Case Law Details
Dabur Pharma Ltd. (now known as Fresenius Kabi Oncology Ltd.) Vs DCIT (ITAT Delhi)
In a significant ruling, the Income Tax Appellate Tribunal (ITAT) Delhi has quashed an assessment order against Dabur Pharma Ltd., citing it was passed beyond the statutory time limit stipulated under Section 144C(13) of the Income Tax Act, 1961. The decision, delivered on May 30, 2016, hinges on a strict interpretation of procedural timelines, rendering the merits of the tax dispute unaddressed.
The case originated from an appeal filed by Dabur Pharma Ltd. against an assessment order dated July 24, 2013, issued by the Assessing Officer (AO) under Section 143(3) read with Section 144C of the Act. The core of the appeal presented several grounds, with the most critical being the assertion that the AO’s order was barred by limitation. Other contentions related to the re-computation of the arm’s length price for international transactions, the applicability of the Transactional Net Margin Method (TNMM), issues with comparability analysis, and the benchmarking of interest on foreign loans.
Procedural History:
Dabur Pharma Ltd. filed its income tax return on November 17, 2006, declaring an income of Rs. 3,45,94,389/-. The case was subsequently selected for scrutiny due to foreign transactions totaling Rs. 5262.03 lacs, leading to a reference to the Transfer Pricing Officer (TPO). The TPO made an adjustment of Rs. 139.34 lacs to the arm’s length price via an order dated October 19, 2009.
Following the TPO’s adjustment, the AO issued a draft assessment order on November 26, 2009. Dabur Pharma Ltd. then raised objections before the Dispute Resolution Panel (DRP), which issued directions on July 2, 2010. Based on these directions, the AO passed the original assessment order on August 9, 2010.
Dissatisfied with this order, Dabur Pharma Ltd. appealed to the ITAT (ITA No. 4556/Del/2010). On August 18, 2011, the ITAT restored the case to the DRP, instructing it to pass a “speaking order” under Section 144C of the Act, preferably within a year. The ITAT noted the DRP’s initial order lacked detailed reasoning regarding the TPO’s computations and the assessee’s objections.
The DRP subsequently issued its fresh directions on January 17, 2013. Following these directions, the AO passed the impugned assessment order on July 24, 2013.
The Limitation Argument:
At the forefront of the assessee’s arguments before the ITAT was the contention that the assessment order dated July 24, 2013, was time-barred. The assessee’s counsel argued that as per Section 144C(13) of the Act, the AO was mandated to pass the order within one month from the end of the month in which the DRP’s directions were received. Given that the DRP’s order was dated January 17, 2013, the AO should have passed the assessment order by February 28, 2013. The order being passed on July 24, 2013, thus exceeded this statutory deadline.
Furthermore, the assessee also briefly raised an argument that the DRP’s order itself was delayed, as the ITAT had directed the DRP to pass the order “preferably within a year” from August 18, 2011, but the DRP’s order was issued on January 17, 2013. However, the ITAT dismissed this point, noting the use of “preferably” indicated a recommendation, not a strict time limit for the DRP.
The revenue, represented by the CIT DR, countered by invoking the Fourth Proviso to Section 153(2A) of the Act. This proviso stipulates a two-year time limit for completing assessments when a reference under Section 92CA(1) has been made during the course of fresh assessment proceedings, following an order from the ITAT under Section 254. The revenue contended that the AO’s order was within this two-year period from the ITAT’s order.
ITAT’s Analysis and Decision:
The ITAT meticulously examined the relevant statutory provisions. It highlighted the non-obstante clause in Section 144C(13), which reads: “notwithstanding anything to the contrary contained in section 153 (or section 153B), the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.”
The Tribunal emphasized that the word “shall” in Section 144C(13) makes the one-month timeline mandatory for the AO. Crucially, it noted that this sub-section has an overriding effect on Sections 153 and 153B, which generally deal with time limits for assessments.
Regarding the revenue’s reliance on the Fourth Proviso to Section 153(2A), the ITAT found it inapplicable to the present facts. The Tribunal clarified that this proviso applies specifically when a fresh reference under Section 92CA(1) is made by the AO after receiving an ITAT order under Section 254. In Dabur Pharma’s case, the ITAT’s August 18, 2011, order did not direct the AO to make a fresh reference to the TPO. Instead, it directed the DRP to issue a speaking order, which the DRP did on January 17, 2013. The AO then acted on these DRP directions. The original reference to the TPO had already been made and resulted in the TPO’s order in October 2009.
Judicial Precedents:
While the order itself does not explicitly list specific judicial precedents, the ITAT’s reasoning aligns with a consistent line of judicial thought emphasizing strict adherence to statutory timelines, particularly where non-obstante clauses are present. The principle that a specific provision overrides a general one (lex specialis derogat legi generali) is fundamental here. Section 144C(13) is a specific provision governing the completion of assessment after DRP directions in transfer pricing cases, and its non-obstante clause signals its supremacy over general assessment time limits.
Previous rulings by various High Courts and ITAT benches have often held that if an assessment order is passed beyond the prescribed time limit, it is null and void ab initio. For instance, in cases concerning Section 153, courts have consistently held that a time-barred assessment cannot be sustained. While the exact interplay with Section 144C was a relatively newer area at the time of this ruling, the underlying principle of procedural compliance being paramount for the validity of an assessment order is well-established in Indian tax jurisprudence.
Conclusion:
Based on its interpretation, the ITAT concluded that the assessment order framed by the AO on July 24, 2013, was indeed barred by limitation. Consequently, the Tribunal quashed the assessment order. As the legal issue of limitation was decided in favor of the assessee, the ITAT deemed it unnecessary to delve into the merits of the other grounds raised by Dabur Pharma Ltd. The appeal was thus allowed for statistical purposes, indicating that while the assessee succeeded on a technicality, the substantive tax dispute was not adjudicated.
This ruling underscores the critical importance of adhering to statutory deadlines for income tax authorities, particularly in complex transfer pricing assessments involving the Dispute Resolution Panel mechanism. Any deviation from these timelines can result in the entire assessment being invalidated, irrespective of the underlying tax demand.
FULL TEXT OF THE ORDER OF ITAT DELHI
This is an appeal by the assessee against the order dated 24.07.2013 passed by the AO u/s 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
“1. That on the facts and circumstance of the case, the order passed by the Ld. Assessing Officer (AO) is bad in law.
2. That on the facts and circumstance of the case and in law, the order passed by the Ld. AO is barred by limitation, since the Ld. AO failed to pass the impugned order with the time limit stipulated under section 144C(13) of the Income-tax Act, 1961 (the Act).
3. That on the facts and circumstance of the case and in law, the Ld. AO/ Ld. Transfer Pricing Officer (TPO)/ Ld. Dispute Resolution Panel (DRP) erred in making an addition of Rs. 85,64,000 to the income of the Appellant, by re-computing the arm’s length price of the international transactions.
4. That on the facts and circumstance of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in benchmarking the international transactions pertaining to purchases from / sales to Associated Enterprise (AE) by ignoring the applicability of Internal Transactional Net Margin Method (TNMM).
5. Without prejudice to ground 4 above, on the facts and circumstance of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in benchmarking the international transactions pertaining to purchases from / sales to AE by:
a. Erroneously considering the operating profit margin of the AE as well as the non-AE transactions as the tested party’s margin (instead of considering the margins only from the AE segment);
b. Rejecting, based on subjective grounds and presumptions, the comparability analysis conducted by the Appellant for determining the arm’s length price, without specifically pointing out functional non-comparability. Herein, the Ld. AO/Ld. TPO/Ld. DRP failed to appreciate that the filters applied by the Appellant were self-explanatory and were in accordance with the functions performed, assets utilized and risks borne (FAR);
c. Not applying the export sales criterion/filter as a percentage to total sales;
d. Modifying and applying the turnover criterion/filter without an upper limit;
e. Applying the related party transactions criterion/filter at 25% of total sales; and
f. Considering companies, which are functionally not comparable to the Appellant
6. That on the facts and circumstance of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in not considering the Comparable Uncontrolled Price (CUP) data for benchmarking the international transaction pertaining to sale of paclitaxel drug to the AE.
7. While holding that benchmarking of interest on foreign loan has to be compared with LIBOR, on the facts and circumstance of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in benchmarking the international transactions pertaining to receipt of interest from the AE, by arbitrarily adding a spread of 2% over the interest charged by the Appellant in an ad-hoc manner (on account of non-descriptive risk factor), without assigning any reasonable basis and by failing to appreciate that the Appellant has already taken a spread of 1.1% over and above the LIBOR;
8. Without prejudice to ground 7 above, on the facts and circumstance of the case and in law, the Ld. AO/Ld. TPO/Ld. DRP erred in benchmarking the international transactions pertaining to receipt of interest from the AE by:
a. Not considering internal CUP available with respect to the interest paid on the loan availed by the AE from ABN Amro Bank; and
b. Not considering internal CUP available with respect to the interest .paid by the Appellant to the Indian banks (on packing credit).
That the above grounds are independent and without prejudice to each other.
The Appellant craves leave to add, alter, amend or vary any of the above grounds either before or at the time of hearing as we may be advised. The arguments taken hereinabove are without prejudice to each other.”
3. At the very first instance the ld. Counsel for the assessee argued Ground No. 2 relating to the validity of the assessment order passed by the AO by stating that the same was barred by limitation as per the provisions of Section 144 C(13) of the Act.
4. Facts of the case in brief are that the assessee filed the e-return of income on 17.11.2006 declaring an income of Rs.3,45,94,389/- under normal provisions of the Income Tax Act, 1961 (hereinafter refer to as the Act) and adjusted book profit amounting to Rs.21,45,06,103/- u/s 115JB of the Act. The said return was processed u/s 143(1) of the Act on 19.11.2007. Subsequently, the case was selected for scrutiny. The AO noticed that the assessee entered into foreign transactions totaling to Rs.5262.03 lacs, therefore, this case was referred to the Transfer Pricing Officer (TPO) for computation of arm’s length price u/s 92CA of the Act. The TPO made an adjustment of Rs.139.34 lacs to the arm’s length price vide order dated 19.10.2009. The AO passed the draft assessment order u/s 143(3) r.w.s. 144C of the Act on 26.11.2009. The assessee raised the objections before the Dispute Resolution Panel (DRP)-1, New Delhi who vide order dated 02.07.2010 communicated the direction to the AO who passed original assessment order u/s 143(3) r.w.s. 144C of the Act on 09.08.2010.
5. Being aggrieved the assessee preferred an appeal to the ITAT in ITA No. 4556/Del/2010 wherein vide order dated 18.08.2011, the case was restored to the file of the ld. DRP for passing speaking order u/s 144C of the Act. The relevant findings given by the ITAT in the order dated 18.08.2011 read as under:
“5. We have heard both the sides and also gone through the order of the DRP. The learned DRP has dealt the issue as under:-
“2.4 We have considered the arguments of the assessee company. The TPO has given detailed reasons in the order u/s 92CA(3) for computing the Arm’s Length Price of the International transactions. The assessee could not justify the filters applied by it and the TPO has carried out a fresh search and applied logical filters to arrive at a comparable on the basis of the same he has computed OP / OC at 19.60%. In the matter of charging of interest @ 6% on the loan of Rs.46.37 crores from its AE, the assessee could not disclose the details of CUP. It was noticed that the assessee has also taken loan from banks to the extent of Rs.52.68 crores, however the rate of interest on the loans taken was not available in the audited annual accounts. The TPO has observed that in this case the issue for determination is not about allowability of interest payment u/s 36(1)(iii) but to determine Arm’s length price of interest charged by the assessee from its AE. Therefore the TPO has determined the CUP for the rate of interest charged by the assessee on loan given to AE @ 10%. This appears reasonable. In these circumstances, we find no compelling reasons to interfere with the order of TPO and the Assessing Officer on this issue.
3. Provision for doubtful bad debts of Rs. 21,48,564/-:
In the draft assessment order, the Assessing Officer has disallowed Rs.21,48,564/- being the provision for doubtful / bad debts. The Assessing Officer has observed that vide provisions of Finance Act, 2009 as inserted in clause (i) to Explanation -I of Section 1l5JB (applicable w.e.f. 01.04.2001 retrospectively), the provisions cannot be claimed against the book profit for the purpose of arriving at the income for taxation u/s 115JB of I.T. Act, 1961. In this issue the observation of the Assessing Officer appears to be correct hence we find no reason to interfere with the order of Assessing Officer on this issue.”
Since both the sides had agreed to restore the issue to the file of the DRP for making a speaking order, we restore the issue to the file of DRP with a direction that the DRP may pass a fresh speaking order u/s 144C of the Income-tax Act after meeting out all the objections preferably within a year from the date of the service of the order after providing an opportunity of being heard to the assessee.”
6. On the direction of the ITAT the DRP passed the order dated 17.01.2013 and directed the AO to complete the assessment in accordance with the directions given in the said order. Thereafter, the AO passed the impugned assessment order on 24.07.2013.
7. Now the assessee has challenged the validity of the assessment order passed by the AO. The ld. Counsel for the assessee submitted that as per the provisions contained in sub-Section 13 of Section 144C of the Act, the AO could have passed the order on or before 28.02.2013 because the order was to be passed within one month from the end of the month in which the direction had been given by the DRP. However, in this case the order was passed on 24.07.2013, therefore, it was barred by limitation. It was further submitted that the direction was given by the ITAT vide order dated 18.08.2011 to the DRP for passing the order within a year. However, the DRP passed the order on 17.01.2013 which was in violation of the direction given by the ITAT, therefore, the order passed by the DRP was also bad-in-law.
8. In his rival submissions the ld. CIT DR submitted that the order was passed by the AO within time as per the provisions contained in 4th proviso to Section 153(2A) of the Act, which provides that the order may be passed within two years of the directions given in the order passed u/s 254 of the Act by the ITAT. In his rejoinder the ld. Counsel for the assessee submitted that the provisions contained in Section 153(2A) of the act are not applicable to the facts of the present case because those provisions are applicable if a reference has been made by the TPO under sub-Section (1) of Section 92CA of the Act. However, in the present case, the assessment order was passed by the AO on the direction of the DRP and no reference was made to the TPO when the matter was restored by the ITAT to the DRP.
9. We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is an admitted fact that the ITAT vide order dated 18.08.2011 in ITA No. 4556/Del/2010, directed the DRP to pass the order preferably within one year from the receipt of the said order. We, therefore, do not see any merit in this argument of the ld. Counsel for the assessee that the order passed by the DRP was not within the time limit of one year because the directions were given to pass the order preferably within one year but no time limit was fixed. Now the question arises as to whether the order passed by the AO was within time limit as prescribed u/s 144C(13) of the Act. The said provisions read as under:
“144C(13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 (or section 153B), the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received.”
10. From the aforesaid provisions it is clear that the AO shall pass the assessment order inconformity with the direction given by the DRP within one month from the end of the month in which such direction has been received. In the aforesaid provisions, the use of the word “shall” makes it mandatory for the AO to comply with the directions of the ld. DRP and pass the assessment order within one month of the receipt of such directions. It is also noticed that this sub-Section (13) of Section 144C of the Act has an overriding effect on the provisions contained in Section 153 of the Act because the sentence starts with non-obstante clause and it has been provided in Section 144C(13) of the Act that “notwithstanding” anything to contrary, contained in Section 153 or Section 153B of the Act, the assessment shall be completed within one month from the end of the month in which directions given by the DRP are received by the AO. Therefore, the provisions contained in sub-Section (13) of Section 144C of the Act overrides the provisions contained in Section 153 or Section 153B of the Act. Furthermore, 4th proviso to Section 153(2A) of the Act reads as under:
“Provided also that where the order under section 254 is received by the (Principal Chief Commissioner or) Chief Commissioner or (Principal Commissioner or) Commissioner or, as the case may be, the order under section 263 or section 264 is passed by the (Principal Commissioner or) Commissioner on or after the 1st day of April , 2010, and during the course of the proceeding for the fresh assessment of total income, a reference under sub-section (1) of section 92CA is made, the provisions of this subsection shall, notwithstanding anything contained in the second proviso, have effect as if for the words “one year”, the words “two years” had been substituted.”
11. From the above provisions it is clear that when a reference has been made by the AO u/s 92CA(1) of the Act, the time limit for completion of the assessment is two years from the receipt of the order u/s 254 of the Act. But in the present case, there was no such direction by the ITAT to the AO to make the reference again which he has already made to the TPO who passed the original order u/s 92CA(3) of the Act on 19.10.2009. In the present case, as there was no such direction given by the ITAT in the order dated 18.08.2011 to the AO to make the reference again rather the directions were given to the ld. DRP who complied with those direction and passed the order on 17.01.2013, in the end of the said order, it is clearly mentioned that the copy of the order is to be given to the AO i.e. Additional CIT, Range-10, New Delhi. Therefore, we do not see any merit in this contention of the department that the AO passed the assessment order, only after receiving the directions of the DRP through TPO who is Technical Officer to decide the matter related to the arm’s length price adjustments. We, therefore, considering the totality of the facts and the legal provision as discussed hereinabove are of the view that the assessment framed by the AO vide order dated 24.07.2013 was barred by limitation. Therefore, the said assessment order is quashed. Since, we have decided the legal issue in favour of the assessee, therefore, no findings are being given on other issues agitated by the assessee on merits of the case.
12. In the result, appeal of the assessee is allowed for statistical purposes.
(Order Pronounced in the Court on 30/05/2016)
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