Nikon India Pvt. Ltd. Vs DCIT (ITAT Delhi)
The issue under consideration is whether the assessment will sustain even if the Assessing Officer ignoring the statutory provisions of section 144C, passed the Final assessment order without issuing draft assessment order to the assessee?
In the present case, the Tribunal vide order dated 31.03.2017 remanded the matter back to the TPO/AO for fresh determination. Thus, as per Section 144C of the Act, it is mandatory for the Assessing Officer to pass draft Assessment Order. But instead of that, the Assessing Officer vide order dated 18.10.2019 merely captioned the final Assessment Order as Draft Assessment Order along with issuance of notices under Section 156 and 274 read with Section 271(1)(c) of the Act which means a final Assessment order u/s 144C was passed without following the mandatory provisions of Section 144C of the Act.
All pronounce decisions highlighted that final Assessment order passed in remand proceedings without passing a draft Assessment order is in violation of Section 144C of the Act and is therefore null and void. The Ld. DR could not bring any case law on contrary to these decisions. In fact, the statute itself gives a mandatory direction to the Assessing Officer under Section 144C that in the first instance the Assessing Officer should forward the draft of the proposed order of assessment. Thus, the Assessment order itself is bad in law and void ab initio, hence quashed. Hence, appeal filed by the assessee is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals are filed by the assessee against the Assessment Orders dated 18/10/2019 and 10.10.2019 passed by the Assessing Officer u/s 143 (3) read with Section 144C of the Income Tax Act, 1961, for Assessment Year 2012-13 and 2015-16 respectively.
2. The grounds of appeal are as under:-
ITA No. 8752/DEL/2019
“Appeal under section 253(1) of the Income Tax Act, 1961 (the “Act”) against the order dated October 18, 2019 (received on October 23, 2019) passed under section 143(3) read with section 144C of the Act by the Deputy Commissioner of Income Tax, Circle 3(1), Gurgaon (the “AO”) for the aforesaid assessment year (“AY”)
GROUNDS OF APPEAL
1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant under section 143(3) of the Act, for the subject assessment year at INR 123,92,03,240 as against the returned income of INR 5,42,98,030.
2. That on the facts and circumstances of the case and in law, the initial order dated December 18, 2018, and the consequential orders passed in pursuance thereto are bad in law and void ab-initio as the same have been passed in violation of the statutory provisions of section 144C of the Act.
2.1. That on the facts and circumstances of the case and in law, the AO by issuing notice of demand under section 156 and penalty notice under section 274 read with section 271 (1 )(c) of the Act, along with the order dated December 18, 2018 (titled as ‘Draft Assessment Order’) has in a way passed a final assessment order as against the draft assessment order contemplated under section 144C(1) of the Act in the case of an eligible assessee.
3. That on the facts and circumstances of the case and in law, the orders passed by the AO / TPO were bad in law as the pre-requisite for applying Chapter – X, ie, existence of international transaction between two Associated Enterprises (“AE”) under section 92B of the Act, was not satisfied or existed as there was no agreement, understanding or arrangement between the Appellant and the AE for incurrence of such expenditure by the Appellant and the Dispute Resolution Panel (“DRP”) erred in upholding the same.
3.1 That on the facts and circumstances of the case and in law, the orders passed by the AO / DRP/ TPO are bad in law as the unilateral AMP expenditure incurred has been categorized as ‘international transaction’ without passing a speaking / reasoned order recording satisfaction in relation to characterisation / categorization of the AMP expenditure as an ‘international transaction’.
3.2 That on the facts and circumstances of the case and in law, the TPO erred in re-characterizing the unilateral AMP expenditure being payments made by Appellant to independent third parties as an ‘international transaction’ under chapter X of the Act, particularly when section 92CA of the Act, enables the TPO only to compute the arm’s length price (“ALP”) of the ‘international transaction’.
4. That on the facts and circumstances of the case and in law, the TPO erred in suo-moto benchmarking the alleged international transaction related to AMP expenditure without their being any order or reference from the AO in relation thereto.
Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds on merits:
Re: Additions on substantive basis:
5. That on facts and circumstances of the case and in law, the AO / TPO have erred in making an adjustment of INR 1,59,39,195 in an arbitrary and ad-hoc manner, without sharing the reasons for deviation from the remand proceedings, as the TPO vide remand report dated 26.07.2019, admitted that under intensity method there is NIL adjustment.
5.1 Notwithstanding and without prejudice, that the AO / TPO have erred in not granting the benefit of (+/-) 5% range as contemplated in proviso section 92C(2) of the Act.
Re: Additions on protective basis:
6. That on facts and circumstances of the case and in law, DRP has erred in not directing AO / TPO to exclude the sales and distribution expenditure from the quantum of alleged excessive AMP expenditure while benchmarking the alleged international transaction using substantive and / or protective methods, disregarding the decision of the Hon’ble Tribunal in Appellant’s own case for the subject assessment year.
7. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in enhancing the Transfer Pricing adjustment to INR 118,49,05,211 in the remand proceedings as against adjustment of INR 51,89,69,687 made in first round, without appreciating that the Assessee could not be in a worse-off position in remand proceedings.
8. That on the facts and circumstances of the case and in law, the AO / DRP/ TPO erred in applying Bright Line Test (‘BLT’) and Cost Plus Method (‘CPM’) for making transfer pricing adjustment of INR 118,49,05,211 under both the methods on protective basis. The lower authorities have further grossly erred in not adhering to the binding order of the Hon’ble Tribunal in Appellant’s own case, wherein the Hon’ble Tribunal expressly directed to compute the adjustment on an aggregate basis in the first round of proceedings.
9. That on the facts and circumstances of the case and in law, the AO/ DRP / TPO have grossly erred in arbitrarily applying CPM for making transfer pricing adjustment amounting to INR 1,18,49,05,211, on protective basis, without appreciating that the CPM and BLT are one and the same, and that BLT has been expressly rejected by the Hon’ble Tribunal in’ Appellant’s own case.
10. That on facts and circumstances of the case and in law, the AO/DRP/TPO have erred in making an adjustment in respect of alleged international transaction of excessive AMP expenditure, without appreciating that adjusted gross profit margin as well as operating margin of the Appellant was better than the comparable companies.
11. That on the facts and circumstances of the case and in law, AO /DRP / TPO have erred in determining the routine AMP expenditure by using arbitrary AMP/Sales ratio of 0.46%, which was devoid cogent and basis.
12. That on the facts and circumstances of the case and in law, AO/DRP/TPO have erred in not appreciating that the Appellant had not provided any value added / brand building services to its AE by incurring AMP expenditure, and therefore, no mark-up could have been charged / levied on such expenditure, even if the same was to be characterized as an ‘international transaction’.
12.1. Notwithstanding and without prejudice that no mark-up could have been levied, on the facts and circumstances of the case and in law, AO / DRP / TPO have erred in law and facts, in selecting improper companies as comparable companies for purpose of computing markup for the alleged international transaction without appreciating that the same are functionally different.
13. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not granting set-off of excess profit from distribution of products while benchmarking the alleged international transaction of incurring excessive AMP expenditure as has been held by the Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communications India Pvt. td.: 374 ITR 118(Del).
14. That on the facts and circumstances of the case and in law, the AO/ DRP / TPO have erred in not granting quantitative / economic adjustments (such as non-payment of royalty / expenses incurred on new product launches) while quantifying arm’s length price of the alleged international transaction of AMP expenditure.
15. That on the facts and circumstances of the case and in law, the AO have erred in levying / charging interest under sections 234B and 234C of the Act.
Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant.”
ITA No. 8753/DEL/2019
“Appeal under section 253(1) of the Income Tax Act, 1961 (the “Act”) against the order dated October 18, 2019 (received on October 23, 2019) passed under section 143(3) read with section 144C of the Act by the Deputy Commissioner of Income Tax, Circle 3(1), Gurgaon (the “AO”) for the aforesaid assessment year (“AY”)
1. That on the facts and circumstances of the case and in law, the AO has erred in assessing the total income of the Appellant under section 143(3) of the Act, for the subject assessment year at INR 163,25,39,320 as against the returned income of INR 64,39,34.320/-.
2. That on the facts and circumstances of the case and in law, the initial order dated December 18, 2018, and the consequential orders passed in pursuance thereto are bad in law and void ab-initio as the same have been passed in violation of the statutory provisions of section 144C of the Act.
2.1 That on the facts and circumstances of the case and in law, the AO by issuing notice of demand under section 156 and penalty notice under section 274 read with section 271 (1 )(c) of the Act, along with the order dated December 18, 2018 (titled as ‘Draft Assessment Order’) has in a way passed a final assessment order as against the draft assessment order contemplated under section 144C(1) of the Act in the case of an eligible assessee.
3. That on the facts and circumstances of the case and in law, the orders passed by the AO / TPO were bad in law as the pre-requisite for applying Chapter – X, ie, existence of international transaction between two Associated Enterprises (“AE”) under section 92B of the Act, was not satisfied or existed as there was no agreement, understanding or arrangement between the Appellant and the AE for incurrence of such expenditure by the Appellant and the Dispute Resolution Panel (“DRP”) erred in upholding the same.
3.1 That on the facts and circumstances of the case and in law, the orders passed by the AO / DRP/ TPO are bad in law as the unilateral AMP expenditure incurred has been categorized as ‘international transaction’ without passing a speaking / reasoned order recording satisfaction in relation to characterisation / categorization of the AMP expenditure as an ‘international transaction’.
3.2 That on the facts and circumstances of the case and in law, the TPO erred in re-characterizing the unilateral AMP expenditure being payments made by Appellant to independent third parties as an ‘international transaction’ under chapter X of the Act, particularly when section 92CA of the Act, enables the TPO only to compute the arm’s length price (“ALP”) of the ‘international transaction’.
4. That on the facts and circumstances of the case and in law, the TPO erred in suo-moto benchmarking the alleged international transaction related to AMP expenditure without their being any order or reference from the AO in relation thereto.
Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds on merits:
5. That on facts and circumstances of the case and in law, DRP has erred in not directing AO / TPO to exclude the sales and distribution expenditure from the quantum of alleged excessive AMP expenditure while benchmarking the alleged international transaction using substantive and / or protective methods, disregarding the decision of the Hon’ble Tribunal in Appellant’s own case and various decisions of the High Court.
6. That on the facts and circumstances of the case and in law, the AO / DRP / TPO grossly erred in applying Bright Line Test (‘BLT’) for making transfer pricing adjustment amounting to INR 98,86,05,077, on protective basis, without appreciating that BLT has been expressly rejected by the Hon’ble Tribunal in Appellant’s own case for earlier AYs.
6.1. Notwithstanding and without prejudice to the ground that BLT is not a statutory method, AO / TPO have erred in arbitrarily selecting the improper company namely, Bharat IT Services Limited for the purposes of BLT without appreciating that the same is functionally not comparable. Further, DRP erred in summarily upholding the order of AO / TPO.
6.2. Notwithstanding and without prejudice to the ground that BLT is not a statutory method, AO / TPO have incorrectly computed the AMP/Sales ratio of companies, namely, (i) Idea Telesystems Limited, (ii) Savex Computers Limited, and (iii) Bharat IT Services Limited.
7. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in making an adjustment in respect of alleged international transaction of AMP expenditure, without appreciating that adjusted gross profit margin as well as operating margin of the Appellant was better than the comparable companies.
8. That on the facts and circumstances of the case and in law, AO / DRP / TPO have erred in not appreciating that the Appellant has not provided any value added / brand building services to its AE by incurring AMP expenditure, and therefore, no mark-up could have been charged / levied on such expenditure, even if the same was to be characterized as an ‘international transaction’.
8.1 Notwithstanding and without prejudice that no mark-up could have been levied, on the facts ‘and circumstances of the case and in law, the AO / TPO have erred in selecting improper comparable companies for application of mark-up, being entities providing market support functions. Further, the DRP erred in upholding the erroneous approach of AO / TPO.
8.2. Notwithstanding and without prejudice that no mark-up could have been levied, on the facts and circumstances of the case and in law, AO /DRP/ TPO have erred in selecting / functionally incomparable companies or had insufficient data, namely, (i) Majestic Research Services & Solutions Limited, (ii) Killick Agencies & Marketing Limited and (iii) Fcbulka Advertising Private Limited, as comparables for purpose of computing mark-up for the alleged international transaction.
9. That on the facts and circumstances of the case and in law, the AO / DRP/ TPO have erred in not granting set-off of excess profit from distribution of products while benchmarking the alleged international transaction of incurrence of excessive AMP expenditure as has been held by the Hon’ble Delhi High Court in the case of Sony Ericson Mobile Communications India Pvt. Ltd.: 374 ITR 118(Del).
10. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not granting quantitative / economic adjustments (such as non-payment of royalty / expenses incurred on new product launches) while quantifying arm’s length price of the alleged international transaction of AMP expenditure.
11. That on the facts and circumstances of the case and in law, the DRP erred in not directing the AO to allow deduction under section 43B(a) of the Act for custom duty amounting INR 52,31,95,566, paid under protest during the subject assessment year for goods purchased and cleared during the subject
12. That on the facts and circumstances of the case and in law, the AO have erred in levying / charging interest under sections 234B and 234C of the Act.
Each of the above grounds are independent and without prejudice to the other grounds of appeal preferred by the Appellant.
The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before, or at, the time of hearing of the appeal.
3. Both the appeals are having identical grounds in respect of challenging the Assessment Order on the ground that the same is bad in law and void-ab- initio. Therefore, we are firstly taking up facts for A.Y. 2012-13. During the relevant assessment year Nikon India Private Limited, i.e., the assessee company was a wholly owned subsidiary of Nikon Corporation, Japan. The assessee company is inter-alia engaged in import, sales and distribution for Nikon Imaging products in India through network of local distributors. The assessee filed its return of income declaring income of Rs. 5,42,98,030. The case of the assessee was selected for scrutiny under Section 143(3) of the Act. The assessee had disclosed following ‘international transactions’ with its Associated Enterprise (AE), which were duly reported in Form 3CEB and benchmarked in TP study. These transactions were accepted to be at arm’s length (ALP) by the Transfer Pricing Officer (TPO) / Assessing Officer.
