Himalaya Drug Company Vs ACIT (ITAT Bangalore)
We noticed that the assessee has exported finished goods to its AEs located in various Countries and the AEs have only marketed the goods. Since the finished goods exported by the assessee are drugs and beauty care items, the assessee was required to comply with the requirement of local laws of the concerned Country with regard to marketing of the said products. There should not be any dispute that the technical details; the details of clinical trials etc., are available with the assessee only, since it has actually developed the products. Hence the assessee could submit those details to the concerned Government authorities for getting product registration/license. The TPO has expressed the view that the concerned AEs would have obtained the product registration/license, if the assessee had not obtained the same. However, it is the undisputed fact that, if at all the AEs wanted to obtain product registration/license, they have to get relevant details from the assessee only.
The assessee has submitted that such kind of approvals are required to market pharma products in any country. Hence these licenses enable the assessee to market its products. The AEs, in the capacity of distributors, should have also obtained separate license for trading in pharma products. There is also no dispute that the AEs have marketed products as re-sellers only. It is also submitted that it is not the commercial practice to charge any amount as royalty over and above the selling rate. In our view, this submission of the assessee is a reasonable one and also makes sense.
The product registration/licensing are requirement of statute, without which the said products could not be marketed in those countries. As noticed earlier, such kinds of product registration/license could be obtained by the manufacturer only, in normal circumstances. The traders should have obtained separate license for trading in the drugs/beauty items. Hence, it cannot be said that the traders have exploited the registration/license obtained by the suppliers under the various statutes. Further, the manufacturers and other suppliers of the products sell them at profit and the practice or presumption is that the supplier has determined the selling price by taking into account all relevant costs. The Ld A.R also submitted that the obtaining product registration/license is usually the responsibility of the manufacturer and it is not the trade practice to levy separate charges as royalty over and above the selling price. He also submitted that the assessee has not collected any amount over and above the selling price from export made to non-AEs. We have noticed that the tax authorities have taken the view that the assessee would have collected royalty amount for finished goods exported to unrelated parties. However, the Ld A.R pointed out that the assessee has not collected any amount over and above the selling price either from domestic customers or from non-AEs. Hence, the basic premise of the TPO, which formed the basis for determining ALP of alleged royalty fails here. Accordingly, we are of the view that, in the facts and circumstances of the case, it cannot be taken that the AEs have exploited the product registration/license obtained by the assessee from various Governments. Hence the question of payment of royalty does not arise. Accordingly, we set aside the order passed by AO/TPO on this issue and direct the AO to delete this T.P adjustment.
FULL TEXT OF THE ITAT JUDGEMENT
The assessee has filed this appeal challenging the assessment order dated 20-10-2016 passed by the Assessing Officer for assessment year 2012-13 u/s 143(3) r.w.s.144C of the Income-tax Act,1961 [‘the Act’ for short] in pursuance of directions given by the ld. Dispute Resolution Panel (DRP).
2. The assessee has filed concise grounds of appeal running into 8 pages and they give rise to the following issues:
a. Assessment order is bad in law, since the AO has issued demand notice along with the draft assessment order. (Ground No.3)
b. Transfer Pricing adjustment relating to sale of goods to associated enterprises. (Ground Nos. 4 to 8)
c. Transfer Pricing adjustment relating to advertisement and market promotion expenses. (Ground No. 9)
d. Transfer Pricing adjustment relating to royalty. (Ground No.10)
Other issues urged by the assessee are either general in nature or consequential.
3. The facts relating to the case have been narrated as under by the Tribunal in its order passed for AY 2013-14 in ITA No.: 1385/Bang/2017:-
“3. The facts relating to the case are stated in brief. The assessee is a partnership firm engaged in the business of manufacture and sale of Ayurvedic medicament and preparations, consumer/personal care products and animal health care products. The partners of the assessee firm are
(a) M/s Himalaya Global Holdings Pvt Ltd., a foreign company registered in Cayman Islands and
(b) M/s Himalaya Drug Co. Pvt. Ltd.
These two partners respectively hold 88% and 12% share in the profits of the assessee firm. The TPO has also discussed ownership details of the above said two partner companies. Mr. Meeraj Alim Manal, is holding 100% shares in M/s Himalaya Global Holdings Pvt. Ltd. He also holds entire shares except one share in M/s Himalaya Drug Co. Pvt. Ltd.”
4. The legal ground urged by the assessee on the validity of assessment order reads as under:-
“3. The action of Learned Assessing Officer in issuing demand notice under section 156 of IT Act while passing the draft assessment order dated 29-02-2016, is in contravention to the scheme of section 144C(1) of IT Act and said draft assessment order having the effect of final assessment order is bad in law as held in the case of Jazzy Creations Pvt. Ltd vs. ITO (TS-52-ITAT-2016 (Mum)).”
4.1 The facts relating to the above said legal issue are stated in brief. The assessee is a partnership firm engaged in manufacture and sale of Ayurvedic medicaments and preparations, consumer/personal care products and animal health care products. It filed its return of income for the year under consideration declaring total income of Rs.50.19 crores. The case was selected for scrutiny. The AO noticed that the assessee has entered into international transactions and accordingly the AO referred the same to the Transfer Pricing Officer (TPO) after obtaining approval of Principal CIT for determining arms length price of the international transactions. The TPO proposed adjustment to the tune of Rs. 169.05 crores in respect of international transactions entered by the assessee. The assessing officer accordingly passed a “draft assessment order” on 19-02-2016 making addition of transfer pricing adjustment of Rs.169.05 crores proposed by the TPO to the total income returned by the assessee. The said draft assessment order was served upon the assessee on 08-03-2016 along with a “notice of demand dated 19-02-2016 u/s 156 of the Act”.
4.2 The assessee filed its objections before Ld DRP on 06-04-2016. The Ld DRP issued directions to the AO on 11.09.2016 and the assessing officer passed final assessment order on 20-10-2016 and served the same upon the assessee on 21-10-2016 along with a “notice of demand dated 20-10-2016 u/s 156 of the Act”.
4.3 Since the assessing officer has issued the Notice of Demand u/s 156 of the Act along with the “Draft assessment order”, the assessee has raised the above said legal issue. It is the contention of the assessee that the assessing officer cannot issue demand notice at the stage of passing of draft assessment order and since, he has issued the same to the assessee at that stage, it has to be construed that the AO has passed final assessment order. In the case, the AO has failed to follow the mandatory procedure prescribed under sec. 144C of the Act and the same would vitiate the assessment proceedings. Accordingly he contended that the impugned assessment order is liable to be quashed.
4.4 We notice that the AO has stated that the draft assessment order and the final assessment order have been passed u/s 143(3) r.w.s. 144C of the Act. Section 144C of the Act reads as under:-
“Section 144C. (1) The Assessing Officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1st day of October, 2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.
(2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,-
(a) file his acceptance of the variations to the Assessing Officer; or
(b) file his objections, if any, to such variation with,-
(i) the Dispute Resolution Panel; and
(ii) the Assessing Officer.
(3) The Assessing Officer shall complete the assessment on the basis of the draft order, if-
(a) the assessee intimates to the Assessing Officer the acceptance of the variation; or
(b) no objections are received within the period specified in subsection (2).
(4) The Assessing Officer shall, notwithstanding anything contained in section 153 or section 153B, pass the assessment order under subsection (3) within one month from the end of the month in which,-
(a) the acceptance is received; or
(b) the period of filing of objections under sub-section (2) expires.
(5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment.
(6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely:-
(a) draft order;
(b) objections filed by the assessee;
(c) evidence furnished by the assessee;
(d) report, if any, of the Assessing Officer, Valuation Officer or Transfer Pricing Officer or any other authority;
(e) records relating to the draft order;
(f) evidence collected by, or caused to be collected by, it; and
(g) result of any enquiry made by, or caused to be made by, it.
(7) The Dispute Resolution Panel may, before issuing any directions referred to in sub-section (5),-
(a) make such further enquiry, as it thinks fit; or
(b) cause any further enquiry to be made by any income-tax authority and report the result of the same to it.
(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.
Explanation.-For the removal of doubts, it is hereby declared that the power of the Dispute Resolution Panel to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee.
9 to 15….. “
The AO has to complete the assessment by passing a final assessment order in conformity with the directions issued by Ld Dispute Resolution Panel (DRP). It can be noticed that the provisions of sec. 144C of the Act prescribe procedures for completion of assessment of an “eligible assessee”. There is no dispute that the assessee herein is an eligible assessee. Hence as per the provisions of sec. 144C, the AO has to issue a draft assessment order to the assessee and the assessee is entitled to either accept it or to file its objections before Ld DRP & AO. There should not be any dispute that no enforceable demand can arise at the stage of passing of draft assessment order and the tax demand shall arise only after passing of final assessment order.
4.5 The Ld D.R submitted that the assessing officer has duly passed the draft assessment order in the instant case and the assessee, after receipt of the same, has filed its objections before Ld DRP within the stipulated time. The Ld Dispute Resolution Panel has issued directions to the AO after considering objections filed by the assessee and accordingly, the assessing officer has passed the final assessment order in conformity with the directions issued by Ld DRP. Accordingly, Ld D.R submitted that the impugned final assessment order has been passed by duly complying with the procedures prescribed under sec.144C of the Act. He submitted that though the assessing officer has also issued Notice of Demand along with draft assessment order, yet no tax demand would arise at the stage of passing of draft assessment order and hence the notice of demand issued at that stage is a nullity in the eyes of law. He submitted that neither the assessing officer nor the assessee has understood or meant the “draft assessment order” as final assessment order. Hence the action of the AO in issuing a notice of demand, which is not enforceable in law, should be ignored. Accordingly he submitted that the plea of the assessee should be rejected.
4.6 The only question that needs to be examined is whether the action of the AO in issuing Notice of Demand along with the draft assessment order would vitiate the assessment proceedings in the facts and circumstances of the case. There is no dispute that, but for the notice of demand, referred above, there is no flaw in the procedure followed by the AO for completion of assessment.
4.7 The Ld A.R placed his reliance on various case laws in support of his proposition that the AO has not followed the procedure prescribed in sec. 144C of the Act and hence the assessment order should be declared as illegal and be quashed. We shall examine the case laws relied upon the Ld A.R. The first case law relied upon by the Ld A.R is the decision rendered by Hon’ble Delhi High Court in the case of Control Risks India P Ltd vs. DCIT (W.P.(C) 5722/2017 & C.M.No.23860/2017 dated 27-07-2017). The facts discussed in the above said case is that the assessment was originally completed by making transfer pricing adjustment. When the matter reached ITAT, the Tribunal remitted the matter back to the TPO to consider the additional details filed by the petitioner before the ITAT. Accordingly the TPO passed a fresh order. Thereafter, the assessing officer passed a final assessment order, instead of passing draft assessment order. The Hon’ble High Court held the same as contrary to the procedure prescribed in sec.144C of the Act and accordingly set aside the said assessment order. It can be noticed that the Hon’ble Delhi High Court has rendered its decision on different set of facts and hence the same cannot be taken support of by the assessee.
4.8 The Ld A.R took support of decision rendered by Hon’ble Madras High Court in the case of ACIT vs. Vijay Television (P) Ltd (2018)(95 taxmann.com 101). The facts relating to the above said case are stated in brief. The AO referred the matter relating to international transactions to the TPO. After receipt of TPO order, the AO passed an assessment order on 26.3.2013, wherein he appears to have mentioned the section under which the said order was passed as sec.143(3). The AO also issued Notice of demand and penalty notice. Subsequently, noting the mistake that the correct section has not been mentioned, the AO issued a corrigendum on 15.04.2013 stating therein that the assessment order passed on 26.3.2013 has to be read and treated as a draft assessment order as per section 144C r.w.s. 92CA r.w.s 143(3) of the Act. The contention of the assessee before Hon’ble Madras High Court was that the assessment order passed on 26.3.2013 was final assessment order and it cannot be treated as draft assessment order. It was also contended that the corrigendum dated 15.4.2013 cannot alter the above said position. The Hon’ble Madras High Court held as under:-
“25. While Section 292B of the Act makes it clear that no return of income, assessment, notice, summons or other proceeding furnished or made or issued or taken or purported to have been furnished or made or issued or taken in pursuance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such return of income, assessment, notice, summons or other proceedings if such return of income, assessment, notice summons or other proceeding is in substance and effect in conformity with or according to the intent and purpose of this Act, Section 144-C mandates the AO, in the first instance, to forward a draft of the proposed order of assessment to the eligible assessee in relation to any variation in the income or loss returned, which is prejudicial to the interest of such assessee, who on receipt of the said draft order, within the time prescribed, shall either file his acceptance of the variations to the AO or file his objections to the variation with the DRP and the AO. It is further mandated that on the objections being received by the DRP under sub-section (2), the DRP shall issue such directions to the AO for the purpose of enabling him to complete the assessment. While issuing directions, the DRP shall consider the documents as mandated under sub-section (6).
26. From the above, it is clear that a right is vested with the assessee to challenge the draft of the proposed order of assessment, issued by the AO with the DRP and the DRP is supposed to guide the AO in completing the assessment.
27. It is the submission of the assessee that no draft assessment order was issued to the assessee by the AO, but the assessment order issued is a final one, which is evident from the corrigendum itself. Further, it is the submission of the assessee that the corrigendum has been issued beyond the limitation period and that the corrigendum cannot rectify the order dated 26.3.2013.
28. A perusal of the records reveal that the original order has been passed on 26.3.2013 and under Column No.13, the Section under which the assessment was passed has been noted as Section
143 (3). It is not in dispute that assessment passed under Section 143 (3) is a final assessment, after duly hearing the assessee and perusing the records.
29. However, curiously, the error that had crept in by mentioning of the incorrect Section in the proceeding was found out by the Revenue and, therefore, a corrigendum dated 15.4.2013 has been issued in and by which Column No.13 was to read as 144-C rws 92CA (4) rws 143 (3).
30. It is the contention of the learned senior counsel for the respondent/assessee that the issue as to whether the corrigendum issued by the Asst. Comm of Income Tax is really sustainable and whether it would have the effect of curing the deficiencies crept in the order dated 26.3.13 has been extensively dealt with by the learned single Judge and finally after elaborating the reasons it has been held that the corrigendum would not have the effect of curing the original order and the reasons stated are as under :-
Under Section 144 (C) of the Act, the AO is required pass only a draft assessment order. DAO on the basis of the recommendations made by the TPO after giving an opportunity to the assessee to file their objections and only thereafter he could pass a final order. In other words, instead of passing a preliminary order, passing a final order straight away would deprive the assessee to file their objections.
The following circumstances are pointed out to show that the order dated 26.3.13 is a final order and not a pre-assessment order:-
a) The order dated 26.3.13 has raised a demand as well as has imposed penalty; Needless to point out that demand would be made after assessment and not prior to the assessment. When it is clear that taxable amount has been determined it would amount to a final order.
b) Following the order dated 26.3.13 a notice of demand u/s 156 of the Act has been issued pursuant to the order dated 26.3.13.
c) In the corrigendum issued, it is only stated that the order u/s 143 (3) has to be read and treated as DAO in terms of Section 1434(C) r/w Section 92 (CA) (4) r/w Section 143 (3) of the Act.
d) Even though 30 days time was granted to file objections when the assessee approached the DRP, DRP itself declared that it is a final order.(Emphasis supplied)
……..
44. The materials available on record reveal that initially, vide proceedings dated 26.3.13, order of assessment u/s 143 (3) was passed by the Assessing Officer. The last date for the four year block period ended on 31.3.2013. Therefore, the initial order of assessment was passed u/s 143 (3) within the said block period. However, the order passed u/s 143 (3) of the Act is a final assessment order and the Revenue, realising the mistake committed by it, had, thereafter, issued the corrigendum, amending the Section to read as Section 144-C r/w 92 CA r/w 143 (3). Curiously, demand u/s 156 of the Act has been issued and penalty has also been imposed. For all practical purposes, the order of assessment should be deemed to be one under Section 143 (3) of the Act, though the draft assessment order ought to have been passed u/s 144-C. On objections being raised before the DRP, the DRP has also opined that the order passed is a final order and, therefore, it has no jurisdiction to entertain the objections.
45. Further, it is to be pointed out that even though the corrigendum has been issued indicating to read the Section 143(3) as Section 144-C r/w 92 (CA) r/w 143 (3) it does not indicate that the demand and penalty made in the Assessment Order has been withdrawn. Hence, the submission of the Revenue that the Assessment Order passed under section 143(3) read with the corrigendum issued shall be treated as Draft Assessment Order cannot be countenanced. It is not the case of the Revenue that the Assessing Officer has consciously passed the Draft Assessment Order under Section 144-C, however, indicated the Section wrongly.
46. The Revenue, with a view to squirm around from under wrongful act of passing the assessment order, which is prohibited by law and an unlawful one, had issued a corrigendum, amending the Section under which the order has been passed, forgetting that the content of the order that matters and not the mere quoting of the Section alone. In other words, the window dressing which has been attempted by the Revenue would not give life to an order passed without jurisdiction. It is to be pointed out that the order of assessment, once issued under Section 143 (3), becomes final and reopening the same is impermissible. The mistake committed by the Revenue in not following the mandatory requirement of Section 144-C by passing an order under Section 143 (3) cannot be cured by the issuance of a corrigendum. In other words, the proceedings issued in the name of corrigendum trying to correct its mistakes only by introducing a Section without realising the consequences of not following the mandatory requirement u/s 144-C will not do justice to either of the parties.”
The Hon’ble Madras High Court also held that the provisions of sec.292B cannot be taken support of by the Revenue with the following observations:-
“48. Though it is the submission of the Revenue that it is a procedural irregularity, which can be corrected through issuance of a corrigendum and no prejudice would be caused to the assessee, however, it is to be pointed out that the act committed by the Revenue is an incurable illegality, which cannot stand protected by Section 292B of the Act. If the contention of the Revenue is accepted, then it would literally render all the provisions of the Income Tax Act subservient to Section 292B. In effect, any error or omission or mistake committed by the Revenue at any stage of a proceeding cannot be sought to be cured by taking umbrage under Section 292B. Allowing such a contention would be misreading the intention of the Parliament in enacting Section 292B and Section 144-C.”
The facts prevailing in the above said case is totally different from the facts available in the case before us. In the instant case, there is no dispute that the assessing officer has consciously passed the draft assessment order by correctly mentioning that the same is passed u/s 143(3) r.w.s 144C of the Act. The assessee has also understood the same as draft assessment order and accordingly filed its objections before Ld DRP. The Ld DRP has also passed its directions in pursuance of objections filed by the assessee. In our view, the question of applicability of sec.292B of the Act does not require consideration in the instant case. Hence, we are of the view that the decision in the case of Vijay Television P Ltd has been rendered on different set of facts.
4.9 The Ld A.R next placed his reliance on the decision rendered by the co-ordinate bench in the case of M/s Inatech India P Ltd (IT(TP)A No.214/Bang/2018 dated 30-04-2019). In the above said case, the assessing officer, after receipt of order from TPO, passed the assessment order u/s 143(3) r.w.s 92CA of the Act on 24.3.2016. He also issued demand notice and also initiated penalty proceedings u/s 271(1)(c) of the Act. The Tribunal noticed that the assessing officer has also entered the demand raised under the above said order in “Demand and Collection Register” maintained by the department and further the demand was also uploaded on the website of the department. However, the above assessment order was titled as “Draft assessment order”. The assessee filed its reply before the AO against the penalty notice issued u/s 271(1)(c) of the Act and also filed a petition for stay of recovery of tax. Subsequently, the assessee filed an appeal before Ld CIT(A), wherein it contended that the impugned assessment order is invalid as the same has been passed in violation of the procedure set out in section 144C of the Act. Subsequently the AO passed another order of assessment on 24.05.2010, wherein it was stated that since the assessee had not filed its objections before the DRP against the draft assessment order dated 24.03.2016, the final assessment order dated 24.05.2016 has now been passed. Under these set of facts, the co-ordinate bench held that the assessment order dated 24.3.2016 has not been passed in compliance of provisions of sec.144C of the Act and hence the same is to be held as a legal nullity. It can be noticed that the assessee has understood the assessment order dated 24.3.2016 as final assessment order, since the notice of demand and penalty notice were issued along with the assessment order. The AO has also understood it as final assessment order, since the demand has been noted by him in the Demand and Collection Register/website. The AO did not respond to the reply filed by the assessee against the penalty notice and also did not respond to the stay petition filed by the assessee. Hence we are of the view that the decision has been rendered in the above said case by the co-ordinate bench on the basis of facts prevailing therein, which is different from the one prevailing in the instant case.
4.10 The Ld A.R also placed his reliance on the decision rendered by Hon’ble Bombay High Court in the case of PCIT vs. Lionbridge Technologies P Ltd (2018)(100 taxmann.com 413)(Bom). In the above said case, the Tribunal restored the assessment order to the assessing officer on the ground that the Ld Dispute Resolution Panel has not addressed the objections raised by the assessee. Consequent thereto, the AO passed an assessment order on 12.3.2014. Subsequently, the AO issued a corrigendum on 16.4.2014 stating that the above said order should be treated as “draft assessment order” and not final order. The Tribunal noticed that the draft assessment order should have been passed before 31.3.2014 in terms of sec.153A(2A) and hence corrigendum has been issued after the expiry of time limit for passing assessment order. Accordingly it quashed the assessment order. The Hon’ble Bombay High Court did not admit the appeal holding that no substantial question of law arises therein. While holding so, the High Court also observed that “mere consent of parties does not bestow jurisdiction, if the order is beyond jurisdiction”. The Ld A.R drew support from the above said observation and submitted that merely because the assessee has filed objections before Ld DRP, the same will not bestow jurisdiction to the assessee. In this regard, the Ld A.R also placed his reliance on the decision rendered by the Mumbai bench of Tribunal in the case of Jazzy Creations (P) Ltd (2017) (83 taxmann.com 244).
4.11 There should not be any quarrel to the proposition observed by Hon’ble Bombay High Court that “mere consent of parties does not bestow jurisdiction, if the order is beyond jurisdiction”. However, we have observed earlier that the assessing officer, in the instant case, has passed the draft assessment order u/s 143(3) r.w.s. 144C of the Act. The assessee has also, in terms of sec.144C of the Act, filed its objections before the Ld DRP. After the receipt of the directions from Ld. DRP, the assessing officer has passed the final assessment order. Except for attaching a notice of demand along with the draft assessment order, everything has been done in accordance with the law.
4.12 The question that boils down is whether the notice of demand attached with the draft assessment order would make the said draft assessment order as final order and consequently, the whole assessment proceedings is liable to be quashed as illegal. In our view, the answer should be negative. As rightly pointed by Ld D.R, the notice of demand issued along with the draft assessment order is a legal nullity and does not exist in the eyes of law, since no valid demand could be raised under the draft assessment order. In our considered view, a document, which is held to be a legal nullity, cannot vitiate the assessment proceeding and the assessment order. Accordingly, we do not find any merit in the above said legal issue urged by the assessee. Accordingly we reject the above said legal ground of the assessee.
5. The next issue relates to the Transfer Pricing adjustment made in respect of goods sold to Associated Enterprises (AEs). During this year, the assessee reported following international transactions:-
