IN THE ITAT CHENNAI BENCH ‘C’
Ford India (P.) Ltd.
Deputy Commissioner of Income-tax
IT APPEAL NO. 2112 (MDS.) OF 2010
[ASSESSMENT YEAR 2006-07]
JUNE 13, 2012
Dr. O.K. Narayanan, Vice-President
This appeal is filed by the assessee. The relevant assessment year is 2006-07. The appeal is directed against the assessment order passed under section 143(3), read with section 144C of the Income-tax Act, 1961. The assessment order has been passed in the light of the order passed by Transfer Pricing Officer-I at Chennai under section 92CA, dated 30-10-2009 and also in the light of the directions issued under sub-section (5) of section 144C, read with sub-section (8) of section 144C, by the Dispute Resolution Panel (DRP), Chennai through their proceedings dated 28-9-2010.
2. The assessee has raised two sets of grounds in the present appeal placed before us. The first set of grounds relates to transfer pricing matters. Those grounds are such that:
• Placing reliance on earlier year’s proceedings.
• Rejection of assessee’s search.
• Conditions under section 92C(3) not satisfied.
• Non-consideration of multiple year data contention.
• Rejection of segmental financials.
• Unwarranted fresh search made by the TPO.
• Inappropriate benchmarking analysis.
• Non-consideration of economic factors.
• Denial of economic adjustments.
• Denial of deviation margin of 5%, etc.
3. The grounds grouped under non-transfer pricing matters are such that:
• Provision for doubtful debts.
• Payment of compensation to vendors.
• Provision for stock obsolescence.
• Community development expenses.
• Deduction under section 35D.
• Disallowance under section 40(a), etc.
4. Shri Arvind Sonde, the learned counsel, appeared for the assessee and Shri K.E.B. Rengarajan, the learned standing counsel, appeared for the Revenue.
5. The first objection raised by the learned counsel appearing for the assessee is that the proceedings of the DRP at Chennai in the present case is a nullity in the eyes of law, as the DRP has not opened their mouth to express any opinion, this way or that way, on various issues of TP matters raised by the assessee before it.
6. The learned counsel explained that disputes on TP analysis made for the earlier assessment year 2004-05 are pending before the Commissioner of Income-tax (Appeals) in the first appeal filed by the assessee. The said appeal has not been disposed off. The DRP, on the above stated ground, held that as similar issues are still pending before the Commissioner of Income-tax (Appeals) in first appeal, the issues raised for the impugned assessment year are not settled or resolved. The learned counsel argued that in such circumstances, the DRP should have settled or resolved the issues, but strangely, on that ground they upheld the order of the Transfer Pricing Officer in toto. To make his arguments clear he invited our attention to paras 3.1, 3.2 and 3.3 of the order of the DRP, as extracted below:-
“3.1 The A.O. in the impugned draft assessment order after discussing the facts of the case and taking into consideration the T.P.O’s order, made an addition of Rs. 44,74,32,138/-. The T.P.O. in the order u/s. 92CA(3) of the Act dated 30/10/2009 analysed the international transactions entered into by the assessee with its AEs and for the reasons discussed therein held that the assessee’s transactions with its AEs were not at arm’s length, therefore upward adjustment with regard to the exports and downward adjustment with regard to the imports were found necessary and thus were made.
3.2 Before us, the learned AR made oral and written arguments on these issues. It is found that the arguments taken by the learned AR on behalf of the assessee are identical with the arguments taken by the assessee before the T.P.O. during the T.P. audit. Briefly, the assessee wants multiple year data. Further, it was pleaded on behalf of the assessee that there was inappropriate analysis conducted by the T.P.O. with regard to the fundamental principles of transfer pricing. Non-performance of appropriate adjustments to the comparable companies and capacity utilization were not considered properly. It was also pleaded on behalf of the assessee that the T.P.O. has disturbed the Cost Plus Method (CPM) adopted by the assessee in its T.P. audit and instead adopted the TNMM as the most appropriate method (MAM). The assessee also reiterated its earlier stand which was taken by it before the T.P.O. that multiple year data should be adopted, however the assessee has not given any specific point like business cycle, introduction of new models, recession in the economy or any other reason in support of its contention that multiple year data should be adopted.
3.3 We have carefully considered the facts of the case, examined the records and considered the oral and written submissions made on behalf of the assessee. The assessee is engaged in the business of manufacturing and selling of automobiles, its parts and accessories thereof. It has entered into international transactions with its AEs, both import and export. In this connection, the facts recorded by the T.P.O. in the T.P.O’s order are not disputed. What the assessee has disputed is the interpretation of such data and facts. The learned ARs have made arguments largely on the legal issues. The T.P. audit is basically a fact based exercise. The law on transfer pricing in India is not yet fully evolved and contentious issues are not yet settled. Therefore, the assessee’s reliance placed on various court decisions in support of its contention that the T.P.O. has erred in recommending the upward and downward adjustments has to be understood in this background. In the assessee’s own case on identical issues with regard to the T.P. its first appeal is pending before the CIT(A) for the A.Y. 2004-05, wherein the A.O. has, following the T.P.O’s order, made additions. Therefore, the contentious issues pertaining to the T.P. audit in this case are not settled or resolved. As may be seen, the T.P. issues this year are identical with those as obtaining in A.Y. 2004-05, therefore no separate view can be taken by us on the present application of the assessee before us. We therefore uphold the action of the T.P.O. in making the upward and downward adjustments in respect of assessee’s exports and imports respectively from its AEs. Consequently, the addition of Rs. 44,74,32,138/-proposed by the A.O. is confirmed and these grounds of dispute are rejected.”
The learned counsel invited our attention specifically to sub-sections (5), (7) and (13) of section 144C, where the law has stated the statutory responsibility of the DRP in giving directions to the Assessing Officer in the matters of transfer pricing. The DRP has not followed any of such dictum stated in the statute, which goes as if there are no such directions at all issued by the DRP.
7. The learned counsel argued that in such circumstances it is necessary to set aside the proceedings of the DRP and further give direction to that body to speak out the facts of the case and redo the proceedings in accordance with law. For this proposition the learned counsel relied on the judgment of the Hon’ble High Court of Delhi in the case of Vodafone Essar Ltd. v. Dispute Resolution Panel-II  196 Taxman 423/ 8 taxmann.com 297.
8. The learned standing counsel appearing for the Revenue, on the other hand, contended that the DRP has upheld the draft assessment order passed by the Assessing Officer in toto and it implies that the DRP has consciously dismissed the reference made by the assessee. Therefore, it is a proper order passed under the provisions of law and the Tribunal may dispose of the appeal on the merits of the various contentions raised by the assessee.
9. The learned standing counsel further argued that if at all the TP issues are to be remitted back to the DRP, non TP issues may be decided by the Tribunal on merits. The learned standing counsel contended that at any rate the proceedings of the DRP are within the parameters of law and at any rate the same cannot be labelled as nullity.
10. We have heard both sides in detail. The relevant portion of the proceedings of the DRP has been extracted above. A reading of the said extract shows that the DRP has not considered any of the objections raised by the assessee in respect of TP matters. They held that the appeal filed by the assessee on some issues are pending before the Commissioner of Income-tax (Appeals) pertaining to the assessment year 2004-05 and, therefore, the issues have not reached finality and for that reason the contentions raised by the assessee for the impugned assessment year 2006-07 are liable to be rejected. Therefore, the DRP themselves have made it clear that they are upholding the draft order of the assessing authority on TP issues without considering the objections and arguments of the assessee. When the DRP itself concedes that they have rejected the objections of the assessee without considering the issues, they are making themselves clear that they have not followed the rules of law while upholding the draft assessment order passed by the assessing authority.
11. Section 144C(5) casts a duty on the DRP to issue such directions, as it thinks fit, for the guidance of the Assessing Officer to enable him to complete the assessment. Where the Assessing Officer frames a draft order and assessee raises a number of objections thereto and when the DRP does not dispose of those objections, the directions, if at all, issued by the DRP will not enable the Assessing Officer to complete the assessment.
12. Sub-section (6) thereof provides that the DRP shall consider so many points before giving directions to the assessing authority, such as considering the draft order itself, objections filed by the assessee, evidence furnished by the assessee, reports of other authorities, records of the case, other evidences on record and further, if necessary, the DRP may itself cause enquiries. It is after conforming to all the above requirements that the DRP may give directions to the Assessing Officer enabling him to pass the assessment order.
13. In the present case, as is seen evidently, the DRP has not followed any of the mandatory provisions contained in the law before disposing of the reference placed before it under section 144C.
14. Therefore, we find that the DRP was not justified in upholding the draft order framed by the assessing authority. We set aside the proceedings of the DRP dated 28-9-2010.
15. We remit back the file to the DRP to consider the reference made by the assessee afresh in accordance with law and after hearing the assessee in detail. As held by the Hon’ble Delhi High Court in the case of Vodafone Essar Ltd. (supra), when a quasi judicial authority deals with a lis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum.
16. The learned standing counsel appearing for the Revenue has suggested that the Tribunal may adjudicate the issues raised by the assessee relating to non-TP matters. If that contention is to be accepted, the TP issues will be remanded back to the DRP and non TP issues have to be adjudicated by the Tribunal. On adjudication of non TP issues by the Tribunal, a different scenario may arise. The Tribunal may remand back some of the issues to the Assessing Officer for fresh consideration. Certain issues decided by the Tribunal may be taken up before the Hon’ble High Court in appeal, either by the assessee or by the Revenue. In such circumstances, the various issues raised in the appeal filed by the assessee for a particular assessment year will be placed before different authorities at different levels, issuewise and groundwise. If the appeal is split into pieces and spread before various authorities, practically it is very difficult for the Assessing Officer to pass the final order to give effect to the appellate and court directions and it will be difficult for the assessee as well to appear before different authorities for arguing different points. It is always better that the grounds and the issues raised in appeal for a particular assessment year are decided in a consolidated manner so that the assessment as a whole is moving from one stage to another stage.
17. Therefore, we set aside the entire proceedings of the DRP and remit back the entire file to them to consider the reference afresh both on TP and non TP issues.
18. In result, this appeal filed by the assessee is treated as allowed for statistical purposes.