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TMI Blog2024 (6) TMI 814X X X X Extracts X X X X X X X X Extracts X X X X ..... 12) TMI 10 - SUPREME COURT] 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 uphold them, if possible, and carry into effect the intention of the parties. The power of this Tribunal to grant stay u/s 254(2A) of the Act is to be read with 254(1) of the Act and either of the section cannot be read on standalone basis, otherwise it would make these provisions redundant. his principle has been discussed in the case of Hindustan Lever Ltd. [ 2023 (3) TMI 188 - ITAT MUMBAI] It is further held in the decision of Hindustan Lever Ltd., cited (supra) that, even though all the issues are covered by the binding judicial precedents in favour of the applicant/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 discernible that, it is not open to this Tribunal to grant a blanket stay as argued by the Ld.Senior Counsel, as it would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omprises of outstanding disputed demand of tax and Interest u/s. 234 B C. It is submitted that the above demand has been raised by the Ld.AO in the final assessment order dated 29/04/2024 for A.Y. 2020-21 and order dated 30/04/2024 for A.Y. 2021-22, passed u/s. 143(3) r.w.s. 144C(13) of the act, against which, the applicant/assessee has preferred appeals before this Tribunal in IT(TP)A No. 1041 1042/Bang/2024 respectively. 2.1 The facts that led to the additions the hands of the applicant/assessee is submitted be identical for both the years under consideration, ans is as under: The applicant/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 Applicant/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 prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distribution activities and consequently, the arm's length margin for the subject year was computed as per TNMM. He relied on the pictorial presentation of international transaction that is submitted to be not disputed by Ld.AO/TPO: 2.4 The Ld.Senior Counsel Shri A. Shankar submitted a brief summary of proceedings relevant for AY 2020-21 as follows:- a) The applicant/assessee filed its return of income under section 139(1) of the Act for AY 2020-21; a) The applicant/assessee filed its return of income under section 139(1) of the Act for the subject AY 2020-21 declaring an income of INR 4,05,52,37,400. The return was processed under section 143(1) of the Act on 24/12.2021, wherein the income of INR 4,05,55,92,770 was determined, raising tax demand of INR 2,27,520 (Net amount payable). b) The case was selected for assessment vide notice dated 29/06/2021 issued under section 143(2) of Act by the ACIT, NaFAC-1(1)(2), Delhi, being the prescribed Income-tax Authority under section 143(2) of the Act. Thereafter, reference was made on 16/11/2021 to the Ld.Transfer Pricing Officer (`Ld. TPO') in respect of the international transactions of the applicant/assessee. Further, search wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other transactions using other TP methods and proposed adjustments amounting to INR 1841,61,19,170. The adjustments also form part of the draft assessment order issued by Ld.AO under Section 143(3) read with Section 144C(1) of the Act dated 30/06/2023. 2.5 The Ld.TPO thus passed order u/s. 92CA on 27.04.2023 by making following adjustments. 2.6 The Ld.Senior Counsel submitted that adjustment made by the Ld.TPO by using other method( transaction by transaction approach), exceeded the TNMM adjustment in relation to distribution segment. It is further submitted that the Ld.TPO chose not to grant adjustment in accordance with TNMM. 2.7. The Ld.Senior Counsel submitted that the Ld.TPO adopted inconsistent approach on year-on-year basis by computing adjustments under a transaction-by-transaction approach as well as under the entity-wide TNMM approach and cherry-picking the approach which yields the higher adjustment with the sole objective of maximising the TP adjustments, despite there being no change in business / functional profile of the applicant. 2.8 The Ld.Senior Counsel submitted that the Ld.TPO considered sales reward as a separate international transaction and not as an opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, 25/04/2023, 26/04/2023) providing detailed contentions on such transactions being at arm's length. The Ld.TPO, disregarded the factual and legal arguments in the submissions made by the applicant/assessee and passes order under section 92CA(3) dated 28/04/2023 proposing adjustment in the hands of the applicant/assessee on transfer pricing issues. e) The Ld.TPO vide order dated 28/04/2023, rejected the transfer pricing analysis undertaken by the applicant/assessee for the distribution segment but accepted the appellants's approach of selecting TNMM and operating profit by operating revenue as the PLI for the same. Consequently, the Ld.TPO proposed an adjustment to the distribution segment amounting to INR 1003,58,40,000. f) The Ld.TPO recomputed ALP of certain other transactions under transaction-by-transaction approach applying other TP methods and proposed adjustments amounting to INR 2202,48,64,440. The adjustments also form part of the draft assessment order issued by Ld. AO under Section 143(3) read with Section 144C(1) of the Act dated 30/06/2023. 2.10 The Ld.TPO passed order u/s.92CA by making following adjustments. Particulars Amount (in INR) Qualcomm royalty expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses and debugging expenses should not be disallowed as they were not for the purpose of business of the applicant/assessee. It is submitted that detailed explanations were filed for both years under consideration to substantiate that such expenses were incurred by the applicant/assessee and were for the purpose of the business and that there was no double payment of Royalty i.e., such royalty for products sold in India was only paid by the applicant/assessee, vide submissions dated 7 26/06/2023. 3.3 The Ld. Senior Counsel submitted that the Ld.AO did not agree with the contentions of the applicant/assessee and issued separate draft assessment orders under section 143(3) read with section 144C(1) of the Act dated 30/06/2023, proposing following additions from a corporate tax perspective for both years under consideration: For AY:2020-21 S. No. Particulars Reference Amount (INR) 1 Transfer Pricing Adjustment As per order passed by the Ld. TPO 1841,61,19,170 2 Profit shifting through cost inflation of Bill of Material ( BoM ) Ld. AO proposed adjustment on account of alleged BoM cost inflation by holding that the BoM cost (component cost supplied by overseas AEs) have been marked-up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alysis etc. The contentions of the applicant/assessee on transaction by transaction adjustments were also vehemently argued (i.e. alleged testing and debugging charges, support services, payment of royalty to Qualcomm, interest on ECB loan, and the recharacterization of transactions as receivables and imputation of interest thereon etc.). Further, with respect to the adjustment under the distribution segment, detailed contentions were presented for exclusion/inclusion of comparable companies and for granting of necessary) economic adjustments. 4.4 The Ld.Sr. Counsel submitted that with respect to the issue of adhoc disallowance under section 37 of the on the account of alleged BoM cost inflation, it was highlighted that the disallowance made by the Ld. AO is a duplicate adjustment since the Ld.TPO during the course of transfer pricing proceedings had tested the distribution segment (inter-alia including purchase cost debited in the books of the Applicant) and accordingly, the Ld.AO has undertaken an arm's length adjustment under the guise of section 37 of the Act. Without prejudice, it was argued that the adhoc disallowance on account of alleged BoM cost was computed on the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 144C of the Act on 29/04/2024, wherein inter-alia , the following quantitative adjustments/ disallowances were made: S. No. Particulars Amount (INR) 1 Transfer Pricing Adjustment as per order passed by the Ld. TPO 1841,69,77,886 2 Disallowance on account of alleged BoM cost inflation 2640,13,04,193 3 Disallowance on account of Education Cess 3,92,54,283 Total adjustments / additions 4485,75,36,362 4.10. He submitted that the Ld.AO issued demand notice u/s. 156 of the act dated 29.04.2024 of INR 1996,66,85,810. It is further submitted that in computing the demand, the Ld.AO has inter-alia considered the incorrect amount as brought forward loss to the tune of INR 216,59,99,556 and has not granted credit of taxes paid amounting to INR 1,08,23,24,244. Where the issues are rectified the demand would substantially reduce to INR 1792,28,54,626. 4.11. For assessment year 2021-22, the Ld.Sr.Counsel submitted that, the Ld.TPO passed the Order Giving Effect ('OGE') to the DRP directions on 24/04/2024. Subsequently, the Ld.AO passed the final assessment order ('impugned order') under section 143(3) read with section 144C of the Act on 30/04/2024, wherein inter-alia, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (No. 16692 of 2022 T-IT) before Hon ble Karnataka High Court challenging the aforesaid order of provisional attachment. On 16/12/2022, Hon ble Karnataka High Court vide judgment allowed the petition of the applicant/assessee in Writ Petition No. 16692 of 2022 (T-IT) and set aside the order of provisional attachment dated 11/08/2022, whilst noting the multiple counts on which the said order was illegal, however, for balancing the equities the Hon ble Karnataka High Court imposed certain conditions on the applicant/assessee. 7. The Ld. Senior Counsel submitted that. on 29/12/2022, another order of provisional attachment under section 281B of the Act was passed against the applicant applicant/assessee, whilst provisionally attaching the fixed deposit totaling 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) for a period of 6 months on the pretext to protect the interest of revenue. The provisional attachment was made in respect to the 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38,78,08,473 (d) 20% of the outstanding demand for AY 2020-21 (20% of 1996,66,85,810) 399,33,37,162 (e) 20% of the outstanding demand for AY 2021-22 (20% of 1736,59,96,420) 347,31,99,284 (f) Total Security in terms of section 254(2A) for AY 2018-19 AY 2021-22 (B) 1552,08,00,699 (g) Available Balance (A-B) 21,47,91,99,301 12. The Ld. Sr.Counsel submitted that stay may be granted for the year under consideration on the same conditions as observed by this Tribunal for A.Y. 2018-19 (supra) which is as under: 4.4 Coming to the facts of present case, as rightly pointed out by the Id 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 applicant/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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rotected by the attachment and hence, absolute stay may be granted. We also note that the Ld. DR though objected for the stay to be granted to the applicant/assessee based on the accounts attached standing in applicant/assessee s name, could not bring out anything on record to establish that the attached money will not be sufficient to consider the case of the applicant/assessee under section 254(2A) of the Act and that the attached monies cannot be treated as security furnished by the applicant/assessee. 18. As per section 254(2A) of the Act, the Tribunal may after considering the merit of the application made by the applicant/assessee, pass an order of stay in any proceedings in relating to an appeal u/s sub-section (1) of section 254 of the Act, for a period of not exceeding 180 days from the date of such order subject to the condition that applicant/applicant/assessee deposits not less than 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alone the fiction can operate. A construction which defeats the very object sought to be achieved by the Legislature must, if possible, be avoided. For this reason alone, the interpretation canvassed by the applicant/assessee is to be rejected. The view so taken has been affirmed by the Hon'ble Bombay High Court , in the judgment reported as CIT Vs Papillon Investments Pvt. Ltd. reported in (2012) 4 SOT 234. 21. The power of this Tribunal to grant stay u/s 254(2A) of the Act is to be read with 254(1) of the Act and either of the section cannot be read on standalone basis, otherwise it would make these provisions redundant. This principle has been discussed by the coordinate bench of Hon ble Mumbai Tribunal in the case of Hindustan Lever Ltd. Vs. Deputy Commissioner of Income-tax reported in 197 ITD 802 (Mum) . It is further held in the decision of Hindustan Lever Ltd., cited (supra) that, even though all the issues are covered by the binding judicial precedents in favour of the applicant/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 discernible that, it is not open to this Tri ..... 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