The Income Tax Appellate Tribunal (ITAT) Delhi recently adjudicated a noteworthy case involving Egis International S.A. and Assistant Commissioner of Income Tax (ACIT). The core issue revolved around whether non-compliance with an e-notice, due to the concerned employee leaving the company, could be considered a “reasonable cause.”
The Grounds of Appeal
Egis International raised multiple issues, questioning the legality and fairness of the decisions made by the Commissioner of Income Tax (Appeals) and the Assessing Officer. These ranged from transfer pricing adjustments to the validity of the ex-parte order passed by the Commissioner.
Non-Compliance Due to Employee’s Exit
A key point in this case was the non-compliance with electronic notices. Egis International argued that the e-notices did not reach the concerned officials as the employee managing the matter had left the company. This was later affirmed by an affidavit from an authorized signatory of Egis.
The Tribunal’s View
ITAT Delhi gave considerable weight to the “reasonable cause” of non-compliance. It took into account the affidavit submitted by Egis International and concluded that non-compliance wasn’t deliberate. Based on these grounds, ITAT Delhi directed that the case be sent back to the Commissioner of Income Tax (Appeals) for de novo adjudication.
FULL TEXT OF THE ORDER OF ITAT DELHI
1. The appeal filed by the assessee is directed against the order dated 15.09.2021 of the Ld. Commissioner of Income Tax (Appeals) –42, Delhi (“CIT(A)”) pertaining to Assessment Year (“AY”) 2016-17.
2. The assessee has raised the following grounds:-
1. That the Learned Commissioner of Income-tax (Appeal) (Ld. CIT (AY) has grossly erred on facts and in law in passing the impugned order on an ex-parte basis without providing adequate opportunity of being heard to the Appellant. To this extent, the order passed is against the principles of natural justice and liable to be quashed.
Transfer Pricing Grounds
2 The Learned Assessing Officer (Ld AO) (along with the Learned Transfer Pricing Officer (Ld TPO)-under reference from the Ld AO) and Ld. CIT(A) has erred on facts and in law in making an addition of INR 2,28,49,247/- to the returned income of the Appellant.
A. Provision of ‘Technical Services’ and ‘Availing of Sub-Consultancy Services’
3. The Ld AO/Ld TPO/Ld CIT(A) erred on facts and in law in modifying/ amending the quantitative filter, with a prejudiced intention of making an addition to the returned income of the Appellant, for rejection of comparable companies and to disregard the transfer pricing documentation.
4. The Ld AO/ Ld TPO/ Ld CIT(A) erred on facts and in law in not appreciating that none of the conditions set out in section 92C(3) of the Act are satisfied in the present case. While doing so, the Ld AO/ Ld TPO/ Ld CIT(A) grossly erred in not acknowledging that:
5. The Ld AO/Ld TPO/ Ld CIT(A) erred on facts in excluding following companies as comparables, without appreciating that in cognizance of Rule 10B(2)(b), the functional, assets and risk profile of these companies are comparable with that of the Appellant.
6. The Ld AO/ Ld TPO/ Ld CIT(A) erred on facts in excluding following as comparables, without appreciating the fact these companies faced peculiar economic circumstances and thereby ignoring the Rule 10B(2)(b) of the Rules:
7. The Le AO/Ld. TPOL CITIA) grossly erred on facts and in saw by not computing the quant of transfer pricing addition on the value of international transaction, which stood at INR 27,29.08,356.
8. The Ld. AO/Ld. TPO/ Ld CIT(A) grossly erred on facts and in law by not appreciating the peculiar nature of transaction with associated enterprises viz. EINTL- EI JV (PRAMC) and EINTL- AARVEE-EI JV, which are Special Purpose Vehicle (Association of Persons (AOPs) and has no functional asset or risk profile. While doing so, the Ld AOI/Ld. TPO/ Ld CIT(A) grossly erred in not acknowledging that:
a. These AOPs are taxed at same rate of tax as the Appellant and there was no profit shitting motive
b. These AOPs are incorporated as per mandate of the Govt’s Projects and have been assessed to meet the arm’s length standard by the Ld TPO for same assessment year
9. The Ld AO/ Ld TPO/ Ld CIT(A) erred on facts and in law by not allowing a risk adjustment and working capital adjustment to the Appellant, thereby contravening the Rule 10B(1)(e)(iii)
10. The Ld AO/Ld TPO/Ld CIT(A) erred on facts and in law in ignoring the fact that all the associated enterprises filed their ‘return of income’ in India and offered to tax their taxable income in India.
B. Interest on receivables
11. The Ld AO/Ld TPO/ Ld CIT(A) erred on the facts and law by imputing interest on the outstanding receivables without appreciating the fact that outstanding receivable is not a separate international transaction and resulting from primary international transactions
12. The Ld AO/ Ld TPO/ Ld CIT(A) erred in on the facts and law by treating “Outstanding receivables” as notional loan while ignoring the fact that Appellant is purely debt free entity and utilizing its own funds and did not carry any interest cost on its funds
13. The Ld AO/ Ld TPO/Ld CIT(A) erred on the facts by not allowing working capital adjustment to the Appellant and which takes care impact of outstanding receivables/ payables
14. The Ld AO/ Ld TPO/ Ld CIT(A) erred on the facts by applying SBI rate for imputing interest on outstanding receivables whereas the Appellant primarily transact in foreign currency with the AES.
15. The Ld AO/ Ld TPO/ Ld CIT(A) grossly erred on facts and in law in not acknowledging the application/ availability of Comparable Uncontrolled Price Method for benchmarking the alleged International transaction “outstanding receivables”.
16. The Ld AO/Ld TPO/ Ld CIT(A) grossly erred on facts and in law by not appreciating the peculiar nature of transaction with associated enterprises viz EINTL EI JV (PRAMC) and EINTL AARVEE-EI JV, which are Special Purpose Vehicle? Association of Persons (AOPs) and has no functional asset or risk profile. While doing so, the Ld AO/ Ld TPO/ Ld CIT(A) grossly erred in not acknowledging that
a. These AOPs are taxed at same rate of tax as the Appellant and there was no profit shifting motive.
b. These AOPs are incorporated as per mandate of the Govt’s Projects and have been assessed to meet the arm’s length standard by the Le TPO for same assessment year,
17 The Ld AO/ Ld TPO/ Ld CIT(A) grossly erred on facts and in law by computing the quantum of addition for full year, without determining the actual outstanding period in receipt of these receivables. While doing so, the Ld AO! Ld TPO/ Le CIT(A) grossly erred in not providing relief of 60 days, which is a routine credit period in the industry
18. The Ld AO/ Ld TPO erred on facts and in law in initiating penalty proceedings u/s 271(1)(c) of the Act
19. The Ld AO/ Ld TPO erred on facts and in law in levying interest under section 234B and 234C of the Act.”
3. Briefly stated the assessee is a foreign company incorporated in India. Its principal business is to provide technical consultancy services to its associate enterprises as well as unrelated third party. For AY 2016-17, it filed its return on 30.11.2016 declaring income of Rs. 1,66,37,026/-. The case was selected for scrutiny under CASS. Statutory notices were served online upon the assessee which were responded to. The assessee offered its income in India on net basis.
4. During the year, the assessee entered into the following international transactions:-
|S. No.||Type of international transaction||Method selected MAM PLI||Total value of transaction (Rs.)|
|1.||Provision of Technical services||TNMN||OP/OR||3,06,01,583|
|2.||Availing of Sub- Consultancy Services||TNMM||OP/OR||24.05.58,400|
|3.||Payment Of Rent & Maintenance Charges||CUP||–||873980|
|4.||Payment Of Finance & Administration Charges||CUP||–||17.48,423|
|5.||Bank Guarantee||Other Method||–||–|
|6.||Reimbursement of Expenses||TNMM||OP/OC||4,09,39,634|
5. The Ld. Assessing Officer (“AO”) referred the case to Ld. Transfer Pricing Officer (“TPO”) who passed an order on 28.10.2019 under section 92CA(3) of the Income Tax Act, 1961 (the “Act”) proposing the cumulative adjustment of Rs. 2,28,49,247/-. Accordingly, the Ld. AO served upon the assessee a draft assessment order requiring the assessee to submit its response under section 144C(2) of the Act. The assessee neither filed any objections before Hon’ble DRP nor submitted any reply to the Ld. AO within the stipulated period. The Ld. AO therefore proceeded to pass the final order and completed the assessment on 17.02.2020 under section 143(3) r.w. section 144C(3) of the Act on total income of Rs. 3,94,86,270/- including therein cumulative adjustment of Rs. 2,28,49,247/- under section 92CA of the Act.
6. The assessee carried the matter in appeal before the Ld. CIT(A). The appeal was filed late with petition to condone the delay due to Covid-19. The Ld. CIT(A) condoned the delay. However, despite various opportunities given, the assessee did not attend the appeal proceedings nor filed any written submission before the Ld. CIT(A). He therefore passed ex-parte order confirming the adjustment made by the Ld. TPO and consequent addition made by the Ld. AO.
7. Aggrieved thereby, the assessee is in appeal before the Tribunal challenging the adjustment made by the Ld. TPO and resultant addition to its income and all the grounds relate thereto.
8. The Ld. AR submitted that non-compliance of notice(s) issued by the Ld. CIT(A) happened due to the fact that the employee handling the matter had left the company. An affidavit sworn by Mr. Sunil Kumar Wasan, an authorised signatory of the assessee company on 06.04.2023 has been filed before us which is kept on record. He has deposed therein that the hearing notices issued by the Ld. CIT(A) were not received by the assessee in its office; that the e-mail address to which notices were sent belonged to Mr. Gaurav Sharma who had left the company w.e.f. 27.08.2021 and notices, if any, sent to his e-mail did not reach the concerned officials of the assessee; that non-compliance was not deliberate. The Ld. AR further submitted that the appeal has not been decided on merits by the Ld. CIT(A). He therefore, urged that the matter may be sent back to Ld. CIT(A) for rehearing and disposal.
9. The Ld. DR vehemently opposed and submitted a bunch of notices issued by the office of the Ld. CIT(A) and pointed out that the notices have been served electronically to the e-filing account of the assessee.
10. We have given our careful thought to the submission of the parties and perused the record. It is obvious that the Ld. CIT(A) has not passed ex-parte order on merits of the case. An affidavit sworn by the authorised signatory of the company has been brought on record by the assessee deposing therein that notice(s) sent to the email of the employee who left the company did not reach the concerned officials of the assessee and that non-compliance was not deliberate. We are therefore of the view that in the interest of justice and fair play, it would be expedient to restore the matter back to the file of the Ld. CIT(A) for denovo adjudication on merits after allowing reasonable opportunity of hearing to both the parties. We order accordingly.
11. In the result, the appeal of the assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on 3rd August, 2023.