Cisco Systems Services B.V. – India Branch Vs DCIT (ITAT Bangalore)
In the present case, the Ld.AO passed the draft assessment order u/s. 143(3) r.w.s. 144C (13) of the Act on 23.03.2016 which is accompanied with demand notice issued u/s. 156 of the Act dated 23.03.2016. It is also noticed that in the draft assessment order, the Ld. AO recorded the statement as follows:-
‘Demand notice issued accordingly. Penalty proceedings u/s. 271(1)(c) are initiated separately for the additions made.–
Being so, it is observed that the draft assessment order passed by the Ld.AO is without following the due process of law as enumerated in the judgment in the case of Vijay Television (supra).
Since the order passed by the Ld.AO is without following the due process of law and it cannot survive in the eyes of law, accordingly we quash the impugned assessment order before us.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal by assessee is directed against the order of the Ld.AO dated 27.02.2017 passed u/s. 143(3) r.w.s. 144C(14) of the Income-tax Act, 1961 [the Act] on the following grounds:
“Based on the facts and circumstances of the case and in law, Cisco Systems Services B.V. – India Branch (hereinafter referred to as the ‘Appellant.) respectfully craves leave to prefer an appeal against the order passed by the Deputy Commissioner of Income-tax (International Taxation) – Circle 1(1) (‘Assessing Officer’ or ‘AO’) dated February 27, 2017 in pursuance of the directions & the revised directions issued by the Dispute Resolution Panel (‘DRP’), Bangalore dated December 29, 2016 & January 16. 2017 respectively, under section 253 of the Income-tax Act, 1961 (‘Act) on the following grounds:
That on the facts and in the circumstances of the case and in law and based on the directions of the DRP:
A. Grounds of appeal relating to corporate tax matters
1. The learned AO has erred in law and in fact. by not considering the plea of the Appellant that foreign currency expenditure incurred in relation to recharge of international assignee costs constitute ‘reimbursements’ and are not in the nature of income chargeable to tax under the Act.
B. Grounds of appeal relating to transfer pricing matters
3. The learned DRP/ learned TPO/ learned AO have erred in law and in fact by concluding that the technical services provided by the Appellant are a mix of high end & low end services.
4. The learned AO/TPO have erred, in law and in facts. by making negative working capital adjustment in relation to the services provided by the Appellant without appreciating the fact that the Appellant is a captive service provider and does not bear any working capital risk.
5. The learned TPO/ learned AO have erred, in law and in facts, by accepting/rejecting certain companies based on unreasonable comparability criteria:
6. The learned TPO/ learned AO have erred, in law and in facts, by wrongly computing the operating margins of some of the comparable companies identified in the transfer pricing order
7. The learned TPO/ learned AO have erred, in law and in facts, by not applying a higher threshold while applying the turnover filter;
8. The learned TPO/ learned AO have erred, in law and in facts. in computing the arm’s length price without giving the benefit of 5 percent under the proviso to section 92C of the Act;
9. The learned TPO/ learned AO have erred, in law and in facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-a-vis the comparables.
10. The learned TPO/ learned AO have erred, in law and in fact, by rejecting certain comparable companies identified by the Appellant using the export sales less than 75% of the sales as a comparability criterion.
11. The learned TPO/ learned AO have erred, in law and in fact, by rejecting certain comparable companies identified by the Appellant using the employee cost less than 25% of the total revenues as a comparability criterion.
12. The learned TPO/ learned AO have erred, in law and in facts, by rejecting certain comparable companies identified by the Appellant using the related party transactions more than 25% of the sales as a comparability criterion:
13. The learned TPO/ learned AO have erred, in law and in facts, by not appreciating the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Rules, conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction and holding that the Appellant’s international transaction is not at arm’s length.
14. The learned TPO/ learned AO have erred, in law and in facts, by applying the filter of companies having different accounting year for rejecting the comparable companies (i.e., companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months):
15. The learned TPO/ learned AO have erred, in law and in facts, by determining the arm’s length margin/price using only FY 2011-12 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements.
16. The learned TPO/ learned AO have erred, in law and in facts, by rejecting the filter of ratio of research and development expenses to sales less than 3% considered by the Appellant for the purpose of selecting the companies which do not own intangibles and are pure service providers:
17. The learned TPO/ learned AO have erred in law and in facts. by rejecting the filter adopted by the Appellant for selecting companies having a ratio of sum of advertising, marketing and distribution expenses to sales less than 3%;
18. The learned AO has erred in making a reference to the TPO without recording a finding that he considers it ‘necessary or expedient’ to do so as required under section 92CA(1) of the Act. hence the reference made by the learned AO to TPO suffers from jurisdictional error.
19. The learned TPO/ AO have erred, in law and in fact, by using the information by exercising powers under section 133(6) of the Act.
C. Grounds of appeal relating to other matters
21. The learned AO has erred in law and in fact, by not providing credit of Minimum Alternate Tax while computing the total tax payable by the Appellant.
The learned AO has erred. in law and in fact. by restricting the credit for taxes deducted at source (‘TDS’) to INR 18,74,81,464 vis-a-vis INR 19,36.50,171 claimed by the Appellant in its return of income.
The Appellant submits that each of the above grounds is independent and without prejudice to one another.
The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.”
2. The assessee has raised modified grounds of appeal vide application dated 30.03.2021.
“Based on the facts and circumstances of the case. the Appellant craves leave to prefer an appeal against the order passed by impugned order of the learned AO. passed under section 143(3) read with section 144C of the Income Tax Act. 1961 (hereinafter referred to as the `Act), each of which are without prejudice to one another.
5.1. The learned TPO/ learned AO have erred in law and in facts by accepting following companies based on unreasonable comparability criteria:
a) Infosys BPO Limited;
b) TCS E-serve Limited; and
c) N.R Udyog Limited
The Assessee craves. to consider the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal.”
3. The assessee has also raised additional ground dated 08.04.2021 as follows:
“Based on the facts and circumstances of the case and in law, Cisco Systems Services B V – India Branch (hereinafter referred to as the `CSS BV – India BO’ or ‘Appellant’), respectfully craves leave to file additional ground of appeal, in addition to the grounds of appeal filed previously by the Appellant on April 28, 2017 which is detailed herein below:
Validity of draft assessment order
22. The learned AO has erred in issuing the notice of demand under section 156 of the Act and notice initiating penalty proceeding under section 271(1)(c) along with draft assessment order and thereby making the same as final order and thus, not following the provisions of section 144C of the Act and hence, the order passed by the learned AO is bad in law and merits to be quashed.
The Appellant craves leave to add, alter, amend, vary, omit or substitute the aforesaid ground of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon’ble Tribunal to decide on the appeal in accordance with the law.
Further, it is respectfully submitted that no prejudice would be caused to the Respondent by reason of the above additional ground being admitted and adjudicated and accordingly the balance of convenience is in favour of such an order being passed by this Hon’ble Tribunal.”
4. We have heard the rival submissions and perused the material on record. In our opinion, the issue raised by the assessee being a legal issue and does not require any investigation of facts which are already on record. Accordingly, these grounds are admitted for adjudication following the decision of Hon’ble Supreme Court judgment in the case of M/s National Thermal Power Co. Ltd. (supra) .
5. The Id. AR submitted that the draft assessment order was passed on 23.03.2016 with a mention that such order was passed u/s. 143(3) r.w.s. 144C(13) of the Act. Further, the draft assessment order was also accompanied with a demand notice u/s. 156 of the Act. We also note that in the draft assessment order the Ld.AO initiated penalty proceedings u/s. 271(1)(c) of the Act. According to the Id. AR, passing of the draft assessment order along with demand notice and also initiating penalty proceedings along with draft assessment proceedings are bad in law, being contrary to the procedure prescribed under law, thus subsequent final assessment order along with demand notice loses its sanctity. Being so, it deserves to be treated as null and void in the eyes of law. He relied on the following judgments:-
