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CASE LAWS

2018-TII-05-HC-KAR-TP

ACIT Vs EPSON INDIA PVT LTD: KARNATAKA HIGH COURT (Dated: January 9, 2018)

Income tax - ALP - AMP expenses - brand promotion of AE - constitutional remedy - grant of interim stay - frivolus petitions - recovery of outstanding demand

The Revenue Department preferred petition challenging the interim stay order passed by the Division Bench of ITAT, finding that the assessee had a good prima facie case in the pending appeal. Before the grant of stay against the recovery of demand from the assessee which, as per the impugned order was to an extent of Rs.22.17 Crores, the ITAT observed that assessee had already paid a sum of Rs.3.32 Crores. Before granting stay, the Tribunal further directed the assessee to deposit Rs.2.00 Crores and balance demand was stayed for a period of 90 days. The ground assigned by the Revenue Department before this Court, was that the DRP had categorically recorded a finding in the impugned order that the expenditure incurred by assessee towards AMP was for promotion of Brand owned by the overseas AEs, and therefore, certain AMP adjustments were required to be made to determine the ALP in the hands of assessee in their declared income and the said findings resulted in the impugned demand against the assessee to an extent of Rs.22.17 Crores. After considering the averments made in the stay application filed by assessee, the ITAT in exercise of its discretion had granted the said interim order.

This court therefore called upon the Chief CIT to file an Affidavit as to why the Revenue had chosen to challenge the said interim order passed by the ITAT, as prima facie it appeared that the interim order passed by Tribunal was in fair exercise of its discretion and apparently no good reason was found for the Revenue to challenge the said order before this Court. In pursuance of the directions of this Court, instead of the Chief CIT, a lower authority working as Principal CIT, other than the Principal Commissioner who approved the sanction of filing of the present writ petition through the Assistant CIT, filed an Affidavit before this Court today. While no order sanctioning or approving the action of filing of the present writ petition had been produced before this Court along with the said Affidavit, the said Principal CIT stated in his Affidavit that the Revenue Department relying upon the decision of Supreme Court in the case of ASSISTANT COLLECTOR OF CENTRAL EXCISE, CHANDAN NAGAR, WEST BENGAL v/s DUNLOP INDIA LTD. AND OTHERS - 2002-TIOL-156-SC-CX-LB had chosen to file this writ petition on the ground that the ITAT in its impugned order, without properly appreciating the orders passed by the TPO, AO and the DRP, proceeded to stay the demand, subject to payment of Rs.2.00 Crores in addition to Rs.3.32 Crores paid against the outstanding demand of Rs.22.17 Crores. The Department in its Affidavit had stated that no hardship was likely to be caused to assessee, if the entire demand was directed to be paid.

On Writ, the HC held that,

Whether Revenue Department's tendency to give a go-by to the National Litigation Policy and CBDT Instructions, while seeking constitutional remedies under frivolus petitions not involving questions of law, merits levy of exemplary costs - YES: HC

+ it is seen that the entire demand raised by the Revenue authorities prima facie was not sustainable, once the controversy was apparently covered by the decision of Delhi High Court and also the Bench of the Tribunal itself at Bengaluru, in favour of assessee. Therefore, the grant of absolute stay against the recovery would have been more appropriate in the circumstances, rather than calling upon the assessee to deposit a further sum of Rs.2.00 Crores. The ITAT, perhaps to serve the interest of the Revenue leaned to some extent in favour of Revenue for the time being subject to the final decision of the appeal itself and chose to pass this order, which brought to the kitty of Revenue more than a sum of Rs.5.00 Crores against a prima facie unsustainable demand of Rs.22.17 Crores, still the Revenue did not feel satisfied and instead of pursuing hearing of the appeal before the ITAT, chose to file the present writ petition before this Court which is absolutely misconceived remedy availed by them. The Supreme Court while dealing with the case of Central Excise, an indirect taxation in which the incidence of tax is admittedly passed on by the assessee to the customers as against the direct taxes, like Income Tax in the present matter, where the demand is raised against the assessee and is required to be paid by them, was laying down certain guidelines for the Constitutional Courts while exercising writ jurisdiction under Articles 226/227 of the Constitution of India. The blanket interim orders in such indirect tax matters causes prejudice to the public interest and therefore should not be so granted blindly;

+ the directions of Constitutional Courts to the assessees to furnish Bank Guarantees, which is nothing more than a piece of paper under which the Bank stands guarantee for the default of the assessee, the Governments cannot be expected to meet the public expenses out of their general funds and the Supreme Court expressed their concern about the public revenue of the public bodies like Municipal Corporation which have to incur huge day to day expenses for the public services rendered by them was laying down their guidelines. The said guidelines laid down by the Supreme Court in Dunlop India case are not at all attached in the circumstances, in which the ITAT has passed the interim order, nor does it fortify the stand of Revenue for having chosen to file this writ petition before this Court against the said interim order of Tribunal. The Income Tax Department can neither be compared with the Municipal Corporation nor do they deal with the indirect taxation. Therefore, both the basic parameters on which the observations of Supreme Court in DUNLOP case is relied upon by the Revenue's counsel justifying the filing of the present writ petition are not applicable. It further shows a non-application of mind on the part of the Principal Commissioner, while sanctioning the filing of this writ petition before this Court;

+ seeking adjournments from the ITAT on the dates fixed by it for hearing the appeal itself which was apparently covered in favour of the assessee by the Departmental counsel adds insult to the injury. The irresponsible and uncoordinated manner in which Income Tax Department have displayed their dealing of the serious matters like invoking the constitutional remedy has prompted this Court to take up this matter to deprecate strongly such tendency on the part of the Revenue authorities and other Government Departments, who choose to avail constitutional remedies for not so good reasons at all, wasting the public money and court's time taken even to hear and reject such frivolous writ petitions. Irrespective of the policy decisions taken at the highest levels of Government in the form of National Litigation Policy and CBDT Instructions restricting these authorities not to invoke superior courts' even regular appellate jurisdiction with the small stakes and petitions not involving larger and important questions of law which require interpretation by the constitutional courts, the individual officers at their own lower level continue to defeat these avowed policies, as is reflected in the present case. Therefore, in the considered opinion of this Court, the present writ petition deserves to be dismissed with exemplary costs on the officials involved in filing of this writ petition.

Revenue's petition dismissed with cost

2018-TII-42-ITAT-DEL-TP

UNITED HEALTH GROUP INFORMATION SERVICES PVT LTD Vs DCIT: DELHI ITAT (Dated: January 11, 2018)

Income tax - Sections 92C & 271(1)(c)

Keywords - ALP - concealment - good faith - penalty - software development services - selection of comparables - TNMM

The Assessee company, engaged in the business of providing software development services, healthcare claim adjudication and bio pharmaceutical services, had reported international transactions, including provision of I.T. services at Rs.10,24,95,795/-. The assessee applied TNMM for showing that Software development services segment was at arm’s length. Similar method was adopted for benchmarking the international transaction of Claim processing service transaction. When the matter was referred to the TPO, he proposed transfer pricing adjustments in the Software development service and ITES segment amounting to Rs.2.68 crore in total. Pursuant to the directions given by the DRP and certain rectification orders passed, the TPO recalculated the TP adjustment in Software development segment at Rs.53,27,302/-. In addition, the AO also levied penalty amounting to Rs.17,93,169/- u/s 271(1)(c).

On appeal, the ITAT held that,

Whether wrong selection of comparable per se inadvertently for purpose of comparison, is no bar in seeking its exclusion later on - YES: ITAT

+ as far as selection of Information Systems Ltd is concerned, it is to be noted that if the assessee fails to report an otherwise comparable company, then the TPO is obliged to include it in the list of comparables, and in the same manner, if the assessee wrongly reported an incomparable case as comparable in its TP study and then later on realizes and claims that it should be excluded then, there should be nothing to forbid it from claiming so, provided the company so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly chosen by the assessee as comparable, cannot tie its hands to contend before the Tribunal that such a company was wrongly considered as comparable which is, in fact, not. There is no difference in the situation where the assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The underlying object of the entire exercise is to determine the arm’s length price of an international transaction. Simply because a company was wrongly considered by the assessee as comparable, cannot, act as a deterrent from challenging the fact that this company is, in fact, not comparable;

Whether consolidated financials of a functionally dissimilar company, can be adopted as comparable, for purpose of benchmarking - NO: ITAT

+ coming to the comparability or otherwise of this company, it is found that it is also engaged in imparting training and licensing its software. However, the assessee is not engaged in imparting any training on commercial basis or selling its software products. The impact of revenues from such two activities cannot be dislodged from the overall profitability of this company, considered at entity level. As such, it is held that consolidated financials of this company cannot be compared with the assessee. Similar view has been taken by the Tribunal in the assessee’s own case for the assessment year 2008-09. This company is, therefore, directed to be excluded;

Whether company having exceptional financial results due to mergers/demergers, can be adopted as comparable - NO: ITAT

+ as far as Sasken Communications Technologies Ltd is concerned, it is seen that the Mumbai Bench of the Tribunal in case of Petro Araldite (P) Ltd. Vs. DCIT - 2013-TII-182-ITAT-MUM-TP, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT - 2015-TII-142-ITAT-DEL-TP. In view of the fact that there were mergers during the year, we hold that this company cannot be considered as comparable due to such extra-ordinary financial events. Accordingly, this company is directed to be excluded from the final list of comparables;

Whether penalty is imposable pursuant to addition on account of TP adjustment, if assessee proves to the satisfaction of TPO that price charged/paid in such international transaction was in accordance with the provisions of section 92C - NO: ITAT

+ as far as levy of penalty is concerned, it is seen from the finally rectified order passed by AO that the only addition which has been made is on account of transfer pricing adjustment under ‘Software development segment’ amounting to Rs.53,27,302/-. A perusal of Explanation 7 to Section 271 transpires that any addition on account of transfer pricing adjustment shall be deemed to represent income in respect of which particulars have been concealed or inaccurate particulars have been furnished in terms of section 271(1)(c), thereby inviting penalty under this provision. However, the exception enshrined in this provision itself states that no penalty will be imposed pursuant to the addition on account of transfer pricing adjustment, if the assessee proves to the satisfaction of the authority that the price charged or paid in such a transaction was in accordance with the provisions of section 92C and such price was computed as per the manner prescribed under that section in good faith and due diligence. It is also clear that the assessee’s application of the TNMM in respect of the ‘Software development’ segment under consideration is ‘in accordance with the provisions contained in section 92C’. Further, such determination is 'in the manner prescribed under that section' because the TPO has nowhere held that the assessee calculated ALP of these transactions in a manner different from the one prescribed under rule 10B(1)(e), which contains mechanism for calculating the ALP under the TNMM;

Whether good faith and due diligence can be said to be lacking, simply because certain comparables chosen by assessee are found to be not comparable by the TPO - NO: ITAT

+ the next ingredient which is crucial for evading penalty u/s 271(1)(c) is that the application by the assessee of most appropriate method for determining ALP should be ‘in good faith and with due diligence.’ There is absolutely no doubt that the assessee applied the TNMM on the international transactions of ‘Software development’ in the manner prescribed and computed the ALP in good faith and with due diligence. Simply because certain comparables chosen by the assessee were found to be not comparable by the TPO, the good faith and due diligence cannot be said to be lacking. It is simply a difference of opinion between the assessee and the authorities on the comparability or otherwise of some companies. Coming back to the Explanation 7 to section 271(1), it is found that no doubt the addition of Rs.53.27 lac has been made on account of transfer pricing adjustment in respect of the international transaction of provision of 'Software development services', but, the same cannot be deemed to represent the income in respect of which particulars have been concealed or furnished wrongly by the assessee. Under these circumstances, the penalty imposed and confirmed in the instant case does not merit countenance and the same is hereby directed to be deleted.

Assessee's appeal allowed