This appeal filed by the assessee is directed against the final assessment order dt. 31st Jan., 2017 passed by the AO (AO) under s. 143(3) r/w s. 144C of the IT Act, 1961 (hereinafter also called ‘the Act’) in relation to the asst. yr. 2012-13.
2. Only two issues are raised in this appeal. First is against the addition of Rs. 33,11,21,660 made by the AO on account of TP adjustment in AMP expenses.
3. Briefly stated, the facts of the case as recorded in the assessment order are that the assessee is engaged in the manufacturing and trading of soft contact lenses, eyecare solution and protein removing enzyme tablets. The assessee is also involved in the trading of surgical equipments, such as, Excimer Laser System and Cataract Machines and Intra Ocular lenses. The assessee reported certain international transactions in Form No. 3CEB. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of these transactions. The TPO proposed transfer pricing adjustment amounting to Rs. 13.69 crores in respect of AMP expenses primarily under bright line approach on protective basis and an addition of Rs. 33,11,21,660 on substantive basis by considering total advertisement, marketing and promotion expenses incurred by the assessee as contributing to the brand promotion of the AE plus gross profit margin rate earned by the assessee. The assessee remained unsuccessful before the DRP. That is how, the AO made an addition of Rs. 33.11 crores on account of AMP expenses on substantive basis against which the assessee has come up in appeal before us.
4. We have heard the rival submissions and perused the relevant material on record. It is noticed that similar issue cropped up in the assessee’s appeals for preceding years. The Hon’ble jurisdictional High Court in the assessee’s own case for the asst. yrs. 2006-07 to 2010-11 has held that there is no international transaction of AMP expenses and the resultant additions were deleted. The immediately preceding assessment year, namely, 2011-12 came up for consideration before the Tribunal. Vide its order dt. 23rd Sept., 2016, the Tribunal in ITA No. 6778/Del/2015, ordered for the deletion of addition on account of AMP expenses by following the judgment of the Hon’ble High Court.
5. The learned Departmental Representative contended that the facts and circumstances of the instant year are different inasmuch as the assessee did only 'distribution’ activity in the year under consideration as against the 'manufacturing and distribution’ activities done for earlier years. This contention does not appear to be correct. It is apparent from the first page of the TPO’s order wherein he has recorded that: ‘the assessee is engaged in manufacturing and trading of soft contact lenses……….’. Similarly, the AO in the impugned order has also recorded in para 2 that the assessee is : ‘engaged in the business of manufacturing lense care solutions and trading of contact lenses and ophthalmic intra ocular lenses and surgical equipments’. It is, therefore, palpable that the nature of activity carried out by the assessee during the instant year is similar to that done in the earlier years, being that of manufacturing and trading as well. In the absence of any difference in the factual position prevailing in the year under appeal vis-à-vis the earlier years and respectfully following the precedents, we order for the deletion of the addition.
6. The only other issue is against the addition of Rs. 15,15,98,787 made by the AO on account of transfer pricing adjustment in intra group services.
7. Briefly stated the factual matrix of this issue is that the TPO did not propose any transfer pricing adjustment in his order on account of intra group services. The DRP found during the course of hearing that the TPO followed due process and had issued a detailed show-cause notice on this score. However, while passing the order, this point was inadvertently overlooked and hence could not be incorporated in the order of the TPO. The DRP required the TPO to incorporate the benchmarking analysis and propose transfer pricing adjustment w.r.t. intra-group services in his order. Ex consequenti, the TPO carried out such benchmarking analysis and determined Nil ALP of such a transaction. The DRP, after due notice to the assessee and having entertained its objections, directed to make transfer pricing adjustment of Rs. 15,15,98,787. That is how, the AO made such an addition in the impugned order, against which the assessee is in appeal before us.
8. The learned Authorised Representative contended at the outset that the DRP overstepped its jurisdiction in directing the AO to make such an addition. It was stated that the DRP had no power to ask the TPO to carry out benchmarking analysis of the international transaction of intra-group analysis, once the TPO did not propose any transfer pricing adjustment on this count in his original order. It was submitted that if, at all, there was some infirmity in the order of the TPO or the draft order, the remedy lied only with the CIT to revise such order under s. 263. This was opposed by the learned Departmental Representative.
9. After hearing both the sides, it is found as an admitted position that the TPO or the AO in the draft order did not propose any transfer pricing adjustment or addition on account of intra-group services. It was done at the instance of the DRP. Now the question is whether the DRP is empowered to adopt this course of action. At this stage, it is relevant to take note of the mandate of sub-ss. (7) and (8) of s. 144C as under : -
‘(7) The DRP may, before issuing any directions referred to in sub-s. (5),—
(a) make such further enquiry, as it thinks fit; or
(b) cause any further enquiry to be made by any IT authorities and report the result of the same to it.
(8) The Dispute Resolution Panel may confirm, reduce or enhance the variations proposed in the draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-s. (5) for further enquiry and passing of the assessment order.
Explanation.—For the removal of doubts, it is hereby declared that the power of the DRP to enhance the variation shall include and shall be deemed always to have included the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was raised or not by the eligible assessee’.
10. It is clear from the mandate of sub-s. (8) that the DRP is empowered, inter alia, to enhance the variations proposed in the draft order. The Explanation to this sub-section inserted retrospectively from 1st April, 2000 clarifies that the power of the DRP to enhance the variation shall include the power to consider any matter arising out of the assessment proceedings relating to the draft order, notwithstanding that such matter was not raised by the assessee. When we consider the language of sub-s. (8) in conjunction with the Explanation, it clearly emerges that the DRP has a power to enhance variations proposed in the draft order on an international transaction, even if it was not raised by the assessee. 'Enhance the variations’ include not only increasing the amount of transfer pricing adjustment already proposed, but also making a new transfer pricing adjustment, which was omitted to be proposed/made by the AO/TPO. There is no doubt and cannot be that the power of the DRP is coterminous with that of the AO/TPO. In other words, the DRP can also do all such things, which the authorities could have done but omitted to do. If the language of the provision is read as disabling the DRP to exercise the power of enhancement in the circumstances as are obtaining in the instant case, as has been canvassed on behalf of the assessee, it would amount to diluting the power which the statute has expressly granted.
11. Sub-s. (7) of s. 144C makes it clear that the DRP, before issuing any final directions under sub-s. (5), may either (a) make such further enquiry, as it thinks fit; or (b) cause any further enquiry to be made by any IT authorities and report the result of the same to it. In the instant case, the DRP has impliedly taken recourse to cl. (b) of sub-s. (7) by causing the further enquiry to be made by the TPO before issuing direction under s. 144C(5). In view of the foregoing discussion, it is clear that no exception can be taken to the course adopted by the DRP in making the enhancement.
12. Now, we espouse the other contention of the learned Authorised Representative that if there was some mistake in the order of the TPO or the draft order, then the remedy was with the CIT to revise the order under s. 263 and not in making the enhancement by the DRP. This contention deserves to be repelled because s. 263(1) clearly provides that the CIT may call for and examine the record of any proceeding under this Act, and if he considers that any ‘order’ passed therein by the AO is erroneous in so far as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard etc., revise the order. What is the subject matter of revision is an order of the AO and that too, if it is prejudicial to the interests of the Revenue. An order can be prejudicial to the interests of the Revenue only when it crystallizes the liability of the assessee to pay and notice of demand is issued, which in the opinion of the authority is prejudicial to the interests of the Revenue. If no final liability, pursuant to which a demand notice can be issued, is capable of determination at that stage, such a draft order ceases to be characterized as an ‘order’ capable of revision under s. 263. A draft order precedes the order. Only when a draft order is either not objected to by the assessee or is approved by the DRP, that the final order is passed determining the liability of the assessee, post which, a notice of demand is issued.
13. A draft order, as such, is not appealable, except to be challenged by the assessee before the DRP, which exercises the power, inter alia, to make enhancement. The very rationale in the giving the power of enhancement to the DRP is to correct the draft order to the extent it is prejudicial to the interests of the Revenue. Once this power is given to the DRP and the draft order cannot be characterized as an order, there cannot be any question of the CIT exercising a parallel power under s. 263 to revise such a draft order. We, therefore, jettison the arguments raised by the learned Authorised Representative challenging the power of the DRP to direct the addition on account of transfer pricing adjustment on account of intra group services in the facts and circumstances of the extant case.
14. Now, we take up the addition on merits. Having heard both the sides and perused the relevant material on record, we find that similar issue was raised in the preceding years, albeit, the addition was made directly by the AO as a result of the order of the TPO and there was no enhancement. The assessee challenged it before the appellate authorities. The Hon’ble High Court in the assessee’s own case for the preceding five years has decided such issue in favour of the assessee by deleting the additions. Following the view of the Hon’ble High Court, the Tribunal, for the asst. yr. 2011-12 has directed the deletion of similar addition. As the facts and circumstances of the issue for the year under consideration are mutatis mutandis similar to those of preceding years, respectfully following the precedents, we order for the deletion of addition.
15. In the result, the appeal is partly allowed.