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TMI Blog2016 (9) TMI 1298X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned with whether the Woco Group, as a whole, has been able to reduce their tax burden by locating their units rendering technical services outside Germany. The authorities below were thus clearly swayed by the considerations which were not at all germane to the context. As long as the technical services are received by the assessee, the payment for these services cannot be declined on the ground that ideally this payment should have been made to the German entity. As for the contention that all these services, for which Woco Sharjah is paid, are already covered by the agreement with Woco Germany, this is factually incorrect. Clearly, therefore, services are rendered, Woco Sharjah is paid for the same, and at best, the contention of the revenue is that these services are de facto rendered by Woco Germany as even the personnel of Woco Sharjah who have rendered the services are primarily Woco Germany employees on secondment to Woco Sharjah. Nothing on turns on this argument either because as long as services are rendered under the arrangement with Woco Sharjah- as is our categorical finding, and irrespective of who renders these services, no arm’s length price adjustment can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndeed devoid of any legally sustainable merits and it must stand deleted. Appeal for the assessment year 2006-07 is allowed. Disallowance under section 10AA - non-compliance with the scheme of Section 144C - Held that:- Any non-compliance with the scheme of Section 144C is fatal to the assessment itself. As a corollary thereto, when an issue is not raised in the draft assessment order, it cannot be raised in the final assessment order either. As learned counsel rightly points out, once a draft assessment order is passed by the AO and the matter is even carried before the DRP by the assessee, all that the Assessing Officer can do, while framing the final assessment order, is to frame the final assessment order in the light of the draft assessment order and the directions of the DRP. We are in considered agreement with the learned counsel’s contention that no other issue, other than the issues taken up in the draft assessment order and the directions of the DRP, can be taken up by the Assessing Officer at the stage of passing final assessment order. Any other view of the matter will be contrary to the scheme of Section 144C. In this view of the matter, and without dealing with other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions pertained to payment of technical services fees, amounting to ₹ 1,34,85,624, to Woco Mothersons FZC, Sharjah (Woco Sharjah, in short). When these international transactions came up for examination before the Transfer Pricing Officer, upon a reference being made to him under section 92CA(1), the TPO noted that "the assessee company has paid TSF (i.e. technical service fees) to Woco Motherson Sharjah while Woco Germany owns the manufacturing technology" and that "Woco Motherson Sharjah is in the tax haven country where the tax rate is very low". It was in this backdrop, and having noted the facts that Woco Germany owns all the intangibles associated with the manufacturing process adopted by the assessee and that Woco Sharjah does not provide such services to any other AE, the Transfer Pricing Officer required the assessee to show cause as to why the arm's length price of technical services fees not be adopted as NIL. It was explained by the assessee that the manufacturing technology has been licensed by the Woco Germany, and that it is on the basis of the manufacturing technology so licensed that the assessee is able to produce the Woco Germany patented products f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate method, and it was held that CUP method was to be applied. The assessee's benchmarking of technical services fees paid on the basis of similar fees paid to independent enterprises was rejected with the observation that "from the copies of agreements filed before us, it is clear that those third party agreements between unrelated parties were for different services, in different geographical locations and are widely off the mark as the services rendered to the assessee are concerned" and that "in view of strict comparability criterion followed in CUP method, submission of the assessee is not accepted as transaction can at best be benchmarked by applying internal CUP wherein the assessee has not provided any technical services fees to Woco Germany vis-à-vis payment to WML (i.e. Woco Sharjah)". The DRP then concluded that "In view of the above discussions, we hold that the TPO has rightly computed arm's length price at NIL in respect of technical service fees paid by the assessee to its AE. The assessee has paid the fees to WML (i.e. Woco Sharjah), a company based in Sharjah (UAE) which is a tax haven. Had the fees been paid to Woco Germany, it might have been taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sharjah will provide technical support services. Interestingly, however, while agreement with Woco Germany was for "use of know how and inventions", the agreement with Woco Sharjah was for "provision for technical assistance required for use of technology". While undoubtedly these two things are interlinked and interconnected, their scope is distinct and separate. While the purpose of agreement with Woco Germany was for "right, authority and licence" for use of know how and trademark, the purpose of agreement with Woco Sharjah was for "operational and technical competencies relating to manufacturing know how provided under the licence agreement and effective commercial exploitation". The obligation on Woco Germany, as noted in clause 3(A) of agreement, was "to furnish and disclose to the licensee all know how relating to development and manufacturing of the licenced products", and the obligation of Woco Sharjah was for "directly or indirectly furnishing of guidance, advice and assistance with regard to use of" product formulae, process technology, know how etc. The nature of services under the two agreements is distinct even though somewhat interconnected. A lot of emphasis has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess is of no relevance. It is not his job to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. As held by Hon'ble jurisdictional High Court in the case of CIT Vs EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". 16. The very foundation of the action of the TPO is thus devoid of legally sustainable merits. There is no dispute that the impugned payments are made under an arrangement with the AE to provide certain services. It is not even the TPO's case that the payments for these services were not made for specific services under the contract but he is of the view that either the services were useless or there was no evidence of actual services having been rendered. As for the services being useless, as we have noted above, it is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gibles is commensurate with the charge. He also contended that if it is established that under similar circumstances, an uncontrolled entity would not incur such an expenditure, the arm's length price in respect of the same will be NIL. In the present case, the technical services are rendered. We are satisfied that these services, being in the nature of being in the nature of technical assistance for use of technology received from Woco Germany, are distinct from the technology itself. These are separate services which are required for the efficient use of technology. The rendition of these services is not in doubt, as there is contemporaneous evidence for travel and work of the personnel of Woco Sharjah. There is nothing to show that an independent entity would not have paid anything for these services as these were important services for proper use of technology. In the light of our these findings, the reliance placed by the learned DR on Gemplus (supra) and Delloite (supra) decisions is of no assistance to the revenue's case at present. It is also important to bear in mind the fact that, even going by revenue's case, agreements that the assessee entered into with Woco Germany an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Lutz Becker, Chief Technical Officer of Woco Group- who is based in Sharjah, should be taken into account as he alone was in a position to render any useful services to Woco India, but then the ascertainment of ALP is not for the consideration paid for visits of this official, as it is not a separate transaction, and as long as the persons have attended to the technical services in question, the CUP analysis for the fees for technical services has to essentially take into account the visits of all these persons since the consideration, for CUP analysis, is based on mandays of persons attending to the technical services. This plea is also devoid of legally sustainable merits. As noted earlier, no other comparables are brought on record by the TPO are either. This is wholly unworkable. Even if CUP is sought to be applied, as canvassed by the learned DR, appropriate comparables are to be brought on record, in case the comparables adopted by the assessee are to be rejected. One cannot proceed on the basis that under CUP method these services are worthless and, therefore, NIL value should be adopted. For the detailed reasons set out above, such an approach is unsustainable in law. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umber of mandays visited by AEs personnel Amount charged by the AEs 2007-08 718.31 4,62,767 2,50,000 2008-09 759.62 6,87,427 2,81,350 2009-10 856,74 5,32,183 3,55,354 2010-11 907.61 4,23,316 3,89,068 2010-11 907.61 3,00,373 2,40,000 [18] No specific infirmities are pointed out in the above, save and except for the ones discussed above, in the course of our order for the assessment year 2006-07, which we have rejected on merits. Obviously, we have no reasons to take any other view of the matter for these assessment years as well. [19] In the light of our discussions above, as also respectfully following our own order for the assessment year 2006-07, these ALP adjustments must also stand deleted. The action of the authorities below is treating arm's length price for technical services fees at NIL thus stands vacated. The assessee gets the relief accordingly. [20] So far as the appeals for the assessment years 2007-08, 2008-09, 2009-10 and 2010-11 are concerned, no other additions, disallowances or ALP adjustments are called into question. [21] In the result, therefore, these four appeals (for the assessment years 2007-08, 2008-09, 2009-10 and 2010-11) must al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 144C and a nullity in law. He contends that once a draft assessment order is framed by the Assessing Officer, he is functus officio except for implementing directions of the DRP. Learned counsel has made elaborate submissions on this and certain other connected legal issues as also on merits of the disallowance, but, for the reasons we will set out in a short while, it is not really necessary to go into these aspects in detail at this stage. [27] Learned Departmental Representative, however, submits that it is an inadvertent mistake committed by the Assessing Officer and at best the matter can be restored to the file of the Assessing Officer for assessee being given an opportunity to approach the DRP on this issue. He submits that a procedural flaw cannot be allowed to prejudice legitimate interests, of such a magnitude, of the revenue. In case of a procedural irregularity, as in this case, the matter should be restored to the stage at which illegality has supervened. Learned Departmental representative then invites our attention to the cases in which it is held that in case the Assessing Officer did not serve draft assessment orders, as required under section 144B- as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing a final order instead of a draft assessment order which resulted in issuing a corrigendum on 15.04.2013. In the corrigendum it was only stated that the order passed on 26.03.2013 under Section 143C of the Act has to be read and treated as a draft assessment order as per Section 143C read with Section 93CA (4) read with Section 143 (3) of the Act. In and by the order dated 15.04.2013, the second respondent granted thirty days time to enable the assessee to file their objections. On receipt of the corrigendum dated 15.04.2013, the petitioner company approached the first respondent, but the first respondent declined to issue any direction to the assessment officer on the ground that the first respondent has got jurisdiction only to entertain such an appeal if the order passed by the second respondent is a pre-assessment order. Therefore, it is evident that the first respondent declined to entertain the objections raised by the petitioner company on the ground that the order passed by the second respondent is not a draft assessment order, rather it is a final order. Thus, the first respondent had treated the order dated 26.03.2013 of the second respondent as a final order and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llity and an order which is irregular and illegal. Where an authority making order lacks inherent jurisdiction, such an order will be null and void ab initio, as the defect of jurisdiction goes to the root of the matter and strikes at his very authority to pass any order and such a defect cannot be cured even by consent of the parties. 24. This decision squarely applies to the facts of this case. In this case, the order passed by the second respondent lacks jurisdiction especially when it is beyond the period of limitation prescribed by the statute. When there is a statutory violation in not following the procedures prescribed, such an order cannot be cured by merely issuing a corrigendum. 25. In the decision rendered by the Honourable Supreme Court of India in the case of (L. Hazari Mal Kuthiala (supra), which was relied on by the learned standing counsel for the respondents, it was held that the mistake or defect on the part of the Commissioner to consult the Central Board of Revenue did not render his order invalid since the provision about consultation in terms of Section 5 (3) of Patiala Act was merely directory and not mandatory. In the present case, the procedure that was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 158BD (inspite of clear terminology used in both the sections) would not amount to a mistake, a defect or an omission, much less a curable one. When different contingencies are dealt with under different sections of the Act, allowing an illegality to be perpetrated and then taking a plea by the Revenue that such an action adopted on their part would not nullify the proceedings, cannot be appreciated since by virtue of such actions, the Revenue has attempted to nullify the scheme of things of limitations legally propounded under the Act...." 29. In yet another decision of the Division Bench of this Court in the case of Smt. R.V. Sarojini Devi (supra), which was relied on by the learned senior counsel for the petitioners, it was held as follows:- "Under Section 158BC of the Act empowers the assessing officer to determine the undisclosed income of the block period in the manner laid down in Section 158BB and 'the provisions of Section 142, sub-sections (2) and (3) of Section 143, Section 144 and Section 145 shall, so far as may be apply. This indicates that this clause enables the Assessing Officer, after the return is filed, to complete the assessment und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a draft assessment order, communicate it to the assessee, hear his objections and then complete assessment. Admittedly, this has not been done and the respondent has passed a final assessment order dated 22.12.2011 straight away. Therefore, the impugned order of assessment is clearly contrary to S.144C of the Act and is without jurisdiction, null and void. The contention of the Revenue that the circular No.5/2010 of the CBDT has clarified that the provisions of S.144C shall not apply for the assessment year 2008-09 and would apply only from the assessment year 2010-2011 and later years is not tenable in as much as the language of Sub-section (1) of Section 144C referring to the cut off date of 01.10.2009 indicates an intention of the legislature to make it applicable, if there is a proposal by the Assessing Officer to make a variation in the income or loss returned by the assessee which is prejudicial to the assessee, after 01.10.2009. Therefore, this particular provision introduced by Finance (No.2) Act, 2009, would apply if the above condition is satisfied and other provisions, in which similar contrary intention is not indicated, which were introduced by the said enactment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd in such event it is contrary to Section 144C of the Act. As mentioned supra, in and by the order dated 26.03.2013, the second respondent determined the taxable amount and also imposed penalty payable by the petitioner. According to the learned senior counsel for the petitioners, even as on this date, the website of the department indicate the amount determined by the second respondent payable by the company inspite of issuance of the corrigendum on 15.04.2013 as a tax due amount. Thus, while issuing the corrigendum, the second respondent did not even withdraw the taxable amount determined by him or updated the status in the website. In any event, such an order dated 26.03.2013 passed by the second respondent can only be construed as a final order passed in violation of the statutory provisions of the Act. The corrigendum dated 15.04.2013 is also beyond the period prescribed for limitation. Such a defect or failure on the part of the second respondent to adhere to the statutory provisions is not a curable defect by virtue of the corrigendum dated 15.04.2013. By issuing the corrigendum, the respondents cannot be allowed to develop their own case. Therefore, following the order pas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benches, as also Hon'ble Madras and AP High Courts, have held that when a draft assessment order is not issued by the Assessing Officer, the final assessment order is a nullity. That's an altogether different approach and it binds us being directly in the context of section 144C. Now that Hon'ble Courts above, even if non jurisdictional High Court, have followed a different path, we must respectfully follow the same. Of course, as on now, this issue is an open issue before Hon'ble Gujarat High Court, and whatever we hold now is, and shall always remain, subject to the esteemed views of Their Lordships. The right forum for the grievance of the revenue, which can take an independent call, is, therefore, before Hon'ble Courts above. Be that as it may, in the light of the legal position as it stands now in the light of binding judicial precedents before us, any non-compliance with the scheme of Section 144C is fatal to the assessment itself. As a corollary thereto, when an issue is not raised in the draft assessment order, it cannot be raised in the final assessment order either. As learned counsel rightly points out, once a draft assessment order is passed by the AO and the matter i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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