A.T. Kearney Ltd, V. DIT Intl. Taxation,

ITA 2103/DEL/2007

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3929 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-05-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 26-04-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHWANI MAHAJAN INTL
• Keywords: Transfer pricing; Principle of natural justice; International transaction; Bad and doubtful debts
• Section: 37(1); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH A : NEW DELHI DELHI BENCH A : NEW DELHI DELHI BENCH A : NEW DELHI DELHI BENCH A : NEW DELHI BEFORE SHRI R.P.TOLANI, JM AND SHRI K.D.RANJAN, AM BEFORE SHRI R.P.TOLANI, JM AND SHRI K.D.RANJAN, AM BEFORE SHRI R.P.TOLANI, JM AND SHRI K.D.RANJAN, AM BEFORE SHRI R.P.TOLANI, JM AND SHRI K.D.RANJAN, AM ITA NO.2103/DEL/2007 ITA NO.2103/DEL/2007 ITA NO.2103/DEL/2007 ITA NO.2103/DEL/2007 ASSESSMENT YEAR : 2002 ASSESSMENT YEAR : 2002 ASSESSMENT YEAR : 2002 ASSESSMENT YEAR : 2002- -- -03 0303 03 M/S AT KEARNEY LIMITED, M/S AT KEARNEY LIMITED, M/S AT KEARNEY LIMITED, M/S AT KEARNEY LIMITED, 14 1414 14 TH THTH TH FLOOR, TOWER D, FLOOR, TOWER D, FLOOR, TOWER D, FLOOR, TOWER D, GLOBAL BUSINESS PARK, GLOBAL BUSINESS PARK, GLOBAL BUSINESS PARK, GLOBAL BUSINESS PARK, GURGAON GURGAON GURGAON GURGAON 122 002. 122 002. 122 002. 122 002. PAN NO.AADCA0861H. PAN NO.AADCA0861H. PAN NO.AADCA0861H. PAN NO.AADCA0861H. VS. VS. VS. VS. DIRECTOR OF INCOME TAX, DIRECTOR OF INCOME TAX, DIRECTOR OF INCOME TAX, DIRECTOR OF INCOME TAX, INTERNATIONAL TAXATION, INTERNATIONAL TAXATION, INTERNATIONAL TAXATION, INTERNATIONAL TAXATION, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SATYEN SETHI, ADVOCATE. RESPONDENT BY : SHRI ASHWANI MAHAJAN, CIT-DR INTL. ORDER ORDER ORDER ORDER PER R.P.TOLANI, JM : PER R.P.TOLANI, JM : PER R.P.TOLANI, JM : PER R.P.TOLANI, JM : THIS IS ASSESSEES APPEAL CHALLENGING THE ORDER OF CIT PASSED U/S 263 BY FOLLOWING GROUNDS:- 1. THAT THE LEARNED DIRECTOR OF INCOME-TAX, INTERN ATIONAL TAXATION, NEW DELHI (DIT) HAS ERRED IN FACTS AND LAW IN ASSUMING JURISDICTION UNDER SECTION 263 OF THE INCO ME-TAX ACT, 1961 (ACT) AND ISSUING SHOW CAUSE NOTICE DAT ED MARCH 14, 2007 TO THE APPELLANT, AS THE ASSESSMENT ORDER PASSED BY THE DEPUTY DIRECTOR OF INCOME-TAX, INTERN ATIONAL TAXATION, CIRCLE-1(1), NEW DELHI (ASSESSING OFFICE R) IS NOT ERRONEOUS WITHIN THE MEANING OF SECTION 263 OF THE ACT. 2. THAT THE LEARNED DIT HAS ERRED ON FACTS AND IN L AW IN PARTLY SETTING ASIDE THE ASSESSMENT ORDER DATED MAR CH 18, 2005 PASSED BY THE ASSESSING OFFICER, AS THE ASSESS MENT ORDER IS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE I NTEREST OF REVENUE WITHIN THE MEANING OF SECTION 263 OF THE AC T. CONSEQUENTLY, IN ABSENCE OF VALID JURISDICTION, THE ORDER PASSED BY THE LEARNED DIT IS BAD IN LAW AND LIABLE TO BE QUASHED. 3. BASED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER PASSED BY THE LEARNED DIT IS BAD IN LAW SINCE IT IS BASED ON SURMISES, CONJECTURES, WITHOUT APPRE CIATING ITA-2103/DEL/2007 2 AND/OR CONSIDERING THE DETAILS/INFORMATION FURNISHE D BY THE APPELLANT. FURTHER, ADEQUATE OPPORTUNITY WAS NOT G RANTED TO THE APPELLANT TO FURNISH NECESSARY DETAILS SOUGH T BY THE LEARNED DIT, DURING THE COURSE OF PROCEEDINGS UNDER SECTION 263 OF THE ACT, THUS THE ORDER PASSED BY LE ARNED DIT IS VIOLATIVE OF PRINCIPLES OF NATURAL JUSTICE, AND LIABLE TO BE QUASHED. 2. BRIEF FACTS ARE THAT ASSESSEE FILED RETURN OF IN COME ON 31.10.2002 AND THEREAFTER REVISED COMPUTATION OF IN COME WAS FILED. THE AO MADE THE REFERENCE TO TPO IN THE MONTH OF JU LY, 2004 AND AFTER THE NECESSARY ENQUIRIES, THE TPO PASSED AN ORDER DE TERMINING THE ARMS LENGTH TRANSACTIONS OF THE ASSESSEE U/S 92CA( 3). THE AO ON THE BASIS OF TPOS REPORT FRAMED THE ASSESSMENT. 3. THEREAFTER, CIT CALLED FOR THE RECORD OF THE AO AND TPO. CIT WAS OF THE VIEW THAT SEVERAL EXPENSES ON FOLLOWING ACCO UNTS WERE NOT EXAMINED CAREFULLY FOR DISALLOWANCE U/S 37(1) AND T HE ALP FOR INTERNATIONAL TRANSACTIONS WAS NOT DETERMINED BY PR OPER BENCHMARKING:- (I) TELEPHONE AND COMMUNICATION EXPENSES : `1,39,27 ,887/-. (II) TRAVELLING AND CONVEYANCE EXPENSES : `2 ,65,71,851/-. (III) BAD DEBTS : `1,75,15,361/-. (IV) REPAIRS AND MAINTENANCE : `20,83,146/-. (V) ENTERTAINMENT EXPENSES : `20,19,679/-. (VI) STAFF WELFARE : `82,81,167/-. (VII) MISC. EXPENSES : `24,51,589/-. 4. THE CIT WAS OF THE VIEW THAT THESE EXPENSES WERE NOT EXAMINED CAREFULLY, THEREFORE, NOTICE U/S 263 WAS ISSUED ON THE ASSESSEE TO REPLY IN THIS BEHALF. ASSESSEE FILED A DETAILED EXPLANAT ION RAISING VARIOUS ISSUES AND RELIED ON FOLLOWING CASE LAWS:- ITA-2103/DEL/2007 3 (I) CIT VS. MALABAR INDUSTRIES CO. LTD. 243 ITR 8 3 (SC). (II) NABHA INVESTMENTS PVT.LTD. VS. UOI 246 ITR 4 1 (DEL). (III) MODI XEROX LTD. VS. DCIT 67 ITD 252 (DEL). 5. CIT, HOWEVER, HELD THAT THE ORDERS OF AO AND TPO WERE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. A GGRIEVED, ASSESSEE IS IN APPEAL. 6. LEARNED COUNSEL FOR THE ASSESSEE CONTENDS THAT T HE REASONS WHICH WEIGHED ON THE CIT FOR ISSUING THE NOTICE AND PASSING THE ORDER U/S 263 ARE AS UNDER:- (I) ASSESSMENT WAS ERRONEOUS BECAUSE ASSESSMENT ORD ER RECORDED THAT REFERENCE MADE TO THE TPO WAS RECEIVE D BACK IN TERMS OF ORDER U/S 92CA(3), IN WHICH NO ADV ERSE INFERENCE WAS DRAWN WITH RESPECT TO THE ARMS LENGTH PRICE WAS INCORRECT, BECAUSE THE DATE OF ASSESSMENT WAS M ADE PRIOR TO THE DATE OF ORDER OF TPO. (II) SEVERAL EXPENSES WERE NOT CAREFULLY EXAMINED F OR DISALLOWANCE AND ARMS LENGTH PRICE WAS NOT PROPERLY DETERMINED. EXPENSES REFERRED TO ARE (I) TELEPHONE & COMMUNICATION, (II) TRAVELING AND CONVEYANCE, (III) BAD DEBTS AND (IV) REPAIR & MAINTENANCE. (III) ARMS LENGTH PRICE WAS NOT PROPERLY DETERMINED BECAUSE COST BASE WAS NOT PROPERLY EXAMINED AND THE OPERATI NG MARGIN WAS ALSO NOT WORKED OUT PROPERLY. 7. LEARNED COUNSEL CONTENDS THAT THE FIRST REASON I S MISTAKEN INASMUCH AS THE TPOS ORDER U/S 92CA(3) WAS PASSED ON 24.3.2005 AND THE ASSESSMENT ORDER WAS PASSED ON 28.3.2005 WHICH IS CORRECTLY MENTIONED IN 263 ORDER ON THE LAST PAGE. ITA-2103/DEL/2007 4 8. APROPOS THE SECOND REASON, LEARNED COUNSEL FOR T HE ASSESSEE CONTENDS THAT ASSESSEE HAS TWO BUSINESS SEGMENTS DOMESTIC AND INTER-COMPANY (OVERSEAS). ALL THE DETAILS IN RESPE CT OF THESE WERE FILED AS UNDER AND ARE FILED IN PAPER BOOK:- (I) DOMESTIC - ASSESSEE PROVIDES MANAGEMENT CONSU LTANCY SERVICES TO INDEPENDENT THIRD PARTY CLIENTS PRIMARI LY THROUGH ITS OWN EMPLOYEES AND RESOURCES AND PARTLY BY AVAILING THE SERVICES OF SPECIALIST OF ATK AFFILIATES. 93% OF TOTAL REVENUE WAS FROM THIS SEGMENT I.E. RS.24,30,19,368/-. PAPER BOOK PAGE 91, 87 (II) INTER-COMPANY - IN THIS SEGMENT, ASSESSEE PR OVIDES CONSULTANCY SERVICES TO OVERSEAS ATK AFFILIATES (INVOLVING DEPU TATION OF PERSONAL ON OVERSEAS PROJECT OF AFFILIATES. REVENUE FROM THIS SEGMENT WAS RS.1,82,83,722/-. PAGE 85-87 (III) CONSULTANCY PROJECTS UNDERTAKEN BY THE ASSESS EE SOMETIMES REQUIRE INVOLVEMENT OF SPECIALISTS OF ATK AFFILIATE S. IN SUCH CASES, OUT OF THE FEE CHARGED FROM THE CLIENTS, ASSESSEE RETAI NS 15% (AS REFERRAL FEE) AND THE BALANCE IS REMITTED. SIMILARLY, IN RE SPECT OF INTER COMPANY SEGMENT, WHERE SERVICES ARE RENDERED TO ATK AFFILIA TES, 85% OF THE FEE IS REMITTED TO THE ASSESSEE AND 15% IS RETAINED BY THE AFFILIATES. PAGE 91, 101-102 FEE RECEIVED BY ATK AFFILIATES FROM THE ASSESSEE IS SUBJECTED TO TAX IN INDIA IN THE HANDS OF RESPECTIVE AFFILIATES. PAGE 150-159, 135-136 INTERNATIONAL TRANSACTIONS OF THE ASSESSEE (IV) (A) CONSULTANCY TO THIRD PARTY CLIENTS INVOLV ING SPECIALISTS OF AFFILIATES (I.E. REFERRAL/MARKETING SERVICES). ITA-2103/DEL/2007 5 (B) CONSULTANCY SERVICES TO ATK AFFILIATES (DEPUT ATION OF PERSONNEL TO ATK AFFILIATES). IN RESPECT OF INTERNATIONAL TRANSACTIONS, ARMS LENG TH PRICE WAS DETERMINED BY APPLYING TRANSACTIONAL NET MARGINAL M ETHOD (TNMM). IT IS NOT THE CASE OF CIT THAT ARMS LENGTH PRICE WAS T O BE COMPUTED BY EMPLOYING METHOD DIFFERENT FROM TNMM. IN RESPECT O F INTERNATIONAL TRANSACTIONS, ARMS LENGTH PRICE OF 107.75% OF COSTS OF ASSESSEE WAS DETERMINED IN TRANSFER PRICING REPORT. PAGES 93-136 (101-123) (V) AS AGAINST OPERATING MARGIN OF 7.75% OF INDEPEN DENT COMPARABLE COMPANIES, ASSESSEES OPERATING MARGIN O N COST WAS 17.65% AND 82.83% RESPECTIVELY ON TRANSACTIONS (A) & (B) ABOVE. TPO BEFORE ACCEPTING THE ARMS LENGTH PRICE MADE DETAILE D ENQUIRY THAT IS SUMMARIZED AS UNDER:- (I) SEGMENT WISE P & L A/C, DETAILS OF WORKING PROG RESS AND COST REIMBURSEMENT TO ATK UK WERE CALLED AND WERE SUBMIT TED ON 13.10.2004. PAGES 137, 141 & 149 (SEGMENTAL RESULTS) (II) DETAILS OF PROJECTS WITH NATURE OF PROJECTS, W HERE SPECIALISTS OF AFFILIATES ALSO PROVIDED SERVICES AND DETAILS OF RE VENUE, WHERE PERSONALS OF ASSESSEE WERE DEPUTED WERE PROVIDED ON 29.12.2004. TOTAL REVENUE WHERE PERSONALS OF ASSESSEE RENDERED CONSULTANCY SERVICES WAS RS.1,82,83,722/-. PAGES 57-59 (III) DETAILS OF OPERATING PROFIT IN RESPECT OF DEP UTATION OF PERSONNEL TO ATK AFFILIATES (INTER COMPANY SEGMENT) WERE SUBM ITTED ON 11.01.2005. ITA-2103/DEL/2007 6 PAGES 142-143 (IV) DETAILS OF THIRD PARTY PROJECTS (DOMESTIC SEGM ENT) I.E. NAME OF THE PROJECT, TOTAL REVENUE, FEE FOR SPECIALISTS FRO M AFFILIATES WERE FURNISHED ON 31.01.2005. IT WAS ALSO CLARIFIED THA T ASSESSEE DOES NOT BEAR ANY DIRECT EXPENSES SUCH AS TRAVELING, TELEPHO NE RENT ETC. INCURRED FOR SPECIALISTS OF ATK AFFILIATES AS THE S AME WERE BORNE BY RESPECTIVE THIRD PARTY CLIENTS PROJECTS TO WHICH SP ECIALISTS RENDERED SERVICES. PAGES 144-146 (V) VIDE LETTER DATED 14.03.2005, DETAILS OF (I) LE GAL AND PROFESSIONAL EXPENSES WITH NATURE THEREOF, (II) TRAVELING & CONV EYANCE (III) AND AFFILIATE FEE PAID INCLUDING NAME OF CONSULTANTS & THEIR CHARGE-OUT RATE WERE PROVIDED. IT WAS CLARIFIED THAT BAD DEBTS AND PROVISION FOR BAD DEBTS PERTAIN TO TRANSACTIONS OF EARLIER YEARS AND THAT THEY DO NOT PERTAIN TO TRANSACTIONS INVOLVING RENDERING OF SERV ICES TO AFFILIATES THROUGH ITS PERSONNELS AND THAT EXPENDITURE ON TRA VELING AND CONVEYANCE DOES NOT INCLUDE EXPENDITURE ON TRAVELIN G AND CONVEYANCE OF SPECIALISTS OF ATK AFFILIATES. PAGES 64-84 (VI) COPY OF AGREEMENT WITH THIRD PARTY CLIENT IN I NDIA WAS PROVIDED VIDE LETTER DATED 17.03.2005. PAGE 13 9. IT IS FURTHER SUBMITTED BY THE LEARNED COUNSEL T HAT IN ORDER TO TURN AN ORDER AS ERRONEOUS, THE ORDER NEEDS TO BE I NCORRECT ON ASSUMPTION OF FACTS OR INCORRECT ON APPLICATION OF LAW. IN THE INSTANT CASE, THERE IS NEITHER ANY ERROR IN ASSUMPTION OF F ACTS NOR APPLICATION OF LAW. THE ALLEGATION OF CIT THAT THE EXPENSES WE RE NOT EXAMINED CAREFULLY ITSELF MILITATES AGAINST THE POWER OF REV ISION AS SECTION 263 NOWHERE PROVIDES AN ORDER TO BE REVISED ON THE ALLE GATION THAT THE EXPENSES WERE NOT CAREFULLY EXAMINED. THE OBSERVAT ION IS PURELY ITA-2103/DEL/2007 7 SUBJECTIVE. THE POWERS OF REVISION DO NOT MEAN THA T THE CIT SHOULD SUBSTITUTE HIS JUDGMENT WITH AO AND OF TPO MERELY B ECAUSE THE AOS ORDER WAS NOT ELABORATE. RELIANCE IS PLACED ON CIT VS. GABRIEL INDIA LTD. 203 ITR 108 (MUM) AND CIT VS. EICHER LTD. 294 ITR 310 (DEL). THERE IS NO ERROR IN THE ORDER EITHER OF THE AO OR THE TPO. THE SAME WERE PASSED AFTER CONDUCTING REASONABLE ENQUIRIES. MERELY BECAUSE THE ORDER IS NOT ELABORATE, IT CANNOT BE HELD THAT NO ENQUIRIES WERE CONDUCTED. THE NUMBER OF DOCUMENTS FILED BY THE AS SESSEE CLEARLY INDICATE THAT IT IS NOT A CASE OF NO ENQUIRY. RELI ANCE IS PLACED ON THE FOLLOWING JUDGMENTS:- (I) CIT VS. SUNBEAM AUTO LTD. (2009)-TIOL-552-HC- DEL. (II) HARYANA COACH BODY BUILDERS VS. ITO 10 SOT 7 36 (DEL). 10. THE ORDER OF THE AO CANNOT BE CALLED ERRONEOUS IN RESPECT OF ARMS LENGTH TRANSACTIONS INASMUCH AS AS PER PROVIS IONS OF SECTION 92CA(4), THE AO HAS TO COMPLETE THE ASSESSMENT IN R ESPECT OF ARMS LENGTH TRANSACTIONS AS DETERMINED BY THE TPO. IN R ESPECT OF ADMISSIBILITY OF VARIOUS EXPENSES, LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO VARIOUS COMPLIANCES MADE BEFORE THE AO. HOWEVER, LEARNED COUNSEL FAIRLY ADMITS THAT IN RESPECT OF TE LEPHONE EXPENSES OF `1,39,27,887/-, THE DETAILS OF ONLY `69,44,956/- WE RE FILED. THE LEARNED COUNSEL THUS ADMITS THAT IN RESPECT OF TELEPHONE EX PENSES, THE ASSESSEE DID NOT FILE COMPLETE DETAILS BEFORE THE A O AND TPO WHICH LEAD TO DISALLOWABILITY OF THESE EXPENSES. IT IS P LEADED THAT IN RESPECT OF ALL OTHER EXPENSES, THERE WAS NO ERROR AND THE O RDERS WERE NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE. LEARNE D COUNSEL FOR THE ASSESSEE CONCEDES THAT THE 263 ACTION MAY BE SUSTAI NED IN RESPECT OF TELEPHONE EXPENSES. 11. LEARNED DR IS HEARD WHO SUPPORTS THE ORDER OF C IT. ITA-2103/DEL/2007 8 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF AUTHORITIES BELOW. IN OUR VIEW, THE ASSESSMENT HAS BEEN FRAMED NOT ON THE BASIS OF AO ALONE BUT ON THE REPORT OF TPO AS W ELL. FROM THE VOLUMINOUS RECORD SUBMITTED BY THE ASSESSEE, IT DOE S NOT TRANSPIRE THAT THE RELEVANT ENQUIRIES WERE NOT MADE BY THE AO AND TPO EXCEPT IN RESPECT OF TELEPHONE EXPENSES. IN OUR VIEW, THE ASSESSEES CASE WAS HEARD FROM TIME TO TIME BY THE AO AND TPO IN RE SPECT OF ALL THE ASPECTS OF ITS BUSINESS, ARMS LENGTH TRANSACTIONS AND CORPORATE ALLOWANCES EXCEPT TELEPHONE AND COMMUNICATION EXPEN SES WHICH IS ADMITTED BY THE ASSESSEE. 13. THE ERROR ABOUT DATE OF ASSESSMENT ORDER BEING PRIOR TO TPOS ORDER IS UNFOUNDED. SINCE THE ASSESSEE HAS CONCEDE D THAT IN RESPECT OF TELEPHONE AND COMMUNICATION EXPENSES THE DETAILS TO THE EXTENT OF `69,44,956/- WERE FILED AS AGAINST TOTAL OF `1,39,2 7,887/-, WE ARE UNABLE TO SEE ANY ERROR IN THE ORDER OF AO AND TPO AND THEREBY ANY PREJUDICE IN THIS REGARD. ACCORDINGLY, WE UPHOLD THE 263 ORDER ONLY TO THE EXTENT OF TELEPHONE AND COMMUNICATION EXPENSES. CONSEQUENTLY, WE PARTLY UPHOLD THE ORDER OF CIT. THUS, THE ENTIR E ORDER PASSED BY AO AND TPO CANNOT BE REVISED AND THE EXERCISE SHOULD B E RESTRICTED TO TELEPHONE AND COMMUNICATION EXPENSES. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON CONCLUSION OF HEARING ON 25 TH MAY, 2011. SD/- SD/- (K.D.RANJAN) (K.D.RANJAN) (K.D.RANJAN) (K.D.RANJAN) (R.P.TOLANI) (R.P.TOLANI) (R.P.TOLANI) (R.P.TOLANI) ACCOUNTANT ACCOUNTANT ACCOUNTANT ACCOUNTANT MEMBER MEMBER MEMBER MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER DATED : 25.05.2011. VK. ITA-2103/DEL/2007 9 COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR