TII Instant Update - 2017-TII-INSTANT-ALL-515

CASE LAWS

2017-TII-106-HC-MAD-TP

PRODAPT SOLUTIONS PVT LTD Vs DCIT: MADRAS HIGH COURT (Dated: December 8, 2017)

Income Tax - Writ - Sections 143(3) & 254.

Keywords - Opportunity of hearing - Adherence to ITAT's directions

The Assessee-company was engaged in the business of Software Services, Products and Operations with their main focus on telecom segment and filed its return for the AY under consideration. The case was selected for scrutiny and notice u/s 143(2) and 142 (1) of the Act was issued. The AO found that the Assessee had international transactions with AE and accordingly, he referred Assessee's case to the TPO. The TPO considered the methodology adopted and determined the ALP with the upward adjustment towards interest accrued to the Assessee on advances given to its wholly owned subsidiary Prodapt Corporation Inc., USA. On appeal by Assessee, the DRP deleted some part of addition and confirm the balance addition. On further appeal by the Assessee, the Tribunal remitted the matter to the file of the AO with certain directions after providing an opportunity of being heard to the Assessee before giving effect to the order of the Tribunal.

However, the Assessee's case was that the order giving effect to the Tribunal's order had been passed whereby the addition u/s 40(a)(ia) of the Act was deleted as per the order passed by the Tribunal but with regard to the other issues, a separate order also had been passed without giving an opportunity of being heard to the Assessee and as the first date of hearing was fixed the order had been passed much earlier to the said date.

After hearing both the parties, the High Court held that,

Whether when AO fails to adhere to the directions issued by the Tribunal and to give a adequate opportunity to the assessee to put forth their submissions, addition made by AO is not sustainable and calls for reconsideration - YES: HC

++ the Tribunal held that considering the apparent facts, material record and the paper book filed the matter has to be reexamined by the Assessing Officer as these facts were not mentioned in the order of the DRP and it is not clear as to whether the assessee had filed these details before the DRP or before the Assessing Officer to substantiate its claim. Therefore, the Tribunal remanded the issue to the file of the Assessing Officer to verify the genuineness after providing an opportunity of hearing to the assessee. With regard to the issue pertaining to the claim that communication charges are paid to Indian Companies in respect of the lease lines, the Tribunal opined that the matter has to be verified by the Assessing Officer and accordingly set aside the order of the Assessing Officer on the said issue for the limited purpose to examine the nature of charges and verify whether this income has been offered in the hands of the recipients and the assessee to be afforded an opportunity before passing an order;

++ when there is a specific direction by the Tribunal to re-examine the matter in a particular manner, the Assessing Officer is bound to scrupulously follow the directions of the Tribunal. The direction of the Tribunal is binding on the Assessing Officer. Therefore, to conclude that no further evidence was produced by the assessee may not be the correct approach to be adopted. On the given set of documents, the Assessing Officer was bound to cause verification of the details and ascertain the genuineness and then take a decision. However, while passing the order this has not been done. The Assessing Officer has made a verification that with regard to the date of commencement of production except for the letter the assessee has not produced any document. However, the assessee's case is that the paper book which was filed by them before the Tribunal and also placed before the Assessing Officer contained the copy of the order of approval granted by the STPI which the Revenue has not considered. In this regard, the counsel for the assessee has drawn the attention of this court to the orders of approval of the STPI. Thus, the order has been passed without adhering to the directions issued by the Tribunal and the chronology of dates and events would show that the assessee did not have adequate opportunity to put forth their submissions. Therefore, it is a fit case where the matter should be remanded for reconsideration by the Assessing Officer.

Writ petition allowed

2017-TII-105-HC-DEL-TP

DABUR INDIA LTD Vs PR CIT: DELHI HIGH COURT (Dated: December 13, 2017)

Income tax - cessation of payment - use of brand name - acquisition of shareholding - technical knowhow - clubbing of royalty rates - absence of brand building - international transaction

During the subject year, the Assessee used to provide expertise and also permit the use of its name "Dabur" by a UAE based entity Redrock. The arrangement was embodied in an agreement, in terms of which the overseas entity Redrock paid royalty of 1%. The assessee acquired the shareholding in Redrock which resulted in a name change, and the overseas entity was then described as M/s Dabur International Ltd. Subsequently, the overseas entity which had then become a 100% subsidiary of the assessee, ceased to pay the royalty. The TPO to whom the returns were referred by the AO, took into account the articulated agreement entered into by assessee with the Redrock in the earlier orders and computed royalty chargeable from M/s Dabur International Ltd. @ 4%. The TPO, in doing so, clubbed the rates of royalty @ 3% being the royalty payable on manufacturing items with the support of assessee and while using technical knowhow provided; and 1% of the products manufactured without the aid and support of assessee. The latter class were marketed under the "Dabur brand". The AO accepted the TPO’s additions and finalized the assessment by making appropriate adjustment to the tune of Rs. 5,44,69,000/-.

On appeal, the CIT(A) reduced the royalty rate to 2% taking the average of the two categories of transactions. The assessee’s arguments with respect to existence or absence of comparables having regard to the mandate of Section 92C and Rule 10B were taken note of. On further appeal, the ITAT scaled down the rate of royalty to 0.75% and directed adjustments accordingly, after accepting the argument of assessee with respect to absence of brand building.

On appeal, the HC held that,

Whether an initial income, which was concededly being shown in the past as an international transaction, is available for scrutiny - YES: HC

Whether Assessee can claim applicability of Second Proviso to Section 92CA(2), when he himself had not offered any adjustment claiming that there was indeed no international transaction - NO: HC

+ this Court is of the opinion that having regard to the conspectus of facts, no infirmity can be found with the ITAT’s approach. If the assessee’s submissions were to be accepted arguendo, the omission by a party to indicate, an initial income, which was concededly being shown in the past as an international transaction, cannot be scrutinized at all. Such an absolute proposition is not possible to support. The assessee is only to explain why the Dabur brand has been permitted to an overseas entity, of which it is the present sole or principal shareholder. That it was not such a sole shareholder in the past is an admitted fact. Equally, with the same overseas entity, when the ownership was of a different pattern, royalty was charged for the use of the Dabur brand. Unless at the entity level there is a complete re-organization so as to result in a complete identity of the two concerns or royalty arising out of the use of the Dabur brand, had to be treated as an international transaction; it was for all previous years. In these circumstances, the conclusions and findings recorded by the Appellate Commissioner and the ITAT cannot be faulted. The assessee’s submission with respect to the applicability of second proviso to Section 92CA(2), i.e. that it is entitled to the benefit of the arithmetical mean – not exceeding 5%, is insubstantial. The assessee, as a matter of fact, did not offer any adjustment claiming that there was indeed no international transaction. In these circumstances, the question of applicability of the said proviso does not arise.

Assessee's appeal dismissed