Stanley Consultant India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 4082/DEL/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2010 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2007-2008
• Appeal Filed On: 19-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Assessee Lawyers: MANONEET DALAL
• Keywords: Transfer pricing
• Section: 143(3); 6; 92

Judgement Text

1 ITA NO. 4082/DEL/2016 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: G NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER ITA NO. 4082/DEL/2016 ( A.Y 2007-08) STANLEY CONSULTANT INDIA PVT. LTD. UNIT NO. 405, A & B, RECTANGLE ONE. D4, 4 TH FLOOR, SAKET DISTRICT CENTRE NEW DELHI AAHCS6192D (APPELLANT) VS DCIT CENTRAL CIRCLE 9(1) NEW DELHI (RESPONDENT) APPELLANT BY SH. MANONEET DALAL, CA RESPONDENT BY SH. S. S. RANA, CIT DR ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER DATED 16/2/2015 & 24/03/2015 PASSED BY CIT(A)-XXIV, NEW DELHI FOR ASS ESSMENT YEAR 2003-04. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ORDER UNDER SECTION 250(6) PASSED BY THE CIT(A) IS BAD IN LAW A ND VOID-AB-INITIO. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN CONFIRMING THE PENALTY LEVIED BY DEPUTY CO MMISSIONER OF INCOME-TAX, CIRCLE 9(1), NEW DELHI ('AO') UNDER SECTION 271(L)( C) OF THE ACT WITHOUT RECORDING ADEQUATE SATISFACTION DURING THE COURSE O F ASSESSMENT PROCEEDINGS 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) / AO ERRED IN LEVYING PENALTY UNDER SECTION 271(L)(C) OF THE ACT IN RELATION TO TRANSFER PRICING ADDITIONS MADE IN THE ASSESSMENT O RDER. DATE OF HEARING 05.09.2018 DATE OF PRONOUNCEMENT 07.09.2018 2 ITA NO. 4082/DEL/2016 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) / AO ERRED IN LEVYING PENALTY IN RELATION TO MERE DIFFER ENCE OF OPINION AS REGARDS ARM'S LENGTH NATURE OF A PARTICULAR TRANSACTION UND ER SECTION 92 OF THE ACT. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) / AO HAS ERRED IN HOLDING THAT THE APPELLANT HAS NO T ACTED IN GOOD FAITH AND HAS NOT EXERCISED DUE- DILIGENCE. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) / AO ERRED IN NOT APPRECIATING THAT THE APPELLANT HAD DI SCLOSED ALL MATERIAL FACTS RELATING TO THE ADJUSTMENT AND HENCE NO PENALTY OUG HT TO BE LEVIED. 3. WHILE COMPLETING ASSESSMENT U/S 143(3) R.W.S. 14 7 ON 03/02/2011, THE FOLLOWING THREE ADDITIONS WERE MADE BY THE ASSESSIN G OFFICER:- I) ADDITION ON A/C OF ARMS LENGTH PRICE BY TPO RS.2,96,58,519/- II) ADDITION ON A/C OF TDS RS. 6,53,850/- III) DISALLOWANCE ON A/C OF MEETING & SEMINAR EXP. RS.4,00,000/- AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, TH E ASSESSEE WENT IN APPEAL BEFORE THE CIT(A) VIDE ITS ORDER DT. 30/04/2012 WHO CONFIRMED FIRST TWO ADDITIONS AT SERIAL NO 1 AND 2 ABOVE AND DELETED TH E ADDITION AT SERIAL NO 3. DURING THE PENALTY PROCEEDINGS, THE ASSESSING OFFIC ER AFTER ISSUING THE SHOW CAUSE LEVIED PENALTY AT RS. 1,03,03,174/- U/S 271(L )(C) ON THE CONCEALMENT OF INCOME AMOUNTING TO RS. 3,03,12,369/- BEING TOTAL O F ADDITION ON ACCOUNT OF ARMS LENGTH PRICE AS DETERMINED BY THE TPO AND ALL ADDITION ON ACCOUNT OF TDS AFTER ISSUING SHOW CAUSE. 4. BEING AGGRIEVED BY THE PENALTY ORDER, THE ASSESS EE FILED APPEAL BEFORE THE CIT(A). THE CIT(A) DISMISSED THE APPEAL OF THE ASSE SSEE. 5. THE LD. AR SUBMITTED THAT THE QUANTUM APPEAL ON WHICH THE PENALTY IS IMPOSED HAS BEEN ALLOWED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ITA NO. 3336/DEL/2012 VIDE ORDER DATED 25 TH JULY, 2016 AND THE CONSEQUENTIAL ORDER IN RESPECT THERETO HAS BEEN PASSED BY THE ASSESSING OFFICER ON 26/12/2017. 3 ITA NO. 4082/DEL/2016 THUS, THE PENALTY DOES NOT SURVIVE. 6. THE LD. DR RELIED UPON THE PENALTY ORDER AND THE ORDER OF THE CIT(A). 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ELEVANT MATERIAL AVAILABLE ON RECORD. IN THE QUANTUM APPEAL, THE T RIBUNAL VIDE ORDER DATED 25 TH JULY 2016 HELD AS UNDER:- 7. WE HAVE NOTED, AS RIGHTLY POINTED OUT BY THE LEARNE D COUNSEL, THAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AS ALSO I N IMMEDIATELY SUCCEEDING ASSESSMENT YEAR, THE TPO HIMSELF HAS ACC EPTED THE SEGMENTAL RESULTS, AS SHOWN BY THE ASSESSEE ON THE SAME LINES AS IN THIS ASSESSMENT YEAR, WITHOUT ANY ADJUSTMENTS. NO DOUBT, THERE IS N O RES JUDICATA IN THE INCOME TAX PROCEEDINGS, BUT THERE HAS TO CONSISTENC Y IN APPROACH ABOUT SUCH A FUNDAMENTAL ASPECT WHICH PERMEATES FROM YEAR TO Y EAR. WE HAVE ALSO NOTED THAT THE BASIC REASON FOR REJECTING THE SEGME NTAL RESULTS IN THIS YEAR IS THAT THERE WERE NO SEPARATE STREAMS OF REVENUES SO FAR AS NON -PROJECT EXPENSES ARE CONCERNED. HOWEVER, IT IS IMPORTANT TO BEAR IN MIND THE FACT THAT WHETHER OR NOT THERE ARE EXISTING SEPARATE STREAMS OF REVENUE FOR NON-PROJECT EXPENSES IS WHOLLY IRRELEVANT BECAUSE WHAT IS MATER IAL IS WHETHER THE EXPENSES IS INCURRED FOR A DISTINCT PURPOSES, OTHER THAN THE THAT OF PROJECT IN QUESTION, OR NOT. ONCE WE COME TO THE CONCLUSION TH AT THE APART FROM DOING THE PROJECT WORK IN QUESTION, THE ASSESSEE WAS ALSO MAK ING EFFORTS TO DEVELOP ITS SEPARATE BUSINESS, AS AN ENTREPRENEUR, AND WHOLE OR A SIGNIFICANT PART OF THE NON PROJECT EXPENSES ARE INCURRED FOR SUCH A PURPOS E, THE EXCLUSION OF WHOLE OF, OR SUCH SIGNIFICANT PART OF, NON-PROJECT EXPENS ES IS FULLY JUSTIFIED. IN CASE THE ASSESSEE HAS TO BEAR THE EXPENSES INCURRED BY I T, AS AN ENTREPRENEUR, FOR BUSINESS DEVELOPMENT EXPENSES, TAKING INTO ACCOUNT SUCH BUSINESS DEVELOPMENT EXPENSES, FOR THE PURPOSE OF COMPUTING OPERATING PROFITS FROM THE BUSINESS ACTIVITY OF PROVIDING THESE TECHNICAL SERVICES IN QUESTION, WILL MAKE THE ASSESSEE INHERENTLY INCOMPARABLE. IT IS NO T EVEN THE CASE OF THE 4 ITA NO. 4082/DEL/2016 REVENUE THAT THE ASSESSEE IS A CAPTIVE SERVICE PROV IDER FORBIDDEN FROM RENDERING SUCH SERVICES TO OTHER ENTITIES. IF THAT BE THE CASE, THE IDLE CAPACITY RISK MUST ALSO GO TO THE AE, BUT THEN THAT IS NOT T HE CASE HERE. IT IS ALSO ELEMENTARY THAT NOBODY CAN BE EXPECTED TO PROVE A N EGATIVE. THE TPO WAS, THEREFORE, CLEARLY IN ERROR IN OBSERVING THAT THE A SSESSEE COULD NOT PROVE THAT THE HEAD NON-PROJECT EXPENSES, WERE NOT WORK. THERE IS NO, AND CANNOT BE ANY, COSTS, ON A FIXED RATIO BASIS, BETWEEN THE PRO JECT COSTS AND NON PROJECT COSTS- SAVE AND EXCEPT FOR THE IDENTIFICATION ON IT EM TO ITEM, I.E ACTUAL, BASIS. THAT IS PRECISELY WHAT THE ASSESSEE HAS DONE. THE D ETAILED BASIS OF ALLOCATION IN RESPECT OF EACH ITEM HAS BEEN SET OUT, AND THE T PO HAS NOT DEALT WITH THESE SPECIFIC ALLOCATION BASIS. SIMILARLY, THE BASIS OF ALLOCATION CANNOT BE FOUND IN THE AGREEMENT AND THE MEMORANDUM OF ASSOCIATION OR ARTICLES OF ASSOCIATION EITHER. THE OBSERVATIONS MADE BY THE TPO ARE THUS W HOLLY UNSUSTAINABLE IN LAW AND INAPPROPRIATE TO THE FACTS OF THE CASE. AS A MATTER OF FACT, AS SUBSEQUENT RESULTS (SET OUT AT PAGE 206 OF THE PAPE R-BOOK) WOULD SHOW, THE ASSESSEE WAS INDEED ABLE TO DEVELOP SUBSTANTIAL BUS INESS FROM NON AES. IN THE SUBSEQUENT ASSESSMENT YEARS, THE PERCENTAGE OF BUSINESS WITH NON AES VIS-A-VIS TOTAL BUSINESS INCREASED TO 31% (AY 208-0 9), 53% (AY 2009-10) AND 59% (AY 2010- 11). THE INFERENCES DRAWN BY THE TPO ARE INCORRECT AND QUITE CLEARLY THE ASSESSEE WAS NOT DOING A SIMPLE SUPPORT SERVICE PER SE FOR THE PROJECT WORK UNDERTAKEN BY ITS AES. THE ASSESSEE DI D ACT AS AN ENTREPRENEUR AND DEVELOPED THIS FIELD QUITE SUBSTANTIALLY, AND T HE SEGMENTAL APPROACH OF THE ASSESSEE HAS BEEN ACCEPTING IN PRECEDING AND SU CCEEDING ASSESSMENT YEAR AS WELL. ON THESE PECULIAR FACTS, THE APPROACH OF THE ASSESSEE, IN TREATING PROJECT WORK AS SEPARATE PROFIT CENTRE, IS JUSTIFIED. THE PLEA OF THE ASSESSEE WAS, THEREFORE, INDEED WELL TAKEN AND WE A PPROVE THE SAME. WITH THESE OBSERVATIONS, THE MATTER GOES BACK TO THE TPO FOR REEXAMINATION OF THE MATTER. AS THE MATTER IS GOING BACK TO THE FILE OF THE TPO, AND AS IT IS UNCONTROVERTED STAND OF THE ASSESSEE THAT IN THE EV ENT OF THIS BASIC PLEA BEING ACCEPTED, ALL OTHER ISSUES, WITH RESPECT TO ALP DET ERMINATION, WILL BE RENDERED 5 ITA NO. 4082/DEL/2016 INFRUCTUOUS AND ACADEMIC, WE SEE NO NEED TO DEAL WI TH OTHER ISSUES, ON ALP DETERMINATION, RAISED BY THE ASSESSEE. 8. THAT TAKES US TO THE SECOND ISSUE WITH RESPECT T O DISALLOWANCE UNDER SECTION 40(A)(I). THERE IS NO DISPUTE THAT TH IS AMOUNT OF 6,53,850 ON ACCOUNT OF RECRUITMENT CHARGES REIMBURSED TO THE ST ANLEY CONSULTANCY INC. THE ASSESSING OFFICER HAS DISALLOWED THE PAYMENT ON THE GROUND THAT NO TAX WAS DEDUCTED AT SOURCE FROM THIS REIMBURSEMENT WHIC H WAS CLEARLY TAXABLE IN INDIA UNDER SECTION 9(1). IN APPEAL, LEARNED CIT (A) HAS CONFIRMED THE SAME. THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPEAL BEFORE US. 9. HAVING HEARD THE RIVAL CONTENTIONS, AND HAVING PERUSED THE MATERIAL ON RECORD, WE FIND THAT THE DISALLOWANCE IS WHOLLY UNCALLED FOR. THE REQUIREMENTS OF TAX DEDUCTION AT SOURCE UNDER SECTI ON 195 DO NOT COME INTO PLAY SIMPLY BECAUSE AN AMOUNT IS BEING REMITTED ABR OAD. THE INCOME EMBEDDED IN SUCH A PAYMENT MUST ALSO BE TAXABLE IN NATURE, AND UNLESS THAT IS ESTABLISHED, THE TAX DEDUCTION AT SOURCE REQUIRE MENTS DO NOT COME INTO PLAY. HERE IS A CASE IN WHICH THE PAYMENT IS IN THE NATURE OF REIMBURSEMENT TO A US RESIDENT, BUT EVEN IF WE GO BY NATURE OF EX PENSES, RECRUITMENT FEES, BY THE VIRTUE OF ARTICLE 12(4)(B) OF INDIA US TAX TREA TY, IS NOT TAXABLE IN THE SOURCE COUNTRY SINCE IT DOES MAKE AVAILABLE TECHNICAL KN OWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, OR PROCESSES OR CONSIST OF THE DEVELOPMEN T AND TRANSFER OF A TECHNICAL PLAN OR TECHNICAL DESIGN. SINCE THE INCO ME EMBEDDED IN THE PAYMENT WAS NOT TAXABLE IN INDIA UNDER THE TREATY P ROVISIONS, AND SINCE TREATY PROVISIONS OVERRIDE THE PROVISIONS OF THE IN COME TAX ACT- UNLESS THE LATTER WAS BENEFICIAL TO THE ASSESSEE, THE TAX WITH HOLDING REQUIREMENTS OF SECTION 195 WERE NOT TRIGGERED ON THE FACTS OF THIS CASE. SINCE THE ASSESSEE DID NOT HAVE ANY TAX WITHHOLDING OBLIGATIONS, NON-D EDUCTION OF TAX AT SOURCE BY THE ASSESSEE CANNOT LEAD TO ANY DISALLOWANCE UND ER SECTION 40(A)(I). WE, THEREFORE, DELETE THE IMPUGNED DISALLOWANCE. 10. THE ASSESSEE THUS SUCCEEDS ON THE SECOND ISSUE. 6 ITA NO. 4082/DEL/2016 THE ORDER GIVING EFFECT TO THE TRIBUNALS FINDING H AS ALSO REVEALED THAT THE ASSESSEES INCOME HAS BEEN ASSESSED AT RS.(-) 1,21 ,79,918/-. THUS, THERE THE PENALTY DOES NOT SURVIVE AS THE ORIGINAL QUANTUM OR DER HAS BEEN QUASHED BY THE TRIBUNAL. THEREFORE, APPEAL OF THE ASSESSEE IS ALLOWED. 8. IN RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH SEPTEMBER, 2018 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 07/09/2018 *R. N COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE OF DICTATION 05.09.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 06.09.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. 7 ITA NO. 4082/DEL/2016 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. PS/PS 7 .09.2018 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 7 .09.2018 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 7 .09.2018 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