The Delhi High Court in a recent case has set aside the Income Tax notice issued demanding management fee paid to oversea company being violative of section 149 (1)(a) of the Income Tax Act, 1961.
Idemia Identity And Security India Private Limited, the petitioner, has challenged the notice dated 21.03.2024 [impugned notice] issued under Section 148 of the Income Tax Act, 1961 [the Act] as well as the consequential proceedings under Section 147 of the Act in respect of Assessment Year [AY] 2019-20.
The impugned notice was issued beyond the period of limitation as prescribed under Section 149(1)(a) of the Act. Therefore, the impugned notice and further proceedings pursuant thereto are liable to be set aside. The impugned notice was issued pursuant to a search conducted on 21.03.2023 in the premises of the petitioner and other connected entities.
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The petitioner had filed its return for the relevant assessment year [AY 2019-20] on 30.11.2019 declaring an income of ₹2,09,00,156/-. The reasons furnished by the Assessing Officer [AO] for issuing the impugned notice under Section 148 and reopening of the assessment noted that there was a huge amount of management fee paid by the petitioner to Idemia France and other associated enterprises during the Financial Years [FYs] 2016-17 to 2022-23, which according to the AO was higher than what ought to have been paid by the petitioner for the services rendered by its associated enterprises [AEs].
On perusal of the above, it could be seen that IISIPL is incurring around 2-6 % of its total revenue on intra group services. It is pertinent to note that IISIPL is a service concern which is mainly in providing biometric based identity management solutions to domestic market. Thus, huge payment of intra-group charges appeared to be suspicious that such huge payment may not commensurate with the actual benefit received.
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It was also astonishing to note that Idemia France also charged mark-up of 3.5% to 5% on such management services of which there was no basis. It is noticed that during the course of search, various incriminating evidences have been found and statements have been recorded which revealed that IISIPL is making substantial payments to AEs as “Management and IT Cost” and such payments are being made without any justification and proper calculation.
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In the case of IISPL also, no management services have actually been received by IISPL. No actual benefit qua the management services was being provided by Idemia France. The payment of management fees was merely used as a conduit to transfer money. Further, even the basis of allocation and keys/parameters used were not known to the Indian entity.
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There is no cavil that the amount alleged to have escaped assessment during the relevant assessment year is less than ₹50,00,000/- (Rupees fifty lacs) and therefore, the conditions, as stipulated under Section 149(1)(b) of the Act, are not satisfied. Notwithstanding the same, the AO is of the view that the case fell within the exception of Sub-section (1A) of Section 149 of the Act as the income alleged to have escaped assessment during the FYs 2016-17 to 2022-23 relevant to AYs 2017-18 to 2023-24 are relatable to a singular event or an occasion. Therefore, the cumulative value of the total income that escaped assessment during the aforesaid period was required to be taken into account for determining whether the value exceeded ₹50,00,000/-, as stipulated in Section 149(1)(b) of the Act.
Mr. Chandra, the counsel appearing for the Revenue submitted that the entire object was to move funds out of this country and therefore, the entire quantum of funds was required to be taken into account for determining whether the aggregate amount exceeded the value as specified under Section 149(1)(b) of the Act, that is, was ₹50,00,000/- or more.
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The question whether the services have been rendered and whether the same were at Arm’s Length Price [ALP] is a contentious issue. However, it is apparent that the income alleged to have escaped assessment is not based on a single occasion or an event spanning over the period in question. It is an amount that is being regularly paid by the petitioner to its AEs overseas, on account of the services which the petitioner claims to have received. It is also not disputed that the payments made by the petitioner were subject matter of the assessments during various previous assessment years and reference for determining the ALP had also been made to the Transfer Pricing Officer [TPO].
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A division bench of Justice Vibhu Bakhru and Justice Tejas Karia found that this does not fall within the exception to Sub-section (1A) of Section 149 of the Act. The issue involved is squarely covered by the decision of the court in M/s. L-1 Identity Solutions Operating Company Private Limited v. Assistant Commissioner of Income Tax, Central Circle-25.
The petition is allowed and set aside the impugned notice as well as all the proceedings pursuant thereto, including an assessment order, that may have been passed. The pending applications are also disposed of.
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