TaxTMI 
TaxTMI 
2024 (6) TMI 814
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....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 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 Applicant/assessee are purchased from Indian third-party manufacturers viz. Rising Stars Mobile India Private Limited (`RSM') and Hipad Technology India Private Limited ('Hipad&....
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....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 was initiated on the applicant/assessee by investigation wing under section 132 of the Act, on 21/12/2021. Various notices were issued by the Learned Assessing Officer (Ld.AO)/TPO calling for details and information during the course of the assessment, and the applicant/assessee filed its responses/submi....
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....d.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 operating income while calculating tested party margin from distribution business. Therefore, tested party margin artificially fell to -8.86% as against the ALP of distribution segment determined as 3.44%. The amount of sales reward received was thus reduced f....
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....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 expense - adjustment 816,12,83,458 Xiaomi Mobile Royalty expense - adjustment 496,71,08,260 Testing and Debugging expense - adjustment 49,26,11,258 Interest on re-imburseme....
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.... 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 by the Applicant 2633,12,25,889 3 Disallowance on A....
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....d functional profile, principle of consistency, ad-hoc ALP determination without undertaking proper economic analysis 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. W....
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.... 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 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 24/0....
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....the interest of revenue. The said attachment was based on the findings of investigation wing (which is an internal record of income-tax department) and finding of the Ld. TPO. On 18/08/2022 the applicant applicant/assessee filed a writ petition (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 pretex....
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....sideration as under: S.No. Particulars Amount (in INR) (a) Bank Accounts attached under section 281B (A) 3700,00,00,000 (b) 20% of the outstanding demand for AY 2018-19 (20% of 1833,22,78,898) 366,64,55,780 (c) 20% of the outstanding demand for AY 2019-20 (20% of 2193,90,42,363) 438,78,08,473 (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....
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....ty thereof, and the Tribunal cannot grant blanket or absolute stay. Thus, he opposed granting of absolute stay in this case. 15. We have heard the rival submissions and perused the materials available on record. In this case, the total demand outstanding for the assessment year 2010-21 is INR19,95,68,06,291/- and INR17,36,59,96,491/- for assessment year 2021-22. The contention of the Ld. Senior Counsel is that the department's interest is already protected 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....
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....en, and the assessee must be deemed to have failed to comply with it. Thus section 28 of the Act would apply on its own terms. The Income-tax officer is, therefore, competent to impose a penalty under section 28 read with section 18A(9)(b) in respect of a failure to submit an estimate under section 18A(3). It is a rule of interpretation well settled that in construing the scope of a legal fiction it would be proper and even necessary to assume all those facts on which 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....
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...., whichever is earlier as the case may be. The Registry is directed to post related appeal for hearing in due course. No further notice of hearing be issued to both the parties. In the result, both the stay applications of the applicant/assessee is allowed in above terms. Order pronounced in the open court on 06th June, 2024. ============= Document 1 Entity Xiaomi HK/ Zhuhai Xiaomi Qualcomm Local third party manufacturers Entity Transactions Zhuhai Xiaomi and Xiaomi HK have supplied components to the local third-party manufacturers in India. They have also supplied Xiaomi products for further distribution and spares for the purpose of after sales support services to the Applicant International/deemed international transaction Purchase made with the Associated Enterprise (AE) have been considered as international transactions as per provisions of the Act The royalty amount paid by the Applicant is linked to the agreement between Qualcomm and the Applicant's AE, where the terms have been agreed and negotiated. Accordingly, Xiaomi group has entered into an arrangement with Qualcomm [an....
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.... technology type. Xiaomi Mobile has licensed technologies (related to hardware and software) to Xiaomi India with respect to the distribution activity of Xiaomi Mobile mobile phones and has charged 2% royalty (calculated on the basis of Xiaomi India's revenue from sale of locally manufactured Xiaomi Products in India.) Local third- party manufacturers The Applicant has purchased finished goods from local third-party manufacturers for distribution in the Indian market. International/deemed international transaction Purchase made with the Associated Enterprise ('AE') have been considered as international transactions as per provisions of the Act The royalty amount paid by the Applicant is linked to the agreement between Qualcomm and the Applicant's AE, where the terms have been agreed and negotiated. Accordingly, payments to Qualcomm have been disclosed and tested for International/deemed international transaction arm's length as per the provisions of section 92B(2) of the Act. Xiaomi India is in relation to the Royalty expense incurred by license and royalty agreement ....
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....terial During the course of assessment proceedings for AY 2018-19 and AY 2019-20, the assessee was requested to submit the details of such inflation, the assessee did not submit any details, hence this office disallowed 8% of entire purchases, as the details of landing cost of material was not submitted by the assessee and the same was not available in the financial statements of the assessee. However during the course of assessment proceedings for AY 2020-21 and 2021-22, the assessee submitted break up of the cost of purchases made along with necessary evidences to indicate that the final purchase cost included following components 1. GST 2. Custom Duty 3. Transport charges 4. MVA (amount paid to manufacturer) These were actual payments made and no evidence was found during the search or post search that the assessee had inflated these items of expenditure in its books of account. Even the evidence found during course of search action was only in respect of emails discussing the quantum of inflation that can be done on raw materials. Hence with the availability of data, the additions in respect of inflated BOM cost was restrict....