Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S. Nokia Siemens Networks Pvt. Ltd., ... on 9 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I' NEW DLEHI
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
AND
SHRI K. NARSIMHA CHARY, JUDICIAL MEMBER
I.T.A. No. 1618/Del/2013
Assessment Year: 2005-06
M/s Nokia Siemens Network India P. Ltd., vs Asstt. Commr. of Income-tax
7th Floor, Building No.9, Tower A, Central Circle-9, New Delhi.
DLF Cyber City, Sector 25A, Gurgaon.
(PAN: AABCS9839H)
I.T.A. No.2053/Del/2013
Assessment Year 2005-06
Dy. Commissioner of Income-tax vs M/s Nokia Siemens Networks P. Ltd.
Circle 13(1), New Delhi. 7th Floor, Building No.9, Tower A,
DLF Cyber City, Sector 25A, Gurgaon.
(Appellant) (Respondent)
Assessee by: Mrs. Rashmi Chopra, Shri Amit Srivastava,
Sh. Harpreet Ajwani
Department by: Smt. Namita Panday, Sr. DR
Date of hearing : 24.01.2018 Date of Pronouncement: 09.02.2018
ORDER
PER K. NARSIMHA CHARY, JM
These two appeals, one by the assessee and the other by the Revenue are directed against the order dated 29.1.2013 passed by the Commissioner of 2 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 Income-tax (Appeals)-XX, New Delhi (for short hereinafter referred to as the "CIT(A)") in Appeal No.27 &28/2010-11 for the assessment year 2005-06.
2. Facts, in brief, are that the assessee formerly known as Siemens Public Communication Networks Private Ltd is a company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of inter alia manufacturing and trading of telecom equipment and other related services. For the Asstt. Year 2005-06 they have filed the return of income on 28.10.2005 declaring a total income of Rs.16,69,52,320/-. During scrutiny the case of the assessee was referred to the Transfer Pricing Officer for determination of arm's length price of the following international transactions entered into by the assessee with its associated enterprises:
Sl No Description of the transaction Amount
1. Purchase of raw material, components etc. Rs.169,29,14,019/-
2. Purchase of fixed assets Rs.7,00,02,668/-
3. Payment of royalty Rs.1,53,52,556/-
4. Purchase of software Rs.49,45,506/-
5. Software services Rs.95,29,11,539/-
6. Commissioner received Rs.26,86,64,303/-
7. Communication charges paid Rs.3,41,97,344/-
8. Fes for technical services Rs.74,80,327/-
9. Payment of training charges Rs.3,05,710/-
10. Recovery of expenses Rs.15,63,21,483/-
11. Payment of miscellaneous and other Administrative Rs.43,43,806/-
expenses
3. Learned TPO accepted the international transactions of the assessee in all segments except in manufacturing and installation segment. Assessee used Transactional Net Margin Method (TNMM) as the most appropriate method and net margin on cost was taken as profit level indicator (PLI). The margin of the 3 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 assessee was 6.63%. Order of the learned TPO shows that the assessee had clubbed manufacturing and installation services into one segment and margin of this segment was calculated at -1.49% on sales. For benchmarking the manufacturing and installation scheme, the assessee had selected five comparable which had margin of 19.92% and the TPO rejected four of these comparables by stating that they were incurring continuous losses or facing declining revenues for the last three years in such segment whereas the assessee's turnover in this segment was on an increasing trend. Ultimately, the TPO concluded that only one company by name Shyam Telecom Ltd. is a comparable case as it is functionally similar to the assessee, depends on imports from other countries. On that premise, the TPO by using single year data calculated the margin of comparables at 1.92% on the sales. Basing on this margin, the difference between the arm's length price and the actual international transaction involved in this segment was determined at Rs.14,37,43,273/-. Ld. AO completed assessment by making addition of Rs.14,37,43,273/- on account of Transfer Pricing adjustment, Rs. 33,11,94,214/- on account of credit on repayment of sales tax deferral loan, Rs. 4,87,82,286/- on account of provision for indirect taxes and Rs. 1,74,06,851/- for excess amortization of spares. Subsequently, at the instance of the assessee the TPO passed an order u/s 154 of the Act by recalculating the comparable margin at 0.23% as against 1.92% as a result of which the arm's length difference was arrived at Rs.5,31,95,236/-. In appeal, learned CIT(A) restricted the transfer pricing adjustment to Rs.2,27,68,692/- and deleted other additions.
4. Challenging the upholding of the addition on the basis of transfer prices adjustment assessee preferred ITA No.1618/Del/2013 whereas challenging the 4 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 deletions made by the learned CIT(A), the Revenue is in appeal before us in ITA No.2053/Del/2013.
ITA No.1618/Del/20135. Assessee filed an application dated 09.09.2015 for admission of the following additional grounds:
1. "The final assessment order dated 12 December, 2008 passed by the Deputy Commissioner of Income-tax, Circle 12(2) Bangalore (Learned AO), the order dated 31 October, 2008 passed by Joint Director of Income Tax, Transfer Pricing-II, Bangalore (Learned TPO) and pursuant to which order passed by Commissioner of Income Tax (Appeals) - XX, New Delhi (CIT(A)), is bad in law and void ab-initio.
2. That on facts and circumstances of the case and in law, the Learned AO have grossly erred in making assessment under section 143(3) read with sections 144C(4) of the Income tax Act, 1961 ("the Act") since:
(i) the reference under section 92CA(1) made by Learned AO on 11 July, 2006 (refer page 1 of the order u/s 92CA of the Act enclosed as Annexure
1) to the Learned TPO was an invalid reference as the same was made before the initiation of the assessment proceedings under section 143(2) of the Act as the notice under section 143(2) of the Act was issued to the Appellant on 4 September, 2006 (refer page 1 of assessment order enclosed as Annexure 2); and
(ii) henceforth, the adjustment made by the Learned AO is not in consequence of an order passed under section 92CA(3) which ought to have been passed by the TPO on the basis of a valid reference under section 92CA(1) of the Act during the course of the assessment proceedings, and hence is invalid in law and void-ab-initio."
6. Ld. AR submitted that inasmuch as the additional ground is purely based on law and all the facts request for its adjudication are available on record, in view of the judgement of the Hon'ble Supreme Court in NTPC vs. CIT (1998) 229 ITR 383, additional ground which does not require any investigation into new facts could 5 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 be admitted. Ld. DR opposes this petition on the ground that inasmuch as the time for issuance of notice under section 143(3) of the Act is not expired, there is no infirmity in the reference made by the Ld. AO u/s 92CA of the Act. She, therefore, submitted that there are no valid grounds to admit the additional evidence.
7. On a careful consideration of the matter, we find that the adjudication of the additional ground does not require any investigation into the facts, and the facts to be found on record are sufficient to deal with this aspect. Since the result of adjudication of the additional ground has a bearing on the tax liability of the assessee and it relates to be statutory rights of the assessee while respectfully following the decision of the Hon'ble Apex Court in NTPC case, we deem it just and proper to admit the additional ground. We accordingly admit the same.
8. As is evident, by way of additional ground, the technical plea is taken by the assessee to the effect that in this matter, reference u/s 92CA(1) was made by the learned AO on 11.7.2006 to the learned TPO the notice u/s 143(2) of the Act was issued on 4.9.2006 initiating the scrutiny proceedings. Reference made by the Ld. AO to the Ld. TPO is, therefore, at a time when the assessment proceeding were not pending. On this ground, he submitted that the proceedings are vitiated and the assessment order is barred by limitation. Learned AR placed reliance on the decisions reported in (i) CIT vs. SAP Labs Pvt. Ltd., 271 CTR 612 (Kar); (ii) XL India Business Services P. Ltd. vs ACIT, ITA No.16/2013 (ITAT Delhi ); (iii) CIT vs XL India Business Services P. Ltd. , ITA No.713/2015 (Delhi High Court); (iv) Kaesar Compressors India Pvt. Ltd. vs ACIT, 60 Taxmann.com 449 (ITAT, Pune); and 6 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 Maximize Learning (P) Ltd. vs ACIT (2015)54 Taxmann.com 234 in support of his submissions.
9. More particularly, Ld. AR placed reliance on the decision in Maximize Learning (P) Ltd. vs ACIT (2015)54 Taxmann.com 234 wherein, according to the Ld. AR, an identical question was considered by the Pune Bench with the following observations:
"..... Sections 92 to 92F of the Act were introduced by the Finance Act, 2001 and are effective from the assessment year 2002-03. Section 92(1) of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions "associated enterprise" and "international transaction" respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of arm's length price in relation to an international transaction. Section 92CA of the Act provides that where the Assessing Officer considers it necessary or expedient to do so, he may refer to the Transfer Pricing Officer the determination of the arm's length price. Section 92CB of the Act relates to the power of the Board to make safe harbour rules. Section 92D of the Act relates to Maintenance and keeping of information and document by persons entering into an international transaction. Section 92E of the Act prescribes that the person entering into international transaction shall furnish a report from a chartered accountant in Form No.3CEB. Section 92F of the Act contains definitions of certain terms which are relevant to compute arm's length price, etc. in terms of sections 92 to 92F of the Act.
13. Notably, the entire scheme and mechanism to compute any income arising from an international transaction entered between associated enterprises is contained in sections 92 to 92F of the Act. Now, we may deal in slight detail the provisions of transfer pricing assessment which are relevant in the context of controversy before us. Section 92(1) of the Act mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Section 92C, inter-alia, prescribes the methods for computation of arm's length price in relation to an international transaction. Sub-section (3) of section 92C of the Act empowers the Assessing Officer to determine the arm's length price in relation to an international transaction in accordance with the methods prescribed in sub-section (1), on the basis of material or information or 7 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 documents available with him, after allowing the assessee an opportunity in this regard; and, sub-section (4) of section 92C provides that where the Assessing Officer so determines the arm's length price, he may compute the total income of the assessee having regard to the arm's length price so determined. However, section 92CA of the Act provides that where the Assessing Officer considers it necessary or expedient so to do, he may refer the computation of arm's length price in relation to an international transaction to the TPO. In such a situation, the TPO, after taking into account the material before him, pass an order in writing u/s 92CA(3) of the Act determining the arm's length price in relation to an international transaction. On receipt of this order, sub-section (4) of section 92CA of the Act requires the Assessing Officer to compute the total income of the assessee in conformity with the arm's length price so determined by the TPO. In other words, the determination of the arm's length price, wherever a reference is made to him, is done by the TPO under sub-section (3) of section 92CA but the computation of total income having regard to the arm's length price so determined by the TPO is required to be done by the Assessing Officer under sub- section (4) of section 92C, read with sub-section (4) of section 92CA.
14. In sum and substance, the scheme of the Act postulates that arm's length price in relation to an international transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing Officer. In both situations, the Assessing Officer is required to compute the total income of the assessee having regard to the arm's length price of the international transaction so determined, either in terms of sub-section (4) of section 92C or sub- section (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is determined by the TPO, on a reference by the Assessing Officer. In the case before us, the total income of the assessee has been computed having regard to the arm's length price determined by the TPO under section 92CA(3) of the Act and therefore the Assessing Officer has taken recourse to section 92CA(4) of the Act.
15. It is quite clear that the process of determination of arm's length price is to be carried out during the course of assessment proceedings, may it be, under sub- section (3) of section 92C where the Assessing Officer determines the arm's length price or under sub-sections (1) to (3) of section 92CA, where the Assessing Officer refers the determination of arm's length price to the TPO. We may also refer to the provisions of section 143(3) of the Act dealing with assessment of income. In 8 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 terms of clause (ii) of sub-section (3) of section 143, it is prescribed that the Assessing Officer shall, by an order in writing, make an assessment of the total income or loss of the assessee, and determine the sum payable by him or refund on any amount due to him on the basis of such assessment. It is only in the course of such assessment of total income, that the Assessing Officer is obligated to compute any income arising from an international transaction of an assessee with associated enterprises, having regard to the arm's length price. In this background, is it not appropriate to infer that the provisions of section 92 to 92F of the Act get triggered only during the pendency of the process of assessment of total income before the Assessing Officer, which culminates in an order under section 143(3) or section 144 of the Act, as the case may be ?
16. In-fact, the occasion which requires the Assessing Officer to compute income from an international transaction arises only during the assessment proceedings, wherein he is determining the total income of the assessee. The appellant has canvassed the aforesaid position before us and in this context reference has also been made to the CBDT Instruction No.3 dated 20th May, 2003 the relevant portion of which read as under :--
". . . . . The Central Board of Direct Taxes, therefore, have decided that wherever the aggregate value of international transaction exceeds Rs.5 crores, the case should be picked up for scrutiny and reference under section 92CA be made to the TPO. If there are more than one transaction with an associated enterprise or there are transactions with more than one associated enterprises the aggregate value of which exceeds Rs.5 crores, the transactions should be referred to the TPO. Before making reference to the TPO, the Assessing Officer has to seek approval of the Commissioner/Director as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment." [underlined for Emphasis by us]
17. It is emphasized on the basis of the CBDT Instruction (supra) that even as per the understanding of the CBDT, a case is to be selected for scrutiny assessment before the Assessing Officer may refer the computation of arm's length price in 9 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 relation to an international transaction to the TPO u/s 92CA of the Act. Therefore, we are inclined to uphold the position sought to be canvassed by the assessee that an Assessing Officer can make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment. In-fact, the aforesaid underlined observations of the CBDT Instruction (supra) is a pointer to the legislative import that the reference to the TPO for determining the arm's length price in relation to an international transaction is envisaged only in the course of the assessment proceedings, which is the only process known to the Act, whereby the assessment of total income is done. As per the CBDT (supra), the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of the international transactions before making assessment since the case would be selected for scrutiny before making reference to the TPO.
18. In the context of the aforesaid controversy, we may refer to the arguments raised by the Ld. CIT-DR whereby it is contended that it was open for the Assessing Officer to make a reference to the TPO for determination of arm's length price without issuing notice u/s 143(2) of the Act; in other words, as per the Revenue, reference to the TPO u/s 92CA of the Act can be made even if no assessment proceeding is pending before the Assessing Officer. In this context, it is submitted that the annual norms for selection of cases for scrutiny prescribed by the CBDT for assessment year 2007-08, inter-alia, prescribed compulsory scrutiny in all cases where the total value of international transactions as defined in section 92B exceeded Rs.15 crores. According to her, in such a case, the Assessing Officer can very well issue the notice u/s 143(2) of the Act and then make a reference to the TPO. However, it is submitted that the CBDT norms also provide that a case which is not directly covered under the aforesaid compulsory scrutiny norm, can also be selected for scrutiny if the Assessing Officer records a satisfaction and seeks the approval of the CCIT/DGIT (International Taxation)/DGIT (Exemption). The aforesaid norm has been pointed out to say that in order to pick-up a case for scrutiny, some satisfaction is required to be recorded before the notice u/s 143(2) of the Act is to be issued. This exercise, according to the Ld. CIT-DR, could very well be the reference of the matter of the TPO, therefore, the stipulated period laid down by the CBDT does not pre-suppose that the issue of notice u/s 143(2) of the Act has to be necessarily and without fail precede the reference to TPO.
19. We have carefully considered the plea of the Ld. CIT-DR, that it is open to the Department to make a reference to the TPO without issuing notice u/s 143(2) of the Act, but in our view, it is not supported by a schematic reading of the relevant 10 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Thus, the computation of income and the determination of arm's length price in relation to the international transaction have to go hand-in-hand and without there being an occasion to compute income arising from an international transaction, it is difficult to comprehend the process for computation of arm's length price in relation to the relevant international transaction. Therefore, it would not be open for the Department to say that the process of computing arm's length price of an international transaction or a reference to the TPO to determine arm's length price can be initiated in the absence of any proceeding for computing total income of the assessee.
20. Further, in our view, the Ld. CIT-DR has relied on one of the norms prescribed for picking a return for scrutiny assessment to say that certain exercise is required to be done on the part of the Assessing Officer to record his satisfaction before the matter is put-up to the CCIT/DGIT who shall approve the selection of case for scrutiny. According to her, the recording of such satisfaction contemplated in the CBDT Instruction, would, inter-alia, envisage a reference to the TPO also. In our considered opinion, the reliance placed by the Ld. CIT-DR on the aforesaid CBDT Procedure for selection of cases for scrutiny, cannot distract from the relevant statutory provisions relating to the controversy before us. In-fact, the scheme of the Act which we have dealt earlier, establishes that the work of computing the arm's length price in relation to international transaction arises only and only when the income from such international transaction is being assessed. Certainly, the reference to the TPO for the computation of arm's length price cannot precede the initiation of the assessment proceedings by the Assessing Officer by issuance of notice u/s 143(2) of the Act.
21. As per the Ld. CIT-DR, section 92C(3) or 92CA of the Act do not enjoin the Assessing Officer to have any assessment proceedings pending before a reference to the TPO can be made for computation of arm's length price in relation to an international transaction. In this context, reference has been made to the phraseology of section 92CA(1) of the Act to say that only two conditions are prescribed therein which are to be fulfilled by the Assessing Officer before referring the matter to the TPO. Firstly, assessee should have entered into international transaction; and, that if the Assessing Officer considers it necessary 11 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 and expedient to do so, he may refer the matter to the TPO under approval of the Commissioner. If both the conditions are satisfied there is no bar or requirement of any assessment proceedings being pending, before the reference is made to the TPO.
22. The aforesaid plea of the Ld. CIT-DR also, in our view, fails to take into consideration the entire scheme envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, meaning of international transaction, determination of arm's length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transaction and the definition of certain expressions occurring in such sections. The aforesaid provisions do not operate in individual spheres but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceedings envisaged under the Act. Section 92CA of the Act is not an independent provision, but it is triggered only when the occasion arises for application of section 92(1) of the Act, whereby income from an international transaction is to be computed having regard to its arm's length price; and, the occasion to compute the income would arise only when there is an on-going assessment proceeding. Therefore, reference made by the Ld. CIT-DR to the phraseology of section 92CA(1) without considering the entire schematic arrangement of sections 92 to 92F would be incorrect.
23. Therefore, we conclude this aspect by holding that the Assessing Officer is precluded from making a reference to the TPO u/s 92CA(1) of the Act for the purposes of computing arm's length price in relation to the international transaction when no assessment proceedings are pending in relation to the relevant assessment year."
10. Per contra, it is the argument of the learned DR that the value of the international transaction exceeds Rs.15 crores and, therefore, it is mandatory for the Ld. AO to refer to the TPO. She further submitted that merely because the notice u/s 143(2) was issued at a later point of time, it would not vitiate the proceedings. She submitted that the decisions relied upon by the assessee, viz., 12 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 CIT vs. Sap Labs (P) Ltd., 271 CTR 612 and XL India Business Services P. Ltd. vs ACIT are the cases where it was inferred that the proceedings were not pending on the date of making reference by the Ld. AO, on the ground that the time for issuance of notice under Section 143(2) was expired. In case on hand, no such time was expired for issuance of notice u/s 143(2), it was issued well within time and, therefore, it is not open for the assessee to contend that the reference u/s 92CA(1) prior to the issuance of notice 143(2) of the Act is bad in law.
11. In this factual matrix and the law relied upon by the Ld. AR, the question that arises for our consideration is -
Whether the reference u/s 92CA(1) is bad because notice under section 143(2) of the Act was issued subsequently and on that ground the assessment proceedings were vitiated and bad under law?
12. We shall now proceed to appreciate the arguments on either side in the light of the decisions relied upon by the assessee. In CIT vs. SAP Labs P. Ltd (supra) vide Paragraph 4, the Hon'ble High Court of Karnataka held that on the day the reference was made by the Assessing Officer to the Transfer Pricing Authority, there was no return, in respect of which a notice u/s 143(2) of the Act can be issued, pending for consideration by him, and therefore, the very reference was bad. The question was not - whether any notice under section 143(2) was issued or not. It was only whether the return, in respect of which such notice can be issued, was pending or not.
13. This decision of Karnataka High Court was referred by a coordinate bench of this Tribunal in XL India Business Services P. Ltd. (supra) wherein the reference to the Transfer Pricing Officer was made after the end of the time limit available 13 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 for issuance of notice u/s 143(2) and before the commencement of re-assessment proceedings. In this context the Tribunal referred to the decision of the Hon'ble Karnataka High Court in SAP Labs (p) Ltd. (supra) and observed that inasmuch as no income-tax return in respect of which a notice u/s 143(2) can be issued was not pending and the time for issuance of such notice had come to an end before the point of time when a reference was made, such a reference itself was legally invalid. It was held therein that unless an income tax return, in respect of which notice under section 143(2) can be issued, was pending before the Assessing Officer, a reference to the Transfer Pricing Officer cannot be made by the AO.
14. This decision of the Tribunal in XL India Business Services P. Ltd. case (supra) was upheld by the Hon'ble jurisdictional High Court by order dated 14.9.2015 in CIT vs XL India Business Services P. Ltd. (supra). While referring to the decision of the Hon'ble Karnataka High Court in SAP Labs India Ltd. (supra) that unless an income-tax return, in respect of which a notice u/s 143(2) of the Act can be issued, was pending before the AO, no reference can be made to the TPO, the Hon'ble jurisdictional High Court held that the provisions u/s 92(1), 92C and 92CA(1) proceed on the premise that the AO in seisin of the assessment proceedings when he forms an opinion about referring the issue of determination of ALP to the TPO.
15. In Kaesar Compressors India P. Ltd. (supra), the last date for issuance of notice u/s 143(2) was 30.9.2008, however, no notice u/s 143(2) of the Act was issued by the AO, the return of income was not picked up for scrutiny assessment and thereafter, on 26.10.09 reference was made by the AO to the TPO for determining the arm's length price entered in relation to international 14 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 transactions entered into by the assessee. By afflux of the period of limitation, the assessment proceedings came to an end and consequently it was held that subsequent reference to the TPO was bad in law.
16. In Maximise Learning's (P) Ltd. vs ACIT (supra) also, the context was that the time for issuance of notice u/s 143(2) expired. Ld. AO made a reference to the TPO u/s 92CA and made the report of the TPO a basis to issue notice u/s 148 of the Act. This is evident from the observations of the Tribunal vide paragraphs 10, 11, 16 & 25 to 27. When we read the decision in Maximize Learning (P) Ltd. (supra), in a holistic manner, we find that it fits into the legal proposition laid down by the Hon'ble Karnataka High Court in CIT vs. SAP Labs (supra) and approved by the Hon'ble jurisdictional High Court in CIT vs XL India Business Services P. Ltd. (supra). In all the cases referred to above, the thread that runs through is that as on the date of reference by the AO to the TPO, the time for issuance of notice u/s 143(2) of the Act was barred by limitation.
17. We are, therefore, clear in our mind that the ratio of all these decisions is that unless an income-tax return, in respect of which notice u/s 143(2) of the Act can be issued, was pending before the AO, no reference could be made by the AO to the TPO. The irresistible conclusion, therefore, is that it is not the requirement of law that notice u/s 143(2) of the Act shall precede the making of reference, but what the law requires is that a return of income tax in respect of which notice u/s 143(2) of the Act could be issued, must be pending as on the date of reference to the Ld. TPO. As a matter of law, Section 92CA does not speak of necessity of any issuance of notice u/s 143(2) as on the date of making reference. Judicial pronouncements make it amply clear that it is suffice if return of income is 15 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 pending and time is available to the AO to issue notice u/s 143(2). When once this the duel requirement is complied with, whether or not the notice u/s 143(2) of the Act is issued before the reference u/s 92CA(1) of the Act, is irrelevant and it does not vitiate the reference or the consequential proceedings on such a ground.
18. Next contention of the Ld. AR is that even if we assume for a while that no assessment proceedings are required to be pending by the date of reference under section 92CA (1) of the Act, however, for the purpose of limitation for completion of assessment under section 153 (1) of the Act, extended period of limitation under Second proviso thereto is available to the Ld. AO only when the reference is made during the course of the proceedings for the assessment of total income. He submitted that since the reference to the Ld. TPO was not made after issuance of notice under section 143(2) of the Act, it is not during the course of assessment proceedings, and on that count, the benefit of extended period under Second proviso to section 153 (1) of the Act is not available to the Ld. AO. He submitted that if the benefit of extended period of 33 months is not available to the Ld. AO, the final assessment is passed after expiry of the period of twenty one months, permitted by the First proviso, is barred by limitation and bad under law.
19. For proper appreciation of this contention, we deem it necessary to extract Section 153(1) of the Act hereunder:-
153. [(1) No order of assessment shall be made under section 143 or section 144 at any time after the expiry of--
(a ) two years from the end of the assessment year in which the income was first assessable ; or 16 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 (b ) one year from the end of the financial year in which a return or a revised return relating to the assessment year commencing on the 1st day of April, 1988, or any earlier assessment year, is filed under sub- section (4) or sub-section (5) of section 139, whichever is later :] [ Provided that in case the assessment year in which the income was first assessable is the assessment year commencing on the 1st day of April, 2004 or any subsequent assessment year, the provisions of clause
(a) shall have effect as if for the words "two years", the words "twenty- one months" had been substituted :] [Provided further that in case the assessment year in which the income was first assessable is the assessment year commencing on the 1st day of April, 2005 or any subsequent assessment year and during the course of the proceeding for the assessment of total income, a reference under sub-section (1) of section 92CA--
(i ) was made before the 1st day of June, 2007 but an order under sub- section (3) of that section has not been made before such date; or (ii ) is made on or after the 1st day of June, 2007, the provisions of clause (a) shall, notwithstanding anything contained in the first proviso, have effect as if for the words "two years", the words "thirty-three months" had been substituted.] [emphasis supplied by us]
20. In the preceding paragraphs we held that a reference under section 92CA (1) could validly be made by the Ld. AO to the Ld. TPO if the income tax return in respect of which notice u/s 143(2) of the Act could be issued, is pending before the Ld. AO as on the date of such reference. We are of the considered opinion that making reference under section 92 CA (1) and issuing notice under section 143(2) are integral part of the exercise to assess the total income of the assessee. That being so, we find it difficult to assume that making reference under section 92CA(1) of the Act earlier to the issuance of notice under section 143(2) of the Act would make any difference in the nature of process of assessment of total income of the assessee. When law permits a reference for determination of ALP to the Ld 17 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 TPO before actual issuance of notice under section 143(2) of the Act, it does it with all the necessary consequences. Otherwise, it will render such a power vested in the Ld. AO to make a reference, a spent force and the entire exercise would remain an empty formality.
21. We, therefore, hold that a reference under section 92CA(1) could validly be made by the Ld. AO to the Ld. TPO for determination of ALP of an international transaction even before a notice under section 143(2) of the Act was issued and the requirement of law is that as on the date of such a reference the income tax return in respect of which notice u/s 143(2) of the Act could be issued, must be pending without attaining finality by afflux of time; and when once a valid reference is made u/s 92CA(1) of the Act, the extended period of thirty three months is available for completion of assessment.
22. This conclusion leads to the necessity of investigation into the fact - whether the notice u/s 143(2) of the Act could be issued in the matter as on the date of the reference made by the AO to the TPO for determination of the arm's length price of the international transactions. Coming to the admitted facts of the case on hand, we find that return of income was filed by the assessee on 28.10.2005. Time to issue notice under section 143(2) of the Act was available till 30-9-2006. However, reference u/s 92CA(1) was made by the learned AO to the learned TPO on 11.7.2006. Notice u/s 143(2) was issued on 4.9.2006. Ld.TPO passed order on 31.10.2008 and the learned AO passed the assessment order on 29.12.2008, before the expiry of the period of 33 months allowed by Second proviso to Section 153(1) of the Act.
18 ITA No. 1618/Del/2013 ITA No. 2053/Del/201323. We, therefore, reject the contention advanced on behalf of the assessee by way of additional grounds that the order dated 31.10.2008 passed by the learned TPO or the final assessment order dated 12.12.2008 passed by the learned AO or the impugned order are bad in law and void ab initio because the reference u/s 92CA(1) preceded the date of issuance of notice u/s 143(2) of the Act, and proceed to adjudicate the matter on merits.
24. In so far as merits are concerned, assessed selected five comparables, namely,
(i) ITI Ltd.;
(ii) Punjab Communications;
(iii) Himachal Futuristic Communications Ltd.
(iv) HTL Ltd.; and
(v) Shyam Telecom Ltd.
25. While enumerating the business/products description of these companies in tabular form, learned TPO observed that the taxpayer also deals with transmission, switching, satellite communication, Network products (Access and Data), Telecom Power Plant/Battery, EPBT, EPBAX, Smart cards, call charge indicators, Caller ID and ID phones and other office products. It is, therefore, clear that functional similarity of the assessee with all comparables selected is not in dispute.
26. Out of these five companies, learned TPO accepted Shyam Telecoms as a good comparable and rejected four others. As recorded by the Learned TPO, the main reason as to why the four companies should not be compared as comparables is that these companies are incurring continuous losses for facing 19 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 decline revenues for the last three years. In respect of ITI Ltd. and Himachal Futuristic Communications Ltd., the learned TPO recorded that these two companies are facing continuous losses for the last three years whereas Punjab Communications Ltd. is suffering declining revenues for the last three years. In respect of HTL Ltd., it is stated that the company was referred to BIFR to declare it as a sick company. Out of these four companies rejected by the learned TPO, assessee is challenging the exclusion of ITA Ltd., Punjab Communications and Himachal Futuristic Communications Ltd. and is not pressing for inclusion of HTL Ltd.
27. It is the argument of the learned AR that the loss making is the trend in the industry of which the assessee is also a part; as such it cannot be aground for excluding these companies on that ground. In respect of Himachal Futuristic Communications Ltd., he placed reliance on the decision reported in DECIT vs. Nortel Networks P. Ltd. for the assessment year 2005-06 where the Himachal Futuristic Communications Ltd. Is considered and was found from the particulars furnished therein that the continuous loss making of this company is factually incorrect. It was further held therein that there is no merit in stating that the companies were consistently a loss making company. Placing reliance on the decision report in Chryscapital Investment Advisors (India) Pvt. Ltd., (2015) 376 ITR 183, he argued that the entity making highly or extremely high profits or losses does not ipso facto lead to its exclusion from the list of comparables.
28. Per contra, it the argument of the learned DR that Himachal Futuristic Communications Ltd.; is excluded on the ground that in the annual report of such company it is mentioned that due to acute financial crisis, the statutory dues 20 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 could not be deposited on time and according to her, this is a good ground for exclusion of this company. In respect of Punjab Communications Ltd., learned DR argued that the annual report of this company says that this company is facing increase in competition and fall in prices of telecom equipments, increase in input cost, which is affecting the profitability of the company. Further this company is looking for diversification in areas of BPO, education programs etc. and on that ground the authorities below are justified in excluding this company. Lastly, coming to the ITI Ltd., it the submission of the learned DR that in the annual report of the company it is mentioned that the company is facing adverse market conditions during the year, the company offered VRS to 299 employees and incurred an expenditure of Rs.16 crores and all these make it clear that the company is facing extraordinary business circumstances which is resulting in company taking decision to lay off. Learned DR submitted that on the face of these facts, the authorities below are justified in rejecting these three companies and there is no reason now for considering all these companies in the set of comparables. The learned DR placed reliance Yum Restaurants, TS 253-ITAT-2011 (DEL) TP); Navisite India (TS-408-ITAT-2014(DEL) TP); and Aithent Technologies Ltd. (TS-760-ITAT-29\016 (Del) TP) in support of her contentions.
29. A reading of the financials of these companies with reference to the annual reports corroborates the statement of learned AR that either loss making or the decline in revenues is the trend in the industry. In Chryscapitals Investments Advisors (I) P.LLtd. (supra) vide para 44, the Hon'ble jurisdictional High Court held that,-
44. In light of the above findings, this Court concludes as follows:
21 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013a. The mere fact that an entity makes high/extremely high profits/losses does not, ipso facto, lead to its exclusion from the list of comparables for the purposes of determination of ALP. In such circumstances, an enquiry under Rule 10B(3) ought to be carried out, to determine as to whether the material differences between the assessee and the said entity can be eliminated. Unless such differences cannot be eliminated, the entity should be included as a comparable.
b. xxx xxx xxx
c. xxx xxx xxx
d. xxx xxx xxx
30. A reading of the TPO's order does not indicate any other reason than the incurring of continuous losses or facing decline in revenues for the last three years. Even in the decisions relied upon by the learned DR, it is stated that the loss making companies shall not be excluded simpliciter on the ground that there are declaring losses. What is to be culled out from the orders is that FAR analysis and other aspects shall be considered in juxtaposition to reach whether or not the comparables selected by the assessee are good comparables or not. In the case in hand, absolutely, there is no dispute on the functional profile of the assesse company similar to the comparables selected by them. In this context, while respectfully following the dictum of the Hon'ble jurisdictional High Court in Chryscapital Investments Advisors (I) P. Ltd. (supra), we find that, in the absence of any dissimilarity as to the functions performed, assets utilized and reasons undertaken, mere loss making or decline in revenues cannot be a ground to reject the otherwise comparable companies from the set of comparables. With this view of the matter, we are inclined to accept the contentions advances on behalf of the assessee that the three companies, namely, ITI Ltd., Punjab communications ltd. and Himachal Futuristic Communications (P) Ltd. cannot be 22 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 excluded from the list of comparables. We, therefore, direct the learned TPO to include these three comparables in the list of comparables.
ITA 2053/Del/2013
31. Revenue is challenging in this appeal, the deletion of Rs.33,11,94,214/- added by the Ld.AO on account of the waiver of sales tax deferral loan, disallowance of Rs.4.87.82,286/- on account of disallowance of the provisions for indirect expenses and Rs.1,74,06,851/- on account of disallowance of amortization of spares.
32. Coming to the additions made by the learned AO on account of waiver of sales-tax deferral loan, learned DR vehemently relied upon the assessment order and submitted that the learned CIT(A) ignored the fact that the sales-tax has been collected as revenue receipt in the hands of the assessee and the scheme availed by the assessee was for a certain period only and, therefore, it will not change the basic nature and the character of expenses from revenue to capital.
33. Per contra, it is the argument of the learned AR that the learned CIT(A) relied upon the decision of the Mumbai Bench in the case of Sulzer India Ltd. vs JCIT (2010), 134 TTJ 385 to reach the conclusion that the waiver of secured loan being capital or non trading in nature, cannot be considered as remission of trading liability to tax u/s 41(1)(a) of the Act. He submitted that this decision in the case of Sulzer India Ltd. (supra) was upheld by the Hon'ble High Court in the decision reported in CIT vs. Sulzer India Ltd., 369 ITR 717. His further submission is that this issue was considered by the Tribunal in favour of the assessee for the Asstt. Years 2004-05 and 2007-08.
23 ITA No. 1618/Del/2013 ITA No. 2053/Del/201334. As could be seen from the order of the leaned CIT(A) vide para 3.4, learned CIT(A) while placing reliance on Sulzer India Ltd., the facts of which are similar to the case on hand, held that the subsequent waiver of the secured loan being capital or non trading in nature cannot be considered as remission of trading liability to tax u/s 41(1)(a) and on that premise, he deleted the same. Further, in assessee's own case in the asstt.2004-05 decided on 30.6.2017, this aspect is considered by this Tribunal and vide para 8, this Tribunal while placing reliance on the decision of the Hon'ble Bombay High Court in CIT vs Sulzer India Ltd. (supra) negatived the contention of the revenue that the addition made on account of treatment of secured loan waiver as revenue receipt. In view of this set of facts involved in this issue, while respectfully following the judicial reasoning, we do not find any merit in the contention of the revenue to treat this secured loan waiver as revenue receipt. We accordingly dismiss this ground of appeal.
35. Next coming to the addition of Rs.48,782,286/-, Ld. DR submitted that when an amount is claimed as mere provision and unascertained liability, the learned CIT(A) ought not to have deleted the same, whereas it is the submission of the learned AR that such a provision is suo moto disallowed by the assessee, as such to avoid the double disallowance made by the AO, learned CIT(A) rightly deleted the same after verifying the record.
36. On a perusal of record, we find that the learned CIT(A) dealt with this aspect vide para 4.3.2 of his order and on verification of the record, he found that the provision for indirect tax amounting to Rs.48,78,286/- in the assessment order by the AO has lead to double disallowance, since the aforesaid amount of provision for indirect taxes has already been suo moto disallowed by the assessee 24 ITA No. 1618/Del/2013 ITA No. 2053/Del/2013 while computing the taxable income for the subject matter and in view of the same, learned CIT(A) deleted it. We do not find any illegality or irregularity in this finding of the CIT(A) inasmuch as it is not either pleaded or established before us that the addition made by the AO does not lead to double disallowance or that the assessee suo moto did not disallow the same. It is a matter of record. We, therefore, find that the learned CIT(A) is justified in deleting this amount only to controvert the double disallowance and upheld the same. This ground of appeal is also dismissed.
37. In respect of amortization of spares, learned AO took the estimated value of the life of spares at 3 years and disallowed the sum of Rs.17,406,851/- holding it to be an excessive one. However, learned CIT(A) observed that the problem had arisen due to the fact that the AO has not computed the amortization of the spares on a straight line basis and instead added the new spares of the earlier years, as a result of which, there was a difference between the working of the allowable deduction between the AO and the assessee. He further observed that as a matter of fact, the learned AO does not object to the amortization of the spare parts. On verification of record, the learned CIT(A) found that the assessee has consistently been following the straight line method of claiming amortization of spares in its accounts, as such, there is no justification in interfering in the method of calculation followed by the assessee. On this premise, the learned CIT(A) directed the learned AO to allow amortization of spares on straight line basis i.e. amortization of spares purchased during the year in three years in equal proportions which means 1/3rd in each year.
25 ITA No. 1618/Del/2013 ITA No. 2053/Del/201338. The observation of the learned CIT(A) could not be shown to be wrong. When there is consistency in the assessee following the straight line method of claiming amortization of spares in its accounts, we are also of the considered opinion that there is no justification for interfering in the method of calculation and the learned AO is not justified in making addition of the spares purchased during the current year to the opening balance of the spares of the earlier years so as to add the difference. With this view of the matter, we uphold the finding of the learned CIT(A) and dismiss this ground of appeal.
39. In the result, appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.
Order pronounced in the open court on 9th February, 2018.
sd/- sd/-
(N.K. SAINI) (K. NARSIMHA CHARY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: February, 2018
'VJ'
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
By order
Asstt. Registrar