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Judgment
PER AMITABH SHUKLA, AM,
Appeal No.4930/Del/2018 for the Assessment Year 2013-14 by the Revenue is directed against the order of the Ld. Commissioner of Income Tax(Appeals)-44, New Delhi [hereinafter referred to as ‘ld. CIT(A)] dated 21.10.2016 arising out of assessment order dated 31.01.2017 passed under section 143(3)/144C of the Income Tax Act, 1961, whereas the appeal filed by the assessee in ITA No.8597/Del/2019 for the Assessment Year 2014-15 is directed against the order of the ld. CIT(A)-44, New Delhi, dated 20.08.2019, arising out of assessment order dated 27.02.2018 passed under section 144C r.w.s. 143(3) of the Act. The word ‘Act’ herein this order would mean Income Tax Act, 1961.
ITA No.4930/Del/2018
The Revenue has raised following grounds of appeal in ITA No.4930/Del/2018:-
“The ld. CIT(A) has erred in law and on facts in directing to delete the adjustment on account of Managerial remuneration to Director of the Company.”
We have heard rival submission the light of material available on record. The brief factual matrix of the case is that the assessee company had filed its Return of Income on 29.11.2013 declaring total income of Rs.304,03,40,790/-. The assessee is engaged in the business of directing selling of consumer products through multilevel marketing. The assessee was having international transactions with Associate Enterprises and hence its case was referred to the TPO for determination of Arm’s Length Price. An order under section 92CA(3) of the Act was passed by the TPO on 31.10.2016 recommending an adjustment of Rs.23,21,04,662/-. Based upon the recommendation of the TPO, the ld. AO made the addition of impugned amount and determined taxable income of the assessee at Rs.327,24,45,452/- vide an order under section 143(3) r.w.s. 144C of the Act dated 31.01.2017.
Aggrieved by the impugned addition, the assessee filed an appeal before the Ld. CIT(A) raising grounds of appeal no.1 to 6. The ld. CIT(A) through her order dated 28.02.2018 under section 250 provided relief to the assessee by allowing the appeal. The assessee subsequently moved a rectification application under section 154 before the ld. CIT(A). It was contended that though ld. CIT(A) has allowed assessee’s appeal in entirety qua grounds of appeal nos. 1 to 6, however, no narrative/underlying reasons were attributed while allowing grounds of appeal no.4 to 6 and that the same may be done. The ld. CIT(A) allowed the rectification application of the assessee by passing order under section 154 r.w.s. 250(6) dated 07.05.2018. The Revenue is contesting the impugned order of the ld. CIT(A) through grounds of appeal (supra).
The ld. CIT (DR), Shri Dharma Veer Singh, vehemently argued that the rectification order of ld. CIT(A) was not maintainable in law. It was stated that the ld. CIT(A) was ousted of her powers to have adjudicated any grounds by way of rectification application.
The ld. Counsel for the assessee Shri Sudesh Garg, argued that no infirmity was committed by ld. CIT(A) by passing the impugned order. It was stated that the ld. CIT(A) had already decided the issue in favour of the assessee through her original order dated 28.02.2018 and that the rectification order dated 07.05.2018 was merely a clarificatory order in nature. It was stated that the ld. AO has also given effect to the order of the ld CIT(A) and that therefore the issue was tax neutral for the Revenue. It was also argued that the Revenue has not contested non-maintainability of CIT(A)’s rectification order through any specific grounds of appeal and therefore the challenge was untenable. The ld. CIT-DR countered that the Revenue’s grounds of appeal (supra) covers the issue. The ld. Counsel for the assessee alternatively placed reliance upon the decision of this Tribunal in the case of Tower Watson India Ltd. at ITA No.5182/Del/2016 holding as under:-
“…..5. We have gone through the record in the light of the submissions made on either side. As could be seen from the impugned order, there is no dispute that ground No. 3.9 of the grounds of appeal of the assessee missed the attention of the Ld. CIT(A) while passing the original appellate order. On examination of the record in the light of the submissions made by the assessee, in the impugned order, Ld. CIT(A) reached a factual conclusion that the issue of computation of operating margin by factoring certain income was not adjudicated by the Ld. CIT(A) in the original order and the Ld. CIT(A) also had not provided any reason for non-adjudication of such ground indicating that the ground had reminded to be adjudicated by oversight. This factual finding of the Ld. CIT(A) is not controverted by the Ld. DR. We, therefore, have no hesitation to hold that no error was committed by the Ld. CIT(A) in rectifying the mistake by adjudicating this ground, which missed the attention of the Ld. CIT(A) while passing the original appellate order….”
At this stage for the purpose of correct understanding of the facts of the case, we deem it appropriate to extract the findings of the ld. CIT(A) recorded in her order dated 07.05.2018 as under:-
“1.The impugned appeal was instituted on 01/3/2017 against the order of the Addl. CIT, Special Range -1, New Delhi dated 31.01.2017 under section 143(3) / 144 C of the Act and received in this office on 03/3/2017. The final appellate order was passed by this office on 28.02.2018 in Appeal No. 112/2016-17/CIT (A)-44.
2.The appellant has filed rectification application u/s 154 vide letter dated 16.03.2018stating as follows:-
We are in receipt of the captioned order (hereinafter referred to as 'the Order') dated February 28, 2018 issued u/s 250(6) of the Act (copy enclosed as Annexure 'A', received on March 12, 2018.)
In this connection, we wish to move a rectification application us 154 of the Act on the following grounds:
1.Adjudication of Ground No. I in the favour of the taxpayer - Appellant virtually decides all subsequent grounds of appeal in its favour. By upholding the aggregated approach (viz. Transaction Net Margin Method) as adopted by the taxpayer-Appellant in its transfer pricing documentation for the relevant year, you have, in effect, annulled the item-wise TP adjustments made by the TPO on account of royalty as well as managerial remuneration.
2.For the sake of probity, it is our duty to point that the captioned Order suffers from a prima facie defect in so far as it does not expressly deal with grounds of appeal directly pertaining to adjustment on account of managerial remuneration. However, there is a clear finding under paragraph 7.10 of the Order to the effect that all grounds (viz. Grounds 1-6) are decided in taxpayer-Appellant's favour. Therefore, it is imperative that you please incorporate the underlying reason(s)/ narrative for allowing Grounds 4-6 in taxpayer-Appellant's favour by passing a suitable rectification order. We request you to please take the current application on record and allow us opportunity of being heard before passing a suitable rectification order.
3.I have perused the impugned order as well as the submissions of the appellant. The appellant has argued that Grounds of Appeal No. 4 pertaining to computation of arm's length price (ALP) of managerial remuneration has not been adjudicated upon even though it has been stated at para 7.1 of the order that all grounds of appeal have been decided in favour of the appellant. I have perused the impugned order and it is seen that Ground of Appeal No. 4 has not been adjudicated. Non adjudication of a particular ground of appeal is covered u/s 154 of the Act and hence is being adjudicated below.
4.Ground No. 4 reads as follows:-
"The Ld. AO/ TPO erred in law and on facts by computing adjustment on account of specified domestic transactions relating to payment of managerial remuneration without applying any prescribed methods, thereby violating the provisions of section 92C of the Act read with Rule 10C of the Income-tax Rules, 1962".
5.The TPO, in his order dated 31.10.2016 bench marked the remuneration paid to the Managing Director, Mr. WilliamS Pinckney by comparing the same with the average remuneration paid by the appellant to the other directors.
6.The appellant, during the course of appellate proceedings, stated that a specified domestic transactions cannot be used as a bench mark for making transfer pricing adjustments with regards to another specified domestic transaction as a related party transactions cannot be used to bench mark another related party transaction for finding the ALP. The appellant relied upon section 92F (ii) of the Act where it has been stated that ALP means the price which is applied / proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions.
7.I agree with the contention of the appellant that, in view of section 92F (ii) of the Act, the payment made to one managing director cannot be compared with the payment made to another director for making transfer pricing adjustment under the Act. In view of the same the contention of the appellant is accepted. The AO / TPO is directed to delete transfer pricing adjustment made on account of managerial remuneration to Mr. William S Pinckney. 8. The application under section 154 r.w.s. 250(6) of the Act is accordingly disposed off….”
At the outset, we have noted that the argument of the ld. Counsel of Revenue not raising any specific ground qua non-maintainability of ld. CIT(A)’s rectification order is correct. The Revenue’s shelter behind its ground of appeal no.1 is resting upon a weak footing. We have also noted sufficient strength in the argument of the ld. Counsel that the issue is tax neutral for the Revenue since the ld. CIT(A) through his original order allowed full relief by adjudicating grounds of appeal nos.1 to 6 in assessee’s favour. True, the issues qua grounds of appeal nos.4 to 6 were not analytically narrated is also borne from records as evident from the rectification order extracted hereinabove. Upon considerations, we have noted that the assessee’s reliance upon the decision of this Tribunal in the case of Tower Watson India (supra) is correct. Accordingly, the arguments of Revenue about non-maintainability of the rectification order have been found to be bereft of any meritorious consideration.
This brings us to the ground of appeal raised by the Revenue qua the merits of the addition. The issue is regarding the upward adjustment proposed by the Ld. TPO of Rs.23,21,04,662/- which was added by the ld. AO and subsequently deleted by ld. CIT(A). At this stage, it necessary to incorporate the relevant findings of the ld. TPO contained in his order dated 31.10.2016.
“Comment of the TPO:-
The assessee in its TP study report has submitted the following details with regard to Managerial Remuneration paid to its directors during A.Y. 2013-14 is as under:-
Sl. No. Name of Directors PAN NO. Remuneration paid Method used for determining Arm’s Length Price 1 William S Pinckney AAMPP9190L 8,30,04,599/- TNMM 2 Sanjay Malhotra AAFPM7045L 81,26,746/- TNMM 3 Anshu Budhraja ACSPD59479 1,13,12,166/- TNMM 4 Arvind Kalra AALPK9081A 31,42,529/- TNMM The assessee was asked to submit the necessary details and information with regard to managerial remuneration paid to its director vide Show Cause Notice dated 21.09.2016 as mentioned above. The reply of the assessee has been perused and Annexure-11 of the submission has been analyzed. However, the assessee has only submitted the required details with regard to the three directors and no information and document has been submitted with regard to payment of managerial remuneration to Mr. William S Pinckney during AY 2013-14. It is pertinent to note that as held by the ITAT, Mumbai in the case of UCB India (2009-11I-02-ITAT-Mum-TP) it is the duty of the AE to furnish requisite information to the taxpayer if it wants to help the assessee in its tax matters. If the assessee does not provide the relevant information then it is not for the revenue to conclude that the transaction is at arm's length.
The assessee did not provide the qualification and professional competence details of its director Mr. WilliamS Pinckney. Further, it also did not provided the role and function performed by Mr. WilliamS Pinckney in comparison to the other three directors. The detailed examination becomes imperative in the light of the assessee submission that it has paid more than 10 times to Mr. WilliamS Pinckney in comparison to the average of managerial remuneration paid to the other three directors. The assessee also asked to submit the details regarding the period of stay in India of Mr. WilliamS Pinckney and copy of income tax return filed by him. In the absence of these information, it is not clear whether Mr. WilliamS Pinckney has paid tax on the receipt of managerial remuneration during AY 2013-14. It is not out of the place mention here that while the assessee has submitted the required details with regard to the three directors, it has not taken pains to submit the required documents and information with regard to managerial remuneration paid to Mr. William S Pinckney.
Therefore, considering the above facts the arm's length price of payment made to Mr. William S Pinckney is determined as the average of the managerial remuneration paid to the other three directors (81,26,746+1,13,12,166+31,42,529=2,25,81,441/3=75,27,147) amounting Rs.75,27,147/-
In view of the above discussion, the arm's length managerial remuneration payment to Mr. William S Pinckney is determined and computed as under:
| Managerial Remuneration to Mr. William S Pinckeny as per Form 3CEB | Rs.8,30,04,559/- |
| Arm’s length Price | Rs.75,27,147/- |
| Balance in excess of ALP disallowed | Rs.7,54,77,412 |
The ld. Counsel for the assessee vehemently argued in favour of the order of the ld. CIT(A) inter alia including the views qua application of section 92F(ii) of the Act. The ld. DR on the contrary argued that since this is Revenue’s appeal and the assessee has not invoked provisions of Rule-27 of the Tribunal’s Rules, the arguments cannot be entertained. We are in conformity with the views of the ld. CIT-DR. The ld. CIT-DR further argued that in subsequent year on the same issue, the ld. CIT-DR had decided the issue in favour of the Revenue.
We have noted that the principal issue, which is seminal to the controversy is that the ld. TPO had proposed the impugned adjustment of Rs.23,21,04,662/- mainly on account of non-supply of any information by the assessee in respect of the said Mr. William S Pinckney. The blame of non-supply therefore squarely rests upon the tax payer. In this regard, we concur with the arguments of the Ld. CIT DR that within the meanings of Rule 10D , it is the responsibility of the tax payer to provide all details to the revenue authorities during assessment proceedings. The ld. CIT-DR further argued that within the meanings of decision of Special Bench of the Tribunal in case Aztec Software, ld. CIT(A) ought to have applied own ALP for determination. In support of TPO’s decisions, the ld. CIT-DR placed reliance upon the decision of Hon’ble Mumbai Tribunal in the case of UCB India holding that if the information from assessee is not adequately forthcoming, then the ld. AO is empowered to draw its conclusions. The ld. Counsel for the assessee however reiterated its argument taken before the ld. CIT(A) qua invocation of provisions of section 92F(ii) of the Act. The ld. AR could not give any satisfactory reasons for non-submission of requested details to the ld. TPO.
Be that as it may be, we are of the considered view that in view of the fact that the entire addition is based upon non-submission of information by the assessee to the ld. TPO, it would be in the fitness of things to remit the matter to the TPO for denovo determination of ALP. Accordingly, we remit the matter to the file of the ld. TPO for determination of ALP. The assessee shall be bounden to comply with statutory notices by the ld. TPO and provide all the requested data which was hitherto requested by the TPO and not provided. The assessee shall be at liberty to provide any other data deemed necessary. Considering the fact that it is an old matter which deserves earliest resolution, the ld. AO shall be required to conclude his proceedings within 180 days of this order. The grounds of appeal raised by the Revenue are therefore allowed for statistical purposes.
In the result, the appeal of the Revenue in ITA NO.4930/Del/2018 is allowed for statistical purposes.
ITA No.8597/Del/2019:-
The assessee has raised following grounds of appeal in ITA No.8597/Del/2019:-
1.The Ld. CIT(A) has erred on facts and in law in confirming the additions/adjustments made by the TPO/AO amounting to Rs.32,58,33,029 - comprising of Royalty Payment adjustments of Rs. 18,59,47,467/- and Managerial Remuneration paid to Managing Director adjustment of Rs. 13,98,85.562/-.
2. Grounds with respect to rejection of benchmarking approach of the appellant:-
2.1The Ld. CIT (A) has erred on facts and in law in confirming the generalised/mechanical rejection by the TPO/AO of arm's length price discovered by the appellant in accordance with the provisions of section 92C of the IT Act ("Act") read with the relevant provisions of rules 10A/10B/10C/10AB/10CA of the Income Tax Rules ("Rules").
2.2The Ld. CIT(A) has erred on facts and in law in confirming the generalised/mechanical rejection by the TPO/AO of the Benchmarking approach adopted by the appellant in its TP documentation prepared u/s 92D of the Act read with rule IOD of the Rules without examining the specific facts and circumstances of the appellant's case.
2.3The Ld. CIT(A) has erred on facts and in law in confirming the generalised/mechanical rejection by the TPO/AO of arm's length price discovered by the appellant in gross violation of principal of natural justice without giving proper opportunity of being heard to the appellant especially in view of the fact that under the same facts and circumstances of the matter during the preceding AY 2013-14 the Ld. CIT(A) had herself disapproved the rejection made by the TPO/AO.
3. Grounds with respect to adjustments with regard to Royalty Payment:-
3.1Ld. CIT(A) has erred on facts and in law in confirming the segregation of the transactions by the TPO/AO with respect to royalty payment without appreciating the fact that those transactions were integral and inseparable constituents of the overall composite business model of the appellant and for that reason were incapable of being tested separately.
3.2Ld. CIT (A) has erred on facts and in law in confirming a new method adopted by the TPO/AO as the most appropriate method ("MAM") with regard to discovery of arm's length price for royalty payment without discharging statutory requirements as regard to fulfilment of relevant criteria for the method preferred by TPO/AO to supersede the method selected by the appellant in its TP documentation.
3.3Ld. CIT(A) has erred on facts and in law in confirming the comparables selected by the TPO/AO for the purposes of discovery of arm's length price with regard to royalty payment without mentioning/disclosing/following the search methodology adopted by the TPO/AO and without giving any opportunity of being heard to the appellant with regard to the correctness/acceptability of the comparables selected by the TPO/AO for discovery of arm's length price.
3.4Ld. CIT(A) has erred on facts and in law in confirming the adjustments made by the TPO/AO on account of royalty payment when in the identical facts and circumstances of the matter the Ld. CIT(A) had herself found the adjustments made by the TPO/AO in the preceding AY 2013-14 to be unsustainable.
3.5Ld. CIT(A) has erred on facts and in law in confirming the adjustments made by the TPO/AO by relying upon inappropriate/incorrect comparables discovered through undisclosed/ defective search process.
3.6Ld. CIT(A) has erred on facts and in law in confirming the rejection made by the TPO/AO of six comparables submitted by the appellant before the TPO with regard to arm's length price for royalty payments as discovered in its Global Royalty Benchmarking Study.
3.7Ld. CIT(A) has erred on facts and in law in confirming the adjustments made by the TPO/AO on account of royalty payment by grossly misleading/misdirecting herself in making absolutely false and incorrect inference/assumption that the TPO has given detailed and cogent reasons for determining the arm's length price of Royalty as 3.64% instead of 5% held by the appellant" when on the face of it the order of the Ld. TPO had no such detailed and cogent reasons whatsoever.
3.8Ld. CIT(A) has erred on facts and in law in confirming the adjustments made by the TPO/AO on account of royalty payment in gross violation of principal of natural justice without considering the interim submission made by the appellant and also ignoring specific request/submission made by the appellant to make further detailed submissions and detailed arguments, as may be warranted.
3.9Ld. CIT(A) has erred on facts and in law in confirming the adjustment made by the TPO/AO on account of Royalty payment when she had herself deleted the similar adjustment on account of Royalty payment made by the TPO in the preceding A.Y. 2013-14 on the identical/similar basis specially considering the fact that there was no difference in the facts and circumstances of the matter with regard to the Royalty payment for both these years.
4. Grounds with respect to adjustments with regard to Managerial Remuneration
4.1Ld. CIT(A) has erred on facts and in law in confirming the segregation of the transactions by the TPO/AO with respect to managerial remuneration paid to the Managing Director without appreciating that those transactions were integral and inseparable constituents of the overall composite business model of the appellant and for that reason were incapable of being tested separately.
4.2Ld. CIT(A) has erred on facts and in law in confirming a new method adopted by the TPO/AO as the most appropriate method ("MAM" for the purpose of carrying out arm's length analysis with regard to discovery of arm's length price for managerial remuneration paid to the Director without discharging onus as regard fulfilment of relevant statutory criteria for method preferred by TPO to supersede the method selected by the appellant in its TP documentation.
4.3Ld. CIT(A) has erred on facts and in law in confirming the adjustment made by the TPO/AO on account of managerial remuneration paid to the Managing Director by benchmarking the same with another related party to discover arm's length price which is against the basic principal of transfer pricing especially when the Ld. CIT(A) herself in the preceding assessment year (AY 2013-14) had under the identical facts and circumstances passed rectification order u/s 154 of the Act and deleted the identical adjustment for the same reason.
4.4Ld. CIT(A) has erred on facts and in law in confirming the adjustment made by the TPO/AO on account of managerial remuneration paid to the Managing Director by comparing the same with the remuneration paid to the directors when they were functionally not comparable in terms of qualification, experience, responsibilities, duties etc
4.5Ld. CIT(A) has erred on facts and in law in confirming the adjustment made by the TPO/AO on account of managerial remuneration paid to the Managing Director ignoring the fact that the remuneration paid to the Managing Director were fully taxable in India as he was resident in India and for that reason there was no tax advantage to the appellant or the appellant and the Managing Director as a whole by paying alleged excessive and unreasonable remuneration within the meaning of section 40A(2)(b) of the Act.
4.6Ld. CIT(A) has erred on facts and in law in confirming the adjustment made by the TPO/AO on account of managerial remuneration to the Managing Director by ignoring the fact that there was always a similar variation between the remuneration paid to the Managing Director and the other directors during several preceding years and the Assessing Officer found them to be reasonable inspite of having completed the assessments u/s 143(3) of the Act.
4.7Ld. CIT(A) has erred on facts and in law in confirming the adjustments made by the TPO/AO on account of managerial remuneration paid to the Managing Director in gross violation of principal of natural justice without considering the interim submission made by the appellant and also ignoring its specific request/submission made by the appellant to make further detailed submissions and detailed arguments, as may be warranted.
5. Ground with respect to the consistency:-
5.1Ld. CIT(A) has erred on facts and in law in rejecting the ground of the consistency raised by the appellant by grossly misdirecting/misleading herself in assuming that "The TPO/AO has given detailed and cogent reasons distinguishing the facts of the case in the year under reference" when the irrefutable fact of the matter is that there was no such distinction pointed out by the TPO/AO.
Ground of appeal no.2 and 4 with reference to addition made on account of managerial remuneration and the ALP determination, are resting on the identical facts as in AY 2013-14 (supra). We have noted from para-5.26 and 5.27 of the ld. CIT(A)’s order that the assessee had not provided details qua its director Mr. William S Pinckney which led to upward adjustment by the TPO. Facts being same, we are of the considered view that the decision taken in AY 2013-14 of Revenue’s appeal shall apply mutatis mutandis. Accordingly, we remit the matter to the file of the ld. TPO for determination of ALP. The assessee shall be bounden to comply with statutory notices by the ld. TPO and provide all the requested data which was hitherto requested by the TPO and not provided. The assessee shall be at liberty to provide any other data deemed necessary. Considering the fact that it is an old matter which deserves earliest resolution, the ld. AO shall be required to conclude his proceedings within 180 days of this order. The grounds of appeal no.2 and 4 raised by the assessee are therefore allowed for statistical purposes.
The next ground of appeal raised by the assessee is regarding the addition made by the ld. AO on account of royalty amounting to Rs.18,59,47,467/- as per recommendation of ld. TPO.
We have heard rival submissions in the light of material placed on record. The ld. Counsel for the assessee has argued that on this issue in AY 2013-14, the ld AO had made an addition of royalty amounting to Rs.15,66,27,250/-which was deleted by the ld. CIT(A) vide appellate order dated 28.02.2018. The matter was taken to the Tribunal by the Revenue which upheld the order of the ld. CIT(A) vide order dated 08.10.2021 in ITA No.2833/Del/2018. The Revenue contested the matter before the Hon’ble jurisdictional High Court, which also dismissed the Revenue’s petition through its order dated 18.09.2022. The ld. Counsel thus argued that the matter is squarely covered in its favour. It was also submitted that no adjustment on royalty was made by the Revenue authorities for assessment year 2009-10 to 2012-13 and for AY 2015-16 and further that for AY 2016-17, the issued was dropped after issuance of a show-cause notice. The ld. Counsel further argued that the arguments taken by ld. TPO for AY 2013-14 and AY 2014-15 are nearly identical save changes in figures.
The ld DR tried to distinguish the case on its facts and that therefore reliance cannot be placed upon past decisions of this Tribunal as well as Hon’ble High Court.
We have noted that there is no change in the facts of the case vis-à-vis AY 2013-14 and for which year the matter stands decided in favour of the assessee by the decisions of this Tribunal as well as Hon’ble High Court mentioned supra. Accordingly, in respectful compliance to the cited judicial precedents, we are of the considered view that there is no case for any adjustment in assessee’s case in respect of royalty. We, therefore, set-aside the order of the ld. CIT(A) and direct the ld. AO to delete the impugned addition. Ground of appeal no.3 raised by the assessee is allowed.
In the result, the appeal in ITA NO.8597/Del/2019 is partly allowed.
20 Finally, ITA NO.4930/Del/2018 of Revenue is allowed for statistical purposes and appeal in ITA NO.8597/Del/2019 of the assessee is partly allowed