I.T.A. No.238/Del/16, I.T.A. No.1679/Del/08

Pramod Kumar AM and Beena A Pillai JM

Amrendra Kumar For The Revenue :
Deepak Chopra, along-with Mansvini Bajpai For The Assessee :

ORDER

Pramod Kumar, AM:- These cross appeals are directed against the order dated 25th February 2008 passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2003-04.

2. It was, at the outset, pointed out that the appeal filed by the Assessing Officer is a belated appeal inasmuch as while the impugned order was served upon the Assessing Officer on 7th March 2008, the present appeal is filed by the Assessing Officer on 18th January 2016, after obtaining approval of the Commissioner on 16th January 2016. The delay is of thus 7 years and 238 days. Learned Departmental Representative has prayed for condonation of this delay. He submits that, as the condonation petition clearly establishes, the delay is bonafide due to the relevant papers being misplaced and that it is a fit case for condonation of delay. He justifies and supports the condonation petition.

3. As for the contents of the condonation petition, the relevant material facts are as follows. By way of a petition dated 15th January 2016, the Principal Commissioner of Income Tax, Delhi IX, New Delhi, has prayed for condonation of delay. It has been submitted that it was only on 12th January 2016 that the CIT(DR) informed the petitioner that while the revenue has not contested the issue regarding disallowance of technical fees for the assessment year 2003-04, the same issue is being contested for the assessment year 2004-05. The petitioner was informed that not contesting the same disallowance in an earlier year may prejudice the case of the petitioner for the subsequent years. It was in this backdrop that the petitioner attempted to locate the judicial folders for the assessment years 2003-04 and 2004- 05 but could not locate the same. The petitioner, however, submits that “now it is inconceivable that when two orders are received in a batch, a decision could be consciously taken to contest the issue in one of the years and not to contest in the other year” and that “clearly the appeal filed for the assessment year 2004-05 shows that there was no intention to accept the decision given by the CIT(A)”. The petitioner further submits that “it is possible that there was some mishap and only one set of appeal papers were filed”. It is in this backdrop that the petitioner prays as follows:’

Under these circumstances, we beg the leave of the Hon’ble Court to allow us to refile the appeal for the AY 2003-04 on the ground being contested in the AY 2003-04 in respect of identical ground being contested for AY 2004-05. It may be mentioned that this particular issue is a recurring issue and is now being contested for the assessment year 2007-08. If our appeal for the AY 2003-04 is not admitted then this being the base year, revenue’s case would be permanently prejudiced for all subsequent years also.

4. Learned counsel for the assessee, on the other hand, vehemently opposes the condonation petition. He submits that there are no facts stated in the condonation petition except for the admission that it is indeed a delayed appeal. As for the reasons for the delay, according to the learned counsel, the petitioner has nothing to say except reliance on certain inferences drawn. He contends that the fact that the interests of the revenue will be prejudiced for the subsequent year cannot have any bearing on the condonation of delay by the appellant. There is nothing more than the impact on revenue’s appeals for the subsequent years which is stated to be reason for which the delay should be condoned, but that, according to the learned counsel, is wholly irrelevant in the present context. The possibility of mishap and the possibility of only set of papers having been inadvertently filed is a hypothetical possibility, and not the true reason for delay in filing of appeal. There is a clear admission that the appeal is being filed as a result of advice from the DR and upon an appreciation of the consequences for delay. It is a long delay of eight years and clearly a case of reviewing the decision of not filing the appeal upon realization of consequences of not filing the appeal. If such a belated dawn of wisdom can be reason for admission of appeal even belatedly, the law of limitation will cease to have any relevance. We are urged to reject the condonation petition and dismiss the appeal in limine.

5. Having perused the petition and having heard the rival contentions on the same, we are not inclined to yield to the prayer of the petitioner. There is nothing on record to show, or even indicate, that a decision was taken to file the appeal but it was due to some other factors that the appeal was never filed. What has been stated by the petitioner is only an inference but there is nothing to substantiate the facts embedded in the inference. There is at best an indication that the appeal is filed now because of the possibility of damage to the revenue’s cause in the other assessment years, but then such a factor, in our considered view, cannot be reason enough to condone the delay. The condonation of delay can only be granted when there is a sufficient cause for delay in filing of appeal, but then in the present case, there is nothing to demonstrate the cause of delay; if at all, the facts set out in the petition show anything, these facts show the cause of filing the appeal now, rather than the cause of delay in filing of the appeal. There is a difference in cause of delay and inferences about cause of delay. Unless the cause of delay is known, which is quite different from inference about the cause of delay, it is not even possible to come to the conclusion whether such a cause is a reasonable cause or not. In the present case, therefore, there is no occasion to even examine reasonableness of the cause of delay, and as such it is not possible to condone the delay. In our considered view, the apprehensions, howsoever justified, about the impact of non filing of appeals for one year, on the fate of similar appeals in the subsequent years, cannot be reason enough to condone the delay in filing of appeal after almost eight years. That cannot, by any stretch of logic, be the cause of delay; that can at best be the impact and consequences of delay, but then, at the cost of repetition, consequences of delay, howsoever material, cannot be reason enough to condone the delay itself. In view of these discussions, in our considered view, the condonation petition does not deserve to be accepted. We reject the same. The appeal is dismissed as time barred. Having held so, we may also add that even on merits grievance of the Assessing Officer is that “On the facts and in the circumstances of the case and in law the order passed by the CIT(A) is erroneous and the learned CIT(A) has erred in deleting the addition of Rs. 31,82,614 made by the AO on account of payment of technical fees pursuant to parent company and failed to appreciate that: (a) the parent company being 100% shareholder of the company, the payment of technical fees is essentially payment to self, and, therefore, disallowance is made under section 37(1) of the Act”. Such a grievance is wholly ill conceived inasmuch as there is no bar on deductions in respect of payments made to even wholly owned subsidiary companies or, for that purpose, in recognition in incomes from the wholly owned subsidiaries. The grievance raised by the Assessing Officer cannot even be taken seriously, leave alone being accepted. On merits also, therefore, the Assessing Officer has no case.

6. The appeal filed by the Assessing Officer is, therefore, dismissed.

7. Coming to the appeal filed by the assessee, the grievances raised by the assessee are as follows:
1. That the learned CIT(A) has erred in upholding the disallowance of technical fees of Rs. 60,89,599 paid to YKK Holding Asia Pte Ltd during the year under reference as under:

2. That the learned CIT(A) has erred in upholding the disallowance of technical fees of Rs. 60,89,599 paid to a related party, i.e. YKK Holding Asia Pte Ltd, without considering the order passed under section 92CA(3) of the Income Tax Act for AY 2003-04 wherein entire amount of technical fees has been considered and allowed.

8. So far as this grievance of the assesse is concerned, a few material facts and the development leading to this appeal will have to be taken note of. The assessee before us is engaged in the business of manufacturing zippers ad fasteners. During the course of the scrutiny assessment proceedings, the Assessing Officer noted that the assessee has made payments, aggregating to Rs. 92,72,214, to it associated enterprises YKK Holdings Asia Pte Ltd. The Assessing Officer also observed that in in the related debit notes furnished by the assessee “nothing is mentioned about the specific jobs performed by YKK Holding Asia Pte Ltd to whom such huge amount of technical services are paid”. The Assessing Officer did not stop at that. He went on to observe that “the most important question is whether the collaboration agreement between the assessee company (licensee) and the licensor YKK Corporation Japan warrants such payment of technical fees or such payment is covered under the royalty agreement”. In plain words, the case of the Assessing Officer was that since the assessee had paid royalty to YKK Corporation Japan, there was no need to make separate payments towards fees for technical services. It was also noted that in the relevant previous year itself, the assessee had paid Rs. 2,33,30,274 and that “this huge amount of royalty payment made to licensor is only in lieu of certain facilities which are to be provided by the licensor”. The Assessing Officer further took note of assessee’s submissions to the effect that the YKK Holding Asia Pte Ltd was a support centre for ‘production planning and implementation’ and that the services received by the assessee were in the nature of assistance in marketing and procurement, support in research and development activities of the assessee, informational technology support services (such as infrastructure support, implementation of WAVE System for production planning and control, implementation of WAVE system, helpdesk and technical support for AS400, NT Server, Lotus notes etc etc) and assistance and support in administrative, secretarial, accounting and finance function. The Assessing Officer was of the view that since the assessee was entitled to receive know how under the royalty agreement, no separate payment for production planning in manufacturing process was warranted. It was also noted that the assessee was also entitled to receive updates about any improvement in the products or manufacture thereof, there was no need to make additional payments for the technical fees. On the basis of, inter alia, this analysis, the Assessing Officer concluded that “the type of services which are claimed by the assessee company as technical fees and for which huge amount of Rs. 92,72,214 is being paid to YKK Holding Asia Pte Ltd are very much forming part of the licence agreement”, that “it was legal duty of the licensor to provide such services for which he was already paid as royalty charges”, and that, “therefore, technical fees at Rs. 92,72,214 to its own associate enterprises is nothing but a diversion of income and hence is required to be disallowed”. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) noted that so far as payment of Rs. 4,99,135 made by the assessee, the same is for threat and vulnerability assessment of the assessee but since expenses for information technology support is also paid under a separate bill, the claim “does not advance the cause of the assesse”. As regards the payments of Rs. 22,55,270 under the head technical research and development fees, the documents furnished by the assessee relate to training report, training schedule, quality management system and environmental management system, various charts, photographs and factory layouts but “these documents do not support actual rendition of services by YHA”. As regards the payment of Rs. 14,93,297 for “sales support to the fasteners division”, the CIT(A) noted that the TP report categorically states that “YKK India’s marketing strategy is essentially driven through relationship marketing whereby company’s marketing personnel maintain regular contact and goodwill with its dealers and direct customers” and that “YKK India does not resort to significant advertising on the brand as the YKK is already a strong and recognized brand”, it is clear that “the appellant follows a specific marketing strategy and there is no apparent reason for making a separate payment to YHA for sales support”. It was also noted that these expenses cannot be said to be genuine expenses. As far as expenses of Rs. 13,24,702 on sales support on tapes and plastics, the CIT(A) did acknowledge that the reports under the head internal quality audit and management review, various charts on different aspects were placed by the assessee but he was of the view that these things donot evidence rendition of services, and that in any event, as the TP study states “YKK India’s marketing strategy is essentially driven through relationship marketing whereby company’s marketing personnel maintain regular contact and goodwill with its dealers and direct customers” and that “YKK India does not resort to significant advertising on the brand as the YKK is already a strong and recognized brand”, it is clear that “the appellant follows a specific marketing strategy and there is no apparent reason for making a separate payment to YHA for sales support”. Similarly, the payment of Rs. 5,17,195 for administration/ HR cost, was also held to be without basis as no services were established to have been rendered. Accordingly, the CIT(A) confirmed the disallowance to the extent of Rs. 60,89,599. The assessee is aggrieved and is in appeal before us.

9. Having heard the rival contentions and having perused the material on record, we see merits in the grievance of the assessee. The payments made by the assessee to its AE were covered by the international transactions reported by the assesse and the TPO have accepted the same to be arm’s length payments. Under these circumstances, it cannot be open to the Assessing Officer to usurp the powers of the Transfer Pricing Officer and hold that these are not arm’s length payments. Such a parallel analysis of transactions by the AO and the TPO is not at all contemplated under the Act. Under the garb of making disallowance under section 37(1) what the Assessing Officer is really doing is that he is holding the payments made to the AEs as payments not at an arm’s length- something which the Assessing Officer is not entitled to deal with once he has referred the matter, regarding determination of arm’s length price, to the TPO. It is also elementary that what the Assessing Officer cannot do directly, he cannot do indirectly either. What has been termed as a disallowance under section 37(1), given the facts of the case in which a reference was made to the TPO which has held that the payments to AE for technical services fees are at arm’s length price, are de facto ALP adjustments mace directly by the Assessing Officer. However, once a reference is made by the Assessing Officer under section 92CA(3), the Assessing Officer is bound to accept the same. Section 92CA(4), as it stood at the material point of time, provides that “On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm’s length price determined under subsection (3) by the Transfer Pricing Officer." It cannot thus be open to the Assessing Officer to disregard the arm’s length price determined by the TPO. When an Assessing Officer holds that no services are rendered by the AE, essentially he holds that the payments made in the international transaction in question are not arm’s length payments. The ascertainment of ALP by the TPO is not a theoretical exercise inasmuch as the ALP determination is for the actual transaction and not a hypothetical transaction envisaged by the contractual arrangement. It cannot, therefore, be open for the Assessing Officer to say that even though transaction value is held to be an at ALP by the TPO, the ALP can be reduced on account of actual rendition, or non-rendition, of services. Once an international transaction is reported by the assessee, and held to be an ALP by the TPO, it cannot be open to the Assessing Officer to make the ALP adjustment, in the garb of disallowance under section 37(1), on the basis of assumption that the services are not rendered. That is clearly contrary to the scheme of the Act and would result in overlapping jurisdictions. As our day to day experience shows, the TPOs not only examine what is stated in the contract but also what has happened on the ground. In view of these discussions, and for the short reason that the payments for international transactions in question, i.e. payment of technical services fee to the AEs, have been held to be at ALP by the Transfer Pricing Officer, the impugned disallowances were wholly unsustainable in law. In any case, we have perused the nature of evidences for the rendition of services and we are satisfied that it is not a case in which services are not rendered by the AE.
10. The appeal of the assessee is thus allowed.