IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI A BENCH, MUMBAI. Before Shri R.K. Gupta (Judicial Member) and Shri Pramod Kumar (Accountant Member)

Transcription

1 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI A BENCH, MUMBAI Before Shri R.K. Gupta (Judicial Member) and Shri Pramod Kumar (Accountant Member) Stay Petition No.13/Mum./2010 Assessment Year : Date of Hearing: M/s. KEC International Limited, Ceat Mahal 1 st Floor, 463, Dr. Annie Besant Road, Worli Mumbai PAN AACCK5599H.. Appellant Vs Addl. Commissioner of Income Tax Range 8(2), Mumbai Respondent Appellant by Respondent by : Shri Yogesh Thar : Shri Vikram Gaur O R D E R Per Pramod Kumar A.M. By this stay petition, the assessee seeks grant of stay against the recovery of Rs.13,82,64,134/-. The Assessing Officer has issued demand for recovery of Rs.20,00,21,794/- on account of Tax and Surcharge, Rs.5,36,22,242/- on account of interest under sections 234-B, 234-C and 234D and Rs.1,21,50,250/- u/s 220(2) of the Act aggregating to the total demand of Rs.26,57,94,286/-. Out of this total demand of Rs.26,57,94,286/- the assessee has already paid Rs.12,75,30,152/- and the balance outstanding demand is Rs.13,82,64,134/- against which the present stay petition has been filed by the assessee.

2 2 KEC International Ltd. S.P. No.13/Mum./ Learned Counsel for the assessee contends before us that, originally, the assessee claimed depreciation of Rs crores on the brand name. The authorities below declined to allow the claim and as a result of which, the assessee filed appeal before this Tribunal challenging the order passed by the learned CIT(A) which is pending final adjudication. Learned Counsel for the assessee contends that he has a strong prima facie case and reasonable hope to succeed. He has addressed us on merits to demonstrate that he has a strong case but at this stage, we are not inclined to go into those arguments. Learned Counsel for the assessee further contends that the assessee is not in a position to pay the huge demand, which is likely to be deleted. We are thus urged to grant stay on the recovery of Rs.13,82,64,134/- till final disposal of the original appeal filed before this Tribunal. It is further submitted that the assessee s financial position does not permit such huge demand and that considering the overall facts, the balance of convenience is in favour of the keeping collection / recovery of demands in abeyance till the final disposal of the appeal. Alternatively, he has requested for early hearing. Learned Departmental Representative, on the other hand, vehemently opposed the request of the assessee. He relied upon the Hon'ble Supreme Court s judgment in the case of C.C.E. Vs Dunlop India Ltd., 154 ITR 172 (SC). 3. We have heard the rival contentions, perused the material on record and duly considered the applicable legal position as also the factual matrix of the case. While we are not inclined to go into merits of the case, suffice to say that the assessee has an arguable case and it is not a frivolous appeal. In our opinion, considering the facts and circumstances of the case, we find that this is a fit case for grant of stay and the interest of justice would be met by granting stay against payment of Rs.13,82,64,134/-, subject to the following conditions:- That the assessee shall not seek adjournment till the date of final hearing of the original appeal on merit. That the assessee shall not, in any manner, dispose off or otherwise alienate it s fixed assets and fully cooperate in expeditious disposal of the appeal.

3 3 KEC International Ltd. S.P. No.13/Mum./2010 The Registry is directed to fix the appeal out of turn on 22 nd April 2010 for final disposal of the appeal on merit. The requirement of sending notice by registered post with acknowledgement to both the parties is hereby dispensed with. 4. As regards learned Departmental Representative s reliance on the Hon'ble Supreme Court s judgment in the case of Dunlup India Ltd. (supra), we may only refer to the following observations made by a co-ordinate bench in the case of B.N. Nobis & Co. Vs JCIT, 71 TTJ 153:- 5. Before parting with the matter, we may make some observations on Revenue s objection, relying on Hon ble Supreme Court s observations in Dunlop s case (supra), to the stay petition on the ground that paucity of funds has not been sufficiently demonstrated and that for this reason alone stay should not be granted. Hon ble Supreme Court has indeed decried the practice of granting interim orders merely because assessee is able to show a good prima facie case, but to appreciate true import of Hon ble Supreme Court s censure, one has to understand the context in which Their Lordships expressed such feelings. Their Lordships started with the observation that..." It is indeed a great pity and we wish we did not have to say it but we are signally failing in our duty if we do not do so that some Courts, of late, appear to have developed an unwarranted tedency to grant interim orders interim orders with a grant potential for public mischief for the mere asking. We find it more distressing that such interim orders, often ex parte and non-speaking, are made by the High Courts by entertaining writ petitions under Art. 226 of the Constitution." Their Lordships, a little later in this order, further observed that... "There cannot be and there are no hard and fast rules. But prudence, discretion and circumspection are called for. There are several other vital considerations apart from existence of prima facie case. There is the question of balance of convenience. There is the question of irrepairable injury. There is the question of public interest. There are many such factors worthy of consideration. We often wonder why in the case of indirect taxation where the burden has already been passed on to the consumer, any interim relief should be given to the manufacturer, dealer and the like." It will, therefore, be clear that the context in which Hon ble Supreme Court disapproved the practice of granting interim orders, solely on the ground that a prima facie case is made out, was relevant to the cases in which High Courts were entertaining writ petitions under Art. 226 of the Constitution of India as also the cases in which disputed demands related to indirect taxes where burden has already been passed to the consumer. We cannot be oblivious to the distinction between nature of writ jurisdiction of the Hon ble High Courts, and the nature of appellate jurisdiction of this Tribunal. In writ proceedings, Hon ble High Courts step in only when fundamental rights of the petitioner are violated and therefore, they have to resist interfering in the matter until a clear case is made out that not only that an assessee has a strong prima facie case but also that there is a serious threat of infringement to petitioner s rights guaranteed under Chapter III of the Constitution. On the other hand, Tribunal s jurisdiction is akin to that of an appellate Court under the CPC, as observed in CIT vs. Hajarimal Nagji & Co. (1962) 46 ITR 1168 (Bom) and in New Indian Assurance Co. Ltd. vs. CIT (1957) 31 ITR 844 (Bom), and right to appeal before the Tribunal is provided in the statute itself. Therefore, observations of Hon ble Supreme Court in the context of

4 4 KEC International Ltd. S.P. No.13/Mum./2010 grant of stay in writ proceedings do not have the binding force on, or even direct relevance to, the principles governing grant of stay during these appellate proceedings. In this context, we are reminded of the observations of Hon ble Supreme Court, in Mumbai Kamgar Sabha vs. Abdulbhai Faizullbhai AIR 1976 SC 1455, that... "It is trite, going by Anglophonic principles, that a ruling of superior Court is binding in law. It is not of spiritual sanctity but is of ratiowise luminosity within the edifice of facts where the judicial lamps plays the legal flame. Beyond those walls and de hors the milleu we cannot impart the eternal vernal value to the decision, exalting the doctrine of precedents into prison house of bigotry, regardless of varying circumstances and myriad developments, Realism dictates that a judgment has to be read, subject to the facts directly presented for consideration and not affecting those matters which may lurk in the dark". 6. We are, therefore, of the view Hon ble Supreme Court s obiter dicta should not be perceived as a blind man s walking stick, but as luminosity of a judicial lamp in the light of which we have to perform our obligations of imparting justice. On principles governing the decision to grant stay, we undoubtedly find guidance from. Their Lordships observations that though there are no hard and fast rules regarding grant of stay, but prudence, discretion and circumspection are called for and that stay should not be granted as a matter of course. Considerations about balance of convenience, question of irrepairable injury and implications to public interest are to be borne in mind. We are also conscious to the apprehension that "if the Tribunal proceeds to stay recovery of taxes or penalties payable by or imposed on the assessee as a matter of course, the Revenue will be put to great loss because of the inordinate delay in disposal of appeals by the Tribunal, [ITO vs. M.K. Mohd Kunhi (1969) 71 ITR 815 (SC) at p. 822], and therefore, the grant of stay by this Tribunal is always coupled with grant of an out of turn hearing which, in the present case, is to take place within three weeks from today. In the present case since the appeals are scheduled to be disposed of within next few weeks, and since admittedly there is no serious apprehension to the Revenue s rights of recovery being prejudiced by further waiting till the outcome of the appeals, the balance of convenience is in favour of not collecting the demand immediately. We are, therefore, of the considered view that Hon ble Supreme Court s observations in Dunlop s case (supra) cannot be interpreted to mean that this Tribunal is denuded of the powers to grant stay until case for financial stringency is successfully made out by the applicant. However, we see no conflict in holding this view as also adhering to the settled principles governing grant of stay which lay down that financial constraints of the applicant are important, even if not sole of qualifying, consideration in entertaining a stay application, besides considerations like existence of strong prima facie case, balance of convenience and possibilities of Revenue s rights of recovery being prejudiced by waiting till the outcome of appeals. In this view of the matter, we are unable to sustain the objection raised by the Revenue. 5. Keeping in view the aforesaid decision, we are unable to accept the argument putforth by the learned Departmental Representative. Consequently, the stay is hereby granted.

5 5 KEC International Ltd. S.P. No.13/Mum./ This stay petition stands allowed subject to the aforesaid conditions. Pronounced in the open court today On 12 th day of February Sd/- (R.K. Gupta) Judicial Member Sd/- (Pramod Kumar) Accountant Member Mumbai; 12 th day of February 2010 Copies of the order forwarded to : (1) The Appellant (2) The Respondent (3) CIT, Mumbai (4) CIT(A), Mumbai (5) DR, A Bench (6) Guard File True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary Assistant Registrar Income Tax Appellate Tribunal

6 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER. AND SMT. ASHA VIJAY RAGHAVAN, JUDICIAL MEMBER S.A. No.122/Mum./2010 (Arising out of ITA No.7420/Mum.2010) (Assessment Year : ) Date of Hearing: C/o Pricewaterhouse Cooper P. Ltd. PWC Plot No.18/A, Guru Nanak Road (Station Road), Bandra (W) Mumbai AAACT2758F.. Applicant v/s Addl. Director of Income Tax (International Taxation) Range 4(1), Scindia House N.M. Road, Ballard Pier Mumbai Respondent Assessee by Revenue by : Shri Kanchun Kaushal a/w Shri Rajiv Vakharia : Shri Surendra Kumar O R D E R PER S.V. MEHROTRA, A.M. The assessee has filed this stay petition under Rule 35A of the Income Tax (Appellate Tribunal) Rules, 1963, for stay of total outstanding demand of ` 1,48,60,961 comprising of tax demand of ` 95,87,717 and interest under section 234B of ` 52,73, Brief facts culminating in raising of demand, as borne out from the stay petition are like this. The assessee is a foreign company incorporated

7 2 under the laws of U.S.A. It is engaged in the manufacturing of high performance chemicals for use in transportation and industrial lubricants. The company performs research and development, testing, production of intermediates, blending of intermediates and finished products for sale of distribution. The assessee being resident of U.S.A., DTAA between U.S.A. and India is applicable. The assessee has 50% share holding (as per assessee s submission is 49%) with balance 50% (as per assessee s submission 51%) being held by IOCL in Lubrizol India Pvt. Ltd. (for short LIPL ), a joint venture between the assessee and IOCL. LIPL manufactures various products in India under license and technology transfer agreement dated 1 st April The assessee is being paid a consideration for providing technical services and for the rights in manufacturing technology, formulation technology and patents rights. Total technical fees of ` 14,48,32,150 has been paid during the year and the same has been offered as royalty in the return of income filed on 8 th December The case was referred for transfer pricing analysis, however, as per the order dated 27 th October 2009, passed under section 92CA(3), no adjustments to Arms Length Price of the transaction, as reported by the assessee, were made. The Assessing Officer noticed that Indian subsidiary namely LIPL is engaged not only in manufacturing of products development by Lubrizol Corporation, U.S.A. (assessee) but also marketing of products manufactured by the assessee. He noted that the sale in India made by the assessee are as below: Sales to LIL USD 78,10,462 Sales to Others USD 21,57,430 USD 99,67,892 ========== 3. The Assessing Officer was of the opinion that the profits made by the assessee on sale of products in India were taxable in India, as the assessee is having Permanent Establishment (for short P.E ) in the form of LIPL. After examining the covenants of exclusive sales representation agreement dated 1 st April 2000 with LIPL and also of sales and marketing agreement and metal working products dealing with market of metal working products dated

8 3 1 st January 2002, the Assessing Officer concluded that LIPL is P.E. of the assessee under Article 5(1), 5(2) and 5(4) of DTAA. The Assessing Officer did not accept the assessee s contention that Lubrizol Corporation had been fully compensated by way of commission for the service provided by it and, therefore, nothing more is taxable in India. He pointed out that this argument was not acceptable since sales made by Lubrizol Corporation were not taken into consideration while determining the royalty paid to them. He further pointed out that for determination of profits, three things namely function performed, asset deployed and risk undertaken have to be seen. He pointed out that in regard to the sale made in India, the assessee had assumed all the risks and, therefore, assessee s profits are taxable in India. Further, as per Article 7(1), the Assessing Officer pointed out that profits arising on sales done in India even directly by the assessee of the same product which are similar to products as sold by the LIPL, will also be taxable in India due to operation of Force of Attraction Rule. 4. After considering the operating profit ratio for 31 st December 2006 (8.2%) and 31 st December 2005 (9.3%), the Assessing Officer estimated the assessee s profits in India for sales made in 5% as under: Total Sales in India Profits in India USD x 5% = USD 5. This order was passed after issuing the draft order to the assessee and the objections being considered by the Disputes Resolution Panel II, Mumbai, vide their order dated 29 th September Against the assessment order, the assessee preferred appeal before the Tribunal. 6. In the present stay petition, the assessee has, inter alia, submitted that the DRP has neither discussed nor given its finding on some of its grounds raised by the assessee viz. Arms Length payment by agent ought to extinguish further liability of the principal even if P.E. is alleged. Further, there is incorrect levy of interest under section 234B. The assessee s submission is that the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of Director of Income Tax (International

9 4 Taxation) v/s Morgan Stanley & Co. INC., (2007) 292 ITR 416 (SC), wherein it has been held that once the transfer pricing analysis is undertaken, there is no further need to attribute profits to P.E. which is an associated enterprise, and has been remunerated on an arm s length basis taking into account all the risk taking functions of the multinational enterprise. Further, it is submitted that LIPL is an independent service provider to the assessee. The assessee pointed out that since the conditions laid down in Article 5(4) r/w Article 5(5) do not get fulfilled, the petitioner cannot be considered as having an agency P.E. in India. In this regard, the assessee placed reliance on the decision of Jurisdictional Tribunal in Dy. Director of Income Tax (International Taxation) I(2) v/s Daimler Chrysler A.G., (2010) 39 SOT 418 (Mum.), wherein it has been held that since the Indian entity was merely functioning as a representative office, no profits could be attributed to the same. It was held that merely acting for a non resident principal would not, by itself, render an agent to be considered as P.E. for the purpose of allocating profits taxable in the hands of the principal and there should be some definite activity of P.E. to which profits could be attributed. 7. Learned Counsel for the assessee further submitted that all the sale transactions have been carried out on principal to principal basis and the contracts have been concluded outside the territory of India by the principal. Thus, there was no control of LIPL on the contracts entered into by the assessee in U.S.A. The role of LIPL was merely to assist the assessee in the direct sales of products to Indian customers. Thus, the learned Counsel submitted that the facts in the case of assessee are identical to the facts in the case of Daimler Chrysler A.G. (supra), and, therefore, the demand raised by the Assessing Officer deserves to be stayed. 8. Learned Departmental Representative, on the other hand, referred to the decision of Hon'ble Supreme Court in the case of Union of India v/s Oswal Woolen Mills Ltd. & Ors., ( ITR 135 (SC), wherein the Hon'ble Supreme Court has, inter alia, observed as under:

10 5 It is, therefore, necessary for the Courts to be circumspect in the matter of granting interim relief, more particularly so where the interim relief is directed against orders or actions of public officials acting in discharge of their public duty and in exercise of statutory powers. On the facts and circumstances of the present case, we are satisfied that no interim should have been granted by the High Court in the terms in which it was done. 9. Learned Departmental Representative submitted that the assessment order has been passed on 1 st October 2010, and, therefore, there is no urgency in the matter. He further submitted that the assessee ought to have resorted to administrative machinery of the Department for seeking stay instead of coming directly before the Tribunal. 10. In the rejoinder, the learned CIT(A) referred to the guidelines framed by the Tribunal in pursuance to the meeting held between the representatives from the Department and the representatives from the ITAT Bar Association before the Tribunal. In the said guidelines, it has been laid down that the bench is not to insist on the rejection letter either from the Assessing Officer or from the CIT(A). He further referred to the decision of the Tribunal in the case of M/s. KEC International Limited V/s ACIT, Stay Petition No.13/Mum./2010, vide order dated 12 th February 2010, wherein the Tribunal has taken note of the observations made by a co ordinate bench of the Tribunal in the case of B.N. Nobis & Co. v/s JCIT, 71 TTJ 153, which reads as follows: 5. Before parting with the matter, we may make some observations on Revenue s objection, relying on Hon ble Supreme Court s observations in Dunlop s case (supra), to the stay petition on the ground that paucity of funds has not been sufficiently demonstrated and that for this reason alone stay should not be granted. Hon ble Supreme Court has indeed decried the practice of granting interim orders merely because assessee is able to show a good prima facie case, but to appreciate true import of Hon ble Supreme Court s censure, one has to understand the context in which Their Lordships expressed such feelings. Their Lordships started with the observation that..." It is indeed a great pity and we wish we did not have to say it but we are signally failing in our duty if we do not do so that some Courts, of late, appear to have developed an unwarranted tedency to grant interim orders interim orders with a grant potential for public mischief for the mere asking. We find it more distressing that such interim orders, often ex parte and nonspeaking, are made by the High Courts by entertaining writ petitions

11 6 under Art. 226 of the Constitution." Their Lordships, a little later in this order, further observed that... "There cannot be and there are no hard and fast rules. But prudence, discretion and circumspection are called for. There are several other vital considerations apart from existence of prima facie case. There is the question of balance of convenience. There is the question of irrepairable injury. There is the question of public interest. There are many such factors worthy of consideration. We often wonder why in the case of indirect taxation where the burden has already been passed on to the consumer, any interim relief should be given to the manufacturer, dealer and the like." It will, therefore, be clear that the context in which Hon ble Supreme Court disapproved the practice of granting interim orders, solely on the ground that a prima facie case is made out, was relevant to the cases in which High Courts were entertaining writ petitions under Art. 226 of the Constitution of India as also the cases in which disputed demands related to indirect taxes where burden has already been passed to the consumer. We cannot be oblivious to the distinction between nature of writ jurisdiction of the Hon ble High Courts, and the nature of appellate jurisdiction of this Tribunal. In writ proceedings, Hon ble High Courts step in only when fundamental rights of the petitioner are violated and therefore, they have to resist interfering in the matter until a clear case is made out that not only that an assessee has a strong prima facie case but also that there is a serious threat of infringement to petitioner s rights guaranteed under Chapter III of the Constitution. On the other hand, Tribunal s jurisdiction is akin to that of an appellate Court under the CPC, as observed in CIT vs. Hajarimal Nagji & Co. (1962) 46 ITR 1168 (Bom) and in New Indian Assurance Co. Ltd. vs. CIT (1957) 31 ITR 844 (Bom), and right to appeal before the Tribunal is provided in the statute itself. Therefore, observations of Hon ble Supreme Court in the context of grant of stay in writ proceedings do not have the binding force on, or even direct relevance to, the principles governing grant of stay during these appellate proceedings. In this context, we are reminded of the observations of Hon ble Supreme Court, in Mumbai Kamgar Sabha vs. Abdulbhai Faizullbhai AIR 1976 SC 1455, that... "It is trite, going by Anglophonic principles, that a ruling of superior Court is binding in law. It is not of spiritual sanctity but is of ratio-wise luminosity within the edifice of facts where the judicial lamps plays the legal flame. Beyond those walls and de hors the milleu we cannot impart the eternal vernal value to the decision, exalting the doctrine of precedents into prison house of bigotry, regardless of varying circumstances and myriad developments, Realism dictates that a judgment has to be read, subject to the facts directly presented for consideration and not affecting those matters which may lurk in the dark". 6. We are, therefore, of the view Hon ble Supreme Court s obiter dicta should not be perceived as a blind man s walking stick, but as luminosity of a judicial lamp in the light of which we have to perform our obligations of imparting justice. On principles governing the decision to grant stay, we undoubtedly find guidance from. Their

12 7 Lordships observations that though there are no hard and fast rules regarding grant of stay, but prudence, discretion and circumspection are called for and that stay should not be granted as a matter of course. Considerations about balance of convenience, question of irrepairable injury and implications to public interest are to be borne in mind. We are also conscious to the apprehension that "if the Tribunal proceeds to stay recovery of taxes or penalties payable by or imposed on the assessee as a matter of course, the Revenue will be put to great loss because of the inordinate delay in disposal of appeals by the Tribunal, [ITO vs. M.K. Mohd Kunhi (1969) 71 ITR 815 (SC) at p. 822], and therefore, the grant of stay by this Tribunal is always coupled with grant of an out of turn hearing which, in the present case, is to take place within three weeks from today. In the present case since the appeals are scheduled to be disposed of within next few weeks, and since admittedly there is no serious apprehension to the Revenue s rights of recovery being prejudiced by further waiting till the outcome of the appeals, the balance of convenience is in favour of not collecting the demand immediately. We are, therefore, of the considered view that Hon ble Supreme Court s observations in Dunlop s case (supra) cannot be interpreted to mean that this Tribunal is denuded of the powers to grant stay until case for financial stringency is successfully made out by the applicant. However, we see no conflict in holding this view as also adhering to the settled principles governing grant of stay which lay down that financial constraints of the applicant are important, even if not sole of qualifying, consideration in entertaining a stay application, besides considerations like existence of strong prima facie case, balance of convenience and possibilities of Revenue s rights of recovery being prejudiced by waiting till the outcome of appeals. In this view of the matter, we are unable to sustain the objection raised by the Revenue. 11. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. Having regard to the facts and circumstances of the case, we are of the opinion that since the assessee has prima facie arguable case, it would be in the interest of justice to stay the demand raised by the Revenue subject to the following conditions that: i) the assessee will deposit 25% of the total outstanding demand by 23 rd December 2010; and for the balance amount, the assessee will furnish security to the satisfaction of the Assessing Officer; and ii) the assessee will not seek adjournment on the date fixed for hearing on any ground, else, the stay order will get vacated.

13 8 12. Registry is directed to fix the appeal out of turn on 17 th January 2011, for final disposal on merit. No separate notice will be sent to the parties as the date of hearing was pronounced in the open Court. 13. In the result, assessee s stay application is allowed subject to the conditions stated above. Order pronounced in the open Court on 24/11/2010. Sd. Sd.Sd/- ASHA VIJAY RAGHAVAN JUDICIAL MEMBER Sd. Sd/- S.V. MEHROTRA ACCOUNTANT MEMBER MUMBAI, DATED: 24 th November, Copy to: (1) The Assessee (2) The Respondent (3) The CIT(A), Mumbai, concerned (4) The CIT, Mumbai City concerned (5) The DR, E Bench, ITAT, Mumbai TRUE COPY BY ORDER Pradeep J. Chowdhury Sr. Private Secretary ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI