Fujitsu Consulting India P.Ltd, New Delhi V. ACIT, Circle-9(2), New Delhi

ITA 140/DEL/2019

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 4794 (ITAT-DELHI)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-08-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 09-01-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Transfer pricing; International transaction; Avoidance of tax
• Section: 143(3); 234B; 28; 92

Judgement Text

ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBE R AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBE R ITA NO. 140/DEL/2019 ASSESSMENT YEAR: 2014-15 FUJITSU CONSULTING INDIA P. LTD., N-63, LAJPAT NAGAR-IV, NEW DELHI- 110024 (PAN: AAACH8894G) VS ACIT, CIRCLE-9(2), NEW DELHI. APPELLANT RESPONDENT ASSESSEE BY: S/SHRI NAGESWAR RAO, PURUSHOTTAM ANAND, ADVOCATES DEPARTMENT BY: SHRI SANJAY I. BARA, C. I.T. DR DATE OF HEARING: 15.05.2019 DATE OF PRONOUNCEMENT: 09.08.2019 O R D E R PER SUDHANSHU SRIVASTAVA, JM: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AG AINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (AP PEALS)-44, NEW DELHI {CIT (A)} VIDE ORDER DATED 31.10.2018 PER TAINING TO ASSESSMENT YEAR 2014-15. 2.0 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS ENGAGED IN THE BUSINESS OF PROVIDING COMPUTER SOFTW ARE CONSULTING, SYSTEM DESIGN, ENTERPRISE APPLICATION A ND COMPUTER PROGRAMMING SERVICES. FUJITSU INDIA (ASSESSEE) IS O NE OF THE GLOBAL DELIVERY CENTRES OF THE FUJITSU GROUP WHICH RENDERS SOFTWARE ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 2 CONSULTING AND BACK-OFFICE SUPPORT SERVICES TO ITS ASSOCIATED ENTERPRISES (AE). FUJITSU INDIA RENDERS ITS SERVICE S TO ITS ASSOCIATED ENTERPRISES USING ESTIMATED COST PLUS PR ICING METHODOLOGY IN ACCORDANCE WITH THE INTERCOMPANY AGR EEMENT AND GLOBAL TRADING MODEL (GTM) OF THE FUJITSU GROUP. TH E ASSESSEE HAD ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) IN ORDER TO JUSTIFY THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTIONS. 2.1 THE RETURN OF INCOME WAS FILED DECLARING INCOM E OF RS. 74,37,01,710/-. SUBSEQUENTLY, THE RETURN OF INCOME WAS REVISED TO AN INCOME OF RS. 75,04,24,590/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND DURING THE COURSE OF ASSE SSMENT PROCEEDINGS IT WAS NOTICED THAT THE ASSESSEE HAD IS SUED CREDIT NOTES TO THE VALUE OF RS. 39 CRORES TO ITS ASSOCIAT ED ENTERPRISES. 2.2 AS PER THE ASSESSEE, DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD RAISED INVOICES ON ITS ASSOCIATED ENTERPRISES IN TERMS OF THE INTERCOMPANY AGREEMENTS AND THE GTM OF THE GROUP. BASED ON THE TURNOVER OF THE PREC EDING FINANCIAL YEARS I.E. IS RS. 259 CRORES FOR FINANCI AL YEAR 201011, RS. 356 CRORES FOR FINANCIAL YEAR 201112 AND RS. 4 23 CRORES FOR FINANCIAL YEAR 201213, THE ASSESSEE COMPANY HAD DE TERMINED ITS ESTIMATED COST FOR THE YEAR UNDER CONSIDERATION I.E . FINANCIAL YEAR ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 3 201314 (ASSESSMENT YEAR 201415) AND AT SUCH COST APPLIED THE MARK-UP PROVIDED IN THE GLOBAL TRADING MODEL. AS PE R THE ASSESSEE, DUE TO LOWER-COST BEING INCURRED BY THE A SSESSEE AND GAIN ARISING ON ACCOUNT OF FOREIGN EXCHANGE, THE RE VENUE DUE TO THE ASSESSEE AS PER THE AGREEMENT WAS LOWER THAN TH E REVENUE WHICH THE ASSESSEE HAD BILLED TO THE ASSOCIATED ENT ERPRISES. ACCORDINGLY, CREDIT NOTES TO THE TUNE OF RS. 39 CRO RES WERE ISSUED BY THE ASSESSEE TO THE AES. ON BEING ASKED TO SHOW CAUSE BY THE ASSESSING OFFICER (AO), IT WAS SUBMITTED BY THE ASS ESSEE THAT THE ASSESSEE HAD ISSUED THESE CREDIT NOTES OF RS. 39 CR ORES TO ITS ASSOCIATED ENTERPRISES WHICH WAS DULY REFLECTED IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE IN THE SERVICE INCOME LEDG ER AND IN THE LEDGER ACCOUNTS OF THE FOUR ASSOCIATED ENTERPRISES TO WHICH THESE CREDIT NOTES WERE ISSUED. IT WAS ALSO SUBMITTED THA T SERVICE CHARGES RECEIVED FROM THE ASSOCIATED ENTERPRISES FR OM TIME TO TIME OR ANY CREDIT NOTE RETURNED OUT OF SUCH RECEIP TS RELATED TO THE INTERNATIONAL TRANSACTION OF PROVISION OF SOFTW ARE CONSULTING AND SUPPORT SERVICES WHICH WERE SHOWN ON THAT BASIS IN FORM 3CEB. IT WAS ALSO SUBMITTED THAT EVEN AFTER GIVING THESE CREDIT NOTES OF RS. 39 CRORES TO THE ASSOCIATED ENTERPRISE S, THE ASSESSEE HAD STILL EARNED A PROFIT MARGIN OF 20.64% ON ITS C OSTS WHICH WAS ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 4 MORE THAN THE MARGIN EARNED BY THE COMPARABLE COMPA NIES I.E. 11.31% AS SHOWN IN THE TRANSFER PRICING (TP) DOCUME NTATION. IT WAS ALSO THE ASSESSEES CLAIM THAT THE SAFE HARBOUR MARGIN PRESCRIBED UNDER RULE 10TD OF THE INCOME TAX RULES, 1962 (HEREINAFTER CALLED THE RULES) FOR SOFTWARE DEVEL OPMENT COMPANIES WAS 20% ON COST AND, THEREFORE, THE MARGI N EARNED BY THE ASSESSEE WAS MORE THAN THE MARGIN PRESCRIBED UN DER THE SAFE HARBOUR RULES AND, THUS, THERE WAS NO EROSION OF TA X BASE IN INDIA BECAUSE OF ISSUE OF THESE CREDIT NOTES. 2.3 IT WAS ALSO SUBMITTED BEFORE THE ASSESSING OFF ICER THAT THE OBJECTIVE BEHIND THE ISSUE OF THESE CREDIT NOTE S TO THE ASSOCIATED ENTERPRISES WAS THAT THE ASSOCIATED ENTE RPRISES WERE CHARGED IN ACCORDANCE WITH THE CONTRACTS WHILE ENSU RING AT THE SAME TIME THAT THE ARMS LENGTH INCOME WAS RETAINED IN INDIA AND IN LINE WITH THE REQUIREMENT OF SECTION 92 (1) OF T HE INCOME TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) WHICH MAND ATED THAT INCOME ARISING FROM INTERNATIONAL TRANSACTION WAS T O BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. IT WAS ALSO SUBMITTED THAT SECTION 92 (1) OF THE ACT DID NOT PROHIBIT THE ASSE SSEE ON ISSUING A CREDIT NOTE OR GIVING DISCOUNT TO A CUSTOMER AS LON G AS THE RESULTING PRICE CHARGED WAS AT ARMS LENGTH. ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 5 2.4 HOWEVER, THE ASSESSING OFFICER REACHED THE CON CLUSION THAT THE REAL PURPOSE OF ISSUANCE OF THE SAID CREDI T NOTES WAS TO MAINTAIN A MINIMUM LEVEL OF OPERATING PROFIT WHICH WAS ACCEPTABLE TO THE INDIAN TAX AUTHORITIES AND REPATR IATE THE BALANCE TO ITS ASSOCIATED ENTERPRISES. THE AMOUNT O F RS. 39 CRORES WAS ASCERTAINED BY THE ASSESSING OFFICER TO BE THE PROFITS ACCRUED TO THE ASSESSEE UNDER SECTION 5 (1) (B) OF THE ACT WHICH HAD BEEN DIVERTED WITH A VIEW TO EVADE TAXES IN INDIA. ACCOR DINGLY, THE AO MADE AN UPWARD ADJUSTMENT ON ACCOUNT OF CREDIT NOTE S ISSUED TO THE GROUP COMPANIES CONSIDERING THEM AS UNDISCLOSED INCOME AND COMPLETED THE INCOME TAX ASSESSMENT AT AN INCOM E OF RS. 1,14,04,24,590/-. 2.5 AGGRIEVED WITH THE ORDER OF ASSESSMENT, THE AS SESSEE FILED APPEAL BEFORE THE LD. FIRST APPELLATE AUTHORI TY. HOWEVER, THE LD. CIT (APPEALS) DISMISSED THE ASSESSEES APPEAL. 2.6 NOW THE ASSESSEE IS BEFORE THIS TRIBUNAL (ITAT ) AND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. COMMISSIONER OF INCOME TAX (APPEAL) (CIT(A) V IDE IMPUGNED ORDER DATED 31.10.2018 GROSSLY ERRED IN UPHOLDING ADDITION MADE BY LD. ASSESSING OFFICER ( AO) TO INCOME RETURNED BY ASSESSEE COMPANY VIDE ORDER DATED 30.12.2016 PASSED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE ACT). ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 6 EACH OF THE GROUND IS REFERRED TO SEPARATELY, WHICH MAY KINDLY BE CONSIDERED INDEPENDENT OF EACH OTHER AND WITHOUT PREJUDICE TO EACH OTHER. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, 1. LD. AO & LD. CIT(A) HAS ERRED IN MAKING AN ADJUSTMENT OF INR 390,000,000 TO THE TOTAL INCOME O F THE APPELLANT BY ERRONEOUSLY CONSIDERING THE CREDIT NOT ES ISSUED TO ITS ASSOCIATED ENTERPRISES (AE) AS INCO ME OF THE APPELLANT AS PER PROVISIONS OF SECTION 5(1 )(B) OF THE ACT AND THEREBY MAKING AN ADJUSTMENT ON ACCOUNT OF UNDISCLOSED INCOME UNDER SECTION 28 OF THE ACT. 2. LD. AO & LD. CIT(A) GROSSLY ERRED IN NOT APPRECIATING THAT ADJUSTMENT OF CONSIDERATION RELAT ING TO INTERNATIONAL TRANSACTION OF PROVISION OF SERVICE I S FULLY IN CONSONANCE WITH AGREEMENT BETWEEN PARTIES AS ALSO T HE PROVISIONS OF LAW AND FURTHER ERRED IN PRESUMING TH AT CONTRACTUAL ADJUSTMENT OF TENTATIVE CONSIDERATION F OR SERVICES AS AN ADJUSTMENT TO ARMS LENGTH PRICE. 3. LD. AO & LD. CIT(A) FAILED TO APPRECIATE FACTS OF THE CASE IN CORRECT PERSPECTIVE AND FURTHER MISINTERPRE TED THE PROVISIONS OF CHAPTER X LEADING TO UNLAWFUL AND INC ORRECT ADJUSTMENT TO RETURNED INCOME. 4. LD. ASSESSING OFFICER & LD. CIT(A) PROCEEDED ON INCORRECT PRESUMPTIONS TO MAKE INCORRECT AND SERIOU S ALLEGATION THAT SUCH ADJUSTMENT WAS FOR SOME OTHER PURPOSES AND IN THE PROCESS FAILED TO APPRECIATE TH AT SUCH CORRECTION OF CONSIDERATION FOR SERVICES WAS NECESSITATED AS PER AGREEMENT, BEFORE BENCHMARKING THE SAME AS PER PROVISIONS OF CHAPTER X. 5. LD. A0 & LD. CIT(A) HAS ERRED IN FAILING TO AP PRECIATE THAT CONCEPT OF REAL INCOME APPLIES TO BOTH NORMAL PROVISIONS OF THE ACT AS WELL AS CHAPTER X. 6. LD AO AND LD. CIT(A) HAS ERRED IN MAKING A TRA NSFER PRICING ADJUSTMENT WITHOUT MAKING A REFERENCE TO TH E ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 7 LEARNED TRANSFER PRICING OFFICER AND IN DOING SO HA S FAILED TO FOLLOW CBDT INSTRUCTION NO. 3/2016. ACCORDINGLY, THE ORDER PASSED BY THE LEARNED AO IS BAD IN LAW AND SHOULD BE QUASHED. 7. LD.AO/ LD. CIT (A) HAVE ERRED IN FAILING TO AP PRECIATE THAT ADJUSTMENT TO CONSIDERATION FOR SERVICE THROUG H ISSUANCE OF CREDIT NOTES IS PART OF THE PROVISION O F SOFTWARE DEVELOPMENT SERVICES TRANSACTION AND NOT A SEPARATE INTERNATIONAL TRANSACTION. 8. LD. AO/ LD.CIT(A) HAS FAILED TO APPRECIATE THE FACT THAT EVEN AFTER THE CREDIT NOTES THE PROFIT MARGIN BEING EARNED BY THE APPELLANT IS MORE THAN THE ARMS LENG TH MARGIN OF COMPARABLE COMPANIES AND THE INTER-COMPAN Y TRANSACTION MEETS THE ARMS LENGTH TEST. 9. WITHOUT PREJUDICE TO ABOVE, LD. AO AND LD. CIT (A) ERRED IN FAILING TO APPRECIATE THAT SUCH ADJUSTMENT OF TENTATIVE CONSIDERATION FOR SERVICES ON THE BASIS O F ACTUAL COSTS IS PERMISSIBLE IN LAW AND LD. AOS ADDITION T O RETURNED INCOME BASED ON INCORRECT PRESUMPTIONS IS IMPERMISSIBLE AND UNLAWFUL. 10. LD. CIT (A) HAS ERRED IN PASSING AN ORDER WIT HOUT CONSIDERING THE DETAILED OBJECTIONS AND EVIDENCES P LACED ON RECORD BY THE APPELLANT. 11. LD. AO HAS GROSSLY ERRED BOTH IN FACTS AND IN LAW IN PROPOSING TO CHARGE INTEREST UNDER SECTION 234A AND 234B OF THE ACT. 12. LD. AO HAS ERRED, IN FACTS AND IN LAW, BY INI TIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1)(C) OF ACT WITHOUT RECORDING ANY ADEQUATE REASONS FOR SUCH INITIATION. THE APPELLANT CRAVES LEAVE TO ADD, AMEND, VARY, OMI T OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL A T ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL . ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 8 THE APPELLANT PRAYS FOR APPROPRIATE RELIEF BASED ON THE SAID GROUNDS OF APPEAL AND THE FACTS AND CIRCUMSTAN CES OF THE CASE. 3.0 THE LD. AUTHORISED REPRESENTATIVE (AR) SUBMITTED THAT THE LOWER AUTHORITIES HAD ERRED IN N OT APPRECIATING THAT EVEN AFTER THE ISSUANCE OF THE SA ID CREDIT NOTES TO THE ASSOCIATED ENTERPRISES THE ASSESSEE HA D STILL EARNED A PROFIT MARGIN OF 20.64% ON ITS COSTS WHICH WAS MORE THAN THE MARGIN EARNED BY THE COMPARABLE COMPA NIES WHICH WAS 11.08% AS SHOWN IN THE TRANSFER PRICING DOCUMENTATION. OUR ATTENTION WAS DRAWN TO THE TRANS FER PRICING DOCUMENTATION PLACE IN THE PAPER BOOK TO BU TTRESS THIS POINT. IT WAS FURTHER SUBMITTED THAT THE SAFE HARBOUR MARGIN PRESCRIBED UNDER RULE 10TD OF THE RULES FOR SOFTWARE DEVELOPMENT COMPANIES WAS 20% ON COSTS AND , THEREFORE, THE MARGIN EARNED BY THE ASSESSEE WAS MO RE EVEN THAN THE MARGIN PRESCRIBED UNDER THE SAFE HARB OUR RULES AND THUS THERE WAS NO EVASION OF TAX IN INDIA BECAUSE OF ISSUANCE OF THESE CREDIT NOTES. 3.1 IT WAS FURTHER SUBMITTED THAT THE LOWER AUTHORITIES HAD FAILED TO APPRECIATE THE FACT THAT THE ONLY OBJECTIVE BEHIND THE ISSUANCE OF THE SAID CREDIT NO TES TO THE ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 9 ASSOCIATED ENTERPRISES WAS THAT THE ASSOCIATED ENTE RPRISES WERE CHARGED IN ACCORDANCE WITH THE CONTRACTS WHILE ENSURING AT THE SAME TIME THAT THE ARMS LENGTH INCO ME WAS RETAINED IN INDIA AND WAS IN LINE WITH THE REQUIREM ENT OF SECTION 92 (1) OF THE ACT WHICH MANDATED THAT INCOM E ARISING FROM INTERNATIONAL TRANSACTION WAS TO BE CO MPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. IT WAS ARGU ED THAT SECTION 92 (1) OF THE ACT DID NOT PROHIBIT THE ASSE SSEE ON GIVING A CREDIT NOTE OR DISCOUNT TO A CUSTOMER AS L ONG AS THE RESULTANT PRICE CHARGED WAS AT ARMS LENGTH. 3.2 THE LD. AUTHORISED REPRESENTATIVE ALSO DREW OU R ATTENTION TO INSTRUCTION NO. 03/2016 DATED 10/03/20 16 REGARDING GUIDELINES FOR IMPLEMENTATION OF TRANSFER PRICING PROVISIONS WHICH HAS BEEN ISSUED BY THE CENTRAL BOA RD OF DIRECT TAXES (CBDT) AND SUBMITTED THAT THE GUIDELIN ES CLEARLY MANDATE THAT WHEN CASES ARE SELECTED FOR SC RUTINY ON THE BASIS OF TRANSFER PRICING RISK PARAMETER, TH EN THE CASE HAS TO BE REFERRED TO THE TRANSFER PRICING OFF ICER (TPO). HE DREW OUR ATTENTION TO PARA 3.7 OF THE SAID CBDT INSTRUCTION AND SUBMITTED THAT SINCE THE IMPUGNED PROCEEDINGS PERTAINED TO ADJUSTMENT MADE WITH RESPE CT TO ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 10 INTRA-GROUP TRANSACTIONS ENTERED INTO BETWEEN TWO G ROUP ENTITIES, IT WAS VERY MUCH EVIDENT THAT THE CASE HA D TRANSFER PRICING IMPLICATIONS AND SINCE NO REFERENC E HAD BEEN MADE TO THE TPO, THE ASSESSMENT ITSELF WAS BAD IN LAW AND DESERVED TO BE QUASHED. 3.3 THE LD. AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT THESE PLEADINGS WERE DULY MADE BEFOR E THE ASSESSING OFFICER AS WELL AS THE LD. CIT (APPEALS) BUT THE LD. FIRST APPELLATE AUTHORITY HAD PASSED THE APPELLATE ORDER IN A ROUTINE MANNER WITHOUT CONSIDERING THE DETAILED OBJ ECTIONS AND EVIDENCES PLACED ON RECORD BY THE ASSESSEE. HE DREW OUR ATTENTION TO THE GROUNDS OF APPEAL RAISED BEFOR E THE LD. FIRST APPELLATE AUTHORITY AND ALSO TO PARA 6.5 OF T HE IMPUGNED ORDER AND SUBMITTED THAT IN THIS ORDER THE LD. FIRST APPELLATE AUTHORITY HAD PROCEEDED ON INCORREC T FACTUAL PRESUMPTION THAT THERE WAS NO MENTION OF CREDIT NOT ES IN THE FINANCIAL STATEMENTS. IT WAS FURTHER SUBMITTED THAT THE ORDER OF THE LD. FIRST APPELLATE AUTHORITY NOT ONLY IGNORED TO DEAL WITH THE ISSUE AS TO HOW THE AMOUNT INVOLVED I N CREDIT NOTES WAS TAXABLE UNDER SECTION 5 (1) (B) OF THE AC T BUT ALSO CITED NO REASONS ON HOW THE ADJUSTMENT OF TENTATIVE BILLING ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 11 FOR ACTUAL EXPENDITURE, WHICH WAS IN CONSONANCE WIT H TERMS OF THE AGREEMENT, AMOUNTED TO CORRECTION OF T HE ARMS LENGTH PRICE. 3.4 THE LD. AUTHORISED REPRESENTATIVE SUBMITTED TH AT THE LD. CIT (APPEALS) HAD UPHELD THE CONCLUSIONS RE ACHED BY THE ASSESSING OFFICER WITHOUT EVEN REFERRING TO THE CONTRACTUAL AGREEMENT AND, THEREFORE, THE DECISION- MAKING PROCESS IN THE IMPUGNED ORDER WAS ARBITRARILY. 3.5 THE LD. AUTHORISED REPRESENTATIVE FURTHER SUBMITTED THAT THE LOWER AUTHORITIES HAD ERRED IN N OT APPRECIATING THAT THE CREDIT NOTES WERE REQUIRED TO BE ISSUED TO ENSURE THAT THE ASSOCIATED ENTERPRISES WE RE CHARGED IN ACCORDANCE WITH THE CONTRACTS AND NOT CH ARGED EXCESSIVELY ONLY BY REFERENCE TO THE BUDGETED EXPEN DITURE. REFERRING TO THE GTM, IT WAS SUBMITTED THAT CREDIT NOTES WERE ISSUED AND ACCOUNTED FOR IN THE CONTEXT OF BIL LING FOR THE SERVICES RENDERED AND THIS APPROACH WAS NOT CON TRARY TO ANY PROVISIONS OF THE ACT INCLUDING SECTION 92 O F THE ACT. IT WAS SUBMITTED THAT CORRECT CHARGES FOR SERVICES AND ISSUANCE OF CREDIT NOTES WAS REQUIRED TO ARRIVE AT CONTRACTUAL CONSIDERATION OF THE INTERNATIONAL TRAN SACTION ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 12 WHICH WAS THE FIRST STEP BEFORE TESTING THE SAME FO R THE POINT OF VIEW OF ARMS LENGTH PRICE. 3.6 IT WAS FURTHER SUBMITTED THAT SECTION 5 (1) (B ) OF THE ACT CANNOT BRING TO TAX NOTIONAL INCOME OR BY S ELECTIVELY IGNORING PARTS OF THE CONTRACTUAL AGREEMENT. IT WAS SUBMITTED THAT IN THE PRESENT CASE THE CONTRACTUAL AGREEMENT PROVIDED THAT THE CONSIDERATION WAS TO BE DETERMINED/ADJUSTED ON THE BASIS OF AGREED MARK-UP TO THE ACTUAL EXPENDITURE AND THE INITIAL ERROR OF BILLING ON THE BASIS BUDGETARY EXPENDITURE WAS NECESSARILY TO BE CORRECTED BY ISSUANCE OF CREDIT NOTES. 3.7 THE LD. AUTHORISED REPRESENTATIVE REFERRED TO ORDER OF THE ITAT IN THE CASE OF SONY INDIA (PRIVAT E) LIMITED REPORTED IN (2008) 114 ITD 448 WHEREIN IT HAD BEEN HELD THAT FORM AND SUBSTANCE OF A TRANSACTION SHOULD BE RESPECTED AS LONG AS THERE IS A WRITTEN AGREEMENT I N PLACE. IT WAS SUBMITTED THAT THE AGREEMENTS WHICH WERE VER Y MUCH IN PLACE AND WERE ON RECORD HAD BEEN COMPLETEL Y IGNORED BY THE LOWER AUTHORITIES. PLACING RELIANCE ON THIS DECISION IT WAS SUBMITTED THAT IN ABSENCE OF INFORM ATION TO ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 13 THE CONTRARY, THE BUSINESS AND COMMERCIAL SUBSTANCE OF A TRANSACTION SHOULD NOT BE DISPUTED. 3.8 IT WAS FURTHER SUBMITTED THAT IN THE INSTANT CASE SINCE THE CREDIT NOTES WERE ISSUED IN THE COURSE OF REGULAR DEALINGS WITH THE ASSOCIATED ENTERPRISES, IT WAS IM PROPER AND BEYOND THE JURISDICTION OF THE ASSESSING OFFICE R TO ASSUME THAT THE ISSUANCE OF SUCH CREDIT NOTES WAS W ITH INTENT TO EVADE TAXES IN INDIA. RELIANCE WAS PLACED ON PARA 1.64 OF THE OECD GUIDELINES WHEREIN IT HAS BEEN PRO VIDED THAT IT IS DESIRABLE FOR THE INCOME TAX AUTHORITIES TO RECOGNISE AND APPRECIATE THE ACTUAL TRANSACTIONS UNDERTAKEN BY A TAXPAYER AND THE SAME SHOULD NOT BE DISREGARDED BARRING EXCEPTIONAL CIRCUMSTANCES. IT W AS SUBMITTED THAT THIS POSITION HAS ALSO BEEN ACCEPTED BY SEVERAL COURTS OF LAW WHEREIN IT HAS BEEN HELD THAT IT IS NECESSARY FOR THE INCOME TAX AUTHORITIES TO ACCEPT AND RECOGNISE A TRANSACTION AS SUCH AND NOT TO DICTATE OR DETERMINE THE TERMS THEREOF. 3.9 THE LD. AUTHORISED REPRESENTATIVE REFERRED EXTENSIVELY TO THE PAPER BOOK WHEREIN THE DETAILED SUBMISSIONS BEFORE THE ASSESSING OFFICER AND THE LD . CIT ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 14 (APPEALS) HAD BEEN INCORPORATED. IT WAS PRAYED THAT SINCE THE LOWER AUTHORITIES AND NOT CONSIDERED THESE ARGU MENTS AND SUBMISSIONS, THE APPEAL OF THE ASSESSEE DESERVE D TO BE ALLOWED. 4.0 IN RESPONSE, THE LD. CIT DEPARTMENTAL REPRESENTATIVE (DR) PLACED EXTENSIVE RELIANCE ON TH E OBSERVATIONS AND FINDINGS OF THE ASSESSING OFFICER. THE LD. CIT DR SUBMITTED THAT REFERENCE WAS NOT REQUIRED TO BE MADE TO THE TRANSFER PRICING OFFICER BECAUSE IN THI S CASE THE ISSUE WAS NOT ANY DISPUTE ABOUT THE ARMS LENGTH PRI CE BUT IT WAS SHIFTING OF PROFITS OR AVOIDANCE OF TAX TO O THER GROUP ENTITIES. THE LD. CIT DR SUBMITTED THAT THE MAIN IS SUE WAS WHETHER THE PROFIT, AS DETERMINED FROM THE BOOKS OF ACCOUNTS MAINTAINED IN THE NORMAL COURSE OF BUSINES S, COULD BE ARTIFICIALLY REDUCED TO A LEVEL JUST ABOVE THE NET PROFIT MARGIN ACCEPTABLE TO THE LOCAL TAX AUTHORITY BY WAY OF ISSUANCE OF CREDIT NOTES TO THE ASSOCIATED ENTERPRI SES. IT WAS FURTHER SUBMITTED THAT THE OTHER ISSUE WHICH NE EDED CONSIDERATION WAS WHETHER OR NOT THE PROFIT OF RS. 39 CRORES HAD ACCRUED TO THE ASSESSEE AND WAS, THEREAFTER, DI VERTED AS AN APPLICATION OF INCOME. THE LD. CIT DR SUBMITT ED THAT ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 15 IT HAS BEEN THE CONTENTION OF THE ASSESSEE THAT THE CREDIT NOTES WERE ISSUED IN ACCORDANCE WITH THE GUIDELINES PROVIDED UNDER THE FUJITSU GLOBAL TRANSFER PRICING POLICY AND, THUS, IT WAS APPARENT THAT THE ASSESSEES JUST IFICATION FOR THE TRANSFER OF FUNDS THROUGH CREDIT NOTES PRIM ARILY RELIED MORE ON THE GROUP TRANSFER PRICING POLICY RA THER THAN THE PROVISIONS OF LAW OR THE INCOME TAX ACT WHICH H AD A STATUTORY BINDING ON THE ASSESSEE WITH REGARD TO IT S ASSESSABLE INCOME IN INDIA. 4.1 THE LD. CIT DR REITERATED THAT AS PER THE PROVISIONS OF THE ACT, THE ASSESSEE COMPANY HAS TO MAKE INTERNATIONAL TRANSACTIONS WITH ITS GROUP ENTITIES AT ARMS LENGTH PRICE AND THERE IS NO PROVISION IN THE RELEV ANT SECTION PERTAINING TO INTERNATIONAL TRANSACTIONS WH ICH LEGALISES A NEGATIVE TRANSFER PRICING OF THE COMPAN IES OPERATING ABOVE THE ARMS LENGTH PRICE. IT WAS SUBMI TTED THAT THE ISSUE OF NEGATIVE TRANSFER PRICING ON COST OR UPWARD TRANSFER PRICING ON SALE OF SERVICES WOULD BE JUSTI FIED TO MAINTAIN THE ARMS LENGTH PRICE FOR ITS TRANSACTIONS AS PER THE INCOME TAX ACT BUT JUST BY THE MERE FACT THAT T HE OPERATING MARGIN OF THE COMPANY WAS MORE THAN THE ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 16 AVERAGE MARGIN OF COMPARABLE INDEPENDENT COMPANIES, THE SAME DID NOT JUSTIFY THE TRANSFER OF FUNDS FROM THE SALE OF SERVICES RECEIVABLES BY THE ASSESSEE UNDER THE COVE R OF GROUP TRANSFER PRICING POLICY. IT WAS SUBMITTED THA T ANY POLICY OR REGULATION OF AN ENTITY IS TO BE READ WIT HIN THE AMBIT AND FRAMEWORK OF THE STATUTORY PROVISIONS OF THE INCOME TAX ACT. 4.2 THE LD. CIT DR REFERRED TO THE OBSERVATIONS OF THE ASSESSING OFFICER IN PARAGRAPH 9 OF THE ASSESSM ENT ORDER AND SUBMITTED THAT THIS ENTIRE EXERCISE OF IS SUANCE OF CREDIT NOTES WAS AN ATTEMPT TO MANIPULATE THE ACCOU NTS TO ADJUST THE TAXABLE PROFITS DOWN WORDS.. THE LD. CIT DR ALSO SUBMITTED THAT THIS WAS AN EXTRAORDINARY TRANSACTIO N WHICH AFFECTED THE TAXABLE PROFIT OF THE ASSESSEE IN INDI A BUT THE SAME WAS NOT DISCLOSED IN FORM 3CEB BY THE ASSESSEE . 4.3 IT WAS ALSO SUBMITTED THAT THE CREDIT NOTES W ERE ISSUED AT THE END OF THE YEAR I.E. ON 31 ST MARCH AND NOT DURING THE COURSE OF THE ASSESSMENT YEAR AND, THERE FORE, IT WAS APPARENT THAT THE CREDIT NOTES WERE ISSUED AFTE R THE ASSESSEE REALISED THAT IT HAD EARNED PROFITS OVER A ND ABOVE EXPECTED MARGINS. ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 17 4.4 THE LD. CIT DR ALSO MADE REFERENCE TO THE EMAI L EXCHANGE TO WHICH THE ASSESSING OFFICER HAD MADE A REFERENCE TO IN PARA 4.7 OF THE ASSESSMENT ORDER FR OM WHICH IT WAS APPARENT THAT THIS ADJUSTMENT WAS DONE TO MA INTAIN ONLY THE MINIMUM LEVEL OF OPERATING PROFIT WHICH WA S ACCEPTABLE TO THE INCOME TAX AUTHORITIES. 4.5 THE LD. CIT DR SUBMITTED THAT IT WAS BEYOND CONCLUSION THAT THE IMPUGNED TRANSACTIONS WERE PURE TRANSFER OF TAXABLE PROFITS OUT OF INDIA WITH THE V IEW TO EVADE TAXES. IT WAS SUBMITTED THAT THESE ADJUSTMENT S CERTAINLY DID NOT QUALIFY AS TAX PLANNING BECAUSE T HE SAME WAS DONE AS AN ARRANGEMENT BY THE GROUP IN TOKYO WI TH A VIEW TO DIVERT THE ACCRUED PROFIT OF 39 CRORES TO O THER ASSOCIATED ENTERPRISES BY LEAVING A MINIMUM LEVEL O F TAXABLE PROFIT IN INDIA. 4.6 THE LD. CIT DR SUBMITTED THAT IN VIEW OF THE OBSERVATIONS OF THE ASSESSING OFFICER AND FURTHER I N VIEW OF THE FINDINGS OF THE LD. CIT (APPEALS), THE APPEAL O F THE ASSESSEE DESERVED TO BE DISMISSED. 5.0 WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALSO PERUSED THE MATERIAL ON RECORD. WE HAVE ALSO P ERUSED ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 18 THE ORDER OF THE ASSESSING OFFICER AS WELL AS THAT OF THE LD. FIRST APPELLATE AUTHORITY. A PERUSAL OF THE ORDER O F THE LD. CIT (APPEALS) SHOWS THAT THE LD. FIRST APPELLATE AU THORITY HAS SUMMARILY REJECTED THE CONTENTIONS OF THE ASSES SEE. THE FINDINGS OF THE LD. CIT (APPEALS) ARE CONTAINED IN PARA 6.5 TO 6.13 AND WHILE ADJUDICATING ALL THE GROUNDS BEFORE HER, THE LD. CIT (APPEALS) HAS JUST MENTIONED THAT SHE HAS FOUND FORCE IN THE ARGUMENTS OF THE ASSESSING OFFIC ER IN VIEW OF THE FACT THAT THE IMPUGNED TRANSACTION WAS NOT A N INTERNATIONAL TRANSACTION AND, THEREFORE, THERE WAS NO REQUIREMENT FOR MAKING ANY REFERENCE TO THE TRANSFE R PRICING OFFICER. APART FROM THIS OBSERVATION, THE L D. CIT (APPEALS) HAS NOT UNDERTAKEN TO ADJUDICATE THE ISSU E BEFORE HER AND, THUS, IT IS VERY MUCH APPARENT THAT THERE IS NO INDEPENDENT APPLICATION OF MIND BY THE LD. CIT (APP EALS). ALTHOUGH THE ASSESSEE HAD CHALLENGED THE ACTION OF THE ASSESSING OFFICER ON THE GROUND THAT THE ASSESSING OFFICER HAD INCORRECTLY INTERPRETED THE PROVISIONS OF THE A CT WHILE MAKING AN ADDITION UNDER SECTION 5 (1) (B) OF THE A CT, THE LD. CIT (APPEALS) HAS DISMISSED IT SIMPLY BY OBSERV ING THAT THE OBSERVATION OF THE ASSESSING OFFICER THAT THE I MPUGNED ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 19 TRANSACTION WAS NOT AN INTERNATIONAL TRANSACTION WA S CORRECT AND, THEREFORE, THIS GROUND IS DISMISSED. S IMILARLY WHILE DISMISSING GROUND NO. 4 OF THE ASSESSEES APP EAL PERTAINING TO THE ASSESSEES CONTENTION THAT THE CR EDIT NOTES ISSUED WERE IN LINE WITH THE CONTRACTUAL AGREEMENT BETWEEN THE ASSESSEE AND THE ASSOCIATED ENTERPRISES, THE LD . CIT (APPEALS) HAS DISMISSED THIS GROUND BY OBSERVING TH AT IN VIEW OF ACCEPTANCE OF THE OBSERVATIONS OF THE ASSES SING OFFICER THAT THIS WAS NOT AN INTERNATIONAL TRANSACT ION, THE GROUND OF APPEAL WAS BEING DISMISSED. FURTHER, WHIL E DISMISSING THE ASSESSEES CONTENTION IN GROUND NO. 5 OF THE ASSESSEES APPEAL THAT THE CREDIT NOTES ISSUED WERE IN LINE WITH THE GLOBAL TRADING MODEL OF THE GROUP WHICH WA S CONSISTENT WITH THE TRANSFER PRICING REGULATIONS IN INDIA AND ABROAD, IT WAS OBSERVED BY THE LD. CIT (APPEALS) TH AT THIS CONTENTION IS NOT ACCEPTED IN VIEW OF THE REASONS G IVEN BY THE ASSESSING OFFICER IN PARAGRAPH 6 OF THE ASSESSM ENT ORDER. IT IS FURTHER SEEN THAT GROUND NO. 6 OF THE ASSESSEES APPEAL ALSO WAS DISMISSED WHEREIN THE ASSESSEE HAD CONTENDED THAT THE ASSESSING OFFICER HAD ERRED IN N OT ACCEPTING THAT THE CREDIT NOTES WERE ISSUED ON ACCO UNT OF ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 20 DIFFERENCE BETWEEN BUDGETED AND ACTUAL COST AND FOR EIGN EXCHANGE FLUCTUATIONS. THE REASON FOR DISMISSAL OF THIS GROUND IS ALSO THAT THE ASSESSING OFFICERS OBSERVA TION THAT THE IMPUGNED TRANSACTION WAS NOT AN INTERNATIONAL TRANSACTION HAS BEEN ACCEPTED BY THE LD. CIT (APPEA LS). FURTHER GROUND NO. 7 PERTAINING TO THE ASSESSEES CONTENTION THAT THE ASSESSING OFFICER HAD ERRED IN CONCLUDING THAT THE CREDIT NOTES WERE PART OF SOFTW ARE DEVELOPMENT SERVICES TRANSACTIONS AND NOT INTERNATI ONAL TRANSACTIONS AND GROUND NO. 8 PERTAINING TO THE CON TENTION OF THE ASSESSEE THAT THE ASSESSING OFFICER HAD ERRE D IN NOT CONSIDERING THAT EVEN AFTER THE ISSUANCE OF CREDIT NOTES THE PROFIT MARGIN EARNED BY THE ASSESSEE WAS MORE THAN THE ARMS LENGTH MARGIN OF THE COMPARABLE COMPANIES WERE ALSO DISMISSED BY MAKING ONLY ONE OBSERVATION THAT THESE GROUNDS REQUIRED TO BE DISMISSED BECAUSE THE ASSESS ING OFFICER HAD HELD THAT THE ADJUSTMENT OF FUNDS BY WA Y OF CREDIT NOTES DID NOT FALL UNDER THE MEANING OF INTE RNATIONAL TRANSACTIONS ACCORDING TO THE PROVISIONS OF SECTION 90(2)(B) OF THE ACT. WHILE DISMISSING THE GROUNDS RAISED BY THE ASSESSEE, THE IMPUGNED ORDER IS WOEFULLY SILENT ON THE ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 21 REASONS AS TO WHY THE LD. CIT (A) AGREES TO THE OBS ERVATIONS OF THE ASSESSING OFFICER. THUS, IT IS VERY MUCH EVI DENT THAT THERE HAS BEEN A FAILURE ON THE PART OF THE LD. FIR ST APPELLATE AUTHORITY TO PROPERLY ADJUDICATE THE GROUNDS BEFORE HER. THERE IS NO INDEPENDENT APPLICATION OF MIND BY THE LD. FIRST APPELLATE AUTHORITY AND SHE HAS FAILED TO CONSIDER ALL OF THE CONTENTIONS RAISED BY THE ASSESSEE IN THE APPEAL BE FORE HER. THE LD. FIRST APPELLATE AUTHORITY HAS SIMPLY DITTOE D THE OBSERVATIONS OF THE ASSESSING OFFICER AND HAS UPHEL D THE FINDINGS OF THE ASSESSING OFFICER WITHOUT EVEN EXAM INING THE OBSERVATIONS OF THE AO VIS-A-VIS THE OBJECTIONS/CON TENTIONS OF THE ASSESSEE. IT IS OUR CONSIDERED OPINION THAT IT WAS INCUMBENT UPON LD. FIRST APPELLATE AUTHORITY TO PAS S A SPEAKING ORDER AFTER PROPER APPRECIATION OF THE FAC TS BEFORE HER. IT MAY NOT BE OUT OF PLACE HERE TO NOTE THAT AS HEL D BY THE HON'BLE APEX COURT IN THE CASE OF KAPOORCHAND S HRIMAL [1981] 131 ITR 451 (SC) IN CONNECTION WITH THE APPE AL BEFORE THE LD. CIT (A) THAT IT IS THE DUTY OF APPEL LATE AUTHORITY TO REMOVE THE ERRORS IN THE ORDER OF AUTH ORITIES BELOW AND REMIT THE ISSUE WITH OR WITHOUT DIRECTION FOR RECONSIDERATION UNLESS PROHIBITED BY LAW. ACCORDING LY, ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 22 SINCE THE LD. CIT (A) HAS NOT PASSED A SPEAKING ORD ER ON THIS ISSUE, WE ARE OF THE CONSIDERED OPINION THAT T HE INTEREST OF JUSTICE WILL BE SERVED IF THIS ISSUE IS REMITTED TO THE FILE OF THE LD. CIT (A) WITH A DIRECTION TO PAS S A SPEAKING ORDER AFTER DULY EXAMINING AND CONSIDERI NG ALL THE CONTENTIONS RAISED BY THE ASSESSEE. ACCORDINGLY , THE APPEAL IS RESTORED TO THE FILE OF THE LD. FIRST APP ELLATE AUTHORITY WITH A DIRECTION TO RE-ADJUDICATE THE ISS UE AFTER DULY CONSIDERING ALL THE CONTENTIONS OF THE ASSESSE E WHICH IT MAY RAISE IN THIS REGARD AND AFTER GIVING PROPER OPPORTUNITY TO THE ASSESSEE. NEEDLESS TO SAY, PASSI NG OF A SPEAKING ORDER IS MANDATORY. 6.0 IN THE FINAL RESULT, THE APPEAL OF THE ASSESSE E STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH AUGUST, 2019. (R.K. PANDA) (SUDHANSHU SRI VASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: AUGUST, 2019 DRAGON ITA NO. 140/D/2019 ASSESSMENT YEAR 2014-15 23 COPY FORWARDED TO: - 1) APPELLANT 2) RESPONDENT 3) CIT(A) 4) CIT 5) DR BY ORDER ASSTT. REGISTRAR DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER