SONATA SOFTWARE LIMITED, MUMBAI V. DCIT RANGE 8(2)(2), MUMBAI

ITA 5369/MUM/2017

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 9138 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2020
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Assessment Year: 2012-2013
• Appeal Filed On: 17-08-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A MOHAN
• Assessee Lawyers: ANUJ KISHADWAL L A AR S
• Keywords: Transfer pricing; International transaction; Question of law; Wholly owned subsidiary; Validity of assessment; Set aside
• Section: 143(3); 142(1); 143(1); 143(2); 208

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J, BENCH MUM BAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ITA NO.5369/MUM/2017 ( ASSESSMENT YEAR: 2012-13 ) SONATA SOFTWARE LIMITED 208 T.V.INDUSTRIAL ESTATE S.K.AHIRE MARG WORLI, MUMBAI-400 025 VS. DCIT,RANGE 8(2)(2) AAYKAR BHAWAN MUMBAI-400 020 PAN/GIR NO. A A BCS8459D ( APPELLANT ) .. ( RESPONDENT ) & ITA NO.5866/MUM/2017 ( ASSESSMENT YEAR: 2012-13 ) DCIT, 8(2)(2) ROOM NO.348 AAYKAR BHAWAN MUMBAI-400 020 VS. SONATA SOFTWARE LIMITED 208 T.V.INDUSTRIAL ESTATE S.K.AHIRE MARG WORLI, MUMBAI-400 025 PAN/GIR NO. AABCS8459D ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY SHRI VIJAY MEHTA & SHRI ANUJ KISHADWAL L A , AR S REVENUE BY SHRI. A. MOHAN, CIT-DR DATE OF HEARING 30/07/2020 DATE OF PRONOUNCEME NT 05 /08 /2020 / O R D E R PER G.MANJUNATHA (A.M) : THESE CROSS APPEALS FILED BY THE ASSESSEE, AS WELL AS THE REVENUE ARE DIRECTED AGAINST ORDER OF THE LD. COMMI SSIONER OF INCOME TAX (APPEALS)58, MUMBAI, DATED 19/06/2017 A ND PERTAINS TO ASST.YEARS 2012-13. SONATA SOFTWARE LIMITED. 2 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- GROUND NO. 1: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LEARNED TRANSFER PRICING OFFICER (TPO) /A.O. ERRED IN MAKIN G AN ADDITION OF RS. 11,37,54,713/- ON ACCOUNT OF TRANSFER PRICING ADJUS TMENT IN RESPECT OF ARM'S LENGTH PRICE OF REDEMPTION OF NON -CUMULATIVE CONVERTIBLE PREFERENCE SHARE OF ITS WHOLLY OWNED SUBSIDIARY. GROUND NO. 2: A) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED TPO / A.O. ERRED IN MAKING ADDITION OF RS. 18,76,94,907 ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN RESPECT O F INTERNATIONAL TRANSACTION OF PROVISION OF SERVICES TO AES. B) THE ID. TPO / AO ERRED IN CONSIDERING TRANSACTIO NAL NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD FOR BENCHMARK ING THE TRANSACTION OF PROVISION OF SERVICES AS AGAINST COS T PLUS METHOD ADOPTED BY THE APPELLANT. C) WITHOUT PREJUDICE TO THE ABOVE, THE ID. TPO / AO ERRED IN CONSIDERING THE ENTITIES WHICH ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE APPELLANT WHILE DETERMINING THE ALP OF THE INTERNAT IONAL TRANSACTION OF PROVISION OF SERVICES TO AES. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS O F APPEAL:- 1 WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) IS JUSTIFIED IN HOLDING THAT ADJ USTMENT TO THE RETURNED INCOME CAN BE MADE ONLY ON TRANSACTIONS WITH ASSOCI ATE ENTERPRISES WITHOUT APPRECIATING THE FACT THAT ON TNMM ANALYSIS THE ADJUSTMENT IS REQUIRED TO BE MADE ON TOTAL TRANSACTIONS ENTERED A S THE ANALYSIS IS ON ENTITY LEVEL. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE AO TO COMPUTE THE MARGIN OF THE ASSESSEE ONLY WITH RESPECT TO THE AE SEGMENT WITHOUT APPRECIATING THE FACT THAT THE DEPARTMENT ON THE IDENTICAL ISSUE IN THE CASE OF FIRESTONE INTERNATIONAL PVT LTD HAS NOT ACCEPTED THE DECISION OF HON'BLE HIGH COURT AND HAS FILED SLP BEFORE THE APEX COURT. 3. THE LD. CIT(A)'S ORDER IS CONTRARY IN LAW AND ON FACTS AND DESERVES TO BE SET ASIDE. 4. THE APPELLANT CRAVES LEAVE LO AMEND OR ALTER A NY GROUND OR ADD A NEW GROUND THAT MAY BE NECESSARY. 5. THE APPELLANT PRAYS THAT THE ORDER OF C1T(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO RESTORED. SONATA SOFTWARE LIMITED. 3 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT. THE RETURN OF INCOME WAS FILED ELECTRONICALLY ON 29/11/2012 AND THE SAME WAS PROCESSED U/S 143(1) OF THE I.T.ACT, 1961. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) AND 142(1) OF THE ACT WERE ISSUED . IN RESPONSE TO NOTICE, THE AUTHORIZED REPRESENTATIVE OF THE ASSESS EE APPEARED FROM TIME AND FILED VARIOUS DETAILS AS CALLED FOR. DURIN G THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS ENTERED INTO VARIOU S INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) AND FORM 3CEB HAS BEEN FILED FOR THE SAME. DURING THE COURSE OF A SSESSMENT PROCEEDINGS, IN ORDER TO DETERMINE THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS, A REFERENCE WAS MAD E TO THE TPO. THE DCIT, TP-(4)(1)(2) HAS PASSED ORDER U/S 92CA(3) DATED 14/01/2016 AND HAS SUGGESTED TRANSFER PRICING ADJU STMENT OF RS.11,37,54,730/-, IN RESPECT OF REDEMPTION OF NON CUMULATIVE CONVERTIBLE PREFERENCE SHARES OF THE SUBSIDIARY COM PANY. THE TPO HAD ALSO MADE ADJUSTMENT OF RS.18,76,94,907/-, IN R ESPECT OF SERVICES PROVIDED TO OVERSEAS AES BY CHANGING THE COST PLUS METHOD SELECTED BY THE ASSESSEE TO TRANSACTIONS NET MARGIN METHOD. CONSEQUENT TO TP ADJUSTMENT AS SUGGESTED BY THE TPO, THE LD. AO HAS PASSED FINAL ASSESSMENT ORDER ON 08/ 03/2016 U/S 143(3) R.W.S. 92CA(4) OF THE I.T.ACT, 1961 AND DETE RMINED TOTAL INCOME AT RS.40,22,85,120/- AFTER MAKING TP ADJUSTM ENT AS SUGGESTED BY THE LD.TPO. HOWEVER, BEFORE PASSING FI NAL ASSESSMENT ORDER, THE LD. AO HAS NOT PASSED DRAFT A SSESSMENT ORDER AS REQUIRED U/S 144C(1) OF THE I.T.ACT, 1961. 5. BEING AGGRIEVED BY THE ASSESSMENT ORDER, THE ASS ESSE HAS PREFERRED AN APPEAL BEFORE THE LD.CIT(A). BEFORE TH E LD.CIT(A), THE ASSESEE HAS CHALLENGED ADDITIONS MADE BY THE LD. AO TOWARDS TP SONATA SOFTWARE LIMITED. 4 ADJUSTMENT ON ACCOUNT OF REDEMPTION OF NON CONVERTI BLE PREFERENCE SHARES AND SERVICES PROVIDED TO OVERSEAS AES. THE LD.CIT(A) FOR THE REASONS RECORDED IN HIS APPELLATE ORDER, DATED 19/06/2017, HAS PARTLY ALLOWED APPEAL FILED BY THE ASSESSEE, WHERE, HE HAS UPHELD ADDITIONS MADE BY THE LD. AO TOWARDS TP ADJUSTMENT ON ACCOUNT OF REDEMPTION OF NON CONVERTIBLE PREFERENCE SHARES, HO WEVER ALLOWED RELIEF IN RESPECT OF ADDITIONS MADE TOWARDS TPA ON ACCOUNT OF SERVICES PROVIDED TO OVERSEAS AES BY HOLDING THAT TRANSACTIONS OF THE ASSESSEE WITH ITS OVERSEAS AE IS AT ARMS LENGT H AND NO ADJUSTMENT IS CALLED FOR ON THIS TRANSACTION. AGGRI EVED BY THE LD.CIT(A) ORDER, THE ASSESSEE AS WELL AS THE REVENU E ARE IN APPEAL BEFORE US. 6. THE LD. AR FOR THE ASSESSEE, AT THE TIME OF HE ARING SUBMITTED THAT THE ASSESEE HAS FILED ADDITIONAL GROUND CHALLE NGING THE ORDER PASSED BY THE LD. AO U/S 143(3) R.W.S. 92CA(4) OF T HE I.T.ACT, 1961, DATED 08/03/2016, IN ABSENCE OF DRAFT ASSESSMENT OR DER. THE LD. AR FOR THE ASSESSEE FURTHER SUBMITTED THAT ALTHOUGH, T HE LD. AO IS REQUIRED TO PASS DRAFT ASSESSMENT ORDER U/S 144C(1) OF THE I.T.ACT, 1961, BEFORE PASSING FINAL ASSESSMENT ORDER, BUT TH E LD. AO HAS PASSED FINAL ASSESSMENT ORDER WITHOUT ANY DRAFT ASS ESSMENT ORDER IN CONTRAVENTION OF THE PROVISIONS OF ACT AND THEREFOR E, THE FINAL ASSESSMENT ORDER PASSED BY THE LD. AO U/S 143(3) R .W.S. 92CA(4) DATED 08/03/2016 IS BAD IN LAW AND LIABLE TO BE QUA SHED. THE LD. AR FOR THE ASSESSEE FURTHER SUBMITTED THAT GROUND CHAL LENGING THE VALIDITY OF THE ORDER PASSED BY THE LD. AO FOR WANT OF DRAFT ASSESSMENT ORDER WAS INADVERTENTLY OMITTED TO BE RA ISED BEFORE THE LD. CIT(A). FURTHER, EVEN BEFORE ITAT, THE ASSESSEE HAS INADVERTENTLY OMITTED TO RAISE THE GROUND CHALLENGI NG VALIDITY OF ASSESSMENT ORDER. THEREFORE, A PETITION FOR ADMISSI ON OF ADDITIONAL SONATA SOFTWARE LIMITED. 5 GROUND HAS BEEN FILED ON 11/09/2019 CHALLENGING THE VALIDITY OF ASSESSMENT ORDER PASSED BY THE LD. AO. HE, FURTHER , SUBMITTED THAT ADDITIONAL GROUND OF APPEAL RAISES PURELY QUESTION OF LAW AND NO FACTS ARE REQUIRED TO BE BROUGHT ON RECORD. THEREFO RE, ADDITIONAL GROUNDS OF APPEAL FILED BY THE ASSESSEE MAY BE ADMI TTED AND ADJUDICATED ON MERITS. IN THIS REGARD, HE RELIED UP ON BY THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF NATIONAL T HERMAL POWER CO. LTD. VS CIT 229 ITR 383(SC). 7. THE LD. DR, ON THE OTHER HAND STRONGLY OPPOSING ADDITIONAL GROUND FILED BY THE ASSESSEE SUBMITTED THAT ADDITIO NAL GROUND OF APPEAL FILED BY THE ASSESSEE SHOULD NOT BE ADMITTED , BECAUSE THE LD. AO HAS NOT PASSED DRAFT ASSESSMENT ORDER, ON TH E BASIS OF ADMISSION OF COUNSEL FOR THE ASSESSEE BEFORE THE LD . AO THAT THE ASSESSEE IS NOT FILING OBJECTIONS BEFORE THE LD. DR P. THEREFORE, ONCE THERE IS AN ADMISSION FROM THE ASSESEE FOR NOT FILI NG OBJECTIONS BEFORE THE LD. DRP, THE LD. AO HAS PROCEEDED TO PAS S FINAL ASSESSMENT ORDER AND HENCE, CHALLENGING THE VALIDIT Y ASSESSMENT ORDER FOR WANT OF DRAFT ASSESSMENT ORDER AT THIS ST AGE IS INCORRECT. 8. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MAT ERIAL AVAILABLE ON RECORD AND GONE THROUGH ORDERS OF THE AUTHORITIE S BELOW. WE FIND THAT ADDITIONAL GROUND OF APPEAL RAISED BY THE ASSE SEE IS PURELY A QUESTION OF LAW AND NO NEW FACTS ARE REQUIRED TO BE BROUGHT ON RECORD. FURTHER, IT IS A SETTLED POSITION OF LAW BY THE DECISION OF HONBLE SUPREME COURT, IN THE CASE OF NTPC VS CIT ( SUPRA), WHERE IT WAS CLEARLY HELD THAT THE ASSESEE CAN RAISE ADDI TIONAL GROUNDS OF APPEAL CHALLENGING LEGAL ISSUES AT ANY TIME, EVEN I F SAID GROUND IS NOT TAKEN BEFORE THE LD. AO. THEREFORE, BY CONSIDER ING FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO, BY FOLLOWING TH E DECISION OF SONATA SOFTWARE LIMITED. 6 HONBLE SUPREME COURT, IN THE CASE OF NTPC VS CIT, WE DEEM IT APPROPRIATE TO ADMIT ADDITIONAL GROUND OF APPEAL FI LED BY THE ASSESSEE. HENCE, THE ADDITIONAL GROUND OF APPEAL FI LED BY THE ASSESSEE IS ADMITTED AND TO BE DECIDED ON MERITS. 9. AS REGARDS THE ADDITIONAL GROUNDS OF APPEAL FIL ED BY THE ASSESEE CHALLENGING VALIDITY OF ASSESSMENT ORDER PASSED BY THE LD. AO U/S 143(3) R.W.S. 92CA(4) OF THE I.T.ACT, 1961 FOR WAN T OF DRAFT ASSESSMENT ORDER U/S 144C(1) OF THE ACT, 1961, WE F IND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF VARIOUS HIGH COURTS, INCLUDING HONBLE DELHI HIG H COURT IN THE CASE OF TURNER INTERNATIONAL PVT.LTD. VS DCIT 398 I TR 177 (DELHI HIGH COURT), WHERE, THE HONBLE HIGH COURT HELD THA T FAILURE BY THE LD. AO TO ADHERE TO THE MANDATORY REQUIREMENT OF SE CTION 144C(1) OF THE ACT, AND PASS DRAFT ASSESSMENT ORDER HAD INV ALIDATED THE FINAL ASSESSMENT ORDER, THE CONSEQUENT DEMAND NOTICE AND PENALTY PROCEEDINGS. THE LEGAL POSITION WAS UNAMBIGUOUS AND FINAL ASSESSMENT ORDER STOOD VITIATED FOR FAILURE TO ADHE RE TO MANDATORY REQUIREMENTS OF FIRST PASSING A DRAFT ASSESSMENT O RDER IN TERM OF SECTION 144C(1) OF THE I.T.ACT, 1961. THE HONBLE B OMBAY HIGH COURT, IN THE CASE OF DCIT VS ANDREW TELECOMMUNICAT ION PVT.LTD. (2018) 96 TAXMANN.COM 613 HAS TAKEN SIMILAR VIEW. F URTHER, THE HONBLE BOMBAY HIGH COURT, IN THE CASE OF DIMENSION DATA ASIA PACIFIC PTE.LTD.VS DCIT (304) CTR 140 HAS TAKEN SIM ILAR VIEW AND HELD THAT THE LD. AO IS OBLIGED TO PASS A DRAFT ASS ESSMENT ORDER, EVEN IN REMAND PROCEEDINGS BY TRIBUNAL. FURTHER, TH E ASSESSEE BEING A FOREIGN COMPANY AND IN THE WORKING OUT OF T HE ORDER DATED 05/05/2017 OF THE TRIBUNAL RESULTS IN THE RETURNED INCOME BEING VARIED, THEN THE PROCEDURE OF PASSING A DRAFT ASSES SMENT ORDER U/S 144C(1) IS MANDATORY AND HAS TO BE COMPLIED WITH WH ICH HAS NOT SONATA SOFTWARE LIMITED. 7 BEEN DONE AND HENCE, IMPUGNED ORDER IS QUASHED AND SET ASIDE. THE HONBLE SUPREME COURT IN THE CASE OF ACIT VS NO KIA INDIA PVT.LTD, WHILE DISMISSING SLP FILED BY THE REVENUE HELD THAT ONCE, THERE IS A CLEAR ORDER OF SETTING ASIDE OF AN ASSES SMENT ORDER WITH REQUIREMENT OF AO/TPO TO UNDERTAKE A FRESH EXERCISE OF DETERMINING ALP, FAILURE TO PASS A DRAFT ASSESSMENT ORDER, WOUL D VIOLATE SECTION 144C(1) OF THE I.T.ACT, 1961 AND THIS IS NOT A CURA BLE DEFECT IN TERMS OF SECTION 292B OF THE I.T.ACT, 1961. THE SUM AND S UBSTANCE OF RATIOS LAID DOWN BY THE DECISIONS OF ABOVE CASE LAW S IS THAT THE LD. AO SHALL MANDATORILY PASS DRAFT ASSESSMENT ORDER U/ S 144C(1) OF THE I.T.ACT, 1961, BEFORE PASSING FINAL ASSESSMENT ORDE R. FURTHER, IN ABSENCE OF A DRAFT ASSESSMENT ORDER AS REQUIRED U/S 144C(1) OF THE I.T.ACT, 1961, THE FINAL ASSESSMENT ORDER PASSED BY THE LD. AO U/S 143(3) R.W.S. 92CA(4) OF THE I.T.ACT, 1961, DATED 0 8/03/2016 IS NULL AND VOID, WHICH CANNOT BE SUSTAINED UNDER LAW. BUT, FACT REMAINS THAT SINCE, THE ASSESSEE HAS TAKEN THE GROUND CHALL ENGING THE VALIDITY OF ASSESSMENT ORDER FOR THE FIRST TIME BEF ORE THE TRIBUNAL AND THE LOWER AUTHORITIES NEVER HAD AN OCCASION TO CONS IDER THE ISSUE, WE ARE OF THE CONSIDERED VIEW THAT THE ISSUE NEEDS TO GO BACK TO THE FILE OF THE LD. CIT(A) TO ASCERTAIN THE FACT, WHETH ER THE AO HAS PASSED DRAFT ASSESSMENT ORDER AS REQUIRED U/S 144C( 1) OF THE ACT, OR NOT. IN CASE, THE LD. CIT(A) FINDS THAT THERE IS NO DRAFT ASSESSMENT ORDER WAS PASSED AS REQUIRED U/S 144C(1) OF THE ACT , THEN THE ASSESSMENT ORDER PASSED BY THE LD. AO U/S 144(3) R. W.S. 92CA(4) OF THE ACT IS BAD IN LAW AND CANNOT BE SUSTAINED. THE LD. CIT(A) IS DIRECTED TO CAUSE NECESSARY ENQUIRES AND PASS APPRO PRIATE ORDER IN ACCORDANCE WITH LAW BY TAKING NOTE OF OUR OBSERVATI ONS GIVEN IN LIGHT OF VARIOUS CASE LAWS DISCUSSED HEREINABOVE. SONATA SOFTWARE LIMITED. 8 10. IN THE RESULT, APPEAL FILED BY THE ASSESSEE, A S WELL AS THE REVENUE IS SET ASIDE FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS: 05/08 /2020 SD/- (SAKTIJIT DEY) SD/- (G. MANJUNATHA) JUDICIAL ME MBER ACCOUNTANT MEMBER MUMBAI ; DATED: 05/08 /2020 THIRUMALESH SR.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT. REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//