to the order passed by the TPO/DRP further made addition of Rs.5,93,513/- on account of making purchases of Rs.7,19,40,901/- from M/s. Mitsui & Co. Ltd., Japan during FY 2009-10 on account of non-deduction of TDS on the business profit on the aforesaid payment on the ground that M/s. Mitsui & Co. Ltd., Japan had a PE in India and was regularly filing its return of income before Indian Income-tax Authorities. Consequently, the amount of Rs.5,93,513/- was added to the total income of assessee.

On appeal, the High Court held that,

Whether the Tribunal's decision from previous AY is binding on the assessee when such order is based on the jurisdictional High Court's decision and the issue involved is identical - YES: HC

+ the two questions urged by the Revenue in these appeals relates firstly to the transfer pricing adjustment made by the TPO for AY 2009-10 and 2010-11 2016-TII-227-ITAT-DEL-TP. The ITAT relied upon its earlier orders which were based upon the ruling in M/s Li & Fung India Pvt. Ltd. v. CIT, 2013-TII-18-HC-DEL-TP. It is pointed out that in respect of an identical adjustment for AY 2007-08 and 2008-09, the ITAT's order was upheld by this Court in ITA 252-253/2016 - by an order dated 28.04.2016 = 2016-TII-24-HC-DEL-TP; a copy of the said order has been brought to the notice of the Court. Having considered the same, this Court is of the opinion that no substantial question of law arises on that count;

Whether disallowance can be made as per Section 14A, when investment made by assessee does not yield tax exempt income - NO: HC

+ the second question of law urged is with respect to the disallowance made under Section 14A by the AO. The ITAT following the principle enunciated in Cheminvest v. CIT, 2015-TIOL-2070-HC-DEL-IT was of the opinion that where the investment does not yield tax exempt income, disallowance is per se inadmissible under Section 14A. Since the ITAT has followed the judgment of this Court, no question of law arises. For the above reasons, the appeals are dismissed.

Revenue's appeal dismissed

2017-TII-18-HC-AHM-TP

IN THE HIGH COURT OF GUJARAT

PRI CIT Vs WOCO MOTHERSON ADVANCED RUBBER TECHNOLOGIES LTD: GUJARAT HIGH COURT (Dated: February 20, 2017)

Income Tax - Sections 10AA,143(3) & 144C

Keywords: technical services - technical services - upward adjustment - ALP - Joint Venture & draft assessment order

The assessee is a rubber manufacturing compsessee is engaged in manufacturing of high quality rubber parts, rubber plastic parts, rubber metal parts and liquid silicon rubber parts. In the assessment year under consideration ie., A.Y 2011-2012, the assessee filed return of income declaring total income at Rs. 9,71,366/=. That thereafter, by considering the TPO's order, a draft assessment order u/s 143 (3) read with Section 144C was passed by determining the total income after making addition on account of adjustment to ALP in the business income of the assessee. AO while passing the final assessment order made disallowance on account of 50% disallowance of deduction u/s 10AA, being excess claimed by assessee and assessed the total income at Rs. 9,22,29,790. On appeal, Tribunal held that disallowance u/s 10AA by AO can be said to be in breach of Section 144C, and thus it had set-aside such disallowances made by AO u/s 10AA.

When AO forwarded a draft of the proposed assessment order to the assessee, he has not proposed to make disallowance of Rs. 7,64,15,421/= u/s 10AA. It is also not in dispute that in the draft assessment order issued by AO, it had proposed only APL adjustment of Rs. 1,48,43,000/=. No disallowances were proposed in the draft assessment order. The said draft assessment order was carried before DRP and proposed adjustment was contested by assessee by filing detailed objections, but the assessee did not succeed before DRP. That thereafter, the matter went before AO for framing the final assessment order. While passing the final assessment order AO not only made addition of APL adjustment, but also made disallowance u/s 10AA. On appeal, ITAT had directed to delete such disallowance made by AO made u/s 10AA on the ground that as in the draft assessment order, it was not proposed to make disallowance of the claim u/s 10AA, and therefore, it was not open for AO to make disallowance of such claim u/s 10AA, while passing the final order of assessment.

On appeal, the High Court held that,

Whether disallowance of claim u/s 10AA deserves to be deleted, when it was not proposed by AO in the draft assessment order u/s 144C - YES: HC

+ while passing the final assessment order, the AO cannot go beyond what is proposed in the draft assessment order. If the submissions made on behalf of the Revenue are accepted that the AO, while passing the final assessment order can also go beyond the variation proposed in the draft assessment order, then in that case, it can be said that the assessee shall not given any opportunity to raise objections against such additions or disallowances which were not even proposed in the draft assessment order. Therefore, the same can be considered to be in breach of the principles of natural justice. It is required to be noted that even while passing the regular assessment order, if the officer proposes to make any further addition and/or disallowances, in that case also, AO is required to issue required notice u/s 142 and the assessee is required to be given an opportunity to raise objection against such addition and/or disallowance. Under the circumstances, considering the entire scheme of Section 144C, AO cannot make any addition and/or disallowance then what is proposed in the draft assessment order. The contention raised on behalf of the Revenue that the aforesaid lapse can be said to be a procedural lapse has also no substance. Such additions/disallowances other than those proposed in the draft assessment order cannot be said to be a mere procedural lapse. Under the circumstances, we are of the opinion that Tribunal has not committed any error in deleting the disallowance made by AO with respect to the claim of the assessee u/s 10AA, as the same was not proposed by AO in the draft assessment order and for which, no opportunity was given to the assessee to submit the objections against such disallowance. Under the circumstances and for the reasons stated above, the proposed Questions no. B to D are held against the Revenue. However, it is made clear that nothing is submitted before us whether subsequently another draft assessment order came to be issued by AO with the fresh proposal of deduction of claimed by the assessee u/s 10AA, and therefore, we express no opinion on the same. We have restricted ourselves to the impugned order passed by Tribunal by which Tribunal has directed to delete disallowance made by the AO with respect to the claim of the assessee u/s 10AA, as the same is found to be in breach of Section 144C in as much as the same was not proposed by AO in the draft assessment order. Thus, the proposed Questions nos. B to D proposed in the present Tax Appeal fails and the same deserves to be dismissed and are accordingly dismissed. However, as observed here-in-above, the present Tax Appeal is admitted qua Question "A" alone.

Revenue's appeal dismissed