If DRP dismissed objections filed by assessee in a summary manner without proper application of mind, matter needed reconsideration

IN THE ITAT DELHI BENCH ‘F’

Panasonic Consumer India (P.) Ltd.

versus

Assistant Commissioner of Income-tax 

IT Appeal No. 5301 (Delhi) of 2010

[Assessment year 2006-07]

September 21, 2012

ORDER

T.S. Kapoor, Accountant Member

This is an appeal filed by the assessee against the order of DRP dated 30.9.2010. The grounds raised by the assessee are as under:-

1.0 That the assessment order passed by the Assessing Officer under Section 143(3) read with Section 144C on the directions given by the DRP is bad in law.

2.0 That the DRP has grossly erred in dismissing various objections filed by the appellant in a summary manner and without proper application of mind on the various issues raised before it.

3.0 That the DRP’s order is against the judicial principles required judicial orders to be speaking order.

4.0 That the DRP/Assessing Officer/TPO have grossly erred in law and on facts in the circumstances of the appellant’s case in making additions of Rs. 11,77,310/- on account of warranting provision, Rs. 1,75,94,836/- on account of provision for sale promotion and Rs. 6,23.30,710/- on account of Transfer Pricing additions. The additions made are wholly illegal, untenable, and on erroneous grounds. The entire addition of Rs. 8,11,02,856/- is prayed to be deleted.

5.0 That the order of assessment including that of the TPO is bad in law.

6.0 That the additions of Rs. 6,23,30,710/- made by the Assessing Officer/TPO under provision of 92CA of the Income Tax Act is bad in law.

7.0 That the A.O./TPO have grossly erred in making additions amounting to Rs. 6,23,30,710, based on his erroneous calculations to arrive at the Arm’s Length Price of the International transactions of the assessee.

8.0 That the A.O/TPO have grossly erred in law for not giving benefit on account of same Harbour Rule under Section 92C of the Income Tax Act 1961 which allows adjustment (+) Plus, (-) Minus 5% to the Arm’s length price determined by the TPO and that price on which the transactions have actually been made.

9.0 That the Ld. A.O./TPO have grossly erred in law and on facts and in circumstances of the appellant’s case in making adjustments in the Arm’s length price of the assessee by holding that the international transactions carried out by the appellant and it’s A.E are not on Arm’s length by applying the wrong principles of Transfer Pricing.

10.0 That the TPO has grossly erred in law in not identifying the international transactions which according to him were not on the principles of Arm’s Length Principle. The law requires a transaction wise analysis of the Arm’s Length nature of the International Transaction.

11.0 That the A.O/TPO has grossly erred in treating the reimbursement received by the appellant on account of advertisement and business promotion expenses as a non operating income for computing the PLI of the assessee and adjusting the ALP of the international transactions and thereby excluding it from the preview of his analysis of transfer pricing under the TNMM method.

12.0 That the A.O./TPO has grossly erred in law in excluding the receipts of advertisement support by treating the same as non-operating income. Without prejudice or alternatively he should have reduced the advertisement expenses by such amount of advertisement support received by the assessee.

13.0 That the treatment given by the TPO to the subsidy/support received towards its advertisement cost is one-sided and faulty. The assessee has treated the subsidy received as its income in its books of account and in the transfer pricing analysis report also it was treated as such. However, the TPO disagreed with this treatment and held that the subsidy received by the assessee was not operating revenue receipt and thus excluded it from the income and thus distorting the PLI of the assessee in comparison to the comparable cases.

14.0 The TPO failed to appreciate that the receipt of subsidy/advertisement support from the AE was very much impliedly a receipt on revenue account and it should not have been excluded from the income.

15.0 Without prejudice as an alternative the TPO ought to reduce the expenses on advertisement and sales promotion by the amount of subsidy/advertisement support against the said expenditure on advertisement and sales promotion.

16.0 That the A.O./TPO has grossly erred in concluding that even the local transaction are covered in Transfer Pricing although the same are neither with associated enterprises nor are they international transactions within the meaning and context of section 92CA of the Income Tax Act, 1961.

17.0 That the TPO should not have brought the sales of the CPO-Local into the TP net and thereby advised an adjustment of 7.41% of these sales. The TP adjustment of Rs. 5,82,42,973/- (i.e. 7.41% of Rs. 78,73,54,562/-) the international purchases from the AE’s is glaringly bad, without any just cause and outside the scope of the provisions of Transfer Pricing, as there are no such purchases or international transactions in the CPO-Local segment. Thus the operating revenue of the CPD-local division should not be subject to any adjustment on account of any alleged arm’s length price.

18.0 The AO/TPO grossly erred in law in suggesting a mark up on the local transactions which against the accepted history of the assessee’s case. That the mark up on the CPO-local segment is totally erroneous and outside the purview of transfer pricing provisions especially when the same has been accepted in AY 2002-03, AY 2003-04 and AY 2004-05 in the assessee’s own case and no appeal has been filed in AY 2004-05 on this issue by the revenue authorities.

19.0 The TPO has grossly erred in rejecting the segment wise analysis done by the assessee and the computation of the segment wise operating profit and PLI, in view of past accepted history of the case.

20.0 The TPO failed to appreciate that such segmental accounts were drawn at the instance of TPO himself and allocation of advertisement and sales promotion subsidy to CPO-local was incidental in turnover ratio.

21.0 The TPO failed to appreciate that only the operating profit margin/PLI of the imported segments i.e. CPO – Imported and SPO – Imported, had international transactions and thus only their PLI’s should be compared for the arm’s length price comparison with that of the comparable companies.

22.0 That the TPO has failed to appreciate that the CPO-Local segment of the assessee’s business has no international transactions whatsoever, and has proceeded to include the CPO-local segment in the transfer pricing analysis done by him.

23.0 That the reasons given by the TPO for including the CPO-local within the net of TP provisions are bad in law and on facts, as well as full of contradictions.

24.0 The TPO failed to appreciate that he has in fact excluded the subsidy received from the operating profit analysis done by him, whereas it was on this basis of advertisement subsidy received allocated to the CPO-local division that he had brought the CPO – Local segment within the TP net.

25.0 That the TPO failed to appreciate that Modi Hoover is not a comparable company of the assessee, and has included the same in his transfer pricing analysis.

26.0 The TPO failed to appreciate that the PLI of the CPO-Local segment is an Internal CUP for the PLI of the CPO-Imported segment.

27.0 That the A.O./TPO has grossly erred in law for not giving the benefit on account of the proviso to section 92C(2) of the Income Tax Act, 1961, which allows an adjustment of +/- 5% to the arm’s length price determined by the TPO and that price at which the transactions have actually been undertaken.

28.0 That the approach of the TPO is completely at variance and inconsistent with the approach of the CIT (A), who has adjudicated in favour of the assessee in AY 2004-05, on exactly the same point of controversy. This is against judicial consistency and discipline especially when the department has accepted the verdict of the CIT(A) by not going in appeal to the Hon’ble ITAT on this issue.

29.0 The TPO has failed to appreciate that there has been no change either in law or in facts of the assessee during the year under consideration to warrant a diametrical shift of the position from the earlier years.

30.0 That the TPO failed to appreciate the fact that the assessee was not into the business of providing “advertisement services” to its AEs. He also overlooked the fat that all expenses incurred on advertisement are booked as “operating expenses” under the head sales, advertisement and product promotion expenses. The receipt by the assessee was nothing but a partial compensation or reimbursement of part of the cost of advertisement met by its AE, whose products the assessee was selling.

31.0 The TPO failed to appreciate the fact that the assessee was not the “brand owner”, therefore by incurring expenditure on advertisements, the brand image generated belonged to the AE or parent company of the assessee for which the assessee was being compensated by its AE.

32.0 That the proposed adjustment of Rs. 6,23,30,710/- by the AO/TPO in orders are illegal, bad in law for determination of ALP on the international transaction and may please not be confirmed.

33.0 That the A.O. failed to appreciate the appellant’s pleas against the order of the TPO and requested not to propose adjustments as suggested by TPO. It was urged upon the A.O. to make an independent case for any such adjustment.

34.0 That the AO has mechanically made the addition in the income of the appellant for exactly the same amount as was advised by TPO. Such an approach by the A.O. is contrary to the decision of jurisdictional High Court in Sony India Pvt. Ltd.

35.0 That the addition proposed on account of Provision for Warranty charges for Rs. 11,77,310/- is wrongly made by the AO and is bad in law.

36.0 The AO has failed to appreciate that the warranty provisions is a business liability incurred during the year which is to be discharged in future, and hence allowable. The addition made is illegal and untenable in law.

37.0 That the A.O has grossly erred in proposing to make a disallowance on account of Provision for Sales Promotion expenses for Rs. 1,75,94,836/-, which is bad in law and untenable.

38.0 The proposed additions of Rs. 1,87,72,146/- on account of non-transfer pricing provision of the IT Act, are prayed not to be made/confirmed.

39.0 That the aforesaid grounds are without prejudice to one another.

40.0 The appellant craves leave to add, amend, alter, change, vary or substitute any of the aforesaid grounds or raise an additional ground if it becomes necessary to do so in interest of justice.

2. At the outset, the Ld AR stated that DRP has not passed a speaking order and has issued only one page order whereas the assessee had filed its objections against the draft order of the Ld Assessing Officer running into 426 pages. He further stated that the DRP has not considered even a single argument/document submitted by the assessee. Moreover, he stated that this issue is already covered by the order of Hon’ble ITAT in the case of assessee for assessment year 2002-03 wherein it has been held that the marketing support subsidy received by the assessee is operating in nature and this judgment of Hon’ble ITAT is final as the Department has not filed any appeal u/s 260 of the Act before the Hon’ble High Court. Therefore, in view of the above, he argued that matter may be set aside to the office of DRP for fresh adjudication in view of ITAT’s order for assessment year 2002-03 and in view of various objections and documents filed by the assessee.

3. The Ld DR was unable to controvert the contention of Ld counsel.

4. We have duly considered the rival contentions and gone through the record carefully. It is imperative upon us to take note of the order passed by Ld DRP. It read as under:-

“Directions u/s 144C(5) of the Income Tax Act, 1961

The above assessee has filed objections u/s 144C(2)(b) of the Income Tax Act, 1961 (the Act) on 28.01.2010 in respect of the draft assessment orders served on the assessee on 02.01.2010 proposed by the ACIT, Circle-14 (1), New Delhi.

We have gone through the Draft Assessment order. We have also heard the Authorized Representative (AR) and have considered the objections of the assessee carefully. After considering the same, we are of the opinion that the Draft Assessment order proposed by the Assessing Officer is to be approved.

Directions

The Assessing Officer is directed to complete the assessment order as proposed in the Draft Assessment order.

From the perusal of this order it nowhere suggest that Ld DRP has considered the facts and circumstances of the case, nature of dispute and what is the defence. The order is running into few lines and does not disclose the mind applied by the Ld Adjudicators. Thus it can safely be said that it is totally a non speaking order. The Hon’ble Punjab & Haryana High Court in the case of Roadmaster Industries of India (P.) Ltd. v. IAC [2008] 303 ITR 138/[2006] 156 Taxman 351 has considered the necessity of assigning reason in support of an order adjudicating the controversy between the parties. The Hon’ble Court has made reference to a large number of decisions of Hon’ble Supreme Court as well as Hon’ble High Courts in order to demonstrate that in the past Hon’ble Supreme Court has emphasized time and again that adjudicating authority should give reason for disposing off the rights of the parties. For the sake of facility of reference we take note of the following findings from the High Court’s order:-

In Travancore Rayon Ltd. v. Union of India AIR 1971 SC 862, the hon’ble Supreme Court observed (page 866) :

“The court insists upon disclosure of reasons in support of the order on two grounds : one, that the party aggrieved in a proceeding before the High Court or this court has the opportunity to demonstrate that the reasons which persuaded the authority to reject his case were erroneous : the other, that the obligation to record reasons operates as a deterrent against possible arbitrary action by the executive authority invested with the judicial power.”

In Mahabir Prasad Santosh Kumar v. State of U.P. AIR 1970 SC 1302, the hon’ble Supreme Court while quashing the cancellation of the petitioner’s licence by the District Magistrate, observed (page 1304) :

“Recording of reasons in support of a decision on a disputed claim by a quasi-judicial authority ensures that the decision is reached according to law and is not the result of caprice, whim or fancy or reached on grounds of policy or expediency. A party to the dispute is ordinarily entitled to know the grounds on which the authority has rejected his claim. If the order is subject to appeal, the necessity to record reasons is greater, for without recorded reasons the appellate authority has no material on which it may determine whether the facts were properly ascertained, the relevant law was correctly applied and the decision was just.”

In Woolcombers of India Ltd. v. Woolcombers Workers Union AIR 1973 SC 2758, the hon’ble Supreme Court quashed the award passed by the Industrial Tribunal on the ground that it was not supported by reasons and observed (page 2761):

“The giving of reasons in support of their conclusions by judicial and quasi-judicial authorities when exercising initial jurisdiction is essential for various reasons. First, it is calculated to prevent unconscious, unfairness or arbitrariness in reaching the conclusions. The very search for reasons will put the authority on the alert and minimise the chances of unconscious infiltration of personal bias or unfairness in the conclusion. The authority will adduce reasons which will be regarded as fair and legitimate by a reasonable man and will discard irrelevant or extraneous considerations. Second, it is a well-known principle that justice should not only be done but should also appear to be done. Unreasoned conclusions may be just but they may not appear to be just to those who read them. Reasoned conclusions, on the other hand, will have also the appearance of justice. Third, it should be remembered that an appeal generally lies from the decision of judicial and quasi-judicial authorities to this court by special leave granted under article 136. A judgment which does not disclose the reasons will be of little assistance to the court.”

The same view was reiterated in Ajantha Industries v. CBDT [1976] 102 ITR 281 (SC) and Siemens Engg. & Mfg. Co. of India Ltd. v. Union of India AIR 1976 SC 1785.

In Testeels Ltd. v. N.M. Desai Conciliation Officer AIR 1970 Guj. 1, a Full Bench of the Gujarat High Court speaking through P.N. Bhagwati, C.J. (as his Lordship then was) made a lucid enunciation of law on the subject in the following words (headnote) :

“The necessity of giving reasons flows as a necessary corollary from the rule of law which constitutes one of the basic principles of the Indian constitutional set up. The administrative authorities having a duty to act judicially cannot therefore decide on considerations of policy or expediency. They must decide the matter solely on the facts of the particular case, solely on the material before them and apart from any extraneous considerations by applying preexisting legal norms to factual situations. Now, the necessity of giving reasons is an important safeguard to ensure observance of the duty to act judicially. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and excludes or, at any rate minimises arbitrariness in the decision-making process.

Another reason which compels making of such an order is based on the power of judicial review which is possessed by the High Court under article 226 and the Supreme Court under article 32 of the Constitution. These courts have the power under the said provisions to quash by certiorari a quasi-judicial order made by an administrative officer and this power of review can be effectively exercised only if the order is a speaking order. In the absence of any reasons in support of the order, the said courts cannot examine the correctness of the order under review. The High Court and the Supreme Court would be powerless to interfere so as to keep the administrative officer within the limits of the law. The result would be that the power of judicial review would be stultified and no redress being available to the citizen, there would be insidious encouragement to arbitrariness and caprice. If this requirement is insisted upon, then they will be subject to judicial scrutiny and correction.”

If we look the order of Ld DRP extracted (supra) in the light of above proposition, it will reveal that DRP has not applied its mind. The assessee has filed objections running into more than 400 pages not a single objection has been considered by the Ld DRP. Therefore, we set aside the order of Ld DRP and remit the issue back to the file of Ld DRP for re-adjudication.

5. In view of the above, the appeal filed by the assessee is allowed for statistical purposes.