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TMI Blog2023 (8) TMI 1016X X X X Extracts X X X X X X X X Extracts X X X X ..... t proviso to section 254(2A) of the Act. Thus, provision of the law should not be interpreted to make other statutory provision within the same section, ineffective and nugatory. However, that will precisely be the outcome if we are to hold that the Tribunal's powers of granting the stay, even after the enactment of the first proviso to Section 254(2A), are unfettered inasmuch as a stay can indeed be granted even in clear disharmony with the statutory conditions set out under the first proviso to Section 254(2A). The requirement with respect to the partial payment of demand or furnishing of security in respect thereof will thus be redundant. The law as it stood at the point of time when in the case of ITO Vs. M.K. Mohd Kunhi [ 1968 (9) TMI 5 - SUPREME COURT] the judgment was delivered has undergone significant change vis- -vis the position prevailing as of now, and, therefore, the observations made by the Hon'ble Supreme Court are now to be read in the light of the subsequent enactment of the law. Unlike the Hon'ble Constitutional Courts above, it is not for this forum, i.e. the Income Tax Appellate Tribunal, to sit in judgment over the reasonableness of the legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total -Rs.1833,22,78,898/- 2. It was submitted that this demand has been raised by the ld. AO vide final assessment order dated 29.5.2023 passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 ['the Act' for short] for the assessment year 2018- 19, against which assessee filed appeal before this Tribunal in IT(TP)A No.455/Bang/2013. 2.1 The facts of the case are that the assessee is a subsidiary company of Xiaomi Singapore Pte. Ltd. (`Xiaomi Singapore') (99.95% holding) which in turn is a subsidiary of Xiaomi Corporation. During the year, the Assessee was engaged in the business of distribution of Xiaomi products in India [authorized by Xiaomi Technology Company Limited ('Xiaomi Inc), Xiaomi Communications Co. Ltd ('Xiaomi Communications), Zhuhai Xiaomi Communications Co. Ltd ('Zhuhai Xiaomi) and Xiaomi HK Limited ('Xiaomi HIQ 1, which includes mobile phones, mobile phone accessories and peripherals, other consumer electronic products and gadgets, lifestyle products, and services. The major portion of the handheld mobiles, power banks, spares and related products sold in India by the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was incorporated on 7 October 2014 and has its registered office at Bengaluru, Karnataka. The Assessee filed its return of income under section 139(1) of the Act for AY 2018-19 declaring a total income of INR 4,66,79,51,640/-. The return was processed under section 143(1) of the Act on 18 November 2019 wherein the income of INR 468,03,43,850 was determined along with a tax refund at INR 21,54,84,534. b) The case was selected for assessment vide notice dated 22 September 2019 issued under section 143(2) of Act by the Ld. Assessing Officer (`A0'). Thereafter, a reference was made to the Ld. Transfer Pricing Officer (`TP0') in respect of the international transactions of the Assessee. Various notices were issued by the Ld. AO/ TPO calling for details/ information during the course of the assessment and the Assessee has filed its responses/ submissions from time to time. Further, a reference to FT and TR was also made in this case by the CIT(TP) 2, Bangalore on 20 July 2021 the acknowledgement to which was received on 29 July 2021. c) Meanwhile, on 21 December 2021, in terms of section 132 of the Act, search was commenced on the Assessee by the investigation win ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in collection. h) The Ld. TPO accepted that Assessee is a distributor of Xiaomi products and accordingly undertook a benchmarking analysis and quantified an adjustment w.r.t the distribution segment on TNMM basis. However, in the TP order, in addition to benchmarking the Distribution Segment on entity level, the Ld. TPO has also adopted a transaction by transaction approach and made adjustment on account of specific transactions undertaken by the Assessee. While Ld. TPO did quantify an adjustment w.r.t the distribution segment, however no separate addition was made as the Ld. TPO was of the view that same was subsumed other additions. i) Effectively, the Ld. TPO computed TP adjustment under two approaches, viz., entity wide and transaction wide and chose the approach which resulted in higher quantum of adjustment. j) Accordingly, the Ld. TPO passed an order under section 92CA of the Act dated 30 July 2022 making the following adjustments: Particulars Adjustment u/s 92CA of the Act (Amount in INR) Adjustment on account of Xiaomi Mobile royalty 4,46,87,38,377 Adjustment on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase price of finished goods on account of alleged BoM inflation o Disallowance of testing and debugging expenses. 2.7 The ld. Senior Counsel submitted that the Ld. AO did not agree with the contentions of the Assessee and issued a draft assessment order under section 143(3) read with section 144C(1) of the Act dated 28 September 2022 and proposed the following additions from a corporate tax perspective: o Disallowance of royalty paid to Qualcomm and Xiaomi Mobile being not for the purpose of business of the Assessee** INR 15,24,29,14,504. o Testing and debugging expenses, being not for the purpose of business of the Assessee INR 7,05,27,820 o Adhoc adjustment of purchase price of finished goods on account of alleged BoM inflation 1NR 16,37,68,83,555 ( Since, Ld. TPO had already proposed adjustments on account of Qualcomm and Xiaomi Mobile royalty, no separate quantitative disallowance was made by the AO in the draft assessment order.) 2.8 The ld. Senior Counsel submitted that various adjustments / additions proposed by the Ld. TPO/ Ld. AO** are summarised in the below mentioned table for our reference: S. No. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under distribution segment and the additions made by the Ld. AO in relation to adjustment of the purchase price. Further, the Ld. TPO also submitted its remand report dated 25 April 2023. In response to the same, the Assessee filed a letter dated 26 April 2023 before the Ld. DRP, wherein the Assessee requested the DRP to delete the adjustments proposed by the Ld. AO on account of adhoc adjustment of purchase price alleging mark-up on BoM [given that the Ld. AO admitted that the disallowance is an overlap to the adjustment made by the Ld. TPO]. However, in complete ignorance of the Assessee's objections, contentions and submission, the Ld. DRP passed its directions dated 28 April 2023 under section 144C of the Act. However, with respect to the double disallowance on account of adhoc adjustment of purchase price alleging mark-up on BoM, the Ld. DRP has also accepted that there is an overlap in the adjustment proposed by the Ld. TPO and the Ld. AO. However, no relief has been granted by the Ld. DRP. The relevant para of the order of the Ld. DRP is reproduced below for your ease of reference: With regard to Assessee's contention that the adjustment made by the TPO in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act dated 29 May 2023 wherein a demand of INR 18,33,68,75,690 was raised. Thereafter, the Ld. AO has passed rectification order dated 05 June 2023 and 07 June 2023 [to correct the mistake apparent from record in relation to the double disallowance of gratuity]. While passing the rectification orders, the Ld. AO erred in not granting the entire credit of prepaid taxes and incorrect levy of interest under section 234B and section 234C of the Act. Consequently, a demand of INR 18,33,22,78,898 (including interest) has been incorrectly raised on the Assessee. 2.14 The ld. Senior Counsel submitted that a rectification application dated 15th June 2023 under section 154 of the Act has been filed with the Ld. AO which is pending disposal. At this juncture, he submitted that it is relevant to highlight that on 24 December 2021, the Deputy Director of Income Tax (Investigation), Unit 1(1), Bengaluru passed an order under section 132(3) of the Act whilst temporarily restrained / seized the fixed deposits of the Assessee totalling to INR 3,700 crores viz. INR 2,600 crores with HSBC Bank (Account No. 073-161671-001) and INR 1,100 crores with CITI Bank (Account No. 521656018). On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... likely tax demand of INR 6871,06,59,320 which may arise post conclusion of assessment proceedings in respect to AYs 2018-19 to 2021-22. The said order has been challenged by the Assessee before the Hon'ble Karnataka High Court vide WP 3004 of 2023. 2.16 Thus, it is relevant to note that the provisional attachment order dated 29 December 2022, the FDs of the Assessee to the tune of INR 3,700 crores have been already attached by the Ld. AO, which is significantly more than the demand raised for the subject year. Accordingly, the interest of the revenue already stands protected with respect to the demand determined as payable by the Ld. AO. 2.17. Further, the ld. Senior Counsel submitted that the bank account of the assessee has been attached by Enforcement Directorate as well as by Income Tax Authority u/s 281B of the Act as of now as below:- Attached Bank Accounts Not Attached Bank Accounts 2.18. Further, he submitted that the issue in dispute is entirely covered in favour of the assessee by various judgements of Tribunal as well as by High Courts and as such absolute stay may be granted. He relied on order of the coordinate bench of Delhi Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 702,01,34,198 182,22,72,918 1833,22,78,898 2020-21* 2,27,520 2021-22* 13.74,630 Total 1518,32,16,112 786,04,56,165 251,24,84,625 2053,27,89,798 60,91,33,302 Further, he submitted that for AY 2020-21 and 2021-22 the demand mentioned is demand raised in 143(1)(a) order by CPC. 3.1 The ld. D.R. submitted the details of bank accounts attached u/s 281 of the Act as follows: a. HSBC Bank A/c number 073-161671-001 -Rs.2600,00,00,000 b. Citi Bank A/c Number 521656018 -Rs.1100,00,00,000 According to the ld. D.R., the sum total of the demands spanning across all the assessment years (excluding interest) and 20% of Principal amount The sum total of all the demands (excluding interest for assessments completed u/s 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20% of the amount of tax, interest, fee, penalty, or any other sum payable under the provisions of this Act, or furnishes security of equal amount in respect thereof and the Appellate Tribunal has to dispose off the appeal within the said period of stay specified in the order. In our opinion, once a statutory provision specifically provides that the Tribunal can only grant a stay subject to deposit of not less than 20% of disputed demand, or furnishing of security of equal amount thereof, it is not open to this Tribunal to grant stay in violation of those basic provisions as the Tribunal being a creation of the statute and we are not in a position to question the provisions of this section 254(2A) of the Act. At this point, it is pertinent to mention ratio laid down by Hon ble Supreme Court in the case of CIT Vs Hindustan Bulk Carriers [(2003) 259 ITR 449 (SC)], A construction which reduces the statute to a futility has to be avoided. A statute or any enacting provision therein must be so construed as to make it effective and operative on the principle expressed in maxim ut res magis valeat quam pereat i.e., a liberal construction should be put upon written instruments, so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing judicial precedents in favour of the assessee, a conditional stay may be granted directing the AO to grant stay on collection/recovery of the demand impugned in the appeal. Thus, it is discernable that it is not be open to this Tribunal to grant a blanket stay as argued by the ld. Senior Counsel, as it would be contrary to the scheme of Act as visualized under the first proviso to section 254(2A) of the Act. 4.3. Thus, from the above discussion, in our opinion, the provision of the law should not be interpreted to make other statutory provision within the same section, ineffective and nugatory. However, that will precisely be the outcome if we are to hold that the Tribunal's powers of granting the stay, even after the enactment of the first proviso to Section 254(2A), are unfettered inasmuch as a stay can indeed be granted even in clear disharmony with the statutory conditions set out under the first proviso to Section 254(2A). The requirement with respect to the partial payment of demand or furnishing of security in respect thereof will thus be redundant. The law as it stood at the point of time when in the case of ITO Vs. M.K. Mohd Kunhi (1969) (71 ITR 815) (SC), the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t restriction, on our power to grant a stay on collection/recovery of disputed demands impugned in appeal before us, as visualised in the first proviso to Section 254(2A) of the Act. 4.4. Coming to the facts of present case, as rightly pointed out by the ld. Senior Counsel, out of total attachment of Rs. 5551,27,15,824/- by Enforcement Directorate as well as by Income Tax authorities, an amount of Rs. 3700 Crores has been attached by both authorities and there was overlapping attachment. In our opinion, as of now, the interest of the revenue is fully secured against quantified demand of Rs. 1833,22,78,898/- for the present assessment year i.e. 2018-19. Being so, till this attachment continues, the assessee is not required to make any further payment and/or furnish any further securities. 4.5 However, in the event the attachment of above Bank Accounts as mentioned in earlier para stands vacated or revoked or disturbed or modified by any orders of Court or authorities, the assessee then shall deposit not less than 20% of Rs. 1833,22,78,898/- or furnish security amounting to not less than 20% of the outstanding liability within two weeks from the date of such removal or vacating ..... X X X X Extracts X X X X X X X X Extracts X X X X
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