Income Tax Appellate Tribunal - Delhi
Coca Cola India Inc.-India Branch ... vs Ddit, New Delhi on 12 January, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "B", NEW DELHI
BEFORE SH. L. P. SAHU, ACCOUNTANT MEMBER
AND
SMT. BEENA A. PILLAI, JUDICIAL MEMBER
I.T.A. Nos. 4487,4488 & 4489/Del/2011
(Assessment Years 1998-99, 1999-00 & 2000-01)
Coca Cola India Inc.- India DCIT
Branch Officer; VS. Central Circle-3(1),
Enkay Tower, Udog Vihar, International Taxation Drum
New Delhi Shaped Building, I. P.Estate
GIR/PAN : AAACC2638K New Delhi.
(Appellant) (Respondent)
AND
ITA No. 1345/Del/2012
(Assessment Year 2001-02)
DCIT Coca Cola India Inc.-
Central Circle-3(1), VS. India Branch Officer;
International Taxation Drum Enkay Tower, Udog
Shaped Building, Vihar, New Delhi
I. P. Estate GIR/PAN : AAACC2638K
New Delhi.
(Appellant) (Respondent)
CO no. 182/Del/2012
(In ITA No. 1345/Del/2012)
(Assessment Year 2001-02)
Coca Cola India Inc.- India DCIT
Branch Officer; VS. Central Circle-3(1),
Enkay Tower, Udog Vihar, International Taxation
New Delhi Drum Shaped Building,
GIR/PAN : AAACC2638K I. P. Estate
New Delhi.
(Appellant) (Respondent)
ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013
Assessee by : Sh. R. Murlidhar, Adv.
Revenue by : Sh. Anil Kumar Sharma, Sr. DR.
Date of hearing : 03.01.2017
Date of Pronouncement: 12.01.2017
ORDER
PER BENCH:
1. The present appeals and cross objection has been filed by assessee as well as Department against common order dated 4.07.2011 passed by Ld. CIT (A) 11 for assessment years 1998-99, 1999-00, 2000-01 and 2001-02. The legal issue involved in assessee's appeals for assessment years under consideration is in respect of validity of reopening of assessment, being not in accordance with law and without proper jurisdiction. At the outset, it has been submitted by Ld. Counsel for the assessee that reopening for assessment year 1998-99 and 1999-2000 have been initiated beyond 4 years and for assessment year 2000-01 and 2001-02, reopening has been initiated on identical set of reasons recorded by the Assessing Officer which is within 4 years for sake of convenience the reasons recorded by the Assessing Officer, which is common to all the assessment years under consideration, for reopening of the is reproduced herein below:
The assessee has submitted its return on 30.11.1998 declaring income of Rs. 6,47,66,370/-. The assessee revised its return on 30.03.2000 declaring income of Rs. 6,28,01,943/-. The assessment was completed u/s 143(3) on 22.03.2001 by making additions as under:-
On substantive:-Page 2 of 17
ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013
(i) Addition of Rs. 63,68,36,936/- by applying provisions u/s 44D of the I. T. Act, 1961.
(ii) On protection basis Rs. 8,74,02,757/-
Coca Cola Inc., a corporation organized and existing under the laws of the state of Delaware, USA has established a Branch Office in India (CCI-India Branch). The legal status of CCI- India Branch is that of a foreign company (Non resident). It provides services in India to the companies of Coca Cola Group. The Coca Cola Group in India is engaged in manufacturing and sale of soft drinks. CCI-India Branch provides consultancy services to the Group companies, i.e its Indian Companies (Resident) in the field of manufacturing, marketing and sale of products of the Coca Cola Company. The consultancy services provided by the assessee are broadly in the nature of:-
• Accounting, building and statutory compliance; • Provision of technical know-how and assistance in technical matters;
• Marketing support;
• Business development and restructuring; • Compliance with international standards; and • Distribution activities.
;
In return for advisory arid support services rendered, the assessee receives consultancy fee at a mark up of 5% of the cost incurred. The 5% mark up is calculated on costs such as salaries and allowances, moving and relocation expenses and service charges for use of assets.
The assessee assumes normal business risks assumed by any service provider, e.g., • It is responsible for contracted risks in respect of persons engaged for provision of services to its Indian companies. • It is responsible for any deficiency in foe services provided by it.Page 3 of 17
ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 • It is also responsible for meeting various legal and regulatory obligations, e.g., deduction of tax at source on the payment made by it to Contractors, Professionals and Landlord for lease of business premises etc. • It receives the consultancy fee only after the expenditure has been incurred by it and there is always risk, however remote, of non receipt of consultancy free from its Indian Companies due to some As claimed by the assessee company that the assessee's role was merely limited to facilitating the payments to third party vendors is not correct The following point may be kept in mind in this regard:
a. The so called third party vendors raised the invoices upon the CCI (assessee) and not upon the Indian Companies.
b. Since the invoices were raised upon CCI, any contractual e.g., deduction of TDS, making timely payments etc. were borne by fee CCI.
c. The payment was first made by CCI, and then realized from its Indian Companies i.e., CCI's substantial funds were deployed for making such payments. This fact is evident from the fact mat the closing balance of sundry debtors was Rs.71.89 crores as against the total consultancy fee of Rs.63.68 crores.
A careful analysis of the balance-sheet of the assessee reveals that the opening and closing balance of sundry debtors for the year under consideration is Rs.34.58 crores and Rs.71.89 crores, respectively, as against the total consultancy fee of Rs. 63.68 crores during the year.
The above facts show; that in its transactions with the Indian companies profit is suppressed. This facts covered under the provisions of Section 92 of the I.T. Act.Page 4 of 17
ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 "Section 92 provides that:-
Where a business is carried on between a resident and a nonresident and it appears to the Assessing Officer that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the Assessing Officer shall determine the amount of profits which may reasonably be deemed to have been derived there from and include such amount in the total income of the Resident."
In this case, the assesses is using unusually and disproportionately large amount of working capital, i.e. the working capital deployed by the assessee is usually high in proportion of its total revenues. The investment in the net working capital (i.e. inventories + debtors - creditors) requires funds. An uncontrolled limited risk routine service provider will expect to earn a market rate of return on that required capital independent of the services it provides. However, the amount of capital required to support these services varies greatly as the level of inventories, debtors and creditors measured as a percent of sales varies.
The view is also confirmed by the Transfer Pricing Officer-I, New Delhi Vide his order dated 07.02.2005 u/s 92CA(3) for A.Y. 2002-03, exacts of relevant portion of this order are reproduced below :-
"In order to account for differences in the net working capital requirement of the tested party (assesses) and the comparables, the operating profit of each of the comparable companies is required to be increased to reflect this functional difference. The adjustment in the operating profit is calculated &s per the following steps:-
First, determining the different between the tested party's (assessee) ratio of average net working capital to average total Page 5 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 sales and the corresponding ratio of average net working capital to average total sales of each comparable. This difference represents the "excess" or "shortage" of net working capital used by the tested party, relative to comparable companies.
Next, discounting the above difference by an interest rate to derive a figure representing the implicit interest benefit/expense borne by comparable, due to different net working capital requirement. The Prime Lending Rate (PLR) for the financial year 2001-02 for major Banks was around 11.00 - 12.00% (source; CMIE Monthly review of Indian Economy, May, 2002. Therefore, on a conservative basis a PLR of 11% has been considered for carrying out the working capital adjustment. The formula of computing the adjustment to the operating profits of comparables companies is given below:-
Adjustment to profit of = PLR x (Net Working Capital of Comparable companies Comparable Companies -(Sales of Comparable Companies 360) x Holding in days of tested party) • The operating profits of the comparable companies are increased/decreased by the amount of adjustment computed above and finally Operating Profit/Total Cost margin of the comparable companies is computed on the basis of such adjusted operating profit This adjustment takes care into account the economic cost of owning net-working capital and the effect -of such costs on the- operating income. The adjustment derives the operating profit after eliminating the effect of difference in net working capital of comparables and the tested party.
Accordingly, operating profit over the total cost margin of the comparable companies was adjusted to take into account the difference in the working capital. The adjusted operating margins of Page 6 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 comparable companies as a result of above adjustment are given in the table below:-
Operating Profit/
Total Operating costs
S.No Comparables 2000 2001 2000-01
1. Kitco Ltd. 17.67 14.45% 15:91%
2. Gilcon Project Services Ltd. 19.27% 11.02% 14.72%
3. NIS Sparta Limited 21.40% 22.90% 21.88%
4. Water and Power 23.82% 32.22% 28.20%
Consultancy services :
5. Vimta Laboratories Ltd,. 24.44% 32.02% 28.95%
Average 7.67% 9,07% 21.83%
Detailed calculation of working capital of comparables and the assessee and working capital adjustment to operating, profits of the comparables is given in Annexure-I. The formula used for carrying out working capital adjustment on the operating profits of comparables is given in para 11.2.
In the manner discussed above, the arithmetic mean of weighted average of operating profit over the total cost margins of the comparables for the financial year 1999-2000 and 2000-01 works out to 21.83%. The arm,s length price of the international transactions entered into by the assessee 'with its various AEs is worked out as under:
Total cost of provision of services by the assessee:
(as per annexure -6 of the TP Report) Rs. 7,41,202, 452 Margin @ 21. 83% of the above: Rs. 1,61,804,495 Arms length price to be charged from the AEs : Rs. 903,006,947 In the manner discussed above, the arm 's length price of the international transactions entered into by the assessee with its AEs Page 7 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 is determined at Rs. 903,006,947/- in place of Rs. 76,32,67,158/- this figure does not tally with the figure provided in para 3 above because it does not include the amount service tax). Accordingly, an adjustment of Rs. 139i739f789/- is to be made to the income of the assessee, being the difference between the aim's length price and the price charged by the assessee from its AEs for rendering services to them, i.e., the Assessing Officer shall enhance the income of the assessee by an amount of Rs. 139, 739, 789/- while computing the total income of the assessee."
In view of above, I have reason to believe that income relevant to AY 1998-99 has escaped assessment which is likely to amount to more than one lac rupees. Necessary approved /sanction for issue of notice u/s 148 for A.Y. 1998-99 may kindly be granted.
2. Ld. Counsel for the assessee further submitted that the Assessing Officer has mentioned an office note at the end of the assessment order which is reproduced herein below:
1) In this case, no addition is being made on the basis of transfer pricing adjustments similar to those made during the proceedings for A.Y 2002-03. This is because the provisions of Chapter-X (section 92 to 92F) came into existence only from 1-4-2002 and therefore are not applicable in the present assessment year.
Further, section 92, as it stood during the period applicable for the present assessment year, did not allow any adjustments to be made in the hands of a non-resident person. Therefore, no adjustments are being made on this ground.
Deputy Director of Income-tax Intl. Tax, Cir. 3(2), New Delhi
3. We shall first deal with assessment years 1998-99 and 1999-00 as these have been reopened beyond 4 years.
Page 8 of 17ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013
4. Ld. Counsel for the assessee has submitted that the reopening in these assessment years has been made beyond the period of 4 years. He submitted that the original assessment was completed under section 143 (3) of the Act on 22.03.2001 & 28.03.2002 for A. Y. 1998-99 & 1999-00 respectively, whereas the notice u/s 148 has been issued on 30.03.2009 for these A. Y. Ld. Counsel submitted that notice u/s 148 has been issued on expiry of 4 years from the end of the relevant assessment years. He further submitted that there is no allegation in the reasons recorded regarding any failure to disclose fully and truly all material facts, necessary for assessment in its returns of income. It has been submitted that in the absence of such an allegation the Proviso to section 147 of the Act would be attracted, as notice under section 148 issued is after expiry of 4 years. In support of his deposition the Ld. Counsel for the assessee placed reliance upon various judicial proceedings as under:
• Haryana Acrylic Manufacturing Company vs. CIT and Anr. Reported in 308 ITR 38 (Del) • Hindustan Lever vs. R.B.Wadkar reported in 268 ITR 332 (BOM) • Coca-Cola Export Corporation VS. ITO reported in 70 ITD 498 (Del) • Wel Intertrade (P) Ltd. vs. ITO reported in 13 DTR 204 (Del) • R. T. Paperboard Ltd vs. ACIT in ITA No. 4868/Del/2013 for assessment year 2003-04.
5. Ld. Counsel for the assessee submitted that the Assessing Officer on a wrong assumption of facts has proceeded to record the reasons and reopened assessments for these years. He Page 9 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 submitted that assessing officer by way of a common order dated 25.2.2009, dismissed the objections raised by the assessee against the reopening of the assessments. He further submitted that there was no fresh material or information, based on which the Assessing Officer came to the conclusion that income has escaped assessment and that the material based on which reopening was made already on record. He placed his reliance upon the decisions of Hon'ble Supreme Court in the case of CIT versus Kelvinator India Ltd reported in 320 ITR 561.
6. On the contrary the Ld. DR relied upon the orders passed by the authorities below.
7. We have perused the records placed before us in the light of the arguments advanced by both the parties and the decisions relied upon by Ld. Counsel for the assessee. Undoubtedly, it is observed that the Assessing Officer has proceeded to reopen the assessments based on materials available on record, without there being any allegation in the reasons recorded, regarding any failure on behalf of the assessee to fully and truly disclose all/any material facts necessary for assessments in the return of income. We agree with the contention advanced by Ld. Counsel for the assessee that under such circumstances proviso to section 147 of the Act is attracted and the notice issued under section 148 of the Act on expiry of 4 years is bad in law. We draw our support from the decision passed by Hon'ble Supreme Court in the case of CIT versus Kelvinator India Ltd (supra) for the view that, ".... The reasons to believe on which a reassessment can be validly order should necessarily be based on tangible Page 10 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 materials which an AO comes by after the assessment. Necessarily such material with outside the record. Straying from this clear path would be sliding down the slippery slope into a quagmire of free appreciation of existing material and even the process of reasoning which is impermissible as it is forbidden."
8. The case of the assessee before further strengthens from the office note that has been reproduced by the assessing officer towards the end of the assessment order (which has been reproduced hereinabove). It is observed that the assessing officer has reopened the assessment under the assumption that provisions of chapter X, being Section 92 was applicable to the case of the assessee. However, during assessment proceedings he eventually realized its non applicability and recorded that said section under Chapter X, will not be applicable to assessee for all the assessment years concerned. It is also observed that the Assessing Officer has dropped the ground which formed the basis of reopening of the assessment and has not made any addition in that respect.
9. Respectfully following the prepositions laid down by Hon'ble Supreme Court in case of CIT vs Kalvinator decisions mentioned hereinabove and on the basis of the discussions above, we are inclined to allow the legal issue raised by the assessee, being the fundamental objection, raised exercise of regarding the jurisdiction by Ld. AO. In the result, as the notice issued by the Assessing Officer itself has been held to be without jurisdiction, the reassessment proceedings made subsequent to that is Page 11 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 quashed and set-aside. We, therefore, do not find any necessity to dwell upon the merits of the case.
10. Appeal filed by the assessee for assessment years 1998-99 and 1999-2000 is allowed.
11. As regards assessment year 2000-01 and 2001-02, Ld. Counsel for the assessee submits that the reopening has been initiated within 4 years. However, it is observed that the reasons recorded for reopening of these assessment years are identical to those recorded for the assessment years 1998-99 and 1999-00. Ld. Counsel for the assessee rehydrated the similar arguments placed and recorded hereinabove for the years under consideration.
12. On the contrary, Ld. DR relied upon the authorities below.
We have perused the records placed before us in the light of the submissions advanced by both the sides. Undisputedly Ld. AO did not make any addition on the issue, which formed the basis for reopening in the reassessment order. Ld. Counsel for the assessee has relied upon the decision of Hon'ble Delhi High Court in the case of Ranbaxy laboratories Ltd versus CIT reported in 336 ITR 136 Hon'ble court has held as under:
"18. We ore in complete agreement with the reasoning of the Division Bench of Bombay High Court in the case of V. Jaganmohan Rao (supra). We may also note that the heading of section 147 is "income escaping assessment"
and that of szection 148 "issue of notice where income escaped assessment". Section 148 is supplementary and Page 12 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 complimentary to section 147. Sub-section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess, reassess or recomputed escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer that the income chargeable to tax has escaped assessment. All these conditions assessment order required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Explanation (3) if during the course of these proceedings the Assessing Officer comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction u/s 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice u/s 148.
Page 13 of 17ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013
13. We have heard both the parties and gone through the facts of the case. Indisputably, the AO did not make any addition on the issue, which formed the basis for reopening the assessment, in his reassessment order. In these circumstances, the Id. CIT(A) relied upon the decision of Hon'ble jurisdictional High Court in Ranbaxy Laboratories Ltd.(supra) and quashed the reassessment order. He also placed reliance the decisions Hon'ble Bombay High Court in CIT versus Jet Airways India Limited, (2011) 331 ITR 236 (Bom.) held as under:
"................Section 147 has this effect that the Assessing Officer has to assess or reassess the income ("such income") which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, afresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee."
14. In the present case, as is noted above, the Assessing Officer was satisfied with the justifications given by the assessee regarding non application of Sec. 92. He consequently Page 14 of 17 ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013 has not made any addition u/s 92 as it was not applicable to assessee during the period under consideration and proceeded to make addition on other issues not mentioned in reason recorded.
15. Before us revenue has not brought on record any contrary decision or any material, so as to enable us to take a different view in these assessment years. We, therefore, set aside and quashed the notice u/s 148 and assessment order for A. Y. 1999-2000 and 2000-01.
Accordingly, we allow the appeal filed by the assessee for assessment year 2000-01 and dismiss appeal by the revenue for assessment years 2001-02.
CO 182/del/2012
16. Ground No. 1 of cross objection has been raised by the assessee against the finding of Ld. CIT (A) that assessee was not entitled to challenge the validity of the reassessment proceedings pursuant to the Hon'ble Supreme Court decision in the assessee's own case.
17. Ld. counsel for the assessee submitted that the order dated 25.10.2010 passed by Hon'ble Supreme Court, which has been placed at page 134 of the paper book has, kept open all issues for assessee to be agitated before the authorities below. He submitted that from the order, it cannot be imputed that the assessee could challenge the validity of jurisdiction of Ld. AO. He thus, seemed up that to that effect the opinion of Ld.CIT (A) need to be rectified.
Page 15 of 17ITA no. 4487, 4488 & 4489/Del/2011 and CO no. 1345/Del/2013
18. Ld. DR relied upon the order passed by the authorities below.
19. We have perused the records placed before us in the light of the submissions advanced by both the sides and the order passed by Hon'ble Supreme Court dated 25.10.2010.
20. On perusal of the order passed by Hon'ble Supreme Court, we agree with the view advanced by Ld. Counsel for assessee different view opined by Ld. CIT(A) which was not at all the directions of Hon'ble Supreme Court. We, therefore, allow this ground raised by assessee in its cross objection. Rest of the grounds raised by the assessee are in support of the order passed by Ld. CIT(A) which do not require any interference as we have set aside and quashed the notice u/s 148 issued by Ld. AO as well as the assessment order passed in the above paras.
21. In view of the above discussions we allow the appeals filed by assessee on legal issued raised for all the assessment years and hold the notice issued for reopening of assessment being without jurisdiction thereby setting aside and quashing the reassessment order passed subsequently, dismiss the appeal raised by the Department for assessment year 2001-02 and allow the CO filed by assessee.
Order pronounced in the open court on 12th January, 2017.
Sd/- Sd/-
(L. P.SAHU) (BEENA A. PILLAI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date: 12.01.2017
@m!t
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